10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 ______________________________________

Form 10-Q

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

For the quarterly period ended June 30, 2012

OR

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

For the transition period from                 to                 

Commission file number 1-31614

 ______________________________________

VITESSE SEMICONDUCTOR CORPORATION

(Exact name of registrant as specified in its charter)

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

741 Calle Plano

Camarillo, California 93012

(Address of principal executive offices)(zip code)

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

 ______________________________________

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

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

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

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

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

As of August 3, 2012, there were 25,803,508 shares of the registrant’s $0.01 par value common stock outstanding.

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2012

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Unaudited Consolidated Balance Sheets as of June 30, 2012 and September 30, 2011	3
	Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2012 and 2011	4
	Unaudited Consolidated Statements of Stockholders' Deficit for the Nine Months Ended June 30, 2012	5
	Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2012 and 2011	6
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 6.	Exhibits	32

2

PART I. FINANCIAL INFORMATION

ITEM 1:  FINANCIAL STATEMENTS

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

	June 30, 2012			September 30, 2011
	(in thousands, except par value)
ASSETS
Current assets:
Cash	$	20,586		$	17,318
Accounts receivable, net	10,724			9,591
Inventory	14,796			20,857
Restricted cash	92			404
Prepaid expenses and other current assets	1,985			2,039
Total current assets	48,183			50,209
Property, plant and equipment, net	4,530			5,934
Other intangible assets, net	1,625			1,781
Other assets	2,805			3,070
	$	57,143		$	60,994
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable	$	5,234		$	5,198
Accrued expenses and other current liabilities	13,208			14,463
Deferred revenue	2,580			3,878
Current portion of capital leases	11			11
Total current liabilities	21,033			23,550
Other long-term liabilities	1,518			1,927
Long-term debt, net	15,742			15,444
Compound embedded derivative	4,023			7,796
Convertible subordinated debt, net	42,064			40,736
Total liabilities	84,380			89,453
Commitments and contingencies, See note 10
Stockholders' deficit:
Preferred stock, $0.01 par value: 10,000 shares authorized; Series B Non Cumulative, Convertible, 135 shares outstanding at June 30, 2012 and September 30, 2011	1			1
Common stock, $0.01 par value: 250,000 shares authorized; 25,315 and 24,470 shares outstanding at June 30, 2012 and September 30, 2011, respectively	253			245
Additional paid-in-capital	1,827,977			1,824,433
Accumulated deficit	(1,855,468		)	(1,853,138		)
Total stockholders' deficit	(27,237		)	(28,459		)
	$	57,143		$	60,994

See accompanying notes to unaudited consolidated financial statements.

3

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended June 30,						Nine Months Ended June 30,
	2012			2011			2012			2011
	(in thousands, except per share data)
Net revenues:
Product revenues	$	25,730		$	31,856		$	81,867		$	103,855
Intellectual property revenues	4,557			4,132			8,148			6,772
Net revenues	30,287			35,988			90,015			110,627
Costs and expenses:
Cost of product revenues	11,270			13,432			34,028			40,776
Engineering, research and development	10,513			12,502			32,518			41,582
Selling, general and administrative	6,292			9,455			22,095			29,892
Restructuring and impairment charges	4			211			36			554
Amortization of intangible assets	88			62			234			288
Costs and expenses	28,167			35,662			88,911			113,092
Income (loss) from operations	2,120			326			1,104			(2,465		)
Other (income) expense :
Interest expense, net	1,950			1,929			5,823			6,486
Gain on compound embedded derivative	(5,755		)	(7,951		)	(3,773		)	(2,491		)
Loss on extinguishment of debt	—			—			—			3,874
Other (income) expense, net	(20		)	25			21			(33		)
Other (income) expense, net	(3,825		)	(5,997		)	2,071			7,836
Income (loss) before income tax expense	5,945			6,323			(967		)	(10,301		)
Income tax expense (benefit)	1,234			(227		)	1,363			(78		)
Net income (loss)	$	4,711		$	6,550		$	(2,330	)	$	(10,223	)
Net income (loss) per common share - basic	$	0.18		$	0.26		$	(0.09	)	$	(0.42	)
Net income (loss) per common share - diluted	$	0.16		$	0.21		$	(0.09	)	$	(0.42	)
Weighted average common shares outstanding - basic	25,302			24,447			24,951			24,266
Weighted average common shares outstanding - diluted	38,413			37,543			24,951			24,266

See accompanying notes to unaudited consolidated financial statements.

4

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

	Preferred Stock			Common Stock					Additional Paid-in-Capital			Accumulated Deficit			Total Stockholders' Deficit
(in thousands)	Shares	Amount		Shares		Amount
Balance at September 30, 2011	135	$	1	24,471		$	245		$	1,824,433		$	(1,853,138	)	$	(28,459	)
Net loss	—	—		—		—			—			(2,330		)	(2,330		)
Compensation expense related to stock options, awards and ESPP	—	—		—		—			3,301			—			3,301
Issuance of common stock upon exercise of stock options	—	—		6		—			16			—			16
Issuance of shares under ESPP	—	—		335		3			865			—			868
Release of restricted stock units	—	—		709		7			(7		)	—			—
Repurchase and retirement of restricted stock units for payroll taxes	—	—		(206	)	(2		)	(631		)	—			(633		)
Balance at June 30, 2012	135	$	1	25,315		$	253		$	1,827,977		$	(1,855,468	)	$	(27,237	)

See accompanying notes to unaudited consolidated financial statements.

5

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended June 30,
	2012			2011
	(in thousands)
Cash flows provided by (used in) operating activities:
Net loss	$	(2,330	)	$	(10,223	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	2,228			2,765
Stock-based compensation	3,301			2,534
Change in fair value of compound embedded derivative liability	(3,773		)	(2,491		)
Loss (gain) on disposal of assets	650			(45		)
Loss on extinguishment of debt, net	—			3,794
Interest paid in kind	—			415
Amortization of debt issuance costs	204			276
Amortization of debt discounts	1,751			1,468
Accretion of debt premiums	(117		)	(80		)
Change in operating assets and liabilities:
Accounts receivable	(1,134		)	3,287
Inventory	6,062			2,325
Prepaids and other assets	441			1,108
Accounts payable	36			(3,559		)
Accrued expenses and other liabilities	(811		)	(3,438		)
Deferred revenue	(1,298		)	(4,807		)
Net cash provided by (used in) operating activities	5,210			(6,671		)
Cash flows used in investing activities:
Capital expenditures	(536		)	(1,915		)
Payments under licensing agreements	(781		)	(1,263		)
Net cash used in investing activities	(1,317		)	(3,178		)
Cash flows used in financing activities:
Proceeds from the exercise of stock options	16			—
Payment of senior debt	—			(8,000		)
Cash restricted for payment of senior debt	—			(1,500		)
Debt issuance costs	—			(60		)
Repurchase and retirement of restricted stock units for payroll taxes	(633		)	(554		)
Capital lease obligations	(8		)	(8		)
Net cash used in financing activities	(625		)	(10,122		)
Net increase (decrease) in cash	3,268			(19,971		)
Cash at beginning of period	17,318			38,127
Cash at end of period	$	20,586		$	18,156
Supplemental disclosure of non cash transactions:
Cash paid during the year for:
Interest	$	4,919		$	5,249
Income taxes	1,474			511
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

See accompanying notes to unaudited consolidated financial statements.

6

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended June 30, 2012

NOTE 1—THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Vitesse Semiconductor Corporation (“Vitesse,” the “Company,” “us” or “we”) is a leading supplier of high-performance integrated circuits (“ICs”) that are utilized 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, included in our Annual Report on Form 10-K filed with the SEC on December 6, 2011.

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

Reclassifications

Certain reclassifications have been made to prior year amounts and related footnotes to conform to current-year presentation with no changes to stockholders’ deficit amounts as of June 30, 2011 or net income (loss) for the three months and nine months ended June 30, 2011.

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 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.

7

Revenue Recognition

Product revenues

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

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

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

Intellectual property revenues

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

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

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

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

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

8

Multiple element transactions

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

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

Fair Value

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

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

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

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

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

Financial Instruments

ASC Topic 825, Financial Instruments, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. Our financial instruments include cash, accounts receivable, accounts payable, and accrued expenses. These financial instruments are stated at their carrying values, which are estimates of their fair values because of their nearness to cash settlement or the comparability of their terms to the terms we 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.

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.

9

Senior Term B Loan

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

Convertible subordinated debt

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

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

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

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

Intangible and Long-Lived Assets

Our intangible assets consist primarily of existing technologies, IP, and costs for our enterprise resource planning system. 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 $0.7 million and $2.2 million as of June 30, 2012 and September 30, 2011, respectively.

10

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.

NOTE 2—COMPUTATION OF NET INCOME (LOSS) PER SHARE

The computation of net income (loss) per share is as follows:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012			2011
	(in thousands, except per share data)
Net income (loss)	$	4,711	$	6,550	$	(2,330	)	$	(10,223	)
Allocation of undistributed earnings to preferred stock	122		176		—			—
Net income (loss) available to common stockholders after allocation for participating securities	$	4,589	$	6,374	$	(2,330	)	$	(10,223	)
Impact of assumed conversions:
Interest on 2014 Debentures, net of tax	1,308		1,237		—			—
Interest on Term B Loan, net of tax	319		284		—			—
Net income (loss) available to common stockholders plus assumed conversions	$	6,216	$	7,895	$	(2,330	)	(10,223		)
Weighted average number of shares - basic	25,302		24,447		24,951			24,266
Effect of dilutive common stock equivalents from:
Outstanding stock options	30		25		—			—
Outstanding restricted stock units	188		178		—			—
Convertible preferred stock	674		674		—			—
2014 Debentures	10,332		10,332		—			—
Term B Loan	1,887		1,887		—			—
Weighted average number of shares - diluted	38,413		37,543		24,951			24,266
Net income (loss) per common share:
Net income (loss) available to common stockholders after allocation for participating securities - Basic	$	0.18	$	0.26	$	(0.09	)	$	(0.42	)
Net income (loss) available to common stockholders - Diluted	$	0.12	$	0.17	$	(0.09	)	$	(0.42	)
Impact of assumed conversions:
Interest on 2014 Debentures, net of tax	0.03		0.03		—			—
Interest on Term B Loan, net of tax	0.01		0.01		—			—
Net income (loss) available to common stockholders plus assumed conversions	$	0.16	$	0.21	$	(0.09	)	$	(0.42	)

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

For periods in which we report net income, the weighted average number of shares used to calculate diluted income per share is inclusive of common stock equivalents from unexercised stock options, restricted stock units, shares to be issued under our Employee Stock Purchase Plan (“ESPP”), warrants, convertible preferred stock, and 2014 Debentures. Unexercised stock options, restricted stock units, unvested shares to be issued under our ESPP, and warrants are considered to be common stock equivalents if, using the treasury stock method, they are determined to be dilutive.

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

11

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

	Three Months Ended June 30,		Nine Months Ended June 30,
	2012	2011	2012	2011
	(in thousands)
Outstanding stock options	1,477	1,350	1,809	1,429
Outstanding restricted stock units	810	343	1,702	287
Outstanding warrants	—	8	—	8
ESPP shares	327	—	327	—
Convertible preferred stock	—	—	674	674
2014 Debentures	—	—	10,332	10,332
Term B Loan	—	—	1,887	1,887
Total potential common stock excluded from calculation	2,614	1,701	16,731	14,617

NOTE 3—INVENTORY

	June 30, 2012		September 30, 2011
	(in thousands)
Inventory:
Raw materials	$	1,480	$	883
Work-in-process	6,937		9,247
Finished goods	6,379		10,727
Total	$	14,796	$	20,857

NOTE 4—DEBT

	June 30, 2012		September 30, 2011
	(in thousands)
Term A Loan, 10.5% fixed-rate notes, due February 2014	$	8,130	$	8,247
Term B Loan, convertible, 8.0% fixed-rate notes, due October 2014	7,600		7,177
Capital leases, non-current portion	12		20
Total long-term debt, net	15,742		15,444
2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014	42,064		40,736
Total debt, net	$	57,806	$	56,180

Additional information about our debt is as follows:

	Term A Loan			Term B Loan			2014 Debentures
	(in thousands)
Principal	$	7,857		$	9,342		$	46,493
Unaccreted debt premium/(unamortized) debt discount	273			(1,742		)	(4,429		)
Carrying value	$	8,130		$	7,600		$	42,064
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

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

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

Prepayment of the 2014 Debentures is permitted at 100% of the principal amount plus accrued and unpaid interest if the closing price of our common stock has been at least 130% of the conversion price in effect for at least 20 trading days during the 30 consecutive trading day period ending on the day prior to the date of notice of prepayment. We can elect to settle any conversion in stock, cash or a combination of stock and cash. If a 2014 Debenture is converted into common stock on or prior to October 30, 2012, we must pay a “make-whole amount” equal to the 2014 Debenture’s scheduled remaining interest payments through October 30, 2012, which we may elect to pay in cash or in shares of common stock valued at 95% of the average daily volume weighted average price per share over a 10 day trading period. The 2014 Debentures are collateralized by a second priority interest in substantially all of our assets. At June 30, 2012, conversion of the outstanding principal amount of the 2014 Debentures would result in the issuance of 10.3 million shares of common stock and $1.2 million in make-whole amount that may be paid in cash or by delivery of 0.5 million shares of common stock.

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

Debt Maturities

Maturity of our total aggregated outstanding debt is as follows:

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

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

NOTE 5—FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY

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

	June 30, 2012								September 30, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)
Compound embedded derivative liability	$	—	$	—	$	4,023	$	4,023	$	—	$	—	$	7,796	$	7,796
	$	—	$	—	$	4,023	$	4,023	$	—	$	—	$	7,796	$	7,796

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There were no transfers in and out of Level 1 and Level 2 fair value measurements during the nine months ended June 30, 2012.

We use a binomial-lattice model to estimate fair values of our financial instruments. The key unobservable input utilized in the model includes a discount rate of 8%.

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

	2012			2011
	(in thousands)
Beginning balance	$	7,796		$	15,476
Transfers in and /or out of Level 3	—			—
Purchases, sales, issuances, and settlements	—			—
Total net gains included in earnings	(3,773		)	(2,491		)
Ending balance as of June 30,	$	4,023		$	12,985

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

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

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

	June 30, 2012				September 30, 2011
	Carrying value		Fair value		Carrying value		Fair value
	(in thousands)
Term A Loan	$	8,130	$	8,467	$	8,247	$	9,990
Term B Loan	7,600		8,535		7,177		8,661
2014 Debentures	42,064		46,791		40,736		45,228

NOTE 6—STOCK BASED COMPENSATION

Under all stock option plans, a total of 4.1 million shares of common stock have been reserved for issuance and 0.6 million shares are available for future grant as of June 30, 2012. The 2010 Incentive Plan permits the grant of stock options, stock appreciation rights, stock awards, performance awards, restricted stock and stock units, and other stock and cash-based awards.

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

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

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011
	(in thousands)
Cost of revenues	$	147	$	123	$	415	$	353
Engineering, research and development	387		288		1,151		758
Selling, general and administrative	558		515		1,735		1,423
Total stock-based compensation expense	$	1,092	$	926	$	3,301	$	2,534

As of June 30, 2012, there was $6.7 million of unrecognized stock-based compensation expense related to non-vested stock options, restricted stock units, and our ESPP. The weighted average period over which the unearned stock-based compensation is expected to be recognized is approximately 2.25 years. An estimated forfeiture rate of 5.23% has been applied to all unvested options and restricted stock outstanding as of June 30, 2012. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards. 

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Stock Options

Activity in stock option awards is as follows:

	Shares		Weighted average exercise price		Weighted average remaining contractual life (in years)	Aggregate intrinsic value
Options outstanding, September 30, 2011	1,699,183		$	29.77	6.37	$	—
Granted	389,182		2.55		—	—
Exercised	(6,047	)	2.54		—	—
Cancelled or expired	(273,770	)	78.25		—	—
Options outstanding, June 30, 2012	1,808,548		16.67		6.84	38,316
Options exercisable, June 30, 2012	992,566		$	27.13	5.37	$	8,884

This intrinsic value represents the excess of the fair market value of our common stock on the date of exercise over the exercise price of such options. The aggregate intrinsic values in the preceding table for the options outstanding represent the total pretax intrinsic value, based on our closing stock price of $2.65, as of June 30, 2012, which would have been received by the option holders had those option holders exercised their in-the-money options as of those dates. There are 0.1 million in-the-money stock options that were exercisable as of June 30, 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:

	Nine Months Ended June 30,
	2012	2011
Expected life (in years)	5.64	6.24
Expected volatility:
Weighted-average	87.0%	85.8%
Range	85.5% - 87.1%	85.7% - 86.5%
Expected dividend	—	—
Risk-free interest rate	1.05% - 1.27%	2.23% - 2.78%

Our determination of the fair value of stock-based payment awards is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to: our expected stock price volatility over the term of 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, using an option-pricing model; however, that value 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.

Activity for our restricted stock award units 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, September 30, 2011	1,295,979		$	4.67
Awarded	1,258,075		2.57
Released	(708,953	)	3.99
Forfeited	(143,080	)	3.44
Restricted stock units, June 30, 2012	1,702,021		$	3.50	1.33	$	4,510,356

From time-to-time, we retain shares of common stock from employees upon vesting of restricted shares and restricted stock units to cover income tax withholding. The impact of such withholding totaled $0.6 million for the nine months ended June 30, 2012, and was recorded as settlement on restricted stock tax withholding in the accompanying unaudited consolidated statements of stockholders’ deficit.

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Employee Stock Purchase Plan

In January 2011, our stockholders approved the 2011 ESPP under which 2.5 million shares of common stock are reserved for issuance. On January 31, 2012, 0.3 million shares were issued at a price per share of $2.59, a 15.0% discount against the share price on that date. The second purchase period began on February 1, 2012 and ends July 31, 2012. The fair value of the ESPP awards are calculated in accordance with ASC 718-50, Employee Share Purchase Plans, under which the fair value of each share granted under the ESPP is equal to the sum of 15% of a share of stock, a call option for 85% of a share of stock, and a put option for 15% of a share of stock. The fair value of the call and put options are determined using the Black-Scholes pricing model. We used the following range of assumptions for both purchase periods: expected useful life of 0.5 years, weighted average expected volatility of 40.4% to 48.4%, a zero dividend rate, and a risk-free interest rate of 0.09% to 0.2%. We recognized approximately $0.2 million and $0.4 million in stock compensation for the three and nine months ended June 30, 2012 related to the ESPP. On July 31, 2012, 0.5 million shares were issued at a price per share of $1.79, a 15.0% discount to the share price on that date.

NOTE 7—INCOME TAXES

The provision for income taxes as a percentage of income from operations before income taxes was (140.9)% for the nine months ended June 30, 2012 compared to 0.7% for the comparable period in the prior year. Our effective tax rate is primarily impacted by withholding taxes on certain foreign income in 2012 and by Federal net operating losses (“NOLs”) for which no tax benefit is recorded since it is not more likely than not that we will ultimately realize the related net deferred tax assets.

Because we have historically experienced net tax losses, the benefits of which resulted in recognized deferred tax assets, we have placed a valuation allowance against our otherwise recognizable deferred tax assets. At June 30, 2012, we had approximately $83.7 million of Federal NOLs that can be used in future tax years. Of this amount, $59.5 million is subject to an annual limitation of $3.1 million caused by a prior year “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, a Section 382 ownership change occurs if there is a cumulative change in Vitesse's ownership by “5%” shareholders (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. An ownership change generally affects the rate at which NOLs and potentially other deferred tax assets are permitted to offset future taxable income. If an additional ownership change occurred during the current year or should one occur in the future, our ability to utilize ourNOL carryforwards and other deferred tax assets to offset future taxable income may be significantly limited. Therefore, the value and recoverability of our NOLs could be further diminished as a result of an additional ownership change.

NOTE 8—RESTRUCTURING AND IMPAIRMENT CHARGES

Activity related to our restructuring accrual is as follows:

	Facility Consolidation and Operating Lease Commitments			Severance Costs			Total
	(in thousands)
Liability balance at September 30, 2011	$	2,310		$	298		$	2,608
Charged to operations	—			24			24
Non-cash charges	29			(17		)	12
Cash payments	(690		)	(305		)	(995		)
Liability balance at June 30, 2012	$	1,649		$	—		$	1,649

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.

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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 nine months ended June 30, 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 revenue from customers that were equal to or greater than 10% of total net revenues is as follows:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011
Nu Horizons Electronics **	10.7	%	20.6	%	14.3	%	20.2	%
WPG **	13.9	%	*		12.8	%	*
Huawei	*		*		*		10.1	%

 __________________________________________________

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

**Distributor

Net revenue by geographic area is as follows:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011
	(in thousands)
United States	$	9,545	$	16,052	$	32,543	$	41,118
Asia Pacific	17,550		15,223		45,502		50,731
EMEA*	3,192		4,713		11,970		18,778
Total net revenues	$	30,287	$	35,988	$	90,015	$	110,627

________________________________________________

*Europe, Middle East and Africa

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

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

Product revenue by product line is as follows:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011
	(in thousands)
Connectivity	$	10,761	$	17,500	$	38,433	52,827
Ethernet switching	8,402		9,334		23,202		28,810
Transport processing	6,567		5,022		20,232		22,218
Product revenues	$	25,730	$	31,856	$	81,867	$	103,855

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NOTE 10—COMMITMENTS AND CONTINGENCIES

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

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

Patents and Licenses

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

Warranties

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

Intellectual Property Indemnities

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

Director and Officer Indemnities and Contractual Guarantees

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

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

General Contractual Indemnities/Products Liability

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

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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 (“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 systems manufacturers in the communications industry. Within the communications industry, our products address Carrier and Enterprise networking, where they enable data to be transmitted at high-speeds and processed and switched under a variety of protocols.

Over the last 10 years, the worldwide proliferation of the Internet and the rapid growth in the volume of data being sent over LANs and WANs has placed a tremendous strain on the existing communications infrastructure. Communication service providers have sought to increase their revenues by delivering a growing range of data 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 Carrier and Enterprise networking to Internet Protocol-based networks. These next-generation networks share the requirements of high reliability, scalability, interoperability, and low cost. Increasingly, these networks will be delivered based on Ethernet technology. We believe that products in this emerging technology area represent the best opportunity for us to provide differentiation in the market.

Realization of Our Strategy

Several years ago, we embarked on a process to substantially re-invent Vitesse to take advantage of the dramatic ongoing transformation of our target networking markets. Towards that goal, we re-positioned our Engineering, Research and Development (“R&D”) teams and invested heavily to enter new markets, develop new products, and penetrate new customers in an effort to diversify ourselves and provide new opportunities for growth.

As with any high-technology company, these growth opportunities begin with new products. We improved 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 years of development, Vitesse introduced over 30 new products in 2010, over 20 new products in 2011, and we continue to introduce new products in 2012. These introductions included many new “platform” products and technology that will serve as the basis for future product development. This rate was nearly double our historic rate of product introductions and allowed us to substantially increase our served markets in both Carrier and Enterprise networking, providing us better growth opportunities. 

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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 our new products to market in 2011 and 2012, we saw a dramatic 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, we recorded over 300 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 in 2012. So far, we are on pace to achieve 300 design wins for the year.

Together with our customers, we are now taking these new products into production. In our industry, it typically takes 12 to 18 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 nine months of 2012, we shipped samples and pre-production on the majority of these new products, and we expect our customers to phase into volume production over the course of 2012 and into 2013.

As these new products ramp, we will begin a migration of our revenues to our new products, providing a new growth cycle for Vitesse. In 2011, only 5% of our revenue was from products sampled in the last three years. Based on observable market traction and the design wins captured in 2011, we expect revenues from our new products to increase in 2012 and continue to grow strongly from there.

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. During the last three years, we accelerated our comprehensive efforts to increase our product gross margins and operating margins, which together have substantially increased our operating leverage. During the last three years we have:

• Expanded our Tier-1 business in Europe and Asia, as a result of improved penetration into 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 of our historical financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements in conformity with those principals require us to make certain estimates of certain items and judgments as to certain 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, affect the reported amounts of our assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. While 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 described in our Annual Report on Form 10-K for the year ended September 30, 2011. There have been no significant changes to these policies during the nine months ended June 30, 2012. 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 recent accounting pronouncements that impact “The Company and Its Significant Accounting Policies” footnote in the accompanying notes to the unaudited consolidated financial statements.

20

Results of Operations for the three and nine months ended June 30, 2012 compared to the three and nine months ended June 30, 2011

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 June 30,										Nine Months Ended June 30,
	2012					2011					2012					2011
	$			%		$			%		$			%		$			%
	(in thousands, except for percentages)
Net revenues:
Product revenues	$	25,730		85.0	%	$	31,856		88.5	%	$	81,867		90.9	%	$	103,855		93.9	%
Intellectual property revenues	4,557			15.0	%	4,132			11.5	%	8,148			9.1	%	6,772			6.1	%
Net revenues	30,287			100.0	%	35,988			100.0	%	90,015			100.0	%	110,627			100.0	%
Costs and expenses:
Cost of product revenues	11,270			37.2	%	13,432			37.3	%	34,028			37.8	%	40,776			36.9	%
Engineering, research and development	10,513			34.7	%	12,502			34.7	%	32,518			36.1	%	41,582			37.6	%
Selling, general and administrative	6,292			20.8	%	9,455			26.3	%	22,095			24.5	%	29,892			27.0	%
Restructuring and impairment charges	4			—	%	211			0.6	%	36			—	%	554			0.5	%
Amortization of intangible assets	88			0.3	%	62			0.2	%	234			0.3	%	288			0.3	%
Costs and expenses	28,167			93.0	%	35,662			99.1	%	88,911			98.7	%	113,092			102.3	%
Income (loss) from operations	2,120			7.0	%	326			0.9	%	1,104			1.3	%	(2,465		)	(2.3	)%
Other (income) expense :
Interest expense, net	1,950			6.4	%	1,929			5.4	%	5,823			6.5	%	6,486			5.9	%
Gain on compound embedded derivative	(5,755		)	(19.0	)%	(7,951		)	(22.1	)%	(3,773		)	(4.2	)%	(2,491		)	(2.3	)%
Loss on extinguishment of debt	—			—	%	—			—	%	—			—	%	3,874			3.5	%
Other (income) expense, net	(20		)	(0.1	)%	25			0.1	%	21			—	%	(33		)	—	%
Other (income) expense, net	(3,825		)	(12.7	)%	(5,997		)	(16.6	)%	2,071			2.3	%	7,836			7.1	%
Income (loss) before income tax expense	5,945			19.7	%	6,323			17.5	%	(967		)	(1.0	)%	(10,301		)	(9.4	)%
Income tax expense (benefit)	1,234			4.1	%	(227		)	(0.6	)%	1,363			1.5	%	(78		)	(0.1	)%
Net income (loss)	$	4,711		15.6	%	$	6,550		18.1	%	$	(2,330	)	(2.5	)%	$	(10,223	)	(9.3	)%

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, 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”) and small-medium business (“SMB”) networks. 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.

21

Product revenue by market is as follows:

	Three Months Ended June 30,
	2012				2011
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)
Carrier networking	$	11,610	45.1	%	$	14,790	46.4	%	$	(3,180	)	(21.5	)%
Enterprise networking	13,529		52.6	%	16,091		50.5	%	(2,562		)	(15.9	)%
Non-core	591		2.3	%	975		3.1	%	(384		)	(39.4	)%
Product revenues	$	25,730	100.0	%	$	31,856	100.0	%	$	(6,126	)	(19.2	)%

	Nine Months Ended June 30,
	2012				2011
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)
Carrier networking	$	33,199	40.6	%	$	48,453	46.7	%	$	(15,254	)	(31.5	)%
Enterprise networking	41,104		50.2	%	49,982		48.1	%	(8,878		)	(17.8	)%
Non-core	7,564		9.2	%	5,420		5.2	%	2,144			39.6	%
Product revenues	$	81,867	100.0	%	$	103,855	100.0	%	$	(21,988	)	(21.2	)%

The decrease in Carrier networking revenues is primarily attributable to the broad-based decline in the Carrier networking equipment market, which negatively impacted demand for our SONET-based products. The decline in Enterprise networking revenues is driven primarily by lower demand for our switch and PHY products selling into SME/SMB applications. Declines in both markets were partially offset by increased sales of our framers and switch fabric products, to customers increasing inventory after we announced our plans to phase out production of products, and to a lesser extent increasing sales of our new products. The decrease in Non-core revenues in the three months ended June 30, 2012 as compared to the same period in the prior year is largely attributable to lower sales of Network Processor (“NPU”) and Fibre Channel products. The increase in Non-core revenues in the nine months ended June 30, 2012 as compared to the same period in the prior year is due to a large sale of Fibre Channel Phys to 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 in 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 from end-of-life products was $6.4 million and $0.7 million in the three months ended June 30, 2012 and 2011, respectively and $19.9 million and $4.3 million in the nine months ended June 30, 2012 and 2011, respectively. Product phase-outs are part of our normal course of business, and we will continue this practice in the future; however, we cannot predict the degree and/or timing of the impact of product phase-out on future revenues. From time-to-time, upon customer request or due to a change in our product strategy, we may decide to resume producing a part we previously phased-out.

Product revenues by product line is as follows:

	Three Months Ended June 30,
	2012				2011
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)
Connectivity	$	10,761	41.8	%	$	17,500	54.9	%	$	(6,739	)	(38.5	)%
Ethernet switching	8,402		32.7	%	9,334		29.3	%	(932		)	(10.0	)%
Transport processing	6,567		25.5	%	5,022		15.8	%	1,545			30.8	%
Product revenues	$	25,730	100.0	%	$	31,856	100.0	%	$	(6,126	)	(19.2	)%

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	Nine Months Ended June 30,
	2012				2011
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)
Connectivity	$	38,433	47.0	%	$	52,827	50.9	%	$	(14,394	)	(27.2	)%
Ethernet switching	23,202		28.3	%	28,810		27.7	%	(5,608		)	(19.5	)%
Transport processing	20,232		24.7	%	22,218		21.4	%	(1,986		)	(8.9	)%
Product revenues	$	81,867	100.0	%	$	103,855	100.0	%	$	(21,988	)	(21.2	)%

The decrease in Connectivity revenues is largely attributable to the broad-based decline in the Carrier networking equipment market, which negatively impacted the demand for our products, particularly SONET-based products. A decline in Ethernet passive optical network physical media device (“PMD”) product revenue also contributed to the decrease. The decrease was partially offset by new product revenues for CDRs, Crosspoints, and 10 Gigabit Ethernet PHYs, and by revenues from some end-of-life products.

The decrease in Ethernet switching revenues is largely attributable to declines in our Gigabit Ethernet Copper PHYs and Ethernet Media Access Controller (“MAC”) products selling primarily into Enterprise markets. The decrease was partially offset by sales of our new Carrier and Enterprise Ethernet switches.

The increase in Transport processing revenues in the three months ended June 30, 2012 as compared to the same period in the prior year is largely attributable to higher sales of our switch fabric products to customers increasing inventories of these products as they approach end-of-life. This increase was partially offset by a broad-based decline in the Carrier networking equipment market that negatively impacted demand for our products, particularly for mature Ethernet over SONET mappers, TSIs, and NPUs. The decrease in Transport processing revenues for the nine months ended June 30, 2012 as compared to the same period in the prior year is also largely attributable to the broad-based market decline in Carrier networking equipment market that negatively impacted demand for our SONET framers and mappers

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

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011
Nu Horizons Electronics **	10.7	%	20.6	%	14.3	%	20.2	%
WPG **	13.9	%	*		12.8	%	*
Huawei	*		*		*		10.1	%

 ________________________________________________

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

**Distributors

Net revenues by geographic area is as follows: 

	Three Months Ended June 30,
	2012				2011
	Amount		% of Total Net Revenues		Amount		% of Total Net Revenues
	(in thousands, except percentages)
United States	$	9,545	31.5	%	$	16,052	44.6	%
Asia Pacific	17,550		58.0	%	15,223		42.3	%
EMEA*	3,192		10.5	%	4,713		13.1	%
Total net revenues	$	30,287	100.0	%	$	35,988	100.0	%

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	Nine Months Ended June 30,
	2012				2011
	Amount		% of Total Net Revenues		Amount		% of Total Net Revenues
	(in thousands, except percentages)
United States	$	32,543	36.2	%	$	41,118	37.2	%
Asia Pacific	45,502		50.5	%	50,731		45.8	%
EMEA*	11,970		13.3	%	18,778		17.0	%
Total net revenues	$	90,015	100.0	%	$	110,627	100.0	%

_________________________________________________

*Europe, Middle East and Africa

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

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

The demand for our products is affected by various factors, including our development and introduction of new products, availability and pricing of competing products, capacity constraints at our suppliers, end-of-life product decisions, and general economic conditions. Therefore, our revenues for the three and nine months ended June 30, 2012 and 2011 may not necessarily be indicative of future revenues.

Intellectual Property (IP) Revenues

	Three Months Ended June 30,
	2012				2011
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change		% Change
	(in thousands, except percentages)
IP revenues	$	4,557	15.0	%	$	4,132	11.5	%	$	425	10.3	%

	Nine Months Ended June 30,
	2012				2011
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change		% Change
	(in thousands, except percentages)
IP revenues	$	8,148	9.1	%	$	6,772	6.1	%	$	1,376	20.3	%

IP revenue increased due to settlement of all future royalties under an existing agreement as well as revenues earned under new IP agreements.  Costs associated with the sale of IP are included in selling, general and administrative expenses.

Cost of Product Revenues

	Three Months Ended June 30,
	2012				2011
	Amount		% of Net Product Revenues		Amount		% of Net Product Revenues		Change			% Change
	(in thousands, except percentages)
Cost of product revenues	$	11,270	43.8	%	$	13,432	42.2	%	$	(2,162	)	(16.1	)%

	Nine Months Ended June 30,
	2012				2011
	Amount		% of Net Product Revenues		Amount		% of Net Product Revenues		Change			% Change
	(in thousands, except percentages)
Cost of product revenues	$	34,028	41.6	%	$	40,776	39.3	%	$	(6,748	)	(16.5	)%

24

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

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

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

Engineering, Research and Development

	Three Months Ended June 30,
	2012				2011
	Amount		% of Net Revenues		Amount		% of Net Revenues		Change			% Change
	(in thousands, except percentages)
Engineering, research and development	$	10,513	34.7	%	$	12,502	34.7	%	$	(1,989	)	(15.9	)%

	Nine Months Ended June 30,
	2012				2011
	Amount		% of Net Revenues		Amount		% of Net Revenues		Change			% Change
	(in thousands, except percentages)
Engineering, research and development	$	32,518	36.1	%	$	41,582	37.6	%	$	(9,064	)	(21.8	)%

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

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

The decrease in R&D expense in the three months ended June 30, 2012 as compared to the same period in the prior year is attributable to a $0.9 million lower compensation expense and a $0.8 million lower expense for EDA and other tools. The reduction in compensation resulted from our consolidation of multiple design center locations.

The decrease in R&D expense for the nine months endedJune 30, 2012 as compared to the same period in the prior year is largely attributable to lower compensation and facility expense of $4.3 million resulting from our consolidation of multiple locations, lower mask and test wafer expense of $1.5 million, lower tools expense of $2.0 million, and lower external physical design and test services of $0.4 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 will impact product development in fiscal year 2012.

25

Selling, General and Administrative

	Three Months Ended June 30,
	2012				2011
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
Selling, general and administrative	$	6,292	20.8	%	$	9,455	26.3	%	$	(3,163	)	(33.5	)%

	Nine Months Ended June 30,
	2012				2011
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
Selling, general and administrative	$	22,095	24.5	%	$	29,892	27.0	%	$	(7,797	)	(26.1	)%

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 three months ended June 30, 2012 as compared to the same period in the prior year is largely attributable to a successful collection of $1.3 million of bad debts reserved in the fourth quarter of fiscal 2011, lower personnel related expenses of $0.7 million, and expenses of $0.8 million related to IP sales incurred in the prior year quarter.

The decrease in SG&A expense for the nine months endedJune 30, 2012 as compared to the same period in the prior year is largely attributable to lower personnel related expenses of $3.2 million, successful collection of $1.5 million of bad debts reserved in the fourth quarter of fiscal 2011, $1.4 million in lower legal and accounting fees, lower facility expenses of $0.8 million due to our consolidation of facilities, reduced outside services of $0.5 million, and a reduction in travel of $0.5 million. Partially offsetting the reductions was a $0.6 million intangible asset write-down expense in the second quarter of fiscal year 2012.

Restructuring and Impairment Charges

	Three Months Ended June 30,
	2012				2011
	Amount		% of Net  Revenues		Amount		% of Net Revenues		Change			% Change
	(in thousands, except percentages)
Restructuring and impairment charges	$	4	—	%	$	211	0.6	%	$	(207	)	(98.1	)%

	Nine Months Ended June 30,
	2012				2011
	Amount		% of Net  Revenues		Amount		% of Net Revenues		Change			% Change
	(in thousands, except percentages)
Restructuring and impairment charges	$	36	—	%	$	554	0.5	%	$	(518	)	(93.5	)%

The restructuring and impairment costs in the three and nine months ended June 30, 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 nine months ended June 30, 2011 were related to a reduction in workforce at our Westford location.

26

Amortization of Intangible Assets

	Three Months Ended June 30,
	2012				2011
	Amount		% of Net  Revenues		Amount		% of Net Revenues		Change		% Change
	(in thousands, except percentages)
Amortization of intangible assets	$	88	0.3	%	$	62	0.2	%	$	26	41.9	%

	Nine Months Ended June 30,
	2012				2011
	Amount		% of Net  Revenues		Amount		% of Net Revenues		Change			% Change
	(in thousands, except percentages)
Amortization of intangible assets	$	234	0.3	%	$	288	0.3	%	$	(54	)	(18.8	)%

The increase in amortization in the three months ended June 30, 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 the nine months ended June 30, 2012, 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 June 30,
	2012				2011
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change		% Change
	(in thousands, except percentages)
Interest expense, net	$	1,950	6.4	%	$	1,929	5.4	%	$	21	1.1	%

	Nine Months Ended June 30,
	2012				2011
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
Interest expense, net	$	5,823	6.5	%	$	6,486	5.9	%	$	(663	)	(10.2	)%

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

The net interest expense remained unchanged for the three months ended June 30, 2012 as compared to the same period last year. The decrease in net interest expense for the nine months ended June 30, 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. 

Gain on Compound Embedded Derivative

	Three Months Ended June 30,
	2012					2011
	Amount			% of Net  Revenues		Amount			% of Net  Revenues		Change		% Change
	(in thousands, except percentages)
Gain on compound embedded derivative	$	(5,755	)	(19.0	)%	$	(7,951	)	(22.1	)%	$	2,196	(27.6	)%

27

	Nine Months Ended June 30,
	2012					2011
	Amount			% of Net  Revenues		Amount			% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
Gain on compound embedded derivative	$	(3,773	)	(4.2	)%	$	(2,491	)	(2.3	)%	$	(1,282	)	51.5	%

The gain on our compound embedded derivative related to our 2014 Debentures for the three and nine months ended June 30, 2012 and June 30, 2011 is primarily generated by the decrease in the price of our underlying common stock during those periods.

Loss on Extinguishment of Debt

	Nine Months Ended June 30,
	2012				2011
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
Loss on extinguishment of debt	$	—	—	%	$	3,874	3.5	%	$	(3,874	)	(100.0	)%

A loss on extinguishment of debt for the nine months ended June 30, 2011 was a result of the extinguishment of the Senior Term Loan at fair value, in which we recognized a $3.9 million loss for the difference between the aggregate fair values of Term A and B Loans plus additional amounts and fees paid to the noteholders compared to the net carrying value of the Senior Term Loan. For the purposes of calculating this loss on extinguishment, the net carrying amount of the Senior Term Loan was $18.7 million, which included the remaining outstanding principal of $17.0 million, the payment-in-kind balance of $1.7 million, and the balance of the unamortized costs of $0.6 million, as of February 4, 2011. There was no such activity for the three and nine ended June 30, 2012.

Income Tax Expense

	Three Months Ended June 30,
	2012				2011
	Amount		% of Net  Revenues		Amount			% of Net  Revenues		Change		% Change
	(in thousands, except percentages)
Income tax expense	$	1,234	4.1	%	$	(227	)	(0.6	)%	$	1,461	(643.6	)%

	Nine Months Ended June 30,
	2012				2011
	Amount		% of Net  Revenues		Amount			% of Net  Revenues		Change		% Change
	(in thousands, except percentages)
Income tax expense	$	1,363	1.5	%	$	(78	)	(0.1	)%	$	1,441	(1,847.4	)%

Our effective tax rate for the nine months ended June 30, 2012 was (140.9)%. Our effective tax rate is primarily impacted by withholding taxes on certain foreign income in 2012 and by Federal net operating losses (“NOLs”) for which no tax benefit is recorded since it is not more likely than not that we will ultimately realize the related net deferred tax assets. Our effective tax rate for the nine months ended June 30, 2011 was 0.7%, which was lower than the federal and state statutory rate due to the projected federal and state losses for the fiscal year.

28

Financial Condition and Liquidity

Cash Flow Analysis

Cash increased to $20.6 million at June 30, 2012, from $17.3 million at September 30, 2011. During the nine months ended June 30, 2012, we generated cash from operations, which was offset by cash used for capital expenditures and financing activities. Our cash flows from operating, investing and financing activities are summarized as follows: 

	Nine Months Ended June 30,
	2012			2011
	(in thousands)
Net cash provided by (used in) operating activities	$	5,210		$	(6,671	)
Net cash used in investing activities	(1,317		)	(3,178		)
Net cash used in financing activities	(625		)	(10,122		)
Net increase (decrease) in cash	3,268			(19,971		)
Cash at beginning of period	17,318			38,127
Cash at end of period	$	20,586		$	18,156

Net Cash Provided by (Used In) Operating Activities

During the nine months ended June 30, 2012, cash provided by operating activities totaled $5.2 million. We used $1.1 million cash related to the increase in accounts receivable. We used $0.8 million cash to pay down accounts payable and accrued expenses and $1.3 million related to a decrease in deferred revenue due to lower purchases from distributors. These uses were offset by the generation of $6.1 million cash from operating with lower inventory levels. Excluding changes in working capital, cash generated by operations totaled $1.9 million.

Accounts receivable increased $1.1 million from $9.6 million at September 30, 2011 to $10.7 million at June 30, 2012 resulting primarily from timing of sales. Inventory decreased $6.1 million from $20.9 million at September 30, 2011 to $14.8 million at June 30, 2012 due to ongoing efforts to ensure purchases align with production. Accounts payable and accrued liabilities decreased by $1.3 million from $19.7 million at September 30, 2011 to $18.4 million at June 30, 2012 due to the timing of obligations and/or payments to our vendors and other service providers.

During the nine months ended June 30, 2011, cash used in operating activities totaled $6.7 million. Excluding changes in working capital, cash used to fund our losses totaled $1.6 million. We also used $7.0 million to pay down our accounts payable and accrued liabilities and $4.8 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 $3.3 million and operating with lower inventory levels of $2.3 million.

Accounts receivable decreased $3.3 million from $15.8 million at September 30, 2010 to $12.5 million at June 30, 2011. The increased cash generated from the collection of accounts receivable was due to lower sales during the nine months ended June 30, 2011 compared to the same period last year. Inventory decreased $2.3 million from $27.3 million at September 30, 2010 to $25.0 million at June 30, 2011. Due to positive changes in the availability of materials, we decreased purchasing in the third quarter as compared to the second quarter of fiscal year 2011. Accounts payable decreased by $3.5 million from $13.2 million at September 30, 2010 to $9.7 million at June 30, 2011 due to a reduction in purchases from our suppliers as industry-wide material shortages eased, as well as the timing of payments to our vendors and other service providers. Accrued expenses decreased by $3.3 million from $16.3 million at September 30, 2010 to $13.0 million at June 30, 2011 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 nine months ended June 30, 2012 for capital expenditures of $0.5 million and payments under licensing agreements of $0.8 million. Investing activities used cash in the nine months ended June 30, 2011 for capital expenditures of $1.9 million and payments under licensing agreements of $1.3 million.

Net Cash Used In Financing Activities

Financing activities used $0.6 million in cash in the nine months ended June 30, 2012, primarily for the repurchase and retirement of restricted stock units for payroll taxes paid on behalf of employees. Financing activities used $10.1 million in cash in the nine months ended June 30, 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 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.

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 the sales or licensing of our IP. Our cash totaled $20.6 million at June 30, 2012. Our working capital at June 30, 2012 was $27.2 million.

In order to achieve sustained profitability and positive cash flows from operations, we may need to further reduce operating expenses and/or increase revenue. We have completed a series of cost reduction actions which 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, 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 principal payments on currently outstanding debt due in the next 12 months.

Contractual Obligations

	Payment Obligations by Fiscal Year
	Remaining in 2012		2013-2014		2015-2016		2017 and thereafter		Total
	(in thousands)
2014 Debentures (1)	$	—	$	—	$	46,493	$	—	$	46,493
Term A Loan (2)	—		7,857		—		—		7,857
Term B Loan (3)	—		—		9,342		—		9,342
Operating leases (4)	927		5,174		1,333		—		7,434
Software licenses (5)	2,305		6,934		5,600		5,600		20,439
Inventory and related purchase obligations (6)	3,219		1,346		—		—		4,565
Total	$	6,451	$	21,311	$	62,768	$	5,600	$	96,130

_________________________________________________

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

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

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

(4) 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.

29

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

(6) 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 June 30, 2012, we had no material off-balance sheet arrangements, other than operating leases.

30

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. There have been no material changes to these risks during the nine months ended June 30, 2012.

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 June 30, 2012, the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2012, 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 June 30, 2012, 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 June 30, 2012, the final disposition of these proceedings will not have a material adverse effect on the financial position, results of operations, or liquidity of the Company.

ITEM 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.

ITEM 6. EXHIBITS

Exhibit		Incorporated by Reference				Filed
Number	Exhibit Description	Form	File Number	Exhibit	Filing Date	Herewith
10.1*	Separation and General Release Agreement, dated May 17, 2012, between Registrant and Steve M. Perna					X
31.1	Certification of Principal Executive officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X
31.2	Certification of Principal Financial officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X
32.1	Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.					X
101.INS	XBRL Instance Document**					X
101.SCH	XBRL Taxonomy Extension Schema Document**					X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document**					X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document**					X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document**					X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document**					X

_____________________________________________________

* A management contract or compensatory plan or arrangement.

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

32

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.

August 7, 2012	VITESSE SEMICONDUCTOR CORPORATION
	By:	/s/ CHRISTOPHER R. GARDNER
		Christopher R. Gardner
		Chief Executive Officer
August 7, 2012	VITESSE SEMICONDUCTOR CORPORATION
	By:	/s/ MARTIN S. MCDERMUT
		Martin S. McDermut
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

33

EX-10.1

10.1

SEPARATION AGREEMENT AND GENERAL RELEASE

THIS SEPARATION AGREEMENT AND GENERAL RELEASE (hereinafter referred to as “Agreement”) is made and entered into by and between STEVEN M. PERNA (hereinafter referred to as “Employee”), and VITESSE SEMICONDUCTOR CORPORATION (hereinafter referred to as “the Company”).

A. WHEREAS, Employee was hired by the Company on August 2, 2010 in the position of Vice President, Product Marketing;

B. WHEREAS, Employee was employed by the Company whereby employment was subject to an Employment Agreement, dated August 2, 2010 (hereinafter referred to as “Employment Agreement”) but the relationship remained terminable “at-will;”

C. WHEREAS, Employee has submitted a notice to the Company indicating his desire to resignation his employment with the Company within two weeks, or specifically, May 30, 2012;

D. WHEREAS, the Company has agreed to accept Employee's resignation and Employee and the Company have mutually agreed that Employee's employment separation should be accelerated to treat this separation as a voluntary resignation effective May 18, 2012, with the last day of work being May 18, 2012;

E. WHEREAS, Employee and the Company also mutually agree to conclude the Employment Agreement;

F. WHEREAS, Employee and the Company desire to settle fully and settle finally any differences that might arise out of Employee's employment and/or the separation thereof; and

NOW THEREFORE, in consideration of the promises herein contained, it is agreed as follows:

1.The above-mentioned recitals are hereby incorporated into, and made a part of, this Agreement.

2.This Agreement shall not in any way be construed as an admission by the Company of any wrongful acts or acts whatsoever against Employee or any other person, and the Company specifically disclaims any liability to Employee or any other person, on the part of itself, its employees, or its agents.

3.Employee represents and agrees that his employment with the Company is concluded as of May 18, 2012, that the Company may elect not to rehire Employee.

4.As consideration for the release set forth in this Agreement, the Company shall pay Employee the gross sum of $7,230.72, as wages, with deduction for State or Federal taxes (hereinafter referred to as the “SEPARATION Amount”), which represents an amount equivalent to the compensation Employee would have been entitled to had he continued working through the notice period and is the consideration for accelerating the two week resignation notice period. Payment of said sum shall be made on the eighth day after both the Company and Employee have executed this Agreement. The Company will also allow Employee to retain the laptop computer (Serial Number __________) and portable cellular telephone (Model A1332) as his personal property. The Employee acknowledges and agrees that the computer and cell phone will be wiped clean by the Company's information technology department before it is retained by Employee after the resignation. The Company does not take any position on the tax consequence to Employee for his retention of the laptop computer and cell phone, but will treat this amount not as wages, but subject to issuance of IRS Form 1099. In the event that any State or Federal taxing agency determines that said provision of the laptop computer or cell phone to Employee, or any part thereof, is taxable income, it shall be solely Employee's responsibility to pay any and all assessed taxes. Employee shall hold the Company harmless to the fullest extent possible pursuant to law and indemnify the Company concerning the tax consequences, if any, to the fullest extent possible.

5.The Company has or will provide to Employee all accrued prorated vacation through last day of work. Employee further agrees to fully cooperate with the Company in all aspects related to the separation of employee, including, but not limited to, completing any and all exit paperwork, providing information upon request of the Company's attorneys, and participating in any and all required filings, proceedings, hearings, depositions, arbitration, or mediation where he is called upon to attend. On or about the last day of work, Employee shall receive notice concerning continuation of medical insurance pursuant to Federal law (COBRA). Thereafter, payment of premiums shall be Employee's sole responsibility to continue such COBRA coverage. In the event that Employee obtains subsequent health insurance coverage, he must immediately notify the Company of such coverage. Upon such notice, the Company shall have no further obligation to continue Employee's COBRA coverage.

6.The Company agrees to provide Employee with a job reference for all written and telephone requests to include only the following: job title and dates of employment. As further consideration, the Company agrees not to dispute Employee's claim for unemployment benefits. The Employee agrees and acknowledges that the California Employment Development Department is a separate entity and the Company does not control the decision to award benefits, if any, to Employee.

7.Except for the laptop computer and cellular telephone identified in paragraph 4 above, Employee agrees that he has turned over to the Company, all property belonging to the Company, including but not limited to documents concerning the Company's personnel matters, any and all of the Company's files, tapes, documents, keys, credit cards, telephone cards, books, software, passwords, equipment, manuals, tools and written materials.

8.This Agreement may not be used in evidence in any proceedings of any kind, except in an action alleging a breach of this Agreement. The parties expressly agree to waive the provisions of California Evidence Code §1152 solely to the extent necessary to render this

Agreement admissible in a proceeding to enforce the provisions hereof.

9.As a material inducement to the Company to enter into this Agreement, Employee hereby irrevocably and unconditionally releases, acquits, and forever discharges the Company and each of the Company's owners, shareholders, predecessors, successors, assigns, agents, directors, officers, employees, representatives, insurers, attorneys, divisions, subsidiaries, affiliates (and agents, directors, officers, employees, representatives and attorneys of such divisions, subsidiaries and affiliates), and all persons acting by, through, under or in concert with any of them (collectively “Employee's Releasees”), or any of them, from any and all complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, costs, losses, debts and expenses (including attorneys' fees and costs actually incurred), of any nature whatsoever, including but not limited to claims arising from the United States and California Constitutions; Title VII of the Civil Rights Act of 1964 (42 U.S.C. §2000e); the California Fair Employment and Housing Act (Cal. Govt. Code §12900 et seq.); the Americans with Disabilities Act; the Age Discrimination in Employment Act (29 U.S.C. §§621-633a); the Older Workers' Benefit Protection Act; Section 132a and 203 of the California Labor Code; termination of the Employment Agreement and claims of intentional infliction of emotional distress; breach of express or implied contract; or any other statute or common law principle of similar effect, known or unknown (“Employee's Claim” or “Employee's Claims”), which Employee now has, owns, or holds, or claims to have, own or hold, or which Employee at any time heretofore had, owned, or held, or claimed to have, own, or hold or which Employee at any time hereinafter may have, own, or hold, or claim to have, own, or hold, against each or any of the Employee's Releasees, arising from acts, events, or circumstances occurring on or before the effective date of this Agreement.

10.As a material inducement to Employee to enter into this Agreement, the Company hereby irrevocably and unconditionally releases, acquits, and forever discharges Employee and each of Employee's successors, assigns, agents, representatives, attorneys (collectively “the Company's Releasees”), or any of them, from any and all complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, costs, losses, debts and expenses (including attorneys' fees and costs actually incurred), of any nature whatsoever, known or unknown (“the Company's Claim” or “the Company's Claims”), which the Company now has, owns, or holds, or claims to have, own, or hold, or which the Company at any time heretofore had, owned, or held, or claimed to have, own, or hold, or which the Company at any time hereinafter may have, own, or hold, or claim to have, own, or hold, against each or any of the Company's Releasees, arising from acts, events or circumstances occurring on or before the effective date of this Agreement. If Employee exercises his right to revoke the release of the Age Discrimination in Employment Claim as provided for in paragraphs 23-24 below, the Company's release as provided for in this paragraph 10, will not be effective and the Company will retain any and all rights it has against Employee.

11.This Agreement will be effective after it is signed by both Employee and the Company.

12.Employee expressly waives and relinquishes all rights and benefits afforded by Section 1542 of the Civil Code of the State of California and does so understand and acknowledge the significance and consequence of such specific waiver of Section 1542 of the Civil Code of the State of California which states as follows:

“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER

FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.”

13.Employee further understands and acknowledges that this Agreement constitutes a voluntary waiver of any and all rights and claims he has against the Company as of the date of the execution of this Agreement, and he has expressly waived rights or claims pursuant to this Agreement in exchange for consideration, the value of which exceeds payment or remuneration to which Employee was already entitled.

14.Employee and the Company agree not to make any negative or derogatory remarks or statements, whether orally or in writing, about each other, or about any employee, officer or director of the Company.

15.This document constitutes the complete and entire Agreement between the parties pertaining to the subject matter hereof, and the final, complete and exclusive expression of the terms and conditions of their Agreement. Any and all prior agreements, representations, negotiations, and understandings between the parties, oral or written, express or implied, are hereby superseded and merged herein.

16.This Agreement may be amended, changed, or modified only by a written document signed by all parties hereto. No waiver of this Agreement or of any of the promises, obligations, terms, or conditions hereof shall be valid unless it is written and signed by the party against whom the waiver is to be enforced.

17.Employee represents that he has not heretofore assigned or transferred, or purported to assign or transfer, to any person or entity, any Employee's Claim or any portion thereof or interest therein. If any Employee's Claim should be made or instituted against Employee's Releasees, or any of them, because of any such purported assignment, Employee agrees to indemnify and hold harmless Employee's Releasees, and each of them, against any such Employee's Claim, including necessary expenses of investigation, attorneys' fees and costs.

18.This Agreement is made and entered into in the State of California, and shall in all respects be interpreted, enforced and governed under the laws of said State. The parties have cooperated in the preparation of this Agreement, and hence, the language of all parts of this Agreement shall in all cases be construed as a whole, according to its fair meaning, and not strictly for or against any of the parties, by virtue of the identity, interest or affiliation of its preparer.

19.Employee represents that he has not filed or authorized the filing of any complaints, charges, or lawsuits against Employee's Releasees, or any of them, with any Federal, State, or local court, governmental agency or administrative agency, and that if, unbeknownst to Employee, such a complaint, charge or lawsuit has been filed on his behalf, he will use his best efforts to cause it immediately to be withdrawn and dismissed with prejudice. Employee further agrees to execute any and all further documents and to perform any and all further acts reasonably necessary or useful in carrying out the provisions and purposes of this Agreement.

20.Should any provision of this Agreement be declared or be determined by any court to be illegal or invalid, the validity of the remaining parts, terms or provisions shall not be affected thereby and said illegal or invalid part, term or provision shall be deemed not to be part of this Agreement.

21.As used in this Agreement, the singular or plural number shall be deemed to include the other whenever the content so indicates or requires. In any action or other proceeding to enforce rights hereunder, the prevailing party shall receive an award of costs and expenses related to such proceeding, including attorneys' fees. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Signatures obtained via facsimile shall be deemed valid as if they were inked originals.

22.Employee represents and acknowledges that in executing this Agreement that he does not rely and has not relied upon any representation or statement made by any of the Employee's Releasees or by any of the Employee's Releasees' agents, representatives or attorneys with regard to the subject matter, basis or effect of this Agreement or otherwise.

23.Employee further specifically acknowledges that he has carefully read this Agreement, that he has had opportunity to consult an attorney to have any questions concerning this Agreement explained to him, that he fully understands its final and binding effect, that the only promises made to him to sign this Agreement are those stated above and that he is signing this Agreement voluntarily. Executive further understands and acknowledges that:

(1)   This Agreement constitutes a voluntary waiver of any and all rights and claims he has against Employee's Releasees as of the date of the execution of this Agreement, including rights or claims arising under the Federal Age Discrimination in Employment Act of 1967 (“ADEA”), 29 U.S.C. §§ 621 et seq., as amended by the Older Workers' Benefit Protection Act of 1990, except for any allegation that a breach of this Act occurred following the Ending Date;

(2)   He has waived rights or claims pursuant to this Agreement in exchange for consideration, the value of which exceeds the payment or remuneration to which he was already entitled;

(3)   He is hereby advised that he may consult with an attorney of his choosing concerning this Agreement prior to executing it;

(4)   He has been afforded a period of at least twenty-one (21) days to consider the terms of this Agreement, and in the event he should decide to execute this Agreement in fewer than twenty-one days, he has done so with the express understanding that he has been given and declined the opportunity to consider this Agreement for a full twenty-one days;

(5)   He may revoke this paragraph 23 of the Agreement at any time during the seven (7) days following the date of execution of this Agreement, and this paragraph 23of the Agreement shall not become effective or enforceable until such revocation period has expired. Employee further understands and acknowledges that he may revoke only paragraph 23 of this Agreement as it relates to any claim pursuant to the Federal Age Discrimination in Employment Act, and that such revocation, if any, will not affect the effectiveness or enforceability of any other of the Released Matters as they are described in paragraph 9; and

(6)   If Employee exercises his right to revoke the release of the Age Discrimination in Employment Claim as provided for in these paragraphs, the Company's release as provided for in paragraph 10, will not become effective and the Company will retain any and all rights it has against Employee.

[THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK.]

24.In the event Employee exercises the right to revocation, as discussed in paragraph 23 above, Employee must notify the Company of such revocation in writing via facsimile and certified mail, return receipt requested. Said notification will be considered timely if post-marked no later than the seventh day after Employee has signed this Agreement. Any such revocation must be addressed to the attention of Ronda Grech at the following address: 741 Calle Plano, Camarillo, California 93012; facsimile number (805) 389-7188.

EMPLOYEE

DATED: 5/17/2012 By: /s/ Steve Perna            

STEVE M. PERNA

THE COMPANY

DATED: 5/17/2012 By:    /s/ CHRISTOPHER GARDNER        

CHRISTOPHER R. GARDNER

Its:CHIEF EXECUTIVE OFFIER

EX-31.1

EXHIBIT 31.1

Certification of Chief Executive Officer Pursuant to

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

as Adopted Pursuant to

Section 302 of the Sarbanes Oxley Act of 2002

I, Christopher R. Gardner, certify that:

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

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

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

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

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

August 7, 2012	/s/ CHRISTOPHER R. GARDNER
	Christopher R. Gardner
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

Certification of Chief Financial Officer Pursuant to

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

as Adopted Pursuant to

Section 302 of the Sarbanes Oxley Act of 2002

I, Martin S. McDermut, certify that:

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

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

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

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

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

August 7, 2012	/s/ MARTIN S. MCDERMUT
	Martin S. McDermut
	Chief Financial Officer

EX-32.1

Exhibit 32.1

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

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Vitesse Semiconductor Corporation (the “Company”) on Form 10-Q for the three months ended June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

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

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

August 7, 2012	/s/ CHRISTOPHER R. GARDNER
	Christopher R. Gardner
	Chief Executive Officer
August 7, 2012	/s/ MARTIN S. MCDERMUT
	Martin S. McDermut
	Chief Financial Officer

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STOCK BASED COMPENSATION Summary of restricted stock unit activity (Details) (Restricted Stock Units (RSUs), USD $) In Millions, except Share data, unless otherwise specified	9 Months Ended
	Jun. 30, 2012
Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award, Non-Option Equity Instruments, Outstanding [Roll Forward]
Restricted stock units, Restricted Stock Units, Beginning balance	1,295,979
Restricted stock units, Weighted Average Grant-Date Fair Value per Share, Beginning balance	$ 4.67
Restricted Stock Units, Awarded	1,258,075
Weighted Average Grant-Date Fair Value per Share, Awarded	$ 2.57
Restricted Stock Units, Released	(708,953)
Weighted Average Grant-Date Fair Value per Share, Released	$ 3.99
Restricted Stock Units, Forfeited	(143,080)
Weighted Average Grant-Date Fair Value per Share, Forfeited	$ 3.44
Restricted stock units, Restricted Stock Units, Ending balance	1,702,021
Restricted stock units, Weighted Average Grant-Date Fair Value per Share, Ending balance	$ 3.50
Restricted stock units, Weighted average remaining contractual life (in years), Ending balance	1 year 3 months 29 days
Aggregate intrinsic value, Ending balance, Restricted stock	$ 4,510,356
Impact of retaining common stock from employees upon vesting of restricted shares and restricted stock units to cover income tax withholding	$ 0.6

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FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY Fair value of compound embedded derivative liability (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Jun. 30, 2012	Jun. 30, 2012 Fair Value, Measurements, Recurring	Sep. 30, 2011 Fair Value, Measurements, Recurring	Jun. 30, 2012 Fair Value, Measurements, Recurring Level 1	Sep. 30, 2011 Fair Value, Measurements, Recurring Level 1	Jun. 30, 2012 Fair Value, Measurements, Recurring Level 2	Sep. 30, 2011 Fair Value, Measurements, Recurring Level 2	Jun. 30, 2012 Fair Value, Measurements, Recurring Level 3	Sep. 30, 2011 Fair Value, Measurements, Recurring Level 3
Statement [Line Items]
Fair Value Inputs, Discount Rate	8.00%
Compound embedded derivative liability		$ 4,023	$ 7,796	$ 0	$ 0	$ 0	$ 0	$ 4,023	$ 7,796
Total liabilities		$ 4,023	$ 7,796	$ 0	$ 0	$ 0	$ 0	$ 4,023	$ 7,796

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THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES Narrative (Details) (USD $) In Millions, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]
Allowance for Doubtful Accounts	$ 0.7	$ 2.2

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RESTRUCTURING AND IMPAIRMENT CHARGES Restructuring and Impairment Charges (Details) (USD $)	9 Months Ended
	Jun. 30, 2012
Restructuring Reserve [Roll Forward]
Liability balance, Beginning	$ 2,608,000
Charged to operations	24,000
Non-cash charges	12,000
Cash payments	(995,000)
Liability balance, Ending	1,649,000
Facility Consolidation and Operating Lease Commitments
Restructuring Cost and Reserve [Line Items]
Lease exit costs	1,400,000
Asset impairment charges for asset write-down for tenant improvements	1,100,000
Restructuring Reserve [Roll Forward]
Liability balance, Beginning	2,310,000
Charged to operations	0
Non-cash charges	29,000
Cash payments	(690,000)
Liability balance, Ending	1,649,000
Severance Costs
Restructuring Reserve [Roll Forward]
Liability balance, Beginning	298,000
Charged to operations	24,000
Non-cash charges	(17,000)
Cash payments	(305,000)
Liability balance, Ending	$ 0

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STOCK BASED COMPENSATION Activity under all stock option plans (Details) (USD $)	9 Months Ended	12 Months Ended
	Jun. 30, 2012	Sep. 30, 2011
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Options outstanding, Shares, Beginning balance	1,699,183
Options outstanding, Weighted average exercise price, Beginning balance	$ 29.77
Options outstanding,Weighted average remaining contractual life (in years), Beginning balance	6 years 10 months 2 days	6 years 4 months 13 days
Shares, Granted	389,182
Weighted average exercise price, Granted	$ 2.55
Shares, Exercised	(6,047)
Weighted average exercise price, Exercised	$ 2.54
Shares, Cancelled or expired	(273,770)
Weighted average exercise price, Cancelled or expired	$ 78.25
Options outstanding, Shares, Ending balance	1,808,548	1,699,183
Options outstanding, Weighted average exercise price, Ending balance	$ 16.67	$ 29.77
Options outstanding, Weighted average remaining contractual life (in years), Ending balance	6 years 10 months 2 days	6 years 4 months 13 days
Options outstanding, Aggregate intrinsic value, Ending balance	$ 38,316
Options exercisable, Shares, Ending balance	992,566
Options exercisable, Weighted average exercise price, Ending balance	$ 27.13
Options exercisable, Weighted average remaining contractual life (in years), Ending balance	5 years 4 months 13 days
Aggregate intrinsic value, Options exercisbale	$ 8,884
Closing stock price used to calculate total pretax intrinsic value	$ 2.65
In-the-money stock options exercisable	100,000

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INVENTORY

9 Months Ended

Jun. 30, 2012

Inventory Disclosure [Abstract]

INVENTORY

INVENTORY

	June 30, 2012		September 30, 2011
	(in thousands)
Inventory:
Raw materials	$	1,480	$	883
Work-in-process	6,937		9,247
Finished goods	6,379		10,727
Total	$	14,796	$	20,857

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SEGMENT AND GEOGRAPHIC INFORMATION Schedule of Revenue by Major Customers by Reporting Segments (Details)	3 Months Ended				9 Months Ended
	Jun. 30, 2012		Jun. 30, 2011		Jun. 30, 2012		Jun. 30, 2011
Revenue from External Customer [Line Items]
Number of Operating Segments					1
Major Customers, Nu Horizons Electronics | Customer Concentration Risk [Member] | Sales
Revenue from External Customer [Line Items]
Concentration Risk, Percentage	10.70%	[1]	20.60%	[1]	14.30%	[1]	20.20%	[1]
Major Customers, WPG | Customer Concentration Risk [Member] | Sales
Revenue from External Customer [Line Items]
Concentration Risk, Percentage	13.90%	[1]			12.80%	[1]
Major Customers, Huawei | Customer Concentration Risk [Member] | Sales
Revenue from External Customer [Line Items]
Concentration Risk, Percentage							10.10%

[1] Distributor

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DEBT Schedule of Long-term Debt Instruments (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
Debt Instrument [Line Items]
Long-term debt, net	$ 15,742	$ 15,444
Convertible subordinated debt, net of discount	42,064	40,736
Long-term Debt and Capital Lease Obligations	57,806	56,180
Term A Loan, 10.5% fixed-rate notes, due February 2014 | Term A Loan, 10.5% fixed-rate notes, due February 2014
Debt Instrument [Line Items]
Long-term debt, net	8,130	8,247
Term B Loan, convertible, 8.0% fixed-rate notes, due October 2014 | Term B Loan-convertible, 8.0% fixed-rate notes, due October 2014
Debt Instrument [Line Items]
Long-term debt, net	7,600	7,177
Capital leases, non-current portion
Debt Instrument [Line Items]
Long-term debt, net	12	20
2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014
Debt Instrument [Line Items]
Convertible subordinated debt, net of discount	$ 42,064	$ 40,736

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INVENTORY INVENTORY (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
Inventory:
Raw materials	$ 1,480	$ 883
Work-in-process	6,937	9,247
Finished goods	6,379	10,727
Total	$ 14,796	$ 20,857

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SEGMENT AND GEOGRAPHIC INFORMATION Net Revenues By Geographic Area (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended				9 Months Ended
	Jun. 30, 2012		Jun. 30, 2011		Jun. 30, 2012		Jun. 30, 2011
Revenue from External Customer [Line Items]
Total net revenues	$ 30,287		$ 35,988		$ 90,015		$ 110,627
United States
Revenue from External Customer [Line Items]
Total net revenues	9,545		16,052		32,543		41,118
Asia Pacific
Revenue from External Customer [Line Items]
Total net revenues	17,550		15,223		45,502		50,731
EMEA
Revenue from External Customer [Line Items]
Total net revenues	$ 3,192	[1]	$ 4,713	[1]	$ 11,970	[1]	$ 18,778	[1]

[1] Europe, Middle East and Africa

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DEBT Schedule of Outstanding Debt (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	Jun. 30, 2012
Term A Loan, 10.5% fixed-rate notes, due February 2014 | Term A Loan, 10.5% fixed-rate notes, due February 2014
Debt Instrument [Line Items]
Principal	$ 7,857
Unaccreted debt premium/(unamortized) debt discount	273
Carrying value	8,130
Annual effective interest rate	8.20%
Term B Loan, convertible, 8.0% fixed-rate notes, due October 2014 | Term B Loan-convertible, 8.0% fixed-rate notes, due October 2014
Debt Instrument [Line Items]
Principal	9,342
Unaccreted debt premium/(unamortized) debt discount	(1,742)
Carrying value	7,600
Annual effective interest rate	17.70%
Conversion rate per common share	$ 4.95
2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014
Debt Instrument [Line Items]
Principal	46,493
Unaccreted debt premium/(unamortized) debt discount	(4,429)
Carrying value	$ 42,064
Annual effective interest rate	12.20%
Conversion rate per common share	$ 4.50

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DEBT Narrative (Details) (USD $) In Millions, except Per Share data, unless otherwise specified	3 Months Ended	9 Months Ended
	Jun. 30, 2012	Jun. 30, 2012	Oct. 30, 2012
2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014
Debt Instrument [Line Items]
Percentage of principal allowed to be prepaid	100.00%	100.00%
Stock price as a percentage of conversion price, minimum	130.00%	130.00%
Trading period, ,minimum	20 days
Consecutive trading period	30 days
Minimum of the average daily volume weighted Aaerage price per share paid in cash or common shares			95.00%
Trading day period to pay in cash or common shares		10 days
Conversion of outstanding principal that would convert to common stock (in shares)	10.3	10.3
Cash make whole amount	$ 1.2	$ 1.2
Shares of common stock make whole amount	0.5	0.5
Term B Loan-convertible, 8.0% fixed-rate notes, due October 2014 | Term B Loan, convertible, 8.0% fixed-rate notes, due October 2014
Debt Instrument [Line Items]
Percentage of principal allowed to be prepaid	100.00%	100.00%
Stock price as a percentage of conversion price, minimum	130.00%	130.00%
Trading period, ,minimum	20 days
Consecutive trading period	30 days
Conversion of outstanding principal that would convert to common stock (in shares)	1.9	1.9
Term A and B Loans
Debt Instrument [Line Items]
Percentage of principal required to be redeemed	100.00%	100.00%
Minimum | Term A and B Loans
Debt Instrument [Line Items]
Trading price of common stock payable in additional shares range		$ 3.20
Maximum | Term A and B Loans
Debt Instrument [Line Items]
Trading price of common stock payable in additional shares range		$ 16

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COMPUTATION OF NET LOSS PER SHARE

9 Months Ended

Jun. 30, 2012

Earnings Per Share [Abstract]

COMPUTATION OF NET LOSS PER SHARE

COMPUTATION OF NET INCOME (LOSS) PER SHARE

The computation of net income (loss) per share is as follows:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012			2011
	(in thousands, except per share data)
Net income (loss)	$	4,711	$	6,550	$	(2,330	)	$	(10,223	)
Allocation of undistributed earnings to preferred stock	122		176		—			—
Net income (loss) available to common stockholders after allocation for participating securities	$	4,589	$	6,374	$	(2,330	)	$	(10,223	)
Impact of assumed conversions:
Interest on 2014 Debentures, net of tax	1,308		1,237		—			—
Interest on Term B Loan, net of tax	319		284		—			—
Net income (loss) available to common stockholders plus assumed conversions	$	6,216	$	7,895	$	(2,330	)	(10,223		)
Weighted average number of shares - basic	25,302		24,447		24,951			24,266
Effect of dilutive common stock equivalents from:
Outstanding stock options	30		25		—			—
Outstanding restricted stock units	188		178		—			—
Convertible preferred stock	674		674		—			—
2014 Debentures	10,332		10,332		—			—
Term B Loan	1,887		1,887		—			—
Weighted average number of shares - diluted	38,413		37,543		24,951			24,266
Net income (loss) per common share:
Net income (loss) available to common stockholders after allocation for participating securities - Basic	$	0.18	$	0.26	$	(0.09	)	$	(0.42	)
Net income (loss) available to common stockholders - Diluted	$	0.12	$	0.17	$	(0.09	)	$	(0.42	)
Impact of assumed conversions:
Interest on 2014 Debentures, net of tax	0.03		0.03		—			—
Interest on Term B Loan, net of tax	0.01		0.01		—			—
Net income (loss) available to common stockholders plus assumed conversions	$	0.16	$	0.21	$	(0.09	)	$	(0.42	)

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

For periods in which we report net income, the weighted average number of shares used to calculate diluted income per share is inclusive of common stock equivalents from unexercised stock options, restricted stock units, shares to be issued under our Employee Stock Purchase Plan (“ESPP”), warrants, convertible preferred stock, and 2014 Debentures. Unexercised stock options, restricted stock units, unvested shares to be issued under our ESPP, and warrants are considered to be common stock equivalents if, using the treasury stock method, they are determined to be dilutive.

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

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

	Three Months Ended June 30,		Nine Months Ended June 30,
	2012	2011	2012	2011
	(in thousands)
Outstanding stock options	1,477	1,350	1,809	1,429
Outstanding restricted stock units	810	343	1,702	287
Outstanding warrants	—	8	—	8
ESPP shares	327	—	327	—
Convertible preferred stock	—	—	674	674
2014 Debentures	—	—	10,332	10,332
Term B Loan	—	—	1,887	1,887
Total potential common stock excluded from calculation	2,614	1,701	16,731	14,617

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DEBT Schedule of Maturities of Long-term Debt (Details) (USD $)	3 Months Ended
	Jun. 30, 2012
Debt Disclosure [Abstract]
2014	$ 7,857,000
2015	55,835,000
Total	63,692,000
Mandatory repayment amount of principal waived	$ 1,700,000

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STOCK BASED COMPENSATION Employee Stock Purchase Plan (Details) (USD $) In Thousands, except Share data in Millions, unless otherwise specified	3 Months Ended		9 Months Ended		0 Months Ended		3 Months Ended	9 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Jul. 31, 2012 ESPP Shares	Jan. 31, 2012 ESPP Shares	Jun. 30, 2012 ESPP Shares	Jun. 30, 2012 ESPP Shares	Jan. 31, 2011 ESPP Shares	Jun. 30, 2012 Minimum ESPP Shares	Jun. 30, 2012 Maximum ESPP Shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total number of common stock shares reserved for issuance	4.1		4.1						2.5
ESPP shares issued					0.5	0.3
Per share price of ESPP shares issued					$ 1.79	$ 2.59
Discount rate on ESPP shares issued					15.00%	15.00%
ESPP for percent of share of stock							15.00%	15.00%
Call option for percent of share of stock							85.00%	85.00%
Put option for percent of share stock							15.00%	15.00%
Expected life (in years)								6 months
Expected volatility, Weighted-average										40.40%	48.40%
Expected dividend rate								0.00%
Risk-free interest rate										0.09%	0.20%
Stock compensation recognized	$ 1,092	$ 926	$ 3,301	$ 2,534			$ 200	$ 400

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CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
Current assets:
Cash	$ 20,586	$ 17,318
Accounts receivable, net	10,724	9,591
Inventory	14,796	20,857
Restricted cash	92	404
Prepaid expenses and other current assets	1,985	2,039
Total current assets	48,183	50,209
Property, plant and equipment, net	4,530	5,934
Other intangible assets, net	1,625	1,781
Other assets	2,805	3,070
Total Assets	57,143	60,994
Current liabilities:
Accounts payable	5,234	5,198
Accrued expenses and other current liabilities	13,208	14,463
Deferred revenue	2,580	3,878
Current portion of capital leases	11	11
Total current liabilities	21,033	23,550
Other long-term liabilities	1,518	1,927
Long-term debt, net	15,742	15,444
Compound embedded derivative	4,023	7,796
Convertible subordinated debt, net	42,064	40,736
Total liabilities	84,380	89,453
Commitments and contingencies, See note 10
Stockholders' deficit:
Preferred stock, $0.01 par value. 10,000 shares authorized; Series B Non Cumulative, Convertible, 135 shares outstanding at June 30, 2012 and September 30, 2011	1	1
Common stock, $0.01 par value. 250,000 shares authorized; 25,315 and 24,470 shares outstanding at June 30, 2012 and September 30, 2011, respectively	253	245
Additional paid-in-capital	1,827,977	1,824,433
Accumulated deficit	(1,855,468)	(1,853,138)
Total stockholders' deficit	(27,237)	(28,459)
Total Liabilities and Stockholders' Deficit	$ 57,143	$ 60,994

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SEGMENT AND GEOGRAPHIC INFORMATION Product Revenues By The Three Product Lines (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Revenue from External Customers [Line Items]
Product revenues	$ 25,730	$ 31,856	$ 81,867	$ 103,855
Connectivity
Revenue from External Customers [Line Items]
Product revenues	10,761	17,500	38,433	52,827
Ethernet switching
Revenue from External Customers [Line Items]
Product revenues	8,402	9,334	23,202	28,810
Transport processing
Revenue from External Customers [Line Items]
Product revenues	$ 6,567	$ 5,022	$ 20,232	$ 22,218

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Cash flows provided by (used in) operating activities:
Net loss	$ (2,330)	$ (10,223)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	2,228	2,765
Stock-based compensation	3,301	2,534
Change in fair value of compound embedded derivative liability	(3,773)	(2,491)
Loss (gain) on disposal of assets	650	(45)
Loss on extinguishment of debt, net	0	3,794
Interest paid in kind	0	415
Amortization of debt issuance costs	204	276
Amortization of debt discounts	1,751	1,468
Accretion of debt premiums	(117)	(80)
Change in operating assets and liabilities:
Accounts receivable	(1,134)	3,287
Inventory	6,062	2,325
Prepaids and other assets	441	1,108
Accounts payable	36	(3,559)
Accrued expenses and other liabilities	(811)	(3,438)
Deferred revenue	(1,298)	(4,807)
Net cash provided by (used in) operating activities	5,210	(6,671)
Cash flows used in investing activities:
Capital expenditures	(536)	(1,915)
Payments under licensing agreements	(781)	(1,263)
Net cash used in investing activities	(1,317)	(3,178)
Cash flows used in financing activities:
Proceeds from the exercise of stock options	16	0
Payment of senior debt	0	(8,000)
Cash restricted for payment of senior debt	0	(1,500)
Debt issuance costs	0	(60)
Repurchase and retirement of restricted stock units for payroll taxes	(633)	(554)
Capital lease obligations	(8)	(8)
Net cash used in financing activities	(625)	(10,122)
Net increase (decrease) in cash	3,268	(19,971)
Cash at beginning of period	17,318	38,127
Cash at end of period	20,586	18,156
Cash paid during the year for:
Interest	4,919	5,249
Income taxes	1,474	511
Non cash investing and financing activities:
Common stock issued under ESPP	868	0
Common stock issued in exchange for Series B Preferred Stock	0	3
Residual value allocated to the equity conversion feature	0	2,490
Premium related to Term B Loan issued in debt exchange	$ 0	$ 2,572

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FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY Schedule of the fair value of the loans and compound embedded derivative (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
Carrying (Reported) Amount, Fair Value Disclosure | Term A Loan
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term Debt, Fair Value	$ 8,130	$ 8,247
Carrying (Reported) Amount, Fair Value Disclosure | Term B Loan
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term Debt, Fair Value	7,600	7,177
Carrying (Reported) Amount, Fair Value Disclosure | 2014 Debentures
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term Debt, Fair Value	42,064	40,736
Estimate of Fair Value, Fair Value Disclosure | Term A Loan
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term Debt, Fair Value	8,467	9,990
Estimate of Fair Value, Fair Value Disclosure | Term B Loan
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term Debt, Fair Value	8,535	8,661
Estimate of Fair Value, Fair Value Disclosure | 2014 Debentures
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term Debt, Fair Value	$ 46,791	$ 45,228

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STOCK BASED COMPENSATION (Tables)

9 Months Ended

Jun. 30, 2012

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

Compensation costs related to the stock-based compensation plans

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

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011
	(in thousands)
Cost of revenues	$	147	$	123	$	415	$	353
Engineering, research and development	387		288		1,151		758
Selling, general and administrative	558		515		1,735		1,423
Total stock-based compensation expense	$	1,092	$	926	$	3,301	$	2,534

Activity under all stock option plans

Activity in stock option awards is as follows:

	Shares		Weighted average exercise price		Weighted average remaining contractual life (in years)	Aggregate intrinsic value
Options outstanding, September 30, 2011	1,699,183		$	29.77	6.37	$	—
Granted	389,182		2.55		—	—
Exercised	(6,047	)	2.54		—	—
Cancelled or expired	(273,770	)	78.25		—	—
Options outstanding, June 30, 2012	1,808,548		16.67		6.84	38,316
Options exercisable, June 30, 2012	992,566		$	27.13	5.37	$	8,884

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

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

	Nine Months Ended June 30,
	2012	2011
Expected life (in years)	5.64	6.24
Expected volatility:
Weighted-average	87.0%	85.8%
Range	85.5% - 87.1%	85.7% - 86.5%
Expected dividend	—	—
Risk-free interest rate	1.05% - 1.27%	2.23% - 2.78%

Summary of restricted stock unit activity

Activity for our restricted stock award units 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, September 30, 2011	1,295,979		$	4.67
Awarded	1,258,075		2.57
Released	(708,953	)	3.99
Forfeited	(143,080	)	3.44
Restricted stock units, June 30, 2012	1,702,021		$	3.50	1.33	$	4,510,356

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STOCK BASED COMPENSATION Compensation costs related to the stock-based compensations plans (Details) (USD $) Share data in Millions, unless otherwise specified	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total number of common stock shares reserved for issuance	4.1		4.1
Number of shares available for future grant	0.6		0.6
Total stock-based compensation expense	$ 1,092,000	$ 926,000	$ 3,301,000	$ 2,534,000
Unrecognized stock-based compensation expense	6,700,000		6,700,000
Weighted average period over which the unearned stock-based compensation is expected to be recognized			2 years 3 months
Cost of revenues
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock-based compensation expense	147,000	123,000	415,000	353,000
Engineering, research and development
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock-based compensation expense	387,000	288,000	1,151,000	758,000
Selling, general and administrative
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock-based compensation expense	$ 558,000	$ 515,000	$ 1,735,000	$ 1,423,000
Stock Options And Restricted Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Estimated forfeiture rate	5.23%		5.23%

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SEGMENT AND GEOGRAPHIC INFORMATION (Tables)

9 Months Ended

Jun. 30, 2012

Segment Reporting [Abstract]

Schedule of Revenue by Major Customers by Reporting Segments

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

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011
Nu Horizons Electronics **	10.7	%	20.6	%	14.3	%	20.2	%
WPG **	13.9	%	*		12.8	%	*
Huawei	*		*		*		10.1	%

 __________________________________________________

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

**Distributor

Net Revenues By Geographic Area

Net revenue by geographic area is as follows:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011
	(in thousands)
United States	$	9,545	$	16,052	$	32,543	$	41,118
Asia Pacific	17,550		15,223		45,502		50,731
EMEA*	3,192		4,713		11,970		18,778
Total net revenues	$	30,287	$	35,988	$	90,015	$	110,627

________________________________________________

*Europe, Middle East and Africa

Product Revenues By The Three Product Lines

Product revenue by product line is as follows:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011
	(in thousands)
Connectivity	$	10,761	$	17,500	$	38,433	52,827
Ethernet switching	8,402		9,334		23,202		28,810
Transport processing	6,567		5,022		20,232		22,218
Product revenues	$	25,730	$	31,856	$	81,867	$	103,855

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THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Jun. 30, 2012

Organization, Consolidation and Presentation of Financial Statements [Abstract]

THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Vitesse Semiconductor Corporation (“Vitesse,” the “Company,” “us” or “we”) is a leading supplier of high-performance integrated circuits (“ICs”) that are utilized 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, included in our Annual Report on Form 10-K filed with the SEC on December 6, 2011.

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

Reclassifications

Certain reclassifications have been made to prior year amounts and related footnotes to conform to current-year presentation with no changes to stockholders’ deficit amounts as of June 30, 2011 or net income (loss) for the three months and nine months ended June 30, 2011.

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 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.

Revenue Recognition

Product revenues

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

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

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

Intellectual property revenues

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

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

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

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

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

Multiple element transactions

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

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

Fair Value

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

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

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

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

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

Financial Instruments

ASC Topic 825, Financial Instruments, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. Our financial instruments include cash, accounts receivable, accounts payable, and accrued expenses. These financial instruments are stated at their carrying values, which are estimates of their fair values because of their nearness to cash settlement or the comparability of their terms to the terms we 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.

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.

Senior Term B Loan

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

Convertible subordinated debt

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

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

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

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

Intangible and Long-Lived Assets

Our intangible assets consist primarily of existing technologies, IP, and costs for our enterprise resource planning system. 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 $0.7 million and $2.2 million as of June 30, 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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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
Statement of Financial Position [Abstract]
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	10,000	10,000
Preferred stock, shares outstanding	135	135
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	250,000	250,000
Common stock, shares outstanding	25,315	24,470

XML

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

9 Months Ended

Jun. 30, 2012

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Fiscal Year

Fiscal Year

Our fiscal year is October 1 through September 30.

Basis of Presentation

Basis of Presentation

The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended September 30, 2011, included in our Annual Report on Form 10-K filed with the SEC on December 6, 2011.

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

Reclassifications

Reclassifications

Certain reclassifications have been made to prior year amounts and related footnotes to conform to current-year presentation with no changes to stockholders’ deficit amounts as of June 30, 2011 or net income (loss) for the three months and nine months ended June 30, 2011

Use of Estimates

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the unaudited consolidated financial statements. Management regularly evaluates estimates and assumptions related to revenue recognition, allowances for doubtful accounts, warranty reserves, inventory 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.

Revenue Recognition, Product Revenues

Product revenues

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

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

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

Revenue Recognition, Intellectual Property Revenues

Intellectual property revenues

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

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

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

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

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

Revenue Recognition, Multiple Element Transactions

Multiple element transactions

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

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

Fair Value

Fair Value

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

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

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

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

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

Financial Instruments

Financial Instruments

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

Senior Term B Loan

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

Convertible subordinated debt

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

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

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

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

Intangible and Long-Lived Assets

Intangible and Long-Lived Assets

Our intangible assets consist primarily of existing technologies, IP, and costs for our enterprise resource planning system. 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

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 $0.7 million and $2.2 million as of June 30, 2012 and September 30, 2011, respectively.

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Document and Entity Information	9 Months Ended
	Jun. 30, 2012	Aug. 03, 2012
Document And Entity Information [Abstract]
Entity Registrant Name	VITESSE SEMICONDUCTOR CORP
Entity Central Index Key	0000880446
Document Type	10-Q
Document Period End Date	Jun. 30, 2012
Amendment Flag	false
Current Fiscal Year End Date	--09-30
Entity Filer Category	Accelerated Filer
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3
Entity Common Stock, Shares Outstanding		25,803,508

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COMPUTATION OF NET LOSS PER SHARE (Tables)

9 Months Ended

Jun. 30, 2012

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted

The computation of net income (loss) per share is as follows:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012			2011
	(in thousands, except per share data)
Net income (loss)	$	4,711	$	6,550	$	(2,330	)	$	(10,223	)
Allocation of undistributed earnings to preferred stock	122		176		—			—
Net income (loss) available to common stockholders after allocation for participating securities	$	4,589	$	6,374	$	(2,330	)	$	(10,223	)
Impact of assumed conversions:
Interest on 2014 Debentures, net of tax	1,308		1,237		—			—
Interest on Term B Loan, net of tax	319		284		—			—
Net income (loss) available to common stockholders plus assumed conversions	$	6,216	$	7,895	$	(2,330	)	(10,223		)
Weighted average number of shares - basic	25,302		24,447		24,951			24,266
Effect of dilutive common stock equivalents from:
Outstanding stock options	30		25		—			—
Outstanding restricted stock units	188		178		—			—
Convertible preferred stock	674		674		—			—
2014 Debentures	10,332		10,332		—			—
Term B Loan	1,887		1,887		—			—
Weighted average number of shares - diluted	38,413		37,543		24,951			24,266
Net income (loss) per common share:
Net income (loss) available to common stockholders after allocation for participating securities - Basic	$	0.18	$	0.26	$	(0.09	)	$	(0.42	)
Net income (loss) available to common stockholders - Diluted	$	0.12	$	0.17	$	(0.09	)	$	(0.42	)
Impact of assumed conversions:
Interest on 2014 Debentures, net of tax	0.03		0.03		—			—
Interest on Term B Loan, net of tax	0.01		0.01		—			—
Net income (loss) available to common stockholders plus assumed conversions	$	0.16	$	0.21	$	(0.09	)	$	(0.42	)

Schedule of potenital common shares excluded from the diluted computation

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

	Three Months Ended June 30,		Nine Months Ended June 30,
	2012	2011	2012	2011
	(in thousands)
Outstanding stock options	1,477	1,350	1,809	1,429
Outstanding restricted stock units	810	343	1,702	287
Outstanding warrants	—	8	—	8
ESPP shares	327	—	327	—
Convertible preferred stock	—	—	674	674
2014 Debentures	—	—	10,332	10,332
Term B Loan	—	—	1,887	1,887
Total potential common stock excluded from calculation	2,614	1,701	16,731	14,617

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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Net revenues:
Product revenues	$ 25,730	$ 31,856	$ 81,867	$ 103,855
Intellectual property revenues	4,557	4,132	8,148	6,772
Net revenues	30,287	35,988	90,015	110,627
Costs and expenses:
Cost of product revenues	11,270	13,432	34,028	40,776
Engineering, research and development	10,513	12,502	32,518	41,582
Selling, general and administrative	6,292	9,455	22,095	29,892
Restructuring and impairment charges	4	211	36	554
Amortization of intangible assets	88	62	234	288
Costs and expenses	28,167	35,662	88,911	113,092
Income (loss) from operations	2,120	326	1,104	(2,465)
Other (income) expense:
Interest expense, net	1,950	1,929	5,823	6,486
Gain on compound embedded derivative	(5,755)	(7,951)	(3,773)	(2,491)
Loss on extinguishment of debt	0	0	0	3,874
Other (income) expense, net	(20)	25	21	(33)
Other (income) expense, net	(3,825)	(5,997)	2,071	7,836
Income (loss) before income tax expense	5,945	6,323	(967)	(10,301)
Income tax expense (benefit)	1,234	(227)	1,363	(78)
Net income (loss)	$ 4,711	$ 6,550	$ (2,330)	$ (10,223)
Net income (loss) per common share - basic	$ 0.18	$ 0.26	$ (0.09)	$ (0.42)
Net income (loss) per common share - diluted	$ 0.16	$ 0.21	$ (0.09)	$ (0.42)
Weighted average common shares outstanding - basic (in shares)	25,302	24,447	24,951	24,266
Weighted average common shares outstanding - diluted (in shares)	38,413	37,543	24,951	24,266

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STOCK BASED COMPENSATION

9 Months Ended

Jun. 30, 2012

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

STOCK BASED COMPENSATION

STOCK BASED COMPENSATION

Under all stock option plans, a total of 4.1 million shares of common stock have been reserved for issuance and 0.6 million shares are available for future grant as of June 30, 2012. The 2010 Incentive Plan permits the grant of stock options, stock appreciation rights, stock awards, performance awards, restricted stock and stock units, and other stock and cash-based awards.

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

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

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011
	(in thousands)
Cost of revenues	$	147	$	123	$	415	$	353
Engineering, research and development	387		288		1,151		758
Selling, general and administrative	558		515		1,735		1,423
Total stock-based compensation expense	$	1,092	$	926	$	3,301	$	2,534

As of June 30, 2012, there was $6.7 million of unrecognized stock-based compensation expense related to non-vested stock options, restricted stock units, and our ESPP. The weighted average period over which the unearned stock-based compensation is expected to be recognized is approximately 2.25 years. An estimated forfeiture rate of 5.23% has been applied to all unvested options and restricted stock outstanding as of June 30, 2012. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards. 

Stock Options

Activity in stock option awards is as follows:

	Shares		Weighted average exercise price		Weighted average remaining contractual life (in years)	Aggregate intrinsic value
Options outstanding, September 30, 2011	1,699,183		$	29.77	6.37	$	—
Granted	389,182		2.55		—	—
Exercised	(6,047	)	2.54		—	—
Cancelled or expired	(273,770	)	78.25		—	—
Options outstanding, June 30, 2012	1,808,548		16.67		6.84	38,316
Options exercisable, June 30, 2012	992,566		$	27.13	5.37	$	8,884

This intrinsic value represents the excess of the fair market value of our common stock on the date of exercise over the exercise price of such options. The aggregate intrinsic values in the preceding table for the options outstanding represent the total pretax intrinsic value, based on our closing stock price of $2.65, as of June 30, 2012, which would have been received by the option holders had those option holders exercised their in-the-money options as of those dates. There are 0.1 million in-the-money stock options that were exercisable as of June 30, 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:

	Nine Months Ended June 30,
	2012	2011
Expected life (in years)	5.64	6.24
Expected volatility:
Weighted-average	87.0%	85.8%
Range	85.5% - 87.1%	85.7% - 86.5%
Expected dividend	—	—
Risk-free interest rate	1.05% - 1.27%	2.23% - 2.78%

Our determination of the fair value of stock-based payment awards is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to: our expected stock price volatility over the term of 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, using an option-pricing model; however, that value 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.

Activity for our restricted stock award units 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, September 30, 2011	1,295,979		$	4.67
Awarded	1,258,075		2.57
Released	(708,953	)	3.99
Forfeited	(143,080	)	3.44
Restricted stock units, June 30, 2012	1,702,021		$	3.50	1.33	$	4,510,356

From time-to-time, we retain shares of common stock from employees upon vesting of restricted shares and restricted stock units to cover income tax withholding. The impact of such withholding totaled $0.6 million for the nine months ended June 30, 2012, and was recorded as settlement on restricted stock tax withholding in the accompanying unaudited consolidated statements of stockholders’ deficit.

Employee Stock Purchase Plan

In January 2011, our stockholders approved the 2011 ESPP under which 2.5 million shares of common stock are reserved for issuance. On January 31, 2012, 0.3 million shares were issued at a price per share of $2.59, a 15.0% discount against the share price on that date. The second purchase period began on February 1, 2012 and ends July 31, 2012. The fair value of the ESPP awards are calculated in accordance with ASC 718-50, Employee Share Purchase Plans, under which the fair value of each share granted under the ESPP is equal to the sum of 15% of a share of stock, a call option for 85% of a share of stock, and a put option for 15% of a share of stock. The fair value of the call and put options are determined using the Black-Scholes pricing model. We used the following range of assumptions for both purchase periods: expected useful life of 0.5 years, weighted average expected volatility of 40.4% to 48.4%, a zero dividend rate, and a risk-free interest rate of 0.09% to 0.2%. We recognized approximately $0.2 million and $0.4 million in stock compensation for the three and nine months ended June 30, 2012 related to the ESPP. On July 31, 2012, 0.5 million shares were issued at a price per share of $1.79, a 15.0% discount to the share price on that date.

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FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY

9 Months Ended

Jun. 30, 2012

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY

FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY

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

	June 30, 2012								September 30, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)
Compound embedded derivative liability	$	—	$	—	$	4,023	$	4,023	$	—	$	—	$	7,796	$	7,796
	$	—	$	—	$	4,023	$	4,023	$	—	$	—	$	7,796	$	7,796

There were no transfers in and out of Level 1 and Level 2 fair value measurements during the nine months ended June 30, 2012.

We use a binomial-lattice model to estimate fair values of our financial instruments. The key unobservable input utilized in the model includes a discount rate of 8%.

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

	2012			2011
	(in thousands)
Beginning balance	$	7,796		$	15,476
Transfers in and /or out of Level 3	—			—
Purchases, sales, issuances, and settlements	—			—
Total net gains included in earnings	(3,773		)	(2,491		)
Ending balance as of June 30,	$	4,023		$	12,985

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

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

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

	June 30, 2012				September 30, 2011
	Carrying value		Fair value		Carrying value		Fair value
	(in thousands)
Term A Loan	$	8,130	$	8,467	$	8,247	$	9,990
Term B Loan	7,600		8,535		7,177		8,661
2014 Debentures	42,064		46,791		40,736		45,228

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RESTRUCTURING AND IMPAIRMENT CHARGES (Tables)

9 Months Ended

Jun. 30, 2012

Restructuring and Related Activities [Abstract]

Restructuring and Impairment Charges

Activity related to our restructuring accrual is as follows:

	Facility Consolidation and Operating Lease Commitments			Severance Costs			Total
	(in thousands)
Liability balance at September 30, 2011	$	2,310		$	298		$	2,608
Charged to operations	—			24			24
Non-cash charges	29			(17		)	12
Cash payments	(690		)	(305		)	(995		)
Liability balance at June 30, 2012	$	1,649		$	—		$	1,649

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INVENTORY (Tables)

9 Months Ended

Jun. 30, 2012

Inventory Disclosure [Abstract]

INVENTORY

	June 30, 2012		September 30, 2011
	(in thousands)
Inventory:
Raw materials	$	1,480	$	883
Work-in-process	6,937		9,247
Finished goods	6,379		10,727
Total	$	14,796	$	20,857

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SEGMENT AND GEOGRAPHIC INFORMATION

9 Months Ended

Jun. 30, 2012

Segment Reporting [Abstract]

SEGMENT AND GEOGRAPHIC INFORMATION

SEGMENT AND GEOGRAPHIC INFORMATION

We manage and operate our business through one operating segment.

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

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011
Nu Horizons Electronics **	10.7	%	20.6	%	14.3	%	20.2	%
WPG **	13.9	%	*		12.8	%	*
Huawei	*		*		*		10.1	%

 __________________________________________________

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

**Distributor

Net revenue by geographic area is as follows:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011
	(in thousands)
United States	$	9,545	$	16,052	$	32,543	$	41,118
Asia Pacific	17,550		15,223		45,502		50,731
EMEA*	3,192		4,713		11,970		18,778
Total net revenues	$	30,287	$	35,988	$	90,015	$	110,627

________________________________________________

*Europe, Middle East and Africa

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

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

Product revenue by product line is as follows:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011
	(in thousands)
Connectivity	$	10,761	$	17,500	$	38,433	52,827
Ethernet switching	8,402		9,334		23,202		28,810
Transport processing	6,567		5,022		20,232		22,218
Product revenues	$	25,730	$	31,856	$	81,867	$	103,855

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INCOME TAXES

9 Months Ended

Jun. 30, 2012

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The provision for income taxes as a percentage of income from operations before income taxes was (140.9)% for the nine months ended June 30, 2012 compared to 0.7% for the comparable period in the prior year. Our effective tax rate is primarily impacted by withholding taxes on certain foreign income in 2012 and by Federal net operating losses (“NOLs”) for which no tax benefit is recorded since it is not more likely than not that we will ultimately realize the related net deferred tax assets.

Because we have historically experienced net tax losses, the benefits of which resulted in recognized deferred tax assets, we have placed a valuation allowance against our otherwise recognizable deferred tax assets. At June 30, 2012, we had approximately $83.7 million of Federal NOLs that can be used in future tax years. Of this amount, $59.5 million is subject to an annual limitation of $3.1 million caused by a prior year “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, a Section 382 ownership change occurs if there is a cumulative change in Vitesse's ownership by “5%” shareholders (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. An ownership change generally affects the rate at which NOLs and potentially other deferred tax assets are permitted to offset future taxable income. If an additional ownership change occurred during the current year or should one occur in the future, our ability to utilize ourNOL carryforwards and other deferred tax assets to offset future taxable income may be significantly limited. Therefore, the value and recoverability of our NOLs could be further diminished as a result of an additional ownership change.

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RESTRUCTURING AND IMPAIRMENT CHARGES

9 Months Ended

Jun. 30, 2012

Restructuring and Related Activities [Abstract]

RESTRUCTURING AND IMPAIRMENT CHARGES

RESTRUCTURING AND IMPAIRMENT CHARGES

Activity related to our restructuring accrual is as follows:

	Facility Consolidation and Operating Lease Commitments			Severance Costs			Total
	(in thousands)
Liability balance at September 30, 2011	$	2,310		$	298		$	2,608
Charged to operations	—			24			24
Non-cash charges	29			(17		)	12
Cash payments	(690		)	(305		)	(995		)
Liability balance at June 30, 2012	$	1,649		$	—		$	1,649

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.

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 nine months ended June 30, 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.

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COMMITMENTS AND CONTINGENCIES

9 Months Ended

Jun. 30, 2012

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

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

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

Patents and Licenses

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

Warranties

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

Intellectual Property Indemnities

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

Director and Officer Indemnities and Contractual Guarantees

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

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

General Contractual Indemnities/Products Liability

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

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FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY Compound embedded derivative liability activity (Details) (Derivative Financial Instruments, Liabilities, USD $) In Thousands, unless otherwise specified	9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Derivative Financial Instruments, Liabilities
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Compound embedded derivative liability, beginning balance	$ 7,796	$ 15,476
Trasfers in and/or out of Level 3	0	0
Purchases, sales, issuances, and settlements	0	0
Total net gains included in earnings	(3,773)	(2,491)
Compound embedded derivative liability, ending balance	$ 4,023	$ 12,985

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FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY (Tables)

9 Months Ended

Jun. 30, 2012

Fair Value Disclosures [Abstract]

Compound embedded derivative liability

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

	June 30, 2012								September 30, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)
Compound embedded derivative liability	$	—	$	—	$	4,023	$	4,023	$	—	$	—	$	7,796	$	7,796
	$	—	$	—	$	4,023	$	4,023	$	—	$	—	$	7,796	$	7,796

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

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

	2012			2011
	(in thousands)
Beginning balance	$	7,796		$	15,476
Transfers in and /or out of Level 3	—			—
Purchases, sales, issuances, and settlements	—			—
Total net gains included in earnings	(3,773		)	(2,491		)
Ending balance as of June 30,	$	4,023		$	12,985

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

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

	June 30, 2012				September 30, 2011
	Carrying value		Fair value		Carrying value		Fair value
	(in thousands)
Term A Loan	$	8,130	$	8,467	$	8,247	$	9,990
Term B Loan	7,600		8,535		7,177		8,661
2014 Debentures	42,064		46,791		40,736		45,228

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COMPUTATION OF NET LOSS PER SHARE Schedule of Earnings Per Share, Basic and Diluted (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Earnings Per Share, Basic and Diluted [Line Items]
Net income (loss)	$ 4,711	$ 6,550	$ (2,330)	$ (10,223)
Allocation of undistributed earnings of preferred stock	122	176	0	0
Net income (loss) available to common stockholders after allocation for participating securities	4,589	6,374	(2,330)	(10,223)
Net income (loss) available to common stockholders plus assumed conversions	6,216	7,895	(2,330)	(10,223)
Weighted average number of shares - basic (in shares)	25,302	24,447	24,951	24,266
Weighted average number of shares, diluted (in shares)	38,413	37,543	24,951	24,266
Net income (loss) available to common stockholders after allocation for participating securities per share - Basic	$ 0.18	$ 0.26	$ (0.09)	$ (0.42)
Net income (loss) available to common stockholders per share - Diluted	$ 0.12	$ 0.17	$ (0.09)	$ (0.42)
Net income (loss) available to common stockholders plus assumed conversions, per share	$ 0.16	$ 0.21	$ (0.09)	$ (0.42)
Outstanding stock options
Earnings Per Share, Basic and Diluted [Line Items]
Incremental common shares attributable to share-based payment arrangements (in shares)	30	25	0	0
Outstanding restricted stock units
Earnings Per Share, Basic and Diluted [Line Items]
Incremental common shares attributable to share-based payment arrangements (in shares)	188	178	0	0
Convertible preferred stock
Earnings Per Share, Basic and Diluted [Line Items]
Incremental common shares attributable to conversion of preferred stock (in shares)	674	674	0	0
2014 Debentures
Earnings Per Share, Basic and Diluted [Line Items]
Interest on convertible debt, net of tax	1,308	1,237	0	0
Incremental common shares attributable to conversion of debt securities (in shares)	10,332	10,332	0	0
Interest on convertible debt, net of tax, per share	$ 0.03	$ 0.03	$ 0.00	$ 0.00
Term B Loan
Earnings Per Share, Basic and Diluted [Line Items]
Interest on convertible debt, net of tax	$ 319	$ 284	$ 0	$ 0
Incremental common shares attributable to conversion of debt securities (in shares)	1,887	1,887	0	0
Interest on convertible debt, net of tax, per share	$ 0.01	$ 0.01	$ 0.00	$ 0.00

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INCOME TAXES Narrative (Details) (USD $) In Millions, unless otherwise specified	9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Operating Loss Carryforwards [Line Items]
Effective Income Tax Rate, Continuing Operations	(140.90%)	0.70%
Percent Of Shareholder Change To Limit The Net Loss Carryforwards	5.00%
Change In Shareholder Owner Percentage Percentage Points To Limit The Net Loss Carryforwards	0.50%
Rolling Period Over Which Shareholder Basis Points Must Be Over To Limit The Net Loss Carryforwards	3 years
Internal Revenue Service (IRS)
Operating Loss Carryforwards [Line Items]
Operating Loss Carryforwards	83.7
Operating Loss Carryforwards, Subject To Annual Limitation	59.5
Net Operating Loss Annual Limit	3.1

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (USD $) In Thousands, except Share data, unless otherwise specified	Total	Preferred Stock	Common Stock	Additional Paid-in-Capital	Accumulated Deficit
Balance at Sep. 30, 2011	$ (28,459)	$ 1	$ 245	$ 1,824,433	$ (1,853,138)
Balance (in shares) at Sep. 30, 2011		135	24,471
Increase (Decrease) in Stockholders' Equity
Net loss	(2,330)				(2,330)
Compensation expense related to stock options, awards and ESPP	3,301			3,301
Issuance of common stock upon exercise of stock options	16			16
Issuance of common stock upon exercise of stock options (in shares)			6
Issuance of shares under ESPP	868		3	865
Issuance of shares under ESPP (in shares)			335
Release of restricted stock units	0		7	(7)
Release of restricted stock units (in shares)			709
Repurchase and retirement of restricted stock units for payroll taxes	(633)		(2)	(631)
Repurchase and retirement of restricted stock units for payroll taxes (in shares)			(206)
Balance at Jun. 30, 2012	$ (27,237)	$ 1	$ 253	$ 1,827,977	$ (1,855,468)
Balance (in shares) at Jun. 30, 2012		135	25,315

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DEBT

9 Months Ended

Jun. 30, 2012

Debt Disclosure [Abstract]

DEBT

DEBT

	June 30, 2012		September 30, 2011
	(in thousands)
Term A Loan, 10.5% fixed-rate notes, due February 2014	$	8,130	$	8,247
Term B Loan, convertible, 8.0% fixed-rate notes, due October 2014	7,600		7,177
Capital leases, non-current portion	12		20
Total long-term debt, net	15,742		15,444
2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014	42,064		40,736
Total debt, net	$	57,806	$	56,180

Additional information about our debt is as follows:

	Term A Loan			Term B Loan			2014 Debentures
	(in thousands)
Principal	$	7,857		$	9,342		$	46,493
Unaccreted debt premium/(unamortized) debt discount	273			(1,742		)	(4,429		)
Carrying value	$	8,130		$	7,600		$	42,064
Interest payable terms	Quarterly, in arrears			Quarterly, in arrears			Semi-annually, in arrears
Annual effective interest rate	8.2		%	17.7		%	12.2		%
Conversion rate per common share	n/a			$	4.95		$	4.50

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

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

Prepayment of the 2014 Debentures is permitted at 100% of the principal amount plus accrued and unpaid interest if the closing price of our common stock has been at least 130% of the conversion price in effect for at least 20 trading days during the 30 consecutive trading day period ending on the day prior to the date of notice of prepayment. We can elect to settle any conversion in stock, cash or a combination of stock and cash. If a 2014 Debenture is converted into common stock on or prior to October 30, 2012, we must pay a “make-whole amount” equal to the 2014 Debenture’s scheduled remaining interest payments through October 30, 2012, which we may elect to pay in cash or in shares of common stock valued at 95% of the average daily volume weighted average price per share over a 10 day trading period. The 2014 Debentures are collateralized by a second priority interest in substantially all of our assets. At June 30, 2012, conversion of the outstanding principal amount of the 2014 Debentures would result in the issuance of 10.3 million shares of common stock and $1.2 million in make-whole amount that may be paid in cash or by delivery of 0.5 million shares of common stock.

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

Debt Maturities

Maturity of our total aggregated outstanding debt is as follows:

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

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

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COMPUTATION OF NET LOSS PER SHARE Schedule of Dilutive Common Shares Excluded from the Computation (Details) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total potential common stock excluded from calculation (in shares)	2,614	1,701	16,731	14,617
Outstanding stock options
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total potential common stock excluded from calculation (in shares)	1,477	1,350	1,809	1,429
Outstanding restricted stock units
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total potential common stock excluded from calculation (in shares)	810	343	1,702	287
Outstanding warrants
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total potential common stock excluded from calculation (in shares)	0	8	0	8
ESPP Shares
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total potential common stock excluded from calculation (in shares)	327	0	327	0
Convertible preferred stock
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total potential common stock excluded from calculation (in shares)	0	0	674	674
2014 Convertible debentures
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total potential common stock excluded from calculation (in shares)	0	0	10,332	10,332
Term B Loan
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Total potential common stock excluded from calculation (in shares)	0	0	1,887	1,887

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STOCK BASED COMPENSATION Summary of assumptions used to value stock options granted in connection with stock incentives (Details) (Stock Options)	9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected life (in years)	5 years 7 months 21 days	6 years 2 months 27 days
Expected volatility, Weighted-average	87.00%	85.80%
Expected volatility, range, minimum	85.50%	85.70%
Expected volatility, range, maximum	87.10%	86.50%
Expected dividend	0.00%	0.00%
Risk-free interest rate, range, minimum	1.05%	2.23%
Risk-free interest rate, range, maximum	1.27%	2.78%

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DEBT (Tables)

9 Months Ended

Jun. 30, 2012

Debt Disclosure [Abstract]

Schedule of Long-term Debt Instruments

	June 30, 2012		September 30, 2011
	(in thousands)
Term A Loan, 10.5% fixed-rate notes, due February 2014	$	8,130	$	8,247
Term B Loan, convertible, 8.0% fixed-rate notes, due October 2014	7,600		7,177
Capital leases, non-current portion	12		20
Total long-term debt, net	15,742		15,444
2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014	42,064		40,736
Total debt, net	$	57,806	$	56,180

Additional information about our debt is as follows:

	Term A Loan			Term B Loan			2014 Debentures
	(in thousands)
Principal	$	7,857		$	9,342		$	46,493
Unaccreted debt premium/(unamortized) debt discount	273			(1,742		)	(4,429		)
Carrying value	$	8,130		$	7,600		$	42,064
Interest payable terms	Quarterly, in arrears			Quarterly, in arrears			Semi-annually, in arrears
Annual effective interest rate	8.2		%	17.7		%	12.2		%
Conversion rate per common share	n/a			$	4.95		$	4.50

Schedule of Maturities of Long-term Debt

Maturity of our total aggregated outstanding debt is as follows:

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