The communications industry’s defining characteristic over the past decade is the exponential traffic growth on public and private communications networks.networks worldwide. These networks include those used by long-distance, local exchange service providers and wireless service providers (“Carriers”), as well as specialized networks, such as those used by corporations, government, schools, and other “Enterprises,” and most recently new networks being created to connect billions of sensors, meters, appliances, vehicles, and other machines in both existing “Industrial” applications and emerging consumer applications in what is now being called the Internet service and over-the-top (“OTT”) content providers. Driving the trafficof Things, or IoT.

Traffic growth is driven by the rapid adoption by consumers, businesses, institutions, and governments of data-intensive applications and services such as webInternet access, web-delivered content, video conferencing, Voice Over Internet Protocol (“IP’VOIP’) video conferencingphones and telepresence, IP television, Cloud storage Cloudand computing, andfinancial transactions, Software-as-a-Service (“SaaS”) by Enterprises. Powerful, and Infrastructure-as-a-Service (“IaaS”). The growth of sophisticated mobile devices like smartphoneshas created the need for high-bandwidth, secure connectivity to the public Internet and tabletsto corporate networks over global 4G/LTE networks and next-generation WiFi technologies. Adding to this exploding demand from consumers and businesses is the emerging connectivity of more and more ‘things.’ Industry analysts expect that rivalthese new applications will actually outstrip the more traditional uses of the Internet within a few years, driving more than 50 billion connections by the year 2020.

As a result of this growth over the last decade, networks have evolved from legacy or semi-proprietary protocols to Internet Protocol (“IP”) as the ‘language’ to deliver high-bandwidth services. IP is most efficiently transported and often exceedswitched using Ethernet networking technologies. Ethernet now dominates in all broad-based network deployments, including small and large Enterprise networks, residential and business Access networks, mobile base stations and backhaul, WiFi networks, and the capabilities of desktop machines now also consume these types of services. In the not too distant future, the industry expects that a majority of devices, appliances, sensors, machines, terminals, vehicles, as well asservice delivery from public and private power distribution systems (“Smart-Grid”) willCloud data center networks used by providers such as Google, Facebook, Amazon, and Netflix. As the new networking technology in all be connectedof these applications, Ethernet creates the necessary economies of scale, and guarantees that everyone and everything can connect to these ever expanding worldwide communications networks, leadingeverything else using the same language.

Just as Ethernet has come to what is commonly referred to as the Internetdominate new deployments of Things (“IoT”). While all independent, this expanding conglomerate of networks faces common challenges: how to provide service delivery, synchronization and timing, and security.

In addition, we anticipate similar transitions to standards-based Ethernet networking to occur for Storage applications, where legacy technologies will be re-built based on these new technologiessubstantially replaced by Ethernet. Although a nascent market today, many industry analysts anticipate this transition to occur rapidly over the next several years. In one of the largest electronics markets, Automotive, the trend is to the connected car. There will be opportunities to connect the car and driver to the Internet, as well as to dozens or hundreds of cameras, sensors and appliances within the vehicle. Over the last two years, the industry has debated the appropriate technologies for these applications. It is now clear that, as with most other markets, the choice will be Ethernet. Every leading automotive manufacturer and all of the leading OEMs providing automotive electronics now support Ethernet as the best alternative for the increasingly complex networking requirements within automobiles.

Because of the growing applications for Ethernet, the technology itself has undergone a profound transformation during the last five years, from a simple, best effort networking technology to 10 years.a highly-sophisticated, highly-standardized universal networking protocol in Enterprise, Carrier, and Industrial-IoT networks. This complexity poses significant barriers to entry for any company seeking to enter the Ethernet networking market, and consequently, few IC suppliers dominate this market.

We develop applicable IC solutions and target customers and platformsIt is our view that sell into these high-growth networking markets. In many cases, we have led the forefrontgreat majority of Ethernet technology development and its integration in Carrier, Enterprise and otherall networks transitioningwill migrate to Ethernet, thereby participating in significant infrastructure investments.leading to our vision: ‘Ethernet Everywhere.’

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

To accelerate packet-based IP network deployment, the industry has developed standards to upgrade traditional Ethernet to “Carrier Ethernet.” Effectively, it is an adaptation of Ethernet to provide similar service, synchronization, and security functions traditionally provided by SONET/SDH. As Carrier Ethernet standards continue to evolve, the majority of legacy service provider networks based onwill be upgraded with equipment using Ethernet technology will gradually replace legacy telecommunications networks. In addition, the migration of Enterprise services into the Cloud will drive the need for Carrier Ethernet in Access networks aimed at delivering business services.networking technology.

We expect the pace of growth in bandwidth demand and the deployment of revenue-generating support services to accelerate well into the future. This promptsfuture, prompting Carrier and Enterprise network evolution in two notable areas: (1) the migration from wireline to wireless communication, as mobile devices quickly surpass wired computers for consumer use, particularly Mobile Access networks for 4G/LTE deployments:deployments; and (2) the demand for high-bandwidth, reliable and secure access to SaaS will drive the migration of traditional Enterprise information technology (“IT”) networks into the Cloud. Accordingly, Carrier networks that can provide Mobile Access and Cloud, Access are key areas for increased future investment.requiring upgrades from T1/E1 connectivity to secure high-bandwidth service delivery to business over Ethernet. These access and edge networks, collectively called the “IP Edge”,Edge,” will see large investments and drive the transition to Carrier Ethernet, which is still in its infancy.Ethernet.

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

Similar to Carrier networks, Enterprise networks and data centers are evolvingmust evolve to provide more bandwidth, mobility, reliability, interoperability, and scalability. The advent of Cloud services constitutes another important growth trend. Cloud services will increasingly move Enterprise IT applications and data into secure hosted applications in the Cloud, where multiple locations, multiple devices and multiple technologies can securely access those applications. Cloud services will increaseescalate the need for Enterprises and data centers to provide secure high-bandwidth, high-reliability networks to interconnect elements of the Cloud, collectively called “Cloud Access.”

Increasingly, things as well as people are connected to the Cloud,Internet. This network is made possible by the growth of machine-to-machine (“M2M”) communications, increased and (2) with our Connectivity product lineimproved sensor technology, and the acceleration of wireless technology. As the IoT creates new networking opportunities, there are literally hundreds, perhaps thousands of companies now participating in this emerging networking market. As many of these companies do not specialize in networking, we see a growing need to make Ethernet simple. So, we have developed and now provide reliable, high-speed connectivity between computinga broad range of turnkey silicon and storagesoftware solutions for this fast growing market.

While there is considerable excitement and hype around the potential of billions of devices in large data center switches and servers.

We are benefiting from this transition. Many of the Carrier Ethernet capabilities that we developed for Carrier Ethernet,networking, including resiliency, high availability,low power, accurate time synchronization low power,and security, and eCloud connectivity, are key featuresrequirements for networks within these broad-based IoT applications. Now-standardized and common Carrier Ethernet protocols are replacing proprietary solutions. SimilarIndustrial-IoT applications as well.

In addition to the Carrier networks, thisexisting and expanding applications within Industrial-IoT networking, there are increasing opportunities within the consumer market. Home automation, security, surveillance, and other markets are creating future requirements for secure high-bandwidth connectivity, all based on Ethernet. This transition is just beginning and will occur over many years. Morgan Stanley forecasts 75 billion devices will connect to the IoT by 2020, translating to 9.4 devices for every one of the eight billion people in the world.

Our goal isThere are a few other networks that have not completed the evolution from legacy protocols to be a leading supplier of high-performance ICs for the global communications infrastructure markets, primarily for IP Edge Carrier networking, Enterprisestandards-based Ethernet technology, but soon will. Two examples are Storage networking and IoT. To attain this goal, we are executing the following strategy:Automotive networking.

Although Storage and Automotive networking equipment.

Our strategy is to focus on high-growth markets that have a high probability of benefiting from our IC solutions to approach $2.0 billion by 2017differentiated Ethernet technologies, are addressable with a compound annual growth rate (“CAGR”) of approximately 14%.

Vitesse develops Ethernet switch engines (“Switches”) and PHYs, bundled turnkey applications software implementing standards-based applications protocols, and complete reference design solutions. Our silicon and software solutions provide a simple path to take OEMs or ODMs to market in development, address substantially larger segmentsrecord time. Because of the Enterprisewide applicability of Ethernet Switches and PHYs in a rapidly increasing number of networking market thanapplications, our prior generation of products. Based on industry market projections and our internal market growth estimates, we expect the addressable market for our products in this segment will approach $450 million by 2017 with a CAGR of 8%.

In addition to our switchingSwitch and PHY products developed specifically for Carrier, Enterprise, and IndustrialIndustrial-IoT applications, we have developed a number ofseveral products that address high-speed signaling and connectivity issues in a broad variety of systems. As bandwidth requirements continue to accelerate,accelerating, more systems require solutions for high-speed signal integrity problems within and between high-capacity computing and communications systems. Our products address a need to transport signals at ever increasing speeds across fiber, cable and copper backplane applications. We

Overall, we estimate the served addressable market for our devicesEthernet-based IC solutions in our target markets to be onexpand from $1 billion today (2015) to approximately $3.1 billion by 2020 with a CAGR of 25%.

As we accelerate the transition to ‘Ethernet Everywhere,’ we serve customers who face the challenge of $292 million by 2017.

Unique technologies embedded inwithin Vitesse silicon, software, and IP solutions are targeted at our customers’ most difficult challenges: service delivery, synchronization, security and security. They are knownsoftware. Together, our solutions simplify adoption of standards-based Ethernet in the industry as:all kinds of networks.

OurThese advanced technology and IP developments will seek to exploitsolutions address major technology trends and disruptions within multiple network markets. By providing a simplified, turnkey path that enables our customers to adopt these new networking equipment including:technologies, we intend to exploit:

Our Tier-1 customers are savvy buyers who carefully analyze and evaluate our ability to serve them reliably with products and technology, on a continuous basis, over the long-term. A key element of our strategy is to work closely with our customers’ product managers and systems design teams,groups, as well as business units and corporate management teams. These key relationships enableteams allowing us to acquire a detailed understanding of our customers’ business and needs for technology needs. We also discuss key trends with service providers and IT organizations around the world to spot new networking trends in their infancy.advancements. Using this knowledge, we develop solutions that address the most compelling design challenges.

We offer a variety of technology cores for license. We count leading processor and consumer electronics IC vendors as customers of our IP cores. We anticipate future revenues from licensing our technology to addresssystems suppliers and non-competing semiconductor suppliers, who would prefer to buy rather than develop this intellectual property. We believe our customers’ design challengesposition as an innovator and provide them with differentiated feature sets for their systems.low-power leader makes us a compelling supplier of these complex IP cores. In many cases, we can also leverage IP licensing partnerships to accelerate our partners’ product developments and extend our process technology roadmaps.

Our worldwide sales, marketing,silicon products are highly-complex VLSI digital designs combined with large, high-performance analog designs, so called ‘mixed-signal’ designs. As such, they represent some of the most complex and application support organizations work togetherchallenging developments in the semiconductor industry. This complexity provides a substantial barrier to keep an openentry to competitors, as it is difficult to develop the capabilities in people, tools and ongoing dialogprocesses to execute both VLSI digital design and well as high-performance analog design. In addition to silicon hardware design, we make substantial investments in the development of software to incorporate into our product portfolio.

Carrier Ethernet Switch Engines:

Carrier networks are transitioning to packet-based IP/Ethernet technologies. Our latest generationViSAA-based switch engines target these applications with innovative features that enable true Carrier Ethernet networking. Our switch engines are based on ViSAA, the industry’s only silicon based implementation to provide Ethernet services sold by Carriers to their Enterprise customers.networking within our target markets. These products combine thetypical network processor packet processing features, typically seen in network processors, together with Layer 2 and Layer 3 Ethernet switch functions, our VeriTime timing and synchronization technology, and an on-board CPU into a single chip, at substantially lower cost and lower power than competing discrete and integrated solutions. With the addition of our CEServices™ applications software,Combined with CEServices, our solutions meet MEF CE 2.0 requirements for both Mobile Access and Cloud Access equipment, and can dramatically cutreduce our customers’ time-to-market. Our new products include thirdIn 2014, we introduced our fourth generation Carrier Ethernet switch engine families, Jaguar-2Jaguar-2™ and Serval-2, created toServal-2™, providing higher density and bandwidth, and even more enhanced features. These products address a broad range of applications in the Access and Edge of the networks, including Mobile Access equipment such as base stations, small cells, fiber and microwave wireless backhaul, and Cloud Access equipment such as EADs used for delivering business services. Additionally, CEServices is already integrated into one of the leading open-source SDN controllers, enabling easy integration into emerging Carrier SDN deployments.

Enterprise Ethernet Switches:

Our Enterprise Ethernet switches target Cloud Access as well as desktop, workgroup and LAN infrastructure within SME/SMB markets, and enable cost-effective migration of these systems to Gigabit Ethernet speeds. To date, we have shipped over 250 million Gigabit Ethernet ports into Enterprise applications. Our Enterprise Ethernet switch productsswitches provide the highly-integrated, advanced features required in Cloud Access with high-levels of integration,network equipment, significantly reducing the physical system size, power consumption, and material cost for our customers.

Gigabit Ethernet Copper and Dual-media Transceivers (Cu PHYs):Copper PHYs with Timing and Security Functions:

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

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

155 Mbps to 15 Gbps.

Crosspoint Switches:

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

Signal Integrity Devices:

Our Transport Processing product line addresses the needs of Carrier network providers as they undergo a migrationmigrate from SONET/SDH to new Ethernet packet-based networks that provide increased bandwidthnetworks.

Framers and lower cost. Latest generation products, as well as our new products in development, target the OTN market, integrating increasing amounts of Ethernet packet processing technology. These products operate at speeds up to 10 Gbps and are targeted principally for next-generation systems in the core and metro segments of the Carrier network. Our latest generation of products includes our patented VeriTime timing and synchronization technology.

We offer a complete line of framers and mappers for SONET/SDH and Ethernet-over-SONET (“EoS”), and OTN applications. Our latest generation products, as well as our new products in development, integrate increasing amounts of Ethernet packet processing technology. These products operate at speeds up to 10 Gbps, and are targeted principally for next-generation systems in the coreCore and metroMetro segments of the Carrier networks.

We classify product revenues into threefour markets: (1) Carrier Networking; (2) Enterprise Networking;Networking, (3) Industrial-IoT Networking, and (3) Non-Core.(4) Non-core. These classifications reflect the major trends in our product lines and how they map into our customer base. We also report intellectual property revenues.revenues from the licensing and sale of IP cores.

Our ability to achieve sustained revenue growth depends on several factors including, increasing demand from our end markets; our ability to capture and maintain market share in growing markets; the rate at which these new markets ramp into production; and the continuing trend by systems companies to outsource the designing and manufacturing of ICs to companies such as ours.

The global telecommunications Carrier network, which includes networks delivering voice, data and datavideo services, has grown dramatically into a complex combination of networks. To address the technical and operational challenges created by the explosive growth of video bandwidth demand requirements, Carriers are increasingly adoptinguse Ethernet technology in their network,networks, particularly for Mobile and Cloud Access.

Broadly, Ethernet technology upgraded to meet these requirements is referred to as “Carrier‘Carrier Ethernet.”’ We provide a variety of products for newly emerging Carrier Ethernet applications, as well as for legacy SONET/SDH and EoS applications. Due to the complexity of the Carrier network ,complexity, products sold into these applications have long design cycles typically ranging from two to four years from design start to production, and have long life cycles, typically five to 10 years or more.

Enterprise networks generally include equipment dedicated to the communication of voice and data services within large Enterprise organizations. An Enterprise network is typically composed of one or more LANs interconnecting computer systems, including workstations and servers, as well as one or more Service Access Network (“SAN”). Increasingly, Enterprise networks also include broadband connections to Carrier networks for the broader communication of voice and data outside of the Enterprise, particularly for access to Cloud services. Enterprise networks are usually classified into groups depending on their size and complexity;complexity: large Enterprise switch and routers, data center switching, Cloud managedCloud-managed switches, and Layer2Layer 2 and Layer 3 managed Ethernet switches. The complexity of products within the Enterprise networks varies dramatically based on the market segment. Products at the “low-end”‘low-end’ of the network, in SOHO SME and low-end SME applications, typically have fast design cycles on the order of six to 12 months and short life cycles, on the order of three to five years. Products sold into applications at the “high-end”‘high-end’ of Enterprise, such as Layer 2Layer-2 and Layer 3Layer-3 stackable switches have longer design cycles, typically one to two years from design start to production and long life cycles, typically three to seven years or more.

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

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

We outsource the majority of our probe and test functions in order to reduce our manufacturing cycle times, better address customer requirements, increase inventory turns, and reduce our overall fixed cost of probe and testing. For most products, we maintain the capability to probe and test products in small volumes at our own facilities. Like our subcontractors, we use advanced automated testers and high-performance bench test equipment.

Continually evolving industry standards, rapid advancements in process technologies, and increasing levels of functional integration characterize the market for our products. We believe that our future success will depend largely on our ability to continue improving our products and our process technologies, to develop new technologies, and to adopt emerging industry standards.

We expend considerable design effort to increase speed and complexity while reducing the power dissipationAll of our products,targets markets use Ethernet today, or are migrating to Ethernet, allowing us to focus our development resources on this single technology. With each generation, we create a number of ‘platform’ developments and then execute ‘derivative’ developments from these platforms to createaddress growing additional market opportunities. In many cases, additional markets can be addressed with simple changes, often just with new value-added featuressoftware features.

The majority of our developments are a combination of highly-complex VLSI digital designs combined with large, high-performance analog designs, so called ‘mixed-signal’ designs. As such, they represent some of the most complex and functionality. We continuechallenging developments in the semiconductor industry. This complexity provides a substantial barrier to entry to competitors, as it is difficult to develop common intellectual property coresthe capabilities in people, tools, and standard blocksprocesses to execute both VLSI digital design and well as high-performance analog design.

In addition to silicon hardware design, we make substantial investments in the development of software to incorporate into our product portfolio. Today, we believe Vitesse is the only company providing both silicon and turnkey applications software in the Carrier Ethernet market. This provides a substantial competitive advantage, particularly at customers that can be reused in multiple products, thereby reducing design cycle time and increasing first-time design correctness.do not have the resources or technical sophistication to develop their own software solutions.

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

We compete for market share based on our customers’ selection of our components over our competitors during the design phase of their systems. In addition, many of our large customers have their own internal design teams, which we also compete against when our customers consider a “make‘make vs. buy”buy’ decision. Our ability to compete is dependent on the needs of our customers, how well our products address those needs, our corporate relationships, and a variety of other factors.

Competition is particularly strong in the market for communication ICs, partially due to the market’s historical growth rate, which attracts larger competitors, and also to the number of smaller companies focused on this area. The trend in the industry has been, and continues to be, to outsource more designs to companies such as ours. While we expect this trend to continue, we view internal design efforts by our customers as a significant competitive threat. Larger competitors in our market have acquired both mature and early-stage companies with advanced technologies. These acquisitions could enhance the ability of larger competitors to obtain new design wins that we may have otherwise won.

In the communications networking market, which includes our Carrier and Enterprise networking markets, ourOur competitors include Applied Micro Circuit, Broadcom, Cortina Systems,InPhi, Marvell Technology Group, and PMC-Sierra. In the signal integrity market, our competitors include Maxim Integrated Products, Micrel, PMC-Sierra, Semtech, and Texas Instruments. Over the next few years, we expect additional competitors, some of whom may have greater financial and other resources than we have, to enter the market with new products. In addition, we are aware of smaller, privately-held companies that focus on specific subsets within our range of products. These companies, individually and collectively, represent future competition for design wins and subsequent product sales.

The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence, price erosion, evolving technical standards, short product life cycles, and wide fluctuations in product supply and demand. These factors and others, together with changes in general economic conditions, cause significant upturns and downturns in the industry and within our business. In addition, our operating results are subject to substantial quarterly and annual fluctuations due to a number of factors, such as demand for network infrastructure equipment, the timing of receipt, reduction or cancellation of significant orders, fluctuations in the levels of component inventories held by our customers and distribution partners, the gain or loss of significant customers, market acceptance of our products and our customers’ products, our ability to develop, introduce, and market new products and technologies on a timely basis, the availability and cost of products from our suppliers, new product and technology introductions by competitors, intellectual property disputes and the timing and extent of product development costs.

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

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

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

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

As of October 31, 2013,September 30, 2014, we had 331356 employees worldwide, including 171195 in R&D. The balance of employees are listed in population size order: operations, marketing and sales, and finance and administration. Our ability to attract and retain qualified personnel is essential to our continued success. None of our employees are represented by a collective bargaining agreement, nor have we ever experienced a work stoppage. We believe our employee relations are good.

We file annual, quarterly and special reports, as well as proxy statementsmaintain a web site, www.vitesse.com, where we regularly post copies of our press releases and other information,company information. Our filings with the Securities and Exchange Commission (“SEC”). Any document, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are posted on and available free of charge through the Investor Relations section of our web site and are accessible as soon as reasonably practicable after being electronically filed with or furnished to the SEC.

You may read and copy materials that we file with the SEC may be read or copied at the SEC’s public reference roomPublic Reference Room at 100 F Street, N.E.,NE, Washington D.C.DC 20549. Please callInformation on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330 for1-800-SEC-0330. The SEC maintains a web site that contains reports, proxy statements and other information onwe file with the public reference room. Our SEC filings are also available atSEC. The address of the SEC’s website at www.sec.gov, and through our website, free of charge, at www.vitesse.com. Copies of such documents maybe requested by contacting our investor relations department at 805-388-3700 or sending an e-mail through the Investor Relations page on our website. The information on our websiteweb site is not incorporated by reference into and is not made a part of this report.www.sec.gov.

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

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

Our quarterly revenues and operating results have fluctuated significantly in the past and we believe they may continue to do so. As a result, you should not rely on the results of any one quarter or fiscal period as an indication of future performance and period-to-period comparisons of our revenues and operating results may not be meaningful. This variability and unpredictability could result in our failure to meet our or our investors’ or securities analysts’ expectations for a particular period, resulting in a decline in the trading price of our common stock.

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

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

Many of our products have very long life cycles, often exceeding 10 years or more. These life cycles may be longer than what is typically supported by wafer and/or assembly manufacturers. Accordingly, we are sometimes subjected to end-of-life notices on certain materials and/or products provided by these manufacturers. This longer life cycle may impact our ability to continue to support certain products, forcing us to cease offering these products if we cannot obtain a replacement source of material. This longer life cycle may impact revenues and/or require us to incur additional costs to obtain alternative sources for these materials.

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

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

Further, we generally use the sell-through accounting policy model which recognizes revenuerevenues only upon shipment of the merchandise from our distributor to the final customer. Because we use the sell-through methodology, we may have variability

in our revenuerevenues from quarter-to-quarter as customers have substantial flexibility to reschedule backlog with most of our distribution partners as part of their terms and conditions of sale.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As with wafer fabrication, worldwide assembly and testing capacity for our products is limited, and we are dependent on our suppliers to provide enough capacity in the correct mix to address all of our requirements. The master service agreements with our assembly subcontractors have provisions for the subcontractors to maintain inventory stocks based on forecasts, but these

agreements do not include any guaranteed capacity provisions. As a result, it is possible that the capacity we will need in the future may not be available to us on acceptable terms, if at all, and we could experience shortages or assembly problems in the future. As part of our test outsourcing agreement, we consigned testing equipment to our test subcontractor. The availability of assembly and test services from these subcontractors could be materially and adversely affected in the event a subcontractor experiences financial difficulties or suffers any damage to their facilities.

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

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

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

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

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

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

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

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

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

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

We rely on a combination of patent, copyright, trademark, and trade secret protections, as well as confidentiality agreements and other methods, to protect our proprietary technologies and processes. For example, we enter into confidentiality agreements with our employees, consultants and business partners, and control access to, and distribution of our proprietary information. As of September 30, 2013,2014, we held 8487 United States patents and 1922 foreign patents, as well as 22and had 17 patent applications pending in the United States and 2830 patent applications pending in foreign applications pendingjurisdictions for various aspects of design and process innovations.

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

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

Certain of our software (as well as that of our customers) may be derived from so-called “open source”‘open source’ software that is generally made available to the public by its authors and/or other third parties. Open source software is made available under licenses that impose certain obligations on us in the event we were to distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public, and/or license such derivative works under a particular type of license, rather than the forms of license customarily used to protect our intellectual property. While we believe we have complied with our obligations under the various applicable licenses for open source software, in the event that the copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distribution of that work if the license is terminated.

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

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

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

Our directors, executive officers and individuals or entities affiliated with our directors as a group beneficially own approximately 23.5% of our outstanding common stock at November 28, 2014. The interests of these stockholders may differ substantially from the interests of other stockholders. If these stockholders choose to act or vote together, they will have the power to significantly influence the election of our directors, and the approval of any other action requiring the approval of our stockholders, including any amendments to our certificate of incorporation and mergers or sales of substantially all of our assets. In addition, without the consent of these stockholders, we could be prevented from entering into transactions that could be beneficial to us or our other stockholders. Also, third parties could be discouraged from making a tender offer or bid to acquire us at a premium will result in increased interest expense inprice per share that is above the periods during which the repurchases occur. In November 2013, we repurchased $13.7 million of our 2014 Debentures at a premium of 7.0% resulting in increased interest expense of $1.6 million in the first quarter of fiscal 2014. If the remaining $32.8 million of 2014 Debentures outstanding after the November 2013 repurchase were to be repurchased at a premium of 5.0%, there would be interest expense of $3.3 million.then-current market price.

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

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

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

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

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

We have significant NOLs and R&D tax credits available to offset our future United States federal and state taxable income. Our ability to utilize our NOLs and other tax attributes are subject to significant limitations under Section 382 of the Internal Revenue Code (and applicable state law) resulting from ownership changes and may in the future be subject to additional limitations under Section 382 if we undergo further ownership changes. Section 382 imposes an annual limitation (based upon our value at the time of the ownership change, as determined under Section 382 of the Internal Revenue Code) on the amount of taxable income a corporation may offset with pre-ownership change NOLs. Section 382383 also limits our ability to use R&D tax credits. In addition, if the tax basis of our assets exceeded the fair market value of our assets at the time of an ownership change, Section 382 could also limit our ability to use amortization of capitalized R&D and goodwill to offset taxable income for the first five years following an ownership change. Any unused annual limitation may be carried over to later years until

the applicable expiration date for the respective NOLs. As a result, our inability to utilize these NOLs, credits or amortization as a result of any ownership changes could adversely impact our operating results and financial condition.

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

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

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

None

Our headquarters which includes our principal R&D and sales facilities, is located in Camarillo, California and is leased pursuant to a non-cancellable operating lease with a term that expires on January 31, 2014.in December 2015. The total space occupied in this building is approximately 111,00064,000 square feet. We also lease an additional 64,00016,000 square foot facility in Camarillo, (“Calle Carga”), which is leased through December 2015. We will reoccupy and build out the Calle Carga facility upon the expiration of our main Camarillo facility lease in January 2014.2016. We also lease space in additional locations that includefor our domestic and international offices in Austin, Milpitas, New Jersey, Massachusetts, China, Denmark, Germany, India, and Taiwan. As of September 30, 2013,2014, we lease total space of approximately 276,000181,000 square feet. Our current space is sufficient to accommodate current operations.

We have never paid cash dividends and presently intend to retain any future earnings for business development. Further, our existing loan agreements limitagreement limits the payment of dividends without the consent of the lenders.

In December 2012,June 2014, we raised $17.1$26.6 million, net of offering costsexpenses of $1.6$2.1 million, from the registered public sale of 10,651,2808,582,076 shares of common stock at $1.75$3.35 per share, which was a discount to the market price of our common stock.

In November 2013, we amended the credit agreement for our Term A and B Loans, which amendment extended the maturity dates of the Term A Loan and Term B Loan from February 4, 2014 and October 30, 2014, respectively, to August 31, 2016, and also provides that the Term A and B Loans will bear interest at 9.0% per annum. In addition, in November 2013, we repurchased and cancelled $13.7 million of our convertible subordinated debentures (“2014 Debentures.Debentures”).

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

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

In October 2009, we completed a debt restructuring transaction. The debt restructuring resulted in the conversion of 96.7% of our 2024 Debentures into a combination of cash, common stock, Series B Preferred Stock and 2014 Debentures. With respect to the remaining 3.3% of the 2024 Debentures, we settled our obligations in cash. Additionally, we repaid approximately $5.0 million of our $30.0 million Senior Term Loan, the terms of which were amended as part of the debt restructuring transactions. Under the terms of the debt restructuring transactions, we:

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

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

Several years ago, we embarked on the strategic mission of re-inventingstrategically re-invented Vitesse to take advantage ofexploit the dramatic ongoing transformation of our target networking markets. Our objective isvision was simple: ‘Ethernet Everywhere.’ We went ‘all in’ on the idea that all networks, in all markets, would eventually transition to be the leading supplier of high-performance ICs for the global communications infrastructure markets. In an effort to diversify ourselves and provide new opportunities for growth, weEthernet. We re-positioned our R&D teamsteam and invested heavilyover $200 million to enter new markets, developand expanding markets. We developed dozens of new products, captured growing market share, and penetrateare continuing to add new customers.customers at an increasing rate. ‘Ethernet Everywhere’ is becoming a reality and we believe this exponentially expands our potential for success as well as the size of our serviceable markets, allowing us to create substantial revenue growth.

We intensified our highly complex, it takes our customers 12 to 36 months to go from sample availability to first customer shipment, as customers do the necessary development work to complete and qualify their systemsfocus in the network. Since it typically takes an additional 12 to 24 months to ramp into full production,Industrial-IoT market. This rapidly growing market provides substantial new growth opportunities for both revenues and diversification of our customer base. Partially as a result of this new market segment, in fiscal year 2014, we believeincreased the number of first-time design wins represent a good leading indicator of future revenues.

In fiscal year 2014, we introduced the normal coursefourth-generation of business, we regularly assessboth our Switch and PHY products, adding substantial new features and capabilities to our product portfolio, significantly increasing our addressable markets in Carrier, Enterprise and Industrial-IoT networking. We invested to ensure it aligns with our strategy. At such time, we may determine to phase-out products, or EOL. When we EOL a product, we typically provide up to six months notice for our customers a complete, turnkey application software package. We are the only company today providing these types of integrated Carrier Ethernet silicon and software solutions, making it simple for existing customers to make a last-time-buy of productmigrate to our new solutions and six additional monthsfor new customers to take receipt of that product. The EOL announcement can result in near-term increases in our revenues as customers typically respondengage with Vitesse to these announcements by making last-time-buysquickly and efficiently bring their new products to ensure that theymarket.

We have adequate stock on hand to support their production forecast.

having the highest average margins and the Enterprise networking market having the lowest average margins. We endeavorBased on our strengthening turnkey solutions mix and our aggressive cost reduction efforts, our overall gross margin profile is steadily improving. Product gross margin increased to 56.7% in fiscal year 2014 compared with 53.9% in fiscal year 2013. Based on estimated gross margins on our new product design wins, we anticipate that our product gross margins will continue to increase margins by providingin fiscal year 2015, underscoring the value that Vitesse brings to these markets.

To effectively serve these large, growing markets without increasing our operating expenses, we must be very efficient with our R&D resources. The products that have significant added value relativewe develop for Carrier and Enterprise markets sell equally well into Industrial-IoT markets, creating tremendous synergy and cost savings, in terms of R&D effort, to provide products into these emerging adjacent markets.

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

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

We use different valuation methodologies that use Level 3 inputs to value our Term A andLoan, Term B Loans,Loan, 2014 Debentures and related compound embedded derivative. The valuation methodologies we use and our assessment of the significance of a particular input to the fair value measurement may produce a fair value that may not be indicative of net realizable value or future fair values. 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.

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

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

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

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

The increase inhigher Ethernet switching revenues isare largely attributable to a doubling in our new switches selling into both the Carrier and Enterprise networking markets. Thean increase was partially offset by declines in sales of our mature products.new Enterprise switches and Carrier Ethernet switch engines and 1GE Cu PHYs into Carrier, Enterprise, and Industrial-IoT applications.

The lower Connectivity revenues are primarily attributable to the decrease in sales of some of our mature crosspoint switches and SONET PHYs, partially offset by a strong increase in sales of our new 10G PHYs, backplane PHYs and new crosspoint switches.

The lower Transport processing revenues for fiscal year 2013 compared to fiscal year 2012 isare largely attributable to lowerdecreased sales of switch fabrics, NPUs and optical transport network productsSONET/SDH framers that had gonewent through EOL in the prior fiscal year. These increases wereperiods. The decrease is partially offset by increased revenues for SONET framers, going through EOLan increase in the current fiscal year.

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