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,~~December 31, 2014



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

For the transition period from to

Commission file number 1-31614

______________________________________

VITESSE SEMICONDUCTOR CORPORATION

(Exact name of registrant as specified in its charter)



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

4721 Calle Carga

Camarillo, California 93012

(Address of principal executive offices)(zip code)

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

______________________________________

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

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

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



Large accelerated filer o	Accelerated filer x

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

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

As of ~~August 1, 2014~~,January 30, 2015, there were outstanding ~~67,697,535~~68,977,645 shares of the registrant’s Common Stock, $0.01 par value.

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VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~JUNE 30,~~DECEMBER 31, 2014

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements
	Unaudited Consolidated Balance Sheets as of ~~June 30,~~December 31, 2014 and September 30, ~~2013~~2014	3
	Unaudited Consolidated Statements of Operations for the Three ~~and Nine~~ Months Ended ~~June 30,~~December 31, 2014 and 2013	4
	Unaudited Consolidated Statements of Stockholders’ Equity for the ~~Nine~~Three Months Ended ~~June 30,~~December 31, 2014	5
	Unaudited Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~June 30,~~December 31, 2014 and 2013	6
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1715
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2924
Item 4.	Controls and Procedures	2924

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	3025
Item 1A.	Risk Factors	3025
Item 6.	Exhibits	3025

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PART I. FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS


	June 30, 2014			September 30, 2013			December 31, 2014			September 30, 2014
	(in thousands, except par value)						(in thousands, except par value)
ASSETS
Current assets:
Cash	$	70,812		$	68,863		$	31,745		$	71,903
Accounts receivable	10,101			9,807			10,081			10,850
Inventory, net	11,237			10,692
Inventories							15,705			12,792
Restricted cash	793			101			1,608			794
Prepaid expenses and other current assets	2,175			1,796			2,170			1,047
Total current assets	95,118			91,259			61,309			97,386
Property, plant and equipment, net	2,944			3,107			2,913			2,858
Other intangible assets, net	1,569			1,170			1,811			1,476
Other assets	3,548			3,425			1,511			3,104
	$	103,179		$	98,961		$	67,544		$	104,824

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,693		$	7,436		$	7,947		$	6,814
Accrued expenses and other current liabilities	12,060			12,245			9,548			12,472
Current portion of debt, net	32,375			—			—			32,727
Deferred revenue	3,030			2,215			6,302			4,902
Total current liabilities	55,158			21,896			23,797			56,915
Other long-term liabilities	470			407			225			234
Long-term debt, net	16,328			16,366			16,508			16,417
Convertible subordinated debt, net	—			44,384
Total liabilities	71,956			83,053			40,530			73,566
Commitments and contingencies (Note 10)
Commitments and contingencies, See note 10
Stockholders’ equity:
Preferred stock, $0.01 par value: 10,000 shares authorized; no shares issued or outstanding	—			—			—			—
Common stock, $0.01 par value: 250,000 shares authorized; 67,342 and 57,545 shares outstanding at June 30, 2014 and September 30, 2013, respectively	673			575
Common stock, $0.01 par value: 250,000 shares authorized; 68,426 and 67,703 shares outstanding at December 31, 2014 and September 30, 2014, respectively							684			677
Additional paid-in-capital	1,922,468			1,891,661			1,925,774			1,924,984
Accumulated deficit	(1,891,918		)	(1,876,328		)	(1,899,444		)	(1,894,403		)
Total stockholders’ equity	31,223			15,908			27,014			31,258
	$	103,179		$	98,961		$	67,544		$	104,824

See accompanying notes to unaudited consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended June 30,						Nine Months Ended June 30,						Three Months Ended December 31,
	2014			2013			2014			2013			2014			2013
	(in thousands, except per share data)												(in thousands, except per share data)
Net revenues:
Product revenues	$	26,012		$	26,285		$	75,744		$	74,879		$	23,969		$	24,863
Intellectual property revenues	1,139			133			4,082			2,019			786			2,220
Net revenues	27,151			26,418			79,826			76,898			24,755			27,083
Costs and expenses:
Cost of product revenues	12,254			11,666			33,909			34,010			10,053			10,676
Engineering, research and development	10,006			11,706			31,581			31,987			11,337			10,679
Selling, general and administrative	7,330			7,257			23,189			22,617			7,415			7,854
Amortization of intangible assets	88			80			267			266			100			88
Costs and expenses	29,678			30,709			88,946			88,880			28,905			29,297
Loss from operations	(2,527		)	(4,291		)	(9,120		)	(11,982		)	(4,150		)	(2,214		)
Other expense (income):
Other expense:
Interest expense, net	1,510			1,983			4,706			5,919			818			1,704
Gain on compound embedded derivative	—			—			—			(803		)
Loss on extinguishment of debt	—			—			1,594			—			—			1,594
Other expense, net	18			31			111			5
Other, net													28			61
Other expense, net	1,528			2,014			6,411			5,121			846			3,359
Loss before income tax expense (benefit)	(4,055		)	(6,305		)	(15,531		)	(17,103		)	(4,996		)	(5,573		)
Income tax expense (benefit)	333			129			59			(790		)	45			(202		)
Net loss	$	(4,388	)	$	(6,434	)	$	(15,590	)	$	(16,313	)	$	(5,041	)	$	(5,371	)

Net loss per common share - basic and diluted	$	(0.07	)	$	(0.17	)	$	(0.27	)	$	(0.47	)	$	(0.07	)	$	(0.09	)

Weighted average common shares outstanding - basic and diluted	59,965			38,630			58,631			34,601			67,974			57,610

See accompanying notes to unaudited consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Common Stock
Additional
Paid-in-Capital
Accumulated Deficit Total Stockholders' Equity
(in thousands) Shares Amount
Balance at September 30, 2013 57,545
$ 575
$ 1,891,661
$ (1,876,328 ) $ 15,908
Net loss —
—
—
(15,590 ) (15,590 )
Compensation expense related to stock options, awards and Employee Stock Purchase Plan —
—
4,466
—
4,466
Issuance of common stock upon exercise of stock options 49
—
114
—
114
Issuance of shares under Employee Stock Purchase Plan 366
4
905
—
909
Issuance of common stock, net of offering costs 8,582
86
26,519
—
26,605
Release of restricted stock units 1,179
12
(12 ) —
—
Repurchase and retirement of restricted stock units for payroll taxes (379 ) (4 ) (1,247 ) —
(1,251 )
Other —
—
62
—
62
Balance at June 30, 2014 67,342
$ 673
$ 1,922,468
$ (1,891,918 ) $ 31,223



	Common Stock					Additional Paid-in-Capital			Accumulated Deficit			Total Stockholders' Equity
(in thousands)	Shares		Amount			Additional Paid-in-Capital			Accumulated Deficit			Total Stockholders' Equity

Balance at September 30, 2014	67,703		$	677		$	1,924,984		$	(1,894,403	)	$	31,258
Net loss	—		—			—			(5,041		)	(5,041		)
Compensation expense related to stock options, awards and employee stock purchase plan	—		—			1,831			—			1,831
Issuance of common stock upon exercise of stock options	14		—			34			—			34
Release of restricted stock units	994		10			(10		)	—			—
Repurchase and retirement of restricted stock units for payroll taxes	(285	)	(3		)	(1,065		)	—			(1,068		)
Balance at December 31, 2014	68,426		$	684		$	1,925,774		$	(1,899,444	)	$	27,014

See accompanying notes to unaudited consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended June 30,						Three months ended December 31,
	2014			2013			2014			2013
	(in thousands)						(in thousands)
Cash flows used in operating activities:
Net loss	$	(15,590	)	$	(16,313	)	$	(5,041	)	$	(5,371	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,541			1,877			519			496
Stock-based compensation	4,466			3,305			1,831			1,265
Change in fair value of compound embedded derivative liability	—			(803		)
Gain on disposal of assets	(137		)	(153		)	—			(159		)
Loss on extinguishment of debt, net	1,594			—			—			1,594
Amortization of debt issuance costs	143			203			16			54
Amortization of debt discounts	1,365			1,890			207			512
Accretion of debt premiums	(15		)	(126		)	—			(9		)
Change in operating assets and liabilities:
Accounts receivable	(294		)	(1,001		)	769			(1,599		)
Inventory	(545		)	179
Inventories							(2,913		)	(1,852		)
Prepaids and other assets	(724		)	(841		)	(1,047		)	(1,124		)
Accounts payable	57			2,639			1,184			2,013
Accrued expenses and other liabilities	(278		)	553
Accrued expenses and other current liabilities							(2,912		)	(856		)
Deferred revenue	815			1,888			1,400			513
Net cash used in operating activities	(7,602		)	(6,703		)	(5,987		)	(4,523		)

Cash flows used in investing activities:
Capital expenditures	(1,157		)	(575		)	(474		)	(884		)
Proceeds from sale of fixed assets	183			156			—			183
Payments under licensing agreements	(510		)	(342		)	(456		)	(87		)
Net cash used in investing activities	(1,484		)	(761		)	(930		)	(788		)

Cash flows provided by financing activities:
Proceeds from the exercise of stock options and issuances of shares under ESPP	1,023			866
Net proceeds from the sale of common stock	26,805			54,668
Repurchase of 2014 Debentures	(14,606		)	—
Cash flows used in financing activities:
Proceeds from the exercise of stock options and issuances of shares under the employee stock purchase plan							34			—
Repayment of convertible subordinated debentures							(32,843		)	(14,606		)
Consent fee on amendment of credit agreement	(308		)	—			—			(308		)
Cash restricted under credit agreement	(687		)	—
Release of cash previously restricted under credit agreement							687			—
Repurchase and retirement of restricted stock units for payroll taxes	(1,251		)	(620		)	(1,068		)	(343		)
Other	59			(6		)	(51		)	60
Net cash provided by financing activities	11,035			54,908
Net cash used in financing activities							(33,241		)	(15,197		)

Net increase in cash	1,949			47,444
Net decrease in cash							(40,158		)	(20,508		)
Cash at beginning of period	68,863			23,891			71,903			68,863
Cash at end of period	$	70,812		$	71,335		$	31,745		$	48,355

Supplemental cash flow information:
Cash paid (refunded) during the period for:
Cash paid during the period for:
Interest	$	4,471		$	4,917		$	1,921		$	2,371
Income taxes	180			(1,094		)	196			25
Non-cash investing and financing activities:
Equity offering costs incurred but not paid	$	200		$	207
Licensing agreement obligation incurred but not paid	156			—			135			—
Reclassification of compound embedded derivative liability to additional paid-in-capital	—			2,096

See accompanying notes to unaudited consolidated financial statements.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

THREE ~~AND NINE~~ MONTHS ENDED ~~JUNE 30,~~DECEMBER 31, 2014 AND 2013

NOTE 1-THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Vitesse Semiconductor Corporation (“Vitesse,” the “Company,” “us,” “we” or ~~“we”~~“our”) is a leading supplier of high-performance integrated circuits (“ICs”) ~~that are~~, associated application and protocol software, and integrated turnkey systems solutions used primarily by manufacturers of networking systems for Carrier, Enterprise and Industrial Internet of Things (“IoT”) networking applications. ~~Vitesse designs, develops~~With these solutions, we enable networking industries to transition from legacy networks to standards-based, ubiquitous ‘Ethernet Everywhere’ networking, starting from Enterprise networks and ~~markets a diverse portfolio of high-performance, low-power~~Carrier networks, and ~~cost-competitive semiconductor products for these applications.~~

now penetrating Industrial-IoT networks.

Vitesse was incorporated in the state of Delaware in 1987. Our headquarters are located at 4721 Calle Carga, Camarillo, California, and our phone number is (805) 388-3700. Our stock trades on the NASDAQ Global Market under the ticker symbol VTSS.

Fiscal Year

Our fiscal year is October 1 through September 30.

Basis of Presentation

The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. The September 30, ~~2013~~2014 balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required for annual periods. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended September 30, ~~2013~~,2014, included in our Annual Report on Form 10-K filed with the SEC on December ~~5, 2013.~~

4, 2014.

The consolidated financial statements included herein are unaudited. However, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly our consolidated financial position, the consolidated results of our operations and the consolidated cash flows and the changes in our stockholders’ equity. The results of operations for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2014 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 fiscal year amounts and related footnotes to conform to current fiscal year presentation with no changes to stockholders’ equity amounts or net loss for the ~~three and nine months ended June 30, 2013~~.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the ~~unaudited~~ consolidated financial statements. Management regularly evaluates estimates and assumptions related to revenue recognition, allowances for doubtful accounts, warranty reserves, inventory valuation reserves, stock-based compensation, ~~compound embedded derivative valuation,~~ purchased intangible asset valuations and useful lives, asset retirement obligations, and deferred income tax asset valuation allowances. These estimates and assumptions are based on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results we experience may differ materially and adversely from our original estimates. To the extent there are material differences between the estimates and the actual results, our future results of operations will be affected.

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Risks and Uncertainties

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

Recent Accounting Pronouncements

In May 2014, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under ~~U.S.~~ GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing ~~U.S.~~ GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in ~~2017.~~fiscal year 2018.

In ~~July 2013,~~August 2014, the FASB issued ASU ~~2013-11,~~No. 2014-15, ~~Income Taxes (Topic 740):~~ Presentation of ~~Unrecognized Tax Benefit When~~Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a ~~NetOperating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carryforward Exists (A Consensus the FASB Emerging Issues Task Force)~~Going Concern. ~~ASU 2013-11 provides guidance on financial statement presentation of unrecognized tax benefit when~~This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about our ability to continue as a ~~netoperating loss carryforward, a similar tax loss, or a tax credit carryforward exists.~~going concern, and if so, to provide related footnote disclosures. The FASB’s objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction as of the reporting date. This amendmentstandard is effective for ~~public entities for fiscal years~~annual reporting periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, ~~2013,~~2016. We are currently evaluating this new standard and ~~interim periods within those years. We do not expect the~~after adoption, we will incorporate this guidance in our assessment of ~~this standard to have a material impact on our unaudited consolidated financial position and results of operations.~~going concern.

~~Table of Contents~~

NOTE 2-COMPUTATION OF NET LOSS PER SHARE

For the three ~~and nine~~ months ended ~~June 30,~~December 31, 2014 and 2013, we recorded a net loss. As such, all outstanding potential common shares were excluded from the diluted earnings per share computation.

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


	June 30,		Outstanding as of December 31,
	2014	2013	2014	2013
	(in thousands)		(in thousands)
Outstanding stock options	2,964	2,110	2,781	3,038
Outstanding restricted stock units	2,377	2,031	2,452	3,034
Employee Stock Purchase Plan shares	355	518	469	365
Convertible preferred stock	—	674
2014 Debentures	7,298	10,332	—	7,298
Term B Loan	1,887	1,887	—	1,887
Total potential common shares excluded from calculation	14,881	17,552	5,702	15,622

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NOTE ~~3-INVENTORY, NET~~3-INVENTORIES


	June 30, 2014		September 30, 2013		December 31, 2014		September 30, 2014
	(in thousands)				(in thousands)
Raw materials	$	1,110	$	1,220	$	1,399	$	1,840
Work-in-process	5,296		3,652		5,140		4,503
Finished goods	4,831		5,820		9,166		6,449
Total inventory, net	$	11,237	$	10,692
Total inventories					$	15,705	$	12,792

NOTE 4-DEBT

June 30,
2014 September 30,
2013
(in thousands)
Term A Loan, bearing interest at 9.0% and 10.5% as of June 30, 2014 and September 30, 2013, respectively, due August 2016 $ 7,783
$ 7,919
Term B Loan, convertible, bearing interest at 9.0% and 8.0% as of June 30, 2014 and September 30, 2013, respectively, due August 2016 8,545
8,444
Other —
3
Long-term debt, net 16,328
16,366
2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014 32,375
44,384
Total debt, net $ 48,703
$ 60,750



	December 31, 2014		September 30, 2014
	(in thousands)
Term A and B Loans, bearing interest at 9.0%, interest payable quarterly in arrears, due August 2016	$	16,508	$	16,417
2014 Debentures, convertible, 8.0% fixed-rate notes, repaid in October 2014	—		32,727
Total debt, net	$	16,508	$	49,144

~~Table of Contents~~

Additional information about our debt is as follows:


	Term A Loan			Term B Loan			2014 Debentures			Term A Loan			Term B Loan			Total
	(in thousands)									(in thousands)
Principal	$	7,857		$	9,342		$	32,843		$	7,857		$	9,342		$	17,199
Unamortized debt discount	(74		)	(797		)	(468		)	(59		)	(632		)	(691		)
Carrying value	$	7,783		$	8,545		$	32,375		$	7,798		$	8,710		$	16,508

Interest payable terms	Quarterly, in arrears			Quarterly, in arrears			Semi-annually, in arrears
Annual effective interest rate	9.5		%	13.5		%	12.2		%	9.5		%	13.5		%
Conversion rate per common share	n/a			$	4.95		$	4.50

~~Our current debt is comprised of our convertible subordinated debentures (“2014 Debentures”).~~ Our long-term debt is comprised of our ~~senior term loans (the “Term~~Term A ~~Loan”~~Loan and ~~“Term~~our Term B ~~Loan”,~~Loan, which we collectively refer to as our “Term A and B Loans”)., due in August 2016.

~~The credit agreements for~~We have the Term A and B Loans and 2014 Debentures provide that we must repurchase, at the option of the holders, indebtedness at its principal amounts plus accrued and unpaid interest upon the occurrence of a fundamental change involving us, as described in the agreements. Upon the occurrence of a fundamental change involving us, the holders of the 2014 Debentures and the Term B Loan may be entitled to receive a “make-whole premium” if they convert their 2014 Debentures or Term B Loan into common stock, payable in additional shares of common stock, if the trading price of our common stock is between ~~$3.20~~ ~~and~~ ~~$6.00~~ ~~per share. During the three months ended June 30, 2014, cash of $0.7 million was restricted for payment of the 2014 Debentures following the sale of assets under the terms of the credit agreement.~~

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

~~The Amendment provides us with the right, so long as no event of default exists under the credit agreement for the Term A and B Loans, to purchase, repay,~~ redeem all or ~~defease any or all~~a portion of the 2014 Debentures. In addition, the Amendment requires us to maintain an unrestricted cash balance of $8.0 million and achieve minimum quarterly revenues of $10.0 million. We were in compliance with all covenants as of June 30, 2014.

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

~~In connection with the Amendment, we paid the lenders a consent fee of~~ ~~$0.3~~ million which was recorded as a debt discount and will be amortized over the remaining term of the Term A and B Loans. Additionally, in connection with the Amendment we repurchased $13.7 million principal amount of our 2014 Debentures at 107%100% of the principal amount ~~thereof~~ plus accrued interest, which eliminated the potential issuance of approximately 3.0 million dilutive common shares. We recorded a loss on extinguishment of debt in the amount of $1.6 million related to the repurchase of the 2014 Debentures. After this transaction, $32.8 million principal amount of 2014 Debentures remain outstanding and ~~are due on October 30, 2014.~~

~~Debt Maturities~~

~~Maturity of our total aggregated outstanding debt is as follows:~~

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

unpaid interest. 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.

The credit agreement for the Term A and B Loans 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. Additionally, we are required to maintain an unrestricted cash balance of $8.0 million and achieve minimum quarterly revenues of $10.0 million. We were in compliance with all covenants as of December 31, 2014. The Term A and B Loans are collateralized by substantially all of our assets.

In November 2013, we paid the holders of the Term A and B Loans a consent fee of $0.3 million and we repurchased $13.7 million principal amount of our convertible subordinated debentures (“2014 Debentures”) at 107% of the principal amount thereof plus accrued interest. We recorded a loss on extinguishment of debt of $1.6 million due to the repurchase during the three months ended December 31, 2013.

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NOTE 5-FAIR VALUE MEASUREMENTS

We measure the fair value of our Term A and B Loans, ~~and 2014 Debentures,~~ which are carried at amortized cost, on a quarterly basis for disclosure purposes. We use a ~~binomial-lattice~~discounted cash flow based model to estimate the fair ~~values~~value of these financial instruments. The estimated fair value of ~~our~~the Term A ~~Loan~~and B Loans is determined using Level 3 inputs based primarily on the comparability of ~~its~~their terms to the terms we could obtain for similar instruments in the current market. The key unobservable input utilized in the model ~~for our Term B Loan and 2014 Debentures~~ includes a discount rate of ~~4.1%~~ ~~and 3.3%, respectively.~~

approximately 4.5%.

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


	June 30, 2014				September 30, 2013				December 31, 2014				September 30, 2014
	Carrying value		Fair value		Carrying value		Fair value		Carrying value		Fair value		Carrying value		Fair value
	(in thousands)								(in thousands)
Term A Loan	$	7,783	$	8,840	$	7,919	$	8,165	$	7,798	$	8,595	$	7,791	$	8,755
Term B Loan	8,545		10,360		8,444		9,781		8,710		10,055		8,626		10,245
2014 Debentures	32,375		34,615		44,384		49,282		—		—		32,727		33,040

NOTE 6-STOCKHOLDERS’ EQUITY

Authorized Capital Stock

We are authorized to issue up to 250 million shares of common stock, par value ~~$0.01~~,$0.01, per share, of which ~~9.2~~7.8 million ~~shares are reserved for future potential issuance upon conversion of debt, 8.4~~ and 3.0 million shares of common stock have been reserved for issuance under our stock compensation plans and ~~3.4 million~~ ~~shares of common stock are reserved for issuance under~~

~~our~~ Employee Stock Purchase Plan (“ESPP”).

~~In June 2014, we raised $26.6 million, net~~, respectively, as of ~~offering expenses of $2.1 million, from the registered public sale of 8,582,076 shares of common stock at $3.35 per share.~~

December 31, 2014.

NOTE 7-STOCK BASED COMPENSATION

Stock Options

We have in effect one stock incentive plan, the 2013 Incentive Plan (the “Plan”), under which non-qualified stock options and restricted stock units have been granted to employees and non-employee directors. Under the Plan, we have ~~1.8~~0.8 million shares available for future grant as of ~~June 30, 2014~~.December 31, 2014.

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


	Three Months Ended June 30,				Nine Months Ended June 30,				Three Months Ended December 31,
	2014		2013		2014		2013		2014		2013
	(in thousands)								(in thousands)
Cost of revenues	$	210	$	161	$	619	$	459	$	230	$	184
Engineering, research and development	573		428		1,643		1,193		671		485
Selling, general and administrative	803		567		2,204		1,653		930		596
Total stock-based compensation expense	$	1,586	$	1,156	$	4,466	$	3,305	$	1,831	$	1,265

As of ~~June 30,~~December 31, 2014,, there was ~~$7.2~~$7.7 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 for stock options and restricted stock units expected to be recognized is approximately ~~1.4~~0.9 years and ~~1.9~~2.1 years,, respectively. ~~Future stock-based compensation expense~~An estimated forfeiture rate of 4.2% has been applied to all unvested time-based options and ~~unearned stock-based compensation will increase to the extent that we grant additional equity awards and our~~restricted stock ~~price increases.~~outstanding as of December 31, 2014.

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Activity in stock option awards is as follows:


	Shares (in thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (in thousands)		Shares (in thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (in thousands)
Options outstanding, September 30, 2013	2,089		$	13.43	6.67	$	591
Options outstanding, September 30, 2014								2,940		$	7.46	7.00	$	2,059
Granted	1,014		2.53					—
Exercised	(49	)	2.35					(14	)	2.41			20
Cancelled or expired	(90	)	86.22					(145	)	54.96
Options outstanding, June 30, 2014	2,964		7.64		7.23	1,792
Options exercisable, June 30, 2014	1,649		$	11.67	5.85	$	578
Options outstanding, December 31, 2014								2,781		$	5.01	7.08	$	2,353
Options exercisable, December 31, 2014								1,774		$	6.46	6.14	$	1,014

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 ~~$3.45~~$3.78 and $3.60 as of ~~June~~December 31, 2014 and September 30, 2014,, which would have been received by the option holders had those option holders exercised their in-the-money options as of those dates. There were ~~0.6~~0.8 million in-the-money stock options that were exercisable as of ~~June 30, 2014~~.December 31, 2014.

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

Nine Months Ended June 30,
2014 2013
Expected life (in years) 5.79 5.65
Expected volatility:

Weighted-average 81.5% 82.0%
Range 79.5% - 81.6% 79.8% - 82.1%
Expected dividend — —
Risk-free interest rate 1.7% - 1.9% .9% - 1.0%

~~The weighted average fair value at the date of grant of time-based options granted in the~~ ~~nine months ended June 30,~~ ~~2014 and 2013 was~~ ~~$1.75~~ ~~and~~ ~~$1.43, respectively.~~

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

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estimate the fair value of the options: expected life of 1.3 years, expected volatility of 80.0%, a zero dividend rate, and a risk-free rate of 2.79%. The market-based options had a grant date per share fair value of $1.86.

The following table provides additional information in regards to options outstanding as of ~~June 30, 2014~~:December 31, 2014:


	Options Outstanding				Options Exercisable			Options Outstanding				Options Exercisable
Range of Exercise Price	Number Outstanding (in thousands)	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable (in thousands)	Weighted Average Exercise Price		Number Outstanding (in thousands)	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable (in thousands)	Weighted Average Exercise Price
$2.10 - $2.26	424	8.68	$	2.11	194	$	2.10	409	8.19	$	2.11	187	$	2.10
2.53	987	9.45	2.53		116	2.53		987	8.94	2.53		239	2.53
2.54 - 4.36	750	7.03	3.45		542	3.50		732	6.52	3.45		700	3.49
4.60 - 41.20	594	5.08	7.89		588	7.91
42.00 - 145.40	209	0.67	57.39		209	57.39
$2.10 - $145.40	2,964	7.23	$	7.64	1,649	$	11.67
4.60 - 30.60								584	4.60	7.58		579	7.60
33.60 - 66.40								69	0.88	52.36		69	52.36
$2.10 - $66.40								2,781	7.08	$	5.01	1,774	$	6.46

Restricted Stock Units

Activity for our restricted stock award units is as follows:


	Restricted Stock Units (in thousands)		Weighted Average Grant-Date Fair Value per Share		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in thousands)		Restricted Stock Units (in thousands)		Weighted Average Grant-Date Fair Value per Share		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in thousands)
Restricted stock units, September 30, 2013	2,021		$	2.65	1.13	$	6,143
Restricted stock units, September 30, 2014								2,328		$	2.61	0.96	$	8,380
Awarded	1,600		2.62					1,129		3.34
Released	(1,179	)	2.69					(994	)	3.04
Forfeited	(65	)	2.42					(11	)	2.80
Restricted stock units, June 30, 2014	2,377		$	2.62	1.21	$	8,200
Restricted stock units, December 31, 2014								2,452		$	2.77	1.38	$	9,267

The aggregate intrinsic values in the preceding table for the restricted stock units outstanding represent the total pretax intrinsic value, based on our closing stock price of $3.78 and $3.60 as of December 31, 2014 and September 30, 2014, respectively. We issue restricted stock units as part of our equity incentive plans. For the three months ended December 31, 2014, the total grant date fair value of shares vested from restricted stock unit grants was $3.0 million. For the majority of restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. The impact of such withholding totaled ~~$1.3 million and $0.6~~$1.1 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2014 and ~~2013, respectively, and~~the amount was recorded as settlement on restricted stock tax withholding in the accompanying unaudited consolidated statements of stockholders’ equity. Although

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shares withheld are not issued, they are treated as common stock repurchases in our unaudited consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting.

Employee Stock Purchase Plan

Pursuant to our ESPP, eligible employees may authorize payroll deductions of up to 15% of their regular base salary subject to certain limits to purchase shares at the lower of 85% of the fair market value of the common stock on the date of the commencement of the offering or on the last day of the 6-month offering period. On January ~~31, 2014, 0.4~~30, 2015, 0.5 million shares were issued at a price per share of ~~$2.46,~~$2.50, a 15% discount to the share price on August 1, ~~2013,~~2014, the commencement date for the purchase period that ended January ~~31, 2014. On July 31, 2014, 0.4 million shares were issued at a price per share of $2.55, a 15% discount to the share price on July 31 2014, the last date of the purchase period.~~30, 2015. We recognized ~~$0.5 million and $0.4~~$0.2 million of stock compensation expense under the ESPP during the ~~nine~~three months ended ~~June 30, 2014 and 2013, respectively.~~December 31, 2014. We determine the fair value of the ESPP awards using the Black-Scholes pricing model. ~~Underlying~~We used the following assumptions ~~used were as follows:~~

~~Table~~during the three months ended December 31, 2014: expected useful life of ~~Contents~~0.5 years, expected volatility of 44.8%, a zero dividend rate, and a risk-free interest rate of 0.05%.

Nine Months Ended June 30,
2014 2013
Expected life (in years) 0.5 0.5
Expected volatility 37.1% - 50.3% 47.6% - 49.8%
Expected dividend — —
Risk-free interest rate 0.07% - 0.08% 0.11% - 0.14%

NOTE 8-INCOME TAXES

The income tax expense (benefit) as a percentage of loss from operations before income taxes was ~~0.4%~~0.9% for the ~~nine~~three months ended ~~June 30,~~December 31, 2014 compared to ~~(4.6)~~(3.6)% for the comparable period in the prior year. Our income tax expense (benefit) is primarily impacted by foreign taxes, certain nondeductible interest and share based expenses. The income tax expense (benefit) is also impacted by the release of a portion of the valuation allowance related to certain foreign jurisdictions’ deferred tax assets as such balances were more likely than not realizable within the applicable carryforward period based on our analysis of the available positive and negative evidence.

At ~~June 30,~~December 31, 2014,, we had approximately ~~$43.4~~$55.8 million,~~, $33.0~~ $27.4 million, and ~~$133.2~~$119.1 million of federal, state, and foreign Net Operating Losses (“NOLs”), respectively, that can be used in future tax years. In December 2012, we issued 10.7 million shares of common stock in a public offering which resulted in a Section 382 ownership change. In general, a Section 382 ownership change occurs if there is a cumulative change in our ownership by “5%” shareholders (as defined in the Internal Revenue Code of 1986, as amended) that exceeds 50 percentage points over a rolling three-year period. An ownership change generally affects the rate at which NOLs and potentially other deferred tax assets are permitted to offset future taxable income. Of our federal NOL amount as of ~~June 30,~~December 31, 2014,~~, $28.1~~ $25.4 million is subject to an annual Section 382 limitation of $1.4 million due to the December 2012 ownership change. Since we maintain a full valuation allowance on all of our U.S. and state deferred tax assets, the impact of the ownership change on the future realizability of our U.S. and state deferred tax assets did not result in an impact to our provision for income taxes for the ~~nine~~three months ended ~~June 30,~~December 31, 2014,, or on our net deferred tax asset as of December 31, 2014.

In June ~~30, 2014~~.

2013, we issued an additional 18.7 million shares of common stock in a public offering. Based on a preliminary evaluation we do not believe this offering caused another Section 382 ownership change. As additional relevant information becomes available we will update our evaluation. If an additional ownership change ~~occurs~~did occur or does occur in the future, our ability to utilize our NOL carryforwards and other deferred tax assets to offset future taxable income may be further limited and the value and recoverability of our NOLs and other deferred tax assets could be further diminished.

NOTE 9-SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK AND GEOGRAPHIC INFORMATION

We manage and operate our business through one operating segment.

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

Three Months Ended June 30, Nine Months Ended June 30,
2014 2013 2014 2013
Tellabs *
10.3 % *
*
WPG Holdings** 26.6 % 19.2 % 24.5 % 16.4 %



	Three Months Ended December 31,
	2014		2013
WPG Holdings and affiliates*	25.2	%	23.8	%

__________________________________________________

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

**Distributor

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

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At ~~June 30,~~December 31, 2014,, there ~~was one customer~~were two customers that accounted for ~~16.8%~~31.0% of accounts receivable. At September 30, ~~2013,~~2014, there were two customers that accounted for ~~23.8%~~24.3% of accounts receivable. We believe that this concentration and the concentration of credit risk resulting from trade receivables owing from high-technology industry customers is substantially mitigated by our credit evaluation process, relatively short collection periods and maintaining an allowance for anticipated losses. We generally do not require collateral security for outstanding amounts.

Net revenues by geographic area are as follows:


	Three Months Ended June 30,				Nine Months Ended June 30,				Three Months Ended December 31,
	2014		2013		2014		2013		2014		2013
	(in thousands)								(in thousands)
United States	$	5,936	$	5,590	$	17,356	$	23,693	$	5,052	$	6,559
Asia Pacific	17,606		16,856		52,272		42,957
China, including Hong Kong									5,531		7,994
Taiwan									7,651		5,651
Other Asia Pacific									3,638		3,141
Europe, Middle East and Africa	3,609		3,972		10,198		10,248		2,883		3,738
Total net revenues	$	27,151	$	26,418	$	79,826	$	76,898
Net revenues									$	24,755	$	27,083

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

We also classify our product revenues based on our three product lines: (i) ~~Connectivity;~~Ethernet switching; (ii) ~~Ethernet switching;~~Connectivity; and (iii) Transport processing. Product revenues by product line are as follows:


	Three Months Ended June 30,				Nine Months Ended June 30,				Three Months Ended December 31,
	2014		2013		2014		2013		2014		2013
	(in thousands)								(in thousands)
Ethernet switching									$	12,171	$	11,336
Connectivity	$	10,132	$	12,199	$	29,556	32,172		10,219		8,949
Ethernet switching	14,001		9,541		36,955		28,178
Transport processing	1,879		4,545		9,233		14,529		1,579		4,578
Product revenues	$	26,012	$	26,285	$	75,744	$	74,879	$	23,969	$	24,863

NOTE 10-COMMITMENTS AND CONTINGENCIES

Operating Leases and Software Licenses

We lease facilities under non-cancellable operating leases. The leases expire at various dates through fiscal year ~~2017~~2019 and frequently include renewal provisions for varying periods of time, provisions which require us to pay taxes, insurance, maintenance costs, or provisions for minimum rent increases. Minimum leases payments, including scheduled rent increases are recognized as rent expenses on a straight line basis over the applicable lease term. Lease incentives received are recognized as a reduction of rental expense on a straight-line basis over the term of the lease.

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

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


	Remaining in 2014		2015		2016		2017		2018		Thereafter		Total		Remaining in 2015		2016		2017		2018		2019		Thereafter		Total
	(in thousands)														(in thousands)
Operating leases	$	559	$	1,952	$	591	$	110	$	—	$	—	$	3,212	$	1,482	$	670	$	186	$	60	$	15	$	—	$	2,413
Software licenses	1,684		7,136		3,147		2,900		2,800		—		17,667		4,989		4,555		4,275		4,175		—		—		17,994
Total	$	2,243	$	9,088	$	3,738	$	3,010	$	2,800	$	—	$	20,879	$	6,471	$	5,225	$	4,461	$	4,235	$	15	$	—	$	20,407

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Litigation

~~From time-to-time, we~~We are ~~involved in legal proceedings~~party to various claims and lawsuits arising in the ~~ordinary~~normal course of ~~business, including actions against us which assert or~~business. We closely monitor these claims and lawsuits and frequently consult with our legal counsel to determine whether they may, assert claims or seek to impose fines and penalties in substantial amounts. Although the ultimate outcome of these matters cannot be determined, we believe that as of June 30, 2014, the final disposition of any such proceedings will notwhen resolved have a material adverse effect on our financial position or results ofor operations and accrue and/or ~~liquidity. Related legal defense costs are expensed~~disclose loss contingencies as appropriate.

~~as incurred.~~

~~Guarantees and Indemnities~~

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, 2014~~ ~~and~~ ~~September 30, 2013~~.

~~Warranties~~

Warranty

We establish reserves for future product warranty costs that are expected to be incurred pursuant to specific warranty provisions with our customers. We generally warrant our products against defects for one year from date of shipment, with certain exceptions in which the warranty period can extend to more than one year based on contractual agreements. 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. Historically, our warranty returns have not been material.

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.

Guarantees and Indemnities

In the normal course of business, we are occasionally required to undertake indemnification for which we may be required to make future payments under specific circumstances. We review our exposure under such obligations no less than annually, or more frequently as required. The amount of any potential liabilities related to such obligations cannot be accurately determined until a formal claim is filed. Historically, any such amounts that become payable have not had a material negative effect our business, financial condition or results of operations. We maintain general and product liability insurance which may provide a source of recovery to us in the event of an indemnification claim.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement

You should read the following discussion and analysis in conjunction with our Unaudited Consolidated Financial Statements and the related Notes thereto contained in Part I, Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report, as well as in our Annual Report on Form 10-K for the year ended September 30, ~~2013~~2014 (“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~~Vitesse is a leading supplier of high-performance networking ICs, application software, and integrated turnkey systems solutions that are used primarily by manufacturers of ~~networking systems~~equipment for Carrier, Enterprise and ~~IoT~~Industrial-IoT networking applications. ~~We design, develop and market a diverse portfolio of high-performance, low-power and cost-competitive networking and connectivity IC solutions.~~ For ~~more than~~over 30 years, we have been a ~~leader~~leading innovator in networking and connectivity IC solutions. During the ~~adoption of new technologies in Carrier and Enterprise networking.~~

~~Both bandwidth demands and complexity, driven by~~last decade, our markets have gone through a dramatic transformation. We have responded with an aggressive transition strategy to address the introduction of new content-rich services, the convergence of voice, video and data, and enhanced 4G/LTE mobile networks, have risen dramatically in Carrier and Enterprise networks. Media-rich devices, such as smartphones and game consoles, require increased bandwidth. New Enterprise deployment options, such as Cloud-based services and social media and telepresence, also spur demand. More recently, there is a trend for increased Ethernet deploymentemerging opportunities within ~~networks used in Industrial and Military networking, automotive transport, and future Smart Grid applications, collectively referred to as the Internet of Things, or IoT.~~

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

these markets.

~~Realization~~Affirmation of Our Transition Strategy

Several years ago, we ~~embarked on the strategic mission of re-inventing~~strategically re-invented Vitesse to ~~take advantage of~~exploit the dramatic ongoing transformation of our target networking markets. Our ~~objective is~~vision was simple: ‘Ethernet Everywhere.’ We went ‘all in’ on the idea that all networks, in all markets, would eventually transition to ~~be a leading supplier of high-performance ICs for the global communications infrastructure markets. In an effort to diversify ourselves and provide new opportunities for growth, we~~Ethernet. We re-positioned our ~~engineering, research and development (“~~R~~&D”) teams~~&D team and invested ~~heavily~~over $200 million to enter new ~~markets, develop~~and expanding markets. We developed dozens of new products, captured growing market share, and ~~penetrate~~are continuing to add new ~~customers. Over~~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 define a set of products introduced since 2010 as our ‘new products.’ These products largely address the transition of our core markets to Ethernet technology. Growing at a compound annual growth rate of 78% from fiscal year 2012 to fiscal year 2014, the consistent revenue growth in our new product portfolio over the last three years ~~we have seen consistent~~validates our strategy. With continued growth in ~~this~~our Carrier and Enterprise markets, combined with early growth in new markets including Industrial-IoT, we anticipate our new product ~~portfolio, which reached 28% and 45%~~revenues will continue to increase in fiscal year 2015. To date, the growth of our ~~total product~~new products has largely been offset by the decline in our legacy products that we identify as end-of-life (“EOL”) and “Mature.” We anticipate that as the legacy products decline and become a smaller portion of revenues, ~~for fiscal year 2013~~ and ~~the nine months ended June 30, 2014, respectively.~~

Toour new products continue to grow, we will achieve overall revenue growth.

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

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

~~In bringing our new products to market,~~ our customer engagements and number of design opportunities ~~identified by our sales team~~and wins have consistently increased since 2010. We believe that design wins are a good leading indicator for future revenues. In ~~2013,~~2014, the number of design wins for our new products ~~increased by approximately 40%~~grew over 50% from ~~2012. We continue to see strong trends in both design~~2013, including wins ~~and design opportunities. Our new products have captured design wins at over 200 customers, including~~from market leaders such as Adtran, Alcatel-Lucent, Alstrom, Belden-Hirschman, Cisco, Dragonwave, Ericsson, ~~Hewlett Packard, Huawei,~~ Juniper, Samsung, and ZTE. While many of these wins represented additional business at our most important customers, what we call “same-store-sales,” many others are wins at new customers, and reflect our growing market ~~share.~~share in multiple markets. In fiscal year 2014, we had over 500 customers worldwide, nearly 300 of which purchased our new products. We added over 130 new customers in fiscal year 2014.

~~Because~~Table of Contents

We intensified our products are 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 ~~believe~~increased the number of first-time design wins ~~represent a good leading indicator~~from new customers by nearly 100% compared with fiscal year 2013. In fiscal year 2014, Industrial-IoT represented 33% of ~~potential future revenues. We model how~~ our total new customers ~~will ramp from design win to production based on a number~~and 28% of ~~factors, including~~our customer ~~forecast, market segment, type~~base for new products as of ~~product, and historical results.~~September 30, 2014.

In ~~2013,~~fiscal year 2014, we introduced the ~~third-generation~~fourth-generation of both our ~~switch engine~~Switch and PHY ~~products. These~~products, adding substantial new ~~products allowed us~~features and capabilities to our product portfolio, significantly ~~increase~~increasing our ~~served~~addressable markets in Carrier, Enterprise and ~~IoT~~Industrial-IoT networking. We ~~have become the clear choice~~invested to provide our customers a complete, turnkey application software package. We provide integrated Carrier Ethernet silicon and software solutions, making it simple for ~~meeting~~existing customers to migrate to our ~~customers’ needs~~new solutions and for ~~service delivery, synchronization, security,~~new customers to engage with Vitesse to quickly and ~~software.~~efficiently bring their new products to market.

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

Our accounting policy generally uses the “sell-through” model for sales to our distributors. The “sell-through” model recognizes revenue only upon shipment of the merchandise from our distributor to the final customer. As such, we may have variability in our revenue from quarter-to-quarter as customers have substantial flexibility to reschedule backlog with our distribution partners as part of the terms and conditions of sale. Our distributor sales were 52.7% , 51.6% and 44.6% of product revenue in fiscal years 2013, 2012 and 2011, respectively, and 57.5% of product revenue for the nine months ended June 30, 2014.

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

~~During the last three years, we~~ accelerated our efforts to increase our product gross margins, ~~and operating margins,~~ which ~~together have~~has substantially ~~increased~~improved our operating leverage. Our efforts in operations include reductions in materials costs and cycle times, improved product yields, implementation of programs such as lean manufacturing, and an enhanced customer-centric focus. As a fabless semiconductor company, we outsource the majority of our manufacturing. Our successful management of our supply chain has provided us with competitive materials pricing and effective lead times for the materials we purchase. We have sizable advantages due to lower manufacturing fixed costs, reduced cycle times, and lower inventory resulting from our outsourcing of almost all of our wafer fabrication and assembly. During periods of strong demand, we could experience longer lead times, difficulties in obtaining capacity, and/or difficulty in meeting commitments for our required deliveries during periods of strong demand. Average margins vary widely within the markets we serve, with the Industrial-IoT and Carrier networking ~~market~~markets having the highest average margins and the Enterprise networking market having the lowest average margins. ~~We endeavor~~Based on our strengthening turnkey solutions mix and our aggressive cost reduction efforts, our overall gross margin profile is steadily improving. Based on estimated gross margins on our new product design wins, we anticipate that our product gross margins will continue to increase ~~margins by providing products~~in fiscal year 2015, underscoring the value that ~~have significant added value relative~~Vitesse brings to ~~our competition.~~these markets.

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

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Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We base our estimates on historical experience and on various other assumptions that we believe are reasonable in the circumstances. We regularly discuss with our audit committee the basis of our estimates. These estimates could change under different assumptions or conditions.

We believe that our critical accounting policies and estimates, as described in our Annual Report on Form 10-K for the year ended September 30, ~~2013~~,2014, are our most critical accounting policies and are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments. There have been no significant changes to these policies during the ~~nine~~three months ended ~~June 30, 2014~~.

December 31, 2014.

Impact of Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements and the impact of these pronouncements see “The Company and Its Significant Accounting Policies” footnote in the accompanying notes to the unaudited consolidated financial statements.

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Results of Operations for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2014, as compared to the three ~~and nine~~ months ended ~~June 30,~~December 31, 2013

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,										Three Months Ended December 31,
	2014					2013					2014					2013					2014					2013
	$			%		$			%		$			%		$			%		$			%		$			%
	(in thousands, except for percentages)																				(in thousands, except for percentages)
Net revenues:
Product revenues	$	26,012		95.8	%	$	26,285		99.5	%	$	75,744		94.9	%	$	74,879		97.4	%	$	23,969		96.8	%	$	24,863		91.8	%
Intellectual property revenues	1,139			4.2	%	133			0.5	%	4,082			5.1	%	2,019			2.6	%	786			3.2	%	2,220			8.2	%
Net revenues	27,151			100.0	%	26,418			100.0	%	79,826			100.0	%	76,898			100.0	%	24,755			100.0	%	27,083			100.0	%
Costs and expenses:
Cost of product revenues	12,254			45.1	%	11,666			44.2	%	33,909			42.5	%	34,010			44.2	%	10,053			40.6	%	10,676			39.4	%
Engineering, research and development	10,006			36.9	%	11,706			44.3	%	31,581			39.6	%	31,987			41.6	%	11,337			45.8	%	10,679			39.4	%
Selling, general and administrative	7,330			27.0	%	7,257			27.5	%	23,189			29.0	%	22,617			29.4	%	7,415			30.0	%	7,854			29.0	%
Amortization of intangible assets	88			0.3	%	80			0.3	%	267			0.3	%	266			0.3	%	100			0.4	%	88			0.3	%
Costs and expenses	29,678			109.3	%	30,709			116.3	%	88,946			111.4	%	88,880			115.5	%	28,905			116.8	%	29,297			108.1	%
Loss from operations	(2,527		)	(9.3	)%	(4,291		)	(16.3	)%	(9,120		)	(11.4	)%	(11,982		)	(15.5	)%	(4,150		)	(16.8	)%	(2,214		)	(8.1	)%
Other expense (income):
Other expense:
Interest expense, net	1,510			5.6	%	1,983			7.5	%	4,706			5.9	%	5,919			7.7	%	818			3.3	%	1,704			6.3	%
Gain on compound embedded derivative	—			—	%	—			—	%	—			—	%	(803		)	(1.0	)%
Loss on extinguishment of debt	—			—	%	—			—	%	1,594			2.0	%	—			—	%	—			—	%	1,594			5.9	%
Other expense, net	18			0.1	%	31			0.1	%	111			0.1	%	5			—	%
Other, net																					28			0.1	%	61			0.2	%
Other expense, net	1,528			5.7	%	2,014			7.6	%	6,411			8.0	%	5,121			6.7	%	846			3.4	%	3,359			12.4	%
Loss before income tax expense (benefit)	(4,055		)	(15.0	)%	(6,305		)	(23.9	)%	(15,531		)	(19.4	)%	(17,103		)	(22.2	)%	(4,996		)	(20.2	)%	(5,573		)	(20.5	)%
Income tax expense (benefit)	333			1.2	%	129			0.5	%	59			0.1	%	(790		)	(1.0	)%	45			0.2	%	(202		)	(0.7	)%
Net loss	$	(4,388	)	(16.2	)%	$	(6,434	)	(24.4	)%	$	(15,590	)	(19.5	)%	$	(16,313	)	(21.2	)%	$	(5,041	)	(20.4	)%	$	(5,371	)	(19.8	)%

Product Revenues

We sell our products into the following markets: (i) Carrier networking; (ii) Enterprise networking; and (iii) ~~Non-core.~~Industrial-IoT networking. The Carrier networking market includes core, metro, edge, and access equipment used for transport, switching, routing, mobile access, and backhaul in service provider networks. The Enterprise networking market covers Ethernet switching and routing

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equipment used within LANs in ~~SME and~~ SME/SMB networks and Cloud Access services. The ~~Non-core~~Industrial-IoT networking market ~~is comprised~~includes industrial-classswitching and routing equipment for networks within Industrial Process Control, Smart-Grid Energy Distribution, Transportation, and Factory Automation applications, as well as switching and connectivity for a broad variety of equipment such as security cameras, LCD signage, intelligent sensors, metering equipment, home and office automation and ‘things’ of all kinds.

In the normal course of business, we regularly assess our product portfolio. At such time, we may determine to phase-out products and put them through EOL. The EOL announcement can result in near-term increases in our revenues as customers typically respond to these announcements by making last-time-buys to ensure that they have ~~not received additional investment over the last five years and, as a result, have generally been in decline.~~

adequate stock on hand to support their production forecast.

The demand for our products is affected by various factors, including our development and introduction of new products, availability and pricing of competing products, capacity constraints at our suppliers, EOL product decisions, and general economic conditions. Therefore, our revenues for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2014 may not necessarily be indicative of future revenues.

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Product revenues by market are as follows:


	Three Months Ended June 30,													Three Months Ended December 31,
	2014				2013									2014				��	2013
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change		Amount		% of Product Revenues			Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)													(in thousands, except percentages)
Carrier networking	$	12,035	46.3	%	$	14,368	54.7	%	$	(2,333	)	(16.2	)%	$	11,370	47.4	%		$	12,539	50.4	%	$	(1,169	)	(9.3	)%
Enterprise networking	13,918		53.5	%	11,368		43.2	%	2,550			22.4	%	10,472		43.7	%		9,768		39.3	%	704			7.2	%
Non-core	59		0.2	%	549		2.1	%	(490		)	(89.3	)%
Industrial-IoT networking														2,127		8.9	%		2,556		10.3	%	(429		)	(16.8	)%
Product revenues	$	26,012	100.0	%	$	26,285	100.0	%	$	(273	)	(1.0	)%	$	23,969	100.0	%		$	24,863	100.0	%	$	(894	)	(3.6	)%

Nine Months Ended June 30,
2014 2013
Amount
% of Product
Revenues
Amount
% of Product
Revenues
Change
%
Change
(in thousands, except percentages)
Carrier networking $ 36,820
48.6 % $ 41,497
55.4 % $ (4,677 ) (11.3 )%
Enterprise networking 38,537
50.9 % 31,884
42.6 % 6,653
20.9 %
Non-core 387
0.5 % 1,498
2.0 % (1,111 ) (74.2 )%
Product revenues $ 75,744
100.0 % $ 74,879
100.0 % $ 865
1.2 %

The lower Carrier networking revenues are largely attributable to a decrease in sales of older products for ~~SONET~~SONET/SDH applications, some of which went through EOL in prior periods. The decline is partially offset by ~~increases~~the continued increase in sales of our new products, primarily for Carrier Ethernet applications, which increased more than ~~65%~~110% from the comparable ~~periods~~period in the prior year.

The higher Enterprise networking revenues are primarily due to ~~increases~~a more than 50% increase in sales of our new products, ~~both~~including switches, Cu PHYs, and ~~10G Ethernet~~10 GE PHYs, as new customers ramp into production. The increases are partially offset by declines in sales of our ~~crosspoint switches and~~ older generation switches and PHYs.

~~In fiscal 2012, a number~~The lower Industrial-IoT revenues are primarily due to decreased sales of older Ethernet switches and Cu PHYs. This decrease was partially offset by growth in sales of our new products ~~went through EOL.~~ in Industrial-IoT applications which increased more than 90% over the prior year.

Revenues from ~~these EOL~~our new products ~~totaled $0.3~~increased 82% to $16.2 million ~~and $3.6 million in~~for the three months ended ~~June 30,~~December 31, 2014 ~~and 2013, respectively, and $5.3~~from $8.9 million ~~and $12.4 million in~~for the ~~nine months ended~~ ~~June 30, 2014~~ ~~and 2013, respectively.~~prior year period.

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

Product revenues by product line are as follows:


	Three Months Ended June 30,													Three Months Ended December 31,
	2014				2013									2014				2013
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change		Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)													(in thousands, except percentages)
Ethernet switching														$	12,171	50.8	%	$	11,336	45.6	%	$	835		7.4	%
Connectivity	$	10,132	39.0	%	$	12,199	46.4	%	$	(2,067	)	(16.9	)%	10,219		42.6	%	8,949		36.0	%	1,270			14.2	%
Ethernet switching	14,001		53.8	%	9,541		36.3	%	4,460			46.7	%
Transport processing	1,879		7.2	%	4,545		17.3	%	(2,666		)	(58.7	)%	1,579		6.6	%	4,578		18.4	%	(2,999		)	(65.5	)%
Product revenues	$	26,012	100.0	%	$	26,285	100.0	%	$	(273	)	(1.0	)%	$	23,969	100.0	%	$	24,863	100.0	%	$	(894	)	(3.6	)%

Nine Months Ended June 30,
2014 2013
Amount
% of Product
Revenues
Amount
% of Product
Revenues
Change
%
Change
(in thousands, except percentages)
Connectivity $ 29,556
39.0 % $ 32,172
43.0 % $ (2,616 ) (8.1 )%
Ethernet switching 36,955
48.8 % 28,178
37.6 % 8,777
31.1 %
Transport processing 9,233
12.2 % 14,529
19.4 % (5,296 ) (36.5 )%
Product revenues $ 75,744
100.0 % $ 74,879
100.0 % $ 865
1.2 %

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

The higher Ethernet switching revenues are largely attributable to an increase in sales of our new Enterprise ~~and~~switches, Carrier Ethernet switch engines and ~~1GbE Copper PHYs.~~Cu PHYs into Carrier, Enterprise and Industrial-IoT applications partially offset by a decrease in sales of our mature Cu PHYs and Ethernet switches.

The higher Connectivity revenues are primarily attributable to the strong increase in sales of our new 10 GE PHYs, partially offset by a decrease in sales of our older generation PHYs and mature crosspoint switches.

The lower Transport processing revenues are largely attributable to decreased sales of ~~SONET~~SONET/SDH framers that went through EOL in prior periods. ~~In the nine months ended June 30, 2014, the~~The decrease is partially offset by an increase in sales of ~~switch fabrics going through EOL and~~ new ~~optical transport network (“OTN”)~~OTN products.

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Intellectual Property Revenues

Three Months Ended June 30,
2014 2013
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)
Intellectual property revenues $ 1,139
4.2 % $ 133
0.5 % $ 1,006
756.4 %



	Three Months Ended December 31,
	2014				2013
	Amount		% of Net Revenues		Amount		% of Net Revenues		Change			% Change
	(in thousands, except percentages)
Intellectual property revenues	$	786	3.2	%	$	2,220	8.2	%	$	(1,434	)	(64.6	)%

Nine Months Ended June 30,
2014 2013
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)
Intellectual property revenues $ 4,082
5.1 % $ 2,019
2.6 % $ 2,063
102.2 %

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

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

Three Months Ended June 30, Nine Months Ended June 30,
2014 2013 2014 2013
Tellabs *
10.3 % *
*
WPG Holdings** 26.6 % 19.2 % 24.5 % 16.4 %



	Three Months Ended December 31,
	2014		2013
WPG Holdings and affiliates*	25.2	%	23.8	%

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

** Distributors

Distributor

Net revenues by geographic area are as follows:


	Three Months Ended June 30,													Three Months Ended December 31,
	2014				2013									2014				2013
	Amount		% of Net Revenues		Amount		% of Net Revenues		Change			% Change		Amount		% of Net Revenues		Amount		% of Net Revenues		Change			% Change
	(in thousands, except percentages)													(in thousands, except percentages)
United States	$	5,936	21.9	%	$	5,590	21.2	%	$	346		6.2	%	$	5,052	20.4	%	$	6,559	24.2	%	$	(1,507	)	(23.0	)%
Asia Pacific	17,606		64.8	%	16,856		63.8	%	750			4.4	%
China, including Hong Kong														5,531		22.3	%	7,994		29.5	%	(2,463		)	(30.8	)%
Taiwan														7,651		31.0	%	5,651		20.9	%	2,000			35.4	%
Other Asia Pacific														3,638		14.7	%	3,141		11.6	%	497			15.8	%
Europe, Middle East and Africa	3,609		13.3	%	3,972		15.0	%	(363		)	(9.1	)%	2,883		11.6	%	3,738		13.8	%	(855		)	(22.9	)%
Net revenues	$	27,151	100.0	%	$	26,418	100.0	%	$	733		2.8	%	$	24,755	100.0	%	$	27,083	100.0	%	$	(2,328	)	(8.6	)%

Nine Months Ended June 30,
2014 2013
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)
United States $ 17,356
21.7 % $ 23,693
30.8 % $ (6,337 ) (26.7 )%
Asia Pacific 52,272
65.5 % 42,957
55.9 % 9,315
21.7 %
Europe, Middle East and Africa 10,198
12.8 % 10,248
13.3 % (50 ) (0.5 )%
Net revenues $ 79,826
100.0 % $ 76,898
100.0 % $ 2,928
3.8 %

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

Cost of Product Revenues

Three Months Ended June 30,
2014 2013
Amount
% of Product
Revenues
Amount
% of Product
Revenues
Change
%
Change
(in thousands, except percentages)
Cost of product revenues $ 12,254
47.1 % $ 11,666
44.4 % $ 588
5.0 %



	Three Months Ended December 31,
	2014				2013
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)
Cost of product revenues	$	10,053	41.9	%	$	10,676	42.9	%	$	(623	)	(5.8	)%

Nine Months Ended June 30,
2014 2013
Amount
% of Product
Revenues
Amount
% of Product
Revenues
Change
%
Change
(in thousands, except percentages)
Cost of product revenues $ 33,909
44.8 % $ 34,010
45.4 % $ (101 ) (0.3 )%

~~Table of Contents~~

We use third-parties for wafer fabrication and assembly and test 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.

Table of Contents

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

Cost of product revenues as a percentage of product revenues for the three months ended June 30, 2014 was negatively impacted by a high volume sale of a single, low-margin product. Otherwise, cost of product revenues as a percentage of product revenues continued to decrease for both the three and nine month periods ended June 30, 2014decreased primarily due to a mix shift toward Carrier Ethernet switches, which have higher margins ~~on Copper PHY and Ethernet Switch products, as well as a decrease in lower margin SONET framer product sales,~~ as compared to the prior ~~periods.~~

year period.

Engineering, Research and Development

Three Months Ended June 30,
2014 2013
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)
Engineering, research and development $ 10,006
36.9 % $ 11,706
44.3 % $ (1,700 ) (14.5 )%



	Three Months Ended December 31,
	2014				2013
	Amount		% of Net Revenues		Amount		% of Net Revenues		Change		% Change
	(in thousands, except percentages)
Engineering, research and development	$	11,337	45.8	%	$	10,679	39.4	%	$	658	6.2	%

Nine Months Ended June 30,
2014 2013
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)
Engineering, research and development $ 31,581
39.6 % $ 31,987
41.6 % $ (406 ) (1.3 )%

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

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

The ~~decrease~~increase in R&D spending ~~for the three months ended June 30, 2014, as compared to the prior year period,~~ is due primarily to ~~reduced mask tooling of $1.5 million and lower outside contractor expenses of $0.7 million in the current period. These decreases are partially offset by~~ higher employee compensation expenses of $0.7 million, including stock compensation, ~~in the current period.~~

and higher tooling and other expense of $0.4 million. The ~~decrease in R&D spending for the nine months ended June 30, 2014, as compared to the prior year period,~~increase is ~~due primarily to reduced mask tooling of $1.3 million and lower outside contractor expenses of $1.3 million in the current period. These decreases are~~ partially offset by ~~higher employee compensation expenses of $1.6 million, including stock compensation,~~decreased spending for masks and ~~higher tooling expense~~test wafers of $0.4 ~~million in the current period, as compared to the prior year period.~~million.

~~Table of Contents~~

Selling, General and Administrative

Three Months Ended June 30,
2014 2013
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)
Selling, general and administrative $ 7,330
27.0 % $ 7,257
27.5 % $ 73
1.0 %



	Three Months Ended December 31,
	2014				2013
	Amount		% of Net Revenues		Amount		% of Net Revenues		Change			% Change
	(in thousands, except percentages)
Selling, general and administrative	$	7,415	30.0	%	$	7,854	29.0	%	$	(439	)	(5.6	)%

Nine Months Ended June 30,
2014 2013
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)
Selling, general and administrative $ 23,189
29.0 % $ 22,617
29.4 % $ 572
2.5 %

SG&A expenses consist primarily of compensation expense, legal and other professional fees, facilities expenses, outside labor, and communication expenses. In fiscal year 2014, we invested in our marketing, sales and applications organization, adding critical industry expertise in hardware and software, as well as additional sales representatives and distributors.

The decrease in SG&A expenses ~~in the three months ended June 30, 2014 are comparable to the same period in the prior year.~~

~~SG&A expenses in the nine months ended June 30, 2014, as compared to the prior year period, increased $0.6 million,~~is primarily due to ~~higher employee compensation~~lower professional fees of $0.6 million, and lower facilities and other expenses of ~~$1.3~~$0.5 million. The decrease is partially offset by higher compensation expense of $0.3 million, including stock compensation, and ~~relocation~~increased other expenses of $0.5 million related to the move of our primary test operations from Singapore to Taiwan and our Camarillo facilities to an adjacent building. These increases are partially offset by $1.3 million lower asset retirement obligation, facilities and other expenses.aggregating $0.4 million.

Table of Contents

Interest Expense, Net

Three Months Ended June 30,
2014 2013
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)
Interest expense, net $ 1,510
5.6 % $ 1,983
7.5 % $ (473 ) (23.9 )%

Nine Months Ended June 30,
2014 2013
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)
Interest expense, net $ 4,706
5.9 % $ 5,919
7.7 % $ (1,213 ) (20.5 )%

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

~~Gain on Compound Embedded Derivative~~



	Three Months Ended December 31,
	2014				2013
	Amount		% of Net Revenues		Amount		% of Net Revenues		Change			% Change
	(in thousands, except percentages)
Interest expense, net	$	818	3.3	%	$	1,704	6.3	%	$	(886	)	(52.0	)%

Nine Months Ended June 30,
2014 2013
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)
Gain on compound embedded derivative $ —
— $ (803 ) (1.0 )% $ 803
(100.0 )%

~~Table~~Interest expense, net is comprised of ~~Contents~~

~~The compound embedded derivative included in our 2014 Debentures required bifurcation~~cash interest expense, amortization of debt discount and ~~accounting at fair value because the economic and contractual characteristics~~debt issuance cost, net of ~~the compound embedded derivative met the criteria for bifurcation and separate accounting~~interest income. Interest expense, net decreased primarily due to the ~~conversion price not being indexed to~~retirement in October 2014 of $32.8 million principal amount of our own stock. The compound embedded derivative is comprised of the conversion option and a make-whole payment for foregone interest if the holder converts the debenture early. The make-whole payment for foregone interest expired October 30, 2012, and upon its expiration, the compound embedded derivative no longer met the criteria for bifurcation as all components of the conversion feature were indexed to our own stock. A final valuation was completed on October 30, 2012, resulting in gain of $0.8 million due to the change in fair value in the first quarter of fiscal year 2013.

2014 Debentures.

Loss on Extinguishment of Debt



	Three Months Ended December 31,
	2014			2013
	Amount		% of Net Revenues	Amount		% of Net Revenues		Change			% Change
	(in thousands, except percentages)
Loss on extinguishment of debt	$	—	—	$	1,594	5.9	%	$	(1,594	)	100.0	%

Nine Months Ended June 30,
2014 2013
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)
Loss on extinguishment of debt $ 1,594
2.0 % $ —
— $ 1,594
100.0 %

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

Income Tax Expense (Benefit)

Three Months Ended June 30,
2014 2013
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)
Income tax expense (benefit) $ 333
1.2 % $ 129
0.5 % $ 204
158.1 %



	Three Months Ended December 31,
	2014				2013
	Amount		% of Net Revenues		Amount			% of Net Revenues		Change		% Change
	(in thousands, except percentages)
Income tax expense (benefit)	$	45	0.2	%	$	(202	)	(0.7	)%	$	247	(122.3	)%

Nine Months Ended June 30,
2014 2013
Amount
% of Net
Revenues
Amount
% of Net
Revenues
Change
%
Change
(in thousands, except percentages)
Income tax expense (benefit) $ 59
0.1 % $ (790 ) (1.0 )% $ 849
(107.5 )%

Our effective tax rate is primarily impacted by certain foreign taxes, certain nondeductible interest and share based expenses and the release of a portion of the ~~evaluation~~valuation allowance related to certain foreign jurisdictions’ deferred tax assets as such balances were more likely than not realizable within the applicable carryforward period. Our effective tax rate for the ~~nine~~three months ended ~~June 30,~~December 31, 2014 was ~~0.4%~~0.9% which was lower than the federal and state statutory rate due to the projected federal and state losses for the fiscal year as well as the related valuation allowances.

Financial Condition and Liquidity

Cash Flow Analysis

Cash ~~increased~~decreased to ~~$70.8~~$31.7 million at ~~June 30,~~December 31, 2014,, from ~~$68.9~~$71.9 million at September 30, ~~2013~~.2014. Our cash flows from operating, investing and financing activities are summarized as follows:



	Three months ended December 31,
	2014			2013
	(in thousands)
Net cash used in operating activities	$	(5,987	)	$	(4,523	)
Net cash used in investing activities	(930		)	(788		)
Net cash used in financing activities	(33,241		)	(15,197		)
Net decrease in cash	(40,158		)	(20,508		)
Cash at beginning of period	71,903			68,863
Cash at end of period	$	31,745		$	48,355

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Nine Months Ended June 30,
2014 2013
(in thousands)
Net cash used in operating activities $ (7,602 ) $ (6,703 )
Net cash used in investing activities (1,484 ) (761 )
Net cash provided by financing activities 11,035
54,908
Net increase in cash 1,949
47,444
Cash at beginning of period 68,863
23,891
Cash at end of period $ 70,812
$ 71,335

Net Cash Used In Operating Activities

During the ~~nine~~three months ended ~~June 30,~~December 31, 2014,, cash used in operations totaled ~~$7.6 million~~.$6.0 million. Excluding changes in working capital, we used ~~$6.6~~$2.5 million to fund the cash portion of our net loss. We used cash to fund increases in inventories and prepaid expenses and other assets totaling $4.0 million and to fund decreases in accrued expenses and other liabilities totaling $2.9 million. These uses were offset by lower accounts receivable of $0.8 million, and higher accounts payable and deferred revenue totaling $2.6 million which provided cash.

Inventory levels increased $2.9 million to $15.7 million at December 31, 2014 from $12.8 million at September 30, 2014 to meet anticipated increased demand. Accounts payable, accrued expenses and other liabilities decreased by $1.8 million, from $19.5 million at September 30, 2014 to $17.7 million at December 31, 2014, due to the timing of obligations and/or payments to our vendors and other service providers. Deferred revenue increased $1.4 million from $4.9 million at September 30, 2014, to $6.3 million at December 31, 2014, due to the timing of payments from distributors.

During the three months ended December 31, 2013, cash used in operations totaled $4.5 million. Excluding changes in working capital, we used $1.6 million to fund the cash portion of our net loss. We used cash to fund increases in accounts receivable, inventory and prepaid expenses and other assets totaling ~~$1.6 million~~ ~~and~~$4.6 million. We also used cash to ~~fund decreases in~~pay down accrued expenses and other liabilities ~~totaling $0.3~~of $0.9 million. These uses were offset by higher accounts payable and deferred revenue totaling ~~$0.9 million which provided cash.~~$2.5 million.

Accounts receivable ~~accounts payable, accrued expenses and other liabilities~~increased $1.6 million from $9.8 million at ~~June 30, 2014~~ ~~are comparable to their respective balances at~~ September 30, 2013,. to $11.4 million at December 31, 2013, primarily due to the timing of sales during the quarter ended December 31, 2013. Inventory levels were increased ~~$0.5~~$1.9 million to ~~$11.2~~$12.5 million at ~~June 30, 2014~~December 31, 2013, from $10.7 million at September 30, 2013 to meet increased demand. ~~Deferred revenue increased~~ ~~$0.8 million~~ ~~from~~ ~~$2.2 million~~ ~~at September 30, 2013, to~~ ~~$3.0 million~~ at ~~June 30, 2014, due to the timing of payments from distributors.~~

~~During the nine months ended~~ ~~June 30, 2013, cash used in operations totaled~~ ~~$6.7 million~~. Excluding changes in working capital, we used $10.1 million to fund the cash portion of our net loss. We used cash to fund increases in accounts receivable and prepaid expenses totaling $1.8 million. These uses were offset by lower inventory of $0.2 million and higher accounts payable, accrued liabilities and deferred revenue totaling $5.1 million.

Accounts receivable increased $1.0 million from $9.4 million at September 30, 2012, to $10.4 million at June 30, 2013, primarily due to higher revenues and timing of sales during the quarter ended June 30, 2013. Accounts payable, accrued expenses and other liabilities increased by ~~$3.2~~$1.1 million, ~~excluding the impact of unpaid equity offering costs,~~ from ~~$18.5~~$20.1 million at September 30, ~~2012,~~2013, to ~~$21.9~~$21.2 million at ~~June 30,~~December 31, 2013, due to the timing of obligations and/or payments to our vendors and other service providers. Deferred revenue increased ~~$1.9~~$0.5 million from ~~$0.9~~$2.2 million at September 30, ~~2012,~~2013, to ~~$2.8~~$2.7 million at ~~June 30,~~December 31, 2013, due to the timing of payments from distributors.

Net Cash Used In Investing Activities

Investing activities used cash in the ~~nine~~three months ended ~~June 30,~~December 31, 2014 for capital expenditures of ~~$1.2~~$0.5 million and payments under licensing agreements of $0.5 million. Investing activities used cash in the three months ended December 31, 2013, for capital expenditures of $0.9 million and payments under licensing agreements of $0.1 million. Expenditures were partially offset by cash provided by the sale of capital assets of $0.2 ~~million. Investing activities used cash~~million in the ~~nine~~three months ended ~~June 30, 2013, for capital expenditures of~~ ~~$0.6 million~~ ~~and payments under licensing agreements of $0.3 million. Expenditures were partially offset by cash provided by the sale of capital assets of $0.2 million.~~

December 31, 2013.

Net Cash ~~Provided By~~Used In Financing Activities

Net cash ~~provided by~~used in financing activities during the ~~nine~~three months ended ~~June 30,~~December 31, 2014 totaled $33.2 million. Cash used to retire our 2014 Debentures totaled $32.8 million. Cash used for the repurchase of restricted stock units for payroll taxes on behalf of employees totaled $~~11.0~~1.1 million. Cash ~~from~~in the ~~sale~~amount of ~~common stock totaled~~ ~~$26.8~~$0.7 million~~, net of approximately $1.9 million in paid expenses. Additional offering costs of~~ ~~$0.2 million~~ ~~were incurred, but unpaid as of June 30, 2014. Proceeds from the exercise of stock options and issuances of shares~~ that had been previously restricted under the ~~ESPP~~terms of our credit agreement was released during the three months ended December 31, 2014. Net cash used in financing activities during the three months ended December 31, 2013, totaled ~~$1.0~~$15.2 million. Cash used for the repurchase of our 2014 Debentures totaled $14.6 million. We also used cash to pay a consent fee of $0.3 million related to the November 2013 amendment of our credit agreement. Cash ~~of $0.7 million was restricted for payment of the 2014 Debentures following the sale of assets under the terms of the credit agreement. Cash~~ used for the repurchase of restricted stock units for payroll taxes on behalf of employees was ~~$1.3 million~~. Net cash provided by financing activities during the nine months ended June 30, 2013 totaled $54.9 million. Cash from the sale of common stock totaled $54.7 million, net of approximately $4.0 million in paid expenses. Additional offering costs of $0.2 million were incurred, but unpaid as of June 30, 2013. Proceeds from the exercise of stock options and issuances of shares under the ESPP totaled $0.9 million. Cash used for the repurchase of restricted stock units for payroll taxes paid on behalf of employee was $0.6$0.3 million.

~~Table of Contents~~

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

Prospective Capital Needs

Our principal sources of liquidity are our existing cash, cash generated from product sales, and cash generated from the sales or licensing of our intellectual property. Our cash totaled ~~$70.8~~$31.7 million at ~~June 30, 2014~~.December 31, 2014. Our working capital at ~~June 30,~~December 31, 2014,, was ~~$40.0 million~~.

$37.5 million.

In order to achieve sustained profitability and positive cash flows from operations, we may need to reduce operating expenses and/or increase revenues. We have completed a series of cost reduction actions that have improved our operating expense structure. We will continue to perform additional actions, as necessary. Our ability to maintain, or increase, current revenue levels to sustain profitability will depend, in part, on demand for our products.

~~Our current debt is comprised~~Table of ~~our 2014 Debentures, of which the total principal amount of $32.8 million is due on October 30, 2014.~~ Contents

Our long-term debt is comprised of our senior Term A and B Loans which have a total principal amount of $17.2 million due on August 31, 2016. ~~We will use our existing cash and restricted cash to repay our 2014 Debentures on or before their maturity in October 2014.~~ The credit agreement for our Term A and B Loans requires us to maintain an unrestricted cash balance of $8.0 million. We believe that our existing sources of liquidity, along with cash expected to be generated from revenues, will be sufficient to fund our operations for at least the next 12 months ~~after repayment of the 2014 Debentures~~ and to meet our minimum cash covenant. Our available liquidity could be adversely affected, however, if we incur operating losses and negative cash flows in the future, and we may need to reduce or postpone our operating costs or obtain alternate sources of financing, or both. We may need additional capital in the future and may not have access to additional sources of capital on favorable terms or at all. If we raise additional funds through the issuance of equity or debt securities, such securities may have rights, preferences or privileges senior to those of our common stock and our stockholders may experience dilution of their ownership interests. There can be no assurance, however, that our efforts will be successful.

We have a Form S-3 universal shelf registration statement on file with the SEC. The universal shelf registration statement on Form S-3 permits Vitesse to sell, in one or more public offerings, shares of our common stock, shares of preferred stock or debt securities, or any combination of such securities, for proceeds in an aggregate amount of up to $75.0 million. As of ~~June 30,~~December 31, 2014, we raised a total of $28.7 million of gross proceeds from the sale of 8,582,076 shares of our common stock, leaving approximately $46.3 million of securities available for issuance pursuant to the Form S-3. The Form S-3 will expire in January 2017.

Contractual Obligations

Payment Obligations by Fiscal Year
Remaining
in 2014 2015 2016 2017 2018 2019 and Thereafter Total
(in thousands)
Convertible subordinated debt (1) $ —
$ 32,843
$ —
$ —
$ —
$ —
$ 32,843
Term A Loan (2) —
—
7,857
—
—
—
7,857
Term B Loan (3) —
—
9,342
—
—
—
9,342
Loan interest (4) 391
3,102
1,776
—
—
—
5,269
Operating leases (5) 559
1,952
591
110
—
—
3,212
Software licenses (6) 1,684
7,136
3,147
2,900
2,800
—
17,667
Inventory and related purchase obligations (7) 5,928
2,005
73
60
—
—
8,066
Total $ 8,562
$ 47,038
$ 22,786
$ 3,070
$ 2,800
$ —
$ 84,256



	Payment Obligations by Fiscal Year
	Remaining in 2015		2016		2017		2018		2019		2020 and Thereafter		Total
	(in thousands)
Term A and B Loans (1)	$	—	$	17,199	$	—	$	—	$	—	$	—	$	17,199
Loan interest (2)	1,174		1,776		—		—		—		—		2,950
Operating leases (3)	1,482		670		186		60		15		—		2,413
Software licenses (4)	4,989		4,555		4,275		4,175		—		—		17,994
Inventory and other purchase obligations (5)	5,750		114		60		—		—		—		5,924
Total	$	13,395	$	24,314	$	4,521	$	4,235	$	15	$	—	$	46,480


(1)	~~Convertible subordinated debt represents amounts due for our 8.0% convertible debentures due October 30, 2014.~~


~~(2)~~	~~Term A Loan represents~~Represents amounts due for our 9.0% fixed rate ~~senior~~ notes due August 31, 2016.


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


~~(4)~~(2)	Interest payable for ~~2014 Debentures through 2015 and~~ Term A and B Loans through 2016.

~~Table of Contents~~


~~(5)~~(3)	We lease facilities under non-cancellable operating lease agreements that expire at various dates through ~~2017.~~2019.


~~(6)~~(4)	Software license commitments represent non-cancellable licenses of technology from third-parties used in the development of our products.

~~(7)~~(5)

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

Off-Balance Sheet Arrangements

At ~~June 30,~~December 31, 2014,, we had no material off-balance sheet arrangements, other than operating leases, certain software licenses and non-cancellable purchase commitments.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our quantitative and qualitative disclosures about market risk are described in our Annual Report on Form 10-K for the year ended September 30, ~~2013~~.2014. There have been no material changes to these risks during the ~~nine~~three months ended ~~June 30, 2014~~.

December 31, 2014.

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,~~December 31, 2014,, 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,~~December 31, 2014,, 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,~~December 31, 2014,, 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,~~December 31, 2014,, the final disposition of these proceedings will not have a material adverse effect on the financial position, results of operations, or liquidity of the Company.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended September 30, ~~2013~~.

2014.

ITEM 6. EXHIBITS

Exhibit

Incorporated by Reference

Filed or Furnished

Number

Exhibit Description

Form

File Number

Exhibit

Filing Date

Herewith

10.1*†

Vitesse Semiconductor Corporation Fiscal Year 2015 Executive Bonus Plan, dated as of October 7, 2014.

10.2*

Employment Agreement, dated as of October 7, 2014, between Vitesse Semiconductor Corporation and Christopher R. Gardner.

8-K

001-31614

10.1

October 10, 2014

10.3*

Employment Agreement, dated as of October 7, 2014, between Vitesse Semiconductor Corporation and Martin S. McDermut.

8-K

001-31614

10.2

October 10, 2014

31.1

Certification of Principal Executive officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Principal Financial officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1#

Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS**

XBRL Instance Document

101.SCH**

XBRL Taxonomy Extension Schema Document

101.CAL**

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF**

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB**

XBRL Taxonomy Extension Label Linkbase Document

101.PRE**

XBRL Taxonomy Extension Presentation Linkbase Document


*	A management contract or compensatory plan or arrangement.


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

The information in this exhibit is furnished and deemed not filed with the Securities and Exchange Commission for purposes of section 18 of the Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of Vitesse Semiconductor Corporation under the Securities Act of 1933, as amended, or the Exchange Act of 1934, as amended, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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

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SIGNATURES

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



~~August 5, 2014~~February 3, 2015	VITESSE SEMICONDUCTOR CORPORATION


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

~~August 5, 2014~~February 3, 2015	VITESSE SEMICONDUCTOR CORPORATION


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

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	Payment Obligations by Fiscal Year
	Remaining in 2014		2015		2016		2017		2018		2019 and Thereafter		Total
	(in thousands)
Convertible subordinated debt (1)	$	—	$	32,843	$	—	$	—	$	—	$	—	$	32,843
Term A Loan (2)	—		—		7,857		—		—		—		7,857
Term B Loan (3)	—		—		9,342		—		—		—		9,342
Loan interest (4)	391		3,102		1,776		—		—		—		5,269
Operating leases (5)	559		1,952		591		110		—		—		3,212
Software licenses (6)	1,684		7,136		3,147		2,900		2,800		—		17,667
Inventory and related purchase obligations (7)	5,928		2,005		73		60		—		—		8,066
Total	$	8,562	$	47,038	$	22,786	$	3,070	$	2,800	$	—	$	84,256