UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-K





ANNUAL
REPORT


PURSUANT
TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





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





For
the fiscal year ended December 31, 2009





OR





 ̈
              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 0-25996







TRANSWITCH
CORPORATION


(Exact
name of Registrant as Specified in its Charter)




Delaware
                
                06-1236189(State
      or Other Jurisdiction of Incorporation or Organization)
                
                (I.R.S.
      Employer Identification
Number)





Three
Enterprise Drive


Shelton,
Connecticut 06484


(Address
of principal executive offices, including zip code)





Telephone
(203) 929-8810







Securities
registered pursuant to Section 12(b) of the Act:


None





Securities
registered pursuant to Section 12(g) of the Act:




Title
      of Each Class
                  
                  Name
      of Each Exchange on Which RegisteredCommon
      Stock, par value $.001 per share
                  
                  Nasdaq
      Capital Market









Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes  ̈ 
 No x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes  ̈ 
 No x





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 o




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.  ̈





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 the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (check one):





Large
      Accelerated Filer  ̈
            Accelerated
      Filer xNon-Accelerated
      Filer  ̈
            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  ̈ 
 No x





The
aggregate market value of the outstanding common stock, other than shares held
by persons who may be deemed affiliates of the Registrant, on June 30, 2009 was
approximately $69.3 million. At March 15, 2010, as reported on the Nasdaq
Capital Market, there were 20,537,475 shares of common stock, par value $.001
per share, of the Registrant outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





Parts of
the following document are incorporated by reference in Part III of this Form
10-K Report:





(1) Proxy
Statement for the Registrant’s 2010 Annual Meeting of Shareholders—Items 10, 11,
12, 13 and 14.












Item
1.    Business





The following description of our
business should be read in conjunction with the information included elsewhere
in this document. The description contains certain forward-looking statements
that involve risks and uncertainties. When used in this document, the words
“intend,” “anticipate,” “believe,” “estimate,” “plan,” “expect” and similar
expressions as they relate to us are included to identify forward-looking
statements. Our actual results could differ materially from the results
discussed in the forward-looking statements as a result of risk factors set
forth elsewhere in this document. See also, “Item 1A. Risk Factors” and “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”





COMPANY
OVERVIEW





TranSwitch
designs, develops and supplies innovative highly-integrated semiconductor
solutions that provide core functionality for voice, data and video
communications equipment for network, enterprise and customer premises
applications.  TranSwitch customers for these semiconductor products are
the original equipment manufacturers (“OEMs”) who supply wire-line and wireless
network operators who provide voice, data and video services to end users such
as consumers, corporations, municipalities etc. Our system-on-a-chip products
incorporate digital and mixed-signal semiconductor technology and related
embedded software. In addition to our system-on-a-chip products, we have been in
the business of licensing intellectual property cores to both OEMs as well as
other semiconductor companies.  One new area where we have made
significant progress in the past couple years is in the area of licensing of our
proprietary video interconnect technology that enables the transmission and
reception of both HDMI and DisplayPort.  We have over 150 active
customers, including the leading global equipment providers, and our products
are deployed in the networks of the major service providers around the
world.




TranSwitch
Corporation is a Delaware corporation incorporated on April 26, 1988. Our
principal executive offices are located at 3 Enterprise Drive, Shelton CT 06484,
and our telephone number at that location is (203) 929-8810. Our Internet
address is www.transwitch.com. We make
available free of charge on or through our Internet website our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
all amendments to those reports as soon as reasonably practicable after such
material is electronically filed with or furnished to the SEC. Our common stock
trades on the Nasdaq Capital Market under the symbol “TXCC.”





INDUSTRY
OVERVIEW




Investment
in telecommunications infrastructure is being driven primarily by the need for
higher bandwidths, more ubiquitous connectivity and more flexibility of
services.  In the US, Canada and Western Europe there has been an
extensive telecommunications infrastructure in place for several decades;
however, this infrastructure was designed primarily for voice services, and is
in dire need of replacement in order to provide the high data bandwidth and
flexibility required by current and future services.  In other parts
of the world, such as China and India, the need for infrastructure expansion is
being driven by the rapidly expanding global economy. These infrastructure
requirements are driven by substantial increases in the number of users and new
bandwidth-intensive computing and communications applications, such as web-based
commerce, streaming audio and video, Internet Protocol television, or IPTV, and
online gaming. In addition, information is increasingly available via wired and
wireless networks through a variety of access devices, including personal
computers and handheld computing devices such as personal digital assistants,
portable digital audio players, digital cameras and cellular phones. These
applications and devices are continuing to require higher and more
cost-efficient data transfer rates throughout the network communications
infrastructures that serve them.




This
evolution has inspired equipment manufacturers and service providers to develop
and expand existing broadband communications markets and has created the need
for new generations of integrated circuits. Broadband transmission of digital
information over existing infrastructure requires highly-integrated mixed-signal
semiconductor products to perform critical systems functions such as complex
signal processing and converting digital data to and from analog signals.
Broadband communications equipment requires substantially higher levels of
system performance, in terms of both speed and precision, which typically cannot
be adequately addressed by traditional semiconductor products developed for
low-speed transmission applications. Moreover, products that are based on
multiple discrete analog and digital chipsets generally cannot achieve the
cost-effectiveness, performance and reliability requirements demanded by today's
broadband marketplace. These requirements are best addressed by new generations
of highly-integrated mixed-signal and digital devices that combine complex
system functions within high performance circuitry and can be manufactured in
high volumes using cost-effective process technologies.


2


In recent
years, there were a number of mergers and acquisitions among North American
telecommunication carriers (“telcos”) and Western Hemisphere communications
OEMs.  As companies merge or consolidate, the rate of ordering,
purchasing and deploying new equipment typically slows.  As these
consolidations complete, we are seeing a shift in demand toward newer
technologies that we introduced into the market in the last several
years.  From 2006 through 2009, we saw demand for legacy network
products decline, which is an indicator that the industry is ready to replace
existing networks with new networks.




Communications
service providers, internet service providers, regional Bell operating companies
and inter-exchange carriers generally closely monitor their capital
expenditures. Spending on voice-only equipment has been slowing over the last
few years, while spending on equipment providing the efficient transport of data
services on existing infrastructure continues to grow. More importantly to us,
major infrastructure initiatives are underway where telecommunications companies
(telcos) are building new, end-to-end internet protocol (IP)-based,
next-generation networks. Demand for new, high bandwidth services such as video
conferencing, broadband audio, high speed internet and other data services is
placing an increased burden on existing public network infrastructure.
Regulatory changes and advances in technology have fostered an intensively
competitive environment for service providers. They have to provide a variety of
services over the same infrastructure in order to maximize the revenue from
their network investment and minimize the risk of losing customers to their
competitors by bundling these services.  Competition between telcos
and cable TV providers offering “triple play” services (voice, data and video)
is driving equipment spending for broadband access, carrier-class
routers/switches, and metro optical gear. Equipment vendors and communications
IC suppliers with the right products and technologies will be major
beneficiaries of this spending by telcos and cable TV service
providers.




Wireless
networks are also being driven by new, data oriented services requiring high
bandwidth.  Third generation wireless infrastructures, such as UMTS
and CDMA2000, and fourth generation wireless infrastructures based on LTE and
/or WiMAX will be heavily based on IP and Ethernet technologies.  The
convergence of the wire-line and wireless network infrastructures is underway,
driven by the desire of service providers to provide “quadruple play” services
(voice, data, video and mobility) to further enhance their competitive position
and profitability.





INDUSTRY
ENVIRONMENT





Over the
past two decades, communications technology has evolved from simple analog voice
signals transmitted over networks of copper telephone lines to complex analog
and digital voice and data signals transmitted over a variety of media, such as
copper wires, fiber optic strands and wireless transmission over radio
frequencies. This evolution has been driven by substantial increases in the
number of users and new bandwidth-intensive computing and communications
applications, such as web-based commerce, streaming audio and video, Internet
Protocol television, or IPTV, and online gaming. In addition, information is
increasingly available via wired and wireless networks through a variety of
access devices, including personal computers and handheld computing devices such
as personal digital assistants, portable digital audio players, digital cameras
and cellular phones. These applications and devices are continuing to require
higher and more cost-efficient data transfer rates throughout the network
communications infrastructures that serve them.





This
evolution has inspired equipment manufacturers and service providers to develop
and expand existing broadband communications markets and has created the need
for new generations of integrated circuits. Broadband transmission of digital
information over existing infrastructure requires highly-integrated mixed-signal
semiconductor products to perform critical systems functions such as complex
signal processing and converting digital data to and from analog signals.
Broadband communications equipment requires substantially higher levels of
system performance, in terms of both speed and precision, which typically cannot
be adequately addressed by traditional semiconductor products developed for
low-speed transmission applications. Moreover, products that are based on
multiple discrete analog and digital chipsets generally cannot achieve the
cost-effectiveness, performance and reliability requirements demanded by today’s
broadband marketplace. These requirements are best addressed by new generations
of highly-integrated mixed-signal and digital devices that combine complex
system functions within high performance circuitry and can be manufactured in
high volumes using cost-effective process technologies.




3


TARGET
MARKETS AND PRODUCTS




In
addition to an extensive portfolio of standard integrated circuit products
addressing voice, data, wireless and video markets, TranSwitch supplies a number
of intellectual property core products for Ethernet and high definition video
(HDMI protocol) applications as well as custom design services. Our combination
of standard products, intellectual property cores and custom design services
enables us to serve our customers needs more fully. Today, we provide our
products and services through a worldwide direct sales force and a worldwide
network of independent distributors and sales representatives.




Our
products and services are compliant with relevant communications network
standards.  We offer several products that combine multi-protocol
capabilities on a single chip, enabling our customers to develop network
equipment for triple play (voice, data and video) applications. A key attribute
of our products is their inherent flexibility. Many of our products incorporate
embedded programmable micro-processors, enabling us to rapidly accommodate new
customer requirements or evolving network standards by modifying the
functionality of the device via software instructions.




We bring
value to our customers through our communications systems expertise, very large
scale integration (“VLSI”) design skills and commitment to excellence in
customer support. Our emphasis on technical innovation results in defining and
developing products that permit our customers to achieve faster time-to-market
and to develop communications systems that offer a host of benefits such as
greater functionality, improved performance, lower power dissipation, reduced
system size and cost, and greater reliability for their customers.





The
following provides a brief description of each of our target markets and the
semiconductor solutions we provide in each of these markets:




Next
Generation (Converged) Network Infrastructure:




Data and
video services are the main drivers for future network infrastructure
investments. Carrier Ethernet is the industry’s accepted standard technology for
next-generation networks, however, a large percentage of optical network
infrastructure currently in place is based on SONET/SDH technology designed and
optimized for voice traffic. Our products enable a mix of voice and data traffic
to be efficiently transported over existing SONET /SDH networks using a number
of techniques for mapping Ethernet data into the SONET or SDH format (EoS) in
accordance with recently introduced industry standards. Our products are
incorporated in Optical Transport equipment, and enable the fiber optic network
to transport information with improved efficiency, thus increasing the overall
network capacity. We also supply products designed for use in Ethernet equipment
such as carrier-grade Ethernet routers and switches.  Our products,
used in such equipment, enable carriers to provide robust and differentiated
services using Ethernet technology in their wide-area networks.




Within
this new infrastructure, voice traffic is also carried over Ethernet, and
TranSwitch provides market leading solutions for use in equipment such as Media
Gateways, Soft Switches and Multi-Service Access Nodes used in both wire-line
and cellular carrier networks as well in corporate network applications.
Currently, most telephony service providers maintain two separate networks - one
for legacy voice traffic and a second for data traffic. VoIP technology
compresses voice signals into discrete packets of data, thereby enabling the
voice signals to be transmitted over lower-cost networks originally designed for
data-only transmission. VoIP technology is used in numerous new types of
communications equipment, such as next generation carrier- and enterprise-class
gateways, soft switches, digital loop carriers, IP DSL access multiplexers,
media terminal adapters, and home gateways for use by consumers and small
businesses. These VoIP technology-based devices enable more efficient and
cost-effective voice transmissions than their legacy circuit-switched equipment
counterparts. In addition to significant cost savings, VoIP also enables
advanced services that traditional telephony could not support. VoIP technology
enables and enhances features such as unified messaging and managed services
that provide additional value to consumers and businesses and allow service
providers to enhance revenue opportunities. Our customers in this market segment
include ZTE, Alcatel-Lucent, Tellabs Fiberhome, Fujitsu, Cisco Systems and
Ericsson.




The
Broadband Access portion of the market includes equipment that provides “last
mile” connectivity between the end customer and the network for broadband
services. It includes systems for connectivity over copper wires based on DSL,
technology, fiber connectivity using Passive Optical Network (PON) technology or
wireless connectivity using cellular, WiMAX or other technologies. Our products
are incorporated into Broadband Access equipment, enabling telecommunications
service providers to deliver next generation services such as voice, data and
video over the broadband connection. Fiber based broadband access, generally
referred to as FTTx is deployed in a variety of alternative architectures such
as Fiber-to-the-home (FTTH), Fiber-to-the-building (FTTB) or Fiber-to-the-node
(FTTN).  In the case of FTTH, fiber extends all the way to each
individual subscriber location, while in the case of FTTB and FTTN fiber extends
to multiplexing equipment located at a building with multiple end-users or in a
neighborhood “node”, and each subscriber location (residence or office) is
connected to the multiplexing equipment with copper wire using DSL or Ethernet
technology.




4


FTTH
provides the highest bandwidth per subscriber, while FTTB and FTTN provide a
more economical alternative.  The underlying technology for most FTTx
deployments is Passive Optical Networking (PON) because it eliminates the need
for active electronics in the fiber portion of the network. There are dominant
variants of this technology namely Ethernet-based PON (EPON) which has been
adopted extensively in Japan and to a lesser extent in other Asian countries,
and Gigabit PON (GPON) which is currently being deployed primarily in North
America and is expected to be deployed in several other regions
worldwide.  EPON supports data rates up to 1 Gigabit per second (Gbps)
while GPON supports data rates up to 2.5 Gbps. FTTx technology provides higher
speeds than DSL technology for both residential and business end users and
enables service providers to offer a wider range of next generation bundled
services to potentially enhance their revenue streams.




Our
Broadband Access product offerings include a variety of solutions for both EPON
as well as GPON standards.  We also supply products that support the
hybrid fiber-copper architectures such as FTTB and FTTN using DSL or Ethernet as
well as Voice-over-IP (VoIP) processors to extract, encode and manage voice
services at the node equipment in the case of FTTB and FTTN
architectures.  Our customers in this market segment include
Alcatel-Lucent, Oki Electronics, ZTE, Sumitomo, Nokia Siemens Networksand other
OEMs.





Broadband
Customer Premises Equipment (CPE):





The
increasing role of Broadband CPE in the delivery of modern communications
services is driven directly by the deployment of broadband access networks
discussed above. A single broadband connection is capable of delivering multiple
services (voice, video data) to the subscriber location in the form of a high
speed packetized data stream. Equipment located at the customer premises
(Broadband CPE) must then process this high speed packet data stream and deliver
the various services to appliances within the home or office in the appropriate
manner.  For instance, telephone (voice) service needs to be converted
from packetized data using VoIP technology into its native electrical form and
distributed over the internal telephone wiring or using a wireless technology
such as DECT to cordless phones. Similarly, internet data traffic must be routed
over Ethernet connections or WiFi to computers within the customer premises and
video traffic must be routed to set-top devices or TV sets as appropriate.
Increasing availability of High Definition video content is driving the need for
high speed connectivity within the home. The Consumer Electronics industry
standard known as High Definition Multimedia Interface (HDMI) and the related
DisplayPort standard adopted by the Computer industry are the de-facto
interfaces of choice. Broadband CPE equipment also provides the necessary
security features such as firewall and data encryption as well as a host of
other management and control functions required for interworking with the
service provider’s network.





TranSwitch
provides a family of communications processors designed specifically for the
broadband CPE applications, combining voice-over-IP, data routing and security
functions in a single highly integrated device that meets the stringent
cost-perfomance and low power consumption demands of this market
segment.  Our customers for these products include ZTE, SK-Telesys,
and OKI Networks as well as domestic Chinese equipment manufacturers such as
Allywll and GK-Tel who are developing equipment for China Telecom and China
Mobile.





TranSwitch
also provides high speed interface technology conforming to HDMI, DisplayPort
and Ethernet standards in the form of IP cores. Our customers for this
technology are other semiconductor companies who supply complementary markets
such as Consumer Electronics (TV, DVR and Video Camera) and Computer equipment
manufacturers.





The
Importance of Communications Standards in our Telecommunications Semiconductor
Business





In
an effort to provide interoperability among communication networks and
equipment, the communications industry has established numerous standards and
protocols that address connectivity issues between networks and network
equipment. Communication standards and protocols for transmission of information
such as voice, high speed data or video over electrical, optical or wireless
media have been implemented to ensure that equipment from different
manufacturers and the various public and private networks can communicate with
each other reliably and efficiently. The VLSI devices supplied by us conform to
these standards, enabling such interoperability across the
networks.





In the
Optical Transport arena, SONET and SDH standards were defined for efficient and
reliable transport of information over optical fiber. SONET is primarily a North
American standard, while SDH is its international counterpart. Introduced in the
late 1980s, SONET and SDH were initially employed primarily for the transport of
voice traffic in telephone networks. Prior to the introduction of the SONET/SDH
standards, Asynchronous/PDH standards were in use for transmission over metallic
cables, radio and optical fiber. Asynchronous Transfer Mode (ATM) is a
higher-level standard that enables public networks, internet, WAN and LAN
systems designers to provide a mix of services to network users. ATM allows
communication service providers to reduce the impact of network congestion,
assure quality of service and to provide mixed high-speed and high-volume data
communications, voice, video and imaging services. This ability allows the
communication service providers to generate more revenue by offering more
services to their customers.


5





Recently,
industry standards have emerged for carrying Ethernet over SONET/SDH. Ethernet
is a protocol that is used throughout LANs. Increased requirements for
connectivity between corporate LANs and WANs are driving the need for bridging
Ethernet protocol over the public network. Communication service providers are
beginning to deploy EoS technology to provide data services because it is an
efficient means of transporting data over their embedded infrastructure and
enables them to generate additional revenue.





Broadband
Access technologies utilize IP as a standard protocol to enable packetized data
to be forwarded, transmitted, and routed between networks. IP packets are often
carried over ATM which serves as a transport layer for the IP packets
particularly in DSL networks.   In newer DSL deployments, ATM is
replaced by Carrier Ethernet as a transport layer. Carrier Ethernet is a new and
evolving technology which brings with it a plethora of new standards that must
be implemented by the equipment and hence by the underlying semiconductor
components.  Fiber to the home (FTTH) and fiber to the curb (FTTC)
deployments are also based on new technologies such as GPON or EPON each of
which has a number of associated standards.





In
order to deploy new infrastructures and transmission protocols, communication
service providers are demanding improved time to market of cost-effective,
differentiated products from OEMs. The complexity of the equipment, increasing
cost pressures and the need for high reliability and standards compliance
mandate the use of VLSI devices incorporating a high degree of functionality.
OEMs recognize that, similar to the trend experienced in the computer industry,
the functionality incorporated into VLSI devices is contributing an increasing
share of the intellectual property and the value of network equipment. The
design of VLSI devices contained in Optical Transport, Broadband Access or
Carrier Ethernet equipment requires specialized expertise in mixed-signal
semiconductor design and implementation, in-depth knowledge of
telecommunications and data communications standards and systems engineering
expertise. Expertise in mixed-signal device design is relatively uncommon, and,
as a result, OEMs needing these capabilities often seek independent
semiconductor vendors. However, many semiconductor vendors lack the
communications industry knowledge and experience, as well as familiarity with
the standards, to be able to contribute significant value to the OEMs’ systems
designs. Consequently, OEMs require a semiconductor vendor that understands
their markets and the applicable standards and is able to provide a broad range
of cost-effective semiconductor devices. Our core competencies include the
ability to understand these standards and protocols and our experience in
designing these specialized VLSI products.




6


Our Products and the
Functions They Serve





We
believe that we are very well positioned to participate in the anticipated
telecommunications growth cycle during the next several years.  This
is because we anticipated many of the high growth market trends, at least
directionally if not quantitatively, and aligned our product development
direction accordingly.





Our
products provide several of the key functionalities required for Converged
Network Infrastructure, Broadband Access and Broadband CPE:





1.
            Converged
      Network Infrastructure


a)
            Infrastructure
      VoIP Processors


b)
            EoS
      / EoPDH Mappers and Framers


c)
            Tributary
      Switches


d)
            Carrier
      Ethernet Solutions


e)
            FTTx
      Protocol Processors


f)
            Access
      VoIP Processors


g)
            Access
      Controller





2.
            Broadband
      CPE


a)
            Multi-Service
      Communications Processors


b)
            HDMI,
      DisplayPort and Ethernet IP Cores





Within
each of these segments, we have developed a number of product families as
described below:





1.
            Products for Converged
      Network Infrastructure





a)
            Infrastructure
      VoIP Processors





Our
Entropia Series of Processors are Highly Integrated System-on-Chip solutions
each incorporating multiple embedded RISC and DSP processors for encoding,
decoding and transcoding Voice-over-IP traffic according to a multitude of
protocols and standards adopted in different networks worldwide. Entropia III
and IV can process up to 1,008 voice channels for high capacity applications
while our Entropia II LP product supports medium density applications requiring
up to 336 voice channels. The Entropia product line is designed for wire-line
and wireless carrier equipment such as Media Gateways, Soft Switches, Integrated
Multimedia Systems (IMS) and Multi-Service Access Nodes (MSAN) as well as in
Enterprise Network applications such as IP-PBX. Because different VoIP coding
standards are used by different network operators, a vital attribute of our
Entropia processors is their ability to recognize and dynamically adapt to the
appropriate coding standard and to trans-code the voice traffic from one
standard to another as required. In addition to VoIP processing, our Entropia
products provide a complete system level solutions by incorporating a variety of
other related functions such as FAX relay, packet processing, circuit emulation,
signaling and control required for operation in the carrier’s
network.





b)
            EoS
      / EoPDH Mappers and Framers





Our
products address the predominant formats and data speeds employed in the access
portion of the network.  We provide solutions that cover both North
American (SONET/ Async) as well as International (SDH/PDH)
standards.  Data rates covered by our products range from 1.5 mb/s to
2.5 Gb/s.





Our
EtherMap and EtherPHAST product families address the need of carriers to
efficiently transport data traffic over their existing SONET, SDH and PDH
networks.  Our VTXP products provide low-level grooming of TDM
circuits which will continue to be a requirement throughout the transition to IP
and will be performed predominantly in smaller edge platforms rather than larger
Metro platforms.  Our products are optimized for these edge platforms,
and will continue to be applicable as will our broad line of mappers and
framers.




7


c)
            Tributary
      Switches





This
category includes switch fabric devices and adjunct switching devices that
enable traffic to be switched or re-arranged (groomed) to use network capacity
more efficiently.





d)
            Carrier
      Ethernet Solutions





As
carriers move to packet-based networks for more and more of their
infrastructure, the need for both pure carrier class Ethernet devices as well as
transition products continues to grow.  Our Envoy line of Ethernet
controllers and switches allows for differentiation and creates the opportunity
for market leadership with trend setting metro Ethernet features. Our
PacketTrunk family of circuit emulation and clock recovery devices provide vital
interworking capability between the new data (IP) based services and
infrastructures and the legacy voice (TDM) based services and
infrastructures.





e)
            FTTx
      Protocol Processors





The
prevalent Passive Optical Networking standards are EPON which is adopted
primarily in Japan, China and Korea and a more recent standard GPON, which has
been adopted by carriers in the US and is expected to be the deployed in several
other countries.





Our
Mustang product is a System-on-Chip solution for EPON Optical Network Unit (ONU)
equipment which is deployed at the customer location, typically on the outside
wall of a dwelling unit. Our Mustang product family consists of our ME250 and
proprietary ME300 products. These highly-integrated, low power and turnkey FTTH
solutions are ideal for service providers deploying EPON to deliver premium
triple play services such as bandwidth-intensive IPTV. Mustang conforms to the
rigid standards established by Nippon Telephone and Telegraph (NTT), and is one
of only two such devices approved for deployment in their
network.   Our COLT processor is a System-on-Chip solution for
the Optical Line Terminator (OLT) equipment which resides in the Carrier’s
Central Office location and is connected to multiple remote ONUs via fiber.
Mustang and COLT are extensively deployed in Japan by NTT and other
carriers.





Our
Diplomat-ONT product is a highly integrated SoC solution for GPON ONU
applications equipped to provide up to four channels of VoIP processing and is
interoperable with OLTs from the leading equipment suppliers
worldwide.




f)
              Access
      VoIP processors





A large
percentage of fiber based broadband access deployments are hybrid fiber-copper
architectures such as fiber-to-the-node (FTTN) or fiber-to-the-building (FTTB).
This is particularly true in countries such as China where large apartment
buildings rather than single family houses are the norm.  Even in the
United States, AT&T has chosen to deploy Fiber-to-the-Node rather than
Fiber-to-the-Home based on its own economic analysis.  In these Hybrid
architectures, the fiber cable terminates in Optical Network Termination (ONT)
equipment designed to serve multiple subscribers is placed in a neighborhood
site or in the basement of the apartment building, and the individual subscriber
locations are served over copper wires using VDSL or Ethernet
technology.





Voice
traffic is carried over the fiber portion of the network in packetized form
(VoIP), and is decoded and converted to the analog form at the ONT so it can be
transmitted over the copper wires.  Our EntropiaTM III-C series of
processors are designed to serve these applications. This new series of Entropia
processors scales the market-proven features and performance advantages of our
larger flagship Entropia III and Entropia-IV series into an appropriately sized,
highly integrated SoC that is ideally matched to the requirements for broadband
access ONT equipment.




g)
            Access
      Controllers





The
multi-subscriber ONT equipment in FTTB or FTTN architectures performs the
function of an access multiplexor in that it must appropriately rout the
appropriate data from the fiber connection to the each subscriber over a
separate copper connection and vice versa.  Data security, quality of
service, and traffic management features are critical elements of this
functionality.  Our Diplomat-IP Access Controller is designed to
provide this core functionality for xDSL equipment such as MSAN, and MDU-ONT for
FTTN and FTTB networks.




8


2.
            Products for Broadband
      CPE





a)
            Multi-Service
      Communications Processors





Our
Atlanta processor family is a multi-service SoC for customer premises equipment
that supports toll-quality telephone voice, fax and routing functionality over
any broadband access network. System designs based on the Atlanta product family
can connect directly to a broadband modem or be added as part of a small
office-home office, or SOHO, network. The Atlanta A70TM product is the family’s
entry level SoC while the A80TM SoC adds the capability to interface with any
WiFi or high-speed adapter. The A90TM SoC is optimized for the SOHO market with
four voice channels and a high-performing routing engine available at 100
Mbit/second. The A100TM SoC adds powerful, enterprise-level security and
encryption of all data and voice.





In 2009
we introduced Atlanta 2000 (A2000) the Flagship of our Atlanta processor
line.  A2000 is a multi-core SoC supporting wire-speed Gigabit routing
performance, up to eight channels of low-bit rate VoIP processing or four
channels of High Definition voice processing and a rich set of data security
features.  A2000 fulfills the high performance requirements for next
generation residential or small business gateway appliances.





b)
            HDMI,
      DisplayPort and Ethernet IP Cores





In
addition to our telecommunications portfolio of standard products, we are a
recognized worldwide leader in the licensing of interconnect
technologies.  Our intellectual property serves as a key building
block for many varied semiconductor applications ranging from consumer
electronics to home network equipment to industrial and automotive applications.
We have been licensing interface technology since 2006 with the introduction of
our MystiPHY line of Ethernet IP cores obtained through our acquisition of
Mysticom Ltd.  Our Ethernet technology has been adopted and
incorporated by many of the world’s leading semiconductor and equipment
manufacturers. In 2008 we introduced our HD-PXL family of products addressing
multimedia interconnect standards specifically addressing the HDMI and
DisplayPort standards for consumer electronics and PC appliances. These
technologies have also been licensed by some of the leading semiconductor
companies serving the consumer electronics and computer equipment
industry.





Our
MystiPHY 110 and MystiPHY 1011 DSP-based Ethernet transceiver cores address 10 /
100 megabit per second and 10/100/1000 megabit per second Ethernet data-rate
specifications.  Both cores are fully compliant with IEEE standards,
and the DSP-based design approach provides superior performance that exceeds
standard requirements for cable length and noise immunity, while providing
exceptionally low power consumption and small die size.





Our
HD-PXL transmitter and receiver Intellectual Property (IP) cores can be used for
a variety of digital video and audio applications operating over standard DVI,
HDMI, or DisplayPort cables. The HD-PXL cores are compliant with DVI 1.0 and
HDMI 1.4 high definition standards and support a wide range of video interface
modes. Our cores support transmission rates of both 2.25 gigabit/second and 3.5
gigabit per second.





Technology





One of
our core competencies is knowledge of the telecommunications and data
communications landscape. Specifically, our systems engineering personnel
possess substantial telecommunications and data communications design
experience, as well as extensive knowledge of the relevant standards. This
includes not only a thorough understanding of the actual written standards, but
also an awareness of and appreciation for the nuances associated with the
standards necessary for assuring that device designs are fully
compliant.





Complementing
our communications industry expertise is our VLSI design competence. Our VLSI
design personnel have extensive experience in designing high-speed digital and
mixed-signal devices for communications applications. These designs require a
sophisticated understanding of complex technology, as well as the specifics of
deep sub-micron manufacturing processes and their resulting impact on device
performance. We have developed a large number of VLSI blocks and intellectual
property cores that operate under the demanding requirements of the
telecommunications and data communications industries. These blocks and
intellectual property cores have been designed using standard VLSI-oriented
programming languages such as VHSIC Hardware Descriptive Language (VHDL) and
Verilog, and have been authenticated with standard verification
tools.


9





We have
developed proprietary tool sets, called “Test Benches,” that facilitate rapid
development of VLSI products and help assure that our products are standards
compliant and meet customer requirements. These Test Benches consist of
behavioral models of all applicable functions in a high-level design environment
and also include test signal generators and analyzers such as models of
SONET/SDH signals. Systems engineers use Test Benches to test new architectural
concepts, while VLSI designers use Test Benches to ensure that the device
conforms to product specifications.





In
addition to the extensive hardware functionality, many of our products utilize
embedded processors that are software programmable. This approach enables us to
develop products with higher levels of functionality and flexibility than are
possible with purely hardware based solutions. A digital signal processor, as it
relates to communications applications, encodes digital data for transmission
over bandwidth-limited media, such as copper telephone lines, and recovers the
encoded data at the receiving end. Our software programmable digital signal
processor is optimized for communications applications and provides high
processing bandwidth with low power requirements. This digital signal processor
can be programmed for several different applications, such as DSL and VoIP
networking. This software programmable digital signal processor technology gives
us the advantage of field programmability of devices. Field programmability
means that service providers can remotely upgrade their equipment to address new
standards or enable improved features, thereby extending the life cycles of
their equipment while incurring lower costs.





Our
products are multi-million gate devices, which are implemented in 65 nanometer,
0.13 and 0.18 micron complementary metal oxide semiconductor (CMOS) silicon
technologies. They incorporate high speed mixed signal
circuitry.  Some of these devices are equipped with embedded
processors that provide added functionality through software.





We have
developed substantial expertise in communications algorithms. Communications
algorithms are the processes and techniques used to transform a digital data
stream into a specially conditioned analog signal suitable for transmission
across copper telephone wires. We possess a thorough understanding of, and
practical experience in, the process of transmitting and receiving a digital
data stream in analog form. We also have significant experience developing
algorithms to enable voice compression, echo cancellation and telephony signal
processing. This expertise allows us to design highly efficient algorithms that
in turn enable us to create products with high performance, re-programmability
and low power consumption.





We are
experts in the area of highly complex, high-speed digital chip development. We
design both the logic and the physical layout for our products. This design
expertise has enabled us to develop tightly integrated digital chips that have
small form factors with low power consumption. We have continued to improve upon
our internal chip layout capabilities and our design for test capability, both
of which have resulted in significant improvements in silicon efficiency,
silicon testability and time-to-market. Our system-on-a-chip definition,
architecture, verification expertise and design methodology ensure that hardware
and software architectural trade-offs yield desired performance testing from our
VLSI solutions. The system-on-a-chip performance simulation, emulation,
verification and stress testing, using Test Benches and test equipment, ensure
that our products meet carrier class quality, performance and reliability
requirements.





We
have expertise in developing software embedded in our semiconductor products
that addresses the needs of network equipment manufacturers and service
providers. In addition, our understanding of various operating systems and
personal computer environments allows us to create software embedded on the chip
that provides for simple installation and operation.





The
expertise of our personnel, our rigorous design methodology and our investment
in state-of-the-art electronic design automation tools enable us to develop the
complex and innovative products our customers demand.





Strategy





Our goal
is to be the leading supplier of innovative, complete VLSI solutions to
telecommunications and data communications OEMs worldwide for the applications
we enable. The key elements of our business strategy include the
following:




Provide
the Optimal Solutions Within Target Markets





We offer
our customers unique chip sets that enable optimized performance and
functionality for applications ranging from Ethernet-over-SONET mapping and
framing for Optical Transport systems, voice media gateway platforms,
fiber-to-the-premises applications, and home gateway/routers.  Our
solutions include:




10


•
            embedded
      software in the computer chip for control of our configurable
      devices;





•
            product
      reference design models for both hardware and software
      applications;





•
            evaluation
      boards and reference design;





•
            OEM
      product design support;





•
            multi-tier
      applications support; and





•
            product
      technical and design documentation.





Our
‘complete product’ approach allows OEMs to optimally configure their products
while maintaining product compatibility over multiple generations. This approach
allows equipment vendors to selectively upgrade their products with
next-generation higher functionality VLSI devices.




Continue
to Promote the Deployment of Programmable Devices




We will
continue to develop highly integrated products that combine the use of embedded
software-programmable blocks and optimized hardware blocks in order to provide
an optimal level of performance and flexibility to our
customers.  This flexibility enables customers to adapt the product
for their unique needs or to accommodate changes resulting from emerging
telecommunications standards.




Seek
Early Market Penetration through Customer Sponsorship





We
seek to develop close sponsoring relationships with strategic OEMs during
product development in order to secure early adoption of our solutions. We
believe that OEMs recognize the value of their early involvement through
sponsorship of our products, as they can design their system products in
parallel with our product development, thereby accelerating their time to
market. In addition, we believe that our sponsoring relationships with leading
OEMs help us to obtain early design wins and help reduce risks of market
acceptance for our new products.





Third-Party Semiconductor
Fabrication





We work
with select third-party foundries to produce our semiconductor devices. This
approach allows us to avoid substantial capital spending, obtain competitive
pricing and technologies, and retain the ability to migrate our products to new
process technologies to reduce costs and optimize performance. Our design
methodology enables the production of our devices at multiple foundries using
well-established and proven processes. We engage foundries that are ISO
9001:2000 certified for quality and which use only semiconductor processes and
packages that are qualified under industry-standard requirements.





Marketing and
Sales





Our
marketing strategy focuses on key customer relationships to promote early
adoption of our VLSI devices in the products of market-leading communications
equipment OEMs. Through our customer sponsorship program, OEMs collaborate on
product specifications and applications while participating in product testing
in parallel with our own certification process. This approach accelerates our
customers’ time-to-market delivery while enabling us to achieve early design
wins for our products and volume forecasts for specific products from these
sponsors.





Our sales
strategy primarily focuses on worldwide suppliers of high-speed communications
and communications-oriented equipment. These customers include
telecommunications, data communications, wireless and wire-line equipment,
internet access, customer premise, computing, process control and defense
equipment vendors. In addition, we target emerging technology leaders in the
communications equipment market that are developing next generation solutions
for the telecommunications and data communications markets. We identify and
address sales opportunities through our worldwide direct sales force and our
worldwide network of independent distributors and sales
representatives.




11


Our
worldwide direct sales force, technical support personnel and design engineers
work together in teams to support our customers. We have technical support
capabilities located in key geographical locations throughout the world as well
as a technical support team at our headquarters as a backup to the field
applications engineers.





We have
established foreign distributors and sales representative relationships in
Australia, Belgium, Brazil, Canada, China, Germany, India, Ireland, Israel,
Italy, Japan, Korea, Luxembourg, Mexico, the Scandinavian countries, Spain,
Switzerland, Taiwan, Turkey and the United Kingdom. We also sell our products
through domestic distributors and a network of domestic sales representatives.
We have regional sales and technical support capabilities in Boston,
Massachusetts; Fremont, California;  Paris, France; Rome, Italy;
Berkshire, England; Hilversum, Netherlands; Brussels, Belgium; New Delhi and
Bangalore, India; Shanghai and Shenzhen, P.R.C.; Seoul, Korea; Tokyo, Japan; and
Taipei, Taiwan, as well as at our headquarters facility in Shelton,
Connecticut.





Customers





We have
sold our products and services to over 400 customers since shipping our first
product in 1990. Our customers include public network systems OEMs that
incorporate our products into telecommunications systems, WAN and LAN equipment
OEMs, internet-oriented OEMs, communications test and performance measurement
equipment OEMs and government, university and private laboratories that use our
products in advanced public network, and WAN and LAN developments. A small
number of our customers have historically accounted for a substantial portion of
our net revenues.





Note 11
of the Notes to Consolidated Financial Statements provides data on major
customers for the last three years.





Research and
Development





We
believe that the continued introduction of new products in our target markets is
essential to our growth. As of December 31, 2009 we had 153 full-time employees
engaged in research and product development efforts. We employ engineers who
have the necessary VLSI, high speed mixed signal, firmware, software, hardware,
physical design, verification, and validation expertise and development
experience.  These engineers are responsible for delivering VLSI and
Evaluation/Demo products for telecommunications and data communications
applications.  Research and development expenditures for the years
ended December 31, 2009, 2008 and 2007 were $19.1 million, $24.6 million, and
$21.7 million, respectively.




All
products are developed and delivered using documented design processes (product
life cycle) operating under a quality management system certified to meet the
ISO 9001:2008 international standard. Our design tools and development
environment are continuously reviewed and updated to improve design,
verification, fabrication and validation methodology, design flow and processes
of our product life cycle.




From time
to time, we subcontract design services and acquire products from third parties
to enhance our product lines.  Our internal research and development
organization thoroughly reviews the external development processes and the
design of these products as part of our quality assurance process.





Patents and
Licenses





Through
the end of 2009, we have been issued or became an assignee of 69 presently
maintained United States patents with an additional 31 patents pending in the
United States. Of that number two patents are co-assigned. Eight of the 31
pending patents were applied for in 2009, for various system-on-chip innovations
for broadband communications and high definition video interconnect
applications. Many of the United States issued and pending patents were also
filed internationally. For one or more of our United States patents, we have
coverage in Canada, China, Taiwan, Israel, Japan, France, Germany, United
Kingdom, Belgium, Italy, Sweden, Spain, and Hong Kong. Internationally, there
are patents pending either in specific countries or in the European Patent
Office (EPO) or under the Patent Cooperative Treaty (PCT). In addition we have
lifetime licenses to use over 23 additional US patents and their foreign
derivatives.




12


We cannot
guarantee that our patents will not be challenged or circumvented by our
competitors, and we cannot be sure that pending patent applications will
ultimately be issued as patents. Under current law, patent applications in the
United States filed before November 29, 2000 are maintained in secrecy until
they are issued, but applications filed after November 29, 2000 (and foreign
applications) are generally published 18 months after their priority date, which
is generally the filing date. The right to a patent in the United States is
attributable to the first to invent, while in most other jurisdictions the right
to a patent is obtained by the first to file the patent application. We cannot
be sure that our products or technologies do not infringe patents that may be
granted in the future based upon currently pending non-published patent
applications or that our products do not infringe any patents or proprietary
rights of third parties. From time to time, we receive communications from third
parties alleging patent infringement. If any relevant claims of third-party
patents are upheld as valid and enforceable, we could be prevented from selling
our products or could be required to obtain licenses from the owners of such
patents or be required to redesign our products to avoid infringement. We cannot
be assured that such licenses would be available or, if available, would be on
terms acceptable to us or that we would be successful in any attempts to
redesign our products or processes to avoid infringement. Our failure to obtain
these licenses or to redesign our products could have a material adverse effect
on our business.





We also
have been granted registration of 16 presently maintained trade or service marks
in the United States and we have one more trademark registration awaiting
approval. We have also obtained 4 presently maintained trademark registrations
under the European Community Trademark (ECT) procedure and have two pending
trademarks awaiting approval in Canada and the ECT.





Our
ability to compete depends to some extent upon our ability to protect our
proprietary information through various means, including ownership of patents,
copyrights, mask work registrations and trademarks. While no intellectual
property right of ours has been invalidated or declared unenforceable, we cannot
assure that such rights will be upheld in the future. We believe that, in view
of the rapid pace of technological changes in the communication semiconductor
industry, the technical experience and creative skills of our engineers and
other personnel are the most important factors in determining our future
technological success.





We have
entered into various license agreements for products or technology exchange. The
purpose of these licenses has, in general, been to obtain second sources for
standard products or to convey or receive rights to certain proprietary or
patented cores, cells or other technology.





We sell
our products for applications in the telecommunications and data communications
industries, which require our products to conform to various standards that are
agreed upon by recognized industry standards committees. Where applicable, we
design our products to be in conformity with these standards. We have received
and expect to continue to receive, in the normal course of business,
communications from third parties stating that if certain of our products meet a
particular standard, these products may infringe one or more patents of that
third party. We review the circumstances of each communication, and, in our
discretion and upon the advice of legal counsel, have taken or may take in the
future one of the following courses of action: we may negotiate payment for a
license under the patent or patents that may be infringed, we may use our
technology and/or patents to negotiate a cross-license with the third party or
we may decline to obtain a license on the basis that we do not infringe the
claimant’s patent or patents, or that such patents are not valid, or other
bases. We cannot be sure that licenses for any such patents will be available to
us on reasonable terms or that we would prevail in any litigation seeking
damages or expenses from us or to enjoin us from selling our products on the
bases of any of the alleged infringements.





Manufacturing and Design
Services





We
produce a variety of VLSI devices utilizing the Fabless Semiconductor Model.
This means that we do not own or operate any of the foundries used in the
production of our devices. Rather, we contract with established independent
foundries to manufacture all of our devices including silicon wafer production,
package assembly and testing. In most cases we maintain a fully functional test
environment for the purpose of production test development, low volume
production testing, and product certification. Once the device reaches
production volume, the test is transferred to a high volume, lower cost test
facility. In some cases, the test development is done at the subcontractor
site.





This
approach permits us to focus on our design strengths, minimize fixed costs and
capital expenditures and access the most advanced manufacturing technologies. It
also allows us to maintain an effective and flexible supply chain which is
managed using fully integrated ERP system. Quality assurance and customer
service activities are all performed at our Shelton, Connecticut and Fremont,
California facilities. Finished goods inventory, packing and shipping are
performed either in our Shelton, Connecticut facility or managed at our
subcontractors.





Our
Shelton, Connecticut facility is registered toISO 9001:2008by TUV
Rheinland of North America, Inc.  We use only ISO certified suppliers
in the manufacture of our products.




13


Our
manufacturing objectives and emphasis are focused in the following
areas:





•
            maximizing
      the reliability and quality of our products utilizing world class foundry
      partners;





•
            leveraging
      the most advanced semiconductor manufacturing technologies
      available;





•
            maintaining
      a flexible supply chain to meet our customer’s demand and delivering on
      time;





•
            minimizing
      capital and other resource requirements by subcontracting
      capital-intensive manufacturing;
and





•
            achieving
      a gross margin commensurate with the value of our
  products.





Our
products and services can be categorized as follows:




·
            VLSI
      devices - This category covers the majority of our products. We purchase
      and own the unique mask sets (tools) required for the production of our
      silicon wafers. We then purchase the wafers from the foundry as needed
      which are shipped directly to one of our wafer sort or assembly partners.
      They are then stored until we issue an assembly or test release based on
      demand. We use a variety of assembly and test suppliers to complete the
      production process. We have supplier agreements in place with most of
      these suppliers including TSMC, Global Foundries and IBM for wafers and
      Amkor and STATS ChipPAC for assembly and test.  For some of our
      devices, we purchase the product in its final form. In these cases, the
      supplier fabricates the wafers and manages the work in process including
      assembly and test. Kawasho Semiconductor Corp. is an example of a turnkey
      supplier where we are delivered fully tested and functional
      product.




·
            Intellectual
      Property Cores – We have several arrangements with foundries like Taiwan
      Semiconductor (TSMC) and Semiconductor Manufacturing International
      Corporation (SMIC) for example, where we make our intellectual property
      cores available to our customers for design in their products. The use of
      these cores is strictly controlled at the foundry and we receive license
      fees or royalties when they are
used.





·
            Services
      – We offer design and manufacturing services to our customers. In these
      cases we can utilize any of our established supply chain partners or use
      suppliers specified by our
customer.




Acquisitions





While
some of the next generation products we introduce are based on technologies that
we develop ourselves, we have filled some of our technology and skills needs
through acquisitions. The following is a table that summarizes technology and
skills we obtained through acquisitions of stand-alone companies during the
years 2007 through 2009.




Acquired Company
            
            Date Acquired
            
            Technology / Skill
  AcquiredCentillium
      Communications, Inc.
            
            October  2008
            
            VOIP
      and Optical transportASIC
      Design Center Division of Data – JCE
            
            January
      2007
            
            Custom
      ASIC development and logistics




Investments in Non-Publicly
Traded Companies and Venture Capital Funds





We will,
from time-to-time, make investments in early stage venture-backed, start-up
companies that develop technologies that are complementary to our product
roadmap. In all cases, when investing in other semiconductor companies, we have
also entered into commercial agreements giving us the rights to resell products
developed by these companies. When determining the accounting method for these
investments, we consider both direct ownership and indirect ownership. We also
consider other factors, such as our influence over the financial, technology and
operating policies of these companies.





We have
invested in venture capital funds as it provides us access to new technologies
and relationships integral for maintaining technological advantages in the
development of advanced semiconductor products for the communications
industry.  Neurone Ventures II (Neurone) is a venture capital fund
organized as a partnership in the business of making, supervising and disposing
of privately negotiated equity and equity-related investments, principally in
early-stage Israeli and Israeli-related high-technology companies.  We
have a 3% ownership interest in this partnership.




14


Competition





The
communication semiconductor industry is intensely competitive and is
characterized by:





•
            rapid
      technological changes in electronic design automation tools,
      wafer-manufacturing technologies, process tools and alternate networking
      technologies;





•
            rapidly
      changing requirements;





•
            manufacturing
      yield problems;





•
            heightened
      international competition in many markets;
and





•
            price
      erosion.





Our
principal competitors are Applied Micro Circuits Corporation, Broadcom
Corporation, Exar Corporation, Infineon Technologies, LSI Corporation, Mindspeed
Technologies, Inc., PMC-Sierra Inc., Texas Instruments Inc., and Vitesse
Semiconductor Corporation.  In addition, there are several FPGA
providers such as Altera Corporation and Xilinx, Inc. which compete with us by
supplying programmable products to OEMs.  Other domestic and
international vendors have announced plans to enter into this
market.





Employees





At
December 31, 2009, we had 227 full time employees, including 153 in research and
development, 28 in marketing and sales, 16 in operations and quality assurance,
and 30 in administration. We have no collective bargaining agreements. We have
never experienced any work stoppage and we believe our employee relations are
good.





Available
Information





Our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to those reports are made available free of charge
through the Investor Relations section of our Internet website
(http://www.transwitch.com) as soon as practicable after such material is
electronically filed with, or furnished to, the Securities and Exchange
Commission. Our executive offices are located at Three Enterprise Drive,
Shelton, CT 06484.





You may
read and copy any document we file at the SEC’s Public Reference Room located
at: Headquarters Office, 100F Street N.E., Room 1580, Washington, DC 20549. You
can request copies of these documents by writing to the Public Reference Section
of the SEC, 100F Street N.E., Washington, DC 20549 or by calling the SEC at
1-800-SEC-0330. Our SEC filings are also available at the SEC’s website at
http://www.sec.gov. This website address is included in this document as an
inactive textual reference only.





Item
1A.  Risk
Factors





From time
to time, information provided by us, statements made by our employees or
information included in our filings with the Securities and Exchange Commission
(including this Form 10-K) may contain statements that are not historical facts,
so-called “forward-looking statements,” which involve risks and uncertainties.
Such forward-looking statements are made pursuant to the safe harbor provisions
of Section 21E of the Securities Exchange Act of 1934, as amended.  In
some cases you can identify forward-looking statements by terminology such as
“may,” “should,” “could,” “will,” “expect,” “intend,” “plans,” “predict,”
“anticipate,” “estimate,” “continue,” “believe” or the negative of these terms
or other similar words. These statements discuss future expectations, contain
projections of results of operations or of financial condition or state other
forward-looking information. When considering forward-looking statements, you
should keep in mind the risk factors and other cautionary statements in this
Form 10-K.




15


Our
actual future results may differ significantly from those stated in any
forward-looking statements. Factors that may cause such differences include, but
are not limited to, the factors discussed below. Each of these factors, and
others, are discussed from time to time in our filings with the Securities and
Exchange Commission.





Our
operating results may fluctuate because of a number of factors, many of which
are beyond our control. If our operating results are below the expectations of
public market analysts or investors, then the market price of our common stock
could decline. Some of the factors that affect our quarterly and annual results,
but which are difficult to control or predict, are:





We
have incurred significant net losses.





Our
net losses have been considerable for the past several years.  Due to
current economic conditions, we expect that our revenues will continue to
fluctuate in the future and there is no assurance that we will attain positive
net earnings in the future.





Our
net revenues may decrease.





Due to
current economic conditions and slowdowns in purchases of VLSI semiconductor
devices, it has become increasingly difficult for us to predict the purchasing
activities of our customers and we expect that our net revenues may
decrease.





Our
business is characterized by short-term orders and shipment schedules, and
customer orders typically can be cancelled or rescheduled without significant
penalty to our customers.  Because we do not have substantial
non-cancelable backlog, we typically plan our production and inventory levels
based on internal forecasts of customer demand, which are highly unpredictable
and can fluctuate substantially.  Future fluctuations to our operating
results may also be caused by a number of factors, many of which are beyond our
control.





In
response to anticipated long lead times to obtain inventory and materials from
our foundries, we may order inventory and materials in advance of anticipated
customer demand, which might result in excess inventory levels if the expected
orders fail to materialize.  As a result, we cannot predict the timing
and amount of shipments to our customers, and any significant downturn in
customer demand for our products would reduce our quarterly and annual operating
results.





We
continue to have substantial indebtedness.





As of
December 31, 2009, we have approximately $8.8 million in principal amount of
indebtedness outstanding in the form of our 5.45% Convertible Notes due
September 30, 2011 (2011 Notes).





In
addition to this indebtedness, we may incur substantial additional indebtedness
in the future. The level of our indebtedness, among other things,
could:





•
            make
      it difficult for us to make payments on our 2011
  Notes;





•
              make
      it difficult for us to obtain any necessary future financing for working
      capital, capital expenditures, debt service requirements or other
      purposes;





•
            limit
      our flexibility in planning for, or reacting to changes in, our business;
      and





•
              make
      us more vulnerable in the event of a downturn in our
    business.




There can
be no assurance that we will be able to meet our debt service obligations,
including our obligations under the 2011 Notes.  The terms of our 2011
Notes permit the holders thereof to voluntarily convert their notes at any time
into a certain number of shares of our common stock.




16


We
are using our available cash and cash equivalents each quarter to fund our
operations, investments and financing activities.





In
January of 2010 we have restructured our operating expense to allow us to
break-even at the rate of sales of approximately $13 million per quarter. Such
rate of sales may not be sustained. Also we may incur unforeseen expenses, which
will cause us to consume our available cash and cash equivalents.





However,
we believe that we have adequate cash and cash equivalents and other financing
resources to fund our operations, and to meet our debt obligations through at
least December 31, 2010.





We may not be able to pay our debt
and other obligations.





If our
cash, cash equivalents and operating cash flows are inadequate to meet our
obligations, we could face substantial liquidity problems. If we are unable to
generate sufficient cash flow or otherwise obtain funds necessary to make
required payments on the 2011 Notes or our other obligations, we would be in
default under their respective terms.  This would permit the holders
of the 2011 Notes and our other obligations to accelerate their respective
maturities and could also cause defaults under any future indebtedness we may
incur.  Any such default or cross default would have a material
adverse effect on our business, prospects, financial condition and operating
results.  In addition, we cannot be sure that we would be able to
repay amounts due in respect of the 2011 Notes if payment of those notes were to
be accelerated following the occurrence of an event of default as defined in the
2011 Notes indenture.





We
may seek to reduce our indebtedness by issuing equity securities, thereby
causing dilution of our stockholders’ ownership interests.





We may
from time to time seek to exchange our 2011 Notes for shares of our common stock
or other securities.  These exchanges may take different forms,
including exchange offers or privately negotiated transactions.  As a
result of shares of our common stock or other securities being issued upon such
conversion or pursuant to such exchanges, our stockholders may experience
substantial dilution of their ownership interest.




The terms
of the 2011 Notes include voluntary conversion provisions upon which shares of
our common stock would be issued. As a result of these shares of our common
stock being issued, our stockholders may experience dilution of their ownership
interest.




If
we seek to secure additional financing we may not be able to do
so.  If we are able to secure additional financing our stockholders
may experience dilution of their ownership interest or we may be subject to
limitations on our operations.





If we are
unable to generate sufficient cash flows from operations to meet our anticipated
needs for working capital and capital expenditures, we may need to raise
additional funds.  However, events in the future may require us to
seek additional capital and, if so required, that capital may not be available
on terms favorable or acceptable to us, if at all.  If we raise
additional funds through the issuance of equity securities, our stockholders may
experience dilution of their ownership interest, and the newly issued securities
may have rights superior to those of our common stock.  On October 21,
2009 we filed a shelf registration statement on Form S-3 (File No. 333-162609)
(the “Shelf Registration Statement”) which was declared effective by the
Securities and Exchange Commission on October 28, 2009, to sell up to
$40,000,000 of our securities.   On December 31, 2009 we agreed,
pursuant to a privately negotiated purchase agreement, to sell up to 1,950,000
shares of our common stock from the Shelf Registration Statement in multiple
closings over the next twelve months.  As of March 15, 2010, we have
sold 450,000 shares of our common stock in such closings.





If we
raise additional funds by issuing debt, we may be limited in our success, as the
terms of the 2011 Notes restrict our ability to issue debt that is senior to or
pari passu with the 2011 Notes, without the consent of the holders of the 2011
Notes.





We
may fail to realize the anticipated benefits of the acquisition of
Centillium.





The
success of the acquisition of Centillium depends on, among other things, our
ability to realize anticipated cost savings and to combine the businesses of
TranSwitch and Centillium in a manner that does not materially disrupt
Centillium’s existing customer relationships or otherwise result in decreased
revenues, and that allows us to capitalize on Centillium’s growth opportunities.
If we are not able to successfully achieve these objectives, the anticipated
benefits of the acquisition may not be realized fully or at all or may take
longer to realize than expected.




17


It is
possible that the ongoing integration process could result in the loss of key
employees, the disruption of our or Centillium’s ongoing businesses or
inconsistencies in standards, controls, procedures and policies that could
adversely affect our ability to maintain relationships with customers and
employees or to achieve the anticipated benefits of the
acquisition.





Our
failure to continue to operate and manage the combined company effectively could
have a material adverse effect on our business, financial condition and
operating results.





We will
need to meet significant challenges to realize the expected benefits and
synergies of the acquisition of Centillium. These challenges
include:




•
            integrating
      the management teams, strategies, cultures and operations of the two
      companies;





•
            retaining
      and assimilating the key personnel of each
  company;





•
            integrating
      sales and business development
operations;





•
            retaining
      existing customers of each company;





•
            developing
      new products and services that utilize the technologies and resources of
      both companies; and





•
            creating
      uniform standards, controls, procedures, policies and information
      systems.





The
accomplishment of these objectives will involve considerable risk,
including:




•
            the
      potential disruption of each company’s ongoing business and distraction of
      their respective management teams;





•
            the
      difficulty of incorporating acquired technology and rights into our
      products and services;





•
            unanticipated
      expenses related to technology
  integration; and





•
            potential
      unknown liabilities associated with the
  acquisition.





If we do
not succeed in addressing these challenges or any other problems encountered in
connection with the acquisition, our operating results and financial condition
could be adversely affected.





Our
stock price is volatile.





The
market for securities for communication semiconductor companies, including our
Company, has been highly volatile. The daily closing price of our common stock
has fluctuated between a low of $1.60 and a high of $22.72 (share price is
reflective of the November 23, 2009 1 for 8 reverse stock split) during the
period from January 1, 2006 to December 31, 2009. It is likely that the price of
our common stock will continue to fluctuate widely in the future. Factors
affecting the trading price of our common stock include:





•
              responses
      to quarter-to-quarter variations in operating
  results;





•
              announcements
      of technological innovations or new products by us or our
      competitors;





•
              current
      market conditions in the telecommunications and data communications
      equipment markets; and





•
              changes
      in earnings estimates by
analysts.




18


We
may have to further restructure our business.





We may
have to make further restructuring changes if we do not sustain the current
level of quarterly revenues.





We
anticipate that shipments of our products to relatively few customers will
continue to account for a significant portion of our total net
revenues.





Historically,
a relatively small number of customers have accounted for a significant portion
of our total net revenues in any particular period. For the years ended December
31, 2009 and 2008, shipments to our top five customers, including sales to
distributors, accounted for approximately 63% and 51% of our total net revenues,
respectively. We expect that a limited number of customers may account for a
substantial portion of our total net revenues for the foreseeable
future.





Some of
the following may reduce our total net revenues or adversely affect our
business:





•
            reduction,
      delay or cancellation of orders from one or more of our significant
      customers;





•
            development
      by one or more of our significant customers of other sources of supply for
      current or future products;





•
            loss
      of one or more of our current customers or a disruption in our sales and
      distribution channels; and





•
            failure
      of one or more of our significant customers to make timely payment of our
      invoices.





We cannot
be certain that our current customers will continue to place orders with us,
that orders by existing customers will return to the levels of previous periods
or that we will be able to obtain orders from new customers. We have no
long-term volume purchase commitments from any of our significant
customers.





The
cyclical nature of the communication semiconductor industry affects our
business.





Communication
service providers, internet service providers, regional operating companies and
inter-exchange carriers continue to closely monitor their capital expenditures.
Spending on voice-only equipment remains slow while spending on equipment
providing the efficient transport of data services on existing infrastructure
appears to be slowly recovering. Demand for new, high bandwidth applications
such as video conferencing, broadband audio and telephone is placing an
increased burden on existing public network infrastructure. We cannot be certain
that the market for our products will not decline in the future.





Because
of our lack of diversity in geographic sources of revenues, economic factors
specific to certain countries may adversely affect our business and operating
results.





During
2009, a substantial amount of our revenue was from, China, Japan, Korea, Israel
and other foreign countries. We expect revenues in 2010 will be substantial
concentrated in foreign markets.  All of our sales have been
historically denominated in U.S. dollars and major fluctuations in currency
exchange rates could materially affect our customers’ demand, thereby causing
them to reduce their orders, which could adversely affect our operating results.
While part of our strategy is to diversify the geographic sources of our
revenues, failure to further penetrate other markets could harm our business and
results of operations and subject us to increased currency risk.





If
foreign exchange rates fluctuate significantly, our profitability may
decline.





We are
exposed to foreign currency rate fluctuations because we incur a significant
portion of our operating expenses in currencies other than U.S. dollars (mainly
Indian rupees, Israeli shekels and Euros). The U.S. dollar has devalued
significantly and this trend may continue.




19


Our
international business operations expose us to a variety of business
risks.





Foreign
markets are a significant part of our net product revenues. For the years ended
December 31, 2009 and December 31, 2008 foreign shipments accounted for
approximately 70% and 85%, respectively of our total net product and services
revenues. We expect foreign markets to continue to account for a significant
percentage of our total net product revenues. A significant portion of our total
net product revenues will, therefore, be subject to risks associated with
foreign markets, including the following:




•
              unexpected
      changes in legal and regulatory requirements and policy changes affecting
      the telecommunications and data communications
  markets;
 
 •
              changes
      in tariffs;
 
 •
              exchange
      rates, currency controls and other
barriers;
 
 •
              political
      and economic instability;
 
 •
              risk
      of terrorism;
 
 •
              difficulties
      in accounts receivable collection;
 
 •
              difficulties
      in managing distributors and
representatives;
 
 •
              difficulties
      in staffing and managing foreign
operations;
 
 •
              difficulties
      in protecting our intellectual property
  overseas;
 
 •
              natural
      disasters;
 
 •
              seasonality
      of customer buying patterns; and
 
 •
              potentially
      adverse tax consequences.





Although
substantially all of our total net product revenues to date have been
denominated in U.S. dollars, the value of the U.S. dollar in relation to foreign
currencies also may reduce our total net revenues from foreign customers. With
the acquisition of our Israeli operations and the expansion of our India Design
Center a substantial amount of our costs are denominated in Israeli shekels and
the Indian rupee.  To the extent that we further expand our
international operations or change our pricing practices to denominate prices in
foreign currencies, we will expose our margins to increased risks of currency
fluctuations.





Our
net product revenues depend on the success of our customers’ products, and our
design wins do not necessarily generate revenues in a timely
fashion.





Our
customers generally incorporate our new products into their products or systems
at the design stage.  However, customer decisions to use our products
(design wins), which can often require significant expenditures by us without
any assurance of success, often precede the generation of production revenues,
if any, by a year or more.  Some customer projects are canceled, and
thus will not generate revenues for our products.  In addition, even
after we achieve a design win, a customer may require further design
changes.  Implementing these design changes can require significant
expenditures of time and expense by us in the development and pre-production
process.  Moreover, the value of any design win will largely depend
upon the commercial success of the customer’s product and on the extent to which
the design of the customer’s systems accommodates components manufactured by our
competitors.  We cannot ensure that we will continue to achieve design
wins in customer products that achieve market acceptance.  Further,
most revenue-generating design wins take several years to translate into
meaningful revenues.




We
must successfully transition to new process technologies to remain
competitive.





Our
future success depends upon our ability to develop products that utilize new
process technologies.




20




Semiconductor
design and process methodologies are subject to rapid technological change and
require large expenditures for research and development. We currently
manufacture our products using 0.8, 0.5, 0.35, 0.25, 0.18 and 0.13 micron and 65
nanometer complementary metal oxide semiconductor (CMOS) processes. We
continuously evaluate the benefits, on a product-by-product basis, of migrating
to smaller geometry process technologies.Other companies in the
industry have experienced difficulty in transitioning to new manufacturing
processes and, consequently, have suffered increased costs, reduced yields or
delays in product deliveries. We believe that transitioning our products to
smaller geometry process technologies will be important for us to remain
competitive. We cannot be certain that we can make such a transition
successfully, if at all, without delay or inefficiencies.





Our
success depends on the timely development of new products, and we face risks of
product development delays.





Our
success depends upon our ability to develop new VLSI devices and software for
existing and new markets. The development of these new devices and software is
highly complex, and from time to time we have experienced delays in completing
the development of new products. Successful product development and introduction
depends on a number of factors, including the following:




•
              accurate
      new product definition;
 
 •
              timely
      completion and introduction of new product
  designs;
 
 •
              availability
      of foundry capacity;
 
 •
              achievement
      of manufacturing yields; and
 
 •
              market
      acceptance of our products and our customers’
  products.
 
 Our
success also depends upon our ability to do the following:
  •
              build
      products to applicable standards;
 
 •
              develop
      products that meet customer
requirements;
 
 •
              adjust
      to changing market conditions as quickly and cost-effectively as necessary
      to compete successfully;
 
 •
              introduce
      new products that achieve market acceptance;
and
 
 •
              develop
      reliable software to meet our customers’ application needs in a timely
      fashion.


In
addition, we cannot ensure that the systems manufactured by our customers will
be introduced in a timely manner or that such systems will achieve market
acceptance.





We
sell a range of products that each has a different gross profit. Our total gross
profits will be adversely affected if most of our shipments are of products with
low gross profits.





We
currently sell more than 60 products. Some of our products have a high gross
profit while others do not.If our customers decide
to buy more of our products with low gross profits and fewer of our products
with high gross profits, our total gross profits could be adversely affected. We
plan our mix of products based on our internal forecasts of customer demand,
which are highly unpredictable and can fluctuate substantially.





The
price of our products tends to decrease over the lives of our
products.





Historically,
average selling prices in the communication semiconductor industry have
decreased over the life of a product, and, as a result, the average selling
prices of our products may decrease in the future. Decreases in the price of our
products would adversely affect our operating results. As global competition
increases our customers are increasingly more focused on price. We may have to
decrease our prices to remain competitive in some situations, which may
negatively impact our gross margins.


21





Our
success depends on the rate of growth of the global communications
infrastructure.





We derive
virtually all of our total net revenues from products for telecommunications,
data and video communications applications. These markets are characterized by
the following:




•
              susceptibility
      to seasonality of customer buying
patterns;
 
 •
              subject
      to general business cycles;
 
 •
              intense
      competition;
 
 •
              rapid
      technological change; and
 
 •
              short
      product life cycles.




We
anticipate that these markets will continue to experience significant volatility
in the near future.





Our
products must successfully include industry standards to remain
competitive.





Products
for telecommunications and data communications applications are based on
industry standards, which are continually evolving. Our future success will
depend, in part, upon our ability to successfully develop and introduce new
products based on emerging industry standards, which could render our existing
products unmarketable or obsolete. If the telecommunications or data
communications markets evolve to new standards, we cannot be certain that we
will be able to design and manufacture new products successfully that address
the needs of our customers and include the new standards or that such new
products will meet with substantial market acceptance.





Our
intellectual property indemnification practices may adversely impact our
business.





We have
historically agreed to indemnify our customers for certain costs and damages of
intellectual property rights in circumstances where one of our products is the
factor creating the customer’s infringement exposure. This practice may subject
us to significant indemnification claims by our customers. In some instances,
our products are designed for use in devices manufactured by our customers that
comply with international standards. These international standards are often
covered by patent rights held by third parties, which may include our
competitors. The costs of obtaining licenses from holders of patent rights
essential to such international standards could be high. The cost of not
obtaining such licenses could also be high if a holder of such patent rights
brings a claim for patent infringement. We are not aware of any claimed
violations on our part. However, we cannot assure you that claims for
indemnification will not be made or that if made, such claims would not have a
material adverse effect on our business, results of operations or financial
condition.





We
continue to expense our new product process development costs when
incurred.





In the
past, we have incurred significant new product and process development costs
because our policy is to expense these costs, including tooling, fabrication and
pre-production expenses, at the time that they are incurred. We may continue to
incur these types of expenses in the future. These additional expenses will have
a material and adverse effect on our operating results in future
periods.





We
face intense competition in the communication semiconductor market.





The
communication semiconductor industry is intensely competitive and is
characterized by the following:




•
              rapid
      technological change;
 
 •
              subject
      to general business cycles;


22




•
              price
      erosion;
 
 •
              limited
      access to fabrication capacity;
 
 •
              unforeseen
      manufacturing yield problems; and
 
 •
              heightened
      international competition in many
markets.




These
factors are likely to result in pricing pressures on our products, thus
potentially affecting our operating results.





Our
ability to compete successfully in the rapidly evolving area of high-performance
integrated circuit technology depends on factors both within and outside our
control, including:




•
              success
      in designing and subcontracting the manufacture of new products that
      implement new technologies;
 
 •
              protection
      of our products by effective use of intellectual property
      laws;
 
 •
              product
      quality;
 
 •
              reliability;
 
 •
              price;
 
 •
              efficiency
      of production;
 
 •
              failure
      to find alternative manufacturing sources to produce VLSI devices with
      acceptable manufacturing yields;
 
 •
              the
      pace at which customers incorporate our products into their
      products;
 
 •
              success
      of competitors’ products; and
 
 •
              general
      economic conditions.




The
telecommunications and data communications industries, which are our primary
target markets, have become intensely competitive because of deregulation,
heightened international competition and significant decreases in demand since
2000.  A number of our customers have internal semiconductor design or
manufacturing capability with which we also compete in addition to our other
competitors.  Any failure by us to compete successfully in these
target markets, particularly in the communications markets, would have a
material adverse effect on our business, financial condition and results of
operations.





We
rely on outside fabrication facilities, and our business could be hurt if our
relationships with our foundry suppliers are damaged.





We do not
own or operate a VLSI circuit fabrication facility. Fourfoundries currently
supply us with all of our semiconductor device requirements. While we have had
good relations with these foundries, we cannot be certain that we will be able
to renew or maintain contracts with them or negotiate new contracts to replace
those that expire. In addition, we cannot be certain that renewed or new
contracts will contain terms as favorable as our current terms. There are other
significant risks associated with our reliance on outside foundries, including
the following:




•
              the
      lack of assured semiconductor wafer supply and control over delivery
      schedules;
 
 •
              the
      unavailability of, or delays in obtaining access to, key process
      technologies; and
 
 •
              limited
      control over quality assurance, manufacturing yields and production
      costs.


23


Reliance
on third-party fabrication facilities limits our ability to control the
manufacturing process.





Manufacturing
integrated circuits is a highly complex and technology-intensive process.
Although we try to diversify our sources of semiconductor device supply and work
closely with our foundries to minimize the likelihood of reduced manufacturing
yields, our foundries occasionally experience lower than anticipated
manufacturing yields, particularly in connection with the introduction of new
products and the installation and start-up of new process technologies. Such
reduced manufacturing yields have at times reduced our operating results. A
manufacturing disruption at one or more of our outside foundries, including,
without limitation, those that may result from natural disasters, accidents,
acts of terrorism or political instability or other natural occurrences, could
impact production for an extended period of time.




Our
dependence on a small number of fabrication facilities exposes us to risks of
interruptions in deliveries of semiconductor devices.





We
purchase semiconductor devices from outside foundries pursuant to purchase
orders, and we do not have a guaranteed level of production capacity at any of
our foundries. We provide the foundries with forecasts of our production
requirements. However, the ability of each foundry to provide wafers to us is
limited by the foundry’s available capacity and the availability of raw
materials. Therefore, our foundry suppliers could choose to prioritize capacity
and raw materials for other customers or reduce or eliminate deliveries to us on
short notice. Accordingly, we cannot be certain that our foundries will allocate
sufficient capacity to satisfy our requirements.





We have
been, and expect in the future to be, particularly dependent upon a limited
number of foundries for our VLSI device requirements. In 2009, approximately 85%
of our wafer requirements were manufactured by one foundry.  The time required to
qualify alternative manufacturing sources for existing or new products could be
substantial and we might not be able to find alternative manufacturing sources
able to produce our VLSI devices with acceptable manufacturing
yields. As a result, we expect that we could experience substantial
delays or interruptions in the shipment of our products if there was a sudden increase in demand
or if our foundry suppliers were to cease operations or limit our
capacity.





We
are subject to risks arising from our use of subcontractors to assemble our
products.





Contract
assembly houses in Asia assemble all of our semiconductor
products.  Raw material shortages, natural disasters, political and
social instability, service disruptions, currency fluctuations, or other
circumstances in the region could force us to seek additional or alternative
sources of supply or assembly.  This could lead to supply constraints
or product delivery delays.





Our
failure to protect our proprietary rights, or the costs of protecting these
rights, may harm our ability to compete.





Our
success depends in part on our ability to obtain patents and licenses and to
preserve other intellectual property rights covering our products and
development and testing tools. To that end, we have obtained certain domestic
and foreign patents and intend to continue to seek patents on our inventions
when appropriate. The process of seeking patent protection can be time consuming
and expensive. We cannot ensure the following:




•
              that
      patents will be issued from currently pending or future
      applications;
 
 •
              that
      our existing patents or any new patents will be sufficient in scope or
      strength to provide meaningful protection or any commercial advantage to
      us;
 
 •
              that
      foreign intellectual property laws will protect our foreign intellectual
      property rights; and
 
 •
              that
      others will not independently develop similar products, duplicate our
      products or design around any patents issued to
  us.




Intellectual
property rights are uncertain and adjudication of such rights involves complex
legal and factual questions. We may be unknowingly infringing on the proprietary
rights of others and may be liable for that infringement, which could result in
significant liability for us. We occasionally receive correspondence from third
parties alleging infringement of their intellectual property rights. If we are
found to infringe the proprietary rights of others, we could be forced to either
seek a license to the intellectual property rights of others or alter our
products so that they no longer infringe the proprietary rights of others. A
license could be very expensive to obtain or may not be available at all.
Similarly, changing our products or processes to avoid infringing the rights of
others may be costly or impractical.




24


We are
responsible for any patent litigation costs. If we were to become involved in a
dispute regarding intellectual property, whether ours or that of another
company, we may have to participate in legal proceedings in the United States
Patent and Trademark Office or in the United States or foreign courts to
determine any or all of the following issues: patent validity, patent
infringement, patent ownership or inventorship. These types of proceedings may
be costly and time consuming for us, even if we eventually prevail. If we do not
prevail, we might be forced to pay significant damages, obtain a license, if
available, or stop making a certain product. From time to time we may prosecute
patent litigation against others and as part of such litigation, other parties
may allege that our patents are not infringed, are invalid and are
unenforceable.





We also
rely on trade secrets, proprietary know-how and confidentiality provisions in
agreements with employees and consultants to protect our intellectual property.
Such parties may not comply with the terms of their agreements with us, and we
may not be able to adequately enforce our rights against these
parties.





The
loss of key management could affect our ability to run our
business.





Our
success depends largely upon the continued service of our executive officers and
technical personnel and on our ability to continue to attract, retain and
motivate other qualified personnel.





We
may engage in acquisitions that may harm our operating results, dilute our
stockholders and cause us to incur debt or assume contingent
liabilities.





We may
pursue acquisitions from time to time that could provide new technologies,
skills, products or service offerings. Future acquisitions by us may involve the
following:




•
              use
      of significant amounts of cash and cash
  equivalents;
 
 •
              potentially
      dilutive issuances of equity securities;
and
 
 •
              incurrence
      of debt or amortization expenses related to intangible assets with
      definitive lives.
 
 In
addition, acquisitions involve numerous other risks, including:
 
 •
              diversion
      of management’s attention from other business
  concerns;
 
 •
              risks
      of entering markets in which we have no or limited prior experience;
      and
 
 •
              unanticipated
      expenses and operational disruptions while acquiring and integrating new
      acquisitions.


From time
to time, we have engaged in discussions with third parties concerning potential
acquisitions of product lines, technologies and businesses. We currently have no
commitments or agreements with respect to any such acquisition. If such an
acquisition does occur, we cannot be certain that our business, operating
results and financial condition will not be materially adversely affected or
that we will realize the anticipated benefits of the acquisition.





We
have made, and may continue to make, investments in development stage companies,
which may not produce any returns for us in the future.





From time
to time we have made investments in early stage venture-backed, start-up
companies that develop technologies that are complementary to our product
roadmap.  In April 2003, we made an initial investment in Opulan
Technologies Corp. (Opulan). Opulan develops high performance and cost-effective
IP convergence ASSPs from its development facility in Shanghai,
China.  We plan to continue to use our cash to make selected
investments in these types of companies. Certain companies in which we invested
in the past have failed, and we have lost our entire investment in them. These
investments involve all the risks normally associated with investments in
development stage companies. As such, there can be no assurance that we will
receive a favorable return on these or any future venture-backed investments
that we may make. Additionally, our original and any future investments may
continue to become impaired if these companies do not succeed in the execution
of their business plans. Any further impairment or equity losses in these
investments could negatively impact our future operating results.




25


We
could be subject to class action litigation due to stock price volatility, which
if it occurs, will distract our management and could result in substantial costs
or large judgments against us.





In the
past, securities and class action litigation has often been brought against
companies following periods of volatility in the market prices of their
securities. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert our management’s
attention and resources, which could cause serious harm to our business,
operating results and financial condition or dilution to our
stockholders.





Provisions
of our certificate of incorporation, by-laws, stockholder rights plan and
Delaware law may discourage takeover offers and may limit the price investors
would be willing to pay for our common stock.





Delaware
corporate law contains, and our certificate of incorporation and by-laws and
shareholder rights plan contain, certain provisions that could have the effect
of delaying, deferring or preventing a change in control of our Company even if
a change of control would be beneficial to our stockholders. These provisions
could limit the price that certain investors might be willing to pay in the
future for shares of our common stock. Certain of these provisions:




•
            authorize
      the issuance of “blank check” preferred stock (preferred stock which our
      Board of Directors can create and issue without prior stockholder
      approval) with rights senior to those of common
  stock;





•
            prohibit
      stockholder action by written
consent;





•
            establish
      advance notice requirements for submitting nominations for election to the
      Board of Directors and for proposing matters that can be acted upon by
      stockholders at a meeting; and





•
            dilute
      stockholders who acquire more than 15% of our common
  stock.




Natural
disasters or acts of terrorism affecting our locations, or those of our
suppliers, in the United States or internationally may negatively impact our
business.





We
operate our businesses in the United States and internationally, including the
operation of a design center in India, and sales, design and engineering
operations in Israel.  Some of the countries in which we operate or in
which our customers are located have in the past been subject to terrorist acts
and could continue to be subject to acts of terrorism.  In addition,
some of these areas may be subject to natural disasters, such as earthquakes or
floods.  If our facilities, or those of our suppliers or customers,
are affected by a natural disaster or terrorist act, our employees could be
injured and those facilities damaged, which could lead to loss of skill sets and
affect the development or fabrication of our products, which could lead to lower
short and long-term revenues. In addition, natural disasters or terrorist acts
in the areas in which we operate or in which our customers or suppliers operate
could lead to delays or loss of business opportunities, as well as changes in
security and operations at those locations, which could increase our operating
costs.





Our
ability to sublease excess office space may adversely affect our future cash
outflows.





We
have outstanding operating lease commitments of approximately $28.0 million,
payable over the next eight years. Some of these commitments are for space that
is not being utilized and, for which, we recorded restructuring charges in prior
periods. We are in the process of trying to sublease additional excess space but
it is unlikely that any sublease income generated will offset the entire future
commitment. As of December 31, 2009, we have sublease agreements totaling
approximately $12.0 million to rent portions of our excess facilities over the
next five years. We currently believe that we can fund these lease commitments
in the future; however, there can be no assurances that we will not be required
to seek additional capital or provide additional guarantees or collateral on
these obligations.




26


Of the
office space being leased in our Shelton, Connecticut location, as of December
31, 2009 approximately 118,335 square feet is considered excess for which we
have taken restructuring charges in prior years. Substantially all of this space
is currently being sublet, but not for the full term that we are committed to
under our lease agreements. If we are unable to re-lease this space, at similar
rates, our future cash outflows would be adversely affected.





Our
business could be harmed if we fail to integrate future acquisitions
adequately.





During
the past four years, we have acquired three companies, one based in the United
States and two in Israel.





Our
management must devote time and resources to the integration of the operations
of any future acquisitions. The process of integrating research and development
initiatives, computer and accounting systems and other aspects of the operations
of any future acquisitions presents a significant challenge to our management.
This is compounded by the challenge of simultaneously managing a larger and more
geographically dispersed entity.





Future
acquisitions could present a number of additional difficulties of integration,
including:




•
              difficulties
      in integrating personnel with disparate business backgrounds and
      cultures;
 
 •
              difficulties
      in defining and executing a comprehensive product strategy;
      and
 
 •
              difficulties
      in minimizing the loss of key employees of the acquired
      company.





If we
delay integrating or fail to integrate operations or experience other unforeseen
difficulties, the integration process may require a disproportionate amount of
our management’s attention and financial and other resources. Our failure to
address these difficulties adequately could harm our business or financial
results, and we could fail to realize the anticipated benefits of the
transaction.





We have
in the past, as a result of industry conditions, later discontinued or abandoned
certain product lines acquired through prior acquisitions.





Item
1B.  Unresolved
Staff Comments





Not
applicable.


27





Item
2.   Properties





Our
headquarters is located in a suburban office park in Shelton, Connecticut. We
have additional sales offices and design centers located throughout the
world.The following is
a summary of our material offices and locations for which we have lease
commitments:




Location
                                      
                                      Business
      Use
                                      
                                      Square
                                        Footage
                                      
                                      Lease
                                        Expiration DatesShelton,
      Connecticut
                                      
                                      Corporation
      Headquarters, Product Development, Operations, Sales, Marketing and
      Administration
                                      
                                      
                                      18,561
                                      
                                      November 2012Herzeliya,
      Israel
                                      
                                      Product
      Development, Sales & Service
                                      
                                      
                                      9,688
                                      
                                      Less than 1 YearNew
      Delhi, India
                                      
                                      Product
      Development
                                      
                                      
                                      16,804
                                      
                                      January
      2015Fremont,
      California
                                      
                                      Product
      Development, Sales, Marketing and Administration
                                      
                                      
                                      12,500
                                      
                                      February
      2011Bangalore,
      India
                                      
                                      Product
      Development
                                      
                                      
                                      12,378
                                      
                                      February
      2014Excess
      property:Fremont,
      California
                                      
                                      Available
      for Lease
                                      
                                      
                                      91,500
                                      
                                      February
      2011Shelton,
      Connecticut
                                      
                                      Available
      for Lease
                                      
                                      
                                      118,335
                                      
                                      November 2012—April 2017





Internationally,
we lease space in Japan, China, Taiwan, France and South Korea for sales
offices. Our current facilities are adequate for our needs.





Refer to
Note 17—Commitments and Contingencies of our Consolidated Financial Statements
for additional disclosures regarding our commitments under lease
obligations.Also,
refer to Note 16—Restructuring and Asset Impairment Charges in our Consolidated
Financial Statements regarding our restructuring charges during fiscal years
2007 through 2009 as we have recorded charges for future rent payments relating
to excess office space.





Item
3.    Legal
Proceedings





We are
not party to any material litigation proceedings.





From time
to time, we may be subject to other legal proceedings and claims in the ordinary
course of business. We are not currently aware of any such proceedings or claims
that we believe will have, individually or in the aggregate, a material adverse
effect on the business, financial condition or results of our
operations.





Item
4.    Reserved


28





PART
II





Item
5.     Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities




Our
common stock is traded under the symbol “TXCC” on The Nasdaq Capital
Market.The
following table sets forth, for the periods indicated, the range of high and low
closing prices for our common stock. The closing prices indicated reflect the 1
for 8 reverse stock split that was effected on November 23, 2009.





High
                          
                          
                          LowQuarter
      to dateFirst
      Quarter (through March 12, 2010)
                          
                          $
                          3.34
                          
                          
                          $
                          1.52Year
      ended December 31, 2009First
      Quarter
                          
                          $
                          4.00
                          
                          
                          $
                          1.60Second
      Quarter
                          
                          $
                          4.16
                          
                          
                          $
                          2.40Third
      Quarter
                          
                          $
                          6.00
                          
                          
                          $
                          3.36Fourth
      Quarter
                          
                          $
                          5.68
                          
                          
                          $
                          1.66Year
      ended December 31, 2008First
      Quarter
                          
                          $
                          7.04
                          
                          
                          $
                          4.80Second
      Quarter
                          
                          $
                          7.36
                          
                          
                          $
                          4.88Third
      Quarter
                          
                          $
                          8.96
                          
                          
                          $
                          4.00Fourth
      Quarter
                          
                          $
                          4.00
                          
                          
                          $
                          2.08




As of
March 2, 2010, there were approximately 135 holders of record and approximately
16,107 beneficial shareholders of our common stock.





We have
never paid cash dividends on our common stock.We currently do not
anticipate paying any cash dividend in the foreseeable future.Any future declaration and
payment of dividends will be subject to the discretion of our Board of
Directors, will be subject to applicable law and will depend upon our results of
operations, earnings, financial condition, contractual limitations, cash
requirements, future prospects and any other factors deemed relevant by our
Board of Directors.





We also
have securities authorized for issuance under equity compensation plans. The
following table provides information as of December 31, 2009 with respect to
shares of our common stock that may be issued under our existing equity
compensation plans, including our 1995 Fourth Amended and Restated Stock Plan
(the “1995 Plan”), our 2000 Stock Option Plan (the “2000 Plan”), the 2008 Equity
Incentive Plan (the “2008 Plan”), the 1995 Non-Employee Director Stock Option
Plan (the “Non-Employee Director Plan”), the 2005 Employee Stock Purchase Plan
(the “Purchase Plan”) and the 1999 Stock Incentive Plan of Onex Communications
Corporation (the “Onex Plan”). As of May 22, 2008, no shares are available for
grant under our 1995 Plan or 2000 Plan.





Plan
      Category
                  
                  Number
      of
                    Securities
      to be
                    Issued
      upon
                    Exercise
      of
                    Outstanding
                    Options,
      Warrants
                    and Rights
                  
                  
                  Weighted
                    Average
                    Exercise
      Price
                    of
      Outstanding
                    Options,
                    Warrants
      and
                    Rights
                  
                  
                  Number
      of Securities
                    Remaining
      Available
                    for
                    Future
      Issuance
                    Under
                    Equity
                    Compensation
                    Plans
      (excluding
                    Securities
      reflected
                    in Column (a))(a)
                  
                  
                  (b)
                  
                  
                  (c)Equity
      Compensation Plans Approved by Stockholders (1)
                  
                  
                  2,674,014
                  (3)(4)
                  
                  $
                  9.55
                  (3)
                  
                  
                  1,211,752Equity
      Compensation Plans Not Approved by Stockholders (2)
                  
                  
                  377,129
                  
                  
                  $
                  10.41
                  
                  
                  
                  -Total
                  
                  
                  3,051,143
                  
                  
                  $
                  9.65
                  
                  
                  
                  1,211,752




29





(1)
            Consists
      of the 1995 Plan, the 2008 Plan, and the Purchase
  Plan.


(2)
            Consists
      of the 2000 Plan and shares subject to outstanding options granted under
      equity compensation plans assumed by us in connection
      with   mergers and acquisitions of the companies which
      originally granted those options. No additional options may be granted
      under the assumed plans.


(3)
            Excludes
      purchase rights accruing under the Purchase Plan which has a
      stockholder-approved reserve of 125,000 shares. Under the Purchase Plan,
      each eligible employee is able to purchase up to 1,250 shares of our
      common stock at semi-annual intervals each year at a purchase price per
      share equal to 85% of the lower of the fair market value of our common
      stock on the first or last trading day of a purchase
    period.


(4)
            Includes
      restricted stock units of 571,182. These awards have no strike price and
      are issued from our 2008 Plan.




Equity
Compensation Plans Not Approved by Stockholders





2000 Stock Option
Plan. The purpose of the 2000 Plan adopted by our Board of Directors on
July 14, 2000 and amended on December 21, 2001, was to promote our long-term
success, by providing financial incentives to employees and consultants of the
Company who are in positions to make significant contributions toward such
success except that no member of our Board of Directors or officer of the
Company appointed by the Board of Directors shall be eligible for grants of
options under the 2000 Plan. The 2000 Plan is designed to attract individuals of
outstanding ability to become or to continue as employees or consultants, to
enable such individuals to acquire or increase proprietary through the ownership
of shares of our Common Stock, and to render superior performance during their
associations with us, by providing opportunities to participate in the ownership
of our future growth through the granting of NQSOs. The 2000 Plan is
administered by our Board of Directors or, at its option, a committee appointed
by our Board of Directors. A total of 1,250,000 shares of common stock were
reserved for issuance under the 2000 Plan. In April 2008, our Board of Directors
determined that no further awards would be made under this plan and that all
remaining 303,379 shares available for issuance under the 2000 Plan that are not
subject to outstanding stock option awards will be eligible for issuance under
the 2008 Equity Incentive Plan.





1999 Stock
Incentive Plan of Onex Communications Corporation. The purpose of the
Onex Plan was to advance the interests of the shareholders by enhancing the Onex
Communications Corporation’s ability to attract, retain and motivate persons who
make (or are expected to make) important contributions to Onex Communications
Corporation by providing those persons with opportunities for equity ownership
and performance-based incentives and thereby to better align the interests of
those persons with those of the shareholders. All of Onex Communications
Corporation’s employees, officers, directors, consultants and advisors were
eligible to be granted options, restricted, stock, or other stock-based awards
under the Onex Plan. We assumed the Onex Plan in connection with our acquisition
of Onex Communications Corporation in 2001. No additional awards may be granted
under the Onex Plan.


30


Issuer
Purchases of Equity Securities




On
February 13, 2008, we announced that our Board of Directors authorized a stock
repurchase program under which we may repurchase up to $10 million of our
outstanding common stock.  The share repurchase program authorizes the
repurchase of shares through February 2010, from time to time, through
transactions in the open market or in privately negotiated
transactions.  The number of shares to be purchased and the timing of
the purchases will be based on market conditions and other
factors.  The stock repurchase program does not require us to
repurchase any specific dollar value or number of shares, and we may terminate
the repurchase program at any time.




During
the year ended December 31, 2009, we did not repurchase any
shares.


31




Item
6.    Selected Financial Data




The
following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and related notes thereto and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” appearing in Item 7 of this Form 10-K.The selected consolidated
statements of operations data as well as the selected consolidated balance
sheets data presented below are derived from our consolidated financial
statements.





Years ended December 31,2009
                                                                  
                                                                  
                                                                  2008
                                                                  
                                                                  
                                                                  2007
                                                                  
                                                                  
                                                                  2006
                                                                  
                                                                  
                                                                  2005(Amounts presented in thousands, except per share amounts)Selected
      Consolidated Statements of Operations Data:Net
      revenues
                                                                  
                                                                  $
                                                                  56,107
                                                                  
                                                                  
                                                                  $
                                                                  41,934
                                                                  
                                                                  
                                                                  $
                                                                  32,565
                                                                  
                                                                  
                                                                  $
                                                                  38,920
                                                                  
                                                                  
                                                                  $
                                                                  32,900Gross
      profit
                                                                  
                                                                  
                                                                  31,484
                                                                  
                                                                  
                                                                  
                                                                  23,894
                                                                  
                                                                  
                                                                  
                                                                  20,171
                                                                  
                                                                  
                                                                  
                                                                  28,174
                                                                  
                                                                  
                                                                  
                                                                  23,984Operating
      loss
                                                                  
                                                                  
                                                                  (9,720
                                                                  )
                                                                  
                                                                  
                                                                  (19,774
                                                                  )
                                                                  
                                                                  
                                                                  (18,800
                                                                  )
                                                                  
                                                                  
                                                                  (11,136
                                                                  )
                                                                  
                                                                  
                                                                  (14,662
                                                                  )Net
      loss (1)
                                                                  
                                                                  $
                                                                  (11,531
                                                                  )
                                                                  
                                                                  $
                                                                  (17,046
                                                                  )
                                                                  
                                                                  $
                                                                  (19,712
                                                                  )
                                                                  
                                                                  $
                                                                  (10,856
                                                                  )
                                                                  
                                                                  $
                                                                  (23,754
                                                                  )Basic
      and diluted net loss per common share
                                                                  
                                                                  $
                                                                  (0.58
                                                                  )
                                                                  
                                                                  $
                                                                  (0.99
                                                                  )
                                                                  
                                                                  $
                                                                  (1.19
                                                                  )
                                                                  
                                                                  $
                                                                  (0.70
                                                                  )
                                                                  
                                                                  $
                                                                  (1.81
                                                                  )Shares
      used in calculation of basic and diluted net loss per common
      share
                                                                  
                                                                  
                                                                  19,938
                                                                  
                                                                  
                                                                  
                                                                  17,260
                                                                  
                                                                  
                                                                  
                                                                  16,566
                                                                  
                                                                  
                                                                  
                                                                  15,600
                                                                  
                                                                  
                                                                  
                                                                  13,097





December 31,2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Selected
      Consolidated Balance Sheets Data:Cash,
      cash equivalents, restricted cash and short-term
    investments
                
                $
                5,075
                
                
                $
                15,284
                
                
                $
                34,098
                
                
                $
                57,723
                
                
                $
                72,702Total
      current assets
                
                
                23,224
                
                
                
                35,179
                
                
                
                45,527
                
                
                
                68,236
                
                
                
                80,822Working
      capital
                
                
                (2,706
                )
                
                
                8,708
                
                
                
                36,867
                
                
                
                30,323
                
                
                
                73,385Total
      non-current assets
                
                
                29,732
                
                
                
                43,248
                
                
                
                22,060
                
                
                
                14,420
                
                
                
                6,004Total
      assets
                
                
                52,956
                
                
                
                78,427
                
                
                
                67,587
                
                
                
                82,656
                
                
                
                86,826Convertible
      Notes due within one year, net of discount
                
                
                5,004
                
                
                
                —
                
                
                
                —
                
                
                
                28,811
                
                
                
                —Derivative
      liability, current
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                980
                
                
                
                —Total
      current liabilities
                
                
                25,930
                
                
                
                26,471
                
                
                
                8,660
                
                
                
                37,913
                
                
                
                7,4375.45%
      Convertible Plus Cash Notes due 2007, net of debt discount,
      long-term
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                49,1025.45%
      Convertible Notes due 2010, long-term
                
                
                —
                
                
                
                10,013
                
                
                
                25,013
                
                
                
                —
                
                
                
                —5.45%
      Convertible Notes due 2011, long-term
                
                
                3,758
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Derivative
      liability, long-term
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                6,040Total
      non-current liabilities
                
                
                14,351
                
                
                
                29,677
                
                
                
                45,259
                
                
                
                20,689
                
                
                
                76,180Total
      stockholders’ equity
                
                
                12,675
                
                
                
                22,279
                
                
                
                13,668
                
                
                
                24,054
                
                
                
                3,209




(1)
            Effective
      January 1, 2006, we adopted FASB ASC Topic 718.  As such, the
      reported net loss for 2009, 2008, 2007 and 2006 reflects stock-based
      compensation expense of $1.3 million, $1.5 million, $2.0 million and $2.4
      million, respectively.


32




Item
      7.
            Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations




Management’s
Discussion and Analysis of Financial Conditions and Results of Operations
(MD&A) is provided to supplement the accompanying consolidated financial
statements and notes in Item 8 to help provide an understanding of our financial
condition, changes in our financial condition and results of operations.
MD&A is organized as follows:




Caution
concerning forward-looking statements.    This
section discusses how certain forward-looking statements made by us throughout
the MD&A are based on management’s present expectations about future events
and are inherently susceptible to uncertainty and changes in
circumstances.




Overview.    This
section provides a general description of our business.




Critical
accounting policies and use of estimates.    This
section discusses those accounting policies that are both considered important
to our financial condition and operating results and require significant
judgment and estimates on the part of management in their
application.




Results of
operations.    This section provides an analysis of
our results of operations for the years ended December 31, 2009, 2008 and 2007.
In addition, a brief description is provided of transactions and events that
impact the comparability of the results.




Liquidity and
capital resources.    This section provides an
analysis of our cash position and cash flows, as well as a discussion of our
financing arrangements. In this section, we also summarize related party
transactions and recent accounting pronouncements not yet adopted by
us.




CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS




Management’s
Discussion and Analysis of Financial Condition and Results of Operations contain
forward-looking statements that involve risks and uncertainties. When used in
this report, the words, “intend,” “anticipate,” “believe,” “estimate,” “plan,”
“expect” and similar expressions as they relate to us are included to identify
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of factors,
including those set forth under “Item 1A Risk Factors” and elsewhere in this
report. You should read this discussion in conjunction with the consolidated
financial statements and the notes thereto included in this report.




OVERVIEW




TranSwitch
designs, develops and markets innovative semiconductor solutions that provide
core functionality for voice, data and video communications network equipment.
We supply innovative highly-integrated semiconductor solutions that provide core
functionality for communications network equipment which is supplied to the
world-wide telecommunications industry.  In this market, TranSwitch
offers a broad range of next-generation telecom products addressing both copper
and fiber-based broadband access, optical transport, carrier Ethernet, and
Voice-over-Internet Protocol (VoIP) applications. Also, we deliver
standards-based products and technologies that enable the transmission and
reception of high-speed, high-definition content and data to third-party
semiconductor companies, consumer electronics manufacturers, and OEMs
worldwide.  The standards that are supported today by these products
include Fast Ethernet, Gigabit Ethernet, HDMI, and DisplayPort. Our customers
are the original equipment manufacturers (“OEMs”) who supply wire-line and
wireless network operators who provide voice, data and video services to end
users such as consumers, corporations, municipalities, etc.  We have
approximately 150 active customers, including the leading global equipment
providers, and our products are deployed in the networks of the major service
providers around the world.




TranSwitch
is a Delaware corporation incorporated on April 26, 1988. Our common stock
trades on The NASDAQ Capital Market under the symbol “TXCC.”




Our
products and services are compliant with relevant communications network
standards.  We offer several products that combine multi-protocol
capabilities on a single chip, enabling our customers to develop network
equipment for triple play (voice, data and video) applications. A key attribute
of our products is their inherent flexibility. Many of our products incorporate
embedded programmable micro-processors, enabling us to rapidly accommodate new
customer requirements or evolving network standards by modifying the
functionality of the device via software instructions.


33


We bring
value to our customers through our communications systems expertise, very large
scale integration (“VLSI”) design skills and commitment to excellence in
customer support. Our emphasis on technical innovation results in defining and
developing products that permit our customers to achieve faster time-to-market
and to develop communications systems that offer a host of benefits such as
greater functionality, improved performance, lower power dissipation, reduced
system size and cost, and greater reliability for their customers.





Our
revenues were $56.1 million in 2009, $41.9 million in 2008 and $32.6 million in
2007.  Despite our revenues being depressed by our world-wide
recession, we view 2009 as another successful year for us. During 2009 we
completed our integration of our acquisition of Centillium and further
diversified our product portfolio to include rapidly growing Fiber-to-the-Home
(FTTH) and VoIP solutions. The combination strengthens our leadership position
in the next-generation communications semiconductor market. The combined
companies will have greater scale, a significantly improved expense structure
and a truly global reach. In addition to growing our revenue streams, we are
focusing on improving our gross margin both by reducing costs on lower margin
products and working to increase sales of higher margin products.





We
continued our move toward profitability by reducing our operating loss from 2008
and 2007 both in dollar amount and as a percentage of revenue. This was achieved
through strict cost control measures and the implementation of a force reduction
plan in both TranSwitch and Centillium.  In the fourth quarter of
2008, we were also able to enter into an agreement with certain holders of our
2010 Notes to purchase $15.0 million of the aggregate principal amount for $9.9
million in cash, plus accrued and unpaid interest. This enabled us to reduce our
long-term debt by 60% and also realize a $4.5 million gain. In the fourth
quarter of 2009, we entered into an agreement with our note holders to exchange
the remaining $10 million of 2010 notes for an equal aggregate principal amount
of new 5.45% notes maturing in September of 2011. These 2011 notes call for
monthly principal and interest payments that could, under certain conditions, be
paid in our stock.





On
December 31, 2009, we entered into a Common Stock Purchase Agreement with
Seaside 88, LP, a Florida limited partnership (“Seaside”), relating to the
offering and sale of up to 1,950,000 shares of our common
stock.  The Common Stock Purchase Agreement requires us to issue
and sell, and Seaside to purchase, up to 75,000 shares of Common Stock once
every two (2) weeks, subject to the satisfaction of customary closing
conditions, beginning on January 4, 2010 and ending on or about the date that is
fifty (50) weeks subsequent to that initial closing.  Such offering and
sale is made pursuant to our shelf registration statement on Form S-3 (File No.
333-162609), which was declared effective by the SEC on October 28, 2009. 
The offering price of the Common Stock at each closing is an amount equal to the
lower of (i) the daily volume weighted average of actual trading prices of the
Common Stock on the trading market (the “VWAP”) for the ten consecutive trading
days immediately prior to a closing date multiplied by 0.875 and (ii) the VWAP
for the trading day immediately prior to a closing date multiplied by
0.90.  In the event that the 3-Day VWAP, as defined in the Common
Stock Purchase Agreement, does not equal or exceed $1.00 (the “Floor”), as
calculated with respect to any subsequent closing date, then such subsequent
closing will not occur, and there will be one fewer subsequent closing and the
aggregate number of Shares to be purchased under the Common Stock Purchase
Agreement will be reduced by 75,000 shares for each subsequent closing that does
not occur because the Floor has not been reached.  We have agreed to
indemnify and hold harmless Seaside against certain liabilities in connection
with the issuance and sale of the shares of our common stock under the Common
Stock Purchase Agreement.  The price per share for the initial Closing
was $1.6025, and we raised gross proceeds of approximately $120,000 at such
closing, before estimated offering expenses of approximately
$33,545.  Proceeds from subsequent closings are dependent on the VWAP
calculations as provided above.




CRITICAL
ACCOUNTING POLICIES AND USE OF ESTIMATES




Our
consolidated financial statements and related disclosures, which are prepared to
conform with accounting principles generally accepted in the United States of
America (U.S. GAAP), require us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses during the
period reported. We are also required to disclose amounts of contingent assets
and liabilities at the date of the consolidated financial statements. Our actual
results in future periods could differ from those estimates and assumptions.
Estimates and assumptions are reviewed periodically, and the effects of
revisions are reflected in the consolidated financial statements in the period
they are determined to be necessary.


34




We
consider the most critical accounting policies and uses of estimates in our
consolidated financial statements to be those relating to:




(1)
recognizing net revenues, cost of revenues and gross profit;




(2)
estimating allowances for doubtful accounts;




(3)
estimating the derivative liability associated with our 5.45% Convertible Plus
Cash Notes due 2007;




(4)
estimating assumptions used in the calculation of stock-based
compensation;




(5)
estimating values for goodwill and long-lived assets;




(6)
estimating excess inventories;




(7)
estimating restructuring liabilities; and




(8)
estimating values of investments in non-publicly traded companies.




These
accounting policies, the bases for these estimates and their potential impact to
our consolidated financial statements, should any of these estimates change, are
further described as follows:




Net Revenues,
Cost of Revenues and Gross Profit.    Net revenues
are primarily comprised of product shipments, principally to domestic and
international telecommunications and data communications OEMs and to
distributors. Net revenues from product sales are recognized at the time of
product shipment when the following criteria are met: (1) persuasive evidence of
an arrangement exists; (2) title and risk of loss transfers to the customer; (3)
the selling price is fixed or determinable; and (4) collectability is reasonably
assured. Agreements with certain distributors provide price protection and
return and allowance rights. With respect to recognizing revenues from our
distributors: (1) the prices are fixed at the date of shipment from our
facilities; (2) payment is not contractually or otherwise excused until the
product is resold; (3) we do not have any obligations for future performance
relating to the resale of the product; and (4) the amount of future returns,
allowances, refunds and costs to be incurred can be reasonably estimated and are
accrued at the time of shipment. Service revenues are recognized when the
following criteria are met: (1) persuasive evidence of an arrangement exists;
(2) we have performed a service in accordance with our contractual obligations;
(3) the fee is fixed or determinable; and (4) collectability is reasonably
assured.




At the
time of shipment, we record a reduction to revenue (with a related liability) to
accrue for future price protection. This liability is established based on
historical experience, contractually agreed-to provisions and future shipment
forecasts. Such accruals have been insignificant for the last three
years.




We also
accrue, at the time of shipment, a reduction to revenue (with a related
liability) and an inventory asset against product cost of revenues in order to
establish a provision for the gross margin related to future returns under our
distributor stock rotation program. Such accruals related to reductions of
revenue were $0.6 million and less than $0.1 million at December 31, 2009 and
2008, respectively.  The accruals related to inventory assets are
insignificant to our financial position and results of operations for all
periods presented.  Should our actual experience differ from our
estimated liabilities, there could be adjustments (either favorable or
unfavorable) to our net revenues, cost of revenues and gross
profits.




We
warranty our products for up to one year from the date of shipment. Warranty
expense is insignificant to all periods presented.





We
license HDMI and other intellectual property.  Revenues from licensing
arrangements generally consist of multiple elements such as license,
implementation and maintenance services. The items (deliverables) included in
the arrangements are evaluated to determine whether they represent separate
units of accounting. We perform this evaluation at the inception of an
arrangement and as we deliver each item in the arrangement.





Generally,
we account for a deliverable (or a group of deliverables) separately if (1) the
delivered item(s) has standalone value to the customer, (2) there is objective
and reliable evidence of the fair value of the undelivered items included in the
arrangement, and (3) if we have given the customer a general right of return
relative to the delivered items, delivery or performance of the undelivered
items or services are probable and substantially in our
control.


35




We also
recognize revenue from royalties upon notification of sale by our licensees. The
terms of the royalty agreements generally require licensees to give us
notification and to pay royalties within 45 days of the end of the quarter
during which the sales by the licensees take place.




Estimated
Allowances for Doubtful Accounts.  We record allowances for
doubtful accounts for estimated losses based upon specifically identified
amounts that we believe to be uncollectible along with our assessment of the
general financial condition of our customer base. If our actual collections
experience changes, revisions to our allowances may be required. We have a
limited number of customers with individually large amounts due at any given
balance sheet date. Any unanticipated change in one of those customers’
creditworthiness or other matters affecting the collectibility of amounts due
from such customers could have a material effect on our results of operations in
the period in which such changes or events occur.




Derivative
Liability Associated with
our 5.45% Convertible Plus Cash Notes due 2007.The holder’s
conversion right contained in the terms governing our 5.45% Convertible Plus
Cash Notes due 2007 (the “Plus Cash Notes”) was not clearly and closely related
to the characteristics of the Plus Cash Notes upon issuance. Accordingly, this
feature qualified as an embedded derivative instrument and, because it does not
qualify for any scope exception, it is required to be accounted for separately
from the debt instrument and recorded as a derivative financial
instrument.




During
the years ended December 31, 2009 and 2008, there were no Plus Cash Notes
outstanding. During the year ended December 31, 2007, we recorded other income
of $1.0 million all of which related to the holder’s conversion right, to
reflect the change in fair value of our derivative liability.




We adjust
the derivative financial instruments to their estimated fair value and analyze
the instruments to determine their classification as a liability or equity. As
of December 31, 2009, 2008 and 2007, the estimated fair value of our derivative
liability was zero as these Plus Cash Notes due 2007 were no longer outstanding.
On July 6, 2007, the Company exchanged approximately $21.2 million aggregate
principal amount of its outstanding Plus Cash Notes for an equivalent principal
amount of a new series of 5.45% Convertible Notes due September 30, 2010 (the
“2010 Notes”).  The remaining $8.9 million balance of the Plus Cash
Notes was redeemed at par value at the end of September, 2007.  The
2010 Notes were subsequently exchanged in October 2009 for an equivalent
principal amount of 5.45% Convertible Notes due September 30,
2011.  The estimated fair value of the holder’s conversion right was
determined using a lattice (trinomial) option-pricing model, while it was
estimated.




Stock-based
Compensation. Determining the amount of stock-based compensation
for awards granted includes selecting an appropriate model to calculate fair
value at the grant date. We have used the Black-Scholes option valuation model
to value employee stock option awards. Certain inputs to this valuation model
require considerable judgment. These inputs include estimating the volatility of
our stock, the expected life of the option awarded and the forfeiture rate. We
have estimated volatility, the expected life and the forfeiture rate based on
historical data. Volatility is estimated over a term that approximates the
expected life of the option awarded.




Goodwill and
Long-Lived Assets.   Our goodwill is tested for impairment
annually or more frequently if events or changes in circumstances indicate that
the asset might be impaired.  We perform impairment reviews using a
fair-value method and discounted cash flow models with estimated cash flows
based on internal forecasts which include terminal values based on current
market valuation metrics.  The fair value represents the amount at
which a reporting unit could be bought or sold in a current transaction between
willing parties on an arms-length basis.  In estimating fair value, we
use our common stock’s market price to determine fair value and other valuation
metrics. The estimated fair value is then compared with the carrying amount of
the reporting unit, including goodwill.  In addition, we perform
discounted cash flow analysis on the entity to determine fair
value.  We are subject to financial statement risk to the extent that
the carrying amount exceeds the estimated fair value.




During
the fourth quarter of 2009, impairment testing we performed indicated that the
estimated fair values of two reporting units tested were less than their
corresponding carrying amounts. As a result of the analyses performed, we
recorded a goodwill impairment charge of $10.1 million. The impaired goodwill
related to business acquisitions in 2007 and 2006.




Indefinite
lived intangible assets are subject to annual impairment testing, as
well.  On an annual basis, the fair value of the indefinite lived
assets is evaluated by us to determine if an impairment charge is required. We
have only nominal amounts of indefinite lived assets.


36




We review
long-lived assets for impairment when events or changes in business
circumstances indicate the carrying amount of the assets may not be fully
recoverable.  If such indicators are present, we perform undiscounted
operating cash flow analyses to determine if impairment exists.  If
impairment is determined to exist, any related impairment loss is calculated
based on fair value.




A
considerable amount of management judgment and assumptions are required in
performing impairment tests.  While we believe that our judgments and
assumptions were reasonable, different assumptions could change the estimated
fair values and, therefore, additional impairment charges could be
required.




Estimated Excess
Inventories.    We periodically review our inventory
levels to determine if inventory is stated at the lower of cost or net
realizable value. The telecommunications and data communications industries have
experienced a significant downturn during the past few years and, as a result,
we have had to evaluate our inventory position based on known backlog of orders,
projected sales and marketing forecasts, shipment activity and inventory held at
our significant distributors.  We recorded charges for excess and
obsolete inventories totaling approximately $0.7 million in 2009, $0.3 million
in 2008 and $0.4 million in 2007.




During
2009, 2008 and 2007, we recorded net product revenues of approximately $3.0
million, $4.8 million and $3.5 million, respectively, on shipments of excess and
obsolete inventory that had previously been written down to their estimated net
realizable value of zero. This resulted in almost 100% gross margin on these
product revenues. Had these products been sold at our historical average cost
basis, gross margin on these revenues would have been 51%, 64% and 64% in 2009,
2008 and 2007 respectively. We currently do not anticipate that a significant
amount of the excess and obsolete inventories subject to the write-downs
described above will be used in the future based upon our current demand
forecast. Should our actual future demand exceed the estimates that we used in
writing down our excess and obsolete inventories, we will recognize a favorable
impact to cost of revenues and gross profits. Should demand fall below our
current expectations, we may record additional inventory write-downs which will
result in a negative impact to cost of revenues and gross profits.




Estimated
Restructuring Liabilities.    During 2009, we
recorded net restructuring credits of $6.3 million related to new sublease
agreements we entered into during 2009 for unused space in our Shelton,
Connecticut location which were partially offset by charges related to workforce
reductions and other restructuring adjustments. During 2008 and 2007, we
recorded restructuring charges and asset impairments totaling $3.8 million and
$1.5 million, respectively, related to employee termination benefits and costs
to exit certain facilities, net of sub-lease benefits. At December 31, 2009 and
2008, the restructuring liabilities were $12.4 million and $25.4 million,
respectively, on our consolidated balance sheets. Restructuring liabilities at
December 31, 2009 include approximately $12.1 million of liabilities for
facility lease costs (Refer to Note 16 – Restructuring and Asset Impairment
Charges of the Notes to Consolidated Financial Statements). These facility
operating leases expire in 2017. The future cash outlays for all of our
operating lease commitments are discussed in Note 17 of the Notes to
Consolidated Financial Statements.  Certain assumptions are used by us
to derive this estimate, including future maintenance costs, price escalation
and sublease income derived from these facilities. Should we negotiate
additional sublease rental income agreements or reach a settlement with our
lessors to be released from our existing obligations, we could realize a
favorable benefit to our results of future operations. Should future lease,
maintenance or other costs related to these facilities exceed our estimates, we
could incur additional expenses in future periods.




Valuation of
Investments in Non-Publicly Traded Companies.    Since
1999, we have been making strategic equity investments in non-publicly traded
companies that develop technologies that are complementary to our product road
map. Depending on our level of ownership and whether or not we have the ability
to exercise significant influence, we account for these investments on either
the cost or equity method, and review such investments periodically for
impairment. The appropriate reductions in carrying values are recorded when, and
if, necessary. The process of assessing whether a particular investment’s net
realizable value is less than its carrying cost requires a significant amount of
judgment. In making this judgment, we carefully consider the investee’s cash
position, projected cash flows (both short and long-term), financing needs, most
recent valuation data, the current investing environment, management / ownership
changes, and competition. This evaluation process is based on information that
we request from these privately held companies. This information is not subject
to the same disclosure and audit requirements as the reports required of U.S.
public companies, and as such, the reliability and accuracy of the data may
vary. Based on our evaluations, we recorded impairment charges related to our
investments in non-publicly traded companies of less than $0.1 million, zero and
$0.1 million during 2009, 2008 and 2007, respectively. The total investment in
non-public companies was $3.0 million as of both December 31, 2009 and 2008.
(For further discussion, please refer to Note 6. Investments in Non-Publicly
Traded Companies and Venture Capital Funds in our Consolidated Financial
Statements). We used the modified equity method of accounting to determine the
impairment loss for certain investments, as it was determined that no better
current evidence of the value of our cost method investments existed and we
believe that this gives us the best basis for our estimate given the historic
negative cash flows of these companies. The modified equity method of accounting
results in recording an impairment loss on a cost method investment equal to the
investor’s proportionate share of the investee’s losses as its contributed
capital is consumed to fund operating losses of the investee from the inception
of the investor’s investment.


37




RESULTS
OF OPERATIONS




The
results of operations that follow should be read in conjunction with our
critical accounting policies and estimates summarized above as well as our
consolidated financial statements and notes thereto contained in Item 8 of this
report. The following table sets forth certain consolidated statements of
operations data as a percentage of net revenues for the periods
indicated.





Years ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Net
      revenues:Product
      revenues
                    
                    
                    90
                    %
                    
                    
                    95
                    %
                    
                    
                    90
                    %Service
      revenues
                    
                    
                    10
                    %
                    
                    
                    5
                    %
                    
                    
                    10
                    %Total
      net revenues
                    
                    
                    100
                    %
                    
                    
                    100
                    %
                    
                    
                    100
                    %Cost
      of revenues:Product
      cost of revenues
                    
                    
                    38
                    %
                    
                    
                    40
                    %
                    
                    
                    32
                    %Provision
      for excess and obsolete inventories
                    
                    
                    1
                    %
                    
                    
                    1
                    %
                    
                    
                    1
                    %Service
      cost of revenues
                    
                    
                    5
                    %
                    
                    
                    2
                    %
                    
                    
                    5
                    %Total
      cost of revenues
                    
                    
                    44
                    %
                    
                    
                    43
                    %
                    
                    
                    38
                    %Gross
      profit
                    
                    
                    56
                    %
                    
                    
                    57
                    %
                    
                    
                    62
                    %Operating
      expenses:Research
      and development
                    
                    
                    34
                    %
                    
                    
                    58
                    %
                    
                    
                    67
                    %Marketing
      and sales
                    
                    
                    19
                    %
                    
                    
                    21
                    %
                    
                    
                    32
                    %General
      and administrative
                    
                    
                    14
                    %
                    
                    
                    16
                    %
                    
                    
                    17
                    %Restructuring
      charge and asset impairment, net
                    
                    
                    6
                    %
                    
                    
                    9
                    %
                    
                    
                    4
                    %Total
      operating expenses
                    
                    
                    73
                    %
                    
                    
                    104
                    %
                    
                    
                    120
                    %Operating
      loss
                    
                    
                    (17
                    )%
                    
                    
                    (47
                    )%
                    
                    
                    (58
                    )%


38




Comparison
of Fiscal Years 2009 and 2008




Net
Revenues. We have two product line categories: Network
Infrastructure and Customer Premises Equipment (CPE). Our Network Infrastructure
product lines include our Optical Transport, Carrier Ethernet, Media Gateway
using VoIP Technology and Broadband Access product line technologies and other
Non-Telecommunications products. The Optical Transport product line is
incorporated into OEM systems that improve the efficiency of fiber optic
networks and in the process increase the overall network capacity. Media
gateway/VoIP products are used in carrier-class and enterprise-class media
gateways and access gateways and used in residential gateway markets. The
Broadband Access product line is incorporated into OEM systems that allow
telecommunications service providers to transition their legacy voice networks
to support next generation services such as voice, data and video. The Carrier
Ethernet product line allows carriers to provide robust and differentiated
services using Ethernet technology in their wide-area networks. The
Non-Telecommunications product line consists of non-telecommunications ASIC
products. Our CPE product line category includes Multi-Service Communications
Processors used in broadband modems or to be added as part of a small office,
home office, or SOHO, network and HDMI, DisplayPort and Ethernet IP Cores which
have been incorporated into a number of consumer electronics and PC
appliances.




The
following table summarizes our net revenue mix by product line
category:





(Tabular dollars in thousands)
                      
                      Year Ended
                        December 31, 2009
                      
                      
                      Year Ended
                        December 31, 2008Revenues
                      
                      
                      Percent of
                        Total
                        Revenues
                      
                      
                      Revenues
                      
                      
                      Percent of
                        Total
                        Revenues
                      
                      
                      Percentage
                        Increase
                        (Decrease) in
                        RevenuesNetwork
      Infrastructure
                      
                      $
                      34,988
                      
                      
                      
                      62
                      %
                      
                      $
                      34,932
                      
                      
                      
                      83
                      %
                      
                      
                      —Customer
      Premises Equipment
                      
                      
                      21,119
                      
                      
                      
                      38
                      %
                      
                      
                      7,002
                      
                      
                      
                      17
                      %
                      
                      
                      202
                      %Total
                      
                      $
                      56,107
                      
                      
                      
                      100
                      %
                      
                      $
                      41,934
                      
                      
                      
                      100
                      %
                      
                      
                      34
                      %




Total net
revenues in 2009 were $56.1 million as compared to $41.9 million in 2008, an
increase of $14.2 million or 34%.  Our product revenues for 2009 were
$50.7 million, a 27% increase compared to 2008 and our service revenues which
consist of design services performed for third parties on a contract basis and
HDMI and technology licenses were $5.4 million, a 180% increase compared to
2008. The increase in net revenue for 2009 compared to 2008 includes
approximately $21.9 million of increased sales as a result of the acquisition of
Centillium in the fourth quarter of 2008.  This was partially offset
by decreased revenues from some of our legacy products and our
non-telecommunications ASIC products.




Our 2009
Network Infrastructure revenues of approximately $35.0 million were flat with
2008 revenues. These 2009 revenues included increased sales of our Entropia
products which were offset by decreased sales of our non-telecommunications ASIC
products and our E1Mx21 product. Our 2009 CPE revenues were approximately $21.1
million, a $14.1 million increase as compared to 2008 revenues. This increase
was attributable to increased sales from our Atlanta and Mustang
products.




For 2009
and 2008 international net revenues were approximately 70% and 85%,
respectively, of net revenues.




As of
December 31, 2009 our backlog was $11.3 million, as compared to $8.3 million as
of December 31, 2008. Backlog represents firm orders anticipated to be shipped,
and service revenue expected to be billed under existing contracts, during the
next 12 months. Our business and, to a large extent, that of the entire
communication semiconductor industry, is characterized by short-term order and
shipment schedules. Since orders constituting our current backlog are subject to
changes in delivery schedules or to cancellation at the option of the purchaser
without significant penalty, backlog is not necessarily indicative of future
revenues.


39




Gross
Profit. Gross
profit was $31.5 million and $23.9 million for the years ended December 31, 2009
and 2008, respectively. Gross profit increased by approximately $7.6 million for
2009 as compared to 2008 while the gross profit as a percentage of revenue
decreased by approximately 1%.  This is a result of increased revenues
from our newly acquired Centillium products.




During
the years ended December 31, 2009 and 2008, gross profit was affected favorably
in the amount of $1.3 million and $1.6 million, respectively, from the sales of
products that had previously been written down to a cost basis of zero. Also
during the years ended December 31, 2009 and 2008, we recorded provisions for
excess and obsolete inventories in the amount of $0.7 million and $0.3 million,
respectively. These charges had a negative impact on our gross
profit.




We
anticipate that gross profit will continue to be impacted by fluctuations in the
volume and mix of our product shipments as well as material costs, yield and the
fixed cost absorption of our production operations.




Research and
Development.    Research and development expenses
consist primarily of salaries and related costs of employees engaged in
research, design and development activities, costs related to electronic design
automation tools, subcontracting and fabrication costs, depreciation and
amortization and facilities expenses. Research and development expenses for 2009
were $19.1 million which decreased $5.4 million, or 22% as compared to the prior
year. This decrease was a result of decreased depreciation for computer chip
design tools and decreases in facilities costs and salaries and employee related
costs as a result of workforce reductions and other cost cutting measures that
were implemented in 2008 partially offset by increased expenses due to the
acquisition of Centillium.




Marketing and
Sales.    Marketing and sales expenses consist
primarily of personnel-related expenses, trade shows, travel expenses and
facilities expenses. Marketing and sales expenses for 2009 were $10.4 million
which increased $1.6 million, or 18% as compared to the prior year. This
increase was a result of increased commissions due to increased revenues and
increased salaries, amortization of purchase accounting intangibles and other
expenses due to the acquisition of Centillium.  These expense
increases were partially offset by decreased employee related expenses as a
result of workforce reductions and other cost cutting measures that were
implemented in 2008.




General and
Administrative.   General and administrative
(G&A) expenses consist primarily of personnel-related expenses,professionaland legal fees, and facilities expenses.G&A expenses were $8.0
million in 2009, an increase of approximately $1.4 million or 20% compared to
the prior year.  The increase was a result of increased legal fees and
other increased expenses due to the acquisition of Centillium.




Restructuring(Credits)Charges, net.   During
the years ended December 31, 2009 and 2008, we recorded net restructuring
credits of approximately $6.3 million and net restructuring charges of $3.8
million, respectively. Information on restructuring credits and charges for each
of the last two years is located in Note 16 of the Notes to Consolidated
Financial Statements.




Impairment of
Goodwill.For 2009 and 2008, we
recorded goodwill impairment charges of $10.1 million and zero, respectively.
Information on the impairment of goodwill recorded during 2009 is located in
Note 1 and Note 9 of the Notes to Consolidated Financial
Statements.




Change in Fair
Value of the Derivative Liability.For 2009 and 2008, we
recorded other expense of zero and approximately $0.3 million, respectively, to
reflect the change in the fair value of the derivative liabilities.




During
the first quarter of 2008 we entered into a number of foreign exchange contracts
to purchase Indian rupees to fund our India operations. For the year ended
December 31, 2008, we recorded other expense of approximately $0.3 million to
reflect the change in the fair value of these derivative financial instruments.
There were no foreign exchange contracts outstanding at December 31, 2009 or
December 31, 2008.




Gain/Loss on
Extinguishment of Debt.We had no gain or loss on the
extinguishment of debt during 2009.  On December 24, 2008, we entered
into an agreement with certain holders of our 5.45% Convertible Notes due 2010
(the “2010 Notes”) to purchase $15.0 million aggregate principal amount of the
Notes for $9.9 million in cash, plus accrued and unpaid interest.  As
a result of this transaction, we recorded a $4.5 million gain on the
extinguishment of debt in 2008.


40




Interest Expense
net.Interest expense, net was approximately $0.7
million in 2009, a decrease of $0.3 million as compared to 2008.




Interest
expense decreased from $1.9 million in 2008 to $0.8 million in 2009 due to lower
debt balances resulting from the extinguishment of $15.0 million of our 2010
Notes during the fourth quarter of 2008 and payments made during 2009 on our
2011 Notes of approximately $1.2 million.




Interest
income decreased from $0.9 million in 2008 to $0.1 million in 2009 as a result
of lower market yields due to decreased interest rates and lower cash and
investment balances. At December 31, 2009 and 2008, the effective interest rates
on our interest-bearing securities were approximately 0.43% and 1.63%,
respectively.




Income Tax
Expense.  Our income tax expense of $0.4 million in 2009 and
$0.5 million in 2008 is applicable to the operating results of certain of our
foreign subsidiaries.  We have incurred significant taxable losses for
U.S. federal and state purposes. We have not recognized any income tax benefits
on those losses because their realization is uncertain.




Comparison
of Fiscal Years 2008 and 2007




Net
Revenues. We have two product line categories: Network
Infrastructure and Customer Premises Equipment (CPE). Our Network Infrastructure
product lines include our Optical Transport, Carrier Ethernet, Media Gateway
using VoIP Technology and Broadband Access product line technologies and other
Non-Telecommunications products. The Optical Transport product line is
incorporated into OEM systems that improve the efficiency of fiber optic
networks and in the process increase the overall network capacity. Media
gateway/VoIP products are used in carrier-class and enterprise-class media
gateways and access gateways and used in residential gateway markets. The
Broadband Access product line is incorporated into OEM systems that allow
telecommunications service providers to transition their legacy voice networks
to support next generation services such as voice, data and video. The Carrier
Ethernet product line allows carriers to provide robust and differentiated
services using Ethernet technology in their wide-area networks. The
Non-Telecommunications product line consists of non-telecommunications ASIC
products. Our CPE product line category includes Multi-Service Communications
Processors  used in broadband modems or to be added as part of a small
office, home office, or SOHO, network and HDMI, DisplayPort and Ethernet IP
Cores which have been incorporated into a number of consumer electronics and PC
appliances.  The following table summarizes our net revenue mix by
product line category:





(Tabular dollars in thousands)
                      
                      Year Ended
                        December 31, 2008
                      
                      
                      Year Ended
                        December 31, 2007Revenues
                      
                      
                      Percent of
                        Total
                        Revenues
                      
                      
                      Revenues
                      
                      
                      Percent of
                        Total
                        Revenues
                      
                      
                      Percentage
                        Increase
                        (Decrease) in
                        RevenuesNetwork
      Infrastructure
                      
                      $
                      34,932
                      
                      
                      
                      83
                      %
                      
                      $
                      29,836
                      
                      
                      
                      92
                      %
                      
                      
                      17
                      %Customer
      Premises Equipment
                      
                      
                      7,002
                      
                      
                      
                      17
                      %
                      
                      
                      2,729
                      
                      
                      
                      8
                      %
                      
                      
                      157
                      %Total
                      
                      $
                      41,934
                      
                      
                      
                      100
                      %
                      
                      $
                      32,565
                      
                      
                      
                      100
                      %
                      
                      
                      29
                      %




Total net
revenues in 2008 were $41.9 million as compared to $32.6 million in 2007, an
increase of $9.3 million or 29%.  Our product revenues for 2008 were
$40.0 million, a 36% increase compared to 2007 and our service revenues which
consist of design services performed for third parties on a contract basis and
HDMI and technology licenses were $1.9 million, a 41% decrease compared to 2007.
The increase in net revenue for 2008 compared to 2007 includes approximately
$6.2 million of increased sales as a result of the acquisition of Centillium in
the fourth quarter of 2008.


41




Our 2008
Network Infrastructure revenues were approximately $34.9 million, a $5.1 million
increase as compared to 2007 revenues. These 2008 revenues included increased
sales of our non-telecommunications ASIC products and our Entropia, L3M, E1Mx21
and ET family products which were offset by decreased sales of our ASPEN, ASPEN
Express and CUBIT-PRO products. Our 2008 CPE revenues were approximately $7.0
million, a $4.3 million increase as compared to 2007 revenues. This increase was
attributable to increased sales from our Apollo, Atlanta and Mustang products,
which are new product lines from the acquisition of Centillium.




For 2008
and 2007 international net revenues were approximately 85% and 79%,
respectively, of net revenues.




As of
December 31, 2008 our backlog was $8.3 million, as compared to $4.6 million as
of December 31, 2007. Backlog represents firm orders anticipated to be shipped,
and service revenue expected to be billed under existing contracts, during the
next 12 months. Our business and, to a large extent, that of the entire
communication semiconductor industry, is characterized by short-term order and
shipment schedules. Since orders constituting our current backlog are subject to
changes in delivery schedules or to cancellation at the option of the purchaser
without significant penalty, backlog is not necessarily indicative of future
revenues.




Gross
Profit. Gross
profit was $23.9 million and $20.2 million for the years ended December 31, 2008
and 2007, respectively. Gross profit increased by approximately $3.7 million for
2008 as compared to 2007 while the gross profit as a percentage of revenue
decreased by approximately 5%.  This is a result of increased revenue
from our lower margin ASIC and newly acquired Centillium
products.




During
the years ended December 31, 2008 and 2007, gross profit was affected favorably
in the amount of $1.6 million and $1.2 million, respectively, from the sales of
products that had previously been written down to a cost basis of zero. Also
during the years ended December 31, 2008 and 2007, we recorded provisions for
excess and obsolete inventories in the amount of $0.3 million and $0.4 million,
respectively. These charges had a negative impact on our gross
profit.




We
anticipate that gross profit will continue to be impacted by fluctuations in the
volume and mix of our product shipments as well as material costs, yield and the
fixed cost absorption of our production operations.




Research and
Development.    Research and development expenses
consist primarily of salaries and related costs of employees engaged in
research, design and development activities, costs related to electronic design
automation tools, subcontracting and fabrication costs, depreciation and
amortization and facilities expenses. Research and development expenses for 2008
were $24.6 million which increased $2.9 million, or 13% as compared to the prior
year.  This increase was a result of increased expenses due to the
acquisition of Centillium and increased expenses due to our HDMI development
program partially offset by decreased depreciation and amortization and
decreases in salaries and subcontracting costs as a result of workforce
reductions and other cost cutting measures that were implemented in 2007 and
2008.




Marketing and
Sales.    Marketing and sales expenses consist
primarily of personnel-related, trade show, travel and facilities expenses.
Marketing and sales expenses for 2008 were $8.8 million which decreased $1.4
million, or 14% as compared to the prior year. These expense decreases were
primarily from lower salaries and employee related expenses partially offset by
increased marketing and sales expenses due to the acquisition of
Centillium.




General and
Administrative.   General and administrative
(G&A) expenses consist primarily of personnel-related expenses, professional
and legal fees, and facilities expenses.G&A expenses were $6.7
million in 2008, an increase of approximately $1.1 million or 19% compared to
the prior year.  The increase was due to increased expenses due to the
acquisition of Centillium.




Restructuring
Charges.   We
recorded restructuring charges of $3.8 million and $1.4 million for 2008 and
2007, respectively.  Information on restructuring charges and asset
impairments for each of the last two years is located in Note 16 of the Notes to
Consolidated Financial Statements.


42




Change in Fair
Value of the Derivative Liability.For 2008 and 2007, we
recorded other expense of approximately $0.3 million and other income of
approximately $1.0 million, respectively, to reflect the change in the fair
value of the derivative liabilities.




During
the first quarter of 2008 we entered into a number of foreign exchange contracts
to purchase Indian rupees to fund our India operations. For the year ended
December 31, 2008, we recorded other expense of approximately $0.3 million to
reflect the change in the fair value of these derivative financial instruments.
There were no foreign exchange contracts outstanding at December 31,
2008.




For the
year ended December 31, 2007, we recorded other income of approximately $1.0
million to reflect the change in the fair value of the derivative liability
resulting from the 5.45% Convertible Plus Cash Notes due 2007 (“Plus Cash
Notes”).   (Refer to Note 15 – Convertible Notes of the Notes to
Consolidated Financial Statements). There were no Plus Cash Notes outstanding at
December 31, 2008 and 2007.




Gain/Loss on
Extinguishment of Debt.On December 24, 2008, we entered into
an agreement with certain holders of our 5.45% Convertible Notes due 2010 (the
“2010 Notes”) to purchase $15.0 million aggregate principal amount of the Notes
for $9.9 million in cash, plus accrued and unpaid interest.  As a
result of this transaction, we recorded a $4.5 million gain on the
extinguishment of debt in 2008.




On July
6, 2007, we exchanged approximately $21.2 million aggregate principal amount of
our outstanding Plus Cash Notes for an equivalent principal amount of the 2010
Notes.  As a result, we recognized a $0.4 million extinguishment loss
in 2007.




Interest Expense
net.Interest expense, net decreased approximately $0.1
million to $1.0 million in 2008.




Interest
expense decreased from $3.6 million in 2007 to $1.9 million in 2008 due to lower
debt balances resulting from the exchanges of our Plus Cash Notes in 2007, the
payment at maturity of the remaining outstanding Plus Cash Notes in 2007 and the
elimination of the debt discount associated with the Plus Cash Notes during
2007.




Interest
income decreased from $2.5 million in 2007 to $0.9 million in 2008 as a result
of lower market yields due to decreased interest rates and lower cash and
investment balances. At December 31, 2008 and 2007, the effective interest rates
on our interest-bearing securities were approximately 1.63% and 4.70%,
respectively.





Income Tax
Expense.  Our income tax expense of $0.5 million in 2008 and
$0.3 million in 2007 is applicable to the operating results of certain of our
foreign subsidiaries.  We have incurred significant taxable losses for
U.S. federal and state purposes. We have not recognized any income tax benefits
on those losses because their realization is uncertain.




LIQUIDITY
AND CAPITAL RESOURCES




As of
December 31, 2009, we had cash, cash equivalents, restricted cash and short-term
investments of approximately $5.1 million compared to $15.3 million as of
December 31, 2008. Further, our working capital was a negative ($2.7) million
compared to $8.7 million last year. Our primary source of liquidity is cash,
cash equivalents and a bank line of credit. We have used cash in our operating
activities in each of the last three years, including $9.1 million in 2009,
$18.5 million in 2008 and $12.8 million in 2007. During 2009 we reduced our
notes payable from $10.0 million as of December 31, 2008 to $8.8 million as of
December 31, 2009.




In the fourth quarter 2008, we
implemented restructuring plans that included the elimination of approximately
76 positions, primarily in our Shelton, Connecticut, Bedford, Massachusetts,
Fremont, California, Eclubens, Switzerland, New Delhi, India and Bangalore,
India locations. We continued to reduce expenses in 2009 and in the first
quarter of 2010 we implemented another restructuring plan that included the
elimination of an additional 20 positions. We believe that we have reduced our
anticipated operating expenses to the point where we can break even on an
operating income basis, excluding stock compensation costs and amortization of
purchase accounting intangibles, at the rate of $13.0 million in revenue per
quarter.


43




Also, we
intend to continue to assess our cost structure in relationship to our revenue
levels and to make appropriate adjustments to expense levels as required.
None-the-less we believe that our existing cash and cash equivalents and a bank
financing facility will be sufficient to fund operating activities and
capital expenditures, and provide adequate working capital through at least
December 31, 2010.




If our
existing resources and cash generated from operations are insufficient to
satisfy liquidity requirements, we may seek to raise additional funds through
public or private debt or equity financings.  The sale of equity or
debt securities could result in additional dilution to our stockholders, could
require us to pledge our intellectual property or other assets to secure the
financing, or could impose restrictive covenants on us.  We cannot be
certain that additional financing will be available in amounts or on terms
acceptable to us, or at all.  If we are unable to obtain this
additional financing, we may be required to reduce the scope of our planned
product development and sales and marketing efforts, which could harm our
business, financial condition and operating results, and/or cause us to sell
assets or otherwise restructure our business to remain viable.




Commitments
and Significant Contractual Obligations




In
October of 2009, we exchanged approximately $10.0 million aggregate principal
amount of our 2010 Notes due September 30, 2010 for an equal principal amount of
new 5.45% Convertible Notes due September 30, 2011 (2011 Notes). We have
existing commitments to make future interest payments on the 2011 Notes and to
pay principal on a monthly basis until September 2011. Over the remaining life
of the outstanding 2011 Notes, we expect to pay approximately $0.4 million in
interest and $8.8 million of principal.




We have
outstanding operating lease commitments of $28.0 million, payable over the next
eight years. Some of these commitments are for space that is not being utilized
and, for which, we recorded restructuring charges in prior years for excess
facilities. We are in the process of trying to sublease additional excess space
but it is unlikely that any sublease income generated will offset the entire
future commitment. As of December 31, 2009, we have approximately $12.0 million
in anticipated sub-lease income over the next five years relating to portions of
our excess facilities. We currently believe that we can fund these lease
commitments in the future. However, there can be no assurances that we will not
be required to seek additional capital or provide additional guarantees or
collateral on these obligations.




A summary
of our significant future contractual obligations and their payments follows (in
thousands):





Payments Due by PeriodContractual Obligations
                    
                    Total
                    
                    
                    2010
                    
                    
                    2011 &
                      2012
                    
                    
                    2013 &
                      2014
                    
                    
                    ThereafterInterest
      on convertible notes
                    
                    $
                    438
                    
                    
                    $
                    352
                    
                    
                    $
                    86
                    
                    
                    $
                    —
                    
                    
                    $
                    —Principal
      on convertible notes
                    
                    
                    8,762
                    
                    
                    
                    5,004
                    
                    
                    
                    3,758
                    
                    
                    
                    —
                    
                    
                    
                    —Operating
      lease obligations
                    
                    
                    28,036
                    
                    
                    
                    5,506
                    
                    
                    
                    8,536
                    
                    
                    
                    6,601
                    
                    
                    
                    7,393Purchase
      obligations
                    
                    
                    5,657
                    
                    
                    
                    5,657
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —$
                    42,893
                    
                    
                    $
                    16,519
                    
                    
                    $
                    12,380
                    
                    
                    $
                    6,601
                    
                    
                    $
                    7,393




We also have pledged
approximately $2.7 million as collateral for stand-by letters of credit that
guarantee certain long-term property lease obligations and to support customer
credit requirements. This $2.7 million is in our bank accounts and is included
in our restricted cash as of December 31, 2009.




Recent
Accounting Pronouncements




Newly
issued accounting pronouncements that potentially impact our financial
statements are disclosed in the Notes to Consolidated Financial Statements of
this report.


44




Item
7A.Quantitative
and Qualitative Disclosures about Market Risk




Interest Rate
Risk.  We have investments in money market accounts that earn
interest income that is a function of the market rates. As a result, we have
exposure to changes in interest rates. For example, if interest rates were to
decrease by one half percentage point from their current levels, our potential
interest income for 2010, assuming a constant cash balance, would decrease by
less than $0.1 million.




Foreign Currency Exchange
Risk.  As substantially all of our net revenues are currently
made or denominated in U.S. dollars, a strengthening of the dollar could make
our products less competitive in foreign markets. Although we recognize our
revenues in U.S. dollars, we incur expenses in currencies other than U.S.
dollars. In 2009, operating expenses incurred in foreign currencies, excluding
impairment of goodwill, were approximately 58% of our total operating expenses.
Although we have not experienced significant foreign exchange rate losses to
date, we may in the future, especially to the extent that we do not engage in
hedging.  We
do not enter into derivative financial instruments for trading or speculative
purposes. The economic impact of currency exchange rate movements on our
operating results is complex because such changes are often linked to
variability in real growth, inflation, interest rates, governmental actions and
other factors. These changes, if material, may cause us to adjust our financing
and operating strategies. Consequently, isolating the effect of changes in
currency does not incorporate these other important economic
factors.




Fair Market Value of Financial
Instruments.  As of December 31, 2009, our debt consisted
exclusively of convertible notes due September 30, 2011 with interest at a fixed
rate of 5.45%. Consequently, we do not have significant cash flow exposure on
the interest payments on these notes. However, the Company does have
considerable exposure in the requirement to redeem these convertible notes
between now and September 30, 2011.  There is no guarantee that the
Company will have either enough cash to pay down this debt, or the ability to
refinance this debt on terms acceptable to the Company.  The fair
market value of our outstanding 5.45% Convertible Notes due September 30, 2011
was estimated based on current market conditions at approximately $8.8 million
at December 31, 2009. Among other factors, changes in interest rates and the
price of our common stock affect the fair value of our convertible notes. Refer
to critical accounting policies and use of estimates in Item 7 - “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” for
additional information associated with our 2010 Notes.


45




Item
8.Financial
Statements and Supplementary Data




TRANSWITCH
CORPORATION AND SUBSIDIARIES




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS


AND
FINANCIAL STATEMENT SCHEDULE




PageFinancial
      Statements:Report
      of Independent Registered Public Accounting Firm
                  
                  47Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                  
                  49Consolidated
      Statements of Operations for the years ended December 31, 2009, 2008 and
      2007
                  
                  50Consolidated
      Statements of Stockholders’ Equity and Comprehensive Loss for the years
      ended December 31, 2009, 2008 and 2007
                  
                  51Consolidated
      Statements of Cash Flows for the years ended December 31, 2009, 2008 and
      2007
                  
                  52Notes
      to Consolidated Financial Statements
                  
                  53Financial
      Statement Schedule:Schedule
      II, Valuation and Qualifying Accounts
                  
                  75


46





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Stockholders and Board of Directors


TranSwitch
Corporation





We have
audited the accompanying consolidated balance sheets of TranSwitch Corporation
and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows for each of the years in the three-year period ended
December 31, 2009.  Our audit also included the financial statement
schedule listed in the Index at Item 8. We have also audited the Company’s
internal control over financial reporting as of December 31, 2009, based on the
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  These financial statements and schedule
are the responsibility of the Company's management.  Further, the
Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in Management’s Annual Report on
Internal Control over Financial Reporting under Item 9A. Our responsibility is
to express an opinion on these financial statements and schedules, and an
opinion on the Company’s internal control over financial reporting based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation.  Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances.  We believe that our
audits provide a reasonable basis for our opinions.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2009 and 2008, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America.  Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein. Further, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).


47





As
discussed in Note 12, the Company adopted, as required, new accounting standards
for uncertain tax positionseffective January 1,
2007.





/s/
      UHY LLPNew
      Haven, ConnecticutMarch
      16, 2010


48


TRANSWITCH
CORPORATION AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS


(dollars
in thousands, except par value)





December 31,
                  2009
                
                
                December 31,
                  2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                2,343
                
                
                $
                7,462Restricted
      cash
                
                
                2,732
                
                
                
                4,852Short-term
      investments
                
                
                -
                
                
                
                2,970Accounts
      receivable (net of allowance for doubtful accounts of $516 in 2009 and
      $536 in 2008)
                
                
                11,667
                
                
                
                12,865Inventories
                
                
                4,183
                
                
                
                4,504Prepaid
      expenses and other current assets
                
                
                2,299
                
                
                
                2,526Total
      current assets
                
                
                23,224
                
                
                
                35,179Property
      and equipment, net
                
                
                1,268
                
                
                
                2,029Goodwill
                
                
                14,144
                
                
                
                25,079Other
      intangible assets, net
                
                
                9,840
                
                
                
                11,454Investments
      in non-publicly traded companies
                
                
                2,989
                
                
                
                2,963Deferred
      financing costs, net
                
                
                193
                
                
                
                403Other
      assets
                
                
                1,298
                
                
                
                1,320Total
      assets
                
                $
                52,956
                
                
                $
                78,427LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                4,949
                
                
                $
                4,240Accrued
      expenses and other current liabilities
                
                
                15,977
                
                
                
                22,231Current
      portion of 5.45% Convertible Notes due 2011
                
                
                5,004
                
                
                
                -Total
      current liabilities
                
                
                25,930
                
                
                
                26,471Restructuring
      liabilities
                
                
                10,593
                
                
                
                19,6645.45%
      Convertible Notes due 2010
                
                
                -
                
                
                
                10,0135.45%
      Convertible Notes due 2011, less current portion
                
                
                3,758
                
                
                
                -Total
      liabilities
                
                
                40,281
                
                
                
                56,148Commitments
      and contingenciesStockholders’
      equity:Common
      stock, $.001 par value: authorized - 300,000,000 shares; issued -
      20,012,521shares
      at December 31, 2009 and 19,834,292 shares at December 31,
      2008
                
                
                20
                
                
                
                20Additional
      paid-in capital
                
                
                382,935
                
                
                
                381,523Accumulated
      other comprehensive income – currency translation
                
                
                551
                
                
                
                36Common
      stock held in treasury (20,794 shares), at cost
                
                
                (118
                )
                
                
                (118
                )Accumulated
      deficit
                
                
                (370,713
                )
                
                
                (359,182
                )Total
      stockholders’ equity
                
                
                12,675
                
                
                
                22,279Total
      liabilities and stockholders’ equity
                
                $
                52,956
                
                
                $
                78,427




See
accompanying notes to consolidated financial statements.


49




TRANSWITCH
CORPORATION AND SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF OPERATIONS


(in
thousands, except per share data)




YearsendedDecember31,2009
                
                
                2008
                
                
                2007Net
      revenues:Product
      revenues
                
                $
                50,709
                
                
                $
                40,003
                
                
                $
                29,310Service
      revenues
                
                
                5,398
                
                
                
                1,931
                
                
                
                3,255Total
      net revenues
                
                
                56,107
                
                
                
                41,934
                
                
                
                32,565Cost
      of revenues:Cost
      of product revenues
                
                
                21,393
                
                
                
                16,730
                
                
                
                10,514Provision
      for excess and obsolete inventories
                
                
                678
                
                
                
                316
                
                
                
                443Cost
      of service revenues
                
                
                2,552
                
                
                
                994
                
                
                
                1,437Total
      cost of revenues
                
                
                24,623
                
                
                
                18,040
                
                
                
                12,394Gross
      profit
                
                
                31,484
                
                
                
                23,894
                
                
                
                20,171Operating
      expenses:Research
      and development
                
                
                19,132
                
                
                
                24,568
                
                
                
                21,703Marketing
      and sales
                
                
                10,413
                
                
                
                8,816
                
                
                
                10,223General
      and administrative
                
                
                8,038
                
                
                
                6,678
                
                
                
                5,617Restructuring
      (credits) charges, net
                
                
                (6,257
                )
                
                
                3,804
                
                
                
                1,428Impairment
      of goodwill
                
                
                10,075
                
                
                
                —
                
                
                
                —Reversal
      of accrued royalties
                
                
                (197
                )
                
                
                (198
                )
                
                
                —Total
      operating expenses
                
                
                41,204
                
                
                
                43,668
                
                
                
                38,971Operating
      loss
                
                
                (9,720
                )
                
                
                (19,774
                )
                
                
                (18,800
                )Other
      (expense) income:Other
      (expense) income
                
                
                (750
                )
                
                
                81
                
                
                
                —Impairment
      of investments in non-publicly traded companies
                
                
                (31
                )
                
                
                —
                
                
                
                (109
                )Change
      in fair value of derivative liability
                
                
                —
                
                
                
                (347
                )
                
                
                980Gain
      (loss) on extinguishment of debt
                
                
                —
                
                
                
                4,491
                
                
                
                (351
                )Interest:Interest
      income
                
                
                122
                
                
                
                934
                
                
                
                2,457Interest
      expense
                
                
                (787
                )
                
                
                (1,941
                )
                
                
                (3,606
                )Interest
      expense, net
                
                
                (665
                )
                
                
                (1,007
                )
                
                
                (1,149
                )Total
      other (expense) income, net
                
                
                (1,446
                )
                
                
                3,218
                
                
                
                (629
                )Loss
      before income taxes
                
                
                (11,166
                )
                
                
                (16,556
                )
                
                
                (19,429
                )Income
      taxes
                
                
                365
                
                
                
                490
                
                
                
                283Net
      loss
                
                $
                (11,531
                )
                
                $
                (17,046
                )
                
                $
                (19,712
                )Basic
      and diluted loss per common share:Net
      loss
                
                $
                (0.58
                )
                
                $
                (0.99
                )
                
                $
                (1.19
                )Basic
      and diluted average common shares outstanding
                
                
                19,938
                
                
                
                17,260
                
                
                
                16,566




See
accompanying notes to consolidated financial statements.


50




TRANSWITCH
CORPORATION AND SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


AND
COMPREHENSIVE LOSS


(dollars
in thousands)





Commonstock
                  
                  
                  Common
                    stock held in
                    treasury
                  
                  
                  Additional
                    paid-in
                    capital
                  
                  
                  Accumulated
                    other
                    comprehensive
                    income
                  
                  
                  Accumulated
                    Deficit
                  
                  
                  TotalShares
                  
                  
                  AmountBalance
      at December 31, 2006
                  
                  
                  16,014,152
                  
                  
                  $
                  16
                  
                  
                  $
                  —
                  
                  
                  $
                  346,058
                  
                  
                  $
                  404
                  
                  
                  $
                  (322,424
                  )
                  
                  $
                  24,054Comprehensive
      loss:Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (19,712
                  )
                  
                  
                  (19,712
                  )Currency
      translation adjustment
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  454
                  
                  
                  
                  —
                  
                  
                  
                  454Total
      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (19,258
                  )Stock
      compensation
                  
                  
                  10,679
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,980
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,980Shares
      of common stock issued in connection with business
    acquisition
                  
                  
                  468,339
                  
                  
                  
                  1
                  
                  
                  
                  —
                  
                  
                  
                  5,544
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  5,545Shares
      of common stock issued under stock option and stock purchase
      plans
                  
                  
                  144,134
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,347
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,347Balance
      at December 31, 2007
                  
                  
                  16,637,304
                  
                  
                  $
                  17
                  
                  
                  $
                  —
                  
                  
                  $
                  354,929
                  
                  
                  $
                  858
                  
                  
                  $
                  (342,136
                  )
                  
                  $
                  13,668Comprehensive
      loss:Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (17,046
                  )
                  
                  
                  (17,046
                  )Currency
      translation adjustment
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (822
                  )
                  
                  
                  —
                  
                  
                  
                  (822
                  )Total
      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (17,868
                  )Stock
      compensation
                  
                  
                  49,136
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,516
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,516Shares
      of common stock issued in connection with business
    acquisition
                  
                  
                  3,125,000
                  
                  
                  
                  3
                  
                  
                  
                  —
                  
                  
                  
                  24,947
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  24,950Shares
      of common stock issued under stock option and stock purchase
      plans
                  
                  
                  22,852
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  131
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  131Repurchase
      of 20,794 shares of common stock
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (118
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (118
                  )Balance
      at December 31, 2008
                  
                  
                  19,834,292
                  
                  
                  $
                  20
                  
                  
                  $
                  (118
                  )
                  
                  $
                  381,523
                  
                  
                  $
                  36
                  
                  
                  $
                  (359,182
                  )
                  
                  $
                  22,279Comprehensive
      loss:Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (11,531
                  )
                  
                  
                  (11,531
                  )Currency
      translation adjustment
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  515
                  
                  
                  
                  —
                  
                  
                  
                  515Total
      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (11,016
                  )Stock
      compensation
                  
                  
                  97,895
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,305
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,305Shares
      of common stock issued under stock option and stock purchase
      plans
                  
                  
                  39,234
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  108
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  108Shares
      of common stock issued under restricted stock plan
                  
                  
                  41,352
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Payout
      of fractional shares as a result of reverse stock split
                  
                  
                  (252
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1
                  )Balance
      at December 31, 2009
                  
                  
                  20,012,521
                  
                  
                  $
                  20
                  
                  
                  $
                  (118
                  )
                  
                  $
                  382,935
                  
                  
                  $
                  551
                  
                  
                  $
                  (370,713
                  )
                  
                  $
                  12,675




See
accompanying notes to consolidated financial statements.


51




TRANSWITCH
CORPORATION AND SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF CASH FLOWS


(dollars
in thousands)





Years ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Operating
      activities:Net
      loss
                  
                  $
                  (11,531
                  )
                  
                  $
                  (17,046
                  )
                  
                  $
                  (19,712
                  )Adjustments
      required to reconcile net loss to net cash flows used by operating
      activities, net of effects of acquisitions:Depreciation
      and amortization
                  
                  
                  2,669
                  
                  
                  
                  4,020
                  
                  
                  
                  4,527Amortization
      of debt discount and deferred financing fees
                  
                  
                  210
                  
                  
                  
                  569
                  
                  
                  
                  1,536(Gain)
      loss on extinguishment of debt
                  
                  
                  —
                  
                  
                  
                  (4,491
                  )
                  
                  
                  351(Benefit)
      provision for doubtful accounts
                  
                  
                  (20
                  )
                  
                  
                  (87
                  )
                  
                  
                  150Provision
      for excess and obsolete inventories
                  
                  
                  678
                  
                  
                  
                  316
                  
                  
                  
                  443Non-cash
      restructuring (credits) charges, net
                  
                  
                  (6,257
                  )
                  
                  
                  3,762
                  
                  
                  
                  1,428Stock-based
      compensation expense
                  
                  
                  1,305
                  
                  
                  
                  1,516
                  
                  
                  
                  1,970Impairment
      of investments in non-publicly traded companies
                  
                  
                  31
                  
                  
                  
                  —
                  
                  
                  
                  109Impairment
      of goodwill
                  
                  
                  10,075
                  
                  
                  
                  —
                  
                  
                  
                  —Change
      in fair value of derivative liability
                  
                  
                  —
                  
                  
                  
                  179
                  
                  
                  
                  (980
                  )Loss
      on retirement of property and equipment
                  
                  
                  —
                  
                  
                  
                  74
                  
                  
                  
                  —Reversal
      of accrued royalties
                  
                  
                  (197
                  )
                  
                  
                  (198
                  )
                  
                  
                  —Other
      non-cash items
                  
                  
                  26
                  
                  
                  
                  15
                  
                  
                  
                  —Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  1,218
                  
                  
                  
                  (3,452
                  )
                  
                  
                  (1,166
                  )Inventories
                  
                  
                  (357
                  )
                  
                  
                  437
                  
                  
                  
                  146Prepaid
      expenses and other assets
                  
                  
                  248
                  
                  
                  
                  505
                  
                  
                  
                  (118
                  )Accounts
      payable
                  
                  
                  709
                  
                  
                  
                  747
                  
                  
                  
                  435Accrued
      expenses and other current liabilities
                  
                  
                  (1,219
                  )
                  
                  
                  (2,131
                  )
                  
                  
                  (124
                  )Obligation
      under deferred revenue
                  
                  
                  (28
                  )
                  
                  
                  146
                  
                  
                  
                  37Restructuring
      liabilities
                  
                  
                  (6,682
                  )
                  
                  
                  (3,427
                  )
                  
                  
                  (1,793
                  )Net
      cash used by operating activities
                  
                  
                  (9,122
                  )
                  
                  
                  (18,546
                  )
                  
                  
                  (12,761
                  )Investing
      activities:Capital
      expenditures
                  
                  
                  (348
                  )
                  
                  
                  (592
                  )
                  
                  
                  (3,884
                  )Investments
      in non-publicly traded companies
                  
                  
                  (57
                  )
                  
                  
                  (65
                  )
                  
                  
                  (42
                  )Acquisition
      of business, net of cash acquired
                  
                  
                  —
                  
                  
                  
                  7,369
                  
                  
                  
                  (1,650
                  )Change
      in restricted cash
                  
                  
                  2,120
                  
                  
                  
                  (2,286
                  )
                  
                  
                  —Purchases
      of short and long-term investments
                  
                  
                  —
                  
                  
                  
                  (10,630
                  )
                  
                  
                  —Proceeds
      from sales and maturities of short and long-term
    investments
                  
                  
                  2,970
                  
                  
                  
                  8,658
                  
                  
                  
                  —Net
      cash provided (used) by investing activities
                  
                  
                  4,685
                  
                  
                  
                  2,454
                  
                  
                  
                  (5,576
                  )Financing
      activities:Issuance
      of common stock under employee stock plans
                  
                  
                  108
                  
                  
                  
                  131
                  
                  
                  
                  1,346Payments
      to extinguish debt
                  
                  
                  —
                  
                  
                  
                  (9,900
                  )
                  
                  
                  (8,908
                  )Principal
      payments on 5.45% Convertible Notes due 2011
                  
                  
                  (1,251
                  )
                  
                  
                  —
                  
                  
                  
                  —Proceeds
      from issuance of debt (net of fees)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,901Purchase
      of 20,794 shares of common stock for treasury
                  
                  
                  —
                  
                  
                  
                  (118
                  )
                  
                  
                  —Net
      cash used by financing activities
                  
                  
                  (1,143
                  )
                  
                  
                  (9,887
                  )
                  
                  
                  (5,661
                  )Effect
      of exchange rate changes on cash and cash equivalents
                  
                  
                  461
                  
                  
                  
                  (657
                  )
                  
                  
                  373Change
      in cash and cash equivalents
                  
                  
                  (5,119
                  )
                  
                  
                  (26,636
                  )
                  
                  
                  (23,625
                  )Cash
      and cash equivalents at beginning of year
                  
                  
                  7,462
                  
                  
                  
                  34,098
                  
                  
                  
                  57,723Cash
      and cash equivalents at end of year
                  
                  $
                  2,343
                  
                  
                  $
                  7,462
                  
                  
                  $
                  34,098





See
accompanying notes to consolidated financial statements.


52




TRANSWITCH
CORPORATION AND SUBSIDIARIES




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


(Tabular
dollars in thousands, except share and per share amounts)




Note
1.    Business and Summary of Significant Accounting
Policies




Description
of Business




TranSwitch
Corporation was incorporated in Delaware on April 26, 1988 and is headquartered
in Shelton, Connecticut. TranSwitch Corporation and its subsidiaries
(collectively, “TranSwitch” or the “Company”) design, develop and supply
innovative highly-integrated semiconductor solutions that provide core
functionality for voice, data and video communications network equipment. 
TranSwitch customers, for these semiconductor products, are the original
equipment manufacturers (“OEMs”) who supply wire-line and wireless network
operators who provide voice, data and video services to end users such as
consumers, corporations, municipalities etc. The Company’s system-on-a-chip
products incorporate digital and mixed-signal semiconductor technology and
related embedded software. In addition to its system-on-a-chip products, the
Company has been in the business of licensing intellectual property cores to
both OEMs as well as other semiconductor companies. TranSwitch also licenses
proprietary video interconnect technology that enables the transmission and
reception of both HDMI and DisplayPort.




Principles
of Consolidation




The
consolidated financial statements include the accounts of TranSwitch Corporation
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.




Use
of Estimates




The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and revenues
and expenses during the period reported. Actual results could differ from those
estimates. Estimates relate to uncollectable accounts receivable, excess or
slow-moving or obsolete inventories, impairment of assets, product warranty
allowances, depreciation and amortization, income taxes, sales returns and
allowances, stock rotation allowances and contingencies. Estimates and
assumptions are reviewed periodically, and the effects of revisions are
reflected in the consolidated financial statements in the period they are
determined to be necessary.




Liquidity





The Company has incurred
significant operating losses and used cash in its operating activities for the
past several years. Operating losses have resulted from inadequate sales levels
for the cost structure. The Company has made business acquisitions in each of
the past three years prior to 2009 to increase revenue. In addition, in the
fourth quarter of 2008 and the first quarter of 2010, the Company executed
restructurings to eliminate cost redundancies and enhance operating
effectiveness. The Company’s management believes it now has an appropriate cost
structure for its anticipated sales. Management believes that operating expenses
have been reduced to the point where the Company can break even, excluding stock
compensation costs and amortization of purchased intangibles, at the rate of
sales of $13.0 million per quarter. As such, management believes that the
Company will provide sufficient cash flows to fund its operations in the
ordinary course of business through at least the next twelve months. There
can be no assurance that the anticipated sales level will be achieved. In
addition, the Company entered into a bank financing agreement which provides for
$5,000,000 of borrowing capacity based on specified levels of eligible accounts
receivable (see Note 20).





Cash,
Cash Equivalents and Investments




All
highly liquid investments with an original maturity of three months or less when
purchased are considered cash equivalents. Cash equivalents consist of money
market funds as of December 31, 2009 and 2008. The majority of the Company’s
cash and cash equivalents balances are maintained with a limited number of major
financial institutions. Cash and cash equivalents balances at institutions may,
at times, be above the Federal Deposit Insurance Corporation insured limit of
$0.25 million per account.




Short-term
investments as of December 31, 2008 consist of government bonds which are all
due within one year. Such investments are classified as held-to-maturity.
Held-to-maturity securities are those securities which the Company has both the
ability and intent to hold to maturity. Held-to-maturity securities are stated
at amortized cost. Amortized cost and accrued interest as of December 31, 2008
approximate market value.


53




TRANSWITCH
CORPORATION AND SUBSIDIARIES




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


(Tabular
dollars in thousands, except share and per share amounts)




Fair
Value of Financial Instruments




The
carrying amounts for cash and cash equivalents, short-term investments, accounts
receivable, and accounts payable approximate fair value. The fair value of the
outstanding 5.45% Convertible Notes due 2011 was estimated at approximately $8.8
million as of December 31, 2009 based on current market conditions and the fair
value of the outstanding 5.45% Convertible Notes due 2010 was estimated at
approximately $6.6 million as of December 31, 2008 based on market conditions.
The fair value of investments in non-publicly traded companies is not readily
determinable.




Inventories




Inventories
are carried at the lower of cost (determined on a weighted-average cost basis)
or estimated net realizable value.




Product
Licenses




All
product licenses were fully amortized as of December 31, 2008. Prior thereto
product licenses were amortized using the greater of: (1) the amount computed
using the ratio of a product’s current gross revenues to the product’s total of
current and estimated future gross revenues; or (2) the straight-line method
over the estimated useful life of the asset, generally three to five years, not
to exceed the term of the license.




Property
and Equipment




Property
and equipment are carried at cost less accumulated depreciation and
amortization. Any gain or loss resulting from sale or retirement is included in
the consolidated statement of operations. Repairs and maintenance are expensed
as incurred while renewals and betterments are capitalized.




Goodwill




Goodwill
represents the excess of the purchase price over the fair value of identifiable
net assets of the business acquired. The Company reviews goodwill for potential
impairment at least annually.




Other
Intangible Assets




Other
intangible assets consist of purchased customer relationships and developed
technology and are stated at cost, less accumulated amortization. Customer
relationships and developed technology are being amortized by the straight line
method over their estimated economic useful lives ranging from five to ten
years.




Deferred
Financing Costs




Deferred
financing costs are being amortized using the interest method over the term of
the related debt. Unamortized deferred financing fees were $0.2 million and $0.4
million as of December 31, 2009 and 2008, respectively. Amortization, included
in the consolidated statement of operations as a component of interest expense,
was $0.2 million, $0.6 million, and $0.5 million for 2009, 2008 and 2007,
respectively.




Impairment
of Intangibles and Long-Lived Assets




The
Company reviews long-lived and intangible assets (including goodwill) for
impairment at least annually, or whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. When
factors indicate that a long-lived asset should be evaluated for possible
impairment, an estimate of the related asset’s undiscounted future cash flows
over the remaining life of the asset is made to measure whether the carrying
value is recoverable. Any impairment is measured based upon the excess of the
carrying value of the asset over its estimated fair value which is generally
based on an estimate of future discounted cash flows. A significant amount of
management judgment is used in estimating future discounted cash
flows.


54




TRANSWITCH
CORPORATION AND SUBSIDIARIES




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


(Tabular
dollars in thousands, except share and per share amounts)




The
Company’s impairment reviews of goodwill were performed using a fair-value
method and discounted cash flow models with estimated cash flows based on
internal forecasts which included terminal values based on current market
valuation metrics. The fair value represents the amount at which a reporting
unit could be bought or sold in a current transaction between willing parties on
an arms-length basis. In estimating fair value, the Company used its common
stock’s market price to determine fair value and other valuation metrics. In
addition, the Company performed discounted cash flow analysis on the reporting
units to determine fair value. During the fourth quarter of 2009, impairment
testing performed by the Company indicated that the estimated fair values of two
reporting units tested were less than their corresponding carrying amounts. As a
result of the analyses performed, the Company recorded a goodwill impairment
charge of $10.1 million. The impaired goodwill related to business acquisitions
in 2007 and 2006.




Investments
in Non-Publicly Traded Companies




The
Company has minority investments in certain non-publicly traded companies.
Depending on the Company’s level of ownership and whether or not the Company has
the ability to exercise significant influence, these investments are accounted
for by either the cost or equity method. All such investments as of December 31,
2009 and 2008 are accounted for by the cost method. These investments are
reviewed periodically for impairment.




Revenue
Recognition




Net
revenues from product sales are recognized at the time of product shipment when
the following criteria are met: (1) persuasive evidence of an arrangement
exists; (2) ownership and risk of loss transfers to the customer; (3) the
selling price is fixed or determinable; and (4) collectability is reasonably
assured.




Agreements
with certain distributors provide price protection and return and allowance
rights. With respect to recognizing revenues from distributors: (1) the prices
are fixed at the date of shipment from the Company’s facilities; (2) payment is
not contractually or otherwise excused until the product is resold; (3) the
Company does not have any obligations for future performance relating to the
resale of the product; and (4) the amount of future returns, allowances, refunds
and costs to be incurred can be reasonably estimated and are accrued at the time
of shipment.




At the
time of shipment, the Company records a reduction to revenue (with a related
liability) to accrue for future price protection. This liability is established
based on historical experience, contractually agreed-to provisions and future
shipment forecasts. Such accruals have been insignificant for the last three
years.




The
Company also accrues, at the time of shipment, a reduction to revenue (with a
related liability) and an inventory asset against product cost of revenues in
order to establish a provision for the gross margin related to future returns
under the Company’s distributor stock rotation program. Such accruals related to
reductions of revenue were $0.6 million and less than $0.1 million at December
31, 2009 and 2008, respectively. The accruals related to inventory assets are
insignificant to the Company’s financial position and results of operations for
all periods presented. Should actual experience differ from estimated
liabilities, there could be adjustments (either favorable or unfavorable) to the
Company’s net revenues, cost of revenues and gross profits.




Service
revenues are recognized when the following criteria are met: (1) persuasive
evidence of an arrangement exists; (2) services have been performed in
accordance with the contractual obligations; (3) the fee is fixed or
determinable; and (4) collectability is reasonably assured.




The
Company licenses HDMI and other intellectual property. Revenues from licensing
arrangements generally consist of multiple elements such as license,
implementation and maintenance services. The items (deliverables) included in
the arrangement are evaluated to determine whether they represent separate units
of accounting. The Company performs this evaluation at the inception of an
arrangement and as the Company delivers each item in the
arrangement.




Generally,
the Company accounts for a deliverable (or a group of deliverables) separately
if (1) the delivered item(s) has standalone value to the customer, (2) there is
objective and reliable evidence of the fair value of the undelivered items
included in the arrangement, and (3) if the Company has given the customer a
general right of return relative to the delivered items, delivery or performance
of the undelivered items or services are probable and substantially in the
Company’s control.





The
Company recognizes revenue from royalties upon notification of sale by its
licensees. The terms of the royalty agreements generally require licensees to
give notification to the Company and to pay royalties within 45 days of the end
of the quarter during which the sales by its licensees take
place.


55




TRANSWITCH
CORPORATION AND SUBSIDIARIES




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


(Tabular
dollars in thousands, except share and per share amounts)




Allowance
for Doubtful Accounts




The
Company records allowances for doubtful accounts for estimated losses based upon
specifically identified amounts that it believes to be uncollectible along with
the Company’s assessment of the general financial condition of its customer
base. If the Company’s actual collections experience changes, revisions to its
allowances may be required. The Company has a limited number of customers with
individually large amounts due at any given balance sheet date. Any
unanticipated change in one of those customers’ creditworthiness or other
matters affecting the collectability of amounts due from such customers could
have a material effect on the Company’s results of operations in the period in
which such changes or events occur.




Concentrations
of Credit Risk




Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents, and accounts
receivable.




Cash and
cash equivalents are held by high-quality financial institutions, thereby
reducing credit risk concentrations. In addition, the Company limits the amount
of credit exposure to any one financial institution.




At
December 31, 2009 and 2008, approximately 57% and 53% of accounts receivable
were due from five customers. The majority of the Company’s sales are to
customers in the telecommunications and data communications industries. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral.




Supplier
Concentrations




The
Company relies on a limited number of suppliers for wafer fabrication capacity.
In 2009 one outside wafer foundry supplied approximately 85% of our
semiconductor wafer requirements. Although the Company would likely be able to
find alternative manufacturing sources, the Company would experience substantial
delays or interruptions in the shipment of products if these suppliers were to
cease operations.




Product
Warranties




The
Company provides warranties on its products for up to one year from the date of
shipment. A liability is recorded for estimated costs to be incurred under
product warranties, which is based on various inputs including historical
experience. Estimated warranty expense is recorded as cost of revenues as
products are shipped. Product warranty costs are nominal for all periods
presented.




Research
and Development Costs




Research
and development costs are expensed as incurred.




Income
Taxes




Deferred
income tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and for operating
loss and tax credit carry forwards. Deferred income tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred income tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance is provided to the extent that it is more likely
than not that the Company will not be able to utilize deferred income tax assets
in the future.




Stock-Based
Compensation




The
Company recognizes share-based compensation expense for the fair value of the
awards on the date granted on a straight-line basis over their vesting
term.


56




TRANSWITCH
CORPORATION AND SUBSIDIARIES




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


(Tabular
dollars in thousands, except share and per share amounts)




Compensation
expense is recognized only for share-based payments expected to vest. The
Company estimates forfeitures at the date of grant based on the Company’s
historical experience and future expectations.




As of
December 31, 2009, the unrecognized stock-based compensation cost related to
non-vested option awards was $0.7 million and such amount will be recognized in
operations over a weighted average period of 2.06 years. As of December 31,
2009, the unrecognized stock-based compensation cost related to non-vested stock
awards was $1.2 million and such amount will be recognized in operations over a
weighted average period of 3.17 years.




Stock
compensation charged to operations was $1.3 million in 2009, $1.5 million in
2008 and $2.0 million in 2007.




Loss
Per Common Share




The basic
and diluted loss per common share amount is based upon the weighted average
common shares outstanding during the periods. All “in-the-money” stock options
and shares issuable upon the conversion of the 5.45% Convertible Notes due 2010
and the 5.45% Convertible Notes due 2011 were anti-dilutive.




Foreign
Currency Translation




Substantially
all foreign subsidiaries use their local currency as their functional currency.
Therefore, assets and liabilities of foreign subsidiaries are translated at
exchange rates in effect at the balance sheet date and revenue and expense
accounts are translated at average exchange rates during the year. The resulting
translation adjustments are recorded in accumulated other comprehensive income
(loss). Translation gains and losses related to monetary assets and liabilities
denominated in a currency different from a subsidiary’s functional currency are
included in the consolidated statements of operations.




Derivatives
and Hedging Activities




Fluctuating
foreign exchange rates may significantly impact the Company’s operating results
and cash flows. During 2008, the Company periodically hedged forecasted foreign
currency transactions related to certain operating expenses. All derivatives are
recorded in the balance sheet at fair value. For a derivative designated as a
fair value hedge, the effective portion of changes in the fair value of the
derivative and of the hedged item attributable to the hedged risk are recognized
in operations. For a derivative designated as a cash flow hedge, the effective
portions of changes in the fair value of cash flow hedges are recorded in other
comprehensive income. If the derivative used in an economic hedging activity is
not designated in an accounting hedging relationship or if it becomes
ineffective, changes in the fair value of the derivative are recognized in
operations.




FASB
Establishes Accounting Standards Codification




On
September 30, 2009, the Company adopted Accounting Standards Update
No. 2009-01, “Generally Accepted Accounting Principles” (ASC Topic
105),The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles (“the Codification” or “ASC”). The Codification combines the
previous U.S. GAAP hierarchy which included four levels of authoritative
accounting literature distributed among a number of different sources. The
Codification does not by itself create new accounting standards but instead
reorganizes thousands of pages of existing U.S. GAAP accounting rules into
approximately 90 accounting topics. All existing accounting standard documents
are superseded by the Codification and all other accounting literature not
included in the Codification is now considered non-authoritative. The
Codification explicitly recognizes the rules and interpretive releases of the
Securities and Exchange Commission (“SEC”) under federal securities laws as
authoritative GAAP for SEC registrants. The Codification is now the single
source of authoritative nongovernmental accounting standards in the
U.S.




As a
result of the Codification, the references to authoritative accounting
pronouncements included herein in this Annual Report on Form 10-K now refer
to the Codification topic section rather than a specific accounting rule as was
past practice and all references to pre-codified U.S. GAAP have been removed
from this Form 10-K. The adoption of the Codification had no effect on any
reported amounts.


57







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CORPORATION AND SUBSIDIARIES




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


(Tabular
dollars in thousands, except share and per share amounts)




Recent
Accounting Pronouncements




The
Company continually assesses any new accounting pronouncements to determine
their applicability to the Company. In the case where it is determined that a
new accounting pronouncement effects the Company’s financial reporting, the
Company undertakes a study to determine the consequence of the change to its
financial reporting, and assures that there are proper controls in place to
ascertain that the Company’s financials properly reflect the change. New
pronouncements assessed by the Company are discussed below:





In
December 2007, the FASB issued new guidance related to ASC Topic 810,
“Accounting for Noncontrolling Interests” (ASC 810). ASC 810 clarifies the
classification of noncontrolling interests in consolidated balance sheets and
reporting transactions between the reporting entity and holders of
noncontrolling interests. Under this statement, noncontrolling interests are
considered equity and reported as an element of consolidated equity. Further,
net income encompasses all consolidated subsidiaries with disclosure of the
attribution of net income between controlling and noncontrolling interests. ASC
810 is effective prospectively for fiscal years beginning after December 15,
2008. Currently, there are no noncontrolling interests in any of the Company’s
subsidiaries. The Company adopted this guidance on January 1, 2009 and it had no
impact on its financial statements at the time of adoption.





In March
2008, the FASB issued new guidance related to ASC Topic 815, “Disclosures about
Derivative Instruments and Hedging Activities” (ASC 815), which requires
additional disclosures about the objectives of using derivative instruments, the
method by which the derivative instruments and related hedged items are
accounted for under and its related interpretations, and the effect of
derivative instruments and related hedged items on financial position, financial
performance, and cash flows. ASC 815 also requires disclosure of the fair values
of derivative instruments and their gains and losses in a tabular format. ASC
815 is effective for financial statements issued for fiscal years
and interim periods beginning after November 15, 2008, with early
adoption encouraged. The Company adopted this guidance on January 1, 2009 and it
had no impact on its financial statements at the time of adoption.





In
April 2008, the FASB issued new guidance related to ASC Topic 350,
“Intangibles – Goodwill and Other” (ASC 350), to improve the consistency between
the useful life of a recognized intangible asset and the period of expected cash
flows used to measure the fair value of the intangible asset. The new guidance
amends the factors to be considered when developing renewal or extension
assumptions that are used to estimate an intangible asset’s useful life. The
guidance in the new staff position is to be applied prospectively to intangible
assets acquired after December 31, 2008 and increases the disclosure
requirements related to renewal or extension assumptions. The Company adopted
this guidance on January 1, 2009 and it had no impact on its financial
statements at the time of adoption.





In June
2008, the FASB ratified ASC 815, “Determining Whether an Instrument (or an
Embedded Feature) Is Indexed to an Entity’s Own Stock”. ASC 815 provides that an
entity should use a two step approach to evaluate whether an equity-linked
financial instrument (or embedded feature) is indexed to its own stock,
including evaluating the instrument’s contingent exercise and settlement
provisions. It also clarifies on the impact of foreign currency denominated
strike prices and market-based employee stock option valuation instruments on
the evaluation. The Company adopted this guidance on January 1, 2009 and it had
no impact on its financial statements at the time of adoption.





In
May 2009, the FASB issued FASB ASC Topic 855, “Subsequent Events Topic”
(ASC 855). This standard is intended to establish general standards of
accounting for and the disclosures of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
ASC Topic 855 is effective for fiscal years and interim periods ended after
June 15, 2009, to be applied prospectively. There was no financial
reporting impact due to the adoption of this standard. The Company has evaluated
subsequent events through March 16, 2010, the date of issuance of the
consolidated financial position and results of operations.





In
October 2009, the FASB issued an update related to ASC Topic 605,“Revenue Recognition —
Multiple Deliverable Revenue Arrangements”(ASC 605). This update
removes the objective-and-reliable-evidence-of-fair-value criterion from the
separation criteria used to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting, replaces references to
“fair value” with “selling price” to distinguish from the fair value
measurements required under the “Fair Value Measurements and
Disclosures” guidance, provides a hierarchy that entities must use
to estimate the selling price, eliminates the use of the residual method for
allocation, and expands the ongoing disclosure requirements. This update is
effective for fiscal years beginning on or after June 15, 2010, and can be
applied prospectively or retrospectively. The Company is currently evaluating
the effect that adoption of this update will have, if any, on its consolidated
financial statements.


58




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CORPORATION AND SUBSIDIARIES




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


(Tabular
dollars in thousands, except share and per share amounts)





Note
2.    Fair Value Measurements





In
September 2006, the FASB issued ASC Topic 820 “Fair Value Measurements”(ASC 820). The Company
adopted ASC 820 as of January 1, 2008 for financial assets and liabilities only.
The adoption of this
statement did not have an impact on our results of operation, financial position
or cash flow, but required additional disclosures.ASC 820
defines fair value, establishes a framework for measuring the fair value of
assets and liabilities, and expands disclosure requirements regarding the fair
value measurement. It does not expand the use of fair value measurements, but
specifies a hierarchy of valuation techniques which requires an entity to
maximize the use of observable inputs that may be used to measure fair
value:





Level 1 –
Quoted prices in active markets are available for identical assets and
liabilities.





Level 2 –
Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities or other inputs that are observable or can be corroborated
by observable market data.




Level 3 –
Unobservable inputs that reflect a reporting entity’s own assumptions about the
assumptions that market participants would use in pricing an asset or
liability.




As of
December 31, 2009, the Company’s financial assets included investments in
non-publicly traded companies. The Company considers net
realizable value for its investments in non-publicly traded companies for
purposes of determining asset impairment losses. For the year ended December 31,
2009, impairment losses on investments in non-publicly traded companies were
less than $0.1 million.





Note
3.     Reverse Stock Split





On
November 9, 2009, the Company announced that its Board of Directors had approved
the implementation of a one-for-eight reverse stock split of the Company's
common stock. The reverse stock split, which was authorized by the stockholders
at the Company's 2009 annual meeting of stockholders on May 21, 2009, took
effect at 11:59 p.m. (Eastern time) on November 23, 2009 (the "Effective Time").
Retroactive restatement has been given to all share numbers in this report, and
accordingly, all amounts including per share amounts are shown on a post-split
basis.




Note
4.    Acquisitions





On
October 24, 2008, the Company acquired Centillium Communications, Inc.
(“Centillium), a Delaware corporation. Centillium was a global company with
headquarters in Fremont, CA and delivered highly innovative communications
processing technology. The acquisition was financed with the issuance of
3,125,000 shares of the Company’s common stock with an approximate fair value of
$25.0 million and $15.0 million of cash. The Company incurred transaction costs
of approximately $2.6 million which resulted in a total purchase price of
approximately $42.6 million. In connection with the acquisition of Centillium,
the Company implemented a worldwide reduction in Centillium’s workforce which
was implemented and concluded during the fourth quarter of 2008 and the first
quarter of 2009. As such, the Company to incurred cash expenditures of
approximately $3.4 million primarily for employee related costs and such costs
were added to the Company’s purchase price of Centillium and allocated to the
net assets acquired. The results of operations of Centillium have been included
in the Company's consolidated financial results from October 24, 2008. All
significant inter-company balances and transactions have been eliminated. The
acquisition was accounted for by the purchase method of accounting. The Company
has allocated the cost to acquire Centillium to its identifiable tangible and
intangible assets and liabilities, with the remaining amount classified as
goodwill. None of the amount allocated to goodwill is expected to be deductible
for income tax reporting purposes.


59




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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


(Tabular
dollars in thousands, except share and per share amounts)





On
January 11, 2007, the Company acquired the ASIC Design Center Division of Data –
JCE, an Israel-based publicly held electronics components distribution company.
The ASIC Design Center develops and sells customer-specific semiconductor
products. The acquisition was financed with the issuance of 468,339 shares of
the Company’s common stock with an approximate fair value of $5.5 million and
$1.4 million of cash. The Company incurred transaction costs of approximately
$0.3 million which resulted in a total purchase price of approximately $7.2
million. Under the earn-out provisions of the ASIC Design Center acquisition
agreement, the Company may have been required to pay up to an additional $14.5
million in the form of TranSwitch common stock or cash, at its option, if the
ASIC Design Center achieved stipulated revenue and operating profit for 2007.
Such targets were not achieved. The results of operations of the ASIC Design
Center have been included in the Company's consolidated financial results from
January 11, 2007. All significant inter-company balances and transactions have
been eliminated. The acquisition was accounted for by the purchase method of
accounting. The Company has allocated the cost to acquire the ASIC Design Center
to its identifiable tangible and intangible assets and liabilities, with the
remaining amount classified as goodwill. None of the amount allocated to
goodwill is expected to be deductible for income tax reporting
purposes.




The total
purchase price of the Company’s acquisitions has been allocated in the Company's
consolidated financial statements as follows:





Centillium
                        2008
                      
                      
                      ASIC Design
                        Center
                        2007Current
      assets
                      
                      $
                      34,246
                      
                      
                      $
                      400Property,
      plant and equipment
                      
                      
                      709
                      
                      
                      
                      36Long-term
      investments
                      
                      
                      992
                      
                      
                      
                      —Other
      intangible assets (1)
                      
                      
                      10,600
                      
                      
                      
                      1,756Goodwill
                      
                      
                      15,004
                      
                      
                      
                      5,183Obligation
      under deferred revenue
                      
                      
                      (23
                      )
                      
                      
                      (180
                      )Accounts
      payable & accrued expenses
                      
                      
                      (14,158
                      )
                      
                      
                      —Restructuring
      reserve
                      
                      
                      (4,798
                      )
                      
                      
                      —Purchase
      price
                      
                      
                      42,572
                      
                      
                      
                      7,195Less:Common
      stock issued
                      
                      
                      (24,950
                      )
                      
                      
                      (5,545
                      )Cash
      and cash equivalents acquired
                      
                      
                      (24,991
                      )
                      
                      
                      —Net
      cash (provided by) used for acquisitions
                      
                      $
                      (7,369
                      )
                      
                      $
                      1,650





(1)


The
valuation of Centillium’s customer relationships of $7.8 million was determined
based on their estimated fair value at the acquisition date. The excess earnings
methodology of the income approach was the technique used to value such
relationships. The value assigned to Centillium’s customer relationships is
being amortized ratably over ten years, which represents the estimated average
remaining useful life.





The
valuation of developed technology of Centillium of $2.8 million was determined
based on its estimated fair value at the acquisition date. A form of the income
approach known as the relief-from-royalty method was the technique used to value
developed technology. The developed technology is being amortized ratably
over five to seven years, which represents the estimated average remaining
useful life.




The
valuation of existing customer relationships of the ASIC Design Center of $1.8
million was determined based on their estimated fair value at the acquisition
date. The income approach, which includes an analysis of the cash flows and
risks associated with achieving such cash flows, was the primary technique used
to value such contracts. The value assigned to the ASIC contracts is
generally being amortized ratably over five years, which represents the
estimated contract average remaining useful life.


60




TRANSWITCH
CORPORATION AND SUBSIDIARIES




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


(Tabular
dollars in thousands, except share and per share amounts)





Unaudited
pro forma results for 2008 and 2007 assuming that Centillium was acquired as of
January 1, 2007: Net revenues of $58.3 million and $48.4 million,
respectively; net loss of $(31.3) million and $(46.5) million, respectively; and
basic and diluted loss per common share of $(1.58) and $(2.36),
respectively.




Note
5. Restricted Cash




At
December 31, 2009, the Company’s liquidity is affected by restricted cash
balances of approximately $2.7 million, which are included in current assets and
are not available for general corporate use. The Company has pledged
approximately $2.7 million of such cash as collateral for stand-by letters of
credit that guarantee certain long-term property lease obligations and to
support customer credit requirements.




At
December 31, 2008, the Company had restricted cash balances of approximately
$4.9 million. The Company pledged $3.1 million of cash as collateral for
stand-by letters of credit that guaranteed certain long-term property lease
obligations and to support customer credit requirements. The other $1.8 million
of restricted cash was being held in escrow for one year as security for certain
indemnification obligations of Centillium as a result of an asset sale agreement
which Centillium had entered into in February of 2008.




Note
6.    Investments in Non-Publicly Traded Companies and
Venture Capital Funds




The
Company owns convertible preferred stock of Opulan Technologies Corp.
(“Opulan”), a 3% limited partnership interest in Neurone II, a venture capital
fund organized as a limited partnership and a 0.42% limited partnership interest
in Munich Venture Partners Fund (“MVP”). The Company accounts for these
investments at cost. The financial condition of these companies is subject to
significant changes resulting from their operating performance and their ability
to obtain financing. The Company continually evaluates its investments in these
companies for impairment. In making this judgment, the Company considers the
investee’s cash position, projected cash flows (both short and long-term),
financing needs, most recent valuation data, the current investing environment,
management/ownership changes, and competition. This evaluation process is based
on information that the Company requests from these privately held companies.
This information is not subject to the same disclosure and audit requirements as
the reports required of U.S. public companies, and as such, the reliability and
accuracy of the data may vary.




As of
December 31, 2006, the Company’s cost method investments were approximately $3.0
million, $2.7 million of which was in Opulan and $0.3 million of which was in
Neurone II.




During
2007, the Company made additional investments of less than $0.1 million and
recognized an impairment of $0.1 million on its investment in Neurone
II.




During
2008, the Company made additional investments of approximately $0.1 million in
MVP.





During
2009, the Company made additional investments of less than $0.1 million and
recognized an impairment of less than $0.1 million on its investment in Neurone
II. As of December 31, 2009, the Company’s cost method investments were
approximately $3.0 million.




Note
7.    Inventories




The
components of inventories follow:





December 31,2009
                
                
                2008Raw
      material
                
                $
                199
                
                
                $
                315Work-in-process
                
                
                1,188
                
                
                
                1,503Finished
      goods
                
                
                2,796
                
                
                
                2,686Total
      inventories
                
                $
                4,183
                
                
                $
                4,504


61


TRANSWITCH
CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Tabular
dollars in thousands, except share and per share amounts)
 
 Note
8.    Property and Equipment, Net
  The
components of property and equipment follow:
  Estimated
                      
                      December31,Useful Lives
                      
                      2009
                      
                      
                      2008Purchased
      computer software
                      1-3
      years
                      
                      $
                      14,647
                      
                      
                      $
                      28,200Computers
      and equipment
                      3-7 years
                      
                      
                      10,853
                      
                      
                      
                      13,730Furniture
                      3-7
      years
                      
                      
                      2,163
                      
                      
                      
                      2,488Leasehold
      improvements
                      Lease term*
                      
                      
                      924
                      
                      
                      
                      938Construction-in-progress
      (software and equipment)
                      
                      
                      
                      25
                      
                      
                      
                      25Gross
      property and equipment
                      
                      
                      
                      28,612
                      
                      
                      
                      45,381Accumulated
      depreciation and amortization
                      
                      
                      
                      (27,344
                      )
                      
                      
                      (43,352
                      )Property
      and equipment, net
                      
                      
                      $
                      1,268
                      
                      
                      $
                      2,029
 
 *
              Estimated useful life of
      improvement if shorter.
 
 Depreciation
expense was $1.1 million, $3.3 million, and $3.9 million, for 2009, 2008 and
2007, respectively.
  Note
9.    Goodwill and Other Intangible Assets
  Changes in the carrying amounts of
goodwill and information about intangible assets follow:
  GoodwillBalance
      at December 31, 2007
                      
                      $
                      10,075Business
      acquisition - Centillium
                      
                      
                      15,004Balance
      at December 31, 2008
                      
                      
                      25,079Purchase
      price allocation adjustments (1)
                      
                      
                      (860
                      )Impairment
      of goodwill (2)
                      
                      
                      (10,075
                      )Balance
      at December 31, 2009
                      
                      $
                      14,144
  (1)
              Relates
      to tax refunds received and accrual adjustments in connection with the
      acquisition of Centillium Communications, Inc. consummated in October
      2008.
 (2)
              During
      the fourth quarter of 2009, impairment testing performed by the Company
      indicated that the estimated fair values of two reporting units tested
      were less than their corresponding carrying amounts. As a result the
      Company recorded a goodwill impairment
charge.
  62
 
 TRANSWITCH
CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Tabular
dollars in thousands, except share and per share amounts)
  OtherIntangibleAssetsDeveloped
                  Technology
                
                
                Customer
                  Relationships
                
                
                TotalBalances
      at December 31, 2009Cost
                
                $
                3,014
                
                
                $
                9,557
                
                
                $
                12,571Accumulated
      amortization
                
                
                (752
                )
                
                
                (1,979
                )
                
                
                (2,731
                )$
                2,262
                
                
                $
                7,578
                
                
                $
                9,840Balances
      at December 31, 2008Cost
                
                $
                3,014
                
                
                $
                9,557
                
                
                $
                12,571Accumulated
      amortization
                
                
                (293
                )
                
                
                (824
                )
                
                
                (1,117
                )$
                2,721
                
                
                $
                8,733
                
                
                $
                11,4542008Cost
                
                $
                2,800
                
                
                $
                7,800
                
                
                $
                10,600Weighted
      average amortization period
                
                6.3
      years
                
                
                10
      years
                
                
                9
      years
  Amortization
expense related to “Other intangible assets” was $1.6 million in 2009, $0.6
million in 2008 and $0.4 million in 2007.  Future estimated aggregate
amortization expense for such assets for each of the five years succeeding
December 31, 2009 follows:  2010 - $1.6 million; 2011 - $1.6 million;
2012 - $1.2 million, 2013 - $1.2 million and 2014 - $1.1 million.
  Note
10.    Accrued Expenses and Other Current
Liabilities
  The
components of accrued and other current liabilities follow:
  December 31,2009
              
              
              2008Accrued
      and other current liabilities
              
              $
              4,939
              
              
              $
              5,578Accrued
      royalties
              
              
              5,578
              
              
              
              6,664Accrued
      compensation and benefits
              
              
              3,264
              
              
              
              3,815Restructuring
      liabilities
              
              
              1,775
              
              
              
              5,725Obligation
      under deferred revenue
              
              
              421
              
              
              
              449Total
      accrued and other current liabilities
              
              $
              15,977
              
              
              $
              22,231
  The
Company periodically evaluates any contingent liabilities in connection with any
payments to be made for any potential intellectual property infringements,
asserted or unasserted. The Company’s accrued royalties as of December 31, 2009
and 2008 represents the contingent payments for asserted or unasserted claims
that are probable as of the respective balance sheet dates based on the
applicable patent law.
  Note
11.    Segment and Major Customer Information
  The
Company has one business segment: communication semiconductor
products.  Its VLSI semiconductor devices provide core functionality
of communications network equipment. The integration of various technologies and
standards in these devices result in a homogeneous product line for management
and measurement purposes.
  63
 
 TRANSWITCH
CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Tabular
dollars in thousands, except share and per share amounts)
  Enterprise-wide
Information
  Enterprise-wide
information provided on geographic net revenues is based on billing locations.
Long-lived asset information is based on the physical location of the assets.
The following tables present net revenues and long-lived assets information for
geographic areas:
 
 YearsEndedDecember31,2009
                        
                        
                        2008
                        
                        
                        2007Net
      revenues:United
      States
                        
                        $
                        16,631
                        
                        
                        $
                        6,122
                        
                        
                        $
                        6,943Japan
                        
                        
                        11,228
                        
                        
                        
                        4,813
                        
                        
                        
                        501Korea
                        
                        
                        7,299
                        
                        
                        
                        2,467
                        
                        
                        
                        1,773Israel
                        
                        
                        5,344
                        
                        
                        
                        10.937
                        
                        
                        
                        5,193China
                        
                        
                        5,112
                        
                        
                        
                        6,943
                        
                        
                        
                        7,468Hong
      Kong
                        
                        
                        3,654
                        
                        
                        
                        1,495
                        
                        
                        
                        71Italy
                        
                        
                        2,098
                        
                        
                        
                        1,324
                        
                        
                        
                        224Germany
                        
                        
                        438
                        
                        
                        
                        1,163
                        
                        
                        
                        4,055Other
      countries
                        
                        
                        4,303
                        
                        
                        
                        6,670
                        
                        
                        
                        6,337Total
                        
                        $
                        56,107
                        
                        
                        $
                        41,934
                        
                        
                        $
                        32,565
 
 As of December 31,2009
                        
                        
                        2008
                        
                        
                        2007Long-lived
      tangible assets:United
      States
                        
                        $
                        680
                        
                        
                        $
                        1,261
                        
                        
                        $
                        3,952Other
      countries
                        
                        
                        1,888
                        
                        
                        
                        2,089
                        
                        
                        
                        2,071Total
                        
                        $
                        2,568
                        
                        
                        $
                        3,350
                        
                        
                        $
                        6,023
  Information
about Major Customers
  The
Company ships its products to distributors and directly to end customers. The
following table sets forth the percentage of net revenues attributable to the
Company’s significant customers:
 
 Years
      ended December 31,2009
                        
                        
                        2008
                        
                        
                        2007Significant
      Customers:Alcatel-Lucent
                        
                        
                        22
                        %
                        
                        
                        18
                        %
                        
                        
                        17
                        %OKI
      Electric Industry
                        
                        
                        18
                        %
                        
                        
                        *
                        
                        
                        
                        *Inbrics
                        
                        
                        11
                        %
                        
                        
                        *
                        
                        
                        
                        *PMC
      Sierra Israel
                        
                        
                        *
                        
                        
                        
                        21
                        %
                        
                        
                        *Nokia
      Siemens
                        
                        
                        *
                        
                        
                        
                        *
                        
                        
                        
                        16
                        %
 
 *
              Revenues
      were less than 10% of the Company’s net revenues in these
      years.
  64
 
 TRANSWITCH
CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Tabular
dollars in thousands, except share and per share amounts)
  Note
12.    Income Taxes
  The
Company adopted a new accounting standard for uncertain income tax
positions,effective
January 1, 2007.The new standard
clarifies and sets forth consistent rules for accounting for uncertain income
tax positions. There was no cumulative effect of applying the provisions of
this standard upon adoption due to the net operating loss and valuation
allowance positions of the Company.  Changes in unrecognized
income tax benefits follow:
  Balance
      at January 1, 2008
                        
                        $
                        6,103Increases
      related to prior year tax positions
                        
                        
                        141Decreases
      related to prior year tax positions
                        
                        
                        (351
                        )Balance
      at December 31, 2008
                        
                        $
                        5,893Decreases
      related to prior year tax positions
                        
                        
                        (4
                        )Balance
      at December 31, 2009
                        
                        $
                        5,889
  Due
to the Company’s net operating loss position in the U.S., any subsequent
recognition of these tax benefits would not likely change the Company’s
effective tax rate. The Company does not reasonably expect any significant
changes in the amount of unrecognized tax benefits to occur within the next
twelve months.
  Historically
the Company has not accrued or paid significant interest and penalties for
underpayments of income taxes due to its net operating loss
position.  Interest and penalties related to underpayment of income
taxes would be classified as a component of income tax expense in the
consolidated statement of operations.  Approximately $132,000 of
interest has been recognized in the balance sheet of the Company through
December 31, 2009. This amount has been recorded as a part of goodwill,
therefore, no interest expense related to this uncertainty has been included in
the consolidated statement of operations.
  The
Company files income tax returns in the U.S. and several foreign countries
and has not extended the statute of limitations to assess additional taxes for
any of these jurisdictions.  The Company has effectively settled U.S.
Federal tax positions taken through 2002.  However, the Company is
subject to adjustment in each of these periods, to the extent of its net
operating loss carry forwards.  The open tax years for foreign
jurisdictions are 2002 through 2009 and 1997 through 2009 for U.S. state and
local jurisdictions.
  The
components of the loss before income taxes follow:
  YearsEndedDecember31,2009
                      
                      
                      2008
                      
                      
                      2007U.S.
      loss
                      
                      $
                      (11,996
                      )
                      
                      $
                      (17,405
                      )
                      
                      $
                      (19,874
                      )Foreign
      income (loss)
                      
                      
                      830
                      
                      
                      
                      849
                      
                      
                      
                      445Loss
      before income taxes
                      
                      $
                      (11,166
                      )
                      
                      $
                      (16,556
                      )
                      
                      $
                      (19,429
                      )
  The
provision for income taxes consists exclusively of current foreign income
taxes.
  A
reconciliation of the U.S. federal statutory rate to the effective income tax
rate follows:
  YearsEndedDecember31,2009
                      
                      
                      2008
                      
                      
                      2007U.S.
      federal statutory tax rate
                      
                      
                      (35.0
                      )%
                      
                      
                      (35.0
                      )%
                      
                      
                      (35.0
                      )%State
      taxes
                      
                      
                      -
                      
                      
                      
                      (9.5
                      )
                      
                      
                      0.6Disallowed
      interest deduction
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3.6Goodwill
      write down
                      
                      
                      15.3
                      
                      
                      
                      -
                      
                      
                      
                      -Change
      in valuation allowance
                      
                      
                      17.1
                      
                      
                      
                      42.0
                      
                      
                      
                      27.4Permanent
      differences, tax credits and other adjustments
                      
                      
                      5.7
                      
                      
                      
                      4.4
                      
                      
                      
                      4.7Effective
      income tax rate
                      
                      
                      3.1
                      %
                      
                      
                      1.9
                      %
                      
                      
                      1.3
                      %
  65
 
 TRANSWITCH
CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Tabular
dollars in thousands, except share and per share amounts)
  The tax
effects of temporary differences that give rise to deferred income taxes
follow:
 
 2009
                    
                    
                    2008Deferred
      income tax assets:Property
      and equipment
                    
                    $
                    843
                    
                    
                    $
                    1,882Other
      nondeductible accruals
                    
                    
                    795
                    
                    
                    
                    388Restructuring
      accrual
                    
                    
                    4,607
                    
                    
                    
                    10,031Capitalized
      research and development for tax purposes
                    
                    
                    11,589
                    
                    
                    
                    21,296Net
      operating loss carry-forwards
                    
                    
                    162,797
                    
                    
                    
                    142,678Capital
      losses
                    
                    
                    1,004
                    
                    
                    
                    15,263Research
      and development and other credits
                    
                    
                    21,334
                    
                    
                    
                    21,762Debt
      discount
                    
                    
                    —
                    
                    
                    
                    68Inventories
                    
                    
                    14,383
                    
                    
                    
                    14,735Stock
      compensation
                    
                    
                    2,230
                    
                    
                    
                    2,242Other
                    
                    
                    2,717
                    
                    
                    
                    360Total
      gross deferred income tax assets
                    
                    
                    222,299
                    
                    
                    
                    230,705Valuation
      allowance
                    
                    
                    (221,207
                    )
                    
                    
                    (229,586
                    )Net
      deferred income tax assets
                    
                    
                    1,092
                    
                    
                    
                    1,119Deferred
      income tax liabilities:Other
                    
                    
                    (1,092
                    )
                    
                    
                    (1,119
                    )Net
      deferred income tax liabilities
                    
                    
                    (1,092
                    )
                    
                    
                    (1,119
                    )Net
      deferred income taxes
                    
                    $
                    —
                    
                    
                    $
                    —
  The
Company continually evaluates its deferred income tax assets to determine
whether it is more likely than not that such assets will be realized. In
assessing the realizability, management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies. Based on this assessment, management believes that significant
uncertainty exists concerning the recoverability of the deferred income tax
assets. As such, a valuation allowance has been provided for deferred income tax
assets as of December 31, 2009 and 2008. Of the $221.2 million valuation
allowance at December 31, 2009, subsequently recognized income tax benefits, if
any, in the amount of $4.7 million will be applied directly to additional
paid-in capital and $72.1 million to goodwill.
  At
December 31, 2009, the Company had available, for federal income tax purposes,
net operating loss (“NOL”) carry-forwards of approximately $439.4 million and
research and development tax credit carry-forwards of approximately $21.3
million expiring in varying amounts from 2009 through 2029. For state income tax
purposes, the Company had available NOL carry-forwards of approximately $163.5
million and state tax credit carry-forwards of $7.7 million expiring in varying
amounts from 2009 to 2029.  Additionally, the Company has generated
$20.3 million of NOL’s in foreign jurisdictions which can be carried forward
indefinitely.
  66
 
 TRANSWITCH
CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Tabular
dollars in thousands, except share and per share amounts)
  Certain
transactions involving the Company’s beneficial ownership have occurred in prior
years, which resulted in a stock ownership change for purposes of Section 382 of
the Internal Revenue Code of 1986, as amended. Consequently, approximately
$189.2 million of the NOL carry-forwards and $11.6 million of research and
development tax credit carry-forwards are subject to these limitations. The
Company has not yet determined if any of the NOL and credits generated through
2009 will be subject to limitation under Section 382.
  Note
13.    Stockholders’ Rights Plan
  The Board
of Directors enacted a stockholder rights plan and declared a dividend of one
preferred share purchase right for each outstanding share of TranSwitch common
stock outstanding at the close of business on October 1, 2001 to the
stockholders of record on that date. Each stockholder of record as of October 1,
2001 received a summary of the rights and any new stock certificates issued
after the record date contain a legend describing the rights. Each preferred
share purchase right entitles the registered holder to purchase from the Company
one one hundred and twenty-fifth of a share of Series A Junior Participating
Preferred Stock, par value $0.01 per share, of the Company, at a price of
$400.00 per one one hundred and twenty-fifth of a Preferred Share, subject to
adjustment, upon the occurrence of certain triggering events, including the
purchase of 15% or more of the Company’s outstanding common stock by a third
party. Until a triggering event occurs, the common stockholders have no right to
purchase shares under the stockholder rights plan. If the right to purchase the
preferred stock is triggered, the common stockholders will have the ability to
purchase sufficient stock to significantly dilute the 15% or greater
holder.
  Note
14.    Employee Benefit Plans
  Employee
Stock Purchase Plans
  Under the
Company’s employee stock purchase plans, eligible employees may purchase a
limited number of shares of common stock at 85% of the fair market value at
either the date of enrollment or the date of purchase, whichever is less. The
1995 Employee Stock Purchase Plan was closed effective December 31, 2004. On May
19, 2005 the Company’s shareholders approved the 2005 Employee Stock Purchase
Plan (the 2005 ESPP). Under the 2005 ESPP, the Company is authorized to issue
125,000 shares of common stock. Shares issued under the 2005 ESPP in 2009, 2008,
and 2007 were 10,172, 10,273, and 12,730 respectively.
  Stock
Option and Award Plans
  As of
December 31, 2009, the Company has three stock options plans: the 1995 Stock
Plan, as amended (the “1995 Plan”), 2000 Stock Option Plan as amended (the “2000
Plan”), and the 2008 Equity Incentive Plan (the ‘2008 Plan”). The 1995
Non-Employee Director Stock Option Plan, as amended (the “Director Plan”)
expired during 2005.
  Under the
1995 Plan, 3,925,000 shares of the Company’s common stock are available to grant
to employees in the form of incentive stock options. Also, non-qualified stock
options and stock awards may be granted to employees, consultants and directors.
The terms of the options granted are subject to the provisions of the 1995 Plan,
as determined by the Compensation Committee of the Board of
Directors.  The exercise price of options under the 1995 Plan must be
equal to the fair market value of the common stock on the date of grant. Options
granted under the 1995 Plan are generally nontransferable. The 1995 Plan, as
amended, expires March 15, 2010.  In connection with the adoption of
the 2008 Plan on May 22, 2008, shares are no longer available for grant under
the 1995 Plan.
  The 2000
Plan provides for the granting of non-qualified options to employees and
consultants to purchase up to an aggregate of 1,250,000 shares of common
stock.  No member of the Board of Directors or executive officers
appointed by the Board of Directors is eligible for grants of options under the
2000 Plan. The terms of the options granted are subject to the provisions of the
2000 Plan, as determined by the Compensation Committee of the Board of
Directors. Each non-qualified stock option shall either be fully exercisable on
the date of grant or shall become exercisable thereafter in such installments as
the Board of Directors may specify. The 2000 Plan will terminate in 2010. No
option granted under the 2000 Plan may be exercised after the expiration of
seven years from the date of grant. The exercise price of options under the 2000
Plan must be equal to the fair market value of the common stock on the date of
grant. Options granted under the 2000 Plan are generally nontransferable. In
connection with the adoption of the 2008 Plan on May 22, 2008, shares are no
longer available for grant under the 2000 Plan.
  67
 
 TRANSWITCH
CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Tabular
dollars in thousands, except share and per share amounts)
  The
2008 Plan was approved by shareholders at the shareholder meeting held on May
22, 2008.  The purpose of this plan is to provide stock options, stock
issuances, and other equity interests in the Company to employees, officers,
directors, consultants, and advisors to the Company and its subsidiaries or any
future parent corporation. The 2008 Plan is to be administered by the Board of
Directors of the Company who will have sole discretion and authority to
interpret and correct the provisions of the Plan and any Award. The Board will
also have sole authority to determine the terms and provisions of the respective
Stock Option Agreements and Awards, which need not be identical.  The
aggregate number of shares of Common Stock of the Company that may be issued
pursuant to the 2008 Plan is 3,196,250. As of December 31, 2009, there were
1,128,418 shares available for grant under the 2008 Plan.
  Information
regarding stock options follows:
  Number
                                  of options
                                  outstanding
                                
                                
                                Weighted average
                                  exercise price
                                  per shareOutstanding
      at December 31, 2006
                                
                                
                                3,030,895
                                
                                
                                $
                                61.49Granted
      and assumed
                                
                                
                                244,151
                                
                                
                                
                                11.93Exercised
                                
                                
                                (131,357
                                )
                                
                                
                                9.33Canceled,
      forfeited or expired
                                
                                
                                (707,821
                                )
                                
                                
                                139.36Outstanding
      at December 31, 2007
                                
                                
                                2,435,868
                                
                                
                                
                                37.71Granted
      and assumed
                                
                                
                                1,406,963
                                
                                
                                
                                9.66Exercised
                                
                                
                                (12,576
                                )
                                
                                
                                5.54Canceled,
      forfeited or expired
                                
                                
                                (962,137
                                )
                                
                                
                                61.28Outstanding
      at December 31, 2008
                                
                                
                                2,868,118
                                
                                
                                
                                15.33Granted
                                
                                
                                461,650
                                
                                
                                
                                2.97Exercised
                                
                                
                                (29,064
                                )
                                
                                
                                2.93Canceled,
      forfeited or expired
                                
                                
                                (815,570
                                )
                                
                                
                                24.97Outstanding
      at December 31, 2009
                                
                                
                                2,485,134
                                
                                
                                $
                                10.02
  Information
regarding restricted stock awards follows:
  Outstanding
      at December 31, 2007
                          
                          
                          -
                          
                          
                          $
                          0.00Granted
                          
                          
                          -
                          
                          
                          
                          0.00Assumed
                          
                          
                          181,968
                          
                          
                          
                          0.00Released
                          
                          
                          (2,133
                          )
                          
                          
                          0.00Canceled,
      forfeited or expired
                          
                          
                          (42,725
                          )
                          
                          
                          0.00Outstanding
      at December 31, 2008
                          
                          
                          137,110
                          
                          
                          
                          0.00Granted
                          
                          
                          495,502
                          
                          
                          
                          0.00Released
                          
                          
                          (39,225
                          )
                          
                          
                          0.00Canceled,
      forfeited or expired
                          
                          
                          (22,205
                          )
                          
                          
                          0.00Outstanding
      at December 31, 2009
                          
                          
                          571,182
                          
                          
                          $
                          0.00
  The
Company has, in connection with the acquisitions of various companies, assumed
the stock option plans of each acquired company.  The related options
are included in the preceding table
  68
 
 TRANSWITCH
CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Tabular
dollars in thousands, except share and per share amounts)
  Options
outstanding and exercisable at December 31, 2009 follow:
  Options Outstanding
                                
                                
                                Options ExercisableRange of
                                  Exercise prices
                                
                                Number
                                  Outstanding
                                
                                
                                Weighted
                                  Average
                                  Remaining
                                  Contractual
                                  Life
                                
                                
                                Weighted
                                  average
                                  exercise
                                  price
                                
                                
                                Number
                                  Exercisable
                                
                                
                                Weighted
                                  average
                                  exercise
                                  price$
                                2.00  to  2.32
                                
                                
                                224,506
                                
                                
                                
                                5.84
                                
                                
                                $
                                2.27
                                
                                
                                
                                80,118
                                
                                
                                $
                                2.302.43  to  2.43
                                
                                
                                267,540
                                
                                
                                
                                6.89
                                
                                
                                
                                2.43
                                
                                
                                
                                2,119
                                
                                
                                
                                2.432.48  to  5.12
                                
                                
                                253,536
                                
                                
                                
                                5.61
                                
                                
                                
                                4.10
                                
                                
                                
                                151,275
                                
                                
                                
                                4.445.52  to  7.36
                                
                                
                                271,067
                                
                                
                                
                                4.46
                                
                                
                                
                                6.22
                                
                                
                                
                                170,272
                                
                                
                                
                                6.577.37
      to 11.04
                                
                                
                                260,441
                                
                                
                                
                                4.69
                                
                                
                                
                                9.51
                                
                                
                                
                                227,263
                                
                                
                                
                                9.4511.12
      to 12.40
                                
                                
                                305,613
                                
                                
                                
                                2.37
                                
                                
                                
                                12.00
                                
                                
                                
                                302,780
                                
                                
                                
                                12.0012.41
      to 13.28
                                
                                
                                345,934
                                
                                
                                
                                3.84
                                
                                
                                
                                13.15
                                
                                
                                
                                343,553
                                
                                
                                
                                13.1513.44
      to 16.88
                                
                                
                                298,935
                                
                                
                                
                                3.59
                                
                                
                                
                                14.77
                                
                                
                                
                                297,442
                                
                                
                                
                                14.7717.04
      to 27.12
                                
                                
                                252,131
                                
                                
                                
                                2.92
                                
                                
                                
                                22.54
                                
                                
                                
                                251,756
                                
                                
                                
                                22.5530.04 to
      410.00
                                
                                
                                5,431
                                
                                
                                
                                1.58
                                
                                
                                
                                39.97
                                
                                
                                
                                5,431
                                
                                
                                
                                39.97$
                                2.00  to
    410.00
                                
                                
                                2,485,134
                                
                                
                                
                                4.38
                                
                                
                                $
                                10.02
                                
                                
                                
                                1,831,989
                                
                                
                                $
                                12.32
  Stock
options generally expire five, seven or ten years from the date of grant and
generally vest ratably over periods ranging from immediately to four
years.
  As of
December 31, 2009 both the fair value of options outstanding and the fair value
of options exercisable were less than the exercise price.
  Stock
compensation charged to operations was $1.3 million in 2009, $1.5 million in
2008, and $2.0 million in 2007. Further, no compensation cost was capitalized as
part of inventory, and no income tax benefit was recognized in those years.
Lastly, no equity awards were settled in cash.
  Stock-Based Compensation Fair Value
Disclosures
  The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
  2009
                      
                      
                      2008
                      
                      
                      2007Risk-free
      interest rate
                      
                      
                      2.43
                      %
                      
                      
                      1.82
                      %
                      
                      
                      4.62
                      %Expected
      life in years
                      
                      
                      4.03
                      
                      
                      
                      2.95
                      
                      
                      
                      3.38Expected
      volatility
                      
                      
                      89.26
                      %
                      
                      
                      68.21
                      %
                      
                      
                      91.98
                      %Expected
      dividend yield
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
  The
weighted average fair value of stock options granted, calculated using the
Black-Scholes option-pricing model, is $1.89, $0.87 and $7.45 for 2009, 2008 and
2007, respectively. The weighted average fair value of restricted stock units
granted, calculated using the Black-Scholes option-pricing model, is $3.01 for
2009.  No restricted stock units were granted during 2008 or 2007. The
total intrinsic value of the options exercised was $0.06 million, $0.02 million
and $0.5 million for 2009, 2008 and 2007, respectively. In 2009 and 2008,
restricted stock units released had an intrinsic value of $0.1 million and
approximately five thousand dollars, respectively. No restricted stock units
were released in 2007.
  The
Company recognized compensation expense related to stock options granted to
non-employees of $0.01 million in 2009, $0.03 million in 2008 and $0.1 million
in 2007.
  69
 
 TRANSWITCH
CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Tabular
dollars in thousands, except share and per share amounts)
  Employee 401(k)
Plan
  The
TranSwitch Corporation 401(k) Retirement Plan (the “Plan”) provides tax-deferred
salary deductions for eligible employees. Employees may contribute an annual
maximum amount as set periodically by the Internal Revenue Service. The Company
provides matching contributions equal to 50% of the employees’ contributions, up
to a maximum of 6% of the employee’s annual compensation. On July 1, 2009, the
Company indefinitely suspended its matching contributions. Company contributions
begin vesting after two years and are fully vested after three years.
Contribution expense related to the Plan was $0.1 million, $0.2 million and $0.2
million for 2009, 2008 and 2007, respectively.
  Note
15.    Convertible Notes
  On July
6, 2007, the Company exchanged approximately $21.2 million aggregate principal
amount of its then outstanding 5.45% Convertible Plus Cash Notes due
September 30, 2007 (the “Plus Cash Notes”) for an equivalent principal amount of
a new series of 5.45% Convertible Notes due September 30, 2010 (the “2010
Notes”). The remaining $8.9 million balance of the 2007 Plus Cash Notes
were redeemed at par value for cash at the end of September, 2007. In connection
with the exchange the Company recorded an extinguishment loss of approximately
$0.4 million, including a non-cash write-off of unamortized debt discount and
deferred debt issuance costs.
  Also on
July 6, 2007, the Company issued for an equal amount of cash an additional $3.8
million aggregate principal amount of 2010 Notes. At December 31, 2007, the
Company had $25.0 million of the 2010 Notes outstanding.
  On
December 24, 2008, the Company entered into an agreement with certain holders of
its 2010 Notes to purchase $15.0 million aggregate principal amount of
the 2010 Notes for $9.9 million in cash, plus accrued and unpaid interest.
As a result of this transaction, the Company recorded an extinguishment gain of
$4.5 million, net of a non-cash write-off of unamortized deferred debt issuance
costs. As of December 31, 2008, $10.0 million of the 2010 Notes remained
outstanding.
  On
October 26, 2009, the Company exchanged approximately $10.0 million aggregate
principal amount of its unsecured 2010 Notes for an equal principal amount of
new unsecured 5.45% Convertible Notes due September 30, 2011 (the “2011
Notes”).
  The
2011 Notes are convertible at the option of the holder, at any time on or prior
to maturity at an initial conversion ratio of 138.8888 per $1,000 principal
amount.
 
 If
a holder of the 2011 Notes converts such notes in connection with a corporate
transaction that constitutes a change in control, as defined, at any time prior
to July 6, 2011, then in addition to the conversion shares, as defined, such
holder is also entitled to receive upon such conversion, a make-whole payment
premium in cash.
 
 Commencing
on October 30, 2009, the 2011 Notes are payable in monthly principal payments of
$417,000 plus interest. The Company’s future principal payments are expected to
be $5.0 million in 2010 and $3.8 million in 2011. The interest payments on the
2011 Notes are expected to be $0.3 million in 2010 and $0.1 million in
2011.
 
 The
principal payments for the 2011 Notes may be paid for in shares of the Company’s
common stock, solely at the Company’s option and upon the satisfaction or waiver
of certain conditions by the note holder.  If the Company elects to
make any payment of or provision for principal in shares of its common stock,
the shares to be delivered will be valued at the lower of $0.90 (subject to
adjustment) or 90% of the arithmetic average of the daily volume-weighted
average price of the common stock for the ten (10) consecutive trading days
ending on or including the second trading day immediately preceding the
applicable interest payment date but; not be less than $0.45.
 
 The
Company may redeem some or all of the 2011 Notes at any time prior to maturity
for cash equal to the principal amount, plus accrued and unpaid interest;
provided, however, that the 2011 Notes will not be redeemable prior to maturity
unless the closing price per share of the Company’s common stock exceeds 150% of
the conversion price, which shall initially be $.90, for at least 20 trading
days within a period of 30 consecutive trading days ending within five trading
days immediately preceding notice to holders of such redemption.
 
 The
holders of the 2011 Notes may require the Company to repurchase the 2011 Notes
upon a change in control for cash at 100% of the principal amount, plus accrued
and unpaid interest.
  70
 
 TRANSWITCH
CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Tabular
dollars in thousands, except share and per share amounts)
  The
terms underlying the 2011 Notes contain certain customary covenants that limit,
among other things, the Company’s ability to incur additional debt. The failure
to comply with such covenants could cause the 2011 Notes to become due and
payable immediately.
  As
of December 31, 2009, $8.8 million of the 2011 Notes remained
outstanding.  Approximately $5.0 million of the 2011 Notes has been
classified as short-term as of December 31, 2009.
  Note
16.    Restructuring and Asset Impairment
Charges
  During
2009, the Company recorded a net restructuring benefit of approximately $6.3
million, primarily resulting from a new sublease. On March 3, 2009 the Company
entered into a sublease with a major corporation to sublease 92,880 square feet
of office space located in Shelton, Connecticut to the year 2014.  As
a result of this sublease, the Company reversed approximately $6.7 million of
accrued restructuring expense that it initially recorded in 2001. The Company
also reversed approximately $0.9 million of accrued restructuring expense as a
result of certain other sub-lease agreements relating to the Company’s excess
facilities in Shelton, Connecticut.  These benefits were partially
offset by approximately $1.3 million of charges for workforce reductions and
other restructuring adjustments.
  During 2008 the Company implemented
restructuring plans that resulted in total restructuring costs of approximately
$7.2 million, of which approximately $3.8 million was recorded as restructuring
charges in its Consolidated Statements of Operations and $3.4 was recorded as a
liability assumed in the acquisition of Centillium.  These
restructuring plans included the elimination of approximately 76 positions,
primarily in the Company’s Shelton, Connecticut, Bedford, Massachusetts,
Fremont, California, Eclubens, Switzerland, New Delhi, India and Bangalore,
India locations.  As a result, the Company recorded restructuring
charges in its Consolidated Statements of Operations of approximately $1.7
million related to employee termination benefits, $0.8 million related to asset
impairments, $0.7 million related to excess facility costs net of anticipated
sublease income and $0.8 million in other restructuring
charges.  These
2008 charges were partially offset by approximately $0.2
million of benefits related to adjustments to certain sublease agreements
relating to the Company’s excess facilities in Shelton,
Connecticut
  In connection with the
restructuring events of 2008, approximately $6.3 million of the $7.2 million in
restructuring costs required cash expenditures. As of December 31, 2009, all but
$0.2 million of the cash expenditures had been paid. The remaining $0.2 million
will be paid in 2010.
  During
2007 the Company recorded restructuring charges of approximately $1.5 million
related to workforce reductions.
  71
 TRANSWITCH
CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Tabular
dollars in thousands, except share and per share amounts)
 A summary
of the restructuring liabilities and activity follows:
 2009 ActivityRestructuring
                    Liabilities
                    December 31,
                    2008
                  
                  
                  Restructuring
                    Charges
                  
                  
                  Cash Payments
                  
                  
                  Non-cash
                    asset
                    write-offs
                  
                  
                  Adjustments
                    and Changes
                    to Estimates
                  
                  
                  Restructuring
                    Liabilities
                    December 31,
                    2009Employee
      Termination Benefits
                  
                  $
                  1,930
                  
                  
                  $
                  523
                  
                  
                  $
                  (2,437
                  )
                  
                  $
                  —
                  
                  
                  $
                  227
                  
                  
                  $
                  243Facility
      lease costs
                  
                  
                  22,534
                  
                  
                  
                  —
                  
                  
                  
                  (3,444
                  )
                  
                  
                  —
                  
                  
                  
                  (6,965
                  )
                  
                  
                  12,125Asset
      impairments
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (82
                  )
                  
                  
                  82
                  
                  
                  
                  —Other
                  
                  
                  925
                  
                  
                  
                  48
                  
                  
                  
                  (801
                  )
                  
                  
                  —
                  
                  
                  
                  (172
                  )
                  
                  
                  —Totals
                  
                  $
                  25,389
                  
                  
                  $
                  571
                  
                  
                  $
                  (6,682
                  )
                  
                  $
                  (82
                  )
                  
                  $
                  (6,828
                  )
                  
                  $
                  12,368
 
 2008 ActivityRestructuring
                      Liabilities
                      December 31,
                      2007
                    
                    
                    Liabilities
                      assumedin
                      acquisition of
                      business
                    
                    
                    Restructuring
                      Charges
                    
                    
                    Cash Payments
                    
                    
                    Non-cash
                      asset
                      write-offs
                    
                    
                    Adjustments
                      and Changes
                      to Estimates
                    
                    
                    Restructuring
                      Liabilities
                      December 31,
                      2008Employee
      Termination Benefits
                    
                    $
                    235
                    
                    
                    $
                    3,071
                    
                    
                    $
                    1,740
                    
                    
                    $
                    (3,080
                    )
                    
                    $
                    —
                    
                    
                    $
                    (36
                    )
                    
                    $
                    1,930Facility
      lease costs
                    
                    
                    20,731
                    
                    
                    
                    1,686
                    
                    
                    
                    728
                    
                    
                    
                    (346
                    )
                    
                    
                    —
                    
                    
                    
                    (265
                    )
                    
                    
                    22,534Asset
      impairments
                    
                    
                    —
                    
                    
                    
                    42
                    
                    
                    
                    835
                    
                    
                    
                    —
                    
                    
                    
                    (877
                    )
                    
                    
                    —
                    
                    
                    
                    —Other
                    
                    
                    124
                    
                    
                    
                    —
                    
                    
                    
                    783
                    
                    
                    
                    (1
                    )
                    
                    
                    —
                    
                    
                    
                    19
                    
                    
                    
                    925Totals
                    
                    $
                    21,090
                    
                    
                    $
                    4,799
                    
                    
                    $
                    4,086
                    
                    
                    $
                    (3,427
                    )
                    
                    $
                    (877
                    )
                    
                    $
                    (282
                    )
                    
                    $
                    25,389
  Note
17.    Commitments and Contingencies
  Lease
Agreements
  The
Company leases buildings and equipment at its headquarters in Shelton,
Connecticut as well as at its subsidiaries’ locations
worldwide.  Rental expense under all operating lease agreements was
$1.5 million in 2009, $2.0 million in 2008 and $1.7 million in
2007.
  The
following table summarizes as of December 31, 2009 future minimum operating
lease commitments, including contractually obligated building operating
commitments that have remaining, non-cancelable lease terms in excess of one
year and future anticipated sublease income:
  Operating
                      Commitments
                    
                    
                    Less:
                      Sublease
                      Agreements
                    
                    
                    Net
                      Commitments2010
                    
                    $
                    5,506
                    
                    
                    $
                    3,331
                    
                    
                    $
                    2,1752011
                    
                    
                    4,299
                    
                    
                    
                    2,732
                    
                    
                    
                    1,5672012
                    
                    
                    4,238
                    
                    
                    
                    2,581
                    
                    
                    
                    1,6572013
                    
                    
                    3,380
                    
                    
                    
                    2,180
                    
                    
                    
                    1,2002014
                    
                    
                    3,220
                    
                    
                    
                    1,181
                    
                    
                    
                    2,039Thereafter
                    
                    
                    7,393
                    
                    
                    
                    -
                    
                    
                    
                    7,393$
                    28,036
                    
                    
                    $
                    12,005
                    
                    
                    $
                    16,031
  72
 
 TRANSWITCH
CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Tabular
dollars in thousands, except share and per share amounts)
  Patent
Indemnity
  Under the
terms of substantially all of its sales agreements, the Company has agreed to
indemnify its customers for costs and damages arising from claims against such
customer based on, among other things, allegations that the Company’s products
infringed upon the intellectual property rights of a third party. In the event
of an infringement claim, the Company retains the right to (i) procure for the
customer the right to continue using the product; (ii) replace the product with
a non-infringing item which shall give equally good service; (iii) modify the
product so that it becomes non-infringing; or (iv) remove the product and, on
return of the product to the Company, the Company shall refund the buyers
purchase price. Due to the nature of these indemnification agreements, the
maximum potential future payments the Company could be required to make under
these guarantees, when and if such claims may arise, cannot be reliably
determined. No amounts have been accrued for any estimated losses with respect
to these guarantees for customer indemnifications since it is not probable that
a loss will be incurred. No claims have been made under these indemnity
provisions.
  Purchase
Commitments
 
 In the
normal course of business, the Company makes various commitments to purchase
goods or services from specific suppliers, including those related to capital
expenditures. As of December 31, 2009, the Company had purchase commitments
totaling $5.7 million
 
 Note
18.    Supplemental Cash Flow Information
  Supplemental
cash flow information follows:
 
 Years Ended December 31,2009
                      
                      
                      2008
                      
                      
                      2007Cash
      paid for interest
                      
                      $
                      712
                      
                      
                      $
                      1,554
                      
                      
                      $
                      1,705Cash
      paid for income taxes
                      
                      $
                      194
                      
                      
                      $
                      340
                      
                      
                      $
                      373
  During
2008, in connection with the Centillium acquisition, the Company issued
3,125,000 shares of its common stock with an approximate fair value of $25.0
million.
 
 In
connection with the ASIC Design Center acquisition in 2007 the Company issued
468,339 shares of its common stock with an approximate fair value of $5.5
million.
 
 Note
19.   Stock Repurchase Program
  On February 13, 2008 the Company
announced that its Board of Directors authorized a stock repurchase program
under which the Company may repurchase up to $10 million of its outstanding
common stock.  The share repurchase program authorizes the Company to
repurchase shares through February 2010, from time to time, through transactions
in the open market or in privately negotiated transactions.  The
number of shares to be purchased and the timing of the purchases will be based
on market conditions and other factors.  The stock repurchase program
does not require the Company to repurchase any specific dollar value or number
of shares, and the Company may terminate the repurchase program at any
time.
  73
 
 TRANSWITCH
CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Tabular
dollars in thousands, except share and per share amounts)
  During
2008, the Company purchased 20,794 shares of its outstanding common stock at an
average price of $5.44 per share or approximately $0.1 million, excluding
commissions.  There were no such repurchases in 2009.
  Note
20.    Subsequent Events
  On
December 31, 2009, the Company, entered into a Common Stock Purchase Agreement
(the "Common Stock Purchase Agreement") with Seaside 88, LP, a Florida limited
partnership ("Seaside"), relating to the offering and sale (the "Offering") of
up to 1,950,000 shares (the "Shares") of the Company's common stock. The Common
Stock Purchase Agreement requires the Company to issue and sell, and Seaside to
purchase, up to 75,000 shares of Common Stock once every two (2) weeks, subject
to the satisfaction of customary closing conditions, beginning on January 4,
2010 and ending on or about the date that is fifty (50) weeks subsequent
to  closing. The offering price of the Company’s common stock at each
closing is an amount equal to the lower of (i) the daily volume weighted average
of actual trading prices of the common stock on the trading market (the "VWAP")
for the ten consecutive trading days immediately prior to a closing date
multiplied by 0.875 and (ii) the VWAP for the trading day immediately prior to a
closing date multiplied by 0.90.  In the event that the 3-Day VWAP, as
defined in the Common Stock Purchase Agreement, does not equal or exceed $1.00
(the "Floor"), as calculated with respect to any subsequent closing date, then
such subsequent closing will not occur, and there will be one fewer subsequent
closing and the aggregate number of Shares to be purchased under the Common
Stock Purchase Agreement will be reduced by 75,000 shares for each subsequent
closing that does not occur because the Floor has not been reached. The Common
Stock Purchase Agreement provides that the Company may, upon ten days' prior
written notice to Seaside, terminate the Common Stock Purchase Agreement after
the fifth subsequent closing (i.e., after six closings) but prior to the sixth
subsequent closing. The Common Stock Purchase Agreement contains representations
and warranties and covenants for each party, which must be true and have been
performed at each closing.
  As
of March 15, 2010, the Company has had 6 closings with Seaside and has sold
450,000 shares of stock to Seaside for an aggregate price of approximately $0.8
million.
 
 On
February 1, 2010, the Company announced that it recently effected a
restructuring to be implemented and concluded during the first quarter of 2010.
The Company expects that such restructuring and other cost reduction initiatives
will result in annual savings of approximately $4.0 million, and that these
savings will begin to be recognized in the first quarter of 2010.  Of
this amount, the Company expects annual savings of approximately $2.4 million in
reduced employee related costs, including base salary reductions, and $1.6
million from other cost savings initiatives. In connection with the
restructuring, the Company expects to incur pre-tax restructuring charges of
approximately $1.4 million which will be cash expenditures primarily for
employee related costs. These charges are expected to be recorded in the first
quarter of 2010.
  On
March 12, 2010 the Company entered into a new credit facility agreement with
Bridge Bank N.A., a subsidiary of Bridge Capital Holdings. The facility is for
up to $5.0 million with availability determined by the Company’s outstanding
accounts receivable.
  Note
21.    Quarterly Information (Unaudited)
  The table
below shows selected unaudited quarterly information of operating results. The
Company believes that this information reflects all normal recurring adjustments
necessary for a fair presentation of the information for the periods presented.
Interim operating results are not necessarily indicative of future period
results.
  First
                    Quarter
                  
                  
                  Second
                    Quarter
                  
                  
                  Third
                    Quarter
                  
                  
                  Fourth
                    Quarter
                  
                  
                  Full
                    YearYear
      ended December 31, 2009Net
      revenues
                  
                  $
                  14,247
                  
                  
                  $
                  14,535
                  
                  
                  $
                  15,181
                  
                  
                  $
                  12,144
                  
                  
                  $
                  56,107Cost
      of revenues
                  
                  
                  5,937
                  
                  
                  
                  5,983
                  
                  
                  
                  7,050
                  
                  
                  
                  5,653
                  
                  
                  
                  24,623Gross
      profit
                  
                  
                  8,310
                  
                  
                  
                  8,552
                  
                  
                  
                  8,131
                  
                  
                  
                  6,491
                  
                  
                  
                  31,484Net
      income (loss) (2)
                  
                  
                  4,016
                  
                  
                  
                  (1,320
                  )
                  
                  
                  (1,497
                  )
                  
                  
                  (12,730
                  )
                  
                  
                  (11,531
                  )Net
      income (loss) per common share (1):Basic
                  
                  $
                  0.20
                  
                  
                  $
                  (0.07
                  )
                  
                  $
                  (0.08
                  )
                  
                  $
                  (0.64
                  )
                  
                  $
                  (0.58
                  )Diluted
                  
                  $
                  0.19
                  
                  
                  $
                  (0.07
                  )
                  
                  $
                  (0.08
                  )
                  
                  $
                  (0.64
                  )
                  
                  $
                  (0.58
                  )Year ended December 31,
      2008Net
      revenues
                  
                  $
                  7,520
                  
                  
                  $
                  8,891
                  
                  
                  $
                  10,498
                  
                  
                  $
                  15,025
                  
                  
                  $
                  41,934Cost
      of revenues
                  
                  
                  2,935
                  
                  
                  
                  3,549
                  
                  
                  
                  4,517
                  
                  
                  
                  7,039
                  
                  
                  
                  18,040Gross
      profit
                  
                  
                  4,585
                  
                  
                  
                  5,342
                  
                  
                  
                  5,981
                  
                  
                  
                  7,986
                  
                  
                  
                  23,894Net
      loss (2)
                  
                  
                  (5,494
                  )
                  
                  
                  (4,320
                  )
                  
                  
                  (2,956
                  )
                  
                  
                  (4,276
                  )
                  
                  
                  (17,046
                  )Net
      loss per common share (1):Basic
                  
                  $
                  (0.33
                  )
                  
                  $
                  (0.26
                  )
                  
                  $
                  (0.18
                  )
                  
                  $
                  (0.22
                  )
                  
                  $
                  (0.98
                  )Diluted
                  
                  $
                  (0.33
                  )
                  
                  $
                  (0.26
                  )
                  
                  $
                  (0.18
                  )
                  
                  $
                  (0.22
                  )
                  
                  $
                  (0.98
                  )
 
 (1)
              The sum of quarterly per share
      amounts may not equal per share amounts reported for year-to-date periods
      due to changes in the number of weighted average shares outstanding and
      the effects of rounding.
 (2)
              The
      reported net loss for 2009 and 2008 reflects stock-based compensation
      expense of $1.3 million (Q1 of $0.3 million, Q2 of $0.3 million, Q3 of
      $0.3 million and Q4 of $0.4 million) and $1.5 million (Q1 of $0.4 million,
      Q2 of $0.3 million, Q3 of $0.3 million and Q4 of $0.5 million),
      respectively.
  74
  SCHEDULE
II
  TRANSWITCH
CORPORATION
  VALUATION
AND QUALIFYING ACCOUNTS
 (in
thousands)
  AdditionsDescription
                  
                  Balance at
                    Beginning
                    of Year
                  
                  
                  Charges to
                    Costs and
                    Expenses
                  
                  
                  Charges
                    to Other
                    Accounts
                  
                  
                  Deductions
                  
                  
                  Balance
                    at End
                    of YearYear
      ended December 31, 2009:Allowance
      for losses on:Accounts
      receivable
                  
                  $
                  536
                  
                  
                  $
                  94
                  
                  
                  $
                  —
                  
                  
                  $
                  (114
                  )
                  
                  $
                  516Sales
      returns and allowances
                  
                  
                  151
                  
                  
                  
                  (2
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  149Stock
      rotation
                  
                  
                  44
                  
                  
                  
                  704
                  
                  
                  
                  —
                  
                  
                  
                  (137
                  )
                  
                  
                  611Deferred
      income tax assets valuation allowance
                  
                  
                  229,586
                  
                  
                  
                  (8,379
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  221,207$
                  230,317
                  
                  
                  $
                  (7,583
                  )
                  
                  $
                  —
                  
                  
                  $
                  (251
                  )
                  
                  $
                  222,483Year
      ended December 31, 2008:Allowance
      for losses on:Accounts
      receivable
                  
                  $
                  623
                  
                  
                  $
                  (3
                  )
                  
                  $
                  17
                  
                  
                  $
                  (101
                  )
                  
                  $
                  536Sales
      returns and allowances
                  
                  
                  99
                  
                  
                  
                  261
                  
                  
                  
                  151
                  
                  
                  
                  (360
                  )
                  
                  
                  151Stock
      rotation
                  
                  
                  60
                  
                  
                  
                  27
                  
                  
                  
                  —
                  
                  
                  
                  (43
                  )
                  
                  
                  44Deferred
      income tax assets valuation allowance
                  
                  
                  148,250
                  
                  
                  
                  9,263
                  
                  
                  
                  72,073
                  
                  
                  
                  —
                  
                  
                  
                  229,586$
                  149,032
                  
                  
                  $
                  9,548
                  
                  
                  $
                  72,241
                  
                  
                  $
                  (504
                  )
                  
                  $
                  230,317Year
      ended December 31, 2007:Allowance
      for losses on:Accounts
      receivable
                  
                  $
                  473
                  
                  
                  $
                  118
                  
                  
                  $
                  32
                  
                  
                  $
                  —
                  
                  
                  $
                  623Sales
      returns and allowances
                  
                  
                  37
                  
                  
                  
                  322
                  
                  
                  
                  —
                  
                  
                  
                  (260
                  )
                  
                  
                  99Stock
      rotation
                  
                  
                  75
                  
                  
                  
                  34
                  
                  
                  
                  —
                  
                  
                  
                  (49
                  )
                  
                  
                  60Deferred
      income tax assets valuation allowance
                  
                  
                  142,791
                  
                  
                  
                  5,459
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  148,250$
                  143,376
                  
                  
                  $
                  5,933
                  
                  
                  $
                  32
                  
                  
                  $
                  (309
                  )
                  
                  $
                  149,032
  Item
9.    Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
  None.
  Item
9A.    Controls and
Procedures
  Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
  Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as amended. Based upon that evaluation, our principal executive officer and
principal financial officer concluded that, as of the evaluation date, our
disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports that we file or submit under the
Securities Exchange Act of 1934 are recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission’s rules and forms.
  75
 
 Management’s
Annual Report on Internal Control over Financial Reporting
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control - Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated
Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2009.
  The
independent registered public accounting firm of the Company has issued a report
on its assessment of the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2009.  That report appears
under Item 8.
  Changes
in Internal Control over Financial Reporting
  No
change in our internal control over financial reporting occurred during the
quarter ended December 31, 2009, that materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
  Item
9B.    Other
Information
  On March 12, 2010,
TranSwitch entered into a Business Financing Agreement (the “Agreement”)
with Bridge Bank, National Association (“Bridge Bank”) together with certain
other related financing documents (the “Financing Documents”).  The
Financing Documents collectively provide an uncommitted credit facility to
TranSwitch of up to $5 million (the “Facility”) secured by substantially all the
personal property of TranSwitch, including the Company’s accounts receivable and
intellectual property.  Subject to the terms of the Agreement,
availability under the Facility is based on a formula pursuant to which Bridge
Bank would advance, in its discretion, an amount equal to the lower of
$5,000,000 or 80% of TranSwitch’s eligible accounts receivable, with account
eligibility determined by Bridge Bank in its sole discretion.  Either party
may terminate the Facility at any time and all loan advances under the Facility
would then become immediately due and payable.  TranSwitch has no
immediate expectation of drawing funds under the Facility.
 
 Except as otherwise set forth in the
Agreement, borrowings made pursuant to the Agreement will bear interest at a
rate equal to the higher of (i) the Prime Rate (as announced by Bridge Bank) or
(ii) 4%, plus, in either case, a margin of 2.5%.  Bridge Bank is also
entitled to the payment of certain fees and expenses pursuant to the Financing
Documents, including an annual fee equal to $62,500 and an early termination fee
of 1% of the gross amount of the Facility.
 
 The Agreement contains customary
representations, warranties, and affirmative and negative covenants for
facilities of this type, including certain restrictions on dispositions of the
Company’s assets, changes in business, and incurrence of certain indebtedness
and encumbrances.  The Agreement also contains customary events of
default, including payment defaults and a breach of representations and
warranties and covenants.  If an event of default occurs and is
continuing, Bridge Bank has customary rights and remedies under the Agreement,
including the right to declare all outstanding indebtedness under the Facility
immediately due and payable, ceasing to advance money or extend credit, and
rights of set-off.
  76
  PART
III
  Item
10.    Directors, Executive Officers and
Corporate Governance
  Information
with respect to directors, the Audit Committee of the Board of Directors, Audit
Committee financial experts and named executive officers is incorporated herein
by reference to the section entitled Proposal No. 1 “Election of Directors”,
“Audit Committee Report” and “Compensation and Other Information Concerning
Named Executive Officers”, respectively, contained in our definitive proxy
statement for the annual meeting of shareholders of the Company to be held on
May 20, 2010, which is to be filed with the Securities and Exchange Commission
not later than 120 days after the close of the year ended December 31,
2009.Information
concerning Section 16(a) compliance is incorporated by reference to the section
of our definitive proxy statement entitled “Section 16(a) Beneficial Ownership
Reporting Compliance.”
  Code
of Ethics
  The
Company has a code of ethics that applies to all its directors, officers,
employees and representatives. This code is publicly available at the investor
relations section of the Company’s website located at http://www.transwitch.com.
Amendments to the code of ethics and any grant of a waiver from a provision of
the code requiring disclosure under applicable SEC rules will be disclosed
within the investor relations section of the Company’s website located at http://www.transwitch.com.   These
materials may also be requested in print by writing to the Company’s Investor
Relations Department at TranSwitch Corporation, Attention: Investor Relations,
Three Enterprise Drive, Shelton, CT 06484.
  Corporate
Governance Principles and Charters
  The
Company’s corporate governance principles and the charters of its Board of
Directors’ Audit and Finance Committee, Nominations and Corporate Governance
Committee and Compensation Committee are available at the investor relations
section of the Company’s website at http://www.transwitch.com.
These materials may also be requested in print by writing to the Company’s
Investor Relations Department at TranSwitch Corporation, Attention: Investor
Relations, Three Enterprise Drive, Shelton, CT 06484.
  Section
16(a) Beneficial Ownership Reporting Compliance
  Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
directors, executive officers, and persons who own more than ten percent of a
registered class of the Company’s equity securities to file reports of ownership
and changes in ownership with the SEC, and such persons are also required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.  Based solely on its review of the copies of such forms received
by it, the Company believes that during fiscal 2008 all executive officers,
board members and greater than ten percent stockholders of the Company complied
with all applicable filing requirements.
  Item
11.Executive
Compensation
  Information
with respect to executive compensation is incorporated herein by reference to
the section entitled “Compensation and Other Information Concerning Named
Executive Officers” contained in our definitive proxy statement for the annual
meeting of shareholders of the Company to be held on May 20, 2010 which is to be
filed with the Securities and Exchange Commission not later than 120 days after
the close of the year ended December 31, 2009.
  Item
12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
 
 Information
regarding security ownership of certain beneficial owners, directors and
executive officers is incorporated herein by reference to the information in the
section entitled “Security Ownership of Certain Beneficial Owners and
Management”, “Related Party Transactions” and “Indemnification Matters”
contained in our definitive proxy statement for the annual meeting of
shareholders of the Company to be held on May 20, 2010 which is to be filed with
the Securities and Exchange Commission not later than 120 days after the close
of the year ended December 31, 2009.
  Item
13.    Certain Relationships and Related
Transactions, and Director Independence
  Information
regarding certain relationships and related transactions of the Company is
incorporated herein by reference to the sections entitled “Compensation
Committee Interlocks and Insider Participation” and “Related Party Transactions”
contained in our definitive proxy statement for the annual meeting of
shareholders of the Company to be held on May 20, 2010 which is to be filed with
the Securities and Exchange Commission not later than 120 days after the close
of the year ended December 31, 2009.
  77
  Item
14.    Principal Accountant Fees and
Services
  Information
regarding principal accountant fees and services is incorporated herein by
reference to the section entitled, under the headings “Information about the
Corporation’s Independent Auditors” contained in our definitive proxy statement
for the annual meeting of shareholders of the Company to be held on May 20,
2010, which is to be filed with the Securities and Exchange Commission not later
than 120 days after the close of the year ended December 31, 2009.
  78
  PART
IV
  Item
15.    Exhibits and Financial Statement
Schedules
 
 (a)(1)
              The
      following financial statements of TranSwitch Corporation are filed as part
      of this Form 10-K under Item 8 “Financial Statements and Supplementary
      Data.”
  FINANCIAL STATEMENTS
                  
                  PAGEConsolidated
      Balance Sheets – December 31, 2009 and 2008
                  
                  
                  49Consolidated
      Statements of Operations – Years ended December 31, 2009, 2008 and
      2007
                  
                  
                  50Consolidated
      Statements of Stockholders’ Equity and Comprehensive Loss – Years ended
      December 31, 2009, 2008 and 2007
                  
                  
                  51Consolidated
      Statements of Cash Flows – Years ended December 31, 2009, 2008 and
      2007
                  
                  
                  52Notes
      to Consolidated Financial Statements
                  
                  
                  53Schedule
      II
                  
                  
                  75
  (a)(2)
              All
      other schedules are omitted because they are either not applicable, not
      required or because the information is presented in the Consolidated
      Financial Statements and Financial Statement Schedule or the notes
      thereto.
  (a)(3)    Exhibits
  3.1
                
                Amended
      and Restated Certificate of Incorporation, as amended to date (previously
      filed as Exhibit 3.1 to TranSwitch Corporation’s Quarterly
      Report on Form 10-Q for the quarter ended March 31, 2005 and
      incorporated herein by reference).3.2
                
                Second
      Amended and Restated By-Laws, (previously filed as Exhibit 3.1 to
      TranSwitch Corporation’s Current Report on Form 8-K as filed with the SEC
      on October 17, 2007 and incorporated herein by
  reference).3.3
                
                Certificate
      of Amendment of Amended and Restated Certificate of Incorporation
      (previously filed as Exhibit 3.1 to TranSwitch Corporation’s Current
      Report on Form 8-K as filed with the SEC on November 23, 2009 and
      incorporated herein by reference).3.4
                
                Amended
      Certificate of Designation of Series A Junior Participating Preferred
      Stock of TranSwitch Corporation (previously filed as Exhibit 3.2 to
      TranSwitch Corporation’s Current Report on Form 8-K as filed with the SEC
      on November 23, 2009 and incorporated herein by
  reference).4.1
                
                Specimen
      certificate representing the common stock of
      TranSwitch Corporation(previously filed as Exhibit 4.1 to
      TranSwitch Corporation’s Quarterly Report on Form 10-Q for the quarter
      ended September 30, 2001 and incorporated herein by
      reference).4.2
                
                Rights
      Agreement, dated as of October 1, 2001, between TranSwitch Corporation and
      EquiServe Trust Company, N.A., which includes the form of Rights
      Certificate and the Summary of Rights to Purchase Preferred Shares
      (previously filed as Exhibit 1 to TranSwitch Corporation’s Registration
      Statement
      No. 0-25996 on Form 8-A filed on October 2, 2001 and incorporated by
      reference herein).4.3
                
                Amendment
      No. 1 to the Rights Agreement, between TranSwitch Corporation and
      Computershare Trust Company, N.A. (formerly known as Equiserve Trust
      Company, N.A) as Rights Agent, dated as of February 24,
      2006.  (previously filed as Exhibit 4.1 to TranSwitch
      Corporation’s Current Report on Form 8-K as filed on February 28, 2006 and
      incorporated herein by reference).4.4
                
                2005
      Employee Stock Purchase Plan, as amended  (previously filed as
      Exhibit 99.1 to TranSwitch Corporation’s Current Report on Form 8-K as
      filed with the Securities and Exchange Commission on August 12, 2009 and
      incorporated herein by reference).*4.5
                
                Form
      of Employee Stock Purchase Plan Enrollment Authorization Form (previously
      filed as Exhibit 4.3 to the Company’s Registration Statement on Form S-8
      (File No. 333-126129) and incorporated herein by
    reference).4.6
                
                Form
      of Employee Stock Purchase Plan Change / Withdrawal Authorization Form
      (previously filed as Exhibit 4.4 to the Company’s Registration Statement
      on Form S-8 (File No. 333-126129) and incorporated herein by
      reference).
  79
  4.7
                  
                  2008
      Equity Incentive Plan, as amended (previously filed as Exhibit 4.1 to
      TranSwitch Corporation’s Quarterly Report on Form 10-Q for the quarter
      ended June 30, 2009 and incorporated herein by
  reference).*4.8
                  
                  Form
      of 2008 Equity Incentive Plan Stock Option Award Agreement (previously
      filed as Exhibit 4.3 to TranSwitch Corporation’s Registration Statement on
      Form S-8 (File No. 333-151113) and incorporated herein by
      reference).4.9
                  
                  Form
      of 2008 Equity Incentive Plan 102 Stock Option Award Agreement (previously
      filed as Exhibit 4.4 to TranSwitch Corporation’s Registration Statement on
      Form S-8 (File No. 333-151113) and incorporated herein by
      reference).4.10
                  
                  Form
      of Restricted Stock Award Agreement under the 2008 Equity Incentive Plan
      (previously filed as Exhibit 4.5 to TranSwitch Corporation’s Registration
      Statement on Form S-8 (File No. 333-151113) and incorporated herein by
      reference).4.11
                  
                  Form
      of Restricted Stock 102 Award Agreement under the 2008 Equity Incentive
      Plan (previously filed as Exhibit 4.6 to TranSwitch Corporation’s
      Registration Statement on Form S-8 (File No. 333-151113) and incorporated
      herein by reference).4.12
                  
                  Form
      of Non-Qualified Stock Option Award to Director Agreement under the 2008
      Equity Incentive Plan (previously filed as Exhibit 4.7 to TranSwitch
      Corporation’s Registration Statement on Form S-8 (File No. 333-151113) and
      incorporated herein by reference).*4.13
                  
                  Form
      of 2008 Equity Incentive Plan 102 Stock Award Agreement (previously filed
      as Exhibit 4.8 to TranSwitch Corporation’s Registration Statement on Form
      S-8 (File No. 333-151113) and incorporated herein by
      reference).4.14
                  
                  Indenture
      between TranSwitch Corporation and U.S. Bank National Trust (previously
      filed as Exhibit 4.1 to TranSwitch Corporation’s Current Report on Form
      8-K as filed with the Securities and Exchange Commission on October 26,
      2009 and incorporated herein by reference).10.1
                  
                  Third
      Amended and Restated 1995 Stock Option Plan, as amended (previously filed
      as an exhibit to TranSwitch Corporation’s Current Report on Form 8-K as
      filed on May 23, 2005 and incorporated herein by
      reference).*10.2
                  
                  1995
      Non-Employee Director Stock Option Plan, as amended (previously filed as
      Exhibit 4.4 to the TranSwitch
      Corporation’s Registration Statement on Form S-8 (File No. 333-89798) and
      incorporated herein by reference).*10.3
                  
                  Form
      of Incentive Stock Option Agreement under the 1995 Stock Plan (previously
      filed as an exhibit to the TranSwitch Corporation’s Registration Statement
      on Form S-8 (File No. 333-94234) and incorporated herein by
      reference).10.4
                  
                  Form
      of Non-Qualified Stock Option Agreement under the 1995 Stock Plan
      (previously filed as an exhibit to the TranSwitch Corporation’s
      Registration Statement on Form S-8 (File No. 333-94234) and incorporated
      herein by reference).10.5
                  
                  Form
      of Non-Qualified Stock Option Agreement under the 1995 Non-Employee
      Director Stock Option Plan (previously filed as an exhibit to the
      TranSwitch Corporation’s Registration Statement on Form S-8 (File No.
      333-94234) and incorporated herein by reference).*10.6
                  
                  Lease
      Agreement, as amended, with Robert D. Scinto (previously filed as Exhibit 10.14 to the TranSwitch
      Corporation’s Annual Report on Form 10-K for the fiscal year ended
      December 31, 1997 and incorporated herein by
reference).10.7
                  
                  2000Stock Option Plan (previously filed as
      Exhibit 4.2 to TranSwitch Corporation’s Registration Statement on Form S-8 (File No. 333-75800)
      and incorporated by reference herein).10.8
                  
                  Form
      of Non-Qualified Stock Option Agreement under the 2000 Stock Option Plan
      (previously filed as Exhibit 4.3 to TranSwitch Corporation’s Registration
      Statement
      on Form S-8 (File No. 333-75800) and incorporated by reference
      herein).10.9
                  
                  1999
      Stock Incentive Plan of Onex Communications Corporation (previously filed
      as Exhibit 4.2 to TranSwitch Corporation’s Registration
      Statement
      on Form S-8 (File No. 333-70344) and incorporated by reference
      herein).10.10
                  
                  Form
      of Incentive Stock Option Agreement under the 1999 Stock Incentive Plan of
      Onex Communications Corporation (previously filed as Exhibit 4.3 to
      TranSwitch Corporation’s Registration
      Statement
      on Form S-8 (File No. 333-70344) and incorporated by reference
      herein).
  80
  10.11
                    
                    Form
      of Director Non-Qualified Stock Option Agreement under the Third Amended
      and Restated 1995 Stock Option Plan, as amended (previously filed as
      Exhibit 10.1 to TranSwitch Corporation’s Current Report on Form 8-K as
      filed with the SEC on May 25, 2007 and incorporated herein by
      reference).*10.12
                    
                    Agreement
      and Plan of Merger by and among TranSwitch Corporation, Centillium
      Communications, Inc., Sonnet Acquisition Corporation and Haiku Acquisition
      Corporation, dated as of July 9, 2008 (previously filed as Exhibit 10.1 to
      TranSwitch Corporation’s Current Report on Form 8-K as filed with the
      Securities and Exchange Commission on July 11, 2008 and incorporated
      herein by reference).10.13
                    
                    Exchange
      Agreement by and among TranSwitch Corporation, QVT Fund LP and
      Quintessence Fund LP (previously filed as Exhibit 10.1 to TranSwitch
      Corporation’s Current Report on Form 8-K as filed with the Securities and
      Exchange Commission on October 26, 2009 and incorporated herein by
      reference).10.14
                    
                    Exchange
      Agreement by and among TranSwitch Corporation, JGB Capital LP, JGB Capital
      Offshore Ltd. and SAMC LLC (previously filed as Exhibit 10.2 to TranSwitch
      Corporation’s Current Report on Form 8-K as filed with the Securities and
      Exchange Commission on October 26, 2009 and incorporated herein by
      reference).10.15
                    
                    Employment
      Agreement dated November 5, 2009 between Dr. M. Ali Khatibzadeh and
      TranSwitch Corporation (previously filed as Exhibit 10.1 to TranSwitch
      Corporation’s Current Report on Form 8-K as filed with the Securities and
      Exchange Commission on November 12, 2009 and incorporated herein by
      reference).*10.16
                    
                    Common
      Stock Purchase Agreement dated December 31, 2009 by and between TranSwitch
      Corporation and Seaside 88, LP (previously filed as Exhibit 10.1 to
      TranSwitch Corporation’s Current Report on Form 8-K as filed with the
      Securities and Exchange Commission on January 4, 2010 and incorporated
      herein by reference).10.17
                    
                    Form
      of Director Indemnification Agreement as executed with each director of
      TranSwitch Corporation (previously filed as Exhibit 10.1 to TranSwitch
      Current Report on Form 8-K as filed with the Securities and Exchange
      Commission on April 9, 2009 and incorporated herein by
      reference).*10.18
                    
                    Form
      of Director Restricted Stock Unit Award Agreement under the 2008 Equity
      Incentive Plan (previously filed as Exhibit 10.1 to TranSwitch
      Corporation’s Current Report on Form 8-K as filed on May 27, 2009 and
      incorporated herein by reference).*10.19
                    
                    Letter Agreement
      by and between TranSwitch Corporation and Robert Bosi, dated as of
      February 13, 2009 (previously filed as Exhibit 10.1 to TranSwitch
      Corporation’s Quarterly Report on Form 10-Q for the quarter ended March
      31, 2009 and incorporated herein by reference).*10.20
                    
                    Sublease
      Agreement by and between TranSwitch Corporation and Sikorsky Aircraft
      Corporation, dated as of March 3, 2009 (previously filed as Exhibit 10.2
      to TranSwitch Corporation’s Quarterly Report on Form 10-Q for the quarter
      ended March 31, 2009 and incorporated herein by
  reference).10.21
                    
                    Separation
      Agreement by and between TranSwitch Corporation and Dr. Santanu Das, dated
      as of November 6, 2009 (filed herewith).*10.22
                    
                    Consulting
      Agreement by and between TranSwitch Corporation and Dr. Santanu Das, dated
      as of November 6, 2009 (filed herewith).*10.23
                    
                    Business
      Financing Agreement by and between TranSwitch Corporation and Bridge Bank,
      National Association, dated as of March 12, 2010 (filed
      herewith).11.1
                    
                    Computation
      of Loss Per Share (filed herewith).12.1
                    
                    Computation
      of Ratio of Earnings to Fixed Charges (filed herewith).21.1
                    
                    Subsidiaries
      of the Company (filed herewith).23.1
                    
                    Consent of Independent Registered Public
      Accounting Firm (filed herewith).31.1
                    
                    CEO
      Certification pursuant to Rule 13a-14(a) and
      Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted
      pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 (filed herewith).31.2
                    
                    CFO Certification pursuant to Rule 13a-14(a) and
      Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
      herewith).32.1
                    
                    CEO Certification pursuant to Rule 13a-14(b) and
      Rule 15d-14(b) of the Securities Exchange Act of 1934, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
      herewith).
  81
  32.2
                
                CFO Certification pursuant to Rule 13a-14(b) and
      Rule 15d-14(b) of the Securities Exchange Act of 1934, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
      herewith).
  *
              Indicates
      management contract or compensatory plan, contract or arrangement
      identified as required in Item 15(a)(3) of
    Form 10-K
  (b)    Exhibits
  We hereby
file as exhibits to this Form 10-K those exhibits listed in Item 15 (a)(3)
above.
  (c)    Financial
Statement Schedule
  TranSwitch
files as a financial statement schedule to this Form 10-K, the financial
statement schedule listed in Item 8 and 15(a) (2) above.
  82
  SIGNATURES
  Pursuant to the requirements of
Section 13 or 15(d) 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.
  Transwitch CorporationBy:
                      /s/Dr. M. Ali KhatibzadehDr.
      M. Ali Khatibzadeh
                        President
      and Chief Executive
Officer
 March 16,
2010
  POWER
OF ATTORNEY AND SIGNATURES
  We, the
undersigned named executive officers and directors of TranSwitch Corporation,
hereby severally constitute and appoint Dr. M. Ali Khatibzadeh and Mr. Robert A.
Bosi, and each of them singly, our true and lawful attorneys, with full power to
them and each of them singly, to sign for us in our names in the capacities
indicated below, all amendments to this report, and generally to do all things
in our names and on our behalf in such capacities to enable TranSwitch
Corporation to comply with the provisions of the Securities Exchange Act of
1934, as amended and all requirements of the Securities and Exchange
Commission.
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
  Name
      and Signature
                                                      
                                                      Title(s)
                                                      
                                                      Date/s/Dr.
      M. Ali Khatibzadeh
                                                      
                                                      President
      and Chief Executive Officer (principal executive officer)
                                                      
                                                      March
      16, 2010Dr.
      M. Ali Khatibzadeh/s/
      Mr. Robert A. Bosi
                                                      
                                                      Vice
      President and Chief Financial Officer (principal financial and
                                                      
                                                      March
      16, 2010Mr.
      Robert A. Bosi
                                                      
                                                      accounting
      officer)/s/
      Mr. Gerald F. Montry
                                                      
                                                      Director
      and Chairman of the Board
                                                      
                                                      March
      16, 2010Mr.
      Gerald F. Montry/s/
      Mr. Faraj Aalaei
                                                      
                                                      Director
                                                      
                                                      March
      16, 2010Mr.
      Faraj Aalaei/s/
      Mr. Thomas Baer
                                                      
                                                      Director
                                                      
                                                      March
      16, 2010Mr.
      Thomas Baer/s/
      Mr. Herbert Chen
                                                      
                                                      Director
                                                      
                                                      March
      16, 2010Mr.
      Herbert Chen/s/
      Mr. Michael Crawford
                                                      
                                                      Director
                                                      
                                                      March
      16, 2010Mr.
      Michael Crawford/s/
      Mr. James M. Pagos
                                                      
                                                      Director
                                                      
                                                      March
      16, 2010Mr.
      James M. Pagos/s/
      Mr. Sam Srinivasan
                                                      
                                                      Director
                                                      
                                                      March
      16, 2010Mr.
      Sam Srinivasan/s/
      Dr. Santanu Das
                                                      
                                                      Director
                                                      
                                                      March
      16, 2010Dr.
      Santanu Das
  83