TRANSWITCH CORP /DE - FORM 10-Q

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EX-31.1 - EXHIBIT 31.1 - TRANSWITCH CORP /DE	v239111_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - TRANSWITCH CORP /DE	v239111_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - TRANSWITCH CORP /DE	v239111_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended September 30, 2011

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 of Incorporation)		(I.R.S. Employer Identification Number)

3 Enterprise Drive

Shelton, Connecticut 06484

(Address of Principal Executive Offices)

(203) 929-8810

(Registrant’s telephone number, including area code)

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

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

Large Accelerated Filer ¨ Accelerated Filer ¨

Non-Accelerated Filer (Do not check if a smaller reporting company) ¨ Smaller Reporting Company x

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

At October 31, 2011, there were 30,533,225 shares of Common Stock, par value $.001 per share, of the Registrant outstanding.

TRANSWITCH CORPORATION AND SUBSIDIARIES

FORM 10-Q

For the Quarterly Period Ended September 30, 2011

Table of Contents

		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010		3

	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010		4

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010		5

	Notes to Unaudited Condensed Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		24

Item 4.	Controls and Procedures		24

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		24

Item 1A.	Risk Factors		24

Item 6.	Exhibits		25

	Signatures		26

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

TRANSWITCH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

(unaudited)

	September 30, 2011			December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	4,450		$	6,280
Restricted cash		138			582
Short-term investments		6,516			973
Accounts receivable, (net of allowance for doubtful accounts of $207 at September 30, 2011 and $336 at December 31, 2010)		6,665			7,907
Inventories, net		2,172			2,555
Prepaid expenses and other current assets		2,773			2,089
Total current assets		22,714			20,386

Property and equipment, net		1,313			1,239
Goodwill		14,144			14,144
Other intangible assets, net		7,066			8,254
Investments in non-publicly traded companies		306			267
Other assets		1,418			1,528

Total assets	$	46,961		$	45,818

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,217		$	1,893
Accrued expenses and other current liabilities		11,168			13,118
Current portion of 5.45% Convertible Notes due 2011		-			3,758
Total current liabilities		13,385			18,769

Restructuring liabilities		9,783			10,317
Total liabilities		23,168			29,086

Stockholders’ equity:
Common stock, $.001 par value: 37,500,000 shares authorized; 30,545,617 and 23,548,608 shares issued at September 30, 2011 and December 31, 2010, respectively; 30,524,823 and 23,527,814 shares outstanding at September 30, 2011 and December 31, 2010, respectively		31			24
Additional paid-in capital		409,981			391,689
Accumulated other comprehensive income – currency translation		156			459
Common stock held in treasury (20,794 shares), at cost		(118	)		(118	)
Accumulated deficit		(386,257	)		(375,322	)
Total stockholders’ equity		23,793			16,732
Total liabilities and stockholders’ equity	$	46,961		$	45,818

See accompanying notes.

TRANSWITCH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Net revenues:
Product revenues	$	4,855		$	11,017		$	14,682		$	34,838
Service revenues		1,810			1,828			7,263			4,890
Total net revenues		6,665			12,845			21,945			39,728
Cost of revenues:
Cost of product revenues		1,425			4,941			4,510			15,500
Provision for excess and obsolete inventories		26			96			186			657
Cost of service revenues		917			673			2,955			2,202
Total cost of revenues		2,368			5,710			7,651			18,359
Gross profit		4,297			7,135			14,294			21,369
Operating expenses:
Research and development		4,672			3,714			13,727			11,422
Marketing and sales		1,772			1,938			5,836			5,670
General and administrative		1,925			1,881			5,699			5,711
Restructuring charges, net		924			(4	)		1,391			398
Reversal of accrued royalties, net		(455	)		-			(2,030	)		-
Total operating expenses		8,838			7,529			24,623			23,201
Operating loss		(4,541	)		(394	)		(10,329	)		(1,832	)
Other (expense) income:
Other income (expense)		23			(869	)		10			101
Interest:
Interest income		8			17			100			54
Interest expense		(44	)		(173	)		(237	)		(547	)
Interest expense, net		(36	)		(156	)		(137	)		(493	)
Total other expense, net		(13	)		(1,025	)		(127	)		(392	)
Loss before income taxes		(4,554	)		(1,419	)		(10,456	)		(2,224	)
Income taxes		233			392			479			557
Net loss	$	(4,787	)	$	(1,811	)	$	(10,935	)	$	(2,781	)

Basic and diluted loss per common share:
Net loss per common share	$	(0.16	)	$	(0.08	)	$	(0.40	)	$	(0.13	)
Weighted average common shares outstanding – basic and diluted		30,475			23,326			27,019			21,735

See accompanying notes.

TRANSWITCH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(unaudited)

	Nine Months Ended September 30,
	2011			2010
Operating activities:
Net loss	$	(10,935	)	$	(2,781	)

Adjustments to reconcile net loss to net cash (used) provided by operating activities:
Depreciation and amortization		1,638			1,691
Amortization of debt discount and deferred financing fees		70			176
Provision for excess and obsolete inventories		186			657
Benefit from allowance for doubtful accounts		(129	)		(20	)
Restructuring charges		1,391			409
Stock-based compensation expense		1,936			1,594
Changes in operating assets and liabilities:
Accounts receivable		1,371			3,900
Inventories		197			862
Prepaid expenses and other assets		(644	)		(232	)
Accounts payable		324			(898	)
Accrued expenses and other current liabilities		(2,864	)		(1,810	)
Restructuring liabilities		(1,011	)		(1,365	)

Net cash (used) provided by operating activities		(8,470	)		2,183

Investing activities:
Capital expenditures		(500	)		(200	)
Investments in non-publicly traded companies		(39	)		(10	)
Proceeds from the sale of investments in non-publicly traded companies		-			2,700
Decrease in restricted cash		444			951
Purchases of short and long-term investments		(6,516	)		(1,125	)
Proceeds from sales and maturities of short-term investments		973			-

Net cash (used) provided by investing activities		(5,638	)		2,316

Financing activities:
Issuance of common stock under employee stock plans		290			82
Payments for deferred financing costs		-			(167	)
Proceeds from issuance of common stock, net of fees		16,073			6,317
Principal payments on 5.45% Convertible Notes due 2011		(3,758	)		(3,753	)

Net cash provided by financing activities		12,605			2,479
Effect of exchange rate changes on cash and cash equivalents		(327	)		97

Change in cash and cash equivalents		(1,830	)		7,075
Cash and cash equivalents at beginning of period		6,280			2,343
Cash and cash equivalents at end of period	$	4,450		$	9,418

See accompanying notes.

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. 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”) designs, develops and supplies innovative semiconductor and intellectual property (IP) solutions that provide core functionality for voice, data and video communications equipment for network, enterprise and customer premises applications. The Company provides integrated multi-core network processor System-on-a-Chip (SoC) solutions and software solutions for fixed, 3G and 4G Mobile, VoIP and Multimedia Infrastructures. For the customer premises market the Company offers a family of communications processors that provide best-in-class performance for a range of applications and also provide interoperable connectivity solutions that enable the reliable distribution and presentation of high-definition (HD) content for consumer electronics and personal computer markets. Our intellectual property (IP) products are compliant with global industry standards such as HDMI and DisplayPort and also feature our proprietary HDP™ and AnyCable™ technologies. Overall, the Company has over 100 active customers, including the leading global telecom equipment providers, semiconductor and consumer product companies.

Liquidity

The Company has incurred significant operating losses and has 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 announced further restructuring actions which were implemented during the first and third quarters of 2011. The Company believes that with the current anticipated gross profit margins and operating expenses the Company can break-even on an operating income basis, excluding stock compensation costs and amortization of purchased intangibles, at the rate of sales of $10.0 million per quarter. Also, the Company intends to continue to assess its cost structure in relationship to its revenue levels and to make appropriate adjustments to expense levels as required. Nonetheless, the Company believes that its existing cash and cash equivalents and its bank financing facility will be sufficient to fund operating activities and capital expenditures, and provide adequate working capital at least through the next twelve months. Of course, there can be no assurance that the anticipated sales level will be achieved.

Concentrations of Credit Risk and Significant Customers

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

Short-term investments consist of government and corporate 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 approximate market value.

At September 30, 2011 and December 31, 2010, approximately 54% 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.

Customers that accounted for more than 10% of total accounts receivable at each period end follows:

	September 30, 2011			December 31, 2010

Customer A		16	%		*
Customer B		11	%		*
Customer C		*			16	%
Customer D		*			15	%

* Accounts receivable due were less than 10% of the Company’s total accounts receivable.

Note 2. Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements of TranSwitch have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q. Accordingly, certain information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements are not included herein. These condensed consolidated financial statements are prepared on a consistent basis with, and should be read in conjunction with, the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2010, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the Securities and Exchange Commission on March 15, 2011. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation. The results of operations for any interim period are not necessarily indicative of the results that may be achieved for the full year.

Note 3. Short term Investments

The following tables summarize the Company’s held-to-maturity investments (in thousands):

September 30, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Corporate debt securities	$	6,035	$	65	$	-		$	6,100

Municipal securities		481		2		-			483

Total	$	6,516	$	67	$	(	)	$	6,583

December 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Corporate debt securities	$	501	$	11	$	-	$	512

Municipal securities		472		39		-		511

Total	$	973	$	50	$	-	$	1,023

Note 4. New Accounting Standards

Recently Issued Standards

In September 2011, FASB issued ASU No. 2011-08, Testing Goodwill for Impairment, which amends the guidance in ASC 350 and allows entities to use a qualitative approach to test goodwill for impairment to determine whether a quantitative assessment is necessary. This guidance is effective for goodwill impairment tests performed in interim and annual periods for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our financial statements.

In June 2011, FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) which provides guidance regarding the presentation of comprehensive income. The new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The updated guidance is effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance will require the Company to change the presentation of comprehensive income to an acceptable method described in this standard. The Company will no longer be allowed to present comprehensive income within the statement of stockholders’ equity. Since this ASU will only change the format of financial statements it is expected that the adoption of this ASU will not have a material effect on the Company’s consolidated financial position and results of operations.

The Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its interim condensed consolidated financial statements.

Note 5. Fair Value Measurements

The Company applies fair value standards for recurring financial assets and liabilities only. The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers as follows:

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 September 30, 2011, the Company’s financial assets included short-term investments and 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 three and nine months ended September 30, 2011 and 2010, the Company had no impairment losses on investments in non-publicly traded companies.

The carrying amounts for cash equivalents, accounts receivable and accounts payable approximate fair value due to their immediate or short-term nature of the maturity. The fair value of the outstanding 5.45% Convertible Notes due September 30, 2011 (“2011 Notes”) was zero as of September 30, 2011 and $3.8 million as of December 31, 2010. The 2011 Notes approximate fair value based on market rates available to the Company for financing with similar terms. The carrying value of such notes was zero as of September 30, 2011 and $3.8 million as of December 31, 2010. The fair value of short-term investments was $6.5 million and $1.0 million as of September 30, 2011 and December 31, 2010, respectively. The short-term investment values are based on a Level 2 valuation technique.

Note 6. 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 loss. In 2011, the Company determined that its intercompany loan balances with its foreign subsidiaries are classified as long-term. As such, the Company has recorded its exchange gains and losses in the translation of these balances as other comprehensive income or loss for the three and nine months ended September 30, 2011. Prior to 2011, the Company considered these loan balances as short term in nature and included the exchange gains and losses for the translation of these intercompany loan balances as other (expense) income in the statement of operations.

Note 7. Stock-Based Compensation

The amount of the stock-based compensation expense is based on the estimated fair value of the awards on their grant dates and is recognized over the required service periods. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model.

Stock-based compensation expense follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2011		2010		2011		2010
Cost of Sales	$	11	$	34	$	48	$	72
Research and Development		195		195		624		607
Marketing and Sales		111		101		361		237
General and Administration		286		251		903		678
Total Stock-Based Compensation	$	603	$	581	$	1,936	$	1,594

During the nine months ended September 30, 2011, 920,765 restricted stock units ("RSU”) were granted, 653,775 RSU were released, and 111,681 RSU were canceled, forfeited, or expired. During the same nine months there were 10,000 stock options granted, 75,104 stock options were exercised, and 175,515 stock options were canceled, forfeited or expired.

Note 8. Loss Per Common Share

Basic net loss per common share and diluted net loss per common share are computed using the weighted average common shares outstanding for the respective periods.

All “in-the-money” stock options and RSUs for the three and nine months ended September 30, 2011 and 2010, respectively, were anti-dilutive and were excluded from the calculation of diluted net loss per share for the entire period.

Note 9. Restricted Cash

The Company’s liquidity is affected by restricted cash balances of approximately $0.1 million as of September 30, 2011 and $0.6 million as of December 31, 2010, which are included in current assets and are not available for general corporate use. The Company has pledged these restricted cash accounts as collateral for stand-by letters of credit that support customer credit requirements.

Note 10. Inventories

The components of inventories follow:

(in thousands)	September 30, 2011		December 31, 2010

Work-in-process	$	841	$	1,130

Finished goods		1,331		1,425

Total inventories, net	$	2,172	$	2,555

During the three months ended September 30, 2011 and 2010, gross profit was affected favorably in the amount of less than $0.1 million and $0.1 million, respectively, from the sales of products that had previously been written down. During the nine months ended September 30, 2011 and 2010, gross profit was affected favorably in the amount of $0.2 million and $0.3 million, respectively, from the sales of products that had previously been written down.

Note 11. Other Intangible Assets, net

Information about other intangible assets follows:

	Other Intangible Assets
(in thousands)	Developed Technology			Customer Relationships			Total

Balances at September 30, 2011
Cost	$	3,014		$	9,557		$	12,571
Accumulated amortization		(1,546	)		(3,959	)		(5,505	)
	$	1,468		$	5,598		$	7,066

Balances at December 31, 2010
Cost	$	3,014		$	9,557		$	12,571
Accumulated amortization		(1,206	)		(3,111	)		(4,317	)
	$	1,808		$	6,446		$	8,254

Amortization expense related to “other intangible assets” for both the three months ended September 30, 2011 and 2010 was $0.4 million. Amortization expense for both the nine months ended September 30, 2011 and 2010 was $1.2 million. Future estimated aggregate amortization expense for such assets as of September 30, 2011 follows: 2011 (remaining three months) - $0.4 million; 2012 - $1.2 million; 2013 - $1.2 million; 2014 - $1.1 million; 2015 - $0.9 million; 2016 - $0.8 million and thereafter - $1.5 million.

Note 12. Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities follow:

	September 30,		December 31,
(in thousands)	2011		2010

Accrued and other current liabilities	$	3,208	$	3,903
Accrued royalties		2,850		5,188
Accrued compensation and benefits		3,038		2,923
Restructuring liabilities		1,805		891
Deferred revenue		267		213
Total accrued expenses and other current liabilities	$	11,168	$	13,118

The Company periodically evaluates any contingent liabilities in connection with any payments to be made for any potential intellectual property infringement asserted or unasserted claims. The Company’s accrued royalties as of September 30, 2011 and December 31, 2010 represent the contingent payments for asserted or unasserted claims that are probable of assertion as of the respective balance sheet dates based on the applicable patent law.

Note 13. Comprehensive Loss

The components of comprehensive loss were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2011			2010			2011			2010
Net loss	$	(4,787	)	$	(1,811	)	$	(10,935	)	$	(2,781	)
Foreign currency translation adjustment		(251	)		865			(303	)		105
Total comprehensive loss	$	(5,038	)	$	(946	)	$	(11,238	)	$	(2,676	)

Note 14. Restructuring Charges

During the three and nine months ended September 30, 2011, the Company recorded net restructuring charges of $0.9 million and $1.4 million, respectively. In the third quarter of 2011, the Company implemented a restructuring plan that included a workforce reduction of approximately 39 positions primarily in the Company’s Shelton, Connecticut, Fremont, California, New Delhi, India and Bangalore, India locations. The Company also implemented a restructuring plan in the first quarter of 2011 that included a workforce reduction of approximately 26 positions primarily in the Company’s Fremont, California, New Delhi, India and Bangalore, India locations. The restructuring charges are primarily for employee termination benefits.

During the nine months ended September 30, 2010, the Company recorded a restructuring charge of approximately $0.4 million. The Company implemented a restructuring plan in the first quarter of 2010 that included a workforce reduction of approximately 17 positions primarily in the Company’s Shelton, Connecticut, Fremont, California, New Delhi, India and Bangalore, India locations. The restructuring charges are primarily for employee termination benefits.

A summary of the restructuring liabilities and activity follows:

(in thousands)	Activity for the Nine Months Ended September 30, 2011
	Restructuring Liabilities December 31, 2010		Restructuring Charges		Cash Payments, net of Receipts on Sublease Activity			Non-cash Items		Adjustments and Changes in Estimates		Restructuring Liabilities September 30, 2011
Employee termination benefits	$	3	$	1,391	$	(387	)	$	—	$	—	$	1,007

Facility lease costs		11,205		—		(624	)		—		—		10,581

Totals	$	11,208	$	1,391	$	(1,011	)	$	—	$	—	$	11,588

Note 15. Investments in Non-Publicly Traded Companies

The Company owns 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 partnerships 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.

During the first quarter of 2010, the Company sold its investment in Opulan Technologies Corp. (“Opulan”) for $2.7 million. The carrying value of this investment in Opulan was also $2.7 million and accordingly no gain or loss was recorded on this transaction.

For the three and nine months ended September 30, 2011 and 2010, there were no impairment charges related to the Company’s investments in non-publicly traded companies. Also, during the nine months ended September 30, 2011 and 2010, the Company made additional investments of approximately $39,000 and $10,000, respectively.

Note 16. Credit Facility and Convertible Notes

Credit Facility:

On April 4, 2011, the Company entered into an Amended and Restated Business Financing Agreement (the “Amended Financing Agreement”) with Bridge Bank N.A. (“Bridge Bank”) which amends and restates its existing credit facility. The Amended Financing Agreement provides a credit facility to the Company of up to $5.0 million which bears interest at the higher of (i) the prime rate plus 2.0% or (ii) 5.25% percent, plus the payment of certain fees and expenses (the “Facility”). The Facility is secured by substantially all the personal property of the Company, including its accounts receivable and intellectual property. Subject to the terms of the Amended Financing Agreement, availability under the Facility is based on a formula pursuant to which Bridge Bank would advance an amount equal to the lower of $5.0 million or 80% of the Company’s eligible accounts receivable, with account eligibility and advance rates determined by Bridge Bank in its sole discretion. The term of the Facility is two years and at the expiration of such term, all loan advances under the Facility will become immediately due and payable.

Convertible Notes:

On October 26, 2009, the Company exchanged approximately $10.0 million aggregate principal amount of its unsecured Convertible Notes due September 30, 2010 for an equal principal amount of new unsecured 2011 Notes. The 2011 Notes were convertible at the option of the holder, at any time on or prior to maturity at an initial conversion ratio of 138.8888 shares per $1,000 principal amount. As of September 30, 2011, the principal amount of these notes would be equal to the value of the common stock into which the 2011 Notes could be converted if the Company’s stock price were $7.20. If a holder of the 2011 Notes converted their 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 were payable in monthly principal payments of $417,000 plus interest. On September 30, 2011 the Company paid in full its 2011 Notes and as such there was no outstanding balance. As of December 31, 2010, $3.8 million of the 2011 Notes remained outstanding and has been classified as short-term.

Note 17. Supplemental Cash Flow Information

Supplemental cash flow information follows:

	Nine Months Ended
(in thousands)	September 30,
	2011		2010

Cash paid for interest	$	117	$	373

Cash paid for income taxes	$	184	$	151

Note 18. Issuance of Common Stock

Sale of Stock

On May 20, 2011, the Company completed an offering of 6,210,000 shares of common stock that resulted in proceeds to the Company of $16.1 million after deducting the underwriting discounts and commissions and estimated expenses payable by the Company of $1.3 million. The shares were offered pursuant to a prospectus supplement dated May 17, 2011 and an accompanying prospectus dated October 21, 2009, pursuant to the Company's existing effective shelf registration statement on Form S-3 (File No. 333-162609), which was declared effective by the Securities and Exchange Commission on October 28, 2009.

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 of up to 1,950,000 shares (the "Shares") of the Company's common stock. The Common Stock Purchase Agreement required 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 was fifty (50) weeks subsequent to closing. The offering price of the Company’s common stock at each closing was 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.

On June 14, 2010, the Company exercised its option to terminate the Common Stock Purchase Agreement with Seaside. The Company had no closings with Seaside during the nine months ended September 30, 2011. The Company also had no closings with Seaside during the three months ended September 30, 2010. During the nine months ended September 30, 2010, the Company had twelve closings at purchase prices ranging from $1.40 to $2.69 per share and sold 900,000 shares of stock to Seaside for gross proceeds of approximately $1.8 million and incurred costs of approximately $0.1 million. The proceeds have been used for general corporate purposes, which includes working capital, capital expenditures, repayment of debt, development costs, and strategic investments.

Rights Offering

The Company filed a Registration Statement on Form S-1 on April 13, 2010 and as amended on April 20, 2010, which was declared effective by the Securities and Exchange Commission on May 3, 2010 (File No. 333-166022) and pursuant to which the Company conducted a rights offering by issuing a dividend of subscription rights (the “Rights”) to all of the Company’s stockholders as of April 29, 2010 (the “Record Date”), (including any permitted transferees of such Rights, the “Stockholders”) to exercise the Rights at a price of $2.40 per share, for shares of the Company’s common stock, par value $0.001 per share (the “Rights Offering”).

Pursuant to the terms of the Rights Offering, the Company distributed to its Stockholders transferable rights to subscribe for and purchase up to an aggregate of 4,153,883 shares of its common stock. Each stockholder of record as of the Record Date received one transferable right for every one share of common stock owned on the Record Date. Each right entitled the stockholder to purchase 0.20 shares of common stock at a price of $2.40 per share (fractional shares were rounded up to the nearest whole share).

On June 3, 2010, as a result of the Rights Offering, the Company issued 2,117,236 shares of its common stock, par value $0.001 per share, to the holders of record on the Record Date who exercised their rights pursuant to the basic and over-subscription privileges and pursuant to the terms of the Rights Offering as described in the prospectus included in the Registration Statement on Form S-1. Such shares of common stock were issued at a subscription price of $2.40 per share. The gross proceeds to the Company were approximately $5.1 million. In addition, the Company incurred $0.4 million in costs associated with this offering.

Note 19. Income Taxes

The provision for income taxes for the three months ended September 30, 2011 and 2010 was $0.2 million and $0.4 million, respectively. The provision for income taxes for the nine months ended September 30, 2011 and 2010 was $0.5 million and $0.6 million, respectively. The provision for income taxes relates to certain of TranSwitch’s subsidiaries located in foreign jurisdictions. The effective income tax rate differs from the U.S. federal statutory rate for the periods presented primarily due to foreign and state income taxes and increases in the valuation allowance for deferred income tax assets offset by non-deductible interest expense.

During the three and nine months ended September 30, 2011 and 2010, we evaluated our deferred income tax assets as to whether it is “more likely than not” that the deferred income tax assets will be realized. In our evaluation of the realizability of deferred income tax assets, we consider projections of future taxable income, the reversal of temporary differences and tax planning strategies. We have evaluated the realizability of the deferred income tax assets and have determined that it is “more likely than not” that all of the deferred income tax assets will not be realized. Accordingly, a valuation allowance was recorded for all of our domestic net deferred income tax assets. In future periods, we will not recognize a deferred tax benefit and will maintain a deferred tax valuation allowance until we achieve sustained U.S. taxable income. Additionally, in the future, we expect our current income tax expense to be related to taxable income generated by our foreign subsidiaries.

The Company is required to make a determination of any of its tax positions (federal and state) for which the sustainability of the position, based upon the technical merits, is uncertain. The Company regularly evaluates all tax positions taken and the likelihood of those positions being sustained. If management is highly confident that the position will be allowed and there is a greater than 50% likelihood that the full amount of the tax position will be ultimately realized, the company recognizes the full benefit associated with the tax position. Additionally, interest and penalties related to uncertain tax positions are included as a component of income tax expense.

Note 20. Other Income (Expense)

Included in other income (expense) are unrealized exchange rate losses which are recorded for the translation of our intercompany loan balances with our wholly owned subsidiaries for the three and nine months ended September 30, 2010.

Note 21. Evaluation of Subsequent Events

In connection with the expiration of the Rights Agreement dated as of October 1, 2001, between the Company and Equiserve Trust Company, N.A., as amended, and the expiration of the associated rights issued thereunder as of October 1, 2011, the Board of Directors of the Company approved the execution of a new Rights Agreement (as it may be amended, supplemented or modified from time to time, the “Rights Agreement”) between the Company and Computershare Trust Company, N.A., as Rights Agent (the “Rights Agent”) effective on October 3, 2011.

In connection with the implementation of the Rights Agreement, on October 3, 2011 the Board of Directors of the Company declared a dividend of one preferred share (“Preferred Share) purchase right (a “Right”) for each share of common stock of the Company (the “Common Shares”) outstanding on October 3, 2011 to the stockholders of record on that date. The description and terms of the Rights are set forth in the Rights Agreement.

The Rights are not exercisable until the earlier to occur of (i) a public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired beneficial ownership of 15% or more of the outstanding Common Shares or (ii) 10 business days (or such later date as may be determined by action of the Board of Directors prior to such time as any person becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of such outstanding Common Shares. The Rights will expire on the earlier of (i) May 15, 2015 and (ii) the first anniversary of the adoption of the Rights Agreement if shareholder approval of the Rights Agreement has not been received by or on such date, unless that date is extended or unless the Rights are earlier redeemed by the Company, in each case, as described below.

Preferred Shares purchasable upon exercise of the Rights will not be redeemable. Each Preferred Share will be entitled to a quarterly dividend payment of 1,000 times the dividend declared per Common Share. In the event of liquidation, the holders of the Preferred Shares will be entitled to an aggregate payment of 1,000 times the aggregate payment made per Common Share. Each Preferred Share will have 1,000 votes, voting together with the Common Shares. In the event of any merger, consolidation or other transaction in which Common Shares are exchanged, each Preferred Share will be entitled to receive 1,000 times the amount received per Common Share. These rights are protected by customary antidilution provisions.

Because of the nature of the Preferred Shares' dividend, liquidation and voting rights, the value of the one one-thousandth interest in a Preferred Share purchasable upon exercise of each Right should approximate the value of one Common Share.

In the event that, at any time after a person becomes an Acquiring Person, the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then-current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. In the event that any person becomes an Acquiring Person, proper provision shall be made so that each holder of a Right, other than Rights beneficially owned by the Acquiring Person and its affiliates and associates (which will thereafter be void), will thereafter have the right to receive upon exercise that number of Common Shares having a market value of two times the exercise price of the Right. If the Company does not have sufficient Common Shares to satisfy such obligation to issue Common Shares, or if the Board of Directors so elects, the Company shall deliver upon payment of the exercise price of a Right an amount of cash or securities equivalent in value to the Common Shares issuable upon exercise of a Right; provided that, if the Company fails to meet such obligation within 30 days following the later of (x) the first occurrence of an event triggering the right to purchase Common Shares and (y) the date on which the Company's right to redeem the Rights expires, the Company must deliver, upon exercise of a Right but without requiring payment of the exercise price then in effect, Common Shares (to the extent available) and cash equal in value to the difference between the value of the Common Shares otherwise issuable upon the exercise of a Right and the exercise price then in effect.

At any time after any person becomes an Acquiring Person and prior to the acquisition by any person or group of a majority of the outstanding Common Shares, the Board of Directors of the Company may exchange the Rights (other than Rights owned by such person or group which have become void), in whole or in part, at an exchange ratio of one Common Share per Right (subject to adjustment).

At any time prior to ten days after the time any person becomes an Acquiring Person, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $0.001 per Right.

A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an exhibit to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 3, 2011. This summary description of the Rights does not purport to be complete and is qualified by reference to the Rights Agreement.

Subsequent events have been evaluated through the date the accompanying condensed consolidated financial statements were issued.

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

You should read the following discussion and analysis in conjunction with our unaudited interim condensed consolidated financial statements and the related notes thereto contained in Part 1, Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2010.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains, and any documents incorporated herein by reference may contain, 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 including those set forth in this report and in our Annual Report on Form 10-K for the year ended December 31, 2010.

COMPANY OVERVIEW

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 and DisplayPort 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.

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.

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.

Broadband Customer Premises Equipment (CPE):

Connectivity solutions - HDMI, DisplayPort, HDP™ and Ethernet IP Cores

We provide 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. 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. Or HD-PXL family of products are compliant with the HDMI and DisplayPort™ multimedia internconnect 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.

In 2010 we also introduced a new proprietary technology called HDP™. It is a patented technology developed for High Definition Television (HDTV) and 3-Dimensional Television (3D-TV) applications. It combines both HDMI 1.4 and DisplayPort capability in a single circuit enabling HDTV and 3D-TV manufacturers to support either standard with a single connector.

Conceived from TranSwitch’s HDP™ technology, our HD-PXL 1.4 IP core supports aggregate data rates over 10Gbps and is designed to meet all HDMI 1.4 resolution requirements including 1080p at 60Hz, the highest resolution for 3D televisions, and 4K x 2K, the resolution required for digital theatres. In addition, this IP core supports Ethernet over HDMI (HEC), and includes the audio return channel (ARC), which eliminates the need for separate audio cables between televisions and home entertainment systems. The result is a technology that elevates the home entertainment experience to new levels of picture quality for consumers while simplifying the overall manufacturing process for HDTV and 3D-TV manufacturers.

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 low power consumption and small die size.

Multi-Service Communications Processors

We also provide 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-performance and low power consumption demands of this market segment. 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 A70™ product is the family’s entry level SoC while the A80™ SoC adds the capability to interface with any WiFi or high-speed adapter. The A90™ SoC is optimized for the SOHO market with four voice channels and a high-performing routing engine available at 100 Mbit/second. The A100™ SoC adds powerful, enterprise-level security and encryption of all data and voice. The A2000 communications processor 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 including 4G LTE™ (Long-Term Evolution) solutions. The Atlanta 1000 (A1000) supports a wide range of applications including voice-enabled gateway routers for home and small office use, as well as IEEE 802.11n WiFi routers.

Available Information

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 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. Material contained on our website is not incorporated by reference in this report. Our executive offices are located at Three Enterprise Drive, Shelton, CT 06484.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

Our unaudited interim condensed 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.

During the quarter ended September 30, 2011, there were no significant changes to the critical accounting policies we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2010.

RESULTS OF OPERATIONS

The results of operations that follow should be read in conjunction with our critical accounting policies and use of estimates summarized above as well as our accompanying unaudited interim condensed consolidated financial statements and notes thereto contained in Item 1 of this report. The following table sets forth certain unaudited interim condensed consolidated statements of operations data as a percentage of net revenues for the periods indicated.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Net revenues:
Product revenues		73	%		86	%		67	%		88	%
Service revenues		27	%		14	%		33	%		12	%
Total net revenues		100	%		100	%		100	%		100	%
Cost of revenues:
Product cost of revenues		21	%		38	%		21	%		39	%
Provision for excess and obsolete inventories		—			1	%		1	%		2	%
Service cost of revenues		14	%		5	%		13	%		6	%
Total cost of revenues		35	%		44	%		35	%		47	%
Gross profit		65	%		56	%		65	%		53	%
Operating expenses:
Research and development		70	%		29	%		62	%		29	%
Marketing and sales		27	%		15	%		27	%		14	%
General and administrative		29	%		15	%		26	%		14	%
Restructuring charges, net		14	%		—			6	%		1	%
Reversal of accrued royalties		(7	)%		—			(9	)%		—
Total operating expenses		133	%		59	%		112	%		58	%
Operating loss		(68	)%		(3	)%		(47	)%		(5	)%

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/VoIP and Broadband Access product lines. The Optical Transport products are incorporated into OEM systems that improve the efficiency of fiber optic networks for packetized data traffic, thereby increasing the overall network capacity. Our Media Gateway/VoIP products provide Voice-over-IP and other packet processing functionality in a variety of equipment types deployed in wireless and wire-line carrier networks as well as in enterprise networks. These equipment types include large capacity media gateways in the core of the network, small-medium capacity access gateways in the ‘last-mile’ section of the network and customer premise equipment for business and residential subscribers. The Broadband Access product line is incorporated into equipment that provides high speed connections to subscribers using fiber (FTTx) or DSL technology, enabling telecommunications service providers to support next generation voice, data and video services. The Carrier Ethernet product line facilitates the transition of existing networks-based legacy voice oriented technologies to Ethernet technology which is more suitable and efficient for supporting next generation converged video, data and voice services. Our CPE product line category includes HDMI, DisplayPort and Ethernet IP Cores which have been incorporated into a number of consumer electronics and PC appliances and Multi-Service Communications Processors used in broadband modems or to be added as part of a small office, home office, or SOHO network. Our Network Infrastructure and Multi-Service Communications Processor product lines continue to show a decline year over year. As such this may affect our impairment analysis of goodwill in the future.

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

(in thousands)	Three Months Ended September 30, 2011					Three Months Ended September 30, 2010
	Net Revenues		Percent of Total Net Revenues			Net Revenues		Percent of Total Net Revenues			Percentage Decrease in Revenues

Network Infrastructure	$	4,686		70	%	$	7,725		60	%		(39	)%

Customer Premises Equipment		1,979		30	%		5,120		40	%		(61	)%

Total net revenues	$	6,665		100	%	$	12,845		100	%		(48	)%

(in thousands)	Nine Months Ended September 30, 2011					Nine Months Ended September 30, 2010
	Net Revenues		Percent of Total Net Revenues			Net Revenues		Percent of Total Net Revenues			Percentage Decrease in Revenues
Network Infrastructure	$	14,230		65	%	$	24,935		63	%		(43	)%

Customer Premises Equipment		7,715		35	%		14,793		37	%		(48	)%

Total net revenues	$	21,945		100	%	$	39,728		100	%		(45	)%

Total net revenues for the three months ended September 30, 2011 were $6.7 million as compared to $12.8 million for the three months ended September 30, 2010, a decrease of $6.1 million or 48%. Our Network Infrastructure revenues decrease of approximately 39% was a result of lower sales of Carrier Ethernet and Optical Transport products due to reduced telecom infrastructure capital expenditures. Our CPE revenues decrease of approximately 61% was attributable to the ramping down of our Mustang (gigabit Ethernet passive optical) product line towards the end of 2010 and reduced sales of our Communications Processor products. This reduction was partially offset by increased service revenues which include royalties and IP licensing of our high speed interface technology.

Total net revenues for the nine months ended September 30, 2011 were $21.9 million as compared to $39.7 million for the nine months ended September 30, 2010, a decrease of $17.8 million or 45%. Our Network Infrastructure revenues decrease of approximately 43% was a result of lower sales of Optical Transport, VOIP and Carrier Ethernet products due to reduced telecom infrastructure capital expenditures. Our CPE revenues decrease of approximately 48% was attributable to the ramping down of our Mustang (gigabit Ethernet passive optical) product line towards the end of 2010 and reduced sales of our Communications Processor products. This reduction was partially offset by increased service revenues which include IP licensing of our high speed interface technology.

International net revenues represented approximately 74% of net revenues for the three months ended September 30, 2011 as compared to 84% for the three months ended September 30, 2010. Also, international net revenues represented approximately 74% of net revenues for the nine months ended September 30, 2011 as compared to 79% for the nine months ended September 30, 2010.

Gross Profit

Total gross profit for the three months ended September 30, 2011 decreased by approximately $2.8 million or 40% as compared to the three months ended September 30, 2010 and total gross profit for the nine months ended September 30, 2011 decreased by approximately $7.1 million or 33% as compared to the nine months ended September 30, 2010. The decrease in gross profit was primarily the result of a decrease in total net revenues which was partially offset by higher gross margins on the revenues that we did have in 2011. The total gross profit as a percentage of revenue was 65% and 56% for three months ended September 30, 2011 and 2010, and 65% and 53% for the nine months ended September 30, 2011 and 2010, respectively. The changes in gross margin percentage are mostly attributable to changes in product mix, especially a larger portion of royalties and higher margin IP licensing revenues. 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 product operations.

During the three and nine months ended September 30, 2011, gross profit was affected favorably in the amount of less than $0.1 million and $0.2 million, respectively, from the sales of products that had previously been written down. During the three and nine months ended September 30, 2010, gross profit was affected favorably in the amount of $0.1 million and $0.3 million, respectively, from the sales of products that had previously been written down. Also during the three months ended September 30, 2011 and 2010, we recorded provisions for excess and obsolete inventories in the amount of less than $0.1 million and $0.1 million, respectively. During the nine months ended September 30, 2011 and 2010, we recorded provisions for excess and obsolete inventories in the amount of $0.2 million and $0.7 million, respectively.

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. During the three months ended September 30, 2011, research and development expenses increased $1.0 million, or 26% over the comparable period of 2010. During the nine months ended September 30, 2011, research and development expenses increased $2.3 million, or 20% over the comparable period of 2010. These increases were a result of increased labor and subcontracting costs as a result of our investment in our high-speed interface product line.

We will continue to closely monitor both our costs and our revenue expectations in future periods. We will continue to concentrate our spending in this area to meet our customer requirements and respond to market conditions.

Marketing and Sales

Marketing and sales expenses consist primarily of personnel-related expenses, trade show expenses, travel expenses and facilities expenses. Marketing and sales expenses for the three months ended September 30, 2011 decreased by $0.2 million or 9% as compared to the three months ended September 30, 2010. This decrease was a result of decreased salaries and commissions due to lower revenues partially offset by increased costs related to our high-speed interface product line. Marketing and sales expenses for the nine months ended September 30, 2011 increased by $0.2 million or 3% as compared to the nine months ended September 30, 2010. This increase was a result of increased costs related to our high-speed interface product line and increased stock compensation costs partially offset by decreased commissions.

General and Administrative

General and administrative expenses consist primarily of personnel-related expenses, professional and legal fees, insurance and facilities expenses. General and administrative expenses for the three months ended September 30, 2011 increased by less than $0.1 million or 2% as compared to the comparable period in 2010. This increase was a result of increased professional fees. General and administrative expenses for the nine months ended September 30, 2011 remained flat as compared to the comparable period in 2010. These expenses included decreased professional fees offset by an increase in stock compensation costs.

Restructuring Charges, net

During the three months ended September 30, 2011 and 2010, we recorded net restructuring charges of $0.9 million and less than $0.1 million, respectively. During the nine months ended September 30, 2011 and 2010, we recorded net restructuring charges of $1.4 million and $0.4 million, respectively.

Interest Expense, net

Interest expense, net was less than $0.1 and $0.2 million for the three months ended September 30, 2011 and 2010, respectively. Interest income was essentially flat with slightly lower cash and investment balances offset by higher interest rates. Interest income will continue to fluctuate as it is affected by our cash and investment balances and the related interest rates. At September 30, 2011 and 2010, the effective interest rate on our interest-bearing securities was approximately 2.4% and 1.1%, respectively. Interest expense decreased approximately $0.1 million due to lower debt balances resulting from principal payments made on our 2011 Notes. The 2011 Notes have been fully paid as of September 30, 2011 and as such, all interest payments related to the 2011 Notes have been made as of September 30, 2011.

Interest expense, net was approximately $0.2 million and $0.5 million for the nine months ended September 30, 2011 and 2010, respectively. Interest income increased less than $0.1 million as a result of higher cash and investment balances during the nine months ended September 30, 2011 as compared to the comparable period in 2010, which was the result of our equity raise during the second quarter of 2011. Interest expense decreased approximately $0.3 million due to lower debt balances resulting from principal payments made on our 2011 Notes.

Other Income (Expense)

For the three months ended September 30, 2011 and 2010, other income (expense) was income of less than $0.1 million and expense of $0.9 million, respectively. For the nine months ended September 30, 2011 and 2010, other income was less than $0.1 million and $0.1 million, respectively. The other income (expense) for the three and nine months ended September 30, 2010 was primarily due to both realized and unrealized exchange rate gains and losses which were recorded for the translation of our intercompany loan balances with our wholly owned subsidiaries. In 2011, the Company determined that its intercompany loan balances with its foreign subsidiaries are classified as long-term. As such, the Company has recorded its exchange gains and losses in the translation of these balances as other comprehensive income or loss for the three and nine months ended September 30, 2011.

Income Tax Expense

Income tax expense was approximately $0.2 million and $0.4 million for the three months ended September 30, 2011 and 2010, respectively. Income tax expense was approximately $0.5 million and $0.6 million for the nine months ended September 30, 2011 and 2010, respectively. The amounts that were recorded reflect income taxes on the earnings of certain of our foreign subsidiaries, principally India.

During the three and nine months ended September 30, 2011 and 2010, we evaluated our deferred income tax assets as to whether it is “more likely than not” that the deferred income tax assets will be realized. In our evaluation of the realizability of deferred income tax assets, we consider projections of future taxable income, the reversal of temporary differences and tax planning strategies. We have evaluated the realizability of the deferred income tax assets, and have determined that it is “more likely than not” that all of the deferred income tax assets will not be realized. Accordingly, a valuation allowance was recorded for all of our domestic net deferred income tax assets. In future periods, we will not recognize a deferred tax benefit and will maintain a deferred tax valuation allowance until we achieve sustained U.S. taxable income. Additionally, in the future, we expect our current income tax expense to be related to taxable income generated by our foreign subsidiaries.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2011 and December 31, 2010, we had total cash, cash equivalents, restricted cash and investment balances of approximately $11.1 million and $7.8 million, respectively. This is our primary source of liquidity, as we are not currently generating any significant positive cash flow from our operations. A summary of our cash, cash equivalents, restricted cash, investments, credit agreements and future commitments are detailed as follows:

Cash, Cash Equivalents, Restricted Cash, Investments and Credit Agreements

Our primary source of liquidity is cash, cash equivalents, restricted cash, short-term investment balances and a credit facility agreement.

During the three and nine months ended September 30, 2011, we made principal payments of approximately $1.3 million and $3.8 million on our 2011 Notes. As of September 30, 2011, the 2011 Notes have been paid in full.

During the three months ended June 30, 2011, we completed an offering of shares of common stock that resulted in the sale of 6,210,000 shares, with net proceeds to us of approximately $16.1 million (see Note 18, Issuance of Common Stock, in the Notes to the Unaudited Condensed Consolidated Financial Statements in Item 1 above).

On March 12, 2010 we entered into a credit facility agreement with Bridge Bank N.A., a subsidiary of Bridge Capital Holdings. The facility allows for borrowings up to the lower of $5.0 million or 80% of our outstanding eligible accounts receivable as determined by Bridge Bank N.A. This agreement was amended and restated on April 4, 2011 and the current facility matures on April 4, 2013 (the “Amended and Restated Business Financing Agreement”). The agreement bears interest at the higher of (i) the lender’s prime rate plus 2.0 percent or (ii) 5.25 percent, plus the payment of certain fees and expenses. We have not borrowed against this facility as of the date of this report.

We have taken cost cutting measures through restructuring plans we implemented during 2010 and 2011. We currently believe that with our anticipated gross profit margins and operating expenses we can break-even on an operating income basis, excluding stock compensation costs and amortization of purchased intangibles, at the rate of sales of $10.0 million per quarter. 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. Nonetheless, we believe that our existing cash and cash equivalents, investments and Amended and Restated Business Financing Agreement will be sufficient to fund operating activities and capital expenditures, and provide adequate working capital at least through the next twelve months.

If our existing resources, including our bank financing facility, 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.

A summary of the net change in total cash and investments follows:

(in thousands)	September 30, 2011		December 31, 2010		Change			September 30, 2010		December 31, 2009		Change
Cash and cash equivalents	$	4,450	$	6,280	$	(1,830	)	$	9,418	$	2,343	$	7,075
Restricted cash		138		582		(444	)		1,781		2,732		(951	)
Short-term investments		6,516		973		5,543			1,125		-		1,125
Total cash and investments	$	11,104	$	7,835	$	3,269		$	12,324	$	5,075	$	7,249

Effect of Exchange Rates and Inflation: Exchange rates and inflation have not had a significant impact on our operations or cash flows.

Commitments and Significant Contractual Obligations

There have been no material changes to our contractual obligations reported in our Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the Securities and Exchange Commission on March 15, 2011. Additional comments related to our contractual obligations are presented below.

We have outstanding operating lease commitments of approximately $19.1 million, payable over the next six years. Some of these commitments are for space that is not being utilized and for which we recorded restructuring charges in prior periods. As of September 30, 2011, we have sublease agreements totaling approximately $6.5 million to rent portions of our excess facilities over the next three 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.

We also have pledged approximately $0.1 million as of September 30, 2011 and $0.6 million as of December 31, 2010 as collateral for stand-by letters of credit to support customer credit requirements. These amounts were in our bank accounts and are included in our restricted cash balances.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2010.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, our management, including our President and Chief Executive Officer, and Chief Financial Officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)). These officers have concluded that our disclosure controls and procedures are effective. As such, we believe that all material information relating to us and our consolidated subsidiaries required to be disclosed in our periodic filings with the SEC (i) is recorded, processed, summarized and reported within the required time period, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

During the three months ended September 30, 2011, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

Limitations Inherent in all Controls

Our management, including the President and Chief Executive Officer, and Chief Financial Officer, recognize that our disclosure controls and our internal controls (discussed above) cannot prevent all errors or all attempts at fraud. Any controls system, no matter how well crafted and operated, can only provide reasonable, and not absolute, assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in any control system, no evaluation or implementation of a control system can provide complete assurance that all control issues and all possible instances of fraud have been or will be detected.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may be subject to 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 our business, financial condition or results of operations.

ITEM 1A. RISK FACTORS

There have been no material changes to the factors disclosed in Item 1A – Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2010.

ITEM 6. EXHIBITS

Exhibit 3.1	Amended and Restated Certificate of Incorporation, as amended to date (previously filed as Exhibit 3.1 to TranSwitch’s quarterly report on Form 10-Q for the quarter ended March 31, 2005 and incorporated herein by reference).

Exhibit 3.2	Amendment to the Amended and Restated Certificate of Incorporation (previously filed as Exhibit 3.1 to TranSwitch’s current report on Form 8-K as filed with the Securities and Exchange Commission on May 21, 2010 and incorporated herein by reference).

Exhibit 3.3	Certificate of Elimination of Series A Junior Participating Preferred Stock, dated October 3, 2011

Exhibit 3.4	Certificate of Designations of Series B Junior Participating Preferred Stock, dated October 3, 2011 (previously filed as Exhibit 3.1B to TranSwitch’s current report on Form8-K filed on October 3, 2011 and incorporated herein by reference).

Exhibit 3.5	Second Amended and Restated By-Laws (previously filed as Exhibit 3.1 to TranSwitch’s current report on Form 8-K as filed with the Securities and Exchange Commission on October 17, 2007 and incorporated herein by reference).

Exhibit 4.1	Rights Agreement between the Registrant and Computershare Trust Company, N.A., as Rights Agent, dated October 3, 2011, which includes the form of Certificate of Designations setting forth the terms of the Series B Junior Participating Cumulative preferred Stock, par value $0.001 per share, as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (previously filed as Exhibit 4.1 to TranSwitch’s current report on Form 8-K filed on October 3, 2011 and incorporated herein by reference).

Exhibit 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).

Exhibit 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).

Exhibit 32.1	CEO and CFO Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

SIGNATURES

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

		TRANSWITCH CORPORATION


November 9, 2011		/s/ Dr. M. Ali Khatibzadeh
Date		Dr. M. Ali Khatibzadeh Chief Executive Officer and President (Chief Executive Officer)

November 9, 2011		/s/ Robert A. Bosi
Date		Robert A. Bosi Vice President and Chief Financial Officer (Chief Financial Officer)

Attached files

TRANSWITCH CORP /DE Reports

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