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, 2011

OR

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

For the transition period from ______________ to _______________

Commission File Number 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 class		Name of exchange on which registered
Common 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 o 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 o 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

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

Indicate by check mark 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. x

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 o		Accelerated Filer x
Non-Accelerated Filer o		Smaller reporting company o

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

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, 2011 was approximately $82.3 million. At March 6, 2012, as reported on the Nasdaq Capital Market, there were 30,664,640 shares of common stock, par value $.001 per share, of the Registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Registrant’s Proxy Statement for the 2012 Annual Meeting of Shareholders are incorporated by reference in Part III, Items 10, 11, 12, 13 and 14 of this Annual report on Form 10-K.

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 integrated circuit (IC) and intellectual property (IP) solutions that provide core functionality for voice, data and video communications equipment for network, enterprise and customer premises applications. We provide 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, we offer interoperable connectivity solutions that provide a bridge between HDMI and DisplayPort and enable the distribution and presentation of high-definition (HD) content for consumer electronic, and personal computer markets and also provide a family of communications processors that provide best-in-class performance for a range of applications. Overall, we have over 100 active customers, including the leading global telecom equipment providers, semiconductor and consumer product companies.

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. Our common stock trades on the Nasdaq Capital Market under the symbol “TXCC.”

Our telecom products are sold to original equipment manufacturers (OEMs) for use in a variety of communications network equipment, including:

Our interoperable connectivity solutions are sold to OEMs for use in consumer electronics and personal computers.

Next Generation Network Infrastructure (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. Such products 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 we provide 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 include Alcatel-Lucent, Tellabs, Fiberhome, Ericsson, NEC and other OEMs.

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. Our customers in this market include Alcatel-Lucent, Sumitomo, Nokia Siemens Networks and other OEMs.

Broadband Customer Premises Equipment (Broadband 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 and data) to the subscriber location in the form of a high speed packetized data stream. 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 digital enhanced cordless telecommunications 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.

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 also provide a family of communications processors designed specifically for Broadband CPE applications, combining VoIP, 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 Products and the Functions They Serve

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

1.  Converged Network Infrastructure

2.  Broadband CPE

Within each of these markets, 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 SoC solutions each incorporating multiple embedded reduced instruction set computing and digital signal processing processors for encoding, decoding and transcoding VoIP 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 series is designed for wire-line and wireless carrier equipment such as Media Gateways, Soft Switches, IMS and 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 solution 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 time-division multiplexing (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.

c)  Tributary Switches

This product 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 provides vital interworking capability between the new 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 United States and is expected to be the deployed in several other countries.

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 optical line terminations (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 FTTN or 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 Entropia^TM III-C series of processors is 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 route 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.

2. Products for Broadband CPE

a)  Connectivity Solutions — HDMI, DisplayPort, HDP^TM, Ethernet IP Cores and HDP^TM Transceivers

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. 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^TM 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.

Recently we also introduced a new proprietary technology called HDP^TM. 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 our HDP^TM 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 × 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. In 2011, we introduced HDplay^TM, our first IC utilizing our HDP^TM technology. HDplay^TM enables HDTV and 3D-TV manufacturers to support either standard with a single connector and also incorporates our AnyCable^TM technology, which provides superior functionality with any low-cost HDMI^TM and DisplayPort cables.

Also in 2011, we introduced HDwire^TM, a video interface solution designed to be used inside flat panel televisions and monitors. Our HDwire^TM video interface solution supports current and next-generation, high-definition (HD) video displays. The ultra-fast HDwire^TM panel interface ensures reliable, crystal-clear video for the high resolution computer and TV displays at low power consumption and low system design cost. We are offering HDwire^TM as licensable intellectual property (IP) cores and plan to offer an IC line in the future.

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.

b)  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 A70^TM product is the family’s entry level SoC while the A80^TM SoC adds the capability to interface with any WiFi or high-speed adapter. The A90^TM SoC is optimized for the SOHO market with four voice channels and a high-performing routing engine available at 100 Mbit/second. The A100^TM 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. In 2010, we introduced the Atlanta 1000 (A1000), which 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.

In 2011, we introduced an LTE^TM (Long Term Evolution) fixed wireless reference design that enables wireless providers to deliver broadband voice, video and data services to homes and enterprises. The reference design incorporates our Atlanta 2000^TM processor and complete software solution which is designed for high performance and real time services under real world network conditions.

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 very large scale integration (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.

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, 130 and 180 nanometer 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 SoC definition, architecture, verification expertise and design methodology ensure that hardware and software architectural trade-offs yield desired performance testing from our VLSI solutions. The SoC 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 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 key elements of our business strategy include the following:

Provide the Optimal Solutions Within Target Markets

We offer our customers unique solutions 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, home gateway/routers and interoperable connectivity solutions for consumer products. Our solutions include:

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 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 9001:2008 and ISO/TS 16949:2009 certified for quality and 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 technology in the products of market-leading 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 premises, computing, process control, and defense equipment vendors. In addition, we target emerging technology leaders that are developing next generation solutions for the telecommunications and data communications markets. We also market our interoperable connectivity solutions to consumer electronics companies and other semiconductor companies that serve these markets.

We identify and address sales opportunities through our worldwide direct sales force and our worldwide network of independent distributors and sales representatives.

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 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, 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 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. Item 1A below describes the risks attendant to the foreign operations.

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. In addition, we have licensed HDMI, DisplayPort, Ethernet and other IP Cores to firms such as Intel, Samsung, Texas Instruments, Analog Devices, Philips NXP, IBM and NEC.

Historically, a small number of our customers have accounted for a substantial portion of our net revenues. In 2011, 29% of our net revenues were from three customers. Note 9 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, 2011, we had 113 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 and demonstration products for telecommunications and data communications applications. Research and development expenditures were $18.9 million in 2011, $16.0 million in 2010, and $19.1 million in 2009.

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

We currently have 39 United States patents with an additional 11 patents pending in the United States. Of that number two patents are co-assigned. 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 22 additional United States patents and their foreign derivatives.

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 be assured 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 integrated circuit (IC) 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 a 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 to ISO 9001:2008 by TUV Rheinland of North America, Inc. We use only ISO certified suppliers in the manufacture of our products.

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

Our products and services can be categorized as follows:

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 2006 through 2011.

Acquired Company		Date Acquired		Technology/Skill Acquired
Centillium Communications, Inc.		October 2008		VOIP and Optical transport
ASIC Design Center Division of Data – JCE, Ltd.		January 2007		Custom ASIC Development and Logistics
Mysticom, Ltd.		January 2006		Analog/Mixed Signal Design Resources

Investments in Non-Publicly Traded Companies and Venture Capital Funds

We have made investments in early-stage venture-backed 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.

Competition

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

Our principal competitors in the communications industry 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 field programmable gate array (FPGA) providers such as Altera Corporation and Xilinx, Inc. which compete with us by supplying programmable products to OEMs.

Our principal competitors in the consumer interconnect product line are Silicon Image, Inc., Analog Devices, Inc., and NXP Semiconductors, NV. Other domestic and international vendors have either entered this market or announced plans to do so.

Employees

At December 31, 2011, we had 169 full time employees, including 113 in research and development, 23 in marketing and sales, 5 in operations and quality assurance, and 28 in administration. We have no collective bargaining agreements. We have never experienced any work stoppage and we believe our employee relations are good.

Executive Officers of the Registrant

Our Executive Officers are as follows:

Dr. M. Ali Khatibzadeh (51)		President, Chief Executive Officer and Director
Mr. Robert A. Bosi (56)		Vice President and Chief Financial Officer
Mr. Amir Bar-Niv (46)		Senior Vice President & GM of the High Speed Interconnect Business Unit
Mr. Theodore Chung (38)		Vice President of Business Development and Worldwide Sales
Mr. Haim Moshe (53)		Senior Vice President & GM of TranSwitch Israel
Mr. Kris Shankar (47)		Senior Vice President & GM of the Telecom Business Unit

There are no family relationships as defined in Item 401 of Regulation S-K between any of the officers named above and there is no arrangement or understanding between any of the officers named above and any other person pursuant to which he or she was selected as an officer. Each of the officers named above was elected by the Board of Directors to hold office until the next annual election of officers and until his or her successor is elected and qualified or until his or her earlier resignation or removal. The Board of Directors elects the officers immediately following each annual meeting of the stockholders and may appoint other officers between annual meetings.

Dr. M. Ali Khatibzadeh was named President and Chief Executive Officer of the Company in December 2009. Prior to his appointment, he was Senior Vice President and General Manager of the RF Products Business Unit of Anadigics (NASDAQ: ANAD) from April 2009 to October 2009. He also served Anadigics as Senior Vice President and General Manager of the Wireless Business Unit from August 2005 to April 2009 and as Vice President of the Wireless Business Unit from June 2000 to August 2005.

Mr. Robert A. Bosi was named Vice President and Chief Financial Officer in January 2008. He has been a partner in Tatum LLC since 2003.

Mr. Amir Bar-Niv was named Senior Vice President & GM in October 2011 and held the position of Vice President Systems & Applications since November 2007.

Mr. Theodore Chung was named Vice President of Business Development and Worldwide Sales in October 2011 and held the position of Vice President Business Development since October 2006. He also served as Interim Chief Financial Officer and Treasurer from January 2007 through January 2008.

Mr. Haim Moshe was named Senior Vice President & GM in October 2011 and held the position of Vice President & GM since December 2007.

Mr. Kris Shankar was named Senior Vice President & GM in October 2011 and held the position of Senior Vice President Worldwide Sales since July 2010 and Vice President Worldwide Sales since October 2008. Prior to joining the Company, he was the Vice President — Worldwide Sales and Customer Support of Centillium Communications Inc.

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, D.C. 20549, on official business days during the hours of 10am to 3pm. You can obtain information on the operation of the Public Reference Room and request copies of these documents by writing to the Public Reference Section of the SEC, 100F Street N.E., Washington, D.C. 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.

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.

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 strategic direction has changed. The company has gone from primarily providing VLSI infrastructure products to more customer premise licensing IP cores and VoIP based products.

As a result, we are suffering through a period of larger losses, including from operations as well as from write-downs of goodwill and other intangibles assets. Our total revenue has decreased 49.6% from $56.1 million in 2009 to $28.3 million in 2011. Product revenue has decreased 61.1% from $50.7 million in 2009 to $19.7 million in 2011.

As our business model changes there can be no assurances that the move to these new product lines will produce acceptable results. Moreover, any other future changes to our business may not prove successful in the short or long term due to a variety of factors, including competition, customer acceptance, demand for our products and other factors. This may cause a material negative impact on our financial results.

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

We have incurred significant losses in prior periods. Our revenues and operating results have fluctuated in the past and may fluctuate in the future and we may incur losses and negative cash flows in future periods. These fluctuations are due to a number of factors, many of which are beyond our control. These factors include, among others:

The foregoing factors are difficult to forecast, and these, as well as other factors, could materially and adversely affect our quarterly or annual operating results.

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.

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 telecom customers and we expect that our net revenues may decrease further.

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.

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. During 2010 and 2011, we issued shares for proceeds to the Company in an amount of $19,197,000 worth of common stock under the Shelf Registration Statement. Accordingly, we have a value of $20,803,000 of shares of our common stock, which could still be issued under this arrangement. On February 10, 2012, we entered into an At Market Issuance Sales Agreement with MLV & Co. LLC (“MLV”), pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $10,000,000 from time to time through MLV.

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 $1.52 and a high of $15.36 (share price is reflective of the November 23, 2009 1 for 8 reverse stock split) during the period from January 1, 2007 to December 31, 2011. 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:

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. Our restructurings could result in management distractions, operational disruptions, and other difficulties. Over the past several years, we have initiated several restructuring activities in an effort to reduce operating costs. Our most recent restructuring was announced on October 4, 2011. Employees whose positions were eliminated in connection with these restructuring activities may seek employment with our customers or competitors. Although each of our employees is required to sign a confidentiality agreement with us at the time of hire, we cannot guarantee that the confidential nature of our proprietary information will be maintained in the course of such future employment. Additionally, we cannot guarantee that we will not undertake additional restructuring activities and that our restructuring efforts will be successful, or that we will be able to realize the cost savings and other anticipated benefits from our previous restructuring plans. Also, if we continue to reduce our workforce, it may adversely impact our ability to respond rapidly to new growth opportunities.

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, 2011 and 2010, shipments to our top five customers, including sales through distributors, accounted for approximately 39% and 57% 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:

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 2011, a substantial amount of our revenue was from China, Japan, Korea, Taiwan, Italy, Israel and other foreign countries. We expect revenues in 2012 will be substantially 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 fluctuated significantly in the past couple of years and this trend may continue.

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, 2011 and 2010, foreign shipments accounted for approximately 77% and 75%, 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 revenues. A significant portion of our total net revenues will, therefore, be subject to risks associated with foreign markets, including the following:

Although substantially all of our total net 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. A substantial amount of our costs are denominated in Israeli shekels and the Indian rupees. 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.

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 65, 130 and 180 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 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:

Our success also depends upon our ability to do the following:

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 35 product families. 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.

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

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

We anticipate that these markets will continue to experience significant volatility and reduced demand 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 successfully design and manufacture new products that address the needs of our customers and include the new standards or that such new products will meet with substantial market acceptance.

Our business has been and may continue to be significantly impacted by the deterioration in worldwide economic conditions, and the current uncertainty in the outlook for the global economy makes it more likely that our actual results will differ materially from expectations.

Global credit and financial markets continue to experience disruptions, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and continued uncertainty about economic stability. Despite signs of improvement, there can be no assurance that there will not be renewed deterioration in credit and financial markets and confidence in economic conditions. These economic uncertainties affect businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. The continued or further tightening of credit in financial markets may lead consumers and businesses to postpone spending, which may cause our customers to cancel, decrease or delay their existing and future orders with us. In addition, financial difficulties experienced by our suppliers or distributors could result in product delays, increased accounts receivable defaults and inventory challenges. The volatility in the credit markets has severely diminished liquidity and capital availability.

The licensing component of our business strategy increases business risk and volatility.

Part of our business strategy is to license IP through agreements with companies whereby companies incorporate our IP into their respective technologies that address certain markets. There can be no assurance that additional companies will be interested in licensing our technology on commercially favorable terms or at

all. We also cannot ensure that companies who license our technology will introduce and sell products incorporating our technology, will accurately report royalties owed to us, will pay agreed upon royalties, will honor agreed upon market restrictions, will not infringe upon or misappropriate our intellectual property and will maintain the confidentiality of our proprietary information. The IP agreements are complex and depend upon many factors including completion of milestones, allocation of values to delivered items and customer acceptances. Many of these factors require significant judgments. Licensing revenue could fluctuate significantly from period to period because it is heavily dependent on a few key deals being completed in a particular period, the timing of which is difficult to predict and may not match our expectations. Because of its high margin content, the licensing mix of our revenue can have a disproportionate impact on gross profit and profitability. Also, generating revenue from these arrangements is a lengthy and complex process that may last beyond the period in which efforts begin and once an agreement is in place, the timing of revenue recognition may be dependent on customer acceptance of deliverables, achievement of milestones, our ability to track and report progress on contracts, customer commercialization of the licensed technology and other factors. Licensing that occurs in connection with actual or contemplated litigation is subject to risk that the adversarial nature of the transaction will induce non-compliance or non-payment. The accounting rules associated with recognizing revenue from these transactions are increasingly complex and subject to interpretation. Due to these factors, the amount of license revenue recognized in any period may differ significantly from our expectations.

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 semiconductor market.

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

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:

The markets that we serve are intensely competitive. 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, 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. A few foundries 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:

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. We work closely with our foundries to minimize the likelihood of reduced manufacturing yields; however, 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 2011, one outside wafer foundry supplied a substantial amount of our total semiconductor wafer requirements. 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, labor disputes, rising wages, 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:

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.

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.

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 Amended and Restated Business Financing Agreement between us and Bridge Bank, N.A. or our other obligations, we would be in default under their respective terms. Any such default or cross default would have a material adverse effect on our business, prospects, financial condition and operating results.

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. As the source of our technological and product innovations, our key technical personnel represent a significant asset. The competition for such personnel can be intense in the semiconductor industry. We may also have a particularly hard time attracting and retaining key personnel during periods of poor performance and during this period following our most recent restructuring.

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:

In addition, acquisitions involve numerous other risks, including:

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.

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

During the past five 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:

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, discontinued or abandoned certain product lines acquired through acquisitions.

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, rights agreement 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 rights agreement 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:

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 $17.1 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. We currently have subleases for the majority of our excess space but our sublease income generated will not offset the entire future commitment. As of December 31, 2011, we have sublease agreements totaling approximately $11.7 million to rent portions of our excess facilities over the next six 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.

Of the office space being leased in our Shelton, Connecticut location, as of December 31, 2011, approximately 111,993 square feet is considered excess, the majority of which we have taken restructuring charges for in prior years. Substantially all of this space is currently being sublet, but not for the full amount of our lease obligation. If we are unable to collect our sub-lease rents, our future cash outflows would be adversely affected.

Not applicable.

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 Dates
Shelton, Connecticut		Corporation Headquarters, Product Development, Operations, Sales, Marketing and Administration		12,122		Less than 1 Year
Herzeliya, Israel		Product Development, Sales & Service		9,688		Less than 1 Year
New Delhi, India		Product Development		16,804		January 2015
Fremont, California		Product Development, Sales, Marketing and Administration		11,222		January 31, 2014
Bangalore, India		Product Development		12,378		February 2014
Excess property:
Shelton, Connecticut		Subleased or Available for Lease		111,993*		November 2012 – April 2017

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

Refer to Note 16 — Commitments and Contingencies of our Consolidated Financial Statements for additional disclosures regarding our commitments under lease obligations. Also, refer to Note 15 — Restructuring Charges of our Consolidated Financial Statements regarding our restructuring charges during fiscal years 2009 through 2011 as we have recorded charges for future rent payments relating to excess office space.

We are not party to any material litigation 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 the business, financial condition or results of our operations.

Not applicable.

PART II

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				Low
Quarter to date
First Quarter (through March 6, 2012)		$	3.56			$	2.51
Year ended December 31, 2011
First Quarter		$	4.61			$	2.00
Second Quarter		$	5.50			$	3.05
Third Quarter		$	3.10			$	2.24
Fourth Quarter		$	3.23			$	2.11
Year ended December 31, 2010
First Quarter		$	3.34			$	1.52
Second Quarter		$	2.95			$	2.10
Third Quarter		$	3.07			$	2.09
Fourth Quarter		$	2.73			$	1.98

As of March 1, 2012, there were approximately 144 holders of record and approximately 16,180 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, 2011 with respect to shares of our common stock that may be issued under our existing equity compensation plans, including our 1995 Third Amended and Restated Stock Plan (the “1995 Plan”), 2000 Stock Option Plan (the “2000 Plan”), 2008 Equity Incentive Plan (the “2008 Plan”), and 2005 Employee Stock Purchase Plan (the “Purchase Plan”). No shares are available for future grants under the 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)			3,163,601	(3)(4)		$	4.33	(3)			890,550
Equity Compensation Plans Not Approved by Stockholders(2)			236,905			$	10.83				—
Total			3,400,506			$	4.79				890,550

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 was eligible for grants of options under the 2000 Plan. The 2000 Plan was designed to attract individuals of outstanding ability to become or to continue as employees or consultants, to enable such individuals to acquire or increase their proprietary interest in the Company through the ownership of shares of our Common Stock, and to incentivize such individuals 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 was 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 were not subject to outstanding stock option awards would be eligible for issuance under the 2008 Equity Incentive Plan.

Issuer Purchases of Equity Securities

On February 13, 2008, we announced that our Board of Directors authorized a stock repurchase program under which we could repurchase up to $10 million of our outstanding common stock. The share repurchase program authorized the repurchase of shares through February 2010, from time to time, through transactions in the open market or in privately negotiated transactions.

During the years ended December 31, 2010 and 2011, we did not repurchase any shares.

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,
		2011				2010				2009				2008				2007
		(Amounts presented in thousands, except per share amounts)
Selected Consolidated Statements of Operations Data:
Net revenues		$	28,255			$	49,822			$	56,107			$	41,934			$	32,565
Gross profit			17,932				27,798				31,484				23,894				20,171
Operating loss			(22,136	)			(3,439	)			(9,720	)			(19,774	)			(18,800	)
Net loss(1)		$	(22,872	)		$	(4,609	)		$	(11,531	)		$	(17,046	)		$	(19,712	)
Basic and diluted net loss per common share		$	(0.82	)		$	(0.21	)		$	(0.58	)		$	(0.99	)		$	(1.19	)
Shares used in calculation of basic and diluted net loss per common share			27,911				22,162				19,938				17,260				16,566

		December 31,
		2011				2010				2009				2008				2007
Selected Consolidated Balance Sheets Data:
Cash, cash equivalents, restricted cash and short-term investments		$	7,554			$	7,835			$	5,075			$	15,284			$	34,098
Total current assets			17,793				20,386				23,224				35,179				45,527
Working capital			4,866				1,617				(2,706	)			8,708				36,867
Total non-current assets			9,825				25,432				29,732				43,248				22,060
Total assets			27,618				45,818				52,956				78,427				67,587
Convertible Notes due within one year			—				3,758				5,004				—				—
Total current liabilities			12,927				18,769				25,930				26,471				8,660
5.45% Convertible Notes due 2010, long-term			—				—				—				10,013				25,013
5.45% Convertible Notes due 2011, long-term			—				—				3,758				—				—
Total non-current liabilities			2,485				10,317				14,351				29,677				45,259
Total stockholders’ equity			12,206				16,732				12,675				22,279				13,668

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, 2011, 2010 and 2009. 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 supplies innovative integrated circuit (IC) and intellectual property (IP) solutions that provide core functionality for voice, data and video communications equipment for network, enterprise and customer premises applications. We provide 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, we offer a family of communications processors that provide best-in-class performance for a range of applications and also provide interoperable connectivity solutions that provide a bridge between HDMI and DisplayPort and enable the distribution and presentation of high-definition (HD) content for consumer electronic, and personal computer markets. Overall, we have over 100 active customers, including the leading global telecom equipment providers, semiconductor and consumer product companies.

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. Our common stock trades on the Nasdaq Capital Market under the symbol “TXCC.”

Our telecom products are sold to original equipment manufacturers (OEMs) for use in a variety of communications network equipment, including:

Our interoperable connectivity solutions are sold to OEMs for use in consumer electronics and personal computers.

Our revenues were $28.3 million in 2011, $49.8 million in 2010 and $56.1 million in 2009. As a result of decreased revenues over the past couple of years, we have taken strict cost control measures including the implementation of restructuring plans during 2010 and 2011. Also, during 2011, we paid in full our 5.45% Convertible Notes due September 30, 2011 (“2011 Notes”) and as such there was no outstanding balance as of December 31, 2011 as compared to notes payable of $3.8 million as of December 31, 2010.

During the year ended December 31, 2011, we raised approximately $16.1 million in net proceeds from the sale of 6,210,000 shares of our common stock (see Note 14 of the Notes to the Consolidated Financial Statements).

We also entered into an Amended and Restated Business Financing Agreement (the “Amended Financing Agreement”) with Bridge Bank N.A. (“Bridge Bank”) on April 4, 2011 which amended and restated our existing credit facility. The Amended Financing Agreement provides us a credit facility 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 of our personal property, including our 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 our 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. At December 31, 2011, we had no outstanding borrowings under this facility.

On February 10, 2012, we entered into an At Market Issuance Sales Agreement with MLV & Co. LLC (“MLV”), pursuant to which we may issue and sell shares of our common stock, $0.001 par value per share, having an aggregate offering price of up to $10,000,000 from time to time through MLV (the “Offering”). Also on February 10, 2012, we filed a prospectus supplement with the Securities and Exchange Commission in connection with the Offering.

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.

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

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 to OEMs 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. Revenues from our distributors can be recognized when: (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. Agreements with certain distributors provide price protection and return and allowance rights. 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 $0.4 million, $0.8 million and $0.6 million at December 31, 2011, 2010 and 2009, 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 connectivity solutions, including HDMI, DisplayPort and Ethernet IP Cores. 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.

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 the creditworthiness of such a customer or other matters affecting the collectability 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.

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.

Intangibles and Long-Lived Assets (including Goodwill).  We review 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. During the fourth quarter of 2011, impairment testing for certain purchased customer relationships and developed technology was performed by us and indicated that the undiscounted future cash flows of these intangible assets were less than its corresponding carrying amount. As a result of the analyses performed, we measured and recorded an impairment of these intangible assets of $5.4 million in 2011. The 2011 impaired purchased customer relationships and developed technology related to a business acquisition in 2008. We did not record any impairment changes on any other intangibles or long-lived assets in 2010.

Our impairment review of goodwill was 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, we used our common stock’s market price to determine fair value and other valuation metrics. In addition, we performed discounted cash flow analysis on the reporting units to determine fair value. During the fourth quarter of 2011, impairment testing performed by us indicated that the estimated fair value of the reporting unit tested was less than its corresponding carrying amount. As a result of the analyses performed, we recorded goodwill impairment charges of $8.9 million in 2011. The 2011 impaired goodwill related to a business acquisition in 2008. We did not record any goodwill impairment charges in 2010. 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 in 2009. The impaired goodwill related to business acquisitions in 2007 and 2006.

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 $0.2 million in 2011, $0.8 million in 2010 and $0.7 million in 2009.

During 2011, 2010 and 2009, we recorded net product revenues of approximately $0.4 million, $1.2 million and $3.0 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%, 58% and 51% in 2011, 2010 and 2009 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 2011, we recorded a net restructuring benefit of $5.6 million. On December 28, 2011, we entered into an amendment (the “Amendment”) to a sublease agreement (the “Sublease”) with an unaffiliated party to sublease 92,880 square feet of our office space in Shelton, Connecticut. As a result of the Sublease, we reversed approximately $7.0 million of previously accrued restructuring liabilities. This amendment extends the sublease through May 2017. This benefit was partially offset by approximately $1.4 million of charges for workforce reductions implemented during 2011. In the third quarter of 2011, we implemented a restructuring plan that included a workforce reduction of approximately 39 positions primarily in our Shelton, Connecticut, Fremont, California, New Delhi, India and Bangalore, India locations. We also implemented a restructuring plan in the first quarter of 2011 that included a workforce reduction of approximately 26 positions primarily in our Fremont, California, New Delhi, India and Bangalore, India locations. The restructuring charges are primarily for employee termination benefits. During 2010, we recorded a net restructuring charge of approximately $0.4 million. We implemented a restructuring plan in the first quarter of 2010 that included a workforce reduction of approximately 17 positions in our Shelton, Connecticut, Fremont, California, New Delhi, India and Bangalore, India locations. The restructuring charges were primarily for employee termination benefits. All of the related cash expenditures were paid during 2010. During 2009, we recorded a net restructuring benefit 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. At December 31, 2011 and 2010, the restructuring liabilities were $4.5 million and $11.2 million, respectively, on our consolidated balance sheets. Restructuring liabilities at December 31, 2011 include approximately $3.7 million of liabilities for facility lease costs and approximately $0.8 million for employee termination benefits (Refer to Note 15 — Restructuring 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 16 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.  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 United States 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 zero, zero, and less than $0.1 million during 2011, 2010 and 2009, respectively. Also, during the first quarter of 2010, we sold our 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. The total investment in non-public companies was $0.3 million and $3.0 million as of December 31, 2011 and 2010, respectively. (For further discussion, please refer to Note 4 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.

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,
		2011				2010				2009
Net revenues:
Product revenues			70	%			84	%			90	%
Service revenues			30	%			16	%			10	%
Total net revenues			100	%			100	%			100	%
Cost of revenues:
Product cost of revenues			24	%			36	%			38	%
Provision for excess and obsolete inventories			1	%			2	%			1	%
Service cost of revenues			12	%			6	%			5	%
Total cost of revenues			37	%			44	%			44	%
Gross profit			63	%			56	%			56	%
Operating expenses:
Research and development			67	%			32	%			34	%
Marketing and sales			26	%			16	%			19	%
General and administrative			26	%			15	%			14	%
Restructuring (credits) charges, net			(20	)%			1	%			(11	)%
Impairment of goodwill and other intangibles			50	%			—				17	%
Reversal of accrued royalties, net			(8	)%			(1	)%			—
Total operating expenses			(141	)%			63	%			73	%
Operating loss			(78	)%			(7	)%			(17	)%

Comparison of Fiscal Years 2011 and 2010

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 and 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 our high-speed interface product line (HDMI, DisplayPort and Ethernet IP Cores) which has 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, which may affect our impairment analysis of goodwill in the future.

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

		Year Ended December 31, 2011								Year Ended December 31, 2010								Percentage Increase (Decrease) in Revenues
(Tabular dollars in thousands)		Revenues				Percent of Total Revenues				Revenues				Percent of Total Revenues
Network Infrastructure		$	19,368				69	%		$	32,095				64	%			(40	)%
Customer Premises Equipment			8,887				31	%			17,727				36	%			(50	)%
Total		$	28,255				100	%		$	49,822				100	%			(43	)%

Total net revenues in 2011 were $28.3 million as compared to $49.8 million in 2010, a decrease of $21.5 million or 43%. Our Network Infrastructure revenues decrease of approximately 40% was a result of lower sales of Optical Transport and VoIP products due to reduced telecom infrastructure capital expenditures and reduced sales of our ASIC products. Our CPE revenues decrease of approximately 50% 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.

For 2011 and 2010, international net revenues were approximately 77% and 75%, respectively, of net revenues.

As of December 31, 2011, our backlog was $4.3 million, as compared to $7.5 million as of December 31, 2010. 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 $17.9 million and $27.8 million for the years ended December 31, 2011 and 2010, respectively, a decrease of approximately $9.9 million for 2011 as compared to 2010. The decrease in gross profit was primarily the result of a decrease in net product revenues which was partially offset by higher gross margins on product revenues in 2011. The product gross profit was 65% as a percentage of product revenue in 2011 as compared to 55% in 2010. The total gross profit as a percentage of total revenue was 63% and 56% for 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.

During the years ended December 31, 2011 and 2010, gross profit was affected favorably in the amount of $0.2 million and $0.5 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, 2011 and 2010, we recorded provisions for excess and obsolete inventories in the amount of $0.2 million and $0.8 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 2011 were $18.9 million which increased $2.9 million, or 18% as compared to the prior year. This was a result of increased spending in labor, subcontracting and fabrication costs for our high-speed interface product line.

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 2011 were $7.3 million which decreased $0.4 million, or 6% as compared to the prior year. This decrease was a result of lower salaries and employee related expenses due to cost cutting measures that were implemented in 2011. These decreases were partially offset by increased sales costs related to our high-speed interface product line

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 remained flat at $7.5 million in 2011 as compared to $7.5 million in 2010.

Restructuring (Credits) Charges, net.  During the years ended December 31, 2011 and 2010, we recorded net restructuring credits of $5.6 million and net restructuring charges of $0.4 million, respectively. Information on restructuring credits and charges for each of the last two years is located in Note 15 of the Notes to Consolidated Financial Statements.

Impairment of Goodwill and Other Intangibles.  For 2011 and 2010, we recorded goodwill and other intangible impairment charges of $14.3 million and zero, respectively. Information on the impairment of goodwill and other intangibles recorded during 2011 is located in Note 1 and Note 7 of the Notes to Consolidated Financial Statements.

Interest Expense net.  Interest expense, net was approximately $0.1 million in 2011, a decrease of $0.5 million as compared to 2010.

Interest expense decreased from $0.7 million in 2010 to $0.2 million in 2011 due to lower debt balances resulting from the principal payments made on our 2011 Notes. The interest payments on our debt balances were $0.1 million and $0.4 million for the years ended December 31, 2011 and 2010, respectively. Our 2011 Notes were paid in full as of September 30, 2011 and as such there will be no interest payments on this debt after that date.

Interest income was $0.1 million in both years ended December 31, 2011 and 2010. Interest income may fluctuate in the future as a result of changes in market yields due to interest rate fluctuations and changes in our cash and investment balances. At December 31, 2011 and 2010, the effective interest rates on our interest-bearing securities were approximately 2.54% and 1.36%, respectively.

Other Income (Expense).  For the years ended December 31, 2011 and 2010, we had other income of approximately $0.1 million and $0.4 million, respectively. The other income for 2010 was primarily due to both realized and unrealized exchange rate gains and losses which are recorded for the translation of our intercompany loan balances with our wholly owned subsidiaries. In 2011, we determined that our intercompany loan balances with our foreign subsidiaries are classified as long-term. As such, we recorded exchange gains and losses in the translation of these balances as other comprehensive income or loss for the year ended December 31, 2011.

Income Tax Expense.  Our income tax expense of $0.6 million in 2011 and $1.0 million in 2010 is applicable to the operating results of certain of our foreign subsidiaries, principally India. We have incurred significant taxable losses for United States federal and state purposes. We have not recognized any income tax benefits on those losses because their realization is uncertain.

Comparison of Fiscal Years 2010 and 2009

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 and Media Gateway using VoIP Technology 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 our high-speed interface product line (HDMI, DisplayPort and Ethernet IP Cores) which has 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.

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

		Year Ended December 31, 2010								Year Ended December 31, 2009								Percentage Increase (Decrease) in Revenues
(Tabular dollars in thousands)		Revenues				Percent of Total Revenues				Revenues				Percent of Total Revenues
Network Infrastructure		$	32,095				64	%		$	34,988				62	%			(8	)%
Customer Premises Equipment			17,727				36	%			21,119				38	%			(16	)%
Total		$	49,822				100	%		$	56,107				100	%			(11	)%

Total net revenues in 2010 were $49.8 million as compared to $56.1 million in 2009, a decrease of $6.3 million or 11%. Our Network Infrastructure revenues decrease of approximately 8% was a result of lower sales of our L3M, CUBIT-3D, TEMx28, ASPEN Express and Entropia products due to reduced telecom infrastructure capital expenditures in the second half of 2010. This was partially offset by increased sales of our EtherMap (Carrier Ethernet products), ENVOY CE4 and our ASIC families of products. Our CPE revenues decrease of approximately 16% was attributable to decreased sales of our Atlanta products (VOIP communication processors) and the ramping down of our Mustang (gigabit Ethernet passive optical) product line. This reduction was partially offset by increased sales from our HDMI products along with increased service revenues which include IP licensing of our high speed interface technology.

For 2010 and 2009, international net revenues were approximately 75% and 70%, respectively, of net revenues.

As of December 31, 2010, our backlog was $7.5 million, as compared to $11.3 million as of December 31, 2009. 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 $27.8 million and $31.5 million for the years ended December 31, 2010 and 2009, respectively. Gross profit decreased by approximately $3.7 million for 2010 as compared to 2009 while the gross profit as a percentage of revenue was the same 56% in 2010 as it was in 2009. The decrease in gross profit is the result of decreased product sales partially offset by increased service revenues.

During the years ended December 31, 2010 and 2009, gross profit was affected favorably in the amount of $0.5 million and $1.3 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, 2010 and 2009, we recorded provisions for excess and obsolete inventories in the amount of $0.8 million and $0.7 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 2010 were $16.0 million which decreased $3.1 million, or 16% as compared to the prior year. This decrease was a result of decreased fabrication costs, decreased depreciation, decreased software tool costs and decreases in salaries and employee related costs as a result of workforce reductions, salary reductions and other cost cutting measures that were implemented in 2009 and the first quarter of 2010. During 2010, expenses were also reduced by approximately $0.4 million for the reversal of a sales tax accrual for a long outstanding tax issue which was recently adjudicated in our favor. The matter related to a manufacturing exemption from sales tax which we claimed. All of these expense reductions were partially offset by increased subcontracting costs as a result of our investment in our high-speed interface product line.

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 2010 were $7.8 million which decreased $2.6 million, or 25% as compared to the prior year. This decrease was a result of lower salaries and employee related expenses associated with the cost cutting measures that were implemented in 2009 and the first quarter of 2010 and lower commissions due to a decrease in revenues.

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 $7.5 million in 2010, a decrease of approximately $0.5 million or 7% compared to the prior year. This decrease was a result of lower employee related expenses, salary reductions and decreased professional fees associated with the cost cutting measures that were implemented in 2009 and the first quarter of 2010 partially offset by increased stock compensation expenses.

Restructuring Charges (Credits), net.  During the years ended December 31, 2010 and 2009, we recorded net restructuring charges of approximately $0.4 million and net restructuring credits of $6.3 million, respectively. Information on restructuring charges and credits for 2010 and 2009 is located in Note 15 of the Notes to Consolidated Financial Statements.

Impairment of Goodwill.  For 2010 and 2009, we recorded goodwill impairment charges of zero and $10.1 million, respectively. Information on the impairment of goodwill recorded during 2009 is located in Note 1 and Note 7 of the Notes to Consolidated Financial Statements.

Interest Expense net.  Interest expense, net was approximately $0.6 million in 2010, a decrease of $0.1 million as compared to 2009.

Interest expense decreased from $0.8 million in 2009 to $0.7 million in 2010 due to lower debt balances resulting from the principal payments made on our 2011 Notes. The interest payments on our debt balances were $0.4 million and $0.5 million for the years ended December 31, 2010 and 2009, respectively.

Interest income was $0.1 million in both years ended December 31, 2010 and 2009. Interest income may fluctuate in the future as a result of changes in market yields due to interest rate fluctuations and changes in our cash and investment balances. At December 31, 2010 and 2009, the effective interest rates on our interest-bearing securities were approximately 1.36% and 0.43%, respectively.

Other Income (Expense).  For the years ended December 31, 2010 and 2009, we had other income of $0.4 million and other expense of $0.8 million, respectively. The other income and expense was primarily due to both realized and unrealized exchange rate gains and losses which are recorded for the translation of our intercompany loan balances with our wholly owned subsidiaries.

Income Tax Expense.  Our income tax expense of $1.0 million in 2010 and $0.4 million in 2009 is applicable to the operating results of certain of our foreign subsidiaries, principally India. We have incurred significant taxable losses for United States 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, 2011, we had cash, cash equivalents, restricted cash and short-term investments of approximately $7.6 million compared to $7.8 million as of December 31, 2010. Further, our working capital was $4.9 million as of December 31, 2011 compared to a negative $1.6 million as of December 31, 2010. Our primary source of liquidity is cash, cash equivalents, restricted cash, short term investments, a credit facility agreement and sales of our common stock. We have used cash in our operating activities in each of the last three years, including $11.6 million in 2011, $0.5 million in 2010 and $9.1 million in 2009. During 2011, we reduced our notes payable from $3.8 million as of December 31, 2010 to zero as of December 31, 2011. Our 2011 Notes were paid in full as of September 30, 2011.

During the year ended December 31, 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 14 of the Notes to the Consolidated Financial Statements).

We also entered into an Amended and Restated Business Financing Agreement (the “Amended Financing Agreement”) with Bridge Bank N.A. (“Bridge Bank”) on April 4, 2011 which amended and restated our existing credit facility. The Amended Financing Agreement provides us a credit facility 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 of our personal property, including our 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 our 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. At December 31, 2011, we had no outstanding borrowings under this facility.

On February 10, 2012, we entered into an At Market Issuance Sales Agreement with MLV & Co. LLC (“MLV”), pursuant to which we may issue and sell shares of our common stock, $0.001 par value per share, having an aggregate offering price of up to $10,000,000 from time to time through MLV (the “Offering”). Also on February 10, 2012, we filed a prospectus supplement with the Securities and Exchange Commission in connection with the Offering.

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, Amended Financing Agreement and At Market Issuance Sales 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 Amended Financing Agreement, 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

We have outstanding operating lease commitments of $17.1 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 years for excess facilities. We currently have subleases for the majority of our excess space but our sublease income generated will not offset the entire future commitment. As of December 31, 2011, we have approximately $11.7 million in anticipated sub-lease income over the next six 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 Period
Contractual Obligations		Total				2012				2013				2014				2015				2016				Thereafter
Operating lease obligations		$	17,122			$	4,169			$	3,336			$	3,055			$	2,729			$	2,706			$	1,127
Purchase obligations			4,398				3,764				634				—				—				—				—
		$	21,520			$	7,933			$	3,970			$	3,055			$	2,729			$	2,706			$	1,127

We also have pledged approximately $0.1 million as collateral for stand-by letters of credit that guarantee certain long-term property lease obligations and to support customer credit requirements. This $0.1 million is in our bank accounts and is included in our restricted cash as of December 31, 2011.

Off-Balance Sheet Arrangements

As of December 31, 2011, we had no material off-balance sheet financing arrangements.

Recent Accounting Pronouncements

Newly issued accounting pronouncements that potentially impact our financial statements are disclosed in the Notes to Consolidated Financial Statements of this Form 10-K.

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 2011, 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 2011, operating expenses incurred in foreign currencies, excluding impairment of goodwill and other intangibles, were approximately 62% 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.  Our 2011 Notes were paid in full as of September 30, 2011 and as such we have no exposure relating to these notes as of December 31, 2011.

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

		Page
Financial Statements:
Report of Marcum LLP, Independent Registered Public Accounting Firm			43
Report of UHY LLP, Independent Registered Public Accounting Firm			45
Consolidated Balance Sheets as of December 31, 2011 and 2010			46
Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009			47
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss for the years ended December 31, 2011, 2010 and 2009			48
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009			49
Notes to Consolidated Financial Statements			50
Financial Statement Schedule:
Schedule II, Valuation and Qualifying Accounts			73

REPORT OF MARCUM LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the
Board of Directors and Shareholders
of TranSwitch Corporation

We have audited the accompanying consolidated balance sheets of TranSwitch Corporation (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and comprehensive loss and cash flows for each of the two years in the period ended December 31, 2011. Our audits also included the financial statement schedule as of December 31, 2011 and 2010, and for each of the two years in the period ended December 31, 2011 listed in the index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.

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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TranSwitch Corporation, as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule for 2011 and 2010, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated, March 12, 2012, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ Marcum llp

Hartford, Connecticut
March 12, 2012

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Audit Committee of the
Board of Directors and Shareholders
of TranSwitch Corporation

We have audited TranSwitch Corporation's (the “Company”) internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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 the accompanying “Management Annual Report on Internal Control over Financial Reporting” under Item 9A. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. 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 audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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 the 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 degree of compliance with the policies or procedures may deteriorate.

In our opinion, TranSwitch Corporation maintained, in all material aspects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2011 and 2010 and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the two-years in period ended December 31, 2011 and the related financial statement schedule as of December 31, 2011 and 2010 and for each of the two years in the period ended December 31, 2011 of the Company and our report dated March 12, 2012 expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/ Marcum llp

Hartford, Connecticut
March 12, 2012

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of
TranSwitch Corporation

We have audited the accompanying consolidated statements of operations, stockholders’ equity and comprehensive loss and cash flows of TranSwitch Corporation and subsidiaries (the “Company”) for the year ended December 31, 2009. Our audit also included the financial statement schedule listed in the Index at Item 15(a)(1). These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of the Company’s operations and their cash flows for the year 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 consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ UHY LLP

New Haven, Connecticut
March 16, 2010

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)

		December 31, 2011				December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents		$	5,453			$	6,280
Restricted cash			98				582
Short-term Investments			2,003				973
Accounts receivable (net of allowance for doubtful accounts of $207 in 2011 and $336 in 2010)			6,375				7,907
Inventories			1,988				2,555
Prepaid expenses and other current assets			1,876				2,089
Total current assets			17,793				20,386
Property and equipment, net			1,355				1,239
Goodwill			5,271				14,144
Other intangible assets, net			1,461				8,254
Investments in non-publicly traded companies			306				267
Other assets			1,432				1,528
Total assets		$	27,618			$	45,818
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	2,272			$	1,893
Accrued expenses and other current liabilities			10,655				13,118
Current portion of 5.45% Convertible Notes due 2011			—				3,758
Total current liabilities			12,927				18,769
Restructuring liabilities			2,485				10,317
Total liabilities			15,412				29,086
Commitments and contingencies
Stockholders’ equity:
Common stock, $.001 par value: 37,500,000 shares authorized; 30,633,302 and 23,527,814 shares issued at December 31, 2011 and 2010, respectively; 30,612,508 and 23,507,020 shares outstanding at December 31, 2011 and 2010, respectively			31				24
Additional paid-in capital			410,551				391,689
Accumulated other comprehensive (loss) income – currency translation			(64	)			459
Common stock held in treasury (20,794 shares), at cost			(118	)			(118	)
Accumulated deficit			(398,194	)			(375,322	)
Total stockholders’ equity			12,206				16,732
Total liabilities and stockholders’ equity		$	27,618			$	45,818

 
 
See accompanying notes to consolidated financial statements.

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)

		Years ended December 31,
		2011				2010				2009
Net revenues:
Product revenues		$	19,700			$	41,703			$	50,709
Service revenues			8,555				8,119				5,398
Total net revenues			28,255				49,822				56,107
Cost of revenues:
Cost of product revenues			6,641				17,992				21,393
Provision for excess and obsolete inventories			228				773				678
Cost of service revenues			3,454				3,259				2,552
Total cost of revenues			10,323				22,024				24,623
Gross profit			17,932				27,798				31,484
Operating expenses:
Research and development			18,885				15,994				19,132
Marketing and sales			7,335				7,784				10,413
General and administrative			7,457				7,479				8,038
Restructuring (credits) charges, net			(5,558	)			398				(6,257	)
Impairment of goodwill and other intangibles			14,312				—				10,075
Reversal of accrued royalties, net			(2,363	)			(418	)			(197	)
Total operating expenses			40,068				31,237				41,204
Operating loss			(22,136	)			(3,439	)			(9,720	)
Other (expense) income:
Other income (expense)			18				426				(750	)
Impairment of investments in non-publicly traded companies			—				—				(31	)
Interest:
Interest income			125				84				122
Interest expense			(243	)			(704	)			(787	)
Interest expense, net			(118	)			(620	)			(665	)
Total other expense, net			(100	)			(194	)			(1,446	)
Loss before income taxes			(22,236	)			(3,633	)			(11,166	)
Income taxes			636				976				365
Net loss		$	(22,872	)		$	(4,609	)		$	(11,531	)
Basic and diluted loss per common share:
Net loss		$	(0.82	)		$	(0.21	)		$	(0.58	)
Average common shares outstanding			27,911				22,162				19,938

 
 
See accompanying notes to consolidated financial statements.

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
(In Thousands, Except Share Data)

		Common stock								Common stock held in treasury				Additional paid-in capital				Accumulated other comprehensive income				Accumulated deficit				Total
		Shares				Amount
Balance at December 31, 2008			19,834,292			$	20			$	(118	)		$	381,523			$	36			$	(359,182	)		$	22,279
Comprehensive loss:
Net loss																							(11,531	)			(11,531	)
Currency translation adjustment																			515				—				515
Total comprehensive loss																											(11,016	)
Stock compensation			97,895				—				—				1,305				—				—				1,305
Shares of common stock issued under stock benefit plans			80,586				—				—				108				—				—				108
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
Comprehensive loss:
Net loss																							(4,609	)			(4,609	)
Currency translation adjustment																			(92	)			—				(92	)
Total comprehensive loss																											(4,701	)
Stock compensation			48,800				—				—				2,358				—				—				2,358
Shares of common stock issued under stock benefit plans			449,257				1				—				82				—				—				83
Sales of stock, net of issuance cost			3,017,236				3				—				6,314				—				—				6,317
Balance at December 31, 2010			23,527,814				24				(118	)			391,689				459				(375,322	)			16,732
Comprehensive loss:
Net loss																							(22,872	)			(22,872	)
Currency translation adjustment																			(523	)			—				(523	)
Total comprehensive loss																											(23,395	)
Stock compensation			—				—				—				2,474				—				—				2,474
Shares of common stock issued under stock benefit plans			895,488				1				—				321				—				—				322
Sales of stock, net of issuance costs			6,210,000				6				—				16,067				—				—				16,073
Balance at December 31, 2011			30,633,302			$	31			$	(118	)		$	410,551			$	(64	)		$	(398,194	)		$	12,206

 
 
See accompanying notes to consolidated financial statements.

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands, Except Share Data)

		Years ended December 31,
		2011				2010				2009
Operating activities:
Net loss		$	(22,872	)		$	(4,609	)		$	(11,531	)
Adjustments required to reconcile net loss to net cash flows used by operating activities:
Depreciation and amortization			1,918				2,220				2,669
Amortization of deferred financing fees			77				245				210
Benefit for doubtful accounts			(129	)			(180	)			(20	)
Provision for excess and obsolete inventories			228				773				678
Non-cash restructuring (credits) charges, net			(5,558	)			409				(6,257	)
Stock-based compensation expense			2,474				2,358				1,305
Impairment of investments in non-publicly traded companies			—				—				31
Impairment of goodwill and other intangibles			14,312				—				10,075
Loss on retirement of property and equipment			35				—				—
Accrued royalty reversals, net			(2,363	)			(418	)			(197	)
Other non-cash items			—				—				26
Changes in operating assets and liabilities:
Accounts receivable			1,661				3,940				1,218
Inventories			339				855				(357	)
Prepaid expenses and other assets			232				95				248
Accounts payable			379				(3,056	)			709
Accrued expenses and other current liabilities			(1,204	)			(1,557	)			(1,247	)
Restructuring liabilities			(1,170	)			(1,569	)			(6,682	)
Net cash used by operating activities			(11,641	)			(494	)			(9,122	)
Investing activities:
Capital expenditures			(670	)			(587	)			(348	)
Investments in non-publicly traded companies			(39	)			(24	)			(57	)
Proceeds from the sale of investments in non-publicly traded companies			—				2,746				—
Change in restricted cash			484				2,150				2,120
Purchases of short and long-term investments			(6,516	)			(1,582	)			—
Proceeds from sales and maturities of short and long-term investments			5,486				609				2,970
Net cash (used) provided by investing activities			(1,255	)			3,312				4,685
Financing activities:
Issuance of common stock under employee stock plans			322				83				108
Payments for deferred financing costs			—				(167	)			—
Principal payments on 5.45% Convertible Notes due 2011			(3,758	)			(5,004	)			(1,251	)
Proceeds from issuance of common stock, net of fees			16,073				6,317				—
Net cash provided (used) by financing activities			12,637				1,229				(1,143	)
Effect of exchange rate changes on cash and cash equivalents			(568	)			(110	)			461
Change in cash and cash equivalents			(827	)			3,937				(5,119	)
Cash and cash equivalents at beginning of year			6,280				2,343				7,462
Cash and cash equivalents at end of year		$	5,453			$	6,280			$	2,343

 
 
See accompanying notes to consolidated financial statements.

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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”) 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 interoperable connectivity solutions that enable the reliable distribution and presentation of high-definition (HD) content for consumer electronics, and personal computer markets and also provides a family of communications processors that provide best-in-class performance for a range of applications. The Company’s intellectual property (IP) products are compliant with global industry standards such as HDMI and DisplayPort and also feature our proprietary HDP^TM and AnyCable^TM technologies. Overall, the Company has over 100 active customers, including the leading global telecom equipment providers, semiconductor and consumer product companies.

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’s total revenue has decreased 49.6% from $56.1 million in 2009 to $28.2 million in 2011. Product revenue has decreased 61.1% from $50.7 million in 2009 to $19.7 million in 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, investments, Amended Financing Agreement and At Market Issuance Sales Agreement will be sufficient to fund operating activities and capital expenditures, and provide adequate working capital through at least the next twelve months. There can be no assurance that the anticipated sales level will be achieved.

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, 2011 and 2010. 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.

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Business and Summary of Significant Accounting Policies  – (continued)

Short-term investments as of December 31, 2011 and 2010 consist of government bonds and corporate debt securities 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, 2011 and 2010, approximate market value.

Fair Value of Financial Instruments

The carrying amounts for cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximate fair value. On September 30, 2011, the Company paid in full its 5.45% Convertible Notes due September 30, 2011 (“2011 Notes”) and as such there was no outstanding balance as of December 31, 2011. Based on market conditions, the fair value of the outstanding 2011 Notes was estimated at approximately $3.8 million as of December 31, 2010. The fair value of investments in non-publicly traded companies is not readily determinable.

Accounts Receivables and 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 the creditworthiness of such customers 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.

Inventories

Inventories are carried at the lower of cost (determined on a weighted-average cost basis) or estimated net realizable value. The Company provides inventory allowances on obsolete inventories and inventories in excess of expected demand for each specific part. The valuation of inventories requires the use of estimates as to the amounts of current inventories that will be sold. These estimates are dependent on the Company’s assessment of current and expected orders from its customers, and orders generally are subject to cancellation with limited advance notice prior to shipment.

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 less than $0.1 million and $0.1 million as of December 31, 2011 and 2010, respectively. Amortization, included in the consolidated statement of operations as a component of interest expense, was $0.1 million, $0.2 million, and $0.2 million for 2011, 2010 and 2009, respectively.

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Business and Summary of Significant Accounting Policies  – (continued)

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. During the fourth quarter of 2011, impairment testing for certain purchased customer relationships and developed technology was performed by the Company and indicated that the undiscounted future cash flows of the mentioned intangible assets were less than its corresponding carrying amount. As a result of the analyses performed, the Company measured and recorded an impairment of these intangible assets of $5.4 million in 2011. The 2011 impaired purchased customer relationships and developed technology related to a business acquisition in 2008.

The Company’s impairment review of goodwill was 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 2011, impairment testing performed by the Company indicated that the estimated fair value of the reporting unit tested was less than its corresponding carrying amount. As a result of the analyses performed, the Company recorded goodwill impairment charges of $8.9 million in 2011. The 2011 impaired goodwill related to a business acquisition in 2008. There were no impairment charges in 2010. 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 in 2009. 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, 2011 and 2010 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.

Revenues from distributors can be recognized when: (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. Agreements with certain distributors provide price protection and return and allowance rights.

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Business and Summary of Significant Accounting Policies  – (continued)

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 $0.4 million, $0.8 million and $0.6 million at December 31, 2011, 2010 and 2009, 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 connectivity solutions, including HDMI, DisplayPort and Ethernet IP Cores. 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.

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, 2011 and 2010, approximately 59% 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.

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Business and Summary of Significant Accounting Policies  – (continued)

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

		December 31, 2011				December 31, 2010
Customer A			17	%			16	%
Customer B			15	%			*
Customer C			10	%			*
Customer D			*				15	%

Supplier Concentrations

The Company relies on a limited number of suppliers for wafer fabrication capacity. In 2011, one outside wafer foundry supplied a substantial amount of our total 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 this supplier were to cease operations.

Operating Leases

The Company recognizes rent expense on a straight-line basis over the term of the lease. The difference between rent expense and rent paid is recorded as deferred rent and is included in accrued expenses in our consolidated balance sheets.

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.

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.

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Business and Summary of Significant Accounting Policies  – (continued)

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.

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, 2011, the unrecognized stock-based compensation cost related to non-vested option awards was $0.08 million and such amount will be recognized in operations over a weighted average period of 1.81 years. As of December 31, 2011, the unrecognized stock-based compensation cost related to non-vested stock awards was $2.7 million and such amount will be recognized in operations over a weighted average period of 2.58 years.

Stock compensation charged to operations was 2.5 million in 2011, $2.4 million in 2010, and $1.3 million in 2009.

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 presented. 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 (loss) income. 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. The Company periodically hedges 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.

Subsequent Events

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

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Business and Summary of Significant Accounting Policies  – (continued)

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 affects 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 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 consolidated 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 consolidated financial statements.

Note 2. 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 December 31, 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 year ended December 31, 2011, the Company had no impairment losses on investments in non-publicly traded companies.

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2. Fair Value Measurements  – (continued)

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. There was no outstanding balance of the 2011 Notes as of December 31, 2011. The fair value of the outstanding 2011 Notes was approximately $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 approximately $3.8 million as of December 31, 2010. The fair value of short term investments was $2.0 million and $1.0 million as of December 31, 2011 and 2010, respectively. The short-term investment values are based on a Level 2 valuation technique.

Note 3. Restricted Cash

At December 31, 2011 and 2010, the Company’s liquidity was affected by restricted cash balances of approximately $0.1 million and $0.6 million, respectively, which are included in current assets and are not available for general corporate use. The Company has pledged these amounts as collateral for stand-by letters of credit that guarantee certain long-term property lease obligations and to support customer credit requirements.

Note 4. Investments in Non-Publicly Traded Companies and Venture Capital Funds

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.

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 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 United States public companies, and as such, the reliability and accuracy of the data may vary.

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.

During 2010, the Company had sales of investments of $2.7 million in Opulan and less than $0.1 million in Neurone II. Also during 2010, the Company made additional investments of less than $0.1 million in both Neurone II and MVP.

During 2011, the Company made additional investments of less than $0.1 million in MVP.

The Company’s cost method investments were approximately $0.3 million and $0.3 million as of December 31, 2011 and 2010, respectively.

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Inventories

The components of inventories follow:

		December 31,
		2011				2010
Raw material		$	60			$	290
Work-in-process			428				840
Finished goods			1,500				1,425
Total inventories		$	1,988			$	2,555

Note 6. Property and Equipment, Net

The components of property and equipment follow:

		Estimated Useful Lives				December 31,
						2011				2010
Purchased computer software			1 – 3 years			$	8,107			$	14,749
Computers and equipment			3 – 7 years				7,808				12,032
Furniture			3 – 7 years				696				2,159
Leasehold improvements			Lease term*				679				1,691
Construction-in-progress (software and equipment)							—				37
Gross property and equipment							17,290				30,668
Accumulated depreciation and amortization							(15,935	)			(29,429	)
Property and equipment, net						$	1,355			$	1,239

Depreciation expense was $0.6 million in 2011, $0.6 million in 2010 and $1.1 million in 2009.

Note 7. Goodwill and Other Intangible Assets

Changes in the carrying amounts of goodwill and information about intangible assets follow:

		Goodwill
Balance at December 31, 2009		$	14,144
No changes during 2010			—
Balance at December 31, 2010			14,144
Impairment of goodwill(1)			(8,873	)
Balance at December 31, 2011		$	5,271

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Goodwill and Other Intangible Assets  – (continued)

		Other Intangible Assets
		Developed Technology				Customer Relationships				Total
Balances at December 31, 2011
Cost(1)		$	1,974			$	5,158			$	7,132
Accumulated amortization			(1,585	)			(4,086	)			(5,671	)
		$	389			$	1,072			$	1,461
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” was $1.4 million in 2011, $1.6 million in 2010 and $1.6 million in 2009. Future estimated aggregate amortization expense for such assets for each of the five years succeeding December 31, 2011 are as follows: 2012 — $0.3 million; 2013 — $0.3 million; 2014 — $0.2 million; 2015 — $0.2 million and 2016 — $0.2 million.

Note 8. Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities follow:

		December 31,
		2011				2010
Accrued and other current liabilities		$	3,162			$	3,903
Accrued royalties			2,536				5,188
Accrued compensation and benefits			2,813				2,923
Restructuring liabilities			1,995				891
Deferred revenue			149				213
Total accrued expenses and other current liabilities		$	10,655			$	13,118

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, 2011 and 2010, represent the contingent payments for asserted or unasserted claims that are probable as of the respective balance sheet dates based on the applicable patent law.

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Segment and Major Customer Information

The Company has one business segment: communication solutions. Its semiconductor and IP solutions provide core functionality for the transmission of voice, video and data. The integration of various technologies and standards in these devices result in a homogeneous product line for management and measurement purposes.

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:

		Years Ended December 31,
		2011				2010				2009
Net revenues:
United States		$	6,439			$	12,258			$	16,631
Israel			4,732				8,220				5,344
Italy			3,836				3,832				2,098
Hong Kong			3,190				6,550				3,654
Korea			2,915				3,753				7,299
United Kingdom			1,904				168				465
Taiwan			1,637				1,541				650
Singapore			757				668				476
China			724				1,907				5,112
Japan			659				9,465				11,228
Other countries			1,462				1,460				3,150
Total		$	28,255			$	49,822			$	56,107

		As of December 31,
		2011				2010
Long-lived tangible assets:
United States		$	502			$	340
Other countries			2,246				2,312
Total		$	2,748			$	2,652

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 end customers:

		Years ended December 31,
		2011				2010				2009
Significant Customers:
Alcatel-Lucent			13	%			20	%			22	%
OKI Electric Industry			*				18	%			18	%
PMC Sierra Israel			*				13	%			*
Inbrics			*				*				11	%

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10. Income Taxes

Changes in unrecognized income tax benefits follow:

Balance at January 1, 2010		$	5,889
Increases related to prior year tax positions			523
Decreases related to prior year tax positions			(109	)
Balance at December 31, 2010			6,303
Increases related to prior year tax positions			42
Decreases related to prior year tax positions			(48	)
Increases related to current year tax positions			125
Settlements			(139	)
Balance at December 31, 2011		$	6,283

Included in the balance of unrecognized tax benefits at December 31, 2011 are potential benefits of $0.4 million that, if recognized, would impact 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 is classified as a component of income tax expense in the consolidated statement of operations. For the year ended December 31, 2011, less than $0.1 million of interest and penalties were recognized in the consolidated statement of operations compared with $0.1 million for the year ended December 31, 2010.

The Company files income tax returns in the United States 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 United States 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 2003 through 2011 and for United States state and local jurisdictions are 1997 through 2011.

The components of the loss before income taxes follow:

		Years Ended December 31,
		2011				2010				2009
U.S. loss		$	(23,082	)		$	(3,700	)		$	(11,996	)
Foreign income			846				67				830
Loss before income taxes		$	(22,236	)		$	(3,663	)		$	(11,166	)

The provision for income taxes consists exclusively of current foreign income taxes.

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10. Income Taxes  – (continued)

A reconciliation of the United States federal statutory rate to the effective income tax rate follows:

		Years Ended December 31,
		2011				2010				2009
U.S. federal statutory tax rate			(35.0	)%			(35.0	)%			(35.0	)%
State taxes			(1.2	)			(33.2	)			—
Deemed repatriation of foreign income			10.1				6.7				—
Excess foreign tax expense			0.5				18.1				—
Goodwill write down			14.0				—				15.3
Tax attributes			20.1				(116.3	)			—
Uncertain tax positions			0.8				9.4				—
Change in valuation allowance			(5.6	)			171.9				17.1
Permanent differences, tax credits and other adjustments			(0.8	)			5.3				5.7
Effective income tax rate			2.9	%			26.9	%			3.1	%

The tax effects of temporary differences that give rise to deferred income taxes follow:

		2011				2010
Deferred income tax assets:
Property and equipment		$	290			$	298
Other nondeductible accruals			1,194				1,051
Restructuring accrual			1,706				4,305
Capitalized research and development for tax purposes			8,368				9,286
Net operating loss carry-forwards			188,147				172,189
Research and development and other credits			20,962				21,073
Inventories			749				14,836
Stock compensation			3,502				3,199
Other			2,452				2,387
Total gross deferred income tax assets			227,370				228,624
Valuation allowance			(226,254	)			(227,498	)
Net deferred income tax assets			1,116				1,126
Deferred income tax liabilities:
Other			(1,116	)			(1,126	)
Net deferred income tax liabilities			(1,116	)			(1,126	)
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, 2011 and 2010. Of the $226.3 million valuation allowance at December 31, 2011, subsequently recognized income tax benefits, if any, in the amount of $4.7 million will be applied directly to additional paid-in capital.

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10. Income Taxes  – (continued)

At December 31, 2011, the Company had available, for federal income tax purposes, net operating loss (“NOL”) carry-forwards of approximately $502.6 million and research and development tax credit carry-forwards of approximately $21.0 million expiring in varying amounts from 2011 through 2031. For state income tax purposes, the Company had available NOL carry-forwards of approximately $192.9 million and state tax credit carry-forwards of $7.8 million expiring in varying amounts from 2011 to 2031. Additionally, the Company has generated $27.5 million of NOL’s in foreign jurisdictions which can be carried forward indefinitely.

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 $192.3 million of the NOL carry-forwards and $11.2 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 2011 will be subject to limitation under Section 382.

Note 11. Stockholder Rights Plan

On September 30, 2011, the Board of Directors enacted a stockholder rights plan and declared a dividend of one preferred share purchase right for each outstanding share of the Company’s common stock outstanding at the close of business on October 3, 2011 to the stockholders of record on that date. Each preferred share purchase right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series B Junior Participating Preferred Stock, par value $0.001 per share, of the Company (the “Preferred Shares”), at a price of $20.00 per one one-thousandth of a Preferred Share, subject to adjustment, upon the occurrence of certain triggering events, including, without limitation, the acquisition 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. 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. Each stockholder of record as of October 3, 2011 received a summary of the rights and any new stock certificates issued after the record date contain a legend describing the rights.

A copy of the stockholder rights plan 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.

Note 12. 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 250,000 shares of common stock. Shares issued under the 2005 ESPP in 2011, 2010, and 2009 were 58,230, 30,249 and 10,172, respectively.

Stock Option and Award Plans

As of December 31, 2011, the Company has one stock option plan which is the 2008 Equity Incentive Plan (the “2008 Plan”). Also, the 1995 Stock Plan, as amended (the “1995 Plan”), expired on March 15, 2010 and the 2000 Stock Option Plan as amended (the “2000 Plan”), expired on July 14, 2010.

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12. Employee Benefit Plans  – (continued)

Under the 1995 Plan, 3,925,000 shares of the Company’s common stock were available to grant to employees in the form of incentive stock options. The 1995 Plan, as amended, expired on March 15, 2010 and as such shares are no longer available for grant. 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 is equal to the fair market value of the common stock on the date of grant. Options granted under the 1995 Plan are generally nontransferable. As of December 31, 2011, 255,902 options were outstanding.

The 2000 Plan provided 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 and was terminated on July 14, 2010. No member of the Board of Directors or executive officers appointed by the Board of Directors was 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. 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 is 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.

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 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 5,196,250. As of December 31, 2011, there were 770,695 shares available for grant under the 2008 Plan.

Information regarding stock options follows:

		Number of options outstanding				Weighted average exercise price per share
Outstanding at December 31, 2008			2,868,118			$	15.33
Granted and assumed			461,650				2.97
Exercised			(29,064	)			2.93
Canceled, forfeited or expired			(815,570	)			24.97
Outstanding at December 31, 2009			2,485,134				10.02
Granted and assumed			113,167				2.18
Exercised			(13,264	)			2.32
Canceled, forfeited or expired			(425,204	)			10.93
Outstanding at December 31, 2010			2,159,833				9.47
Granted			10,000				2.77
Exercised			(88,188	)			2.42
Canceled, forfeited or expired			(311,091	)			12.85
Outstanding at December 31, 2011			1,770,554			$	9.19

TRANSWITCH CORPORATION AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12. Employee Benefit Plans  – (continued)

Information regarding restricted stock awards follows:

		Number of restricted stock units outstanding
Outstanding at December 31, 2008			137,110
Granted			495,502
Released			(39,225	)
Canceled, forfeited or expired			(22,205	)
Outstanding at December 31, 2009			571,182
Granted			1,398,250
Released			(405,838	)
Canceled, forfeited or expired			(66,726	)
Outstanding at December 31, 2010			1,496,868
Granted			1,045,251
Released			(749,070	)
Canceled, forfeited or expired			(163,097	)
Outstanding at December 31, 2011			1,629,952

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.

Options outstanding and exercisable at December 31, 2011 follow:

		Options Outstanding												Options Exercisable
Range 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			238,512				4.71			$	2.21				162,138			$	2.23
2.43 to 2.43			226,066				4.89				2.43				132,316				2.43
2.48 to 5.12			196,341				3.87				4.01				179,505				4.12
5.52 to 8.16			200,924				3.59				6.37				197,417				6.38
8.40 to 11.76			186,646				3.11				10.41				186,646				10.41
11.84 to 13.12			177,637				2.63				12.76				177,637				12.76
13.20 to 13.28			185,678				1.38				13.24				185,678				13.24
13.44 to 16.88			225,178				2.09				14.93				225,178				14.93
17.04 to 24.80			132,993				2.19				23.23				132,993				23.23
25.76			579				4.31				25.76				579				25.76
$   2.00 to 25.76			1,770,554				3.26			$	9.19				1,580,087			$	10.01