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, 2008

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 Each Class	Name of Each 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 ¨   No x

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

Yes ¨   No x

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

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

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

Large Accelerated Filer ¨	Accelerated Filer x
Non-Accelerated Filer ¨	Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨   No x

The aggregate market value of the outstanding common stock, other than shares held by persons who may be deemed affiliates of the Registrant, on June 30, 2008 was approximately $103.8 million. At February 28, 2009, as reported on the Nasdaq Capital Market, there were 159,089,117 shares of common stock, par value $.001 per share, of the Registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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

(1) Proxy Statement for the Registrant’s 2008 Annual Meeting of Shareholders—Items 10, 11, 12, 13 and 14.

Item 1.    Business

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

COMPANY OVERVIEW

TranSwitch designs, develops and supplies innovative highly-integrated semiconductor solutions that provide core functionality for voice, data and video communications network equipment.  TranSwitch customers for these semiconductor products are the original equipment manufacturers (“OEMs”) who supply wire-line and wireless network operators who provide voice, data and video services to end users such as consumers, corporations, municipalities etc. Our system-on-a-chip products incorporate digital and mixed-signal semiconductor technology and related embedded software. In addition to our system-on-a-chip products, we have been in the business of licensing intellectual property cores to both OEMs as well as other semiconductor companies.  One new area where we have made significant progress in the past couple years is in the area of licensing of our proprietary video interconnect technology that enables the transmission and reception of both HDMI and DisplayPort.  We have over 200 active customers, including the leading global equipment providers, and our products are deployed in the networks of the major service providers around the world.

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

INDUSTRY ENVIRONMENT

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

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

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TARGET MARKETS AND PRODUCTS

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

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

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

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

Optical Transport:  This market segment includes equipment that transports information over optical networks based on the established SONET and SDH standards as well as the emerging networks that utilize the more recently introduced standards for Ethernet over SONET (“EoS”) and SDH. 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.  Our customers in this market segment include Fujitsu, Alcatel-Lucent, ZTE, Tejas Networks, Cisco Systems and Ericsson.

Broadband Access:  This market segment 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. FTTP technologies provide higher speeds than DSL for network access for both residential and business end users. FTTP offers speeds of service up to 1 Gigabit per seconds, or Gbps, without the limitations of distance or the symmetry/asymmetry profiles typical in DSL. In addition, FTTP also has the potential to virtually eliminate the cost of an entire class of equipment in the provider's network: the outside plant electronics. This optical broadband infrastructure enables FTTP service providers to offer a wider range of next generation bundled services to potentially enhance their revenue streams. Our FTTP product offerings address PON technology and we offer specific products that comply with the two 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. Each of our FTTP products consists of one or two semiconductor devices either working independently or jointly - a mixed-signal device known as a protocol chipset and an analog device known as a transceiver. The mixed-signal chip translates signals between analog and digital formats, and our analog chip incorporates innovative technologies to bring photonic signals into the protocol device.  Our customers in this market segment include Alcatel-Lucent, Oki Electronics, Sumitomo, Nokia Siemens Networksand other ASIC Design Center customers.

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Carrier Ethernet and Voice-over-IP:  Data and video services are the main drivers for future network infrastructure investments, and Carrier Ethernet is the industry’s accepted standard technology for next-generation networks.  This market segment includes a variety of equipment including carrier grade Ethernet routers and switches.  Our products, used in such equipment, enable carriers to provide robust and differentiated services using Ethernet technology in their wide-area networks. Within this new infrastructure, voice data is also carried over Ethernet, and TranSwitch VoIP products are market leading for use in carrier-class and enterprise-class media gateways and access gateways and for use in residential gateway markets. Currently, most telephony service providers maintain two separate networks - one for legacy voice traffic and a second for data traffic. VoIP technology compresses voice signals into discrete packets of data, thereby enabling the voice signals to be transmitted over lower-cost networks originally designed for data-only transmission. VoIP technology is used in numerous new types of communications equipment, such as next generation carrier- and enterprise-class gateways, soft switches, digital loop carriers, IP DSL access multiplexers, media terminal adapters, and home gateways for use by consumers and small businesses. These VoIP technology-based devices enable more efficient and cost-effective voice transmissions than their legacy circuit-switched equipment counterparts. In addition to significant cost savings, VoIP also enables advanced services that traditional telephony could not support. VoIP technology enables and enhances features such as unified messaging and managed services that provide additional value to consumers and businesses and allow service providers to enhance revenue opportunities. Our customers in this market segment include ZTE, Alcatel-Lucent and Tellabs.

Non-Telecommunications:  In 2008, we began to license functional blocks for the transmission and reception video data through our high-speed video interconnects (both HDMI and DisplayPort).  We expect this business to grow in 2009 and beyond as we expand our product offering in this area.  Additionally, for the past several years we have been licensing our Ethernet interconnect technology both to enable Fast Ethernet and Gigabit Ethernet. In addition to technology licensing, our design services unit leverages our integrated circuits (IC) design expertise, internal processes, tools and foundry relationships to develop and supply IC products to customers in a variety of industries besides telecommunications. Our customers in this market segment currently include various integrated circuit manufacturers and certain defense contractors.

Telecommunications Industry Overview

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

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

Since 2001, when the worldwide telecommunications industry experienced a major correction, the market has been undergoing a gradual recovery.  The path to recovery has been shaped by a number of factors such as industry consolidation, globalization, deregulation and competition.

In recent years, there were a number of mergers and acquisitions among North American telecommunication carriers (“telcos”) and Western Hemisphere communications OEMs.  As companies merge or consolidate, the rate of ordering, purchasing and deploying new equipment typically slows.  As these consolidations complete, we are seeing a shift in demand toward newer technologies that we introduced into the market in the last several years.  In 2006, 2007 and 2008, we saw demand for legacy network products decline, which is an indicator that the industry is ready to replace existing networks with new networks.

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Communications service providers, internet service providers, regional Bell operating companies and inter-exchange carriers generally closely monitor their capital expenditures. Spending on voice-only equipment has been slowing over the last few years, while spending on equipment providing the efficient transport of data services on existing infrastructure continues to grow. More importantly to us, major infrastructure initiatives are underway where telcos are building new, end-to-end internet protocol (IP)-based, next-generation networks.  The clearest example of this is British Telecom’s 21st Century Network.  Demand for new, high bandwidth services such as video conferencing, broadband audio, high speed internet and other data services is placing an increased burden on existing public network infrastructure. Regulatory changes and advances in technology have fostered an intensively competitive environment for service providers. They have to provide a variety of services over the same infrastructure in order to maximize the revenue from their network investment and minimize the risk of losing customers to their competitors by bundling these services.  Competition between telcos and cable TV providers offering “triple play” services (voice, data and video) is driving equipment spending for broadband access, carrier-class routers/switches, and metro optical gear. Equipment vendors and communications IC suppliers with the right products and technologies will be major beneficiaries of this spending by telcos and cable TV service providers.

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

The Importance of Communications Standards in our Telecommunications Semiconductor Business

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

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

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

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

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

Applications of our Products in the Network

Our products are targeted primarily at the Access (including equipment at the customers’ premises) and Metro segments of network infrastructure (as further described below). The following briefly describes our view of these market segments and some typical equipment types that may include our VLSI products.

The Access Network

This Access portion of the network infrastructure interconnects end user locations (residences or businesses) to the nearest service provider location (usually the telephone company central office). The primary functions performed by equipment in the Access network are aggregation and distribution of traffic, and interconnection to the switching or transmission equipment that connects to the WAN. The Access network may consist of electrical, optical or wireless transmission equipment. Our Broadband Access products are used in a variety of equipment in the Access network. For example, our Diplomat, ASPEN and Cubit product families are used in equipment that provides DSL services or fiber based FTTH and FTTC access services.  Our Mustang, Apollo, and Atlanta products are used in FTTH or FTTC equipment located at or near customer premises to either provide fiber-based access services to residences and business and, in the case of Atlanta, route these services throughout a home or building.  Our products are also used in Base Station equipment for cellular phone service. Our Optical Transport products are used in Multi-Service Provisioning Platform (MSPP) and Multi-Service Access Network (MSAN) equipment that serve as primary vehicles for aggregation and distribution of traffic in the Access network.

The Metro Network

The Metro network infrastructure is principally an optical fiber-based network.  It provides high-speed communications and data transfer covering an area larger than a campus area network and smaller than a WAN, interconnects two or more LANs, and usually covers an entire metropolitan area, such as a large city and its suburbs. In addition to interconnecting locations within the metropolitan area, the Metro network connects to the Access portion of the network and the long-haul or core network which interconnects different metropolitan networks across a region, a country or internationally. Equipment in the Metro network perform functions such as switching or routing of traffic, processing of data in various protocols, and further aggregation and distribution of traffic.  Our Optical Transport products are used in a range of Metro network equipment such as Dense Wave Division Multiplexers (DWDM), Coarse Wave Division Multiplexers (CWDM), Multi-Service Provisioning Platforms (MSPP), Digital Cross-connect Systems (DCS) and Add-Drop Multiplexers (ADM).

Our Products and the Functions they Serve

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

Our products address four high growth market segments within telecommunications:

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1. Optical Transport

2. Broadband Access including FTTH/FTTC optical access

3. Carrier Ethernet

4. Voice over IP

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

Optical Transport Products

The need for data transport across existing SONET, SDH and PDH networks is effectively addressed through our EtherMap and EtherPHAST product families.  Low-level grooming of TDM circuits will continue to be a requirement through the transition to IP.  The grooming will be done predominantly in smaller Access platforms rather than larger Metro platforms. The VTXP products, optimized for the access network, will continue to be applicable as will our broad line of mappers and framers. Optical Transport products include SONET/SDH/PDH mappers and framers and tributary switching and grooming products.

· Sonet/SDH/PDH 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.  This product family includes devices that enable the transport of Ethernet and other types of data traffic over SONET/SDH and Asynch/PDH networks.

· Tributary Switching and Grooming Devices

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

Broadband Access Products

We have successfully participated in the DSL market with our CUBIT and ASPEN products based on our patented CellBus architecture.  CellBus is based on ATM technology, which was the predominant standard for DSL.  Industry emphasis is shifting away from ATM based equipment towards IP/Ethernet-centric DSL equipment.  We anticipated this evolution, and developed the new Diplomat product line which addresses the latest industry standards in this area.  The Diplomat family of products will address equipment for broadband services over copper (ADSL2+, VDSL) as well as fiber-to-the-home and fiber-to-the-curb services (GPON).  The acquisition of Centillium Communications, Inc, has enabled us to significantly enhance our Broadband Access product portfolio with the addition of the Mustang, COLT and Apollo products that address EPON applications.

· ATM Controllers

ATM Controllers include TranSwitch’s CellBus line of products used extensively in DSLAM and APON/BPON OLT equipment by a large number of vendors. These devices, with built in switch engine, provide the single most cost-efficient means of transporting and processing ATM cells in such gear. These devices range in port density from 16-ports to 124-ports and in speed from STS-3/STM-1 to STS-12/STM-4.

· FTTP Physical Layer Products

Our physical layer solution consists of the Apollo chipset that supports multiple applications from a single, efficient footprint. This chipset integrates a broad range of functionality into a small, standards-compliant package, without the need for a separate microcontroller. The Apollo transceiver chip enables control of point-to-point data traffic over fiber, and targets various areas of the continuous data mode environment for data rates, from 100 Mbps through the higher data rate architectures known as OC3, OC12, Gigabit Ethernet, and OC48. Apollo addresses systems vendors’ and service providers’ requirement and offers applications on a wide spectrum of data-delivery modes for deployment on a global basis.

· FTTP Protocol Layer Products

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Protocol processors interface with the data streams to and from a transceiver, managing the bi-directional flow of information for delivery to an end user. End users may then use these streams of data to access the Internet over high speed circuits, connect voice devices (VoIP or traditional analog telephones), receive video broadcasts, and access video-on-demand (VoD) services.

Our protocol layer solutions include a mixed-signal EPON protocol engine and bridge for CO-based optical line termination, the Colt™ family, as well as an EPON protocol engine and bridge for CPE-based optical network units, the Mustang™ family. Centillium optical solutions are compliant with the latest industry standards, including IEEE 802.3ah.

Our Colt 100 SoC supports the complex set of capabilities required by service providers deploying CO equipment in Ethernet Passive Optical Networks. This product is a highly integrated, cost effective, mixed-signal EPON protocol processing solution that is fully compliant with IEEE 802.3ah.

Our Mustang product family consists of our ME250 and proprietary ME300 products. These highly-integrated, low power and turnkey FTTH solutions are ideal for service providers deploying EPON in customer premise equipment (CPE) to deliver premium triple play services such as bandwidth-intensive IPTV. We have been heavily engaged in the development of a gigabit Ethernet Passive optical networking, or GEPON, solution for the FTTP market. We introduced our newest generation of GEPON chips, called ME300 in 2007.

Carrier Ethernet Products

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. As an important complement to our Optical Transport products, our PacketTrunk family of circuit emulation and clock recovery devices provide vital interworking capability between the new data (IP) based services and infrastructures and the legacy voice (TDM) based services and infrastructures.  The development of 10G PHY devices creates opportunities in the emerging high speed Ethernet space and also brings future competitive advantages by giving us the capability to provide more vertically integrated devices.

· Circuit Emulation Devices

Circuit Emulation, which is complementary to VoIP, offers a graceful, robust, and affordable migration path for transporting T1, E1, T3 and E3 circuits over IP, MPLS, and tag-switched Ethernet networks.

· Ethernet Switches

Ethernet Switches examine header information on an incoming packet such as source/destination address, VLAN tags, and MPLS labels to decide which output port to send the packet to.

· Ethernet Controllers

Ethernet Controllers manage Ethernet traffic to and from multiple physical interfaces, providing important functions such as traffic aggregation and flow-control.  Since Ethernet traffic is inherently “bursty” in nature, these functions are necessary to ensure efficient utilization and robust operation of the network.

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· Ethernet PHY

Our TransPHY 10-Gigabit PHY devices address copper (CX4) and fiber (LX4) 10-Gigabit ethernet connectivity applications.  Our products feature industry leading performance in terms of transmission distance, power consumption and device footprint.

Voice-over-IP Products

We leverage our expertise in mixed-signal system-on-chip technology and embedded software applications to deliver VoIP products for carrier-class media gateway, access gateway and residential gateway markets. Comprising VoIP processors for next-generation voice, media and wireless gateways along with carrier-grade VoIP products for the rapidly growing customer premise equipment (CPE) market, our EntropiaTM and AtlantaTM product families provide system designers with broad flexibility while delivering a strong combination of performance and features.

· Media Gateway

Entropia, our flagship VoIP product line, is a series of advanced VoIP system-on-chip processor. The Entropia III and IV can process up to 1,008 voice channels for voice and media gateways, wireless infrastructure gateways, Class 4 and 5 switch replacements, digital loop carriers, voice-enabled IP routers and IP private branch exchange (PBX) systems. Entropia II LP is our VoIP product that processes up to 336 or 96 voice channels per chip. Entropia II LP is marketed for use in central office and enterprise voice equipment that require mid-level channel densities and central office equipment that process both DSL and VoIP signals.

Entropia™ III-C is the newest member of our suite of system-on-chip (SoC) VoIP solutions aimed at fast-growing multi-service access network (MSAN) applications such as “plain old telephone service” (POTS) replacement. Entropia III-C scales the market-proven features and performance advantages of our flagship system into a smaller-sized, highly integrated chipset with cost structures and channel densities that squarely target the requirements of business communications and subscriber loop infrastructures. With a single-chip design and low per-channel cost, the Entropia III-C provides a powerful and cost-efficient platform for deployment within MSAN and Digital Loop Carrier (DLC) environments. Carrier-proven algorithms improve voice quality, while the highly integrated design reduces power consumption compared to other approaches. The chipset’s high degree of integration minimizes external component counts and printed circuit board, or PCB, layers to reduce overall system bill-of-materials (BOM) costs.

· Customer Premises

Our Atlanta product family is a voice processing SoC for customer premises equipment that supports toll-quality telephone voice, fax and routing functionality over any broadband access network. System designs based on the Atlanta product family can connect directly to a broadband modem or be added as part of a small office-home office, or SOHO, network. The Atlanta A70™ product is the family’s entry level SoC while the A80™ SoC adds the capability to interface with any WiFi or high-speed adapter. The A90™ SoC is optimized for the SOHO market with four voice channels and a high-performing routing engine available at 100 Mbit/second. At the top of the Atlanta family, the A100™ SoC adds powerful, enterprise-level security and encryption of all data and voice.

Serial Interconnect Technology Licensing

In addition to our telecommunications portfolio of standard products, we are a recognized worldwide leader in the licensing of interconnect technologies.  Our intellectual property serves as a key building block for many varied semiconductor applications ranging from consumer electronics to home network equipment to industrial and automotive applications.  Starting in 2006, we began licensing interface technology, first for Ethernet with our MystiPHY line of IP cores acquired from Mysticom Ltd in January of that year.  These technologies have been adopted and incorporated by many of the world’s leading semiconductor and equipment manufacturers.  In addition to the licensing of Ethernet interface technology,  in 2008, we introduced our HD-PXL family of products addressing multimedia interconnect standards specifically addressing the HDMI and DisplayPort standards for consumer electronics and PC appliances.

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· MystiPHY

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.

· HD-PXL

Our HD-PXL transmitter and receiver Intellectual Property (IP) cores can be used for a variety of digital video and audio applications operating over standard DVI, HDMI, or DisplayPort cables. The HD-PXL cores are compliant with DVI 1.0 and HDMI 1.3 high definition standards and support a wide range of video interface modes. Our cores support transmission rates of both 2.25 gigabit/second and 3.5 gigabit per second.

Technology

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

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

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

Other products that incorporate programmability are the ASPEN family of ATM processors, and the PHAST series of products that target simultaneous mapping and transport of ATM/point-to-point protocol (PPP) and TDM services over fiber optic networks.  The T3BwP and TEPro VLSI devices support both data and management planes with an on-chip Reduced Instruction Set Computing (RISC) processor supporting full standards-based management and performance monitoring.

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

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

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

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

Strategy

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

Provide Complete Solutions Within Target Markets

We offer network equipment OEMs chip sets that represent complete solutions for SONET/SDH, Asynchronous/PDH and ATM/IP, VoIP and FTTP applications. In addition to providing families of VLSI devices, we offer OEM customers the following:

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

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

• evaluation boards and reference design;

• OEM product design support;

• multi-tier applications support; and

• product technical and design documentation.

Our “chip-set” approach allows OEMs to optimally configure their products while maintaining product compatibility over multiple generations. This approach allows equipment vendors to selectively upgrade their products with next-generation higher functionality VLSI devices. We have extended this approach to provide seamless integration of SONET/SDH, Asynchronous/PDH, ATM/IP VoIP and FTTP applications.

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 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.

Focus on Mixed-Signal Applications

We seek to identify applications requiring our mixed-signal VLSI device design capabilities. By leveraging both our industry knowledge and the special design skills required for mixed-signal devices, we are able to identify and implement optimal combinations of design elements for desired analog and digital functionality targeted toward the specific needs of network equipment OEMs. Our experience and expertise provides our customers accelerated time to market, better performance and lower costs than combinations of separate digital and analog solutions.

 Partner With Selected Foundries

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

Marketing and Sales

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

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

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

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

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Customers

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

 Note 9 of the Notes to Consolidated Financial Statements provide 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, 2008, we had 174 full-time employees engaged in research and product development efforts. We employ engineers who have the necessary VLSI, high speed mixed signal, firmware, software, hardware, physical design, verification, and validation expertise and development experience.  These engineers are responsible for delivering VLSI and Evaluation/Demo products for telecommunications and data communications applications.   Research and development expenditures for the years ended December 31, 2008, 2007 and 2006 were $24.6 million, $21.7 million, and $21.2 million, respectively.

All products are developed and delivered using documented design processes (product life cycle) operating under a quality management system certified to meet the ISO 9001:2000 international standard.  Our design tools and development environment are continuously reviewed and updated to improve design, verification, fabrication and validation methodology, design flow and processes of our product life cycle.

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

Patents and Licenses

Through the end of 2008, we have been issued or became an assignee of 66 presently maintained United States patents with an additional 25 patents pending in the United States. Of that number two patents are co-assigned. Of the 66 United States patents, we were granted 8 in 2008. Nine of the 25 pending patents were applied for in 2008 and they cover HDMI and Systems on a Chip innovations. Many of the United States issued and pending patents were also filed internationally. For one or more of our United States patents, we have coverage in Canada, China, Taiwan, Israel, Japan, France, Germany, United Kingdom, Belgium, Italy, Sweden, Spain, and Hong Kong. Internationally, there are patents pending either in specific countries, in the European Patent Office (EPO) or under the Patent Cooperative Treaty (PCT). In addition we have lifetime licenses to use over 23 additional US patents and their foreign derivatives.

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.

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

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

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

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

Manufacturing and Design Services

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

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

Our Shelton, Connecticut facility is registered to ISO 9001:2000 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:

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

• leveraging the most advanced semiconductor manufacturing technologies available;

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

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

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

Our products and services can be categorized as follows:

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

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

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

In 2003, the European Union (EU) published its directive to restrict the use of certain environmentally hazardous substances and defined the requirements for reducing their impact on the environment.  This legislation, which became effective July 1, 2006, restricts the use of Lead, Mercury, Cadmium, Hexavalent Chromium, Polybrominated Biphenyls (PBBs) and Polybrominated Diphenyl Ethers (PBDEs), as well as secondary elements defined in the directive.  Since early 2003, we have been monitoring the activity of the regulatory initiatives for Lead-free and "Green" products in compliance with the Restriction of Hazardous Substances (RoHS) legislation defined by the EU’s directive.  We have incorporated these requirements into our product designs and packaging technology with cooperation from our suppliers.  Our first RoHS device became available during 2004.

In order to facilitate a smooth transition without any supply disruptions, we offer RoHS compliant devices while continuing to offer these same devices in packages containing Lead. The RoHS compliant devices are clearly marked with a unique part number and alloy code to help customers maintain quality and follow appropriate manufacturing practices required by such devices.  We mark all RoHS devices according to JEDEC specifications.  Additionally, all RoHS compliant devices shipped are accompanied by a Certificate of Compliance guaranteeing conformance to the RoHS directive

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 2008.

Acquired Company	Date Acquired	Technology / Skill Acquired
Centillium Communications, Inc.	October  2008	VOIP and Optical transport
ASIC Design Center Division of Data – JCE	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 will, from time-to-time, make investments in early stage venture-backed, start-up companies that develop technologies that are complementary to our product roadmap. In all cases, when investing in other semiconductor companies, we have also entered into commercial agreements giving us the rights to resell products developed by these companies. When determining the accounting method for these investments, we consider both direct ownership and indirect ownership. We also consider other factors, such as our influence over the financial, technology and operating policies of these companies.

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

Competition

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

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

• declining availability of fabrication capacity;

• manufacturing yield problems;

• heightened international competition in many markets; and

• price erosion.

 The telecommunications and data communications industries, which are our primary target markets, are also intensely competitive due to deregulation and heightened international competition.

Through on-going planning and analysis with our customers, our product strategy is updated and focused on their current needs.  We participate in industry standards setting groups that give us further insight into market trends and requirements.  Recently, we introduced new product lines that meet our customers’ evolving data communications requirements. Our Ethernet over SONET/SDH product line enables telecommunication carriers and internet service providers the ability to offer new revenue-generating services, such as the high-speed transport of information over IP networks, based on their current network infrastructure. By utilizing the current network infrastructure, telecommunication carriers can realize revenue growth with only a modest increase in their costs.

In the period following 2001 when the telecommunications industry suffered a major correction, a number of our traditional competitors diverted their focus towards alternate markets such as storage and enterprise.   However, we made a deliberate decision to remain focused on telecommunications and to improve our competitive standing in this arena as the market recovered.  We concluded that future investment in communications technology would be driven by video, high speed data and mobility services, and adjusted our product focus accordingly to develop products for Ethernet over SONET and Carrier Ethernet applications.

Presently, many of our traditional competitors are attempting to re-enter the communications market.  However, our sustained focus on this market during the past several years has enabled us to build a robust product portfolio, secure several key design wins and strengthen our relationships with Tier-1 customers.  As a result, we believe we are very well positioned on a competitive basis.

Our competition consists of specialized semiconductor companies from the United States as well as other countries and semiconductor divisions of vertically integrated companies, such as IBM Corporation, NEC Corporation and Fujitsu Corporation. New entrants are also likely to attempt to obtain a share of the market for our current and future products.

Our principal competitors are Applied Micro Circuits Corporation, Conexant Systems, Inc., Cirrus Logic, Inc., Infineon Technologies, Exar Corporation, Agere Systems, PMC-Sierra Inc., TriQuint Semiconductor, Inc., Mindspeed Technologies Inc., Vitesse Semiconductor Corporation and Broadcom Corporation. In addition, there are a number of Applications Specific Integrated Circuit (ASIC) vendors, including AMI Semiconductor, LSI Logic Corporation and STM Microelectronics Group, which compete with us by supplying customer-specific products to OEMs.  Other domestic and international vendors have announced plans to enter into this market.

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Employees

At December 31, 2008, we had 257 full time employees, including 174 in research and development, 42 in marketing and sales, 17 in operations and quality assurance, and 24 in administration. We have no collective bargaining agreements.  We have never experienced any work stoppage and we believe our employee relations are good.

Available Information

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

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

Item 1A.  Risk Factors

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

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

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

We have incurred significant net losses.

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

Our net revenues may decrease.

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

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

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

We continue to have substantial indebtedness.

As of December 31, 2008, we have approximately $10.0 million in principal amount of indebtedness outstanding in the form of our 5.45% Convertible Notes due September 30, 2010 (2010 Notes).

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

• make it difficult for us to make payments on our 2010 Notes;

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

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

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

There can be no assurance that we will be able to meet our debt service obligations, including our obligations under the 2010 Notes.  The terms of our 2010 Notes permit the holders thereof to voluntarily convert their notes at any time into a certain number of shares of our common stock.

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

Although we have restructured our operating expenses to allow us to break-even at the rate of sales attained in the fourth quarter of fiscal 2008, such rate of sales may not be sustained. Also we may incur unforeseen expenses, which will cause us to consume our available cash and cash equivalents.

However, we believe that we have adequate cash and cash equivalents to fund our operations, investments and to meet our debt obligations through at least December 31, 2009.

 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 2010 Notes or our other obligations, we would be in default under their respective terms.  This would permit the holders of the 2010 Notes and our other obligations to accelerate their respective maturities and could also cause defaults under any future indebtedness we may incur.  Any such default or cross default would have a material adverse effect on our business, prospects, financial condition and operating results.  In addition, we cannot be sure that we would be able to repay amounts due in respect of the 2010 Notes if payment of those notes were to be accelerated following the occurrence of an event of default as defined in the 2010 Notes indenture.

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

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We may from time to time seek to exchange our 2010 Notes for shares of our common stock or other securities.  These exchanges may take different forms, including exchange offers or privately negotiated transactions.  As a result of shares of our common stock or other securities being issued upon such conversion or pursuant to such exchanges, our stockholders may experience substantial dilution of their ownership interest.

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 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.  If we raise additional funds by issuing debt, we may be limited in our success, as the terms of the 2010 Notes restrict our ability to issue debt that is senior to or pari passu with the 2010 Notes, without the consent of the holders of the 2010 Notes.

The terms of the 2010 Notes include voluntary conversion provisions upon which shares of our common stock would be issued.  As a result of these shares of our common stock being issued, our stockholders may experience dilution of their ownership interest.

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

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

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

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

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

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

• retaining and assimilating the key personnel of each company;

• integrating sales and business development operations;

• retaining existing customers of each company;

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

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

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

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

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

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• unanticipated expenses related to technology integration; and

• potential unknown liabilities associated with the acquisition.

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

Our stock may be delisted on Nasdaq.

On January 28, 2008, we received notification from the Nasdaq Listing Qualification Department providing notification that, for the last 30 consecutive business days, the bid price of our common stock had closed below the minimum $1.00 per share required for continued inclusion under Nasdaq Marketplace Rule 4450(a)(5).  On July 30, 2008, we received notice from the Listing Qualifications Department of The NASDAQ Stock Market that our application to list our common stock on The Nasdaq Capital Market was approved and our common stock began trading on the Nasdaq Capital Market on that date. On October 22, 2008, we received notification from the Nasdaq Listing Qualification Department providing notification that, due to the recent turmoil in U.S. and world financial markets, Nasdaq has temporarily suspended its enforcement of the bid price and market value of publicly held shares as required pursuant to Nasdaq Marketplace Rule 4450(a)(5). As a result, and in accordance with Nasdaq Marketplace Rule 4450(e)(2), we have been provided until July 26, 2009, to regain compliance.  To regain compliance, the bid price of our common stock must close at $1.00 per share or more for a minimum of ten consecutive business days at any time before July 26, 2009.

If we do not regain compliance with Nasdaq Marketplace Rule 4450(a)(5) by July 26, 2009, we will be notified that our securities will be delisted.  At that time, we may appeal Nasdaq’s determination to delist our securities to a Listing Qualification Panel.  On February 28, 2009 the price of our shares was $0.28.

We cannot be sure that our price will comply with the requirements for continued listing of our common stock on The Nasdaq Capital Market, or that any appeal of a decision to delist our common stock will be successful. If our common stock loses its status on The Nasdaq Capital Market, shares of our common stock would likely trade on the over-the-counter market bulletin board, commonly referred to as the “pink sheets.”

If our stock were to trade on the over-the-counter market, selling our common stock could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be reduced.  In addition, in the event our common stock is delisted, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our common stock, further limiting the liquidity thereof. These factors could result in lower prices and larger spreads in the bid and ask prices for shares of our common stock.

Such delisting from The Nasdaq Capital Market or future declines in our stock price could also greatly impair our ability to raise additional necessary capital through equity or debt financing, and could significantly increase the ownership dilution to stockholders caused by our issuing equity in financing or other transactions.

Our Board of Directors may elect to exercise its discretion to affect a reverse stock split. There are risks and uncertainties inherent in a reverse stock split.

By resolution approved by our stockholders at the annual meeting of stockholders held on May 22, 2008, our Board of Directors has the authority, in its sole discretion, to effect a reverse stock split of our common stock at any time prior to the date of our annual meeting of stockholders to be held in 2009 at a ratio between one for two and one for twenty as selected by the Board of Directors. In addition, notwithstanding approval of the reverse stock split by the stockholders, the Board of Directors may choose, in its sole discretion, not to affect a reverse stock split without further approval or action by or prior notice to the stockholders.

There can be no assurance that any increase in the market price for our common stock resulting from a reverse stock split, if approved and implemented, would be sustainable since there are numerous factors and contingencies that would effect such price, including the market conditions for our common stock at the time, our reported results of operations in future periods and general economic, geopolitical, stock market and industry conditions. Accordingly, the total market capitalization of our common stock after a reverse stock split may be lower than the total market capitalization before such reverse stock split and, in the future, the market price of our common stock may not exceed or remain higher than the market price prior to such reverse stock split. Further, there can be no assurance that after a reverse stock split, we would continue to meet the minimum listing requirements of The Nasdaq Capital Market.

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While a higher share price may help generate investor interest in our common stock, there can be no assurance that a reverse stock split would result in a per share market price that attracts institutional investors or investment funds, or that such price would satisfy the investing guidelines of institutional investors or investment funds. As a result, the trading liquidity of our common stock may not improve as a result of a reverse stock split.  Furthermore, the liquidity of our common stock could be adversely affected by the reduced number of shares of our common stock that would be outstanding after the reverse stock split.

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 $0.26 and a high of $2.84 during the period from January 1, 2005 to December 31, 2008. It is likely that the price of our common stock will continue to fluctuate widely in the future. Factors affecting the trading price of our common stock include:

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

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

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

• changes in earnings estimates by analysts.

 We may have to further restructure our business.

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

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

Historically, a relatively small number of customers have accounted for a significant portion of our total net revenues in any particular period. For the years ended December 31, 2008 and 2007, shipments to our top five customers, including sales to distributors, accounted for approximately 51% and 44% of our total net revenues, respectively. We expect that a limited number of customers may account for a substantial portion of our total net revenues for the foreseeable future.

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

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

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

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

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

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

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.

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During 2008, a substantial amount of our revenue was from Israel, China, Japan and other foreign countries. We expect revenues in 2009 will be substantial concentrated in foreign markets.  All of our sales have been historically denominated in U.S. dollars and major fluctuations in currency exchange rates could materially affect our customers’ demand, thereby causing them to reduce their orders, which could adversely affect our operating results. While part of our strategy is to diversify the geographic sources of our revenues, failure to further penetrate other markets could harm our business and results of operations and subject us to increased currency risk.

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

         We are exposed to foreign currency rate fluctuations because we incur a significant portion of our operating expenses in currencies other than U.S. dollars (mainly Indian rupees, Israeli shekels and Euros). The U.S. dollar has devalued significantly and this trend may continue. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, we enter into foreign currency forward contracts. The contracts reduce, but do not eliminate, the impact of foreign currency exchange rate movements. Also, this foreign currency risk management policy may not be effective in addressing long-term fluctuations.

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

Communication service providers, internet service providers, regional Bell 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.

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, 2008 and December 31, 2007 foreign shipments accounted for approximately 85% and 79%, respectively of our total net product and services revenues. We expect foreign markets to continue to account for a significant percentage of our total net product revenues. A significant portion of our total net product revenues will, therefore, be subject to risks associated with foreign markets, including the following:

• unexpected changes in legal and regulatory requirements and policy changes affecting the telecommunications and data communications markets;

• changes in tariffs;

• exchange rates, currency controls and other barriers;

• political and economic instability;

• risk of terrorism;

• difficulties in accounts receivable collection;

• difficulties in managing distributors and representatives;

• difficulties in staffing and managing foreign operations;

• difficulties in protecting our intellectual property overseas;

• natural disasters;

• seasonality of customer buying patterns; and

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• potentially adverse tax consequences.

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

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

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

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

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

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

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

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

• accurate new product definition;

• timely completion and introduction of new product designs;

• availability of foundry capacity;

• achievement of manufacturing yields; and

• market acceptance of our products and our customers’ products.

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

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• build products to applicable standards;

• develop products that meet customer requirements;

• adjust to changing market conditions as quickly and cost-effectively as necessary to compete successfully;

• introduce new products that achieve market acceptance; and

• develop reliable software to meet our customers’ application needs in a timely fashion.

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

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

We currently sell more than 70 products. Some of our products have a high gross profit while others do not.If our customers decide to buy more of our products with low gross profits and fewer of our products with high gross profits, our total gross profits could be adversely affected. We plan our mix of products based on our internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially.

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

Historically, average selling prices in the communication semiconductor industry have decreased over the life of a product, and, as a result, the average selling prices of our products may decrease in the future. Decreases in the price of our products would adversely affect our operating results. Our customers are increasingly more focused on price, as semiconductor products become more prevalent in their equipment.  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 derive virtually all of our total net revenues from products for telecommunications and data communications applications. These markets are characterized by the following:

• susceptibility to seasonality of customer buying patterns;

• subject to general business cycles;

• intense competition;

• rapid technological change; and

• short product life cycles.

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

Our products must successfully include industry standards to remain competitive.

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

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Our intellectual property indemnification practices may adversely impact our business.

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

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

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

We face intense competition in the communication semiconductor market.

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

• rapid technological change;

• subject to general business cycles;

• price erosion;

• limited access to fabrication capacity;

• unforeseen manufacturing yield problems; and

• heightened international competition in many markets.

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

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

• success in designing and subcontracting the manufacture of new products that implement new technologies;

• protection of our products by effective use of intellectual property laws;

• product quality;

• reliability;

• price;

• efficiency of production;

• failure to find alternative manufacturing sources to produce VLSI devices with acceptable manufacturing yields;

• the pace at which customers incorporate our products into their products;

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• success of competitors’ products; and

• general economic conditions.

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

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

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

• the lack of assured semiconductor wafer supply and control over delivery schedules;

• the unavailability of, or delays in obtaining access to, key process technologies; and

• limited control over quality assurance, manufacturing yields and production costs.

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

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

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

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

We have been, and expect in the future to be, particularly dependent upon a limited number of foundries for our VLSI device requirements. In particular, as of the date of this Form 10-K, a single foundry manufactures all of our BiCMOS devices.   As a result, we expect that we could experience substantial delays or interruptions in the shipment of our products due to any of the following:

• sudden demand for an increased amount of semiconductor devices or sudden reduction or elimination of any existing source or sources of semiconductor devices;

• time required to qualify alternative manufacturing sources for existing or new products could be substantial; and

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• failure to find alternative manufacturing sources to produce VLSI devices with acceptable manufacturing yields.

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

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

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

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

• that patents will be issued from currently pending or future applications;

• that our existing patents or any new patents will be sufficient in scope or strength to provide meaningful protection or any commercial advantage to us;

• that foreign intellectual property laws will protect our foreign intellectual property rights; and

• that others will not independently develop similar products, duplicate our products or design around any patents issued to us.

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

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

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

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

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

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

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

• use of significant amounts of cash and cash equivalents;

• potentially dilutive issuances of equity securities; and

•  incurrence of debt or amortization expenses related to intangible assets with definitive lives.

In addition, acquisitions involve numerous other risks, including:

• diversion of management’s attention from other business concerns;

• risks of entering markets in which we have no or limited prior experience; and

• unanticipated expenses and operational disruptions while acquiring and integrating new acquisitions.

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

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

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

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

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

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

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

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

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• prohibit stockholder action by written consent;

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

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

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

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

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

         We have outstanding operating lease commitments of approximately $34.2 million, payable over the next nine years. Some of these commitments are for space that is not being utilized and, for which, we recorded restructuring charges in prior periods. We are in the process of trying to sublease additional excess space but it is unlikely that any sublease income generated will offset the entire future commitment. As of December 31, 2008, we have sublease agreements totaling approximately $4.7 million to rent portions of our excess facilities over the next four 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, 2008 approximately 142,375 square feet is considered excess for which we have taken restructuring charges in prior years. Substantially all of this space is currently being sublet, but not for the full term that we are committed to under our lease agreements. If we are unable to re-lease this space, at similar rates, our future cash outflows would be adversely affected.

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

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

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

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

• difficulties in integrating personnel with disparate business backgrounds and cultures;

• difficulties in defining and executing a comprehensive product strategy; and

• difficulties in minimizing the loss of key employees of the acquired company.

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

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

Item 1B.  Unresolved Staff Comments

Not applicable.

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Item 2. Properties

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

Location	Business Use	Square Footage		Lease Expiration Dates
Shelton, Connecticut	Corporation Headquarters, Product Development, Operations, Sales, Marketing and Administration		18,561	November 2012
Herzeliya, Israel	Product Development, Sales & Service		9,688	Less than 1 Year
San Jose, California	Sales & Service		2,535	September 2009
New Delhi, India	Product Development		48,554	January 2015
Fremont, California	Product Development, Sales, Marketing and Administration		12,500	February 2011
Bangalore, India	Product Development		48,734	February 2014
Excess property:
Fremont, California	Available for Lease		91,500	February 2011
Bedford, Massachusetts	Available for Lease		4,100	September 2010
Shelton, Connecticut	Available for Lease		142,375	November 2012— April 2017

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

Refer to Note 15—Commitments and Contingencies of our Consolidated Financial Statements for additional disclosures regarding our commitments under lease obligations. Also, refer to Note 14—Restructuring and Asset Impairment Charges in our Consolidated Financial Statements regarding our restructuring charges during fiscal years 2006 through 2008 as we have recorded charges for future rent payments relating to excess office space.

Item 3.    Legal Proceedings

We are not party to any material litigation proceedings.

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

Item 4.    Submission of Matters to a Vote of Security-Holders

We did not submit any matters to a vote of our security-holders during the three months ended December 31, 2008.

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PART II

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

Delisting Notice

On October 22, 2008, TranSwitch received notification from the Nasdaq Listing Qualification Department providing notification that, due to the recent turmoil in U.S. and world financial markets, Nasdaq has temporarily suspended its enforcement of the bid price and market value of publicly held shares as required pursuant to Nasdaq Marketplace Rule 4450(a)(5). As a result, we now have until July 26, 2009 to regain compliance with the minimum bid requirement. To regain compliance, the bid price of our common stock must close at $1.00 per share or more for a minimum of ten consecutive business days at any time before July 26, 2009.

If we do not regain compliance with Nasdaq Marketplace Rule 4450(a)(5) by July 26, 2009, we will be notified that our securities will be delisted.  At that time, we may appeal Nasdaq’s determination to delist our securities to a Listing Qualification Panel.

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.

	High		Low
Year ended December 31, 2008
First Quarter	$	0.88	$	0.60
Second Quarter	$	0.92	$	0.61
Third Quarter	$	1.12	$	0.50
Fourth Quarter	$	0.50	$	0.26
Year ended December 31, 2007
First Quarter	$	1.71	$	1.17
Second Quarter	$	1.92	$	1.45
Third Quarter	$	1.82	$	1.37
Fourth Quarter	$	1.38	$	0.80

As of February 24, 2009, there were approximately 469 holders of record and approximately 17,978 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, 2008 with respect to shares of our common stock that may be issued under our existing equity compensation plans, including our 1995 Fourth Amended and Restated Stock Plan (the “1995 Plan”), our 2000 Stock Option Plan (the “2000 Plan”), the 2008 Equity Incentive Plan (the “2008 Plan”), the 1995 Non-Employee Director Stock Option Plan (the “Non-Employee Director Plan”), the 2005 Employee Stock Purchase Plan (the “Purchase Plan”) and the 1999 Stock Incentive Plan of Onex Communications Corporation (the “Onex Plan”). As of May 22, 2008, no shares are available for grant under our 1995 Plan or 2000 Plan.

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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)		19,514,528	(3)(4)	$	2.04	(3)		5,044,419
Equity Compensation Plans Not Approved by Stockholders (2)		4,538,813		$	1.43			-
Total		24,053,341		$	1.92			5,044,419

(1) Consists of the 1995 Plan, the 2008 Plan, the Non-Employee Director Plan and the Purchase Plan.

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

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

(4) Includes restricted stock units of 1,104,298. These awards have no strike price and are issued from our 2008 Plan.

Equity Compensation Plans Not Approved by Stockholders

2000 Stock Option Plan. The purpose of the 2000 Plan adopted by our Board of Directors on July 14, 2000 and amended on December 21, 2001, was to promote our long-term success, by providing financial incentives to employees and consultants of the Company who are in positions to make significant contributions toward such success except that no member of our Board of Directors or officer of the Company appointed by the Board of Directors shall be eligible for grants of options under the 2000 Plan. The 2000 Plan is designed to attract individuals of outstanding ability to become or to continue as employees or consultants, to enable such individuals to acquire or increase proprietary through the ownership of shares of our Common Stock, and to render superior performance during their associations with us, by providing opportunities to participate in the ownership of our future growth through the granting of NQSOs. The 2000 Plan is administered by our Board of Directors or, at its option, a committee appointed by our Board of Directors. A total of 10,000,000 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 2,427,033 shares available for issuance under the 2000 Plan that are not subject to outstanding stock option awards will be eligible for issuance under the 2008 Equity Incentive Plan.

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

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Issuer Purchases of Equity Securities

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

During the year ended December 31, 2008, we repurchased 166,350 shares at an average price of $0.68 per share for approximately $0.1 million, excluding approximately $5,000 of commissions.  For the year ended December 31, 2008, our total cost for repurchasing shares was approximately $0.1 million.

(table in thousands, except per share amounts)

	(a)		(b)		(c)		(d)
Period	Total Number of Shares Purchased		Average Price Paid per share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
February 1-29, 2008		120	$	0.67		120	$	9,919
March 1-31, 2008		46	$	0.69		46	$	9,887
Total		166	$	0.68		166

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Item 6.    Selected Financial Data

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

	Years ended December 31,
	2008			2007			2006			2005			2004
	(Amounts presented in thousands, except per share amounts)
Selected Consolidated Statements of Operations Data:
Net revenues	$	41,934		$	32,565		$	38,920		$	32,900		$	33,687
Gross profit		23,894			20,171			28,174			23,984			23,347
Operating loss		(19,774	)		(18,800	)		(11,136	)		(14,662	)		(43,049	)
Loss before cumulative effect of adoption of and change in accounting principle		(17,046	)		(19,712	)		(10,856	)		(23,754	)		(44,347	)
Cumulative effect on prior years adoption of FIN 46R		—			—			—			—			(277	)
Net loss (1)	$	(17,046	)	$	(19,712	)	$	(10,856	)	$	(23,754	)	$	(44,624	)
Basic and diluted loss per common share before cumulative effect of a change in accounting principle	$	(0.12	)	$	(0.15	)	$	(0.09	)	$	(0.23	)	$	(0.47	)
Basic and diluted net loss per common share	$	(0.12	)	$	(0.15	)	$	(0.09	)	$	(0.23	)	$	(0.47	)
Shares used in calculation of basic and diluted net loss per common share		138,080			132,529			124,801			104,779			94,638

	December 31,
	2008		2007		2006		2005		2004
Selected Consolidated Balance Sheets Data:
Cash, cash equivalents, restricted cash and short-term investments	$	15,284	$	34,098	$	57,723	$	72,702	$	102,504
Total current assets		35,179		45,527		68,236		80,822		112,475
Working capital		8,708		36,867		30,323		73,385		76,361
Long-term investments (marketable securities)		—		—		—		—		32,178
Total non-current assets		43,248		22,060		14,420		6,004		42,233
Total assets		78,427		67,587		82,656		86,826		154,708
Convertible Notes due within one year, net of discount		—		—		28,811		—		24,442
Derivative liability, current		—		—		980		—		—
Total current liabilities		26,471		8,660		37,913		7,437		36,114
5.45% Convertible Plus Cash Notes due 2007, net of debt discount, long-term		—		—		—		49,102		67,370
5.45% Convertible Notes due 2010, long-term		10,013		25,013		—		—		—
Derivative liability, long-term		—		—		—		6,040		8,461
Total non-current liabilities		29,677		45,259		20,689		76,180		97,363
Total stockholders’ equity		22,279		13,668		24,054		3,209		21,231
Book value per share	$	0.14	$	0.10	$	0.19	$	0.03	$	0.21

(1) Effective January 1, 2006, we adopted SFAS No. 123R.  As such, the reported net loss for 2008, 2007 and 2006 reflects stock-based compensation expense of $1.5 million, $2.0 million and $2.4 million, respectively.

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

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

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

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

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

Results of operations.    This section provides an analysis of our results of operations for the years ended December 31, 2008, 2007 and 2006. 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 is a Delaware corporation incorporated on April 26, 1988. TranSwitch designs, develops and supplies innovative highly-integrated semiconductor solutions that provide core functionality for voice, data and video communications network equipment.  TranSwitch end customers are the original equipment manufacturers (“OEMs”) who supply wire-line and wireless network operators who provide voice, data and video services to end users such as consumers, corporations, municipalities etc. Our system-on-a-chip products incorporate digital and mixed-signal semiconductors and related embedded software. We serve the Voice over Internet Protocol (VoIP) and Fiber-To-The-Premises (FTTP), which is also known as optical networking, markets. We have over 200 active customers, including the leading global equipment providers, and our products are deployed in the networks of the major service providers around the world.

In addition to an extensive portfolio of standard integrated circuit products addressing voice, data, wireless and video markets, TranSwitch supplies a number of intellectual property core products for Ethernet and high definition video (HDMI protocol) applications and custom design services. Our combination of standard products, intellectual property cores and custom design services enables us to serve our customers needs more fully.

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

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

 Our revenues were $41.9 million in 2008, $32.6 million in 2007 and $38.9 million in 2006.  2008 was a successful year for TranSwitch. Our acquisition of Centillium further diversified our product portfolio to include rapidly growing Fiber-to-the-Home (FTTH) and Voice-over-Internet-Protocol (VoIP) solutions. The combination strengthens our leadership position in the next-generation communications semiconductor market. The combined companies will have greater scale, a significantly improved expense structure and a truly global reach.

We attained revenue growth in three of our four major product revenue categories as we continued to focus on the developing markets of Optical Transport, Broadband Access and Carrier Ethernet and VoIP. Part of this growth came from our acquisition of Centillium Communications, Inc., whose products are well positioned in the Broadband Access and VoIP markets. Our previous acquisitions of the ASIC Design Center Division of Data – JCE and Mysticom, Ltd. continue to provide successful diversification in the areas of ASIC customer specific telecom / non-telecom products and High Definition video processing, respectively. In addition to growing our revenue streams, we are focusing on improving our gross margin both by reducing costs on lower margin products and working to increase sales of higher margin products.

We continued our move toward profitability by reducing our operating loss from 2007 both in a dollar amount and as a percentage of revenue. This was achieved through strict cost control measures and the implementation of a force reduction plan in both TranSwitch and Centillium. We were also able to enter into an agreement with certain holders of our 2010 Notes to purchase $15.0 million of the aggregate principal amount for $9.9 million in cash, plus accrued and unpaid interest. This enabled us to reduce our long term debt by 60% and also realize a $4.5 million gain.

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:

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

(2) estimating allowances for doubtful accounts;

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

(4) estimating stock-based compensation;

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

(6) estimating excess inventories;

(7) estimating restructuring liabilities; and

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

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

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

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

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

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

We license HDMI and other intellectual property.  Revenues from licensing arrangements generally consist of multiple elements such as license, implementation and maintenance services. The items (deliverables) included in the arrangement are evaluated pursuant to EITF Issue No. 00-21 “Revenue Arrangements with Multiple Deliverables” 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 one of those customers’ creditworthiness or other matters affecting the collectibility of amounts due from such customers could have a material effect on our results of operations in the period in which such changes or events occur.

Derivative Liability Associated with our 5.45% Convertible Plus Cash Notes due 2007.  In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (SFAS 133), the holder’s conversion right contained in the terms governing our 5.45% Convertible Plus Cash Notes due 2007 (the “Plus Cash Notes”) was not clearly and closely related to the characteristics of the Plus Cash Notes upon issuance. Accordingly, this feature qualified as an embedded derivative instrument and, because it does not qualify for any scope exception within SFAS 133, it is required by SFAS 133 to be accounted for separately from the debt instrument and recorded as a derivative financial instrument.

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During the year ended December 31, 2008, there were no Plus Cash Notes outstanding. During the years ended December 31, 2007 and 2006, we recorded other income of $1.0 million and $5.1 million, respectively, all of which related to the holder’s conversion right, to reflect the change in fair value of our derivative liability.

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

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

Goodwill and Long-Lived Assets.   Our goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.  We perform impairment reviews using a fair-value method based on management’s judgments and assumptions.  The fair value represents the amount at which an entity could be bought or sold in a current transaction between willing parties on an arms-length basis.  In estimating fair value, we use our common’s stock market price to determine fair value.  Quoted market prices are the best evidence of fair value, and the market capitalization based on the Company’s common stock price is apportioned based on revenue to the entity being tested for impairment.  The estimated fair value is then compared with the carrying amount of the entity, including goodwill.  In the case where an entities’ estimated fair value would be lower than its carrying value, we would perform discounted cash flow analysis on the entity to determine fair value.  If after a discounted cash flow analysis the entities estimated fair value is lower than its carrying value, we would retain independent appraisers to perform additional fair value calculations.  We are subject to financial statement risk to the extent that the carrying amount exceeds the estimated fair value.  The impairment testing performed by us at October 1, 2008 indicated that the estimated fair value of entities tested exceeded their corresponding carrying amount. As such, there was no impairment.  Indefinite lived intangible assets are subject to annual impairment testing, as well.  On an annual basis, the fair value of the indefinite lived assets is evaluated by us to determine if an impairment charge is required. We have only nominal amounts of indefinite lived assets.

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

A considerable amount of management judgment and assumptions are required in performing the impairment test.  While we believe that our judgments and assumptions were reasonable, different assumptions could change the estimated fair values and, therefore, 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 $0.3 million in 2008, $0.4 million in 2007 and zero in 2006.  Most of these products have not been disposed of and remain in our inventory.

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During 2008, 2007 and 2006, we recorded net product revenues of approximately $4.8 million, $3.5 million and $9.1 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 would have been 64%, 64% and 68% in 2008, 2007 and 2006 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 2008, 2007 and 2006, we recorded restructuring charges and asset impairments totaling $3.8 million, $1.5 million and $0.4 million, respectively, related to employee termination benefits and costs to exit certain facilities, net of sub-lease benefits. At December 31, 2008 and 2007, the restructuring liabilities were $25.4 million and $21.1 million, respectively, on our consolidated balance sheets. Restructuring liabilities at December 31, 2008 include approximately $22.5 million of liabilities for facility lease costs (Refer to Note 14 – Restructuring and Asset Impairment Charges of the Notes to Consolidated Financial Statements). These facility operating leases expire through 2017. The future cash outlays for all of our operating lease commitments are discussed in Note 15 of the Notes to Consolidated Financial Statements.  Certain assumptions are used by us to derive this estimate, including future maintenance costs, price escalation and sublease income derived from these facilities. Should we negotiate additional sublease rental income agreements or reach a settlement with our lessors to be released from our existing obligations, we could realize a favorable benefit to our results of future operations. Should future lease, maintenance or other costs related to these facilities exceed our estimates, we could incur additional expenses in future periods.

Valuation of Investments in Non-Publicly Traded Companies.    Since 1999, we have been making strategic equity investments in non-publicly traded companies that develop technologies that are complementary to our product road map. Depending on our level of ownership and whether or not we have the ability to exercise significant influence, we account for these investments on either the cost or equity method, and review such investments periodically for impairment. The appropriate reductions in carrying values are recorded when, and if, necessary. The process of assessing whether a particular investment’s net realizable value is less than its carrying cost requires a significant amount of judgment. In making this judgment, we carefully consider the investee’s cash position, projected cash flows (both short and long-term), financing needs, most recent valuation data, the current investing environment, management / ownership changes, and competition. This evaluation process is based on information that we request from these privately held companies. This information is not subject to the same disclosure and audit requirements as the reports required of U.S. public companies, and as such, the reliability and accuracy of the data may vary. Based on our evaluations, we recorded impairment charges related to our investments in non-publicly traded companies of zero, $0.1 million and zero during 2008, 2007 and 2006, respectively. The total investment in non-public companies was $3.0 million and $2.9 million as of December 31, 2008 and 2007, 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.

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	Years ended December 31,
	2008			2007			2006
Net revenues:
Product revenues		95	%		90	%		93	%
Service revenues		5	%		10	%		7	%
Total net revenues		100	%		100	%		100	%
Cost of revenues:
Product cost of revenues		40	%		32	%		24	%
Provision for excess and obsolete inventories		1	%		1	%		-	%
Service cost of revenues		2	%		5	%		3	%
Total cost of revenues		43	%		38	%		27	%
Gross profit		57	%		62	%		73	%
Operating expenses:
Research and development		58	%		67	%		55	%
Marketing and sales		21	%		32	%		30	%
General and administrative		16	%		17	%		16	%
Restructuring charge and asset impairment, net		9	%		4	%		1	%
Total operating expenses		104	%		120	%		102	%
Operating loss		(47	) %		(58	) %		(29	) %

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Comparison of Fiscal Years 2008 and 2007

Net Revenues.   We have four product line categories: 1) Optical Transport; 2) Broadband Access; 3) Carrier Ethernet and VOIP and 4) Non-Telecommunications.  The Optical Transport product line is incorporated into OEM systems that improve the efficiency of fiber optic networks and in the process increase the overall network capacity.  The Broadband Access product line is incorporated into OEM systems that allow telecommunications service providers to transition their legacy voice networks to support next generation services such as voice, data and video.  The Carrier Ethernet product line allows carriers to provide robust and differentiated services using Ethernet technology in their wide-area networks. VoIP products are used in carrier-class and enterprise-class media gateways and access gateways and for use in residential gateway markets.  The Non-Telecommunications product line consists of non-telecommunications ASIC products.  The following tables summarize our net product revenue mix by product line:

(Tabular dollars in thousands)	Year Ended December 31, 2008					Year Ended December 31, 2007					Percentage
	Revenues		Percent of Total Revenues			Revenues		Percent of Total Revenues			Increase (Decrease) in Revenues
Optical Transport	$	20,258		48	%	$	18,055		56	%		12	%
Broadband Access		15,512		37	%		7,731		24	%		101	%
Carrier Ethernet and VOIP		3,348		8	%		2,431		7	%		38	%
Non-Telecommunications		885		2	%		1,093		3	%		(19	)%
Sub-total product revenues		40,003		95	%		29,310		90	%		36	%
Service revenues		1,931		5	%		3,255		10	%		(41	)%
Total	$	41,934		100	%	$	32,565		100	%		29	%

Total product sales in 2008 were $40.0 million as compared to $29.3 million in 2007, an increase of $10.7 million or 36%.  The increase in net product revenue for 2008 compared to 2007 includes approximately $6.0 million of increased sales as a result of the acquisition of Centillium in the fourth quarter of 2008.  Approximately $5.0 million of the Centillium revenue is included in our Broadband Access products and $1.0 million is included in Carrier Ethernet and VOIP.  The increase in Broadband Access product sales in 2008 also included increased sales of our ASIC products partially offset by lower sales of our ASPEN, ASPEN Express and CUBIT-PRO products. Our Optical Transport product revenue increased approximately $2.2 million in 2008 as compared to 2007.  This included increased sales of our L3M, E1Mx21 and ET family of products which were partially offset by decreased sales of our TEMx28, QE1F-Plus and DART products. Our Non-telecommunications products decreased by approximately $0.2 million in 2008 as compared to 2007.

Service revenues (approximately $1.9 million in 2008 and $3.3 million in 2007) consist of design services performed for third parties on a contract basis and HDMI and technology licenses.

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

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

42

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

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

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

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

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

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

Restructuring Charges.   We recorded restructuring charges of $3.8 million and $1.4 million for 2008 and 2007, respectively.  Information on restructuring charges and asset impairments for each of the last two years is located in Note 14 of the Notes to Consolidated Financial Statements.

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

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

For the year ended December 31, 2007, we recorded other income of approximately $1.0 million to reflect the change in the fair value of the derivative liability resulting from the 5.45% Convertible Plus Cash Notes due 2007 (“Plus Cash Notes”).   (Refer to Note 13 – Convertible Notes of the Notes to Consolidated Financial Statements). There were no Plus Cash Notes outstanding at December 31, 2008 and 2007.

43

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

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

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

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

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

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

Comparison of Fiscal Years 2007 and 2006

Net Revenues.  During 2007, we changed our presentation of net revenues by product line.  We have four product line categories: 1) Broadband Access; 2) Optical Transport; 3) Carrier Ethernet and 4) Non-Telecommunications.  The Broadband Access product line is incorporated into OEM systems that allow telecommunications service providers to transition their legacy voice networks to support next generation services such as voice, data and video.  The Optical Transport product line is incorporated into OEM systems that improve the efficiency of fiber optic networks and in the process increase the overall network capacity.  The Carrier Ethernet product line allows carriers to provide robust and differentiated services using Ethernet technology in their wide-area networks.  The Non-Telecommunications product line consists of non-telecommunications ASIC products.  The following tables summarize our net product revenue mix by product line:

(Tabular dollars in thousands)	Year Ended December 31, 2007					Year Ended December 31, 2006					Percentage
	Revenues		Percent of Total Revenues			Revenues		Percent of Total Revenues			Increase (Decrease) in Revenues
Optical Transport	$	18,055		56	%	$	28,150		72	%		36	%
Broadband Access		7,731		24	%		5,765		15	%		34	%
Carrier Ethernet		2,431		7	%		1,969		5	%		23	%
Non-Telecommunications		1,093		3	%		275		1	%		297	%
Sub-total product revenues		29,310		90	%		36,159		93	%		(19	)%
Service revenues		3,255		10	%		2,761		7	%		18	%
Total	$	32,565		100	%	$	38,920		100	%		(16	)%

44

Total product sales in 2007 were $29.3 million as compared to $36.1 million in 2006, a decrease of $6.8 million or 19%.  The decrease in net product revenue for 2007 compared to 2006 reflects decreased volume of our Optical Transport products of $10.1 million, including decreasing sales of $9.0 million in legacy products (led by DART, L3M and SOT-3) and $1.1 million decreased sales in new products (mainly EtherPHAST 48 Plus). Broadband Access, Carrier Ethernet and Non-Telecommunications product sales increased by $3.2 million in total primarily due to ASIC product sales in our Mysticom and ASIC Design Center businesses.

Service revenues (approximately $3.3 million in 2007 and $2.8 million in 2006) consist of design services performed for third parties on a short-term contract basis and technology licenses.

For 2007 and 2006 international net revenues were approximately 79% and 75%, respectively, of net revenues.

As of December 31, 2007 our backlog was $4.6 million, as compared to $7.0 million as of December 31, 2006. 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 $20.2 million and $28.2 million for the years ended December 31, 2007 and 2006, respectively. The decrease in gross profit for 2007 as compared to 2006 reflects lower overall revenues, a decrease in sales of our newer non-ASIC products, which generally yield a higher margin than our legacy products, and an increase in sales of our lower margin ASIC products.   

During the years ended December 31, 2007 and 2006, gross profit was affected favorably in the amount of $1.2 million and $2.8 million, respectively, from the sales of products that had previously been written down to a cost basis of zero. Also during the year ended December 31, 2007, we recorded a provision for excess and obsolete inventories in the amount of $0.4 million. This charge 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 2007 were $21.7 million which increased $0.5 million, or 2% as compared to the prior year.  This increase is primarily due to increased fabrication costs associated with new product development.

We believe that continued investment in the design and development of future products is vital to maintain a competitive edge. We have closely monitored our known and forecasted revenue demand and operating expense run rates.  We continue to seek opportunities to focus our research and development activities and will continue to closely monitor both our costs and our revenue expectations in future periods.  We will continue to concentrate our spending in this area to meet our customer requirements and respond to market conditions.

Marketing and Sales.    Marketing and sales expenses consist primarily of personnel-related, trade show, travel and facilities expenses. Marketing and sales expenses for 2007 were $10.2 million which decreased $1.3 million, or 11% as compared to the prior year. The decrease is primarily due to lower salary and commission expenses associated with a lower headcount and lower levels of revenue.

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 $5.6 million in 2007 a decrease of approximately $0.5 million, or 9% compared to the prior year.  The decrease was primarily due to a lower headcount associated with cost cutting measures.

45

Restructuring Charges.   We recorded restructuring charges of $1.4 million and $0.4 million for 2007 and 2006, respectively.  Information on restructuring charges and asset impairments for each of the last two years is located in Note 14 of the Notes to Consolidated Financial Statements.

Change in Fair Value of the Derivative Liability.  For 2007 and 2006, we recorded other income of approximately $1.0 million and $5.1 million, respectively, to reflect the change in the fair value of the derivative liability associated with the 5.45% Convertible Plus Cash Notes due September 30, 2007 (the “Plus Cash Notes”).  (Refer to Note 13 – Convertible Notes of the Notes to Consolidated Financial Statements). There were no Plus Cash Notes outstanding at December 31, 2007.

Loss on Extinguishment of Debt.  On July 6, 2007, the Company exchanged approximately $21.2 million aggregate principal amount of its outstanding Plus Cash Notes for an equivalent principal amount of a new series of 5.45% Convertible Notes due September 30, 2010 (the “2010 Notes”).  As a result we recognized a $0.4 million extinguishment loss.

Interest Expense net.  Interest expense, net decreased approximately $0.5 million to $1.1 million in 2007.

Interest expense decreased from $4.4 million in 2006 to $3.6 million in 2007 due to lower debt balances resulting from the exchanges of the Plus Cash Notes described above.

Interest income decreased slightly from $2.7 million in 2006 to $2.5 million in 2007, due to lower interest earning cash equivalent balances. At December 31, 2007 and 2006, the effective interest rates on our interest-bearing securities were approximately 4.70% and 5.20%, respectively.

Income Tax Expense.  Our income tax expense of $0.3 million in 2007 and $0.1 million in 2006 is applicable to the operating results of certain of our foreign subsidiaries.  We have incurred significant taxable losses for U.S. federal and state purposes. We have not recognized any income tax benefits on those losses because their realization is uncertain.

Information on income taxes for each of the last three years is located in Note 10 of the Notes to Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2008, we had cash, cash equivalents, restricted cash and short-term investments of approximately $15.3 million compared to $34.1 million as of December 31, 2007. Further, our working capital was $8.7 million compared to $36.9 million last year. Our primary source of liquidity is cash, cash equivalents and short term investments. We have used cash in our operating activities in each of the last three years, including $18.5 million in 2008, $12.8 million in 2007 and $6.9 million in 2006. During 2008 we reduced long-term debt from $25.0 million as of December 31, 2007 to $10.0 million as of December 31, 2008.

In the fourth quarter 2008, we implemented restructuring plans that included the elimination of approximately 76 positions, primarily in our Shelton, Connecticut, Bedford, Massachusetts, Fremont, California, Eclubens, Switzerland, New Delhi, India and Bangalore, India locations.  As a result, we incurred restructuring costs of approximately $7.2 million. We believe that we have reduced our anticipated operating expenses to the point where we can break-even, excluding stock compensation costs, at the rate of sales that we achieved in the fourth quarter of 2008. Also, we intend to continue to assess our cost structure in relationship to our revenue levels and to make appropriate adjustments to expense levels as required. None-the-less we believe that our existing cash and cash equivalents and short-term investments will be sufficient to fund operating activities and capital expenditures, and provide adequate working capital through at least December 31, 2009.

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

46

Commitments and Significant Contractual Obligations

We have existing commitments to make future interest payments on the 2010 Notes and to redeem these notes in September 2010.  Over the remaining life of the outstanding 2010 Notes, we expect to pay approximately $1.1 million of interest on them.

We have outstanding operating lease commitments of $34.2 million, payable over the next nine years. Some of these commitments are for space that is not being utilized and, for which, we recorded restructuring charges in prior years for excess facilities. We are in the process of trying to sublease additional excess space but it is unlikely that any sublease income generated will offset the entire future commitment. As of December 31, 2008, we have approximately $4.7 million in anticipated sub-lease income over the next four 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		2009		2010 & 2011		2012 &  2013		Thereafter
Interest on convertible notes	$	1,091	$	546	$	545	$	—	$	—
Convertible notes		10,013		—		10,013		—		—
Operating lease obligations		34,215		6,178		10,267		8,155		9,615
Purchase obligations		6,432		6,432		—		—		—
	$	51,751	$	13,156	$	20,825	$	8,155	$	9,615

We also have pledged approximately $3.1 million as collateral for stand-by letters of credit that guarantee certain long-term property lease obligations and to support customer credit requirements. This $3.1 million is in our bank accounts and is included in our restricted cash as of December 31, 2008.

Recent Accounting Pronouncements

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

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk 

Interest Rate Risk.  We have investments in money market accounts that earn interest income that is a function of the market rates. As a result, we have exposure to changes in interest rates. For example, if interest rates were to decrease by one half percentage point from their current levels, our potential interest income for 2009, 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 2008, operating expenses incurred in foreign currencies were approximately 41% 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.

47

Fair Market Value of Financial Instruments.  As of December 31, 2008, our debt consisted exclusively of convertible notes due September 30, 2010 with interest at a fixed rate of 5.45%. Consequently, we do not have significant cash flow exposure on the interest payments on these notes. However, the Company does have considerable exposure in the requirement to redeem these convertible notes on September 30, 2010.  There is no guarantee that the Company will have either enough cash to pay down this debt, or the ability to refinance this debt on terms acceptable to the Company.  The fair market value of our outstanding 5.45% Convertible Notes due September 30, 2010 was estimated based on current market conditions at approximately $6.6 million at December 31, 2008. Among other factors, changes in interest rates and the price of our common stock affect the fair value of our convertible notes. Refer to critical accounting policies and use of estimates in Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information associated with our 2010 Notes.

48

Item 8.    Financial Statements and Supplementary Data

TRANSWITCH CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND FINANCIAL STATEMENT SCHEDULE

	Page
Financial Statements:
Report of Independent Registered Public Accounting Firm	50
Consolidated Balance Sheets as of December 31, 2008 and 2007	52
Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006	53
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss for the years ended December 31, 2008, 2007 and 2006	54
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006	55
Notes to Consolidated Financial Statements	56
Financial Statement Schedule:
Schedule II, Valuation and Qualifying Accounts	78

49

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors

TranSwitch Corporation

We have audited the accompanying consolidated balance sheets of TranSwitch Corporation and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders' equity and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2008.  Our audit also included the financial statement schedule listed in the Index at Item 8. We have also audited the Company’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  These financial statements and schedule are the responsibility of the Company's management.  Further, the Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Annual Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express an opinion on these financial statements and schedule, and an opinion on the Company’s internal control over financial reporting based on our audits.

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

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

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the  financial position of the Company as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Further, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008,  based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

50

As discussed in Note 10, the Company adopted FIN 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109, effective January 1, 2007.

/s/ UHY LLP

New Haven, Connecticut

March 12, 2009

51

TRANSWITCH CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

	December 31,			December 31,
	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	7,462		$	34,098
Restricted cash		4,852			—
Short-term investments		2,970			—
Accounts receivable, net of allowances of $536 and $623		12,865			6,850
Inventories		4,504			3,069
Prepaid expenses and other current assets		2,526			1,510
Total current assets		35,179			45,527
Property and equipment, net		2,029			5,116
Goodwill		25,079			10,075
Other intangible assets, net		11,454			1,483
Investments in non-publicly traded companies		2,963			2,898
Deferred financing costs, net		403			1,581
Other assets		1,320			907
Total assets	$	78,427		$	67,587
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,240		$	1,665
Accrued expenses and other current liabilities		22,231			6,995
Total current liabilities		26,471			8,660
Restructuring liabilities		19,664			20,246
5.45% Convertible Notes due 2010		10,013			25,013
Total liabilities		56,148			53,919
Commitments and contingencies
Stockholders’ equity:
Common stock, $.001 par value: authorized - 300,000,000 shares; issued - 158,674,340 shares at December 31, 2008 and 133,098,432 shares at December 31, 2007		159			133
Additional paid-in capital		381,384			354,813
Accumulated other comprehensive income – currency translation		36			858
Common stock held in treasury (166,350 shares), at cost		(118	)		—
Accumulated deficit		(359,182	)		(342,136	)
Total stockholders’ equity		22,279			13,668
Total liabilities and stockholders’ equity	$	78,427		$	67,587

See accompanying notes to consolidated financial statements.

52

TRANSWITCH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Years ended December 31,
	2008			2007			2006
Net revenues:
Product revenues	$	40,003		$	29,310		$	36,159
Service revenues		1,931			3,255			2,761
Total net revenues		41,934			32,565			38,920
Cost of revenues:
Cost of product revenues		16,730			10,514			9,507
Provision for excess and obsolete inventories		316			443			—
Cost of service revenues		994			1,437			1,239
Total cost of revenues		18,040			12,394			10,746
Gross profit		23,894			20,171			28,174
Operating expenses:
Research and development		24,568			21,703			21,245
Marketing and sales		8,816			10,223			11,523
General and administrative		6,678			5,617			6,139
Restructuring charges, net		3,804			1,428			403
Reversal of accrued royalties		(198	)		—			—
Total operating expenses		43,668			38,971			39,310
Operating loss		(19,774	)		(18,800	)		(11,136	)
Other income (expense):
Other income		81			—			85
Impairment of investments in non-publicly traded companies		—			(109	)		—
Change in fair value of derivative liability		(347	)		980			5,060
Gain (loss) on extinguishment of debt		4,491			(351	)		(3,124	)
Interest:
Interest income		934			2,457			2,728
Interest expense		(1,941	)		(3,606	)		(4,355	)
Interest expense, net		(1,007	)		(1,149	)		(1,627	)
Total other income (expense), net		3,218			(629	)		394
Loss before income taxes		(16,556	)		(19,429	)		(10,742	)
Income taxes		490			283			114
Net loss	$	(17,046	)	$	(19,712	)	$	(10,856	)
Basic and diluted loss per common share:
Net loss	$	(0.12	)	$	(0.15	)	$	(0.09	)
Basic and diluted average common shares outstanding		138,080			132,529			124,801

See accompanying notes to consolidated financial statements.

53

TRANSWITCH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE LOSS

(dollars in thousands)

										Accumulated
					Common			Additional		other			Accumulated
	Common stock				stock held in			paid-in		comprehensive			earnings
	Shares		Amount		treasury			capital		(loss) income			(deficit)			Total
Balance at December 31, 2005		108,345,342	$	108	$	—		$	314,697	$	(28	)	$	(311,568	)	$	3,209
Comprehensive loss:
Net loss											—			(10,856	)		(10,856	)
Currency translation adjustment											432			—			432
Total comprehensive loss																	(10,424	)
Stock compensation		—		—					2,385		—			—			2,385
Shares of common stock issued in connection with common stock offering		13,766,667		14					18,856		—			—			18,870
Shares of common stock issued in connection with business acquisition		2,621,845		3					4,832		—			—			4,835
Shares of common stock issued under stock option and stock purchase plans		1,879,364		2					2,462		—			—			2,464
Shares of common stock issued upon exchange of 5.45% Convertible Plus Cash Notesdue 2007		1,500,000		1					2,714		—			—			2,715
Balance at December 31, 2006		128,113,218	$	128	$	—		$	345,946	$	404		$	(322,424	)	$	24,054
Comprehensive loss:
Net loss														(19,712	)		(19,712	)
Currency translation adjustment											454			—			454
Total comprehensive loss																	(19,258	)
Stock compensation		85,432		—					1,980		—			—			1,980
Shares of common stock issued in connection with business acquisition		3,746,713		4					5,541		—			—			5,545
Shares of common stock issued under stock option and stock purchase plans		1,153,069		1					1,346		—			—			1,347
Balance at December 31, 2007		133,098,432	$	133	$	—		$	354,813	$	858		$	(342,136	)	$	13,668
Comprehensive loss:
Net loss														(17,046	)		(17,046	)
Currency translation adjustment											(822	)		—			(822	)
Total comprehensive loss																	(17,868	)
Stock compensation		393,091		1					1,515		—			—			1,516
Shares of common stock issued in connection with business acquisition		25,000,000		25					24,925		—			—			24,950
Shares of common stock issued under stock option and stock purchase plans		182,817		—					131		—			—			131
Repurchase of 116,350 shares of common stock		—		—		(118	)		—		—			—			(118	)
Balance at December 31, 2008		158,674,340	$	159	$	(118	)	$	381,384	$	36		$	(359,182	)	$	22,279

See accompanying notes to consolidated financial statements.

54

TRANSWITCH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)
 

	Years ended December 31,
	2008			2007			2006
Operating activities:
Net loss	$	(17,046	)	$	(19,712	)	$	(10,856	)
Adjustments required to reconcile net loss to net cash flows used by operating activities, net of effects of acquisitions:
Depreciation and amortization		4,020			4,527			4,214
Amortization of debt discount and deferred financing fees		569			1,536			2,308
(Gain) loss on extinguishment of debt		(4,491	)		351			3,124
(Benefit) provision  for doubtful accounts		(87	)		150			27
Provision for excess and obsolete inventories		316			443			—
Non-cash restructuring charges		835			58			184
Stock-based compensation expense		1,516			1,970			2,395
Impairment of investments in non-publicly traded companies		—			109			—
Change in fair value of derivative liability		179			(980	)		(5,060	)
Loss on retirement of property and equipment		74			—			—
Reversal of accrued royalties		(198	)		—			—
Other non-cash items		15			—			—
Changes in operating assets and liabilities:
Accounts receivable		(3,452	)		(1,166	)		(1,838	)
Inventories		437			146			(682	)
Prepaid expenses and other assets		505			(118	)		585
Accounts payable		747			435			717
Accrued expenses and other current liabilities		(2,131	)		(124	)		(1,181	)
Obligation under deferred revenue		146			37			(562	)
Restructuring liabilities		(500	)		(423	)		(247	)
Net cash used by operating activities		(18,546	)		(12,761	)		(6,872	)
Investing activities:
Capital expenditures		(592	)		(3,884	)		(4,636	)
Investments in non-publicly traded companies		(65	)		(42	)		(1,996	)
Acquisition of business, net of cash acquired		7,369			(1,650	)		(769	)
Increase in restricted cash		(2,286	)		—			—
Purchases of short and long-term investments		(10,630	)		—			(4,921	)
Proceeds from sales and maturities of short and long-term investments		8,658			—			38,782
Net cash provided (used) by investing activities		2,454			(5,576	)		26,460
Financing activities:
Net proceeds from issuance of common stock		—			—			18,870
Issuance of common stock under employee stock plans		131			1,346			2,464
Payments to extinguish debt		(9,900	)		(8,908	)		(22,176	)
Proceeds from issuance of debt (net of fees)		—			1,901			—
Purchase of 166,350 shares of common stock for treasury		(118	)		—			—
Net cash used by financing activities		(9,887	)		(5,661	)		(842	)
Effect of exchange rate changes on cash and cash equivalents		(657	)		373			136
Change in cash and cash equivalents		(26,636	)		(23,625	)		18,882
Cash and cash equivalents at beginning of year		34,098			57,723			38,841
Cash and cash equivalents at end of year	$	7,462		$	34,098		$	57,723

See accompanying notes to consolidated financial statements.

55

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Note 1.    Business and Summary of Significant Accounting Policies

Description of Business

TranSwitch Corporation was incorporated in Delaware on April 26, 1988 and is headquartered in Shelton, Connecticut. TranSwitch Corporation and its subsidiaries (collectively, “TranSwitch” or the “Company”) design, develop, market and support highly integrated digital and mixed-signal semiconductor devices for the telecommunications and data communications markets.

Principles of Consolidation

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

Use of Estimates

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

Liquidity

The Company has incurred significant operating losses and used cash in its operating activities for the past several years. Operating losses have resulted from inadequate sales levels for the cost structure. The Company has made business acquisitions in each of the past three years to increase revenue. In addition, in the fourth quarter of 2008, the Company executed a significant restructuring to eliminate cost redundancies and enhance operating effectiveness. The Company’s management believes it now has an appropriate cost structure for its anticipated sales. As such, management believes that the Company will provide sufficient cash flows to fund its operations in the ordinary course of business through at least December 31, 2009. Of course 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, 2008 and 2007. The majority of the Company’s cash and cash equivalents balances are maintained with a limited number of major financial institutions. Cash and cash equivalents balances at institutions may, at times, be above the Federal Deposit Insurance Corporation insured limit of $0.25 million per account.

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

Fair Value of Financial Instruments

The carrying amounts for cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximate fair value. The fair value of the outstanding 5.45% Convertible Notes due 2010 was estimated at approximately $6.6 million and $20.6 million as of December 31, 2008 and December 31, 2007, respectively, based on current market conditions.

56

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

The fair value of investments in non-publicly traded companies is not readily determinable.

Inventories

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

Product Licenses

All product licenses were fully amortized as of December 31, 2008 and 2007.  Prior thereto product licenses were amortized using the greater of: (1) the amount computed using the ratio of a product’s current gross revenues to the product’s total of current and estimated future gross revenues; or (2) the straight-line method over the estimated useful life of the asset, generally three to five years, not to exceed the term of the license. Amortization of product licenses amounted to $0.2 million for  2006.

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. Costs incurred for assets being constructed or installed but not yet available for service at the balance sheet date are shown as construction in progress.

    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 twelve years.

Deferred Financing Costs

Deferred financing costs are being amortized using the interest method over the term of the related debt. Unamortized deferred financing fees were $0.4 million and $1.6 million as of December 31, 2008 and 2007, respectively. Amortization, included in the consolidated statement of operations as a component of interest expense, was $0.6 million, $0.5 million, and $0.4 million for 2008, 2007 and 2006, respectively.

Impairment of Intangibles and Long-Lived Assets

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

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, 2008 and 2007 are accounted for by the cost method.  These investments are reviewed periodically for impairment.

57

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

Revenue Recognition

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

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

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

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

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

          The Company licenses HDMI and other intellectual property.  Revenues from licensing arrangements generally consist of multiple elements such as license, implementation and maintenance services. The items (deliverables) included in the arrangement are evaluated pursuant to EITF Issue No. 00-21 “Revenue Arrangements with Multiple Deliverables” 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.

Allowance for Doubtful Accounts

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

Concentrations of Credit Risk

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

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

58

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

At December 31, 2008 and 2007, approximately 53% and 44% 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. The Company establishes an allowance for potentially uncollectable accounts based upon factors surrounding the credit risk of specific customers, historical payment trends and other information.

Product Warranties

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

Research and Development Costs

Research and development costs are expensed as incurred.

Income Taxes

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

Stock-Based Compensation

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

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, 2008, the unrecognized stock-based compensation cost related to non-vested option awards was $0.7 million and such amount will be recognized in operations over a weighted average period of 1.59 years.  As of December 31, 2008, the unrecognized stock-based compensation cost related to non-vested stock awards was $0.4 million and such amount will be recognized in operations over a weighted average period of 3.35 years.

Stock compensation charged to operations was $1.5 million in 2008, $2.0 million in 2007 and $2.4 million in 2006.

Loss Per Common Share

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

Foreign Currency Translation

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

59

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

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.

     Recent Accounting Pronouncements

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

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring the fair value of assets and liabilities, and expands disclosure requirements regarding the fair value measurement. SFAS 157 does not expand the use of fair value measurements. SFAS 157 also specifies a hierarchy of valuation techniques which requires an entity to maximize the use of observable inputs that may be used to measure fair value:

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

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

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

This statement, as issued, is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. FASB Staff Position (FSP) FAS No. 157-2 was issued in February 2008 and deferred the effective date of SFAS 157 for nonfinancial assets and liabilities to fiscal years beginning after November 2008. As such, the Company adopted SFAS 157 as of January 1, 2008 for financial assets and liabilities only. There was no significant effect on the Company’s financial statements. As of December 31, 2008, the Company’s financial assets included held to maturity investments in marketable securities and investments in non-publicly traded companies.

The Company considers fair value for its investments in held to maturity marketable securities and its investments in non-publicly traded companies for purposes of determining asset impairment losses. There were no impairment losses for the year ended December 31, 2008. As such, neither category of asset has been measured at fair value on a nonrecurring basis.

The Company does not believe that the adoption of SFAS 157 to non-financial assets and liabilities will significantly affect its financial statements.

60

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Liabilities—including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards which requires assets or liabilities to be carried at fair value. The objective of SFAS 159 is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Under SFAS 159, a company may elect to use fair value to measure eligible items at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Eligible items include, but are limited to, accounts receivable, accounts payable, and issued debt. If elected, SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company has not elected to measure any additional assets or liabilities at fair value that are not already measured at fair value under existing standards.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The Company will apply the provisions of SFAS 141 (R) to any acquisition after January 1, 2009.

In December 2007, the FASB issued SFAS No. 160, “Accounting for Noncontrolling Interests.” SFAS 160 clarifies the classification of noncontrolling interests in consolidated balance sheets and reporting transactions between the reporting entity and holders of noncontrolling interests. Under this statement, noncontrolling interests are considered equity and reported as an element of consolidated equity. Further, net income encompasses all consolidated subsidiaries with disclosure of the attribution of net income between controlling and noncontrolling interests. SFAS No. 160 is effective prospectively for fiscal years beginning after December 15, 2008. Currently, there are no noncontrolling interests in any of the Company’s subsidiaries.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” or SFAS 161, which requires additional disclosures about the objectives of using derivative instruments, the method by which the derivative instruments and related hedged items are accounted for under FASB Statement No. 133 and its related interpretations, and the effect of derivative instruments and related hedged items on financial position, financial performance, and cash flows. SFAS 161 also requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. The Company is currently assessing the impact that the adoption of SFAS 161 will have on its financial statement disclosures.

In April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” or FSP No. 142-3, to improve the consistency between the useful life of a recognized intangible asset (under SFAS No. 142) and the period of expected cash flows used to measure the fair value of the intangible asset (under SFAS No. 141(R)). FSP No. 142-3 amends the factors to be considered when developing renewal or extension assumptions that are used to estimate an intangible asset’s useful life under SFAS No. 142. The guidance in the new staff position is to be applied prospectively to intangible assets acquired after December 31, 2008. In addition, FSP No. 142-3 increases the disclosure requirements related to renewal or extension assumptions. The Company does not believe implementation of FSP No. 142-3 will have a material impact on its financial statements.

In June 2008, the FASB issued FASB Staff Position Emerging Issues Task Force (EITF) No. 03-6-1, “Determining whether Instruments granted in Share-Based Payment Transactions are Participating Securities” or FSP EITF No. 03-6-1.  Under FSP EITF No. 03-6-1, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. FSP EITF No. 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. It is not expected to have a significant impact on the Company’s financial statements.

In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies on the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The implementation of this standard will not have a material impact on the Company’s financial statements.

61

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

In June 2008, the FASB ratified EITF Issue No. 08-3, “Accounting for Lessees for Maintenance Deposits Under Lease Arrangements” (EITF 08-3). EITF 08-3 provides guidance for accounting for nonrefundable maintenance deposits. It also provides revenue recognition accounting guidance for the lessor. EITF 08-3 is effective for fiscal years beginning after December 15, 2008. The implementation of this standard will not have a material impact on the Company’s consolidated financial position and results of operations.

In September 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (FSP 133-1 and FIN 45-4). FSP 133-1 and FIN 45-4 amends and enhances disclosure requirements for sellers of credit derivatives and financial guarantees. It also clarifies that the disclosure requirements of SFAS No. 161 are effective for quarterly periods beginning after November 15, 2008, and fiscal years that include those periods. FSP 133-1 and FIN 45-4 is effective for reporting periods (annual or interim) ending after November 15, 2008. The implementation of this standard will not have a material impact on the Company’s consolidated financial position and results of operations.

In September 2008, the FASB ratified EITF Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value With a Third-Party Credit Enhancement” (EITF 08-5). EITF 08-5 provides guidance for measuring liabilities issued with an attached third-party credit enhancement (such as a guarantee). It clarifies that the issuer of a liability with a third-party credit enhancement (such as a guarantee) should not include the effect of the credit enhancement in the fair value measurement of the liability. EITF 08-5 is effective for the first reporting period beginning after December 15, 2008. The Company is currently assessing the impact of EITF 08-5 on its consolidated financial position and results of operations.

 In October 2008, the FASB issued FSP 157-3 “Determining Fair Value of a Financial Asset in a Market That Is Not Active” (FSP 157-3). FSP 157-3 clarified the application of SFAS No. 157 in an inactive market. It demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The implementation of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.

Note 2.    Acquisitions

On October 24, 2008, the Company acquired Centillium Communications, Inc. (“Centillium), a Delaware corporation. Centillium was a global company with headquarters in Fremont, CA and delivered highly innovative communications processing technology. The acquisition was financed with the issuance of 25,000,000 shares of the Company’s common stock with an approximate fair value of $25.0 million and $15.0 million of cash.  The Company incurred transaction costs of approximately $2.6 million which resulted in a total purchase price of approximately $42.6 million. In connection with the acquisition of Centillium, the Company implemented a worldwide reduction in Centillium’s workforce to be implemented and concluded during the fourth quarter of 2008 and the first quarter of 2009.  As such, the Company expects to incur cash expenditures of approximately $3.4 million primarily for employee related costs, $2.4 million of which was paid during 2008 and $1.0 million which is estimated to be paid in 2009.  Such costs were added to the Company’s purchase price of Centillium and allocated to the net assets acquired. The results of operations of Centillium have been included in the Company's consolidated financial results from October 24, 2008.  All significant inter-company balances and transactions have been eliminated. The acquisition was accounted for by the purchase method of accounting. The Company has allocated the cost to acquire Centillium to its identifiable tangible and intangible assets and liabilities, with the remaining amount classified as goodwill.  None of the amount allocated to goodwill is expected to be deductible for income tax reporting purposes.

On January 11, 2007, the Company acquired the ASIC Design Center Division of Data – JCE, an Israel-based publicly held electronics components distribution company.  The ASIC Design Center develops and sells customer-specific semiconductor products. The acquisition was financed with the issuance of 3,746,713 shares of the Company’s common stock with an approximate fair value of $5.5 million and $1.4 million of cash.  The Company incurred transaction costs of approximately $0.3 million which resulted in a total purchase price of approximately $7.2 million. Under the earn-out provisions of the ASIC Design Center acquisition agreement, the Company may have been required to pay up to an additional $14.5 million in the form of TranSwitch common stock or cash, at its option, if the ASIC Design Center achieved stipulated revenue and operating profit for 2007.  Such targets were not achieved. The results of operations of the ASIC Design Center have been included in the Company's consolidated financial results from January 11, 2007.  All significant inter-company balances and transactions have been eliminated. The acquisition was accounted for by the purchase method of accounting. The Company has allocated the cost to acquire the ASIC Design Center to its identifiable tangible and intangible assets and liabilities, with the remaining amount classified as goodwill.  None of the amount allocated to goodwill is expected to be deductible for income tax reporting purposes.

62

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

On January 30, 2006, the Company completed its acquisition of Mysticom Ltd. (“Mysticom”), an Israel-based, privately-held developer of high-performance, low-power, multi-Gigabit Ethernet transceivers for the communications industry.  The acquisition of Mysticom allows TranSwitch to integrate high-speed SerDes and PHY capabilities in the Company’s next generation of products as the market for 10-Gbps ports on telecommunications and data communications equipment grows. TranSwitch acquired all the capital stock of Mysticom through the issuance of 2,378,185 shares of TranSwitch common stock.  The common stock issued was valued at approximately $4.4 million ($1.85 per share).  The Company incurred transaction costs of approximately $1.0 million in conjunction with this acquisition, resulting in a total purchase price of approximately $5.4 million. Under the earn-out provisions of the Mysticom acquisition agreement, the Company could have paid up to an additional $10 million in the form of TranSwitch common stock or cash, upon Mysticom’s achievement of stipulated revenue objectives and a positive operating cash flow over the 12 month period ending January 30, 2007.  Based on the operating performance of Mysticom there was no earn-out provision payment. The results of operations of Mysticom have been included in the Company's consolidated financial results beginning on January 31, 2006, and all significant inter-company balances have been eliminated. The acquisition was accounted for under the purchase method of accounting.  The Company has allocated the cost to acquire Mysticom to its identifiable tangible and intangible assets and liabilities, with the remaining amount classified as goodwill.  None of the amount allocated to goodwill is expected to be deductible for tax reporting purposes.

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

				ASIC Design
	Centillium			Center			Mysticom
	2008			2007			2006
Current assets	$	34,246		$	400		$	1,317
Property, plant and equipment		709			36			369
Long-term investments		992			—			—
Other intangible assets  (1)		10,600			1,756			894
Goodwill		15,004			5,183			4,892
Obligation under deferred revenue		(23	)		(180	)		(625	)
Accounts payable & accrued expenses		(14,158	)		—			(1,408	)
Restructuring reserve		(4,798	)		—			—
Purchase price		42,572			7,195			5,439
Less:
Common stock issued		(24,950	)		(5,545	)		(4,399	)
Cash and cash equivalents acquired		(24,991	)		—			(271	)
Net cash (provided by) used for acquisitions	$	(7,369	)	$	1,650		$	769

(1)

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

63

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

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

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

The valuation of purchased intellectual property of Mysticom of $0.9 million was determined based on its estimated fair value at the acquisition date. The income approach, which includes an analysis of the cash flows and risks associated with achieving such cash flows, was the primary technique utilized in valuing the purchased intellectual property. The purchased intellectual property is primarily being amortized ratably, based upon the recognition of the associated license revenue.

Unaudited pro forma results for 2008, 2007 and 2006 assuming that Centillium was acquired as of January 1, 2007 and ASIC Design Center was acquired as of January 1, 2006 follows:  Net revenues of $58.3 million, $48.4 million and $43.7 million, respectively; net loss of $(31.3) million, $(46.5) million and $(10.4) million, respectively; and basic and diluted loss per common share of $(0.20), $(0.30) and $(0.08), respectively.

Note 3.  Restricted Cash

At December 31, 2008, the Company’s liquidity is affected by restricted cash balances of approximately $4.9 million, which are included in current assets and are not available for general corporate use. The Company has pledged the $3.1 million of cash as collateral for stand-by letters of credit that guarantee certain long-term property lease obligations and to support customer credit requirements.  The other $1.8 million of restricted cash is being held in escrow for one year as security for certain indemnification obligations of Centillium as a result of an asset sale agreement which Centillium had entered into in February of 2008.

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

The Company owns convertible preferred stock of Opulan Technologies Corp. (“Opulan”), a 3% limited partnership interest in Neurone II, a venture capital fund organized as a limited partnership and a 0.42% limited partnership interest in Munich Venture Partners Fund (“MVP”).  The Company accounts for these investments at cost.  The financial condition of these companies is subject to significant changes resulting from their operating performance and their ability to obtain financing.  The Company continually evaluates its investments in these companies for impairment. In making this judgment, the Company considers the investee’s cash position, projected cash flows (both short and long-term), financing needs, most recent valuation data, the current investing environment, management/ownership changes, and competition. This evaluation process is based on information that the Company requests from these privately held companies. This information is not subject to the same disclosure and audit requirements as the reports required of U.S. public companies, and as such, the reliability and accuracy of the data may vary. SFAS 157 was adopted as of January 1, 2008 to measure impairment, resulting in no additional charges.

As of December 31, 2005, the Company’s cost method investments were approximately $1.0 million, consisting of convertible preferred stock of Opulan of $0.7 million and a 3% limited partnership interest in Neurone II of $0.3 million.

During 2006, the Company made additional investments of approximately $2.0 million substantially all of which was invested in Opulan.

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

64

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

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

During 2008, the Company made additional investments of approximately $0.1 million in MVP and incurred no impairment charges related to investments in non-publicly traded companies. As of December 31, 2008, the Company’s cost method investments were approximately $3.0 million.

Note 5.    Inventories

The components of inventories follow:

	December 31,
	2008		2007
Raw material	$	315	$	401
Work-in-process		1,503		992
Finished goods		2,686		1676
Total inventories	$	4,504	$	3,069

Note 6.    Property and Equipment, Net

The components of property and equipment follow:

	Estimated	December 31,
	Useful Lives	2008			2007
Purchased computer software	1-3 years	$	28,200		$	29,220
Computers and equipment	3-7 years		13,730			13,102
Furniture	3-7 years		2,488			2,761
Leasehold improvements	Lease term*		938			1,039
Construction-in-progress (software and equipment)			25			2,300
Gross property and equipment		$	45,381		$	48,422
Accumulated depreciation and amortization			(43,352	)		(43,306	)
Property and equipment, net		$	2,029		$	5,116

* Estimated useful life of improvement if shorter.

Depreciation expense was $3.3 million, $3.9 million, and $3.5 million, for 2008, 2007 and 2006, respectively.

65

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

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, 2006	$	4,892
Business acquisition – ASIC Design Center		5,183
Balance at December 31, 2007		10,075
Business acquisition - Centillium		15,004
Balance at December 31, 2008	$	25,079

	Other Intangible Assets
	Developed Technology			Customer Relationships			Total
Balances at December 31, 2008
Cost	$	3,014		$	9,557		$	12,571
Accumulated amortization		(293	)		(824	)		(1,117	)
	$	2,721		$	8,733		$	11,454
Balances at December 31, 2007
Cost	$	214		$	1,756		$	1,970
Accumulated amortization		(137	)		(350	)		(487	)
	$	77		$	1,406		$	1,483
Asset additions:
2008
Cost	$	2,800		$	7,800		$	10,600
Weighted average amortization period	6.3 years			12 years			10.5 years
2007
Cost	$	—		$	1,756		$	1,756
Weighted average amortization period		—		5 years			5 years

Amortization expense related to “Other intangible assets” was $0.6 million in 2008 and $0.4 million in 2007.  Future estimated aggregate amortization expense for such assets for each of the five years succeeding December 31, 2008 follows: 2009 - $1.5 million; 2010 - $1.5 million; 2011 - $1.5 million; 2012 - $1.1 million and 2013 - $1.1 million.

Note 8    Accrued Expenses and Other Current Liabilities

The components of accrued and other current liabilities follow:

	December 31,
	2008		2007
Accrued and other current liabilities	$	5,578	$	3,517
Accrued royalties		6,664		147
Accrued compensation and benefits		3,815		2,207
Restructuring liabilities		5,725		844
Obligation under deferred revenue		449		280
Total accrued and other current liabilities	$	22,231	$	6,995

66

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

The Company periodically evaluates any contingent liabilities in connection with any payments to be made for any potential intellectual property infringement asserted or unasserted claims in accordance with FAS 5, “Accounting for Contingencies”. The Company’s accrued royalties as of December 31, 2008 and 2007 represents the contingent payments for asserted or unasserted claims that are probable as of the respective balance sheet dates based on the applicable patent law.

Note 9.    Segment and Major Customer Information

The Company has one business segment: communication semiconductor products.  Its VLSI semiconductor devices provide core functionality of communications network equipment. The integration of various technologies and standards in these devices result in a homogeneous product line for management and measurement purposes.

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,
	2008		2007		2006
Net revenues:
Israel	$	10,937	$	5,193	$	2,670
China		6,943		7,468		8,630
United States		6,122		6,943		9,674
Japan		4,813		501		858
Korea		2,467		1,773		1,960
Hong Kong		1,495		71		747
Italy		1,324		224		—
Belgium		1,166		168		728
Germany		1,163		4,055		3,610
Singapore		1,155		838		1,207
Other countries		4,349		5,331		8,836
Total	$	41,934	$	32,565	$	38,920

	As of December 31,
	2008		2007		2006
Long-lived tangible assets:
United States	$	1,261	$	3,952	$	4,086
Other countries		2,089		2,071		2,069
Total	$	3,350	$	6,023	$	6,155

67

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

Information about Major Customers

The Company ships its products to distributors and directly to end customers. The following table sets forth the percentage of net revenues attributable to the Company’s significant customers:

	Years ended December 31,
	2008			2007			2006
Significant Customers:
PMC Sierra Israel		21	%		*			*
Alcatel-Lucent		18	%		17	%		11	%
Nokia Siemens		*			16	%		11	%

* Revenues were less than 10% of the Company’s net revenues in these years.

Note 10.    Income Taxes

          The Company adopted FIN 48, “Accounting for Uncertainty in Income Taxes”, effective January 1, 2007.  FIN 48 clarifies and sets forth consistent rules for accounting for uncertain income tax positions in accordance with FAS 109 “Accounting for Income Taxes”. There was no cumulative effect of applying the provisions of this interpretation upon adoption due to the net operating loss and valuation allowance positions of the Company.  Changes in unrecognized tax benefits follow:

Balance at January 1, 2007	$	5,356
Increases related to current year tax positions		747
Balance at December 31, 2007	$	6,103
Increases related to prior year tax positions		141
Decreases related to prior year tax positions		(351	)
Balance at December 31, 2008	$	5,893

          Due to the Company’s net operating loss position in the U.S., any subsequent recognition of these tax benefits would not likely change the Company’s effective tax rate. The Company does not reasonably expect any significant changes in the amount of unrecognized tax benefits to occur within the next year.

          Historically the Company has not accrued or paid significant interest and penalties for underpayments of income taxes due to its net operating loss position.  Interest and penalties related to underpayment of income taxes would be classified as a component of income tax expense in the consolidated statement of operations.  Approximately $119,000 of interest has been recognized in the balance sheet of the Company through December 31, 2008. This amount has been recorded as a part of goodwill, therefore, no interest expense related to this uncertainty has been included in the consolidated statement of operations.

          The Company files income tax returns in the U.S. and several foreign countries and has not extended the statute of limitations to assess additional taxes for any of these jurisdictions.  The Company has effectively settled U.S. Federal tax positions taken through 2002 in accordance with FSP FIN 48-1.  However, the Company is subject to adjustment in each of these periods, to the extent of its net operating loss carry forwards.  The open tax years for foreign jurisdictions are 2002 through 2008 and 1997 through 2008 for U.S. state and local jurisdictions.

The components of the loss before income taxes follow:

	Years Ended December 31,
	2008			2007			2006
U.S. loss	$	(17,405	)	$	(19,874	)	$	(10,389	)
Foreign income (loss)		849			445			(353	)
Loss before income taxes	$	(16,556	)	$	(19,429	)	$	(10,742	)

68

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

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

A reconciliation of the U.S. federal statutory rate to the effective income tax rate follows:

	Years Ended December 31,
	2008			2007			2006
U.S. federal statutory tax rate		(35.0	)%		(35.0	)%		(35.0	)%
State taxes		(9.5	)		0.6			12.6
Disallowed interest deduction		-			3.6			6.9
Change in valuation allowance		42.0			27.4			13.7
Permanent differences, tax credits and other adjustments		4.4			4.7			2.9
Effective income tax rate		1.9	%		1.3	%		1.1	%

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

	2008			2007
Deferred income tax assets:
Property and equipment	$	1,882		$	526
Other nondeductible accruals		388			249
Restructuring accrual		10,031			7,894
Capitalized research and development for tax purposes		21,296			15,082
Investment impairment		—			50
Net operating loss carry-forwards		142,678			81,320
Capital losses		15,263			15,307
Research and development and other credits		21,762			11,556
Debt discount		68			—
Inventories		14,735			14,311
Stock compensation		2,242			1,618
Other		360			1,424
Total gross deferred income tax assets		230,705			149,337
Valuation allowance		(229,586	)		(148,250	)
Net deferred income tax assets		1,119			1,087
Deferred income tax liabilities:
Other		(1,119	)		(1,087	)
Net deferred income tax liabilities		(1,119	)		(1,087	)
Net deferred income taxes	$	—		$	—

69

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

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, 2008 and 2007. Of the $229.6 million valuation allowance at December 31, 2008, subsequently recognized income tax benefits, if any, in the amount of $4.7 million will be applied directly to additional paid-in capital and $72.0 million to goodwill.

At December 31, 2008, the Company had available, for federal income tax purposes, net operating loss (“NOL”) carry-forwards of approximately $401 million, capital loss carry-forwards of approximately $40.7 million and research and development tax credit carry-forwards of approximately $21.7 million expiring in varying amounts from 2008 through 2027. For state income tax purposes, the Company had available NOL carry-forwards of approximately $159.9 million, capital loss carry-forwards of $40.7 million and state tax credit carry-forwards of $5.4 million expiring in varying amounts from 2008 to 2026.

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 $162.9 million of the NOL carry-forwards and $11.4 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 2008 will be subject to limitation under Section 382.

Note 11.    Stockholders’ Rights Plan

On October 1, 2001, the Board of Directors enacted a stockholder rights plan and declared a dividend of one preferred share purchase right for each outstanding share of TranSwitch common stock outstanding at the close of business on October 1, 2001 to the stockholders of record on that date. Each stockholder of record as of October 1, 2001 received a summary of the rights and any new stock certificates issued after the record date contain a legend describing the rights. Each preferred share purchase right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share, of the Company, at a price of $50.00 per one one-thousandth of a Preferred Share, subject to adjustment, upon the occurrence of certain triggering events, including the purchase of 15% or more of the Company’s outstanding common stock by a third party. Until a triggering event occurs, the common stockholders have no right to purchase shares under the stockholder rights plan. If the right to purchase the preferred stock is triggered, the common stockholders will have the ability to purchase sufficient stock to significantly dilute the 15% or greater holder.

Note 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 1,000,000 shares of common stock. Shares issued under the 2005 ESPP in 2008, 2007, and 2006 were 82,191, 101,844, and 89,077 respectively.

 Stock Option and Award Plans

As of December 31, 2008, the Company has three stock options plans: the 1995 Stock Plan, as amended (the “1995 Plan”), 2000 Stock Option Plan as amended (the “2000 Plan”), and the 2008 Equity Incentive Plan (the ‘2008 Plan”). The 1995 Non-Employee Director Stock Option Plan, as amended (the “Director Plan”) expired during 2005.

Under the 1995 Plan, 31,400,000 shares of the Company’s common stock are available to grant to employees in the form of incentive stock options.  Also, non-qualified stock options and stock awards may be granted to employees, consultants and directors.  The terms of the options granted are subject to the provisions of the 1995 Plan, as determined by the Compensation Committee of the Board of Directors.  The exercise price of options under the 1995 Plan must be equal to the fair market value of the common stock on the date of grant.  Options granted under the 1995 Plan are generally nontransferable. The 1995 Plan, as amended, expires March 15, 2010.  In connection with the adoption of the 2008 Plan on May 22, 2008, shares are no longer available for grant under the 1995 Plan.

70

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

The 2000 Plan provides for the granting of non-qualified options to employees and consultants to purchase up to an aggregate of 10,000,000 shares of common stock.  No member of the Board of Directors or executive officers appointed by the Board of Directors is eligible for grants of options under the 2000 Plan. The terms of the options granted are subject to the provisions of the 2000 Plan, as determined by the Compensation Committee of the Board of Directors. Each non-qualified stock option shall either be fully exercisable on the date of grant or shall become exercisable thereafter in such installments as the Board of Directors may specify. The 2000 Plan will terminate in 2010. No option granted under the 2000 Plan may be exercised after the expiration of seven years from the date of grant. The exercise price of options under the 2000 Plan must be equal to the fair market value of the common stock on the date of grant. Options granted under the 2000 Plan are generally nontransferable. In connection with the adoption of the 2008 Plan on May 22, 2008, shares are no longer available for grant under the 2000 Plan.

          The 2008 Plan was approved by shareholders at the shareholder meeting held on May 22, 2008.  The purpose of this plan is to provide stock options, stock issuances, and other equity interests in the Company to employees, officers, directors, consultants, and advisors to the Company and its subsidiaries or any future parent corporation. The 2008 Plan is to be administered by the Board of Directors of the Company who will have sole discretion and authority to interpret and correct the provisions of the Plan and any Award. The Board will also have sole authority to determine the terms and provisions of the respective Stock Option Agreements and Awards, which need not be identical.  The aggregate number of shares of Common Stock of the Company that may be issued pursuant to the 2008 Plan is 15,000,000. As of December 31, 2008, there were 4,317,261 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, 2005		25,441,094		$	8.09
Granted and assumed		2,814,959			1.80
Exercised		(1,790,287	)		1.30
Canceled, forfeited or expired		(2,215,577	)		10.09
Outstanding at December 31, 2006		24,250,189			7.69
Granted and assumed		1,954,243			1.49
Exercised		(1,051,225	)		1.17
Canceled, forfeited or expired		(5,636,359	)		17.49
Outstanding at December 31, 2007		19,516,848			4.58
Granted		4,495,352			0.51
Assumed		6,762,866			1.66
Exercised		(100,626	)		0.69
Canceled, forfeited or expired		(7,725,397	)		7.66
Outstanding at December 31, 2008		22,949,043		$	1.92

Information regarding restricted stock awards follows:

Outstanding at December 31, 2007	-			0.000
Granted	-			0.001
Assumed	1,456,815			0.001
Released	(17,076	)		0.001
Canceled, forfeited or expired	(335,441	)		0.001
Outstanding at December 31, 2008	1,104,298		$	0.001

71

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

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, 2008 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
$	0.28  to   1.12		6,736,663		5.31	$	0.64		2,935,670	$	0.83
	1.14  to   1.50		4,085,037		3.63		1.38		3,568,903		1.39
	1.53  to   1.65		3,670,225		3.96		1.60		3,325,071		1.60
	1.66  to   2.47		5,030,070		3.67		1.92		4,845,269		1.92
	2.50  to   3.39		1,467,211		3.81		3.08		1,464,894		3.08
	3.80  to   8.54		983,008		0.17		4.73		983,008		4.73
	8.70 to 11.04		973,829		0.37		9.42		973,829		9.42
	51.25 to 51.25		3,000		0.71		51.25		3,000		51.25
$	0.28  to 51.25		22,949,043		3.91	$	1.92		18,099,644	$	2.24

Stock options generally expire five, seven or ten years from the date of grant and generally vest ratably over periods ranging from immediately to four years.

As of December 31, 2008 both the fair value of options outstanding and the fair value of options exercisable were less than the exercise price.

Stock compensation charged to operations was $1.5 million in 2008, $2.0 million in 2007, and $2.4 million in 2006. Further, no compensation cost was capitalized as part of inventory, and no income tax benefit was recognized in those years. Lastly, no equity awards were settled in cash.

Stock-Based Compensation Fair Value Disclosures

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	2008			2007			2006
Risk-free interest rate		1.82	%		4.62	%		4.83	%
Expected life in years		2.95			3.38			3.46
Expected volatility		68.21	%		91.98	%		94.52	%
Expected dividend yield		—			—			—

The weighted average fair value of stock options granted, calculated using the Black-Scholes option-pricing model, is $0.12, $0.93 and $1.15 for 2008, 2007 and 2006, respectively. The total intrinsic value of the options exercised was $0.02 million, $0.5 million, and $1.2 million for 2008, 2007 and 2006, respectively. In 2008, restricted stock units released had an intrinsic value of approximately five thousand dollars.

72

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

The Company recognized compensation expense related to stock options granted to non-employees of $0.03 million in 2008, $0.1 million in 2007 and less than $0.1 million in 2006.

            In December 2005, the Company’s Board of Directors approved the acceleration of the vesting of certain stock options held by current non-officer employees with two or more years of employment with the Company. As a result, stock options to purchase approximately 1.5 million shares that would have vested from time to time to December 2009 became immediately exercisable. As such, the Company recorded compensation expense of approximately $0.3 million in the fourth quarter of 2005. The accelerated vesting reduces the amount of compensation expense that the Company would have otherwise been required to recognize in 2006 and later upon the adoption effective January 1, 2006 of SFAS 123R. The reduction in compensation expense for 2006 was approximately $0.5 million.

Employee 401(k) Plan

The TranSwitch Corporation 401(k) Retirement Plan (the “Plan”) provides tax-deferred salary deductions for eligible employees. Employees may contribute an annual maximum amount as set periodically by the Internal Revenue Service. The Company provides matching contributions equal to 50% of the employees’ contributions, up to a maximum of 6% of the employee’s annual compensation. Company contributions begin vesting after two years and are fully vested after three years. Contribution expense related to the Plan was $0.2 million, $0.2 million and $0.3 million for 2008, 2007 and 2006, respectively.

Note 13.    Convertible Notes

In 2006, the Company issued an aggregate of 1,500,000 shares of the Company’s common stock plus approximately $22.2 million cash in exchange for $24.6 million aggregate original principal amount of its then outstanding 5.45% Convertible Plus Cash Notes due September 30, 2007 (the “Plus Cash Notes”) and accrued interest. As a result of these exchanges, the Company recorded an extinguishment loss of approximately $3.1 million in 2006, including non-cash write-offs of unamortized debt discount and deferred debt issuance costs.

On July 6, 2007, the Company exchanged approximately $21.2 million aggregate principal amount of its outstanding Plus Cash Notes for an equivalent principal amount of a new series of 5.45% Convertible Notes due September 30, 2010 (the “2010 Notes”). The remaining $8.9 million balance of the 2007 Plus Cash Notes were redeemed at par value for cash at the end of September, 2007. In connection with the exchange the Company recorded an extinguishment loss of approximately $0.4 million, including a non-cash write-off of unamortized debt discount and deferred debt issuance costs.

Also on July 6, 2007, the Company issued for an equal amount of cash an additional $3.8 million aggregate principal amount of 2010 Notes.  At December 31, 2007, the Company had $25.0 million of the 2010 Notes outstanding.

On December 24, 2008, the Company entered into an agreement with certain holders of its 2010 Notes to purchase $15.0 million aggregate principal amount of the 2010 Notes for $9.9 million in cash, plus accrued and unpaid interest.  As a result of this transaction, the Company recorded an extinguishment gain of $4.5 million, net of a non-cash write-off of unamortized deferred debt issuance costs.  As of December 31, 2008, $10.0 million of the 2010 Notes remained outstanding.

          The 2010 Notes are redeemable at par value by the Company at any time after July 6, 2009, provided that the closing price per share of the Company’s common stock as reported on the Nasdaq Capital Market exceeds 150% of the conversion price for at least 20 trading days within a period of 30 consecutive trading days, and the Company provides notice of redemption to the holders of the 2010 Notes.

Upon the occurrence of a change of control, as defined, each of the holders of the 2010 Notes has the right to require the Company to repurchase all or a portion of such holder’s 2010 Notes at a purchase price equal to 100% of the principal amount plus interest, accrued and unpaid to the date of such repurchase.   Also, prior to July 6, 2010, if the 2010 Notes are converted in connection with a change of control, where 10% or more of the consideration paid for the Company’s common stock consists of cash or securities that are not traded or scheduled to be traded on a United States national securities exchange, then in addition to the shares of the Company's common stock that such holder would be entitled to receive upon such conversion, the Company is required to pay a make-whole payment in cash to such holder.

73

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

Upon the occurrence of certain events of default, the trustee or the holders of at least 25% in principal amount of the then-outstanding 2010 Notes may declare the principal of, and accrued but unpaid interest on the 2010 Notes immediately due and payable. Certain such events of default include failure to make payments of principal, failure to make payments of interest, failure to comply with certain covenants and agreements, failure to file certain periodic reports, and certain events of bankruptcy or insolvency. The Indenture governing the terms of the 2010 Notes also contains certain covenants that limit, among other things, the Company’s ability to incur additional debt.

Initially, each $1,000 principal amount of the 2010 Notes is convertible into 472 common shares or $2.118 per share of common stock. The conversion rate is subject to adjustment upon the occurrence of certain events, including, the issuance of a common stock or cash dividend or distribution of securities, cash or assets, certain subdivisions and combinations of the Company’s common stock, where the fair market value of a tender or exchange offer exceeds certain amounts, or if the Company’s September 30, 2008 trailing twelve month net income was less than $0.00.  The Company may increase the conversion rate by any amount for any period of time if the period is at least twenty (20) days and the Board of Directors has made the determination that such increase would be in the Company’s best interest. Under no circumstances, may the conversion rate be adjusted to less than $1.83.

Note 14.    Restructuring and Asset Impairment Charges

During 2008 the Company implemented restructuring plans that resulted in total restructuring costs of approximately $7.2 million, of which approximately $3.8 million was recorded as restructuring charges in its Consolidated Statements of Operations and $3.4 million was recorded as a liability assumed in the acquisition of Centillium.  These restructuring plans included the elimination of approximately 76 positions, primarily in the Company’s Shelton, Connecticut, Bedford, Massachusetts, Fremont, California, Eclubens, Switzerland, New Delhi, India and Bangalore, India locations.  As a result, the Company recorded restructuring charges in its Consolidated Statements of Operations of approximately $1.7 million related to employee termination benefits, $0.8 million related to asset impairments, $0.7 million related to excess facility costs net of anticipated sublease income and $0.8 million in other restructuring charges.  These 2008 charges were partially offset by approximately $0.2 million of benefits related to adjustments to certain sublease agreements relating to the Company’s excess facilities in Shelton, Connecticut

In connection with the restructuring events of 2008, the Company expects that approximately $6.3 million of the $7.2 million in restructuring costs will require cash expenditures. In 2008, the Company made payments of approximately $2.9 million in connection with these plans. The Company expects future cash expenditures to be made as follows: $3.3 million in 2009 and $0.1 million in 2010.

During 2007 the Company recorded restructuring charges of approximately $1.5 million related to workforce reductions.

During 2006the Company recorded restructuring charges of approximately $0.4 million including $0.2 million of additional costs for changes in estimates for restructuring actions taken at the Company’s European design centers in 2004 and 2005, and $0.2 million for changes in estimates relating to subleases at the Company’s facilities in Shelton, Connecticut.

A summary of the restructuring liabilities and activity follows:

			2008 Activity
	Restructuring Liabilities December 31, 2007		Liabilities assumed in acquisition of business		Restructuring Charges		Cash Payments			Non-cash asset write-offs			Adjustments and Changes to Estimates			Restructuring Liabilities December 31, 2008
Employee Termination Benefits	$	235	$	3,071	$	1,740	$	(3,080	)	$	—		$	(36	)	$	1,930
Facility lease costs		20,731		1,686		728		(346	)		—			(265	)		22,534
Asset impairments		—		42		835		—			(877	)		—			—
Other		124		—		783		(1	)		—			19			925
Totals	$	21,090	$	4,799	$	4,086	$	(3,427	)	$	(877	)	$	(282	)	$	25,389

74

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

	2007 Activity
	Restructuring Liabilities December 31, 2006		Restructuring Charges		Cash Payments			Non-cash asset write-offs			Adjustments and Changes to Estimates			Restructuring Liabilities December 31, 2007
Employee Termination Benefits	$	—	$	1,482	$	(1,193	)	$	—		$	(54	)	$	235
Facility lease costs		21,370		—		(600	)		—			(39	)		20,731
Other		143		—		—			(58	)		39			124
Totals	$	21,513	$	1,482	$	(1,793	)	$	(58	)	$	(54	)	$	21,090

Note 15.    Commitments and Contingencies

Lease Agreements

The Company leases buildings and equipment at its headquarters in Shelton, Connecticut as well as at its subsidiaries’ locations worldwide.  Rental expense under all operating lease agreements was $2.0 million in 2008, $1.7 million in 2007 and $1.7 million in 2006.

The following table summarizes as of December 31, 2008 future minimum operating lease commitments, including contractually obligated building operating commitments that have remaining, non-cancelable lease terms in excess of one year and future anticipated sublease income:

	Operating Commitments		Less: Sublease Agreements		Net Commitments
2009	$	6,178	$	2,132	$	4,046
2010		5,600		1,344		4,256
2011		4,667		683		3,984
2012		4,632		521		4,111
2013		3,523		-		3,523
Thereafter		9,615		-		9,615
	$	34,215	$	4,680	$	29,535

75

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

 Refer to Note 19 of the Notes to Consolidated Financial Statements, which provides information on subsequent events that will have an impact on the Company’s future minimum operating lease commitments.

Patent Indemnity

Under the terms of substantially all of its sales agreements, the Company has agreed to indemnify its customers for costs and damages arising from claims against such customer based on, among other things, allegations that the Company’s products infringed upon the intellectual property rights of a third party. In the event of an infringement claim, the Company retains the right to (i) procure for the customer the right to continue using the product; (ii) replace the product with a non-infringing item which shall give equally good service; (iii) modify the product so that it becomes non-infringing; or (iv) remove the product and, on return of the product to the Company, the Company shall refund the buyers purchase price. Due to the nature of these indemnification agreements, the maximum potential future payments the Company could be required to make under these guarantees, when and if such claims may arise, cannot be reliably determined. No amounts have been accrued for any estimated losses with respect to these guarantees for customer indemnifications since it is not probable that a loss will be incurred. No claims have been made under these indemnity provisions.

Purchase Commitments

In the normal course of business, the Company makes various commitments to purchase goods or services from specific suppliers, including those related to capital expenditures. As of December 31, 2008, the Company had purchase commitments totaling $6.4 million

Note 16.    Supplemental Cash Flow Information

Supplemental cash flow information follows:

	Years Ended December 31,
	2008		2007		2006
Cash paid for interest	$	1,554	$	1,705	$	2,136
Cash paid for income taxes	$	340	$	373	$	322

Non-cash investing and financing activities include:  

Common stock issued in acquisitions	$	24,950	$	5,541	$	4,832
Common stock issued upon conversion of Plus Cash Notes	$	—	$	—	$	2,714

Note 17.    Issuance of Common Stock

During 2008, in connection with the Centillium acquisition, the Company issued 25,000,000 shares of its common stock with an approximate fair value of $25.0 million.

In connection with the ASIC Design Center acquisition in 2007 the Company issued 3,746,713 shares of its common stock with an approximate fair value of $5.5 million.

Note 18.   Stock Repurchase Program

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

76

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

During 2008, the Company purchased 166,350 shares of its outstanding common stock at an average price of $0.68 per share or approximately $0.1 million, excluding commissions.

Note 19.    Subsequent Events

On March 2, 2009, the Company issued a press release reporting that it has reached an agreement to reduce its leased office space by 24,000 square feet by amending its lease covering the company’s principal executive offices at 3 Enterprise Drive, Shelton, Connecticut.  The lease amendment will result in a cash savings of the Company’s lease obligation, through November 2012, by approximately $1.5 million.

On March 6, 2009, the Company announced that it entered into a sublease agreement (the “Sublease Agreement”) on March 3, 2009 with an unaffiliated party to sublease 92,880 square feet of the Company’s office space in Shelton, Connecticut (the “Sublease Premises”). The term of the Sublease Agreement shall commence on a date no later than August 14, 2009 (the “Commencement Date”).  The initial term of the Sublease Agreement shall expire sixty-one (61) full months after the Commencement Date.  Base rent for the Subleased Premises is One Hundred Twelve Thousand, Two Hundred Thirty Dollars ($112,230.00) per month. As a result of the Sublease Agreement, the Company expects to reverse approximately $6.7 million of its previously accrued restructuring liability during the first quarter of the fiscal year ending December 31, 2009.

Note 20.    Quarterly Information (Unaudited)

The table below shows selected unaudited quarterly information of operating results. The Company believes that this information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. Interim operating results are not necessarily indicative of future period results.

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Full Year
Year ended December 31, 2008
Net revenues	$	7,520		$	8,891		$	10,498		$	15,025		$	41,934
Cost of revenues		2,935			3,549			4,517			7,039			18,040
Gross profit		4,585			5,342			5,981			7,986			23,894
Net loss		(5,494	)		(4,320	)		(2,956	)		(4,276	)		(17,046	)
Net loss per common share (1):
Basic	$	(0.04	)	$	(0.03	)	$	(0.02	)	$	(0.03	)	$	(0.12	)
Diluted	$	(0.04	)	$	(0.03	)	$	(0.02	)	$	(0.03	)	$	(0.12	)
Year ended December 31, 2007
Net revenues	$	9,286		$	8,875		$	7,234		$	7,170		$	32,565
Cost of revenues		3,165			3,530			2,553			3,146			12,394
Gross profit		6,121			5,345			4,681			4,024			20,171
Net loss		(5,216	)		(4,405	)		(4,480	)		(5,611	)		(19,712	)
Net loss per common share (1):
Basic	$	(0.04	)	$	(0.03	)	$	(0.03	)	$	(0.04	)	$	(0.15	)
Diluted	$	(0.04	)	$	(0.03	)	$	(0.03	)	$	(0.04	)	$	(0.15	)

(1)  The sum of quarterly per share amounts may not equal per share amounts reported for year-to-date periods due to changes in the number of weighted average shares outstanding and the effects of rounding.

(2)  The reported net loss for 2008 and 2007 reflects stock-based compensation expense of $1.5 million (Q1 of $0.4 million, Q2 of $0.3 million, Q3 of $0.3 million and Q4 of $0.5 million) and $2.0 million (Q1 of $0.4 million, Q2 of $0.7 million, Q3 of $0.4 million and Q4 of $0.5 million), respectively.

77

SCHEDULE II

TRANSWITCH CORPORATION

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

			Additions
Description	Balance at Beginning of Year		Charges to Costs and Expenses			Charges to Other Accounts		Deductions			Balance at End of Year
Year ended December 31, 2008:
Allowance for losses on:
Accounts receivable	$	623	$	(3	)	$	17	$	(101	)	$	536
Sales returns and allowances		99		261			151		(360	)		151
Stock rotation		60		27			—		(43	)		44
Deferred income tax assets valuation allowance		148,250		9,263			72,073		—			229,586
	$	149,032	$	9,548		$	72,241	$	(504	)	$	230,317
Year ended December 31, 2007:
Allowance for losses on:
Accounts receivable	$	473	$	118		$	32	$	—		$	623
Sales returns and allowances		37		322			—		(260	)		99
Stock rotation		75		34			—		(49	)		60
Deferred income tax assets valuation allowance		142,791		5,459			—		—			148,250
	$	143,376	$	5,933		$	32	$	(309	)	$	149,032
Year ended December 31, 2006:
Allowance for losses on:
Accounts receivable	$	446	$	27		$	—	$	—		$	473
Sales returns and allowances		45		542			—		(550	)		37
Stock rotation		671		(523	)		—		(73	)		75
Warranty		150		(150	)		—		—			—
Deferred income tax assets valuation allowance		141,029		1,762			—		—			142,791
	$	142,341	$	1,658		$	—	$	(623	)	$	143,376

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     None.

Item 9A.    Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the evaluation date, our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

78

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.

The independent registered public accounting firm of the Company has issued a report on its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008.  That report appears under Item 8.

Changes in Internal Control over Financial Reporting

 No change in our internal control over financial reporting occurred during the quarter ended December 31, 2008, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.    Other Information

    None.

79

PART III

Item 10.    Directors, Executive Officers and Corporate Governance

Information with respect to directors, the Audit Committee of the Board of Directors, Audit Committee financial experts and named executive officers is incorporated herein by reference to the section entitled Proposal No. 1 “Election of Directors”, “Audit Committee Report” and “Compensation and Other Information Concerning Named Executive Officers”, respectively, contained in our definitive proxy statement for the annual meeting of shareholders of the Company to be held on May 21, 2009, which is to be filed with the Securities and Exchange Commission not later than 120 days after the close of the year ended December 31, 2008.Information concerning Section 16(a) compliance is incorporated by reference to the section of our definitive proxy statement entitled “Section 16(a) Beneficial Ownership Reporting Compliance.”

Code of Ethics

The Company has a code of ethics that applies to all its directors, officers, employees and representatives. This code is publicly available at the investor relations section of the Company’s website located at http://www.transwitch.com. Amendments to the code of ethics and any grant of a waiver from a provision of the code requiring disclosure under applicable SEC rules will be disclosed within the investor relations section of the Company’s website located at http://www.transwitch.com.   These materials may also be requested in print by writing to the Company’s Investor Relations Department at TranSwitch Corporation, Attention: Investor Relations, Three Enterprise Drive, Shelton, CT 06484.

Corporate Governance Principles and Charters

The Company’s corporate governance principles and the charters of its Board of Directors’ Audit and Finance Committee, Nominations and Corporate Governance Committee and Compensation Committee are available at the investor relations section of the Company’s website at http://www.transwitch.com. These materials may also be requested in print by writing to the Company’s Investor Relations Department at TranSwitch Corporation, Attention: Investor Relations, Three Enterprise Drive, Shelton, CT 06484.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors, executive officers, and persons who own more than ten percent of a registered class of the Company’s equity securities to file reports of ownership and changes in ownership with the SEC, and such persons are also required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.  Based solely on its review of the copies of such forms received by it, the Company believes that during fiscal 2008 all executive officers, board members and greater than ten percent stockholders of the Company complied with all applicable filing requirements, with the exception of Thomas Baer, who filed a Form 4 on May 28, 2008 to report a stock option grant on becoming a director of the Company on May 22, 2008. This Form 4 was due on May 27, 2008 and was late due to delays in registering with the Securities and Exchange Commission.

Item 11.    Executive Compensation

Information with respect to executive compensation is incorporated herein by reference to the section entitled “Compensation and Other Information Concerning Named Executive Officers” contained in our definitive proxy statement for the annual meeting of shareholders of the Company to be held on May 21, 2009 which is to be filed with the Securities and Exchange Commission not later than 120 days after the close of the year ended December 31, 2008.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information regarding security ownership of certain beneficial owners, directors and executive officers is incorporated herein by reference to the information in the section entitled “Security Ownership of Certain Beneficial Owners and Management”, “Related Party Transactions” and “Indemnification Matters” contained in our definitive proxy statement for the annual meeting of shareholders of the Company to be held on May 21, 2009 which is to be filed with the Securities and Exchange Commission not later than 120 days after the close of the year ended December 31, 2008.

80

Item 13.    Certain Relationships and Related Transactions, and Director Independence

Information regarding certain relationships and related transactions of the Company is incorporated herein by reference to the sections entitled “Compensation Committee Interlocks and Insider Participation” and “Related Party Transactions” contained in our definitive proxy statement for the annual meeting of shareholders of the Company to be held on May 21, 2009 which is to be filed with the Securities and Exchange Commission not later than 120 days after the close of the year ended December 31, 2008.

Item 14.    Principal Accountant Fees and Services

Information regarding principal accountant fees and services is incorporated herein by reference to the section entitled, under the headings “Information about the Corporation’s Independent Auditors” contained in our definitive proxy statement for the annual meeting of shareholders of the Company to be held on May 21, 2009, which is to be filed with the Securities and Exchange Commission not later than 120 days after the close of the year ended December 31, 2008.

81

PART IV

Item 15.    Exhibits and Financial Statement Schedules

(a)(1) The following financial statements of TranSwitch Corporation are filed as part of this Form 10-K under Item 8 “Financial Statements and Supplementary Data.”

FINANCIAL STATEMENTS	PAGE
Consolidated Balance Sheets – December 31, 2008 and 2007		52
Consolidated Statements of Operations – Years ended December 31, 2008, 2007 and 2006		53
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss – Years ended December 31, 2008, 2007 and 2006		54
Consolidated Statements of Cash Flows – Years ended December 31, 2008, 2007 and 2006		55
Notes to Consolidated Financial Statements		56
Schedule II		78

(a)(2) All other schedules are omitted because they are either not applicable, not required or because the information is presented in the Consolidated Financial Statements and Financial Statement Schedule or the notes thereto.

(a)(3)    Exhibits

3.1	Amended and Restated Certificate of Incorporation, as amended to date (previously filed as Exhibit 3.1 to TranSwitch Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 and incorporated herein by reference).
3.2	Second Amended and Restated By-Laws, (previously filed as Exhibit 3.1 to TranSwitch Corporation’s Current Report on Form 8-K as filed with the SEC on October 17, 2007 and incorporated herein by reference).
4.1	Specimen certificate representing the common stock of TranSwitch Corporation(previously filed as Exhibit 4.1 to TranSwitch’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference).
4.2	Rights Agreement, dated as of October 1, 2001, between TranSwitch Corporation and EquiServe Trust Company, N.A., which includes the form of Rights Certificate and the Summary of Rights to Purchase Preferred Shares (previously filed as Exhibit 1 to TranSwitch Corporation’s Registration Statement No. 0-25996 on Form 8-A filed on October 2, 2001 and incorporated by reference herein).
4.3	Indenture dated July 6, 2007 by and between TranSwitch Corporation and U.S. Bank National Association, as trustee (previously filed as Exhibit 4.1 to TranSwitch Corporation’s Current Report on Form 8-K as filed with the SEC on July 6, 2007 and incorporated herein by reference).
4.4	Amendment No. 1 to the Rights Agreement, between TranSwitch Corporation and Computershare Trust Company, N.A. (formerly known as Equiserve Trust Company, N.A) as Rights Agent, dated as of February 24, 2006.  (previously filed as Exhibit 4.1 to TranSwitch Corporation’s Current Report on Form 8-K as filed on February 28, 2006 and incorporated herein by reference).
4.5	2005 Employee Stock Purchase Plan (filed as Exhibit 4.2 to the Company’s registration statement on Form S-8 (File No. 333-126129) and incorporated herein by reference).*
4.6	Form of Employee Stock Purchase Plan Enrollment Authorization Form (previously filed as Exhibit 4.3 to the Company’s registration statement on Form S-8 (File No. 333-126129) and incorporated herein by reference).
4.7	Form of Employee Stock Purchase Plan Change / Withdrawal Authorization Form (previously filed as Exhibit 4.4 to the Company’s registration statement on Form S-8 (File No. 333-126129) and incorporated herein by reference).
4.8	2008 Equity Incentive Plan (previously filed as Exhibit 4.2 to TranSwitch Corporation’s Registration Statement on Form S-8 (File No. 333-151113) and incorporated herein by reference).*
4.9	Form of 2008 Equity Incentive Plan Stock Option Award Agreement (previously filed as Exhibit 4.3 to TranSwitch Corporation’s Registration Statement on Form S-8 (File No. 333-151113) and incorporated herein by reference).

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4.10	Form of 2008 Equity Incentive Plan 102 Stock Option Award Agreement (previously filed as Exhibit 4.4 to TranSwitch Corporation’s Registration Statement on Form S-8 (File No. 333-151113) and incorporated herein by reference).
4.11	Form of Restricted Stock Award Agreement under the 2008 Equity Incentive Plan (previously filed as Exhibit 4.5 to TranSwitch Corporation’s Registration Statement on Form S-8 (File No. 333-151113) and incorporated herein by reference).
4.12	Form of Restricted Stock 102 Award Agreement under the 2008 Equity Incentive Plan (previously filed as Exhibit 4.6 to TranSwitch Corporation’s Registration Statement on Form S-8 (File No. 333-151113) and incorporated herein by reference).
4.13	Form of Non-Qualified Stock Option Award to Director Agreement under the 2008 Equity Incentive Plan (previously filed as Exhibit 4.7 to TranSwitch Corporation’s Registration Statement on Form S-8 (File No. 333-151113) and incorporated herein by reference).
4.14	Form of 2008 Equity Incentive Plan 102 Stock Award Agreement (previously filed as Exhibit 4.8 to TranSwitch Corporation’s Registration Statement on Form S-8 (File No. 333-151113) and incorporated herein by reference).
10.1	Third Amended and Restated 1995 Stock Option Plan, as amended (previously filed as an exhibit to TranSwitch Corporation’s Current Report on Form 8-K as filed on May 23, 2005).*
10.2	1995 Non-Employee Director Stock Option Plan, as amended (previously filed as Exhibit 4.4 to the TranSwitch Corporation’s Registration Statement on Form S-8 (File No. 333-89798) and incorporated herein by reference).*
10.3	Form of Incentive Stock Option Agreement under the 1995 Stock Plan (previously filed as an exhibit to the TranSwitch Corporation’s Registration Statement on Form S-8 (File No. 33-94234) and incorporated herein by reference).
10.4	Form of Non-Qualified Stock Option Agreement under the 1995 Stock Plan (previously filed as an exhibit to the TranSwitch’s Registration Statement on Form S-8 (File No. 33-94234) and incorporated herein by reference).
10.5	Form of Non-Qualified Stock Option Agreement under the 1995 Non-Employee Director Stock Option Plan (previously filed as an exhibit to the TranSwitch Corporation’s Registration Statement on Form S-8 (File No. 33-94234) and incorporated herein by reference).
10.6	Lease Agreement, as amended, with Robert D. Scinto (previously filed as Exhibit 10.14 to the TranSwitch Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and incorporated herein by reference).
10.7	2000Stock Option Plan (previously filed as Exhibit 4.2 to TranSwitch Corporation’s Registration Statement on Form S-8 (File No. 333-75800) and incorporated by reference herein).
10.8	Form of Non-Qualified Stock Option Agreement under the 2000 Stock Option Plan (previously filed as Exhibit 4.3 to TranSwitch Corporation’s Registration Statement on Form S-8 (File No. 333-75800) and incorporated by reference herein).
10.9	1999 Stock Incentive Plan of Onex Communications Corporation (previously filed as Exhibit 4.2 to TranSwitch Corporation’s Registration Statement on Form S-8 (File No. 333-70344) and incorporated by reference herein).
10.10	Form of Incentive Stock Option Agreement under the 1999 Stock Incentive Plan of Onex Communications Corporation (previously filed as Exhibit 4.3 to TranSwitch Corporation’s Registration Statement on Form S-8 (File No. 333-70344) and incorporated by reference herein).
10.11	Form of Director Non-Qualified Stock Option Agreement under the Third Amended and Restated 1995 Stock Option Plan, as amended (previously filed as Exhibit 10.1 to TranSwitch Corporation’s Current Report on Form 8-K as filed with the SEC on May 25, 2007 and incorporated herein by reference).
10.12	Registration Rights Agreement dated July 6, 2007 by and among TranSwitch Corporation and the Initial Purchasers named therein (previously filed as Exhibit 10.2 to TranSwitch Corporation’s Current Report on Form 8-K as filed with the SEC on July 6, 2007 and incorporated herein by reference).
10.13	Agreement and Plan of Merger by and among TranSwitch Corporation, Centillium Communications, Inc., Sonnet Acquisition Corporation and Haiku Acquisition Corporation, dated as of July 9, 2008 (previously filed as Exhibit 2.1 to TranSwitch Corporation’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on July 11, 2008 and incorporated herein by reference).

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10.14	Purchase Agreement dated as of December 24, 2008 by and among TranSwitch Corporation, QVT Fund LP and Quintessence Fund L.P. (filed herewith).
11.1	Computation of Loss Per Share (filed herewith).
12.1	Computation of Ratio of Earnings to Fixed Charges (filed herewith).
21.1	Subsidiaries of the Company (filed herewith).
23.1	Consent of Independent Registered Public Accounting Firm (filed herewith).
31.1	CEO Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	CFO Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	CEO Certification pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2	CFO Certification pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

*  Indicates management contract or compensatory plan, contract or arrangement identified as required in Item 15(a)(3) of Form 10-K

(b)    Exhibits

We hereby file as exhibits to this Form 10-K those exhibits listed in Item 15 (a) (3) above.

(c)    Financial Statement Schedule

TranSwitch files as a financial statement schedule to this Form 10-K, the financial statement schedule listed in Item 8 and 15(a) (2) above.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Transwitch Corporation
By:	/s/    Dr. Santanu Das
	Dr. Santanu Das President and Chief Executive Officer

March 13, 2009

POWER OF ATTORNEY AND SIGNATURES

We, the undersigned named executive officers and directors of TranSwitch Corporation, hereby severally constitute and appoint Dr. Santanu Das and Mr. Robert A. Bosi, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities indicated below, all amendments to this report, and generally to do all things in our names and on our behalf in such capacities to enable TranSwitch Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended and all requirements of the Securities and Exchange Commission.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name and Signature	Title(s)	Date
/s/ Dr. Santanu Das Dr. Santanu Das	President and Chief Executive Officer (principal executive officer)	March 13, 2009
/s/ Mr. Robert A. Bosi Mr. Robert A. Bosi	Vice President and Chief Financial Officer (principal financial and accounting officer)	March 13, 2009
/s/ Mr. Gerald F. Montry Mr. Gerald F. Montry	Director and Chairman of the Board	March 13, 2009
/s/ Mr. Faraj Aalaei Mr. Faraj Aalaei	Director	March 13, 2009
/s/ Mr. Thomas Baer Mr. Thomas Baer	Director	March 13, 2009
/s/ Mr. Alfred F. Boschulte Mr. Alfred F. Boschulte	Director	March 13, 2009
/s/ Mr. Herbert Chen Mr. Herbert Chen	Director	March 13, 2009
/s/ Mr. Michael Crawford Mr. Michael Crawford	Director	March 13, 2009
/s/ Dr. Hagen Hultzsch Dr. Hagen Hultzsch	Director	March 13, 2009
/s/ Mr. James M. Pagos Mr. James M. Pagos	Director	March 13, 2009
/s/ Dr. Albert E. Paladino Dr. Albert E. Paladino	Director	March 13, 2009
/s/ Mr. Sam Srinivasan Mr. Sam Srinivasan	Director	March 13, 2009

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