10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

for the quarterly period ended June 30, 2011

or

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

for the transition period from to

Commission File Number 0-25996

TRANSWITCH CORPORATION

(Exact name of Registrant as Specified in its Charter)

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

3 Enterprise Drive

Shelton, Connecticut 06484

(Address of Principal Executive Offices)

 (203) 929-8810

(Registrant’s telephone number, including area code)

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

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

Yes   x     No    ¨

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

Large Accelerated Filer ¨Accelerated Filer¨  

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

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

At July 31, 2011, there were 30,441,008 shares of Common Stock, par value $.001 per share, of the Registrant outstanding.

TRANSWITCH CORPORATION AND SUBSIDIARIES

FORM 10-Q

For the Quarterly Period Ended June 30, 2011

Table of Contents

		Page
PART I.    FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and  2010	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	24
PART II.    OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 6.	Exhibits	25
	Signatures	26

2

PART I.   FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS

TRANSWITCH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

(unaudited)

	June 30, 2011			December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	10,109		$	6,280
Restricted cash		138			582
Short-term investments		6,147			973
Accounts receivable, (net of allowance for doubtful accounts of $207 at June 30, 2011 and $336 at December 31, 2010)		7,476			7,907
Inventories, net		1,879			2,555
Prepaid expenses and other current assets		2,324			2,089
Total current assets		28,073			20,386
Long-term investments		486			-
Property and equipment, net		1,278			1,239
Goodwill		14,144			14,144
Other intangible assets, net		7,462			8,254
Investments in non-publicly traded companies		293			267
Other assets		1,627			1,528
Total assets	$	53,363		$	45,818
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,034		$	1,893
Accrued expenses and other current liabilities		11,777			13,118
Current portion of 5.45% Convertible Notes due 2011		1,256			3,758
Total current liabilities		15,067			18,769
Restructuring liabilities		10,119			10,317
Total liabilities		25,186			29,086
Stockholders’ equity:
Common stock, $.001 par value: 37,500,000 shares authorized; 30,433,563 and 23,548,608 shares issued at June 30, 2011 and December 31, 2010, respectively; 30,412,769 and 23,527,814 shares outstanding at June 30, 2011 and December 31, 2010, respectively		30			24
Additional paid-in capital		409,328			391,689
Accumulated other comprehensive income – currency translation		407			459
Common stock held in treasury (20,794 shares), at cost		(118	)		(118	)
Accumulated deficit		(381,470	)		(375,322	)
Total stockholders’ equity		28,177			16,732
Total liabilities and stockholders’ equity	$	53,363		$	45,818

See accompanying notes.

3

TRANSWITCH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Net revenues:
Product revenues	$	4,016		$	11,881		$	9,827		$	23,821
Service revenues		3,037			2,196			5,453			3,062
Total net revenues		7,053			14,077			15,280			26,883
Cost of revenues:
Cost of product revenues		1,305			5,331			3,085			10,559
Provision for excess and obsolete inventories		-			269			160			561
Cost of service revenues		1,034			1,001			2,038			1,529
Total cost of revenues		2,339			6,601			5,283			12,649
Gross profit		4,714			7,476			9,997			14,234
Operating expenses:
Research and development		4,490			3,636			9,055			7,708
Marketing and sales		2,076			1,914			4,064			3,732
General and administrative		1,915			2,013			3,774			3,830
Restructuring charges, net		-			-			467			402
Reversal of accrued royalties, net		(825	)		-			(1,575	)		-
Total operating expenses		7,656			7,563			15,785			15,672
Operating loss		(2,942	)		(87	)		(5,788	)		(1,438	)
Other (expense) income:
Other (expense) income		(8	)		848			(13	)		970
Interest:
Interest income		68			26			92			37
Interest expense		(68	)		(205	)		(193	)		(374	)
Interest expense, net		-			(179	)		(101	)		(337	)
Total other (expense) income, net		(8	)		669			(114	)		633
(Loss) income before income taxes		(2,950	)		582			(5,902	)		(805	)
Income taxes		49			99			246			165
Net (loss) income	$	(2,999	)	$	483		$	(6,148	)	$	(970	)
Basic and diluted (loss) income per common share:
Net (loss) income per common share – basic	$	(0.11	)	$	0.02		$	(0.24	)	$	(0.05	)
Net (loss) income per common share – diluted	$	(0.11	)	$	0.02		$	(0.24	)	$	(0.05	)
Weighted average common shares outstanding – basic		26,853			21,510			25,263			20,926
Weighted average common shares outstanding – diluted		26,853			22,326			25,263			20,926

See accompanying notes.

4

TRANSWITCH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 (unaudited)

	Six Months Ended June 30,
	2011			2010
Operating activities:
Net loss	$	(6,148	)	$	(970	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization		1,095			1,153
Amortization of debt discount and deferred financing fees		36			107
Provision for excess and obsolete inventories		160			560
Benefit from allowance for doubtful accounts		(129	)		(45	)
Restructuring charges		467			409
Stock-based compensation expense		1,333			1,013
Changes in operating assets and liabilities:
Accounts receivable		560			(928	)
Inventories		516			914
Prepaid expenses and other assets		(370	)		(552	)
Accounts payable		141			(1,706	)
Accrued expenses and other current liabilities		(1,526	)		(687	)
Restructuring liabilities		(480	)		(1,169	)
Net cash used by operating activities		(4,345	)		(1,901	)
Investing activities:
Capital expenditures		(343	)		(54	)
Investments in non-publicly traded companies		(26	)		(10	)
Proceeds from the sale of investments in non-publicly traded companies		-			2,700
Decrease in restricted cash		444			1,704
Purchases of short and long-term investments		(6,633	)		(510	)
Proceeds from sales and maturities of short-term investments		973			-
Net cash (used) provided by investing activities		(5,585	)		3,830
Financing activities:
Issuance of common stock under employee stock plans		236			19
Payments for deferred financing costs		-			(167	)
Proceeds from issuance of common stock, net of fees		16,075			6,327
Principal payments on 5.45% Convertible Notes due 2011		(2,502	)		(2,502	)
Net cash provided by financing activities		13,809			3,677
Effect of exchange rate changes on cash and cash equivalents		(50	)		(763	)
Change in cash and cash equivalents		3,829			4,843
Cash and cash equivalents at beginning of period		6,280			2,343
Cash and cash equivalents at end of period	$	10,109		$	7,186

See accompanying notes.

5

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Description of Business

TranSwitch Corporation was incorporated in Delaware on April 26, 1988 and is headquartered in Shelton, Connecticut. TranSwitch Corporation and its subsidiaries (collectively, “TranSwitch” or the “Company”) designs, develops and supplies innovative semiconductor and intellectual property (IP) solutions that provide core functionality for voice, data and video communications equipment for network, enterprise and customer premises applications.  The Company provides integrated multi-core network processor System-on-a-Chip (SoC) solutions and software solutions for fixed, 3G and 4G Mobile, VoIP and Multimedia Infrastructures.  For the customer premises market the Company offers a family of communications processors that provide best-in-class performance for a range of applications and  also provide interoperable connectivity solutions that enable the reliable distribution and presentation of high-definition (HD) content for consumer electronics and personal computer  markets.  Our intellectual property (IP) products are compliant with global industry standards such as HDMI and DisplayPort and also feature our proprietary HDP™ and AnyCable™ technologies. Overall, the Company has over 100 active customers, including the leading global telecom equipment providers, semiconductor and consumer product companies.

Liquidity

The Company has incurred significant operating losses and has used cash in its operating activities for the past several years. Operating losses have resulted from inadequate sales levels for the cost structure. The Company reduced operating expenses during 2010 as a result of the restructuring plans it implemented during 2009 and 2010. The Company also announced further restructuring actions which were implemented during the first quarter of 2011. The Company believes that with the current anticipated gross profit margins and operating expenses the Company can break-even on an operating income basis, excluding stock compensation costs and amortization of purchased intangibles, at the rate of sales of $11.0 million per quarter. Also, the Company intends to continue to assess its cost structure in relationship to its revenue levels and to make appropriate adjustments to expense levels as required. Nonetheless, the Company believes that its existing cash and cash equivalents and its bank financing facility will be sufficient to fund operating activities and capital expenditures, and provide adequate working capital at least through the next twelve months.  Of course, there can be no assurance that the anticipated sales level will be achieved.

Concentrations of Credit Risk and Significant Customers

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

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

At June 30, 2011 and December 31, 2010, approximately 69% and 53% of accounts receivable were due from five customers. The majority of the Company’s sales are to customers in the telecommunications and data communications industries. The Company performs ongoing credit evaluations of its customers and generally does not require collateral.

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

	June 30, 2011	December 31, 2010
Customer A	25%	*
Customer B	16%	16%
Customer C	12%	*
Customer D	10%	*
Customer E	*	15%

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

6

Note 2. Basis of Presentation

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

Note 3.  Investments

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

June 30, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Corporate debt securities	$	6,147	$	71	$	(2	)	$	6,216
Municipal securities		486		5		-			491
Total	$	6,633	$	76	$	(2	)	$	6,707

December 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Corporate debt securities	$	501	$	11	$	-	$	512
Municipal securities		472		39		-		511
Total	$	973	$	50	$	-	$	1,023

All of our long-term investments had maturities of between one and two years in duration at June 30, 2011.

Note 4.  New Accounting Standards

Recently Issued Standards

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

7

In December 2010, FASB issued ASU No. 2010-28, Intangibles - Goodwill and Other (Topic 350). Under Topic 350, testing for goodwill impairment is a two-step test. When a goodwill impairment test is performed (either on an annual or interim basis), an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). If it does, an entity must perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment (Step 2). The amendments in this update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company adopted this standard as of January 1, 2011. The adoption of this update did not have a material effect on the consolidated financial statements through June 30, 2011.

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

Note 5.  Fair Value Measurements

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

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

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

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

As of June 30, 2011, the Company’s financial assets included short-term investments, long-term investments and investments in non-publicly traded companies. The Company considers net realizable value for its investments in non-publicly traded companies for purposes of determining asset impairment losses. For the three and six months ended June 30, 2011 and 2010, the Company had no impairment losses on investments in non-publicly traded companies.

The carrying amounts for cash equivalents, accounts receivable and accounts payable approximate fair value due to their immediate or short-term nature of the maturity. The fair value of the outstanding 5.45% Convertible Notes due September 30, 2011 (“2011 Notes”) was estimated at approximately $1.3 million as of June 30, 2011 and $3.8 million as of December 31, 2010. The 2011 Notes approximate fair value based on market rates available to the Company for financing with similar terms. The carrying value of such notes was approximately $1.3 million as of June 30, 2011 and $3.8 million as of December 31, 2010.  The fair value of short-term investments was $6.1 million and $1.0 million as of June 30, 2011 and December 31, 2010, respectively. The fair value of long-term investments was $0.5 million as of June 30, 2011 and there were no long-term investments as of December 31, 2010.  The short-term and long-term investment values are based on a Level 2 valuation technique.

Note 6.  Foreign Currency Translation

Substantially all foreign subsidiaries use their local currency as their functional currency. Therefore, assets and liabilities of foreign subsidiaries are translated at exchange rates in effect at the balance sheet date and revenue and expense accounts are translated at average exchange rates during the year. The resulting translation adjustments are recorded in accumulated other comprehensive loss. In 2011, the Company determined that its intercompany loan balances with its foreign subsidiaries are classified as long-term.  As such, the Company has recorded its exchange gains and losses in the translation of these balances as other comprehensive income or loss for the three and six months ended June 30, 2011.  Prior to 2011, the Company considered these loan balances as short term in nature and included the exchange gains and losses for the translation of these intercompany loan balances as other (expense) income in the statement of operations.

Note 7.  Stock-Based Compensation

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

8

Stock-based compensation expense follows:

(in thousands)	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Cost of Sales	$	16	$	26	$	37	$	38
Research and Development		218		221		429		412
Marketing and Sales		122		100		250		136
General and Administration		295		254		617		427
Total Stock-Based Compensation	$	651	$	601	$	1,333	$	1,013

During the six months ended June 30, 2011, 840,463 restricted stock units ("RSU”) were granted, 570,484 RSU were released, and 67,625 RSU were canceled, forfeited, or expired.  During the same six months there were 10,000 stock options granted, 72,863 stock options were exercised, and 99,926 stock options were canceled, forfeited or expired.

Note 8.  (Loss) Income Per Common Share

Basic net (loss) income per common share and diluted net (loss) income per common share are computed using the weighted average common shares outstanding for the respective periods. Diluted net (loss) income per common share is computed as though all potential dilutive common shares were outstanding during the period. Dilutive securities primarily include stock options and RSU.  The following table sets forth the computation of the denominators used to compute diluted net (loss) income per common share.

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2011		2010		2011		2010
Weighted average common shares used to compute basic net (loss) income per share		26,853		21,510		25,263		20,926
Dilutive effect of restricted stock units		-		794		-		-
Dilutive effect of stock options		-		22		-		-
Weighted average common shares used to compute diluted net (loss) income per share		26,853		22,326		25,263		20,926

5.45% Convertible Notes:  The effects of the 2011 Notes are anti-dilutive for the periods presented. As such, the related interest has been excluded from the numerator and the number of shares of common stock the 2011 Notes are convertible into has been excluded from the denominator.

Restricted Stock Units: As of June 30, 2011, the Company had 1.7 million RSU unvested and outstanding. All of these instruments were considered anti-dilutive and were excluded from the calculation of diluted net (loss) income per share for the entire period.

As of June 30, 2010, the Company had 1.0 million RSU unvested and outstanding. All of these instruments were considered dilutive and were included in the calculation of diluted net (loss) income per share for the entire period.

None of the outstanding units as of June 30, 2011 or June 30, 2010 had an exercise price.

Stock Options: As of June 30, 2011 the Company had 2.0 million stock options outstanding. All of these instruments were considered anti-dilutive and were excluded from the computation of diluted net (loss) income per share for the entire period.   

As of June 30, 2010, the Company had 2.2 million stock options outstanding of which 0.5 million were used in the calculation of diluted net (loss) income per share. This calculation did not include 1.7 million stock options with an exercise price that was greater than the average stock price for the period because their inclusion would have been anti-dilutive. These options could be dilutive in the future if the average share price increases and is greater than the exercise price of these options.

9

Note 9.  Restricted Cash

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

Note 10.  Inventories

The components of inventories follow:

(in thousands)	June 30, 2011		December 31, 2010
Work-in-process	$	552	$	1,130
Finished goods		1,327		1,425
Total inventories, net	$	1,879	$	2,555

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

Note 11.  Other Intangible Assets

Information about other intangible assets follows:

	Other Intangible Assets
(in thousands)	Developed Technology			Customer Relationships			Total
Balances at June 30, 2011
Cost	$	3,014		$	9,557		$	12,571
Accumulated amortization		(1,433	)		(3,676	)		(5,109	)
	$	1,581		$	5,881		$	7,462
Balances at December 31, 2010
Cost	$	3,014		$	9,557		$	12,571
Accumulated amortization		(1,206	)		(3,111	)		(4,317	)
	$	1,808		$	6,446		$	8,254

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

10

Note 12.  Accrued Expenses and Other Current Liabilities

The components of accrued and other current liabilities follow:

	June 30,		December 31,
(in thousands)	2011		2010
Accrued and other current liabilities	$	3,429	$	3,903
Accrued royalties		3,298		5,188
Accrued compensation and benefits		3,538		2,923
Restructuring liabilities		1,076		891
Deferred revenue		436		213
Total accrued expenses and other current liabilities	$	11,777	$	13,118

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

Note 13.  Comprehensive Loss

The components of comprehensive loss were as follows:

(in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Net (loss) income	$	(2,999	)	$	483		$	(6,148	)	$	(970	)
Foreign currency translation adjustment		(29	)		(713	)		(52	)		(760	)
Total comprehensive loss	$	(3,028	)	$	(230	)	$	(6,200	)	$	(1,730	)

Note 14.  Restructuring and Asset Impairment Charges

During the six months ended June 30, 2011, the Company recorded a net restructuring charge of approximately $0.5 million.  The Company implemented a restructuring plan in the first quarter of 2011 that included a workforce reduction of approximately 26 positions primarily in the Company’s Fremont, California, New Delhi, India and Bangalore, India locations.  The restructuring charges are primarily for employee termination benefits.

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

11

A summary of the restructuring liabilities and activity follows:

(in thousands)	Activity for the Six Months Ended June 30, 2011
	Restructuring Liabilities December 31, 2010		Restructuring Charges		Cash Payments, net of Receipts on Sublease Activity			Non-cash Items		Adjustments and Changes in Estimates		Restructuring Liabilities June 30, 2011
Employee termination benefits	$	3	$	467	$	(53	)	$	—	$	—	$	417
Facility lease costs		11,205		—		(427	)		—		—		10,778
Totals	$	11,208	$	467	$	(480	)	$	—	$	—	$	11,195

Note 15.  Investments in Non-Publicly Traded Companies

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

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

For the three and six months ended June 30, 2011 and 2010, there were no impairment charges related to the Company’s investments in non-publicly traded companies. Also, during the six months ended June 30, 2011 and 2010, the Company made additional investments of approximately $26,000 and $10,000, respectively. 

Note 16.  Credit Facility and Convertible Notes

Credit Facility:

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

Convertible Notes:

On October 26, 2009, the Company exchanged approximately $10.0 million aggregate principal amount of its unsecured Convertible Notes due September 30, 2010 for an equal principal amount of new unsecured 2011 Notes. The 2011 Notes are convertible at the option of the holder, at any time on or prior to maturity at an initial conversion ratio of 138.8888 shares per $1,000 principal amount.  As of June 30, 2011, the principal amount of these notes would be equal to the value of the common stock into which the 2011 Notes could be converted if the Company’s stock price were $7.20.  If a holder of the 2011 Notes converts such notes in connection with a corporate transaction that constitutes a change in control, as defined, at any time prior to July 6, 2011, then in addition to the conversion shares, as defined, such holder is also entitled to receive upon such conversion a make-whole payment premium in cash. Commencing on October 30, 2009, the 2011 Notes are payable in monthly principal payments of $417,000 plus interest. The Company’s future principal payments are expected to be $1.3 million over the next three months with the final payment being due on September 30, 2011. The interest payments on the 2011 Notes are expected to be $11,000 over the next three months.  The 2011 Notes may be paid for in shares of the Company’s common stock, solely at the Company’s option and upon the satisfaction or waiver of certain conditions.  If the Company elects to make any payment of or provision for principal in shares of its common stock, the shares to be delivered will be valued at the lower of $7.20 (subject to adjustment) or 90% of the arithmetic average of the daily volume-weighted average price of the common stock for the ten (10) consecutive trading days ending on or including the second trading day immediately preceding the applicable Interest Payment Date, but not less than $3.60.  The Company may redeem some or all of the 2011 Notes at any time prior to maturity for cash equal to the principal amount, plus accrued and unpaid interest; provided, however, that the 2011 Notes will not be redeemable prior to maturity unless the closing price per share of the Company’s common stock exceeds 150% of the conversion price, which currently is $7.20, for at least 20 trading days within a period of 30 consecutive trading days ending within five trading days immediately preceding notice to holders of such redemption. The holders of the 2011 Notes may require the Company to repurchase the 2011 Notes upon a change in control for cash at 100% of the principal amount, plus accrued and unpaid interest.  The terms underlying the 2011 Notes contain certain customary covenants that limit, among other things, the Company’s ability to incur additional debt. The failure to comply with such covenants could cause the 2011 Notes to become due and payable immediately. As of June 30, 2011, $1.3 million of the 2011 Notes remained outstanding and has been classified as short-term. As of December 31, 2010, $3.8 million of the 2011 Notes remained outstanding and has been classified as short-term.

12

Note 17.  Supplemental Cash Flow Information

Supplemental cash flow information follows:

(in thousands)	Six Months Ended June 30,
	2011		2010
Cash paid for interest	$	101	$	268
Cash paid for income taxes	$	125	$	77

Note 18.  Issuance of Common Stock

Sale of Stock

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

On December 31, 2009, the Company, entered into a Common Stock Purchase Agreement (the "Common Stock Purchase Agreement") with Seaside 88, LP, a Florida limited partnership ("Seaside"), relating to the offering and sale of up to 1,950,000 shares (the "Shares") of the Company's common stock. The Common Stock Purchase Agreement required the Company to issue and sell, and Seaside to purchase, up to 75,000 shares of Common Stock once every two (2) weeks, subject to the satisfaction of customary closing conditions, beginning on January 4, 2010 and ending on or about the date that is fifty (50) weeks subsequent to closing. The offering price of the Company’s common stock at each closing was an amount equal to the lower of (i) the daily volume weighted average of actual trading prices of the common stock on the trading market (the "VWAP") for the ten consecutive trading days immediately prior to a closing date multiplied by 0.875 and (ii) the VWAP for the trading day immediately prior to a closing date multiplied by 0.90. 

On June 14, 2010, the Company exercised its option to terminate the Common Stock Purchase Agreement with Seaside.  The Company had no closings with Seaside during the six months ended June 30, 2011.  The Company had five closings with Seaside during the three months ended June 30, 2010 at a purchase price ranging from $1.94 to $2.51 per share and sold 375,000 shares of common stock to Seaside for gross proceeds of approximately $0.8 million and incurred costs of approximately $0.1 million.  In addition, the Company had twelve closings during the six months ended June 30, 2010 at a purchase price ranging from $1.40 to $2.69 per share and sold 900,000 shares of stock to Seaside for gross proceeds of approximately $1.8 million and incurred costs of approximately $0.1 million. The proceeds have been used for general corporate purposes, which includes working capital, capital expenditures, repayment of debt, development costs, and strategic investments.

Rights Offering

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

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

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

13

Note 19.   Income Taxes

The provision for income taxes for both the three months ended June 30, 2011 and 2010 was $0.1 million. The provision for income taxes for both the six months ended June 30, 2011 and 2010 was $0.2 million. The provision for income taxes relates to certain of TranSwitch’s subsidiaries located in foreign jurisdictions.  The effective income tax rate differs from the U.S. federal statutory rate for the periods presented primarily due to foreign and state income taxes and increases in the valuation allowance for deferred income tax assets offset by non-deductible interest expense.

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

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

Note 20.  Other (Expense) Income

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

Note 21.  Evaluation of Subsequent Events

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

14

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

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

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains, and any documents incorporated herein by reference may contain, forward-looking statements that involve risks and uncertainties. When used in this document, the words, “intend”, “anticipate”, “believe”, “estimate”, “plan”, “expect” and similar expressions as they relate to us are included to identify forward-looking statements. Our actual results could differ materially from the results discussed in the forward-looking statements as a result of risk factors including those set forth in this report and in our Annual Report on Form 10-K for the year ended December 31, 2010.

COMPANY OVERVIEW

TranSwitch Corporation was incorporated in Delaware on April 26, 1988 and is headquartered in Shelton, Connecticut. TranSwitch Corporation and its subsidiaries (collectively, “TranSwitch” or the “Company”) designs, develops and supplies innovative semiconductor and intellectual property (IP) solutions that provide core functionality for voice, data and video communications equipment for network, enterprise and customer premises applications.  The Company provides integrated multi-core network processor System-on-a-Chip (SoC) solutions and software solutions for fixed, 3G and 4G Mobile, VoIP and Multimedia Infrastructures.  For the customer premises market the Company offers a family of communications processors that provide best-in-class performance for a range of applications and  also provide interoperable connectivity solutions that enable the reliable distribution and presentation of high-definition (HD) content for consumer electronics and personal computer  markets.  Our intellectual property (IP) products are compliant with global industry standards such as HDMI and DisplayPort and also feature our proprietary HDP™ and AnyCable™ technologies. Overall, the Company has over 100 active customers, including the leading global telecom equipment providers, semiconductor and consumer product companies.

TARGET MARKETS AND PRODUCTS

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

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

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

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

Next Generation (Converged) Network Infrastructure:

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

15

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

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

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

Our Broadband Access product offerings include a variety of solutions for both EPON as well as GPON standards.  We also supply products that support the hybrid fiber-copper architectures such as FTTB and FTTN using DSL or Ethernet as well as Voice-over-IP (VoIP) processors to extract, encode and manage voice services at the node equipment in the case of FTTB and FTTN architectures.

Broadband Customer Premises Equipment (CPE):

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

We provide high speed interface technology conforming to HDMI, DisplayPort and Ethernet standards in the form of IP cores. Our customers for this technology are other semiconductor companies who supply complementary markets such as Consumer Electronics (TV, DVR and Video Camera) and computer equipment manufacturers.   We are a recognized worldwide leader in the licensing of interconnect technologies.  Our intellectual property serves as a key building block for many varied semiconductor applications ranging from consumer electronics to home network equipment to industrial and automotive applications. We have been licensing interface technology since 2006 with the introduction of our MystiPHY line of Ethernet IP cores obtained through our acquisition of Mysticom Ltd.  Our Ethernet technology has been adopted and incorporated by many of the world’s leading semiconductor and equipment manufacturers. In 2008 we introduced our HD-PXL family of products addressing multimedia interconnect standards specifically addressing the HDMI and DisplayPort™ standards for consumer electronics and PC appliances. These technologies have also been licensed by some of the leading semiconductor companies serving the consumer electronics and computer equipment industry.

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

16

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

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

b)  Multi-Service Communications Processors

We also provide a family of communications processors designed specifically for the broadband CPE applications, combining voice-over-IP, data routing and security functions in a single highly integrated device that meets the stringent cost-performance and low power consumption demands of this market segment.  Our Atlanta processor family is a multi-service SoC for customer premises equipment that supports toll-quality telephone voice, fax and routing functionality over any broadband access network. System designs based on the Atlanta product family can connect directly to a broadband modem or be added as part of a small office-home office, or SOHO, network. The Atlanta A70™ product is the family’s entry level SoC while the A80™ SoC adds the capability to interface with any WiFi or high-speed adapter. The A90™ SoC is optimized for the SOHO market with four voice channels and a high-performing routing engine available at 100 Mbit/second. The A100™ SoC adds powerful, enterprise-level security and encryption of all data and voice.

In 2009 we introduced Atlanta 2000 (A2000) the flagship of our Atlanta processor line.  A2000 is a multi-core SoC supporting wire-speed Gigabit routing performance, up to eight channels of low-bit rate VoIP processing or four channels of High Definition voice processing and a rich set of data security features.  A2000 fulfills the high performance requirements for next generation residential or small business gateway appliances.  In 2010 we introduced the Atlanta 1000 (A1000) which supports a wide range of applications including voice-enabled gateway routers for home and small office use, as well as IEEE 802.11n WiFi routers.

Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports are made available free of charge through the Investor Relations section of our Internet website (http://www.transwitch.com) as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. Material contained on our website is not incorporated by reference in this report. Our executive offices are located at Three Enterprise Drive, Shelton, CT 06484.

17

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

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

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

RESULTS OF OPERATIONS

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Net revenues:
Product revenues		57	%		84	%		64	%		89	%
Service revenues		43	%		16	%		36	%		11	%
Total net revenues		100	%		100	%		100	%		100	%
Cost of revenues:
Product cost of revenues		18	%		38	%		20	%		39	%
Provision for excess and obsolete inventories		0	%		2	%		1	%		2	%
Service cost of revenues		15	%		7	%		14	%		6	%
Total cost of revenues		33	%		47	%		35	%		47	%
Gross profit		67	%		53	%		65	%		53	%
Operating expenses:
Research and development		64	%		26	%		59	%		29	%
Marketing and sales		29	%		14	%		26	%		14	%
General and administrative		27	%		14	%		25	%		14	%
Restructuring charges, net		—			—			3	%		1	%
Reversal of accrued royalties		(11	)%		—			(10	)%		—
Total operating expenses		109	%		54	%		103	%		58	%
Operating loss		(42	)%		(1	)%		(38	)%		(5	)%

Net Revenues

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

18

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

(in thousands)	Three Months Ended June 30, 2011					Three Months Ended June 30, 2010
	Net Revenues		Percent of Total Net Revenues			Net Revenues		Percent of Total Net Revenues			Percentage  Decrease in Revenues
Network Infrastructure	$	4,073		58	%	$	8,814		63	%		(54	) %
Customer Premises Equipment		2,980		42	%		5,263		37	%		(43	) %
Total net revenues	$	7,053		100	%	$	14,077		100	%		(50	) %

(in thousands)	Six Months Ended June 30, 2011					Six Months Ended June 30, 2010
	Net Revenues		Percent of Total Net Revenues			Net Revenues		Percent of Total Net Revenues			Percentage  Decrease in Revenues
Network Infrastructure	$	9,544		63	%	$	17,212		64	%		(45	) %
Customer Premises Equipment		5,736		37	%		9,671		36	%		(41	) %
Total net revenues	$	15,280		100	%	$	26,883		100	%		(43	) %

Total net revenues for the three months ended June 30, 2011 were $7.1 million as compared to $14.1 million for the three months ended June 30, 2010, a decrease of $7.0 million or 50%. Our Network Infrastructure revenues decrease of approximately 54% was a result of lower sales of Optical Transport and VOIP products due to reduced telecom infrastructure capital expenditures and reduced sales of our ASIC products. Our CPE revenues decrease of approximately 43% was attributable to the ramping down of our Mustang (gigabit Ethernet passive optical) product line towards the end of 2010 and reduced sales of our Communications Processor products. This reduction was partially offset by increased service revenues which include IP licensing of our high speed interface technology.

Total net revenues for the six months ended June 30, 2011 were $15.3 million as compared to $26.9 million for the six months ended June 30, 2010, a decrease of $11.6 million or 43%. Our Network Infrastructure revenues decrease of approximately 45% was a result of lower sales of Optical Transport, VOIP and Gigabit Ethernet Controller products due to reduced telecom infrastructure capital expenditures and reduced sales of our ASIC products. Our CPE revenues decrease of approximately 41% was attributable to the ramping down of our Mustang (gigabit Ethernet passive optical) product line towards the end of 2010. This reduction was partially offset by increased service revenues which include IP licensing of our high speed interface technology.

International net revenues represented approximately 76% of net revenues for the three months ended June 30, 2011 as compared to 77% for the three months ended June 30, 2010. Also, international net revenues represented approximately 74% of net revenues for the six months ended June 30, 2011 as compared to 76% for the six months ended June 30, 2010.

Gross Profit

Total gross profit for the three months ended June 30, 2011 decreased by approximately $2.8 million or 37% as compared to the three months ended June 30, 2010 and total gross profit for the six months ended June 30, 2011 decreased by approximately $4.2 million or 30% as compared to the six months ended June 30, 2010. The decrease in gross profit was primarily the result of a decrease in total net revenues which was partially offset by higher gross margins on the revenues that we did have in 2011.The total gross profit as a percentage of revenue was 67% and 53% for three months ended June 30, 2011 and 2010, and 65% and 53% for the six months ended June 30, 2011 and 2010, respectively. The changes in gross margin percentage are mostly attributable to changes in product mix, especially a larger portion of royalties and higher margin IP licensing revenues. We anticipate that gross profit will continue to be impacted by fluctuations in the volume and mix of our product shipments as well as material costs, yield and the fixed cost absorption of our product operations.

19

During the three and six months ended June 30, 2011, gross profit was affected favorably in the amount of less than $0.1 million and $0.1 million, respectively, from the sales of products that had previously been written down. During the three and six months ended June 30, 2010, gross profit was affected favorably in the amount of $0.1 million and $0.2 million, respectively, from the sales of products that had previously been written down.  Also during the three months ended June 30, 2011 and 2010, we recorded provisions for excess and obsolete inventories in the amount of zero and $0.3 million, respectively. During the six months ended June 30, 2011 and 2010, we recorded provisions for excess and obsolete inventories in the amount of $0.2 million and $0.6 million, respectively.

Research and Development

Research and development expenses consist primarily of salaries and related costs of employees engaged in research, design and development activities, costs related to electronic design automation tools, subcontracting and fabrication costs, depreciation and amortization, and facilities expenses.  During the three months ended June 30, 2011, research and development expenses increased $0.9 million, or 23% over the comparable period of 2010. During the six months ended June 30, 2011, research and development expenses increased $1.3 million, or 17% over the comparable period of 2010. These increases were a result of increased labor and subcontracting costs as a result of our investment in our high-speed interface product line.

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

Marketing and Sales

Marketing and sales expenses consist primarily of personnel-related expenses, trade show expenses, travel expenses and facilities expenses.  Marketing and sales expenses for the three months ended June 30, 2011 increased by $0.2million or 8% as compared to the three months ended June 30, 2010.  This increase was a result of increased costs related to our high-speed interface product line. Marketing and sales expenses for the six months ended June 30, 2011 increased by $0.3million or 9% as compared to the six months ended June 30, 2010. This increase was a result of increased costs related to our high-speed interface product line and increased stock compensation costs.

General and Administrative

General and administrative expenses consist primarily of personnel-related expenses, professional and legal fees, insurance and facilities expenses. General and administrative expenses for the three months ended June 30, 2011 decreased by $0.1 million or 5% as compared to the comparable period in 2010. This decrease was a result of decreased professional fees that were associated with the cost cutting measures that were implemented in the first quarter of 2011. General and administrative expenses for the six months ended June 30, 2011 decreased by $0.1 million or 1% as compared to the comparable period in 2010.  This decrease was the result of decreased professional fees partially offset by an increase in stock compensation costs.

Restructuring Charges, net

During the three months ended June 30, 2011 and 2010, there were no restructuring charges recorded. During the six months ended June 30, 2011 and 2010, we recorded net restructuring charges of $0.5 million and $0.4 million, respectively.

Interest Expense, net

Interest expense, net was approximately zero and $0.2 million for the three months ended June 30, 2011 and 2010, respectively. Interest income increased slightly as a result of higher cash and investment balances during the three months ended June 30, 2011 as compared to the comparable period in 2010, which was the result of our equity raise during the second quarter of 2011. Interest income will continue to fluctuate as it is affected by our cash and investment balances and the related interest rates. At June 30, 2011 and 2010, the effective interest rate on our interest-bearing securities was approximately 1.5% and 0.9%, respectively.  Interest expense decreased approximately $0.1 million due to lower debt balances resulting from principal payments made on our 2011 Notes. The interest payments on the 2011 Notes are expected to be $11,000 for the remainder of 2011.

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

20

Other (Expense) Income

For the three months ended June 30, 2011 and 2010, other (expense) income was approximately zero and $0.8 million of income, respectively. For the six months ended June 30, 2011 and 2010, other (expense) income was approximately zero and $1.0 million of income, respectively. The other income for the three and six months ended June 30, 2010 was primarily due to both realized and unrealized exchange rate gains and losses which were recorded for the translation of our intercompany loan balances with our wholly owned subsidiaries. In 2011, the Company determined that its intercompany loan balances with its foreign subsidiaries are classified as long-term.  As such, the Company has recorded its exchange gains and losses in the translation of these balances as other comprehensive income or loss for the three and six months ended June 30, 2011.

Income Tax Expense

Income tax expense was approximately $0.1 million for both the three months ended June 30, 2011 and 2010.  Income tax expense was approximately $0.2 million for both the six months ended June 30, 2011 and 2010. The amounts that were recorded reflect income taxes on the earnings of certain of our foreign subsidiaries, principally India.

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

21

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2011 and December 31, 2010, we had total cash, cash equivalents, restricted cash and investment balances of approximately $16.9 million and $7.8 million, respectively. This is our primary source of liquidity, as we are not currently generating any significant positive cash flow from our operations. A summary of our cash, cash equivalents, restricted cash, investments, credit agreements and future commitments are detailed as follows:

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

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

During the three and six months ended June 30, 2011, we made principal payments of approximately $1.2 million and $2.5 million on our 2011 Notes. As of June 30, 2011 the outstanding balance on the 2011 Notes was $1.3 million.

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

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

We have taken cost cutting measures through restructuring plans we implemented during 2010 and 2011. We currently believe that with our anticipated gross profit margins and operating expenses we can break-even on an operating income basis, excluding stock compensation costs and amortization of purchased intangibles, at the rate of sales of $11.0 million per quarter. Also, we intend to continue to assess our cost structure in relationship to our revenue levels and to make appropriate adjustments to expense levels as required. Nonetheless, we believe that our existing cash and cash equivalents, investments and Amended and Restated Business Financing Agreement will be sufficient to fund operating activities and capital expenditures, and provide adequate working capital at least through the next twelve months.

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

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

(in thousands)	June 30, 2011		December 31, 2010		Change			June 30, 2010		December 31, 2009		Change
Cash and cash equivalents	$	10,109	$	6,280	$	3,829		$	7,186	$	2,343	$	4,843
Restricted cash		138		582		(444	)		1,028		2,732		(1,704	)
Short-term investments		6,147		973		5,174			510		-		510
Long-term investments		486		-		486			-		-		-
Total cash and investments	$	16,880	$	7,835	$	9,045		$	8,724	$	5,075	$	3,649

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

22

Commitments and Significant Contractual Obligations

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

We have existing commitments to make future interest payments on the 2011 Notes and to pay principal on a monthly basis until September 2011. Over the remaining life of the outstanding 2011 Notes, we expect to accrue and pay less than $0.1 million in interest.

We have outstanding operating lease commitments of approximately $20.5 million, payable over the next seven years. Some of these commitments are for space that is not being utilized and for which we recorded restructuring charges in prior periods. As of June 30, 2011, we have sublease agreements totaling approximately $7.3 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.

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

23

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.  CONTROLS AND PROCEDURES

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

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

Limitations Inherent in all Controls

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

PART II.    OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

ITEM 1A.  RISK FACTORS

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

24

ITEM 6.  EXHIBITS

Exhibit 3.1	Amended and Restated Certificate of Incorporation, as amended to date (previously filed as Exhibit 3.1 to TranSwitch’s quarterly report on Form 10-Q for the quarter ended March 31, 2005 and incorporated herein by reference).
Exhibit 3.2	Amendment to the Amended and Restated Certificate of Incorporation (previously filed as Exhibit 3.1 to TranSwitch’s current report on Form 8-K as filed with the Securities and Exchange Commission on May 21, 2010 and incorporated herein by reference).
Exhibit 3.3	Second Amended and Restated By-Laws (previously filed as Exhibit 3.1 to TranSwitch’s current report on Form 8-K as filed with the Securities and Exchange Commission on October 17, 2007 and incorporated herein by reference).
Exhibit 4.1	2005 Employee Stock Purchase Plan, as amended (previously filed as Exhibit 4.1 to TranSwitch’s current report on Form 8-K as filed with the Securities and Exchange Commission on May 19, 2011 and incorporated herein by reference).
Exhibit 31.1	CEO Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Exhibit 31.2	CFO Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Exhibit 32.1	CEO and CFO Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

25

SIGNATURES

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

	TRANSWITCH CORPORATION
August 9, 2011	/s/ Dr. M. Ali Khatibzadeh
Date	Dr. M. Ali Khatibzadeh
	Chief Executive Officer and President (Chief Executive Officer)
August 9, 2011	/s/ Robert A. Bosi
Date	Robert A. Bosi
	Vice President and Chief Financial Officer (Chief Financial Officer)

26

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Dr. M. Ali Khatibzadeh, certify that:

1.  I have reviewed this Quarterly Report on Form 10-Q of TranSwitch Corporation;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:	/s/ Dr. M. Ali Khatibzadeh
	Dr. M. Ali Khatibzadeh Chief Executive Officer and President

Dated: August 9, 2011

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Robert A. Bosi, certify that:

1.  I have reviewed this Quarterly Report on Form 10-Q of TranSwitch Corporation;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:	/s/ Robert A. Bosi
	Robert A. Bosi Vice President and Chief Financial Officer

Dated:  August 9, 2011

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of TranSwitch Corporation (the Company) for the period ended June 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the Report), Dr. M. Ali Khatibzadeh, Chief Executive Officer and President of the Company and Robert A. Bosi, Vice President & Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge, based upon review of the report, subject to the qualifications noted below:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

By: /s/ Dr. M. Ali Khatibzadeh

Dr. M. Ali Khatibzadeh

Chief Executive Officer and President

August 9, 2011

By: /s/ Robert A. Bosi

Robert A. Bosi

Vice President and Chief Financial Officer

August 9, 2011

XML



CONDENSED CONSOLIDATED BALANCE SHEETS [Parenthetical] (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2011	Dec. 31, 2010
Allowance for doubtful accounts (in dollars)	$ 207	$ 336
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	37,500,000	37,500,000
Common stock, shares issued	30,433,563	23,548,608
Common stock, shares outstanding	30,412,769	23,527,814
Interest rate on Notes payable, current and non - current	5.45%	5.45%
Common shares held in Treasury Stock	20,794	20,794

XML



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Net revenues:
Product revenues	$ 4,016	$ 11,881	$ 9,827	$ 23,821
Service revenues	3,037	2,196	5,453	3,062
Total net revenues	7,053	14,077	15,280	26,883
Cost of revenues:
Cost of product revenues	1,305	5,331	3,085	10,559
Provision for excess and obsolete inventories	0	269	160	560
Cost of service revenues	1,034	1,001	2,038	1,529
Total cost of revenues	2,339	6,601	5,283	12,649
Gross profit	4,714	7,476	9,997	14,234
Operating expenses:
Research and development	4,490	3,636	9,055	7,708
Marketing and sales	2,076	1,914	4,064	3,732
General and administrative	1,915	2,013	3,774	3,830
Restructuring charges, net	0	0	467	402
Reversal of accrued royalties, net	(825)		(1,575)
Total operating expenses	7,656	7,563	15,785	15,672
Operating loss	(2,942)	(87)	(5,788)	(1,438)
Other (expense) income:
Other (expense) income	(8)	848	(13)	970
Interest:
Interest income	68	26	92	37
Interest expense	(68)	(205)	(193)	(374)
Interest expense, net	0	(179)	(101)	(337)
Total other (expense) income, net	(8)	669	(114)	633
(Loss) income before income taxes	(2,950)	582	(5,902)	(805)
Income taxes	49	99	246	165
Net (loss) income	$ (2,999)	$ 483	$ (6,148)	$ (970)
Basic and diluted (loss) income per common share:
Net (loss) income per common share - basic (in dollars per share)	$ (0.11)	$ 0.02	$ (0.24)	$ (0.05)
Net (loss) income per common share - diluted (in dollars per share)	$ (0.11)	$ 0.02	$ (0.24)	$ (0.05)
Weighted average common shares outstanding - basic (in shares)	26,853	21,510	25,263	20,926
Weighted average common shares outstanding - diluted (in shares)	26,853	22,326	25,263	20,926

XML



Supplemental Cash Flow Information

6 Months Ended

Jun. 30, 2011

Supplemental Cash Flow Information [Abstract]

Cash Flow, Supplemental Disclosures [Text Block]

Note 17.  Supplemental Cash Flow Information

Supplemental cash flow information follows:

(in thousands)	Six Months Ended June 30,
	2011		2010
Cash paid for interest	$	101	$	268
Cash paid for income taxes	$	125	$	77

XML



DOCUMENT AND ENTITY INFORMATION	6 Months Ended
	Jun. 30, 2011	Jul. 31, 2011
Entity Registrant Name	TRANSWITCH CORP /DE
Entity Central Index Key	0000944739
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Trading Symbol	txcc
Entity Common Stock, Shares Outstanding		30,441,008
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2011
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2011

XML



Other (Expense) Income

6 Months Ended

Jun. 30, 2011

Other Income and Expenses [Abstract]

Other Income and Other Expense Disclosure [Text Block]

Note 20.  Other (Expense) Income

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

XML



Foreign Currency Translation

6 Months Ended

Jun. 30, 2011

Foreign Currency Translation [Abstract]

Foreign Currency Disclosure [Text Block]

Note 6.  Foreign Currency Translation

Substantially all foreign subsidiaries use their local currency as their functional currency. Therefore, assets and liabilities of foreign subsidiaries are translated at exchange rates in effect at the balance sheet date and revenue and expense accounts are translated at average exchange rates during the year. The resulting translation adjustments are recorded in accumulated other comprehensive loss. In 2011, the Company determined that its intercompany loan balances with its foreign subsidiaries are classified as long-term.  As such, the Company has recorded its exchange gains and losses in the translation of these balances as other comprehensive income or loss for the three and six months ended June 30, 2011.  Prior to 2011, the Company considered these loan balances as short term in nature and included the exchange gains and losses for the translation of these intercompany loan balances as other (expense) income in the statement of operations.

XML



Evaluation of Subsequent Events

6 Months Ended

Jun. 30, 2011

Subsequent Events [Abstract]

Subsequent Events [Text Block]

Note 21.  Evaluation of Subsequent Events

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

XML



Income Taxes

6 Months Ended

Jun. 30, 2011

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

Note 19.   Income Taxes

The provision for income taxes for both the three months ended June 30, 2011 and 2010 was $0.1 million. The provision for income taxes for both the six months ended June 30, 2011 and 2010 was $0.2 million. The provision for income taxes relates to certain of TranSwitch’s subsidiaries located in foreign jurisdictions.  The effective income tax rate differs from the U.S. federal statutory rate for the periods presented primarily due to foreign and state income taxes and increases in the valuation allowance for deferred income tax assets offset by non-deductible interest expense.

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

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

XML



Other Intangible Assets

6 Months Ended

Jun. 30, 2011

Goodwill and Intangible Assets Disclosure [Abstract]

Intangible Assets Disclosure [Text Block]

Note 11.  Other Intangible Assets

Information about other intangible assets follows:

	Other Intangible Assets
(in thousands)	Developed Technology			Customer Relationships			Total
Balances at June 30, 2011
Cost	$	3,014		$	9,557		$	12,571
Accumulated amortization		(1,433	)		(3,676	)		(5,109	)
	$	1,581		$	5,881		$	7,462
Balances at December 31, 2010
Cost	$	3,014		$	9,557		$	12,571
Accumulated amortization		(1,206	)		(3,111	)		(4,317	)
	$	1,808		$	6,446		$	8,254

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

XML



Basis of Presentation

6 Months Ended

Jun. 30, 2011

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

Note 2. B asis of Presentation

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

XML



(Loss) Income Per Common Share

6 Months Ended

Jun. 30, 2011

Earnings Per Share [Abstract]

Earnings Per Share [Text Block]

Note 8.  (Loss) Income Per Common Share

Basic net (loss) income per common share and diluted net (loss) income per common share are computed using the weighted average common shares outstanding for the respective periods. Diluted net (loss) income per common share is computed as though all potential dilutive common shares were outstanding during the period. Dilutive securities primarily include stock options and RSU.  The following table sets forth the computation of the denominators used to compute diluted net (loss) income per common share.

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2011		2010		2011		2010
Weighted average common shares used to compute basic net (loss) income per share		26,853		21,510		25,263		20,926
Dilutive effect of restricted stock units		-		794		-		-
Dilutive effect of stock options		-		22		-		-
Weighted average common shares used to compute diluted net (loss) income per share		26,853		22,326		25,263		20,926

5.45% Convertible Notes:   The effects of the 2011 Notes are anti-dilutive for the periods presented. As such, the related interest has been excluded from the numerator and the number of shares of common stock the 2011 Notes are convertible into has been excluded from the denominator.

Restricted Stock Units: As of June 30, 2011, the Company had 1.7 million RSU unvested and outstanding. All of these instruments were considered anti-dilutive and were excluded from the calculation of diluted net (loss) income per share for the entire period.

As of June 30, 2010, the Company had 1.0 million RSU unvested and outstanding. All of these instruments were considered dilutive and were included in the calculation of diluted net (loss) income per share for the entire period.

None of the outstanding units as of June 30, 2011 or June 30, 2010 had an exercise price.

Stock Options: As of June 30, 2011 the Company had 2.0 million stock options outstanding. All of these instruments were considered anti-dilutive and were excluded from the computation of diluted net (loss) income per share for the entire period.   

As of June 30, 2010, the Company had 2.2 million stock options outstanding of which 0.5 million were used in the calculation of diluted net (loss) income per share. This calculation did not include 1.7 million stock options with an exercise price that was greater than the average stock price for the period because their inclusion would have been anti-dilutive. These options could be dilutive in the future if the average share price increases and is greater than the exercise price of these options.

XML



Comprehensive Loss

6 Months Ended

Jun. 30, 2011

Stockholders' Equity Note [Abstract]

Comprehensive Income Note [Text Block]

Note 13.  Comprehensive Loss

The components of comprehensive loss were as follows:

(in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Net (loss) income	$	(2,999	)	$	483		$	(6,148	)	$	(970	)
Foreign currency translation adjustment		(29	)		(713	)		(52	)		(760	)
Total comprehensive loss	$	(3,028	)	$	(230	)	$	(6,200	)	$	(1,730	)

XML



Restricted Cash

6 Months Ended

Jun. 30, 2011

Receivables [Abstract]

Restricted Assets Disclosure [Text Block]

Note 9.  Restricted Cash

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

XML



Stock-Based Compensation

6 Months Ended

Jun. 30, 2011

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

Note 7.  Stock-Based Compensation

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

Stock-based compensation expense follows:

(in thousands)	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Cost of Sales	$	16	$	26	$	37	$	38
Research and Development		218		221		429		412
Marketing and Sales		122		100		250		136
General and Administration		295		254		617		427
Total Stock-Based Compensation	$	651	$	601	$	1,333	$	1,013

During the six months ended June 30, 2011, 840,463 restricted stock units ("RSU”) were granted, 570,484 RSU were released, and 67,625 RSU were canceled, forfeited, or expired.  During the same six months there were 10,000 stock options granted, 72,863 stock options were exercised, and 99,926 stock options were canceled, forfeited or expired.

XML



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS [Parenthetical]	Jun. 30, 2011	Dec. 31, 2010
Interest rate on Notes payable, current and non - current	5.45%	5.45%

XML



Investments

6 Months Ended

Jun. 30, 2011

Investments, Debt and Equity Securities [Abstract]

Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]

Note 3.  Investments

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

June 30, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Corporate debt securities	$	6,147	$	71	$	(2	)	$	6,216
Municipal securities		486		5		-			491
Total	$	6,633	$	76	$	(2	)	$	6,707

December 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Corporate debt securities	$	501	$	11	$	-	$	512
Municipal securities		472		39		-		511
Total	$	973	$	50	$	-	$	1,023

All of our long-term investments had maturities of between one and two years in duration at June 30, 2011.

XML



New Accounting Standards

6 Months Ended

Jun. 30, 2011

Accounting Changes and Error Corrections [Abstract]

Accounting Changes and Error Corrections [Text Block]

Note 4.  New Accounting Standards

Recently Issued Standards

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

In December 2010, FASB issued ASU No. 2010-28, Intangibles - Goodwill and Other (Topic 350) . Under Topic 350, testing for goodwill impairment is a two-step test. When a goodwill impairment test is performed (either on an annual or interim basis), an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). If it does, an entity must perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment (Step 2). The amendments in this update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company adopted this standard as of January 1, 2011. The adoption of this update did not have a material effect on the consolidated financial statements through June 30, 2011.

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

XML



Accrued Expenses and Other Current Liabilities

6 Months Ended

Jun. 30, 2011

Payables and Accruals [Abstract]

Accounts Payable and Accrued Liabilities Disclosure [Text Block]

Note 12.  Accrued Expenses and Other Current Liabilities

The components of accrued and other current liabilities follow:

	June 30,		December 31,
(in thousands)	2011		2010
Accrued and other current liabilities	$	3,429	$	3,903
Accrued royalties		3,298		5,188
Accrued compensation and benefits		3,538		2,923
Restructuring liabilities		1,076		891
Deferred revenue		436		213
Total accrued expenses and other current liabilities	$	11,777	$	13,118

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

XML



Fair Value Measurements

6 Months Ended

Jun. 30, 2011

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

Note 5.  Fair Value Measurements

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

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

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

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

As of June 30, 2011, the Company’s financial assets included short-term investments, long-term investments and investments in non-publicly traded companies. The Company considers net realizable value for its investments in non-publicly traded companies for purposes of determining asset impairment losses. For the three and six months ended June 30, 2011 and 2010, the Company had no impairment losses on investments in non-publicly traded companies.

The carrying amounts for cash equivalents, accounts receivable and accounts payable approximate fair value due to their immediate or short-term nature of the maturity. The fair value of the outstanding 5.45% Convertible Notes due September 30, 2011 (“2011 Notes”) was estimated at approximately $1.3 million as of June 30, 2011 and $3.8 million as of December 31, 2010. The 2011 Notes approximate fair value based on market rates available to the Company for financing with similar terms. The carrying value of such notes was approximately $1.3 million as of June 30, 2011 and $3.8 million as of December 31, 2010.  The fair value of short-term investments was $6.1 million and $1.0 million as of June 30, 2011 and December 31, 2010, respectively. The fair value of long-term investments was $0.5 million as of June 30, 2011 and there were no long-term investments as of December 31, 2010.  The short-term and long-term investment values are based on a Level 2 valuation technique.

XML



Investments in Non-Publicly Traded Companies

6 Months Ended

Jun. 30, 2011

Investments, All Other Investments [Abstract]

Cost-method Investments, Description [Text Block]

Note 15.  Investments in Non-Publicly Traded Companies

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

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

For the three and six months ended June 30, 2011 and 2010, there were no impairment charges related to the Company’s investments in non-publicly traded companies. Also, during the six months ended June 30, 2011 and 2010, the Company made additional investments of approximately $26,000 and $10,000, respectively.

XML



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Operating activities:
Net loss	$ (6,148)	$ (970)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization	1,095	1,153
Amortization of debt discount and deferred financing fees	36	107
Provision for excess and obsolete inventories	160	560
Benefit from allowance for doubtful accounts	(129)	(45)
Restructuring charges	467	409
Stock-based compensation expense	1,333	1,013
Changes in operating assets and liabilities:
Accounts receivable	560	(928)
Inventories	516	914
Prepaid expenses and other assets	(370)	(552)
Accounts payable	141	(1,706)
Accrued expenses and other current liabilities	(1,526)	(687)
Restructuring liabilities	(480)	(1,169)
Net cash used by operating activities	(4,345)	(1,901)
Investing activities:
Capital expenditures	(343)	(54)
Investments in non-publicly traded companies	(26)	(10)
Proceeds from the sale of investments in non-publicly traded companies	0	2,700
Decrease in restricted cash	444	1,704
Purchases of short and long-term investments	(6,633)	(510)
Proceeds from sales and maturities of short-term investments	973
Net cash (used) provided by investing activities	(5,585)	3,830
Financing activities:
Issuance of common stock under employee stock plans	236	19
Payments for deferred financing costs	0	(167)
Proceeds from issuance of common stock, net of fees	16,075	6,327
Principal payments on 5.45% Convertible Notes due 2011	(2,502)	(2,502)
Net cash provided by financing activities	13,809	3,677
Effect of exchange rate changes on cash and cash equivalents	(50)	(763)
Change in cash and cash equivalents	3,829	4,843
Cash and cash equivalents at beginning of period	6,280	2,343
Cash and cash equivalents at end of period	$ 10,109	$ 7,186

XML



Credit Facility and Convertible Notes

6 Months Ended

Jun. 30, 2011

Debt Disclosure [Abstract]

Debt Disclosure [Text Block]

Note 16.  Credit Facility and Convertible Notes

Credit Facility:

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

Convertible Notes:

On October 26, 2009, the Company exchanged approximately $10.0 million aggregate principal amount of its unsecured Convertible Notes due September 30, 2010 for an equal principal amount of new unsecured 2011 Notes. The 2011 Notes are convertible at the option of the holder, at any time on or prior to maturity at an initial conversion ratio of 138.8888 shares per $1,000 principal amount.  As of June 30, 2011, the principal amount of these notes would be equal to the value of the common stock into which the 2011 Notes could be converted if the Company’s stock price were $7.20.  If a holder of the 2011 Notes converts such notes in connection with a corporate transaction that constitutes a change in control, as defined, at any time prior to July 6, 2011, then in addition to the conversion shares, as defined, such holder is also entitled to receive upon such conversion a make-whole payment premium in cash. Commencing on October 30, 2009, the 2011 Notes are payable in monthly principal payments of $417,000 plus interest. The Company’s future principal payments are expected to be $1.3 million over the next three months with the final payment being due on September 30, 2011. The interest payments on the 2011 Notes are expected to be $11,000 over the next three months.  The 2011 Notes may be paid for in shares of the Company’s common stock, solely at the Company’s option and upon the satisfaction or waiver of certain conditions.  If the Company elects to make any payment of or provision for principal in shares of its common stock, the shares to be delivered will be valued at the lower of $7.20 (subject to adjustment) or 90% of the arithmetic average of the daily volume-weighted average price of the common stock for the ten (10) consecutive trading days ending on or including the second trading day immediately preceding the applicable Interest Payment Date, but not less than $3.60.  The Company may redeem some or all of the 2011 Notes at any time prior to maturity for cash equal to the principal amount, plus accrued and unpaid interest; provided, however, that the 2011 Notes will not be redeemable prior to maturity unless the closing price per share of the Company’s common stock exceeds 150% of the conversion price, which currently is $7.20, for at least 20 trading days within a period of 30 consecutive trading days ending within five trading days immediately preceding notice to holders of such redemption. The holders of the 2011 Notes may require the Company to repurchase the 2011 Notes upon a change in control for cash at 100% of the principal amount, plus accrued and unpaid interest.  The terms underlying the 2011 Notes contain certain customary covenants that limit, among other things, the Company’s ability to incur additional debt. The failure to comply with such covenants could cause the 2011 Notes to become due and payable immediately. As of June 30, 2011, $1.3 million of the 2011 Notes remained outstanding and has been classified as short-term. As of December 31, 2010, $3.8 million of the 2011 Notes remained outstanding and has been classified as short-term.

XML



Issuance of Common Stock

6 Months Ended

Jun. 30, 2011

Stockholders' Equity Note [Abstract]

Stockholders' Equity Note Disclosure [Text Block]

Note 18.  Issuance of Common Stock

Sale of Stock

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

On December 31, 2009, the Company, entered into a Common Stock Purchase Agreement (the "Common Stock Purchase Agreement") with Seaside 88, LP, a Florida limited partnership ("Seaside"), relating to the offering and sale of up to 1,950,000 shares (the "Shares") of the Company's common stock. The Common Stock Purchase Agreement required the Company to issue and sell, and Seaside to purchase, up to 75,000 shares of Common Stock once every two (2) weeks, subject to the satisfaction of customary closing conditions, beginning on January 4, 2010 and ending on or about the date that is fifty (50) weeks subsequent to closing. The offering price of the Company’s common stock at each closing was an amount equal to the lower of (i) the daily volume weighted average of actual trading prices of the common stock on the trading market (the "VWAP") for the ten consecutive trading days immediately prior to a closing date multiplied by 0.875 and (ii) the VWAP for the trading day immediately prior to a closing date multiplied by 0.90. 

On June 14, 2010, the Company exercised its option to terminate the Common Stock Purchase Agreement with Seaside.  T he Company had no closings with Seaside during the six months ended June 30, 2011.  The Company had five closings with Seaside during the three months ended June 30, 2010 at a purchase price ranging from $1.94 to $2.51 per share and sold 375,000 shares of common stock to Seaside for gross proceeds of approximately $0.8 million and incurred costs of approximately $0.1 million.  In addition, the Company had twelve closings during the six months ended June 30, 2010 at a purchase price ranging from $1.40 to $2.69 per share and sold 900,000 shares of stock to Seaside for gross proceeds of approximately $1.8 million and incurred costs of approximately $0.1 million. The proceeds have been used for general corporate purposes, which includes working capital, capital expenditures, repayment of debt, development costs, and strategic investments.

Rights Offering

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

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

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

XML



Description of Business

6 Months Ended

Jun. 30, 2011

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Nature of Operations [Text Block]

Note 1.  Description of Business

TranSwitch Corporation was incorporated in Delaware on April 26, 1988 and is headquartered in Shelton, Connecticut. TranSwitch Corporation and its subsidiaries (collectively, “TranSwitch” or the “Company”) designs, develops and supplies innovative semiconductor and intellectual property (IP) solutions that provide core functionality for voice, data and video communications equipment for network, enterprise and customer premises applications.  The Company provides integrated multi-core network processor System-on-a-Chip (SoC) solutions and software solutions for fixed, 3G and 4G Mobile, VoIP and Multimedia Infrastructures.  For the customer premises market the Company offers a family of communications processors that provide best-in-class performance for a range of applications and  also provide interoperable connectivity solutions that enable the reliable distribution and presentation of high-definition (HD) content for consumer electronics and personal computer  markets.  Our intellectual property (IP) products are compliant with global industry standards such as HDMI and DisplayPort and also feature our proprietary HDP™ and AnyCable™ technologies. Overall, the Company has over 100 active customers, including the leading global telecom equipment providers, semiconductor and consumer product companies.

Liquidity

The Company has incurred significant operating losses and has used cash in its operating activities for the past several years. Operating losses have resulted from inadequate sales levels for the cost structure. The Company reduced operating expenses during 2010 as a result of the restructuring plans it implemented during 2009 and 2010. The Company also announced further restructuring actions which were implemented during the first quarter of 2011. The Company believes that with the current anticipated gross profit margins and operating expenses the Company can break-even on an operating income basis, excluding stock compensation costs and amortization of purchased intangibles, at the rate of sales of $11.0 million per quarter. Also, the Company intends to continue to assess its cost structure in relationship to its revenue levels and to make appropriate adjustments to expense levels as required. Nonetheless, the Company believes that its existing cash and cash equivalents and its bank financing facility will be sufficient to fund operating activities and capital expenditures, and provide adequate working capital at least through the next twelve months.  Of course, there can be no assurance that the anticipated sales level will be achieved.

Concentrations of Credit Risk and Significant Customers

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

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

At June 30, 2011 and December 31, 2010, approximately 69% and 53% of accounts receivable were due from five customers. The majority of the Company’s sales are to customers in the telecommunications and data communications industries. The Company performs ongoing credit evaluations of its customers and generally does not require collateral.

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

	June 30, 2011	December 31, 2010
Customer A	25%	*
Customer B	16%	16%
Customer C	12%	*
Customer D	10%	*
Customer E	*	15%

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

XML



Inventories

6 Months Ended

Jun. 30, 2011

Inventory Disclosure [Abstract]

Inventory Disclosure [Text Block]

Note 10.  Inventories

The components of inventories follow:

(in thousands)	June 30, 2011		December 31, 2010
Work-in-process	$	552	$	1,130
Finished goods		1,327		1,425
Total inventories, net	$	1,879	$	2,555

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

XML



Restructuring and Asset Impairment Charges

6 Months Ended

Jun. 30, 2011

Restructuring and Related Activities [Abstract]

Restructuring and Related Activities Disclosure [Text Block]

Note 14.   Restructuring and Asset Impairment Charges

During the six months ended June 30, 2011, the Company recorded a net restructuring charge of approximately $0.5 million.  The Company implemented a restructuring plan in the first quarter of 2011 that included a workforce reduction of approximately 26 positions primarily in the Company’s Fremont, California, New Delhi, India and Bangalore, India locations.  The restructuring charges are primarily for employee termination benefits.

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

A summary of the restructuring liabilities and activity follows:

(in thousands)	Activity for the Six Months Ended June 30, 2011
	Restructuring Liabilities December 31, 2010		Restructuring Charges		Cash Payments, net of Receipts on Sublease Activity			Non-cash Items		Adjustments and Changes in Estimates		Restructuring Liabilities June 30, 2011
Employee termination benefits	$	3	$	467	$	(53	)	$	—	$	—	$	417
Facility lease costs		11,205		—		(427	)		—		—		10,778
Totals	$	11,208	$	467	$	(480	)	$	—	$	—	$	11,195

XML



CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)	Jun. 30, 2011	Dec. 31, 2010
ASSETS
Cash and cash equivalents	$ 10,109	$ 6,280
Restricted cash	138	582
Short-term investments	6,147	973
Accounts receivable, (net of allowance for doubtful accounts of $207 at June 30, 2011 and $336 at December 31, 2010)	7,476	7,907
Inventories, net	1,879	2,555
Prepaid expenses and other current assets	2,324	2,089
Total current assets	28,073	20,386
Long-term investments	486	0
Property and equipment, net	1,278	1,239
Goodwill	14,144	14,144
Other intangible assets, net	7,462	8,254
Investments in non-publicly traded companies	293	267
Other assets	1,627	1,528
Total assets	53,363	45,818
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable	2,034	1,893
Accrued expenses and other current liabilities	11,777	13,118
Current portion of 5.45% Convertible Notes due 2011	1,256	3,758
Total current liabilities	15,067	18,769
Restructuring liabilities	10,119	10,317
Total liabilities	25,186	29,086
Stockholders' equity:
Common stock, $.001 par value: 37,500,000 shares authorized; 30,433,563 and 23,548,608 shares issued at June 30, 2011 and December 31, 2010, respectively; 30,412,769 and 23,527,814 shares outstanding at June 30, 2011 and December 31, 2010, respectively	30	24
Additional paid-in capital	409,328	391,689
Accumulated other comprehensive income - currency translation	407	459
Common stock held in treasury (20,794 shares), at cost	(118)	(118)
Accumulated deficit	(381,470)	(375,322)
Total stockholders' equity	28,177	16,732
Total liabilities and stockholders' equity	$ 53,363	$ 45,818