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Description of Business

9 Months Ended

Sep. 30, 2012

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”) provide innovative integrated circuit (IC) and intellectual property (IP) solutions that deliver core functionality for video, voice, and data communications equipment for the customer premises and network infrastructure markets. For the customer-premises market, the Company offers multi-standard, high-speed interconnect solutions enabling the distribution and presentation of high-definition (HD) video and data content for consumer electronics applications. The Company also provides a family of best-in-class communications processors. For the network infrastructure market, the Company provides integrated multi-core network processor system-on-a-chip solutions for fixed, 3G and 4G mobile, VoIP and multimedia applications. TranSwitch’s customers are leading consumer electronics and telecom equipment companies around the globe.

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. As of September 30, 2012, the Company has negative working capital of approximately $4.1 million. In addition, the Company has outstanding indebtedness to Bridge Bank under its credit facility of $0.9 million.

The Company’s current forecast projects that, absent an infusion of capital, it will be unable to meet its current obligations through September 30, 2013. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

In July of 2012, the Company announced a restructuring which primarily affected the telecom product unit and is expected to save $8.0 million in annual operating costs (see Note 12, Restructuring Charges). With this restructuring, the Company has cancelled all development programs related to its telecom product lines. The Company has redeployed all of its remaining research and development resources to focus on its interoperable connectivity solutions for consumer electronic and personal computer markets. The Company has also announced its intentions to sell its non-strategic assets. During the quarter, the Company announced that it retained a leading patent broker to sell its telecom related patent portfolio. The Company also effectuated restructurings in the first and third quarters of 2011. The Company continues to assess its cost structure in relationship to its revenue levels, which may necessitate further expense reductions.

As with any operating plan, there are risks associated with the Company’s ability to execute it, including the current economic environment in which it operates. Therefore, there can be no assurance that the Company will be able to satisfy its obligations, or achieve the operating improvements as contemplated by the current operating plan. If the Company is unable to execute this plan, it will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as currently contemplated. There can be no assurance that the additional funding sources will be available to the Company at favorable rates or at all. If the Company cannot maintain compliance with its covenant requirements on its bank financing facility or cannot obtain appropriate waivers and modifications, the lenders may call the debt. If the debt is called, the Company would need to obtain new financing and there can be no assurance that the Company will be able to do so. If the Company is unable to achieve its operating plan and maintain compliance with its loan covenants and its debt is called, the Company will not be able to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

Reclassifications

Certain prior period amounts have been reclassified to conform to current year presentation.

Concentrations of Credit Risk and Significant Customers

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

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

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

At September 30, 2012 and December 31, 2011, approximately 79% and 59% 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 follow:

	September 30, 2012			December 31, 2011

Customer A		42	%		*
Customer B		20	%		*
Customer C		*			17	%
Customer D		*			15	%
Customer E		*			10	%

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