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EX-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). - TRANSWITCH CORP /DEv230324_ex32-1.htm
EX-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). - TRANSWITCH CORP /DEv230324_ex31-2.htm
EXCEL - IDEA: XBRL DOCUMENT - TRANSWITCH CORP /DEFinancial_Report.xls
EX-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). - TRANSWITCH CORP /DEv230324_ex31-1.htm
 
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.
 
 
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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.
 
 
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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.
 
 
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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.

 
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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.
 
 
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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.
 
 
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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.
 
 
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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 $0.2 million 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 $0.3 million 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.
 
 
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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.
 
 
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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.
 
 
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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.
 
 
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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.
 
 
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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).
 
 
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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)
 
 
 
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