You should read the following discussion and analysis in conjunction with our unaudited 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, 2008.

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, 2008.

OVERVIEW

TranSwitch designs, develops and markets innovative semiconductor solutions that provide core functionality for voice, data and video communications network equipment. We supply innovative highly-integrated semiconductor solutions that provide core functionality for communications network equipment which is supplied to the world-wide telecommunications industry. In this market, TranSwitch offers a broad range of next-generation telecom products addressing both copper and fiber-based broadband access, optical transport, carrier Ethernet, and Voice-over-Internet Protocol (VoIP) applications. Also, we deliver standards-based products and technologies that enable the transmission and reception of high-speed, high-definition content and data to third-party semiconductor companies, consumer electronics manufacturers, and OEMs worldwide. The standards that are supported today by these products include Fast Ethernet, Gigabit Ethernet, HDMI, and DisplayPort. Our customers are the original equipment manufacturers ("OEMs") who supply wire-line and wireless network operators who provide voice, data and video services to end users such as consumers, corporations, municipalities, etc. We have approximately 150 active customers, including the leading global equipment providers, and our products are deployed in the networks of the major service providers around the world.

TranSwitch is a Delaware corporation incorporated on April 26, 1988. Our common stock trades on The NASDAQ Capital Market under the symbol "TXCC."

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.

We provide our products and services to customers in the following markets:

Optical Transport: This market includes equipment that transports information over optical networks based on the established SONET and SDH standards as well as the emerging networks that utilize the more recently introduced standards for Ethernet over SONET ("EoS") and SDH. Our products are incorporated in Optical Transport equipment, and enable the fiber optic network to transport information with improved efficiency, thus increasing the overall network capacity. Our customers in this market segment include Fujitsu, Alcatel-Lucent, ZTE, Tejas Networks, Cisco Systems and Ericsson.

Broadband Access: This market includes equipment that provides "last mile" connectivity between the end customer and the network for broadband services. It includes systems for connectivity over copper wires based on DSL, technology, fiber connectivity using Passive Optical Network (PON) technology or wireless connectivity using cellular, WiMAX or other technologies. Our products are incorporated into Broadband Access equipment, enabling telecommunications service providers to deliver next generation services such as voice, data and video over the broadband connection. FTTP technologies provide higher speeds than DSL for network access for both residential and business end users. FTTP offers speeds of service up to 1 Gigabit per second, or Gbps, without the limitations of distance or the symmetry/asymmetry profiles typical in DSL. In addition, FTTP also has the potential to virtually eliminate the cost of an entire class of equipment in the provider's network: the outside plant electronics. This optical broadband infrastructure enables FTTP service providers to offer a wider range of next generation bundled services to potentially enhance their revenue streams. Our FTTP product offerings address PON technology and we offer specific products that comply with the two dominant variants of this technology namely Ethernet-based PON (EPON) which has been adopted extensively in Japan and to a lesser extent in other Asian countries, and Gigabit PON (GPON) which is currently being deployed primarily in North America and is expected to be deployed in several other regions worldwide. Each of our FTTP products consists of one or two semiconductor devices either working independently or jointly - a mixed-signal device known as a protocol chipset and an analog device known as a transceiver. The mixed-signal chip translates signals between analog and digital formats, and our analog chip incorporates innovative technologies to bring photonic signals into the protocol device. Our customers in this market segment include Alcatel-Lucent, Oki Electronics, Sumitomo, Nokia Siemens Networks and PMC Sierra Israel.

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

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

We have sold our VLSI devices to more than 400 customers worldwide since shipping our first product in 1990. Our products are sold through a worldwide direct sales force and a worldwide network of independent distributors and sales representatives.

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.

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 September 30, 2009, 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, 2008.

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                Nine Months Ended
                                                  September 30,                     September 30,
                                              2009              2008            2009              2008
Net revenues:
Product revenues                                   89 %              94 %            91 %              95 %
Service revenues                                   11 %               6 %             9 %               5 %
Total net revenues                                100 %             100 %           100 %             100 %
Cost of revenues:
Product cost of revenues                           39 %              40 %            38 %              37 %
Provision for excess and obsolete
inventories                                         1 %               1 %             1 %               1 %
Service cost of revenues                            6 %               2 %             4 %               3 %
Total cost of revenues                             46 %              43 %            43 %              41 %
Gross profit                                       54 %              57 %            57 %              59 %
Operating expenses:
Research and development                           29 %              53 %            33 %              63 %
Marketing and sales                                17 %              17 %            18 %              22 %
General and administrative                         11 %              13 %            13 %              16 %
Restructuring and asset impairment
(credits) charges, net                              1 %               0 %           (14 )%              0 %
Total operating expenses                           58 %              83 %            50 %             101 %
Operating loss                                    ( 4 )%           ( 26 )%            7 %            ( 42 )%

Net Revenues

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

                                       Three Months Ended                 Three Months Ended
(Tabular dollars in thousands)         September 30, 2009                 September 30, 2008
                                                                                                         Percentage
                                                    Percent of                         Percent of         Increase
                                                      Total                              Total          (Decrease) in
                                   Revenues          Revenues         Revenues          Revenues          Revenues
Broadband Access                 $      7,471                49 %   $      3,925                37 %                90 %
Optical Transport                       3,188                21 %          5,274                50 %               (40 ) %
Carrier Ethernet                        2,588                17 %            497                 5 %               421 %
Non-Telecommunications                    221                 2 %            200                 2 %                11 %
Sub-total product revenues             13,468                89 %          9,896                94 %                36 %

Service revenues                        1,713                11 %            602                 6 %               185 %
Total                            $     15,181               100 %   $     10,498               100 %                45 %




                                       Nine Months Ended                  Nine Months Ended
(Tabular dollars in thousands)         September 30, 2009                 September 30, 2008
                                                                                                         Percentage
                                                    Percent of                         Percent of         Increase
                                                      Total                              Total          (Decrease) in
                                   Revenues          Revenues         Revenues          Revenues          Revenues
Broadband Access                 $     19,111                43 %   $      8,626                32 %               122 %
Optical Transport                      11,707                27 %         14,494                54 %               (19 ) %
Carrier Ethernet                        8,434                19 %          1,574                 6 %               436 %
Non-Telecommunications                    801                 2 %            736                 3 %                 9 %
Sub-total product revenues             40,053                91 %         25,430                95 %                58 %

Service revenues                        3,910                 9 %          1,479                 5 %               164 %
Total                            $     43,963               100 %   $     26,909               100 %                63 %

Net revenues, including product and service revenues, were $15.2 million for the three months ended September 30, 2009. The revenues for the three months ended September 30, 2009 were up approximately 45% as compared to the third quarter of 2008, which is principally due to the acquisition of Centillium. For the third quarter of 2009 versus the comparable period of 2008, revenue from our Broadband Access products increased approximately $3.5 million, which is primarily from increased revenues from our Atlanta and Mustang products partially offset by decreases in our ASIC products. Sales of our Optical Transport products were down 40% for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008. This decrease is the result of lower sales in 2009 for various legacy products that were offered as last time buy basis during 2008 partially along with decreased sales of our TEMx28 family of products. Sales of our Carrier Ethernet products increased in the third quarter of 2009 as compared to the third quarter of 2008 by approximately $2.1 million as a result of sales of our Entropia product line.

Net revenues, including product and service revenues, were $44.0 million for the nine months ended September 30, 2009. The revenues for the nine months ended September 30, 2009 were up approximately 63% as compared to the first nine months of 2008, which is principally due to the acquisition of Centillium. For the first nine months of 2009 versus the comparable period of 2008, revenue from our Broadband Access products increased approximately $10.5 million, which is primarily from increased revenues from our Atlanta and Mustang products partially offset by decreases in our ASIC products. Sales of our Optical Transport products were down 19% for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. This decrease is the result of lower sales during 2009 for various legacy products that were offered as last time buy opportunities in 2008 and lower sales of our TL3M product partially offset by increased sales for our TEMx28 product. Sales of our Carrier Ethernet products increased in the first nine months of 2009 as compared to the first nine months of 2008 by approximately $6.9 million as a result of sales of our Entropia products which we acquired from Centillium.

Service revenues (approximately $1.7 million and $0.6 million for the three months ended September 30, 2009 and 2008, respectively and approximately $3.9 million and $1.5 million for the nine months ended September 30, 2009 and 2008, respectively) consist of design and support services performed for third parties on a contract basis and HDMI and technology licenses.

International net revenues represented approximately 71% of net revenues for the three months ended September 30, 2009 as compared to 88% for the three months ended September 30, 2008.

Gross Profit

Total gross profit for the three months ended September 30, 2009 increased by approximately $2.2 million or 36% from the comparable period of the prior year. The increase in gross profit was the result of increased revenues from our newly acquired Centillium products. The total gross profit as a percentage of revenue was 54% and 57% for the three months ended September 30, 2009 and 2008, respectively. The year over year reduction in gross margin percentage was mostly attributable to an unfavorable product mix and higher inventory write-off provisions during 2009 as compared to 2008

During the three months ended September 30, 2009 and 2008, gross profit was affected favorably in the amount of $0.3 million and $0.4 million, respectively, from the sales of products that had previously been written down. Also during the three months ended September 30, 2009 and 2008, we recorded provisions for excess and obsolete inventories in the amount of $0.2 million and $0.1 million, respectively. These charges had a negative impact on our gross profit.

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

Research and Development

Research and development expenses consist primarily of salaries and related costs of employees engaged in research, design and development activities, costs related to electronic design automation tools, subcontracting and fabrication costs, depreciation and amortization, and facilities expenses. During the quarter ended September 30, 2009, research and development expenses decreased $1.2 million, or 22% over the comparable period of 2008. This decrease was a result of decreased depreciation and decreases in salaries and employee related costs as a result of workforce reductions and other cost cutting measures that were implemented in 2008.

Research and development expenses for the nine months ended September 30, 2009 decreased $2.7 million, or 16% as compared to the nine months ended September 30, 2008. This decrease was a result of decreased depreciation for computer chip design tools and decreases in facilities, subcontracting costs and salaries and employee related costs as a result of workforce reductions and other cost cutting measures that were implemented in 2008 partially offset by increased expenses due to the acquisition of Centillium.

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 September 30, 2009 increased by $0.8 million or 43% as compared to the three months ended September 30, 2008. This increase was a result of increased expenses due to the acquisition of Centillium partially offset by lower salaries and employee related expenses as a result of workforce reductions that were implemented in 2008.

For the nine months ended September 30, 2009 marketing and sales expenses increased by $2.2 million or 37% as compared to the nine months ended September 30, 2008. This increase was a result of increased expenses due to the acquisition of Centillium and increased commission expenses due to increased revenues partially offset by lower salaries and employee related expenses as a result of workforce reductions that were implemented in 2008.

General and administrative expenses consist primarily of personnel-related expenses, professional and legal fees, and facilities expenses. General and administrative expenses for the three months ended September 30, 2009 increased by $0.3 million or 22% as compared to the comparable period in 2008. This increase was a result of increased expenses due to the acquisition of Centillium.

General and Administrative expenses for the nine months ended September 30, 2009 increased by $1.4 million or 32% as compared to the comparable period in 2008.
This increase was a result of increased legal fees and other increased expenses due to the acquisition of Centillium.

Restructuring and Asset Impairment Charges, net

During the three months ended September 30, 2009 and 2008, we recorded net restructuring charges of approximately $0.1 million and net restructuring credits of $0.1 million, respectively. During the nine months ended September 30, 2009 and 2008, we recorded net restructuring credits of approximately $6.1 million and net restructuring charges of $0.1 million, respectively.

The net restructuring charges of $0.1 million for the three months ended September 30, 2009 includes charges related to workforce reductions and other restructuring adjustments.

The net restructuring credit of approximately $6.1 million for the nine month period ended September 30, 2009 includes the reversal of previously accrued restructuring charges as the result of a sublease agreement we entered into in March 2009 for unused space in our Shelton, Connecticut location.

During the first nine months of 2008, restructuring charges of approximately $0.1 million were related to workforce reductions in Europe partially offset by benefits related to adjustments to certain sub-lease agreements relating to the Company's excess facilities in Shelton, Connecticut.

Interest Expense, net

Interest expense, net decreased approximately $0.1 million in the third quarter of 2009 as compared to the third quarter of 2008. Interest income decreased as a result of lower market yields due to decreased interest rates and lower cash and investment balances. At September 30, 2009 and 2008, the effective interest rate on our interest-bearing securities was approximately 0.4% and 2.2%, respectively. Interest expense decreased due to lower debt balances resulting from the extinguishment of $15.0 million of our 5.45% Convertible Notes due September 30, 2010 (the "2010 Notes") during the fourth quarter of 2008.

Interest expense, net decreased approximately $0.3 million for the nine months ended September 30, 2009 as compared to the comparable period in 2008. Interest income decreased as a result of lower market yields due to decreased interest rates and lower cash and investment balances. Interest expense decreased due to lower debt balances resulting from the extinguishment of $15.0 million of our 2010 Notes during the fourth quarter of 2008.

Income Tax Expense

For the three months ended September 30, 2009 and 2008, income tax expense was $0.2 million and $0.1 million, respectively. For the nine months ended September 30, 2009 and 2008, income tax expense was $0.5 million and $0.4 million, respectively. The amounts that were recorded reflect income taxes on the earnings of certain of our foreign subsidiaries.

During the nine months ended September 30, 2009 and 2008, we evaluated our . . .