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Article by DailyStocks_admin    (05-19-08 08:29 AM)

Filed with the SEC from May 8 to May 14:

Transwitch (TXCC)
A group including Brener International Group says that it wants the company to consider the interests of stockholders and engage in "meaningful repurchases" of the company's stock. Brener believes that management continues to "lack any plan to boost the company's stock price and, generally, seems to lack business acumen." He also says that the stock-purchase program continues at an "anemic pace," even though management considers the shares undervalued. The Brener group reported ownership of 7,475,000 shares (5.62%) as of Dec. 28, 2007.

BUSINESS OVERVIEW

General

TranSwitch designs, develops and markets innovative semiconductor solutions that provide core functionality for voice, data and video communications network equipment. TranSwitch 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 over 200 active customers, including the leading global equipment providers, and our products are deployed in the networks of the major service providers around the world.

TranSwitch is a Delaware corporation incorporated on April 26, 1988. Our common stock trades on the NASDAQ Global Market under the symbol “TXCC.”

In addition to an extensive portfolio of standard integrated circuit products addressing voice, data, wireless and video markets, TranSwitch supplies a number of intellectual property core products for Ethernet and high definition video (HDMI protocol) applications. In 2007, we expanded our offerings to include custom design services. Our combination of standard products, intellectual property cores and custom design services enables us to serve our customers needs more fully.

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

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

Broadband Access: This market segment includes equipment that provides “last mile” connectivity between the end customer and the network for broadband services. It includes systems for connectivity over copper wires based on DSL technology, fiber connectivity using Passive Optical Network (“PON”) technology or wireless connectivity using cellular, WiMAX or other technologies. Our products are incorporated into Broadband Access equipment, enabling telecommunications service providers to deliver next generation services such as voice, data and video over the broadband connection. Our customers in this market segment include Alcatel-Lucent and Nokia Siemens Networks.

Carrier Ethernet: This is a new and rapidly growing market segment. 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. Our customers in this market segment include ZTE, Alcatel-Lucent and Tellabs.

Non-Telecommunications: TranSwitch’s design services unit leverages the company’s 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.

Industry Overview

Investment in telecommunications infrastructure is being driven primarily by the need for higher bandwidths, more ubiquitous connectivity and more flexibility of services. In the US, Canada and Western Europe there has been an extensive telecommunications infrastructure in place for several decades; however, this infrastructure was designed primarily for voice services, and is in dire need of replacement in order to provide the high data bandwidth and flexibility required by modern services. In other parts of the world, such as China and India, the need for infrastructure expansion is being driven by the rapidly expanding global economy.

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

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

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

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

The Importance of Communications Standards in our Business

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

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

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

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

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

Applications of our Products in the Network

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

The Access Network

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

The Metro Network

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

Our Products and the Functions they Serve

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

Our products address three high growth market segments:


1. Optical Transport


2. Broadband Access


3. Carrier Ethernet

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

Optical Transport Products

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




Sonet/SDH/PDH Mappers and Framers

Our products address the predominant formats and data speeds employed in the access portion of the network. We provide solutions that cover both North American (SONET/ Async) as well as International (SDH/PDH) standards. Data rates covered by our products range from 1.5 mb/s to 2.5 Gb/s. This product family includes devices that enable the transport of Ethernet and other types of data traffic over SONET/SDH and Asynch/PDH networks.




Tributary Switching and Grooming Devices

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

Broadband Access Products

TranSwitch has successfully participated in the DSL market with its CUBIT and ASPEN products based on its patented CellBus architecture. CellBus is based on ATM technology, which was the predominant standard for DSL. Industry emphasis is shifting away from ATM based equipment towards IP/Ethernet-centric DSL equipment. TranSwitch anticipated this evolution, and developed the new Diplomat product line which addresses the latest industry standards in this area. The Diplomat family of products will address equipment for broadband services over copper (ADSL2+, VDSL) as well as fiber-to-the-home and fiber-to-the-curb services (GPON).




ATM Controllers

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




IP Controllers

These Broadband Access devices enable the next generation of DSLAM and GPON products.

Carrier Ethernet Products

As carriers move to packet-based networks for more and more of their infrastructure, the need for both pure carrier class Ethernet devices as well as transition products continues to grow. Our Envoy line of Ethernet controllers and switches allows for differentiation and creates the opportunity for market leadership with trend setting metro Ethernet features. As an important complement to our Optical Transport products, our PacketTrunk family of circuit emulation and clock recovery devices provide vital interworking capability between the new data (IP) based services and infrastructures and the legacy voice (TDM) based services and infrastructures. The development of 10G PHY devices creates opportunities in the emerging high speed Ethernet space and also brings future competitive advantages by giving us the capability to provide more vertically integrated devices.




Circuit Emulation Devices

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




Ethernet Switches

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




Ethernet Controllers

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



Ethernet PHY

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

Technology

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

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

We have developed proprietary tool sets, called “Test Benches,” that facilitate rapid development of VLSI products and help assure that our products are standards compliant and meet customer requirements. These Test Benches consist of behavioral models of all applicable functions in a high-level design environment and also include test signal generators and analyzers such as models of SONET/SDH signals. Systems engineers use Test Benches to test new architectural concepts, while VLSI designers use Test Benches to ensure that the device conforms to product specifications.

In addition to the extensive hardware functionality, many of our products utilize embedded processors that are software programmable. This approach enables us to develop products with higher levels of functionality and flexibility than are possible with purely hardware based solutions.

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

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

We have continued to improve upon our internal chip layout capabilities and our design for test capability, both of which have resulted in significant improvements in silicon efficiency, silicon testability and time-to-market. Our system-on-a-chip definition, architecture, verification expertise and design methodology ensure that hardware and software architectural trade-offs yield desired performance testing from our VLSI solutions. The system-on-a-chip performance simulation, emulation, verification and stress testing, using Test Benches and test equipment, ensure that our products meet carrier class quality, performance and reliability requirements.

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

Strategy

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

Provide Complete Solutions Within Target Markets

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




software programs for control of our configurable devices;




product reference design models for both hardware and software applications;




evaluation boards and reference design;




OEM product design support;




multi-tier applications support; and




product technical and design documentation.

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

Continue to Promote the Deployment of Programmable Devices

We will continue to develop highly integrated products that combine the use of embedded software-programmable blocks and optimized hardware blocks in order to provide an optimal level of performance and flexibility to our customers. This flexibility enables customers to adapt the product for their unique needs or to accommodate changes resulting from emerging telecommunications standards.

Seek Early Market Penetration through Customer Sponsorship

We seek to develop close sponsoring relationships with strategic OEMs during product development in order to secure early adoption of our solutions. We believe that OEMs recognize the value of their early involvement through sponsorship of our products, as they can design their system products in parallel with our product development, thereby accelerating their time to market. In addition, we believe that our sponsoring relationships with leading OEMs help us to obtain early design wins and help reduce risks of market acceptance for our new products.

Focus on Mixed-Signal Applications

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

Partner With Selected Foundries

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

Marketing and Sales

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

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

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

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

Customers

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

Note 6 of the Notes to Consolidated Financial Statements provide data on major customers for the last three years.

Research and Development

We believe that the continued introduction of new products in our target markets is essential to our growth. As of December 31, 2007, we had 160 full-time employees engaged in research and product development efforts. We employ engineers who have the necessary VLSI, high speed mixed signal, firmware, software, hardware, physical design, verification, and validation expertise and development experience. These engineers are responsible for delivering VLSI and Evaluation/Demo products for telecommunications and data communications applications. Research and development expenditures for the years ended December 31, 2007, 2006 and 2005 were $21.7 million, $21.2 million, and $21.3 million, respectively.

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

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

CEO BACKGROUND

Dr. Santanu Das , a founder of the Corporation, has been President, Chief Executive Officer and a director of the Corporation since its inception in 1988. Prior to joining the Corporation, Dr. Das held various positions, including President, with Spectrum Digital Corporation, where he worked from 1986 through 1988. Prior to joining Spectrum Digital Corporation, he held various positions, including Director of the Applied Technology Division of ITT Corporation’s Advanced Technology Center.

Mr. Alfred F. Boschulte became a director of the Corporation in December 1998 and Chairman in 2005. Mr. Boschulte has over 30 years of experience in the telecommunications industry. Mr. Boschulte currently serves as Chairman of the Audit Committee of the Board of Directors of the New York, Independent Systems Operator Corporation, as Director of Symmetricom Corporation and as the Chairman of Probe Financial, Inc. an advisory service on current and emerging trends in the telecommunication and digital media industry. Mr. Boschulte served as the Chairman of DETECON, Inc., a telecommunications consulting business, for which he was also President and Chief Executive Officer from January 1999 to September 2002. From September 1998 to December 2000, Mr. Boschulte served as the Chairman of Independent Wireless One, Inc., a PCS service provider. Mr. Boschulte also served as the Chief Executive Officer of Independent Wireless One, Inc. from September 1998 to October 1999. From January 1996 through December 1997, he served as Managing Director of Exelcomindo, a national cellular service in Indonesia. From December 1994 through December 1995, Mr. Boschulte served as President of Tomcom, L.P., a wireless services corporation, and from November 1990 through December 1994, he served as President and Chairman of Nynex Mobile Communications, a cellular telecommunications Corporation.

Dr. Hagen Hultzsch became a director of the Corporation in August 2001 and has more than 40 years of management experience in the technology sector. In December 2001, he retired as Chairman of the Supervisory Board of T-Venture Holding in Bonn, Germany. From 1993 to 2001, Dr. Hultzsch served as a member of the Board of Management of Deutsche Telekom, responsible for Research and Development, Information Management & Systems, and Process & Quality Management. Prior to joining Deutsche Telekom, Dr. Hultzsch held executive positions at Volkswagen Group, Electronic Data Systems and Gesellschaft fuer Schwerionenforschung, a large German research organization in Darmstadt, Germany. Dr. Hultzsch also served as an Assistant Professor at Mainz University, including a fellowship at IBM’s Thomas J. Watson Research Center, Yorktown Heights, New York. Dr. Hultzsch currently serves as a Director of SCM Microsystems Inc., RIT Technologies Ltd., Radware Ltd., and living-e AG and amongst others as chairman of the board of T-Systems Solutions for Research GmbH, and Zimory GmbH, as well as chairman of the board of trustees of Fraunhofer Fokus in Berlin. He also serves as chair of ICANN 2008 Nominating Committee.

Mr. Gerald F. Montry became a director of the Corporation in May 2000. Since 1998 Mr. Montry has been the Managing Partner of Mont Reuil & Co., a private investment firm. Mr. Montry serves as Chairman of the Audit Committee of the Board of Directors of Intervoice Corporation, a developer of voice recognition and speech automation applications. From 1986 through its acquisition by Alcatel in 1998, Mr. Montry served as Senior Vice President and Chief Financial Officer of DSC Communications Corporation, a telecommunications equipment provider. He also served as a member of the Board of Directors. Prior to his tenure at DSC, Mr. Montry held management positions within the Aerospace, Defense and Computer industries.

Mr. James M. Pagos became a director of the Corporation in April 1999. Since May 2001, Mr. Pagos has been the Chief Executive Officer of P TEK, LLC, a consulting and investment company. From September 2006 to February 2008 Mr. Pagos was the Chief Executive Officer and member of the Board of Renaissance Lighting, a solid state lighting fixture and technology company located in Herndon, VA. From August 2003 to September 2006, Mr. Pagos was Chief Executive Officer and member of the Board of Vibrant Solutions, Inc., a provider of performance improvement software and services to the telecom industry. From November 1999 to April 2001, Mr. Pagos was the Chief Executive Officer of Vectant, Inc., a global infrastructure and data network services corporation. From 1972 to 1999, Mr. Pagos was employed by AT&T, a telecommunications corporation, where he most recently served as Chief Operating Officer of AT&T Solutions, the managed services division of AT&T. He also served as Vice President of AT&T Global Services from 1994 until June 1998 and began his telecommunications career in 1972 with AT&T in New England Telephone.

Dr. Albert E. Paladino became a director of the Corporation in December 1988. In 2002, Dr. Paladino was elected Chairman of the Board of Directors of RF Micro Devices, Inc., a manufacturer of radio frequency components for wireless communications. He has served as a Director of RF Micro Devices, Inc. since 1992. He serves as a Director of Paladino and Company, an international green building consulting firm. Dr. Paladino was Chairman of the Board of Directors of Telaxis Communications, a manufacturer of broadband wireless equipment for network access applications, until its acquisition by Terabeam, Inc., in 2003. He was a managing partner of Advanced Technology Ventures, a venture capital investment partnership, from 1981 through December 1998, and now is a private investor. He currently serves on the Board of Advisors of Battelle Ventures. Prior to joining Advanced Technology Ventures, Dr. Paladino held senior management positions with Raytheon Corporation, GTE Laboratories, the National Institute of Standards and Technology and the Congressional Office of Technology Assessment.

Thomas H. Baer has served as a director of Medici Arts, B.V, a Netherlands holding company since its creation in September 2004, and as Vice Chairman of Medici Arts, LLC since January 2007. Since November, 2007, Mr. Baer has served as a special advisor to Ideation Acquisition Corporation, a special purpose acquisition corporation seeking acquisitions in the digital media space. Mr. Baer founded Baer & McGoldrick, now Schulte, Roth and Zabel, a New York and London based law firm. From 1961 to 1966 Mr. Baer served as an Assistant United States Attorney for the Southern District of New York. Since 1983, Mr. Baer has been active as a motion picture producer and as an executive in the entertainment and media industry in partnership with Michael H. Steinhardt. Mr. Baer is a graduate of Tufts University and Yale Law School.

Herbert Chen has more than 20 years of investment management experience. Mr. Chen is the co-founder and managing member of Lattanzio Chen Management, LLC, an investment firm based in New York, New York that he founded in 2005. He also founded the investment firm of Chen Capital Management, Inc. in 1993. In addition Mr. Chen was a partner at Steinhardt Partners, LP. from 1991 to 1993. Mr. Chen does not sit on the board of directors of any other corporation. Mr. Chen received a BA from Brown University in 1982 and an MBA from the Wharton School in 1987.

MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW

TranSwitch is a Delaware corporation incorporated on April 26, 1988. TranSwitch designs, develops and markets innovative semiconductor solutions that provide core functionality and complete solutions for voice, data and video communications network equipment. As a leading supplier to telecom, datacom, cable television and wireless markets, TranSwitch customers include the major original equipment manufacturers that serve the worldwide public network, the internet, and corporate wide area networks. TranSwitch devices are inherently flexible, many incorporating embedded programmable microcontrollers to rapidly meet customers’ new requirements or evolving network standards by modifying a function via software instruction

In addition to an extensive portfolio of standard integrated circuit products addressing voice, data, wireless and video markets, TranSwitch supplies a number of intellectual property core products for Ethernet and high definition video (HDMI protocol) applications. In 2007, we expanded our offerings to include design services. Our combination of standard products, intellectual property cores and custom design services enables us to serve our customers needs more fully.

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

Our revenues were $32.6 million in 2007 and $38.9 million in 2006 and $32.9 million in 2005.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

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

We consider the most critical accounting policies and uses of estimates in our consolidated financial statements to be those relating to:


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


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


(3) estimating stock-based compensation;


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


(5) estimating excess inventories;


(6) estimating restructuring liabilities; and


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

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

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

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

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

We warranty our products for up to one year from the date of shipment. A liability is recorded for estimated claims to be incurred under product warranties and is based primarily on historical experience. Estimated warranty expense is recorded as cost of product revenues when products are shipped. Warranty expense is insignificant to all periods presented. Should future warranty claims differ from our estimated current liability, there could be adjustments (either favorable or unfavorable) to our cost of revenues. Any adjustments to cost of revenues could also impact future gross profits.

Derivative Liability Associated with our 5.45% Convertible Plus Cash Notes due 2007. In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (SFAS 133), the auto-conversion make-whole provision and the holder’s conversion right (collectively, the features) contained in the terms governing our 5.45% Convertible Plus Cash Notes due 2007 (the “Plus Cash Notes”) were not clearly and closely related to the characteristics of the Plus Cash Notes upon issuance. Accordingly, these features qualified as embedded derivative instruments and, because they do not qualify for any scope exception within SFAS 133, they are required by SFAS 133 to be accounted for separately from the debt instrument and recorded as derivative financial instruments.

During the year ended December 31, 2007, we recorded other income of $1.0 million, all of which related to the holder’s conversion right, to reflect the change in fair value of our derivative liability. During the year ended December 31, 2006, we recorded other income of $5.1 million, all of which related to the holder’s conversion right, to reflect the change in fair value of our derivative liability.

We adjust the derivative financial instruments to their estimated fair value and analyze the instruments to determine their classification as a liability or equity. As of December 31, 2007, the estimated fair value of our derivative liability was zero as these Plus Cash Notes due 2007 were no longer outstanding. On July 6, 2007 the Company exchanged approximately $21.2 million aggregate principal amount of its outstanding Plus Cash Notes for an equivalent principal amount of a new series of 5.45% Convertible Notes due September 30, 2010 (the “2010 Notes”). The remaining $8.9 million balance of the Plus Cash Notes was redeemed at par value at the end of September, 2007. The auto-conversion make-whole provision of the Plus Cash Notes expired on September 30, 2005, thus there was no value to this provision as of December 31, 2007 and 2006. As of December 31, 2006 and December 31, 2005, the estimated fair value of our derivative liability was $1.0 and $6.0 million, respectively all of which relates to the holder’s conversion right. The estimated fair value of the auto-conversion make-whole provision and holder’s conversion right were determined using the Monte Carlo simulation model and a lattice (trinomial) option-pricing model, respectively, while they were estimates, they are no longer subject to change.

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

Goodwill and Long-Lived Assets. Our goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. We perform impairment reviews using a fair-value method based on management’s judgments and assumptions. The fair value represents the amount at which an entity could be bought or sold in a current transaction between willing parties on an arms-length basis. In estimating fair value, the Company uses our common’s stock market price to determine fair value. Quoted market prices are the best evidence of fair value, and the market capitalization based on the Company’s common stock price is apportioned based on revenue to the entity being tested for impairment. The estimated fair value is then compared with the carrying amount of the entity, including goodwill. In the case where an entities’ estimated fair value would be lower than its carrying value, we would perform discounted cash flow analysis on the entity to determine fair value. If after a discounted cash flow analysis the entities estimated fair value is lower than its carrying value, we would retain independent appraisers to perform additional fair value calculations. We are subject to financial statement risk to the extent that the carrying amount exceeds the estimated fair value. The impairment testing performed by us at October 1, 2007
indicated that the estimated fair value of entities tested exceeded their corresponding carrying amount. As such, there was no impairment. Indefinite lived intangible assets are subject to annual impairment testing, as well. On an annual basis, the fair value of the indefinite lived assets are evaluated by us to determine if an impairment charge is required. We have only nominal amounts of indefinite lived assets.

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

A considerable amount of management judgment and assumptions are required in performing the impairment test. While we believe that our judgments and assumptions were reasonable, different assumptions could change the estimated fair values and, therefore, impairment charges could be required.

Estimated Excess Inventories. We periodically review our inventory levels to determine if inventory is stated at the lower of cost or net realizable value. The telecommunications and data communications industries have experienced a significant downturn during the past few years and, as a result, we have had to evaluate our inventory position based on known backlog of orders, projected sales and marketing forecasts, shipment activity and inventory held at our significant distributors. We recorded charges for excess and obsolete inventories totaling approximately $0.4 million in 2007, zero in 2006 and $0.6 million in 2005. Most of these products have not been disposed of and remain in our inventory.

During 2007, 2006 and 2005, we recorded net product revenues of approximately $3.5 million, $9.1 million and $12.2 million, respectively, on shipments of excess and obsolete inventory that had previously been written down to their estimated net realizable value of zero. This resulted in almost 100% gross margin on these product revenues. Had these products been sold at our historical average cost basis, gross margin would have been 64%, 68% and 69% in 2007, 2006 and 2005 respectively. We currently do not anticipate that a significant amount of the excess and obsolete inventories subject to the write-downs described above will be used in the future based upon our current demand forecast. Should our actual future demand exceed the estimates that we used in writing down our excess and obsolete inventories, we will recognize a favorable impact to cost of revenues and gross profits. Should demand fall below our current expectations, we may record additional inventory write-downs which will result in a negative impact to cost of revenues and gross profits.

Estimated Restructuring Liabilities. During 2007, 2006 and 2005, we recorded restructuring charges and asset impairments totaling $1.5 million, $0.4 million and $2.7 million, respectively, related to employee termination benefits and costs to exit certain facilities, net of sub-lease benefits. At December 31, 2007 and 2006, the restructuring liabilities were $21.1 million and $21.5 million, respectively, on our consolidated balance sheets. Certain assumptions are used by us to derive this estimate, including future maintenance costs, price escalation and sublease income derived from these facilities. Should we negotiate additional sublease rental income agreements or reach a settlement with our lessors to be released from our existing obligations, we could realize a favorable benefit to our results of future operations. Should future lease, maintenance or other costs related to these facilities exceed our estimates, we could incur additional expenses in future periods.

Valuation of Investments in Non-Publicly Traded Companies . Since 1999, we have been making strategic equity investments in non-publicly traded companies that develop technologies that are complementary to our product road map. Depending on our level of ownership and whether or not we have the ability to exercise significant influence, we account for these investments on either the cost or equity method, and review such investments periodically for impairment. The appropriate reductions in carrying values are recorded when, and if, necessary. The process of assessing whether a particular investment’s net realizable value is less than its carrying cost requires a significant amount of judgment. In making this judgment, we carefully consider the investee’s cash position, projected cash flows (both short and long-term), financing needs, most recent valuation data, the current investing environment, management / ownership changes, and competition. This evaluation process is based on information that we request from these privately held companies. This information is not subject to the same disclosure and audit requirements as the reports required of U.S. public companies, and as such, the reliability and accuracy of the data may vary. Based on our evaluations, we recorded impairment charges related to our investments in non-publicly traded companies of $0.1 million, zero and $1.5 million during 2007, 2006 and 2005, respectively. The total investment in non-public companies was $2.9 million, $3.0 million and $1.0 million as of December 31, 2007, 2006 and 2005, respectively. (For further discussion, please refer to Note 3. Investments in Non-Publicly Traded Companies and Venture Capital Funds in our Consolidated Financial Statements). We used the modified equity method of accounting to determine the impairment loss for certain investments, as it was determined that no better current evidence of the value of our cost method investments existed and we believe that this gives us the best basis for our estimate given the historic negative cash flows of these companies. The modified equity method of accounting results in recording an impairment loss on a cost method investment equal to the investor’s proportionate share of the investee’s losses as its contributed capital is consumed to fund operating losses of the investee from the inception of the investor’s investment.

RESULTS OF OPERATIONS

Comparison of Fiscal Years 2007 and 2006

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

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

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

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

As of December 31, 2007 our backlog was $4.6 million, as compared to $7.0 million as of December 31, 2006. Backlog represents firm orders anticipated to be shipped, and service revenue expected to be billed under existing contracts, during the next 12 months. Our business and, to a large extent, that of the entire communication semiconductor industry, is characterized by short-term order and shipment schedules. Since orders constituting our current backlog are subject to changes in delivery schedules or to cancellation at the option of the purchaser without significant penalty, backlog is not necessarily indicative of future revenues.

Research and Development. Research and development expenses consist primarily of salaries and related costs of employees engaged in research, design and development activities, costs related to electronic design automation tools, subcontracting and fabrication costs, depreciation and amortization and facilities expenses. Research and development expenses for 2007 were $21.7 million which increased $0.5 million, or 2% as compared to the prior year. This increase is primarily due to increased fabrication costs associated with new product development.

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

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

General and Administrative. General and administrative (G&A) expenses consist primarily of personnel-related expenses, professional and legal fees, and facilities expenses. G&A expenses were $5.6 million in 2007 a decrease of approximately $0.5 million, or 9% compared to the prior year. The decrease was primarily due to a lower headcount associated with cost cutting measures.

Restructuring Charges. We recorded restructuring charges of $1.4 million and $0.4 million for 2007 and 2006, respectively. Information on restructuring charges and asset impairments for each of the last two years is located in Note 11 of the Notes to Consolidated Financial Statements.

Change in Fair Value of the Derivative Liability. For 2007 and 2006, we recorded other income of approximately $1.0 million and $5.1 million, respectively, to reflect the change in the fair value of the derivative liability associated with the 5.45% Convertible Plus Cash Notes due September 30, 2007 (the “Plus Cash Notes”). (Refer to Note 10 – Convertible Notes of the Notes to Consolidated Financial Statements.)

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

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

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

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

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

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS

Net Revenues

Net revenues, including product and service revenues were $7.5 million in the first quarter of 2008.

Total product sales for the three months ended March 31, 2008 were $6.9 million as compared to $8.9 million for the three months ended March 31, 2007, a decrease of $2.0 million or 23%. This decrease in net product revenues for the first quarter of 2008 versus the comparable period of 2007 reflects decreased sales of our Optical Transport products of $1.1 million (mainly EtherPHAST 48 Plus) and decreased sales of our Broadband Access products of $1.4 million which is a result of lower sales for our ASPEN family of products. These decreases were partially offset by lesser increases in sales of our Carrier Ethernet and Non-Telecommunications products.

Service revenues (approximately $0.6 million in the first quarter of 2008 and $0.3 million in the first quarter of 2007) consist of design services performed for third parties on a short-term contract basis and technology licenses.

International net revenues represented approximately 85% and 89% of net revenues for the three months ended March 31, 2008 and 2007, respectively.

Gross Profit

Total gross profit for the three months ended March 31, 2008, decreased by approximately $1.5 million, or 25% from the comparable period of the prior year. The decrease in gross profit reflects lower overall revenues coupled with an increase in sales of our lower margin ASIC products.

Excluding the benefit from sales of previously written down inventory, gross profit as a percentage of net revenues declined from 63% in the first quarter of 2007 to 58% in the first quarter of 2008. 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 March 31, 2008, research and development expenses decreased $0.6 million, or 9% over the comparable period of 2007.

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

Marketing and Sales

Marketing and sales expenses consist primarily of personnel-related expenses, trade show expenses, travel expenses and facilities expenses. Marketing and sales expenses for the three months ended March 31, 2008 decreased by $.7 million or 24%, as compared to the same period in the prior year.
General and Administrative

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 March 31, 2008 increased by $0.1 million as compared to the same period in the prior year.

Restructuring and Asset Impairment Charges, net

During the three months ended March 31, 2008, we recorded restructuring charges of approximately $0.2 million. These charges include approximately $0.3 million related to workforce reductions partially offset by approximately $0.1 million related to adjustments to certain sub-lease agreements relating to our excess facilities.

In the first quarter of 2007, we recorded charges of approximately $0.7 million for costs associated with a workforce reduction of approximately 16 primarily research and development employees in our Shelton, Connecticut and Bedford, Massachusetts facilities.

Change in Fair Value of Derivative Liability

During the first quarter of 2008 we entered into a number of foreign exchange contracts to purchase Indian Rupees which we use in our India operations. The fair value of these derivative financial instruments at March 31, 2008 was a liability of $24,000.

For the first quarter of 2007, we recorded other income of approximately $0.1 million to reflect the change in the fair value of the derivative liability resulting from the 5.45% Convertible Plus Cash Notes due 2007 (“Plus Cash Notes”).

Interest Expense, net

Interest expense, net decreased from $0.3 million in the first quarter of 2007 to $0.2 million in 2008, reflecting lower interest income and lower interest expense.

Interest expense decreased from $1.0 million in the first quarter of 2007 to $0.5 million in 2008 due to lower debt balances resulting from the exchanges of our Plus Cash Notes in 2007.

Interest income decreased from $0.7 million in the first quarter of 2007 to $0.3 million in 2008. This decrease is the result of lower market yields due to decreased interest rates and lower cash and investment balances. At March 31, 2008 and 2007, the effective interest rate on our interest-bearing securities was approximately 3.1% and 5.2%, respectively.

Income Tax Expense

For the three months ended March 31, 2008 and 2007, income tax expense was $.2 million and $.1 million respectively. The amounts that were recorded reflect income taxes on the earnings of certain of our foreign subsidiaries.

During the three months ended March 31, 2008 and 2007, 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 and determined that it is not “more likely than not” that all of the deferred income tax assets will 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.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2008 and December 31, 2007, we had total cash, cash equivalents and investments in marketable securities of approximately $30.8 million and $34.1 million, respectively. This is our primary source of liquidity, as we are not currently generating positive cash flow from our operations. A summary of our cash, cash equivalents and investments in marketable securities and future commitments are detailed as follows:

Cash, Cash Equivalents and Short-term investments in marketable securities

We have financed our operations and have met our capital requirements since incorporation in 1988 primarily through private and public issuances of equity securities, convertible notes, bank borrowings and, for certain years, cash generated from operations. Our principal sources of liquidity as of March 31, 2008, consisted of $30.8 million in cash and cash equivalents and marketable securities . Cash equivalents are instruments with original maturities of less than 90 days and short-term investments have original maturities of greater than 90 days but remaining maturities of less than one year. Our cash equivalents and investments as of March 31, 2008 consist of money market instruments, corporate bonds, mortgage backed securities and government securities.

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