TRANSWITCH CORP /DE
DEF 14A, 1999-04-26
SEMICONDUCTORS & RELATED DEVICES
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<PAGE>


                                UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                 SCHEDULE 14A 

          Proxy Statement Pursuant to Section 14(a) of the Securities
                    Exchange Act of 1934 (Amendment No.  )
        
Filed by the Registrant [X]

Filed by a Party other than the Registrant [_] 

Check the appropriate box:

[_]  Preliminary Proxy Statement           [_]  Confidential, for Use of the
                                                Commission Only (as permitted
[X]  Definitive Proxy Statement                 by Rule 14a-6(e)(2))
 
[_]  Definitive Additional Materials 

[_]  Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12

                            TranSwitch Corporation
- --------------------------------------------------------------------------------
               (Name of Registrant as Specified In Its Charter)

                                 
- --------------------------------------------------------------------------------
   (Name of Person(s) Filing Proxy Statement, if other than the Registrant)

   
Payment of Filing Fee (Check the appropriate box):

[X]  No fee required.

[_]  Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

   
     (1) Title of each class of securities to which transaction applies:

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     (2) Aggregate number of securities to which transaction applies:

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     (3) Per unit price or other underlying value of transaction computed
         pursuant to Exchange Act Rule 0-11 (set forth the amount on which
         the filing fee is calculated and state how it was determined):

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     (4) Proposed maximum aggregate value of transaction:

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     (5) Total fee paid:

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[_]  Fee paid previously with preliminary materials.

     -------------------------------------------------------------------------
     
[_]  Check box if any part of the fee is offset as provided by Exchange
     Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
     was paid previously. Identify the previous filing by registration statement
     number, or the Form or Schedule and the date of its filing.
     
     (1) Amount Previously Paid:
 
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     (4) Date Filed:

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Notes:




Reg. (S) 240.14a-101.

SEC 1913 (3-99)


<PAGE>
 
                            TRANSWITCH CORPORATION
 
                            Three Enterprise Drive
                          Shelton, Connecticut 06484
 
                               ----------------
 
                   NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
                          TO BE HELD ON MAY 27, 1999
 
TO THE STOCKHOLDERS:
 
  NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of TranSwitch
Corporation, a Delaware corporation (the "Corporation"), will be held on
Thursday, May 27, 1999, at 10:00 A.M., Eastern time, at the Ramada Plaza
Hotel, 780 Bridgeport Avenue, Shelton, Connecticut 06484 for the following
purposes:
 
    1. To elect a Board of Directors for the ensuing year.
 
    2. To consider and act upon a proposal to amend the Corporation's Amended
  and Restated Certificate of Incorporation to increase the number of
  authorized shares of Common Stock, par value $.001 per share, of the
  Corporation (the "Common Stock") by an additional 75,000,000 shares.
 
    3. To consider and act upon a proposal to approve an amendment to the
  Corporation's Third Amended and Restated 1995 Stock Plan to increase the
  number of shares of Common Stock available for issuance thereunder by an
  additional 1,700,000 shares.
 
    4. To consider and act upon a proposal to approve an amendment to the
  Corporation's 1995 Non-Employee Director Stock Option Plan to (a) increase
  the number of shares of Common Stock available for issuance thereunder by
  an additional 100,000 shares and (b) to amend Section 10(d) thereof to
  appropriately increase or decrease the number of shares of Common Stock
  that a Non-Employee Director receives options to purchase on the date he or
  she is first elected to the Board of Directors and on each one-year
  anniversary of the date he or she is first elected to the Board of
  Directors to reflect stock dividends, stock splits, reorganizations or any
  other changes in the corporate structure or shares of the Corporation.
 
    5. To ratify the selection of the firm of KPMG LLP as auditors for the
  fiscal year ending December 31, 1999.
 
    6. To transact such other business as may properly come before the
  meeting and any adjournments thereof.
 
  Only stockholders of record at the close of business on April 12, 1999 are
entitled to notice of and to vote at the meeting and any adjournment thereof.
 
                                          By Order of the Board of Directors

                                          /s/Michael C. McCoy
                                          Michael C. McCoy
                                          Secretary
 
Shelton, Connecticut
April 26, 1999
 
  YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL
MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT
PROMPTLY IN THE ENCLOSED STAMPED ENVELOPE BY RETURN MAIL PRIOR TO THE DATE OF
THE ANNUAL MEETING OF STOCKHOLDERS IN ORDER TO ASSURE REPRESENTATION OF YOUR
SHARES.
<PAGE>
 
                            TRANSWITCH CORPORATION
 
                            Three Enterprise Drive
                          Shelton, Connecticut 06484
 
                               ----------------
 
                                PROXY STATEMENT
 
                    FOR THE ANNUAL MEETING OF STOCKHOLDERS
 
                          TO BE HELD ON MAY 27, 1999
 
                               ----------------
 
                                April 26, 1999
 
  Proxies in the form enclosed with this proxy statement are solicited by the
Board of Directors of TranSwitch Corporation (the "Corporation") for use at
the Annual Meeting of Stockholders to be held on Thursday, May 27, 1999, at
10:00 A.M., at the Ramada Plaza Hotel, 780 Bridgeport Avenue, Shelton,
Connecticut 06484, or at any adjournments thereof (the "Annual Meeting").
 
  The Board of Directors has fixed the close of business on April 12, 1999 as
the record date (the "Record Date"). Only stockholders of record as of the
close of business on the Record Date will be entitled to notice of, and to
vote at, the Annual Meeting and any adjournments thereof. As of the Record
Date, 16,850,394 shares of Common Stock, $.001 par value per share (the
"Common Stock"), of the Corporation were issued and outstanding. Stockholders
are entitled to cast one vote for each share of Common Stock held of record by
them on each proposal submitted to a vote at the Annual Meeting. Stockholders
may vote in person or by proxy. Execution of a proxy will not in any way
affect a stockholder's right to attend the Annual Meeting and vote in person.
Any stockholder giving a proxy has the right to revoke that proxy by (i)
filing a later-dated proxy or a written notice of revocation with the
Secretary of the Corporation at any time before it is exercised or (ii) voting
in person at the Annual Meeting. The holders of a majority of the outstanding
shares of Common Stock entitled to vote at the Annual Meeting will constitute
a quorum for the transaction of business.
 
  The persons named as attorneys in the proxies, Santanu Das and Michael F.
Stauff, were selected by the Board of Directors and are directors and/or
executive officers of the Corporation. All properly executed proxies returned
in time to be counted at the Annual Meeting will be voted as stated below
under "Voting Procedures." Any stockholder giving a proxy has the right to
withhold authority to vote for any individual nominee to the Board of
Directors by so marking the proxy in the space provided thereon.
 
  In addition to the election of directors, the stockholders will consider and
vote upon proposals to (i) approve an amendment to the Corporation's Amended
and Restated Certificate of Incorporation to increase the number of authorized
shares of Common Stock by an additional 75,000,000 shares; (ii) approve an
amendment to the Corporation's Third Amended and Restated 1995 Stock Plan to
increase the number of shares of Common Stock available for issuance
thereunder by an additional 1,700,000 shares; (iii) approve an amendment to
the Corporation's 1995 Non-Employee Director Stock Option Plan to (a) increase
the number of shares of Common Stock available for issuance thereunder by an
additional 100,000 shares and (b) to amend Section 10(d) thereof to
appropriately increase or decrease the number of shares of Common Stock that a
Non-Employee Director receives options to purchase on the date he or she is
first elected to the Board of Directors and on each one-year anniversary of
the date he or she is first elected to the Board of Directors to reflect stock
dividends, stock splits, reorganizations or any other changes in the corporate
structure or shares of the Corporation; and (iv) ratify the selection of the
firm of KPMG LLP as auditors for the fiscal year ending December 31,
 
                                       1
<PAGE>
 
1999, all as further described in this proxy statement. Where a choice has
been specified on the proxy with respect to the foregoing matters, including
the election of directors, the shares represented by the proxy will be voted
in accordance with the specifications and will be voted FOR any such proposal
if no specification is indicated. See "Proposals for Consideration at the
Annual Meeting of Stockholders."
 
  The Board of Directors of the Corporation knows of no other matters to be
presented at the Annual Meeting. If any other matter should be presented at
the Annual Meeting upon which a vote properly may be taken, shares represented
by all proxies received by the Board of Directors will be voted with respect
thereto in accordance with the judgment of the persons named as attorneys in
the proxies.
 
  An Annual Report to Stockholders containing financial statements for the
fiscal year ended December 31, 1998 is being mailed together with this proxy
statement to all stockholders entitled to vote. This proxy statement and the
form of proxy were first mailed to stockholders on or about April 26, 1999.
 
                     MANAGEMENT AND PRINCIPAL STOCKHOLDERS
 
  The following table sets forth as of the Record Date certain information
regarding the ownership of outstanding shares of Common Stock by (i) each
person who, to the knowledge of the Corporation, beneficially owned more than
5% of the outstanding shares of Common Stock, (ii) each director (or nominee
for director) of the Corporation, (iii) each Named Executive Officer (as
defined under "Compensation and Other Information Concerning Directors and
Named Executive Officers--Executive Compensation") and (iv) all directors and
nominees for directors and executive officers as a group. Unless otherwise
indicated below, each person listed below maintains a business address at
c/o TranSwitch Corporation, Three Enterprise Drive, Shelton, Connecticut 06484
and has sole voting and investing power with respect to all shares of Common
Stock owned.
 
<TABLE>
<CAPTION>
                                                         Shares
                                                      Beneficially   Percent
Name and address of Beneficial Owner                    Owned(1)   of Class(2)
- ------------------------------------                  ------------ -----------
<S>                                                   <C>          <C>
Pilgrim Baxter & Associates, Ltd.....................  1,355,400      8.0%
 825 Duportail Road
 Wayne, PA 19087
 
Nicholas-Applegate Capital Management................    823,900      4.9%
 600 West Broadway, 29th Floor
 San Diego, CA 92101
 
Santanu Das(3).......................................    254,813      1.5%
Steward S. Flaschen(4)...............................    139,971        *
Michael F. Stauff(5).................................     76,293        *
Ljubomir Micic(6)....................................     40,000        *
Terrence S. Rogers(7)................................     37,063        *
Albert E. Paladino...................................     17,000        *
Erik H. van der Kaay(8)..............................     12,134        *
Alfred R. Boschulte(9)...............................      4,167        *
James M. Pagos(10)...................................      4,167        *
All directors and executive officers as a group (9
 persons)(11)........................................    585,608      3.4%
</TABLE>
- --------
 *  Less than 1% of the outstanding common stock.
 (1)  Beneficial ownership is determined in accordance with the rules of the
      Securities and Exchange Commission and generally includes voting or
      investment power with respect to securities. Shares
 
                                       2
<PAGE>
 
      of Common Stock subject to options currently exercisable or exercisable
      within 60 days of the Record Date ("Presently Exercisable Securities") are
      deemed outstanding for computing the percentage of the person or entity
      holding such securities, but are not outstanding for computing the
      percentage of any other person or entity.
 (2)  Percentage of beneficial ownership is based on 16,850,394 shares of
      Common Stock outstanding as of the Record Date.
 (3)  Consists of 87,500 shares owned and 167,313 shares issuable upon
      exercise of Presently Exercisable Securities.
 (4)  Includes 55,683 shares owned by the Joyce D. Flaschen Revocable
      Investment Trust of which Dr. Flaschen is trustee. Dr. Flaschen
      disclaims beneficial ownership of the shares held by the Joyce D.
      Flaschen Revocable Investment Trust. Also includes 17,100 shares
      issuable upon exercise of Presently Exercisable Securities.
 (5)  Consists of 28,222 shares owned and 48,071 shares issuable upon exercise
      of Presently Exercisable Securities.
 (6)  Consists of 17,500 shares owned and 22,500 shares issuable upon exercise
      of Presently Exercisable Securities.
 (7)  Consists of 12,000 shares owned and 25,063 shares issuable upon exercise
      of Presently Exercisable Securities.
 (8)  Consists of 3,800 shares owned and 8,334 shares issuable upon exercise
      of Presently Exercisable Securities.
 (9)  Consists of 4,167 shares issuable upon exercise of Presently Exercisable
      Securities.
(10)  Consists of 4,167 shares issuable upon exercise of Presently Exercisable
      Securities.
(11)  Includes 296,715 shares issuable upon exercise of Presently Exercisable
      Securities.
 
                   THE BOARD OF DIRECTORS AND ITS COMMITTEES
 
  The business and affairs of the Corporation are managed under the direction
of its Board of Directors. The Board of Directors met eight (8) times during
the fiscal year ended December 31, 1998. The Audit Committee of the Board of
Directors, currently consisting of Erik H. van der Kaay (Chairman), Ljubomir
Micic, James M. Pagos and Steward S. Flaschen, reviews with the Corporation's
independent auditors the scope and timing of their audit services and any
other services the independent auditors are asked to perform, the independent
auditors' report on the Corporation's financial statements following
completion of their audit and the Corporation's policies and procedures with
respect to internal accounting and financial controls. In addition, the Audit
Committee makes annual recommendations to the Board of Directors for the
appointment of independent auditors for the ensuing year. The Audit Committee
met two (2) times during the fiscal year ended December 31, 1998. The
Compensation Committee of the Board of Directors, currently consisting of
Albert E. Paladino (Chairman), Erik H. van der Kaay, James M. Pagos and
Steward S. Flaschen, reviews and evaluates the compensation and benefits of
all officers of the Corporation, reviews general policy matters relating to
compensation and benefits of employees of the Corporation and administers the
Corporation's 1989 Stock Option Plan, Third Amended and Restated 1995 Stock
Plan, 1995 NonEmployee Director Stock Option Plan and 1995 Employee Stock
Purchase Plan. The Compensation Committee met eight (8) times during the
fiscal year ended December 31, 1998. The Board of Directors does not currently
have a standing nominating committee. Each of the directors attended at least
75% of the aggregate of all meetings of the Board of Directors and all
committees on which he serves.
 
                                       3
<PAGE>
 
                OCCUPATIONS OF DIRECTORS AND EXECUTIVE OFFICERS
 
  The following table sets forth the current directors and executive officers
of the Corporation and the nominees to be elected at the Annual Meeting, their
ages and the positions currently held by each such person with the
Corporation.
 
<TABLE>
<CAPTION>
Name                                 Age                  Position
- ----                                 ---                  --------
<S>                                  <C> <C>
Santanu Das.........................  54 President, Chief Executive Officer and
                                         Chairman of the Board of Directors
 
Michael F. Stauff...................  48 Senior Vice President, Chief Financial
                                         Officer and Treasurer
 
Terrence S. Rogers..................  43 Vice President, Worldwide Sales
 
Alfred R. Boschulte.................  56 Director
 
Steward S. Flaschen(1)(2)...........  72 Director
 
Erik H. van der Kaay(1)(2)..........  58 Director
 
Ljubomir Micic(2)...................  68 Director
 
James M. Pagos(1)(2)................  51 Director
 
Albert E. Paladino(1)...............  66 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
 
Nominees for Election of Directors at the Annual Meeting
 
  Santanu Das, a founder of the Corporation, has been President, Chief
Executive Officer and a director of the Corporation since its inception in
1988 and its Chairman since May 1997. Prior to joining the Corporation, Dr.
Das held various positions, including President, with Spectrum Digital
Corporation, where he worked from 1986 through August of 1988. Prior to
joining Spectrum Digital Corporation, he held various positions, including
Director, Applied Technology Division, of ITT Corporation's Advanced
Technology Center. Dr. Das holds a Ph.D. from Washington University, St. Louis
and an undergraduate degree from Jadavpur University, Calcutta, India.
 
  Alfred R. Boschulte became a director of the Corporation in December 1998.
Mr. Boschulte has over 30 years of experience in the telecommunications
industry and has served as Chairman and Chief Executive Officer of Independent
Wireless One, Inc., a new PCS service provider, since September 1998 and as
President and Chief Executive Officer of AFB Consulting, Inc., a
telecommunications consulting business, since January 1998. 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.
 
  Steward S. Flaschen, a founder of the Corporation, has been a director of
the Corporation since its inception and served as Chairman of the Board from
1988 through May 1997. Dr. Flaschen has served as President of Flaschen and
Davies, a consulting firm, since 1986; as Chairman of the Board of Directors
of Telco Systems, an electronics manufacturing corporation, from 1986 through
November 1998; and as a member of the Board of Directors of Sipex Corporation,
a semiconductor corporation, since 1996. In addition, he has been an
Independent General Partner of Merrill Lynch Capital Fund LP II, an investment
fund, since 1986.
 
  Erik H. van der Kaay became a director of the Corporation in September 1997
and is also a member of the Board of Directors of RF Micro Devices, Inc., a
manufacturer of RF components for
 
                                       4
<PAGE>
 
wireless communications. Since April 1998, he has been President and Chief
Executive Officer of Datum, Inc., which manufactures time and frequency
products used in telecommunications and other fields. Mr. van der Kaay was
Executive Vice President of Allen Telecom, Inc., a telecommunications
Corporation, from March 1997 through April 1998 and served as President of the
Antennae Specialist Division of Allen Telecom from June 1990 until March 1997.
Prior to joining Allen Telecom, he was President and Chief Executive Officer
of Millitech Corporation, a manufacturer of RF broadband wireless equipment.
 
  Ljubomir Micic has been a director of the Corporation since June 1994. Since
1990, he has been the Chief Executive Officer of VEN-NET-A, a German
consulting Corporation. Prior to his retirement from ITT Corporation in 1990,
he was a Vice President of ITT Corporation and Chairman of its Semiconductor
Division.
 
  James M. Pagos became a director of the Corporation in April 1999, replacing
Charles Lee. Mr. Pagos has served as Chief Operating Officer of AT&T
Solutions, the managed services division of AT&T Corporation, a
telecommunications company, since June 1998. He also served as Vice President
AT&T Global Services from 1994 until June 1998 and began his
telecommunications career in 1972 with New England Telephone. Mr. Pagos holds
degrees in Electrical Engineering and Economics from Brown University.
 
  Albert E. Paladino has been a director of the Corporation since December
1988. He is the Chairman of Millitech Corporation, a manufacturer of broadband
wireless equipment for network access applications, a position he has held
since 1992. Dr. Paladino is also a member of the Board of Directors of RF
Micro Devices, Inc., a manufacturer of RF components for wireless
communications, and Helios Corporation, a developer of high capacity
millimeter wave communications equipment. He was a general partner of Advanced
Technology Ventures, a venture capital investment partnership, from 1981
through December 1998. Prior to joining Advanced Technology Ventures, Dr.
Paladino held senior positions with Raytheon Corporation, GTE Laboratories,
the National Institute of Standards and Technology and the Congressional
Office of Technology Assessment.
 
Executive Officers
 
  Michael F. Stauff is Senior Vice President, Chief Financial Officer and
Treasurer of the Corporation. Prior to joining the Corporation in November
1994, Mr. Stauff was the Vice President, Treasurer and Chief Financial Officer
of I.M. Holdings, Inc., an international manufacturer of marine electronic and
hardware products, since 1985. He holds a B.S.B.A. and an M.B.A. from
Northeastern University.
 
  Terrence S. Rogers joined the Corporation as Vice President, Worldwide
Sales, in February 1998 from Nippon Steel Semiconductor USA, a semiconductor
Corporation, where he was Vice President, Marketing and Sales, from May 1996
through February 1998. Prior to Nippon Steel, Mr. Rogers served as Senior
Marketing Manager at Siemens Microelectronics, Inc., a microelectronics
Corporation, from August 1995 to May 1996; Strategic Accounts Manager at
Hyundai Electronics America, an electronics Corporation, from May 1993 to
August 1995; and as Strategic Account and Regional Sales Manager at Oki
Semiconductor, an integrated circuit manufacturing Corporation, from March
1989 through May 1993. He holds a B.S.E.E. and a B.A. in Psychology from the
University of Notre Dame and an M.B.A. in Marketing from the University of
Arizona.
 
                                       5
<PAGE>
 
                      COMPENSATION AND OTHER INFORMATION
               CONCERNING DIRECTORS AND NAMED EXECUTIVE OFFICERS
 
Executive Compensation
 
  Summary Compensation. The following table sets forth the compensation earned
by the Corporation's Chief Executive Officer and each of the other most highly
compensated executive officers of the Corporation whose total salary and bonus
for 1998 exceeded $100,000 (collectively, the "Named Executive Officers") for
services rendered in all capacities to the Corporation for the fiscal years
ended December 31, 1998, 1997 and 1996:
 
                          Summary Compensation Table
 
<TABLE>
<CAPTION>
                                         Annual        Long-Term
                                      Compensation    Compensation
                                    ----------------- ------------
                                                       Securities
Name and Principal                                     Underlying     All Other
Position                    Year     Salary   Bonus     Options      Compensation
- ------------------          ----    -------- -------- ------------   ------------
<S>                         <C>     <C>      <C>      <C>            <C>
Santanu Das(1)............  1998    $218,256 $265,000   223,000         $6,188(2)
 President, Chief
 Executive Officer          1997     194,862   62,525   110,000(3)       5,910(4)
                            1996     178,173   39,000    80,000          1,825(5)
 
Terrence S. Rogers(6).....  1998     186,289   25,250   100,250          5,655(7)
 Vice President, Worldwide
 Sales(8)                   1997(9)      --       --        --             --
                            1996(9)      --       --        --             --
 
Michael F. Stauff(6)(10)..  1998     129,174   62,400    55,800          5,351(11)
 Senior Vice President,
 Chief                      1997     121,494   24,250    42,350(12)      4,650(13)
 Financial Officer and
 Treasurer                  1996     112,752   10,000    22,300            522(5)
</TABLE>
- --------
 (1)  Dr. Das will receive a severance payment equal to his then current
      annual base salary and the highest annual bonus paid to him over the
      preceding five years if the Corporation terminates his employment other
      than for cause or if Dr. Das resigns from his position due to a
      substantial reduction in his responsibilities or authority.
 (2)  Includes $5,000 contributed to defined contributions plans and $1,188 in
      premiums paid with respect to term life insurance on behalf of Dr. Das.
 (3)  Consists of 110,000 securities underlying options that were repriced as
      of May 30, 1997.
 (4)  Includes $4,750 contributed to defined contributions plans and $1,160 in
      premiums paid with respect to term life insurance on behalf of Dr. Das.
 (5)  Premiums paid with respect to term life insurance on behalf of the Named
      Executive Officer.
 (6)  Each of Messrs. Rogers and Stauff will receive a severance payment equal
      to three months' salary if the Corporation terminates his employment for
      any reason.
 (7)  Includes $4,764 contributed to defined contributions plans and $891 in
      premiums paid with respect to term life insurance on behalf of Mr.
      Rogers.
 (8)  Mr. Rogers joined the Corporation effective February 12, 1998.
 (9)  Information is not provided for 1996 and 1997 because Mr. Rogers was not
      employed by the Corporation during those years.
(10)  Mr. Stauff will receive a severance payment equal to six months' salary
      and fifty percent of the highest annual bonus paid to him over the
      preceding five years if the Corporation terminates his employment
      without cause within 12 months of a change of control.
(11)  Includes $4,603 contributed to defined contributions plans and $748 paid
      with respect to term life insurance on behalf of Mr. Stauff.
(12)  Includes 34,800 securities underlying options that were repriced as of
      May 30, 1997.
(13)  Includes $3,945 contributed to defined contributions plan and $705 paid
      with respect to term life insurance on behalf of Mr. Stauff.
 
                                       6
<PAGE>
 
  Option Grants. The following table sets forth information concerning stock
options granted during the fiscal year ended December 31, 1998 under the
Corporation's Third Amended and Restated 1995 Stock Plan to the Named
Executive Officers. The Corporation did not grant any stock appreciation
rights during fiscal year 1998.
 
                             Option Grants in 1998
 
<TABLE>
<CAPTION>
                                       Individual Grants
                         ---------------------------------------------
                                    Percent of                                 Potential
                                      Total                               Realizable Value at
                         Number of   Options                            Assumed Annual Rates of
                         Securities Granted to                         Stock Price Appreciation
                         Underlying Employees    Exercise                 for Option Term(1)
                          Options   in Fiscal     Price     Expiration -------------------------
  Name                   Granted(2)  Year(3)   ($/Share)(4)    Date         5%          10%
  ----                   ---------- ---------- ------------ ----------      --      ------------
<S>                      <C>        <C>        <C>          <C>        <C>          <C>
Santanu Das.............  223,000       14%       $14.63     9/21/08   $  1,827,227 $  4,631,702
Terrence S. Rogers......  100,250        6%       $14.63     9/21/08        709,305    1,798,286
Michael F. Stauff.......   55,850        4%       $14.63     9/21/08        467,548    1,185,178
</TABLE>
- --------
(1)  The potential realizable value is calculated based on the term of the
     option at the time of grant (10 years). Stock price appreciation of 5%
     and 10% is based on the fair market value at the time of grant and
     assumes that the option is exercised at the exercise price and sold on
     the last day of its term at the appreciated price, pursuant to rules
     promulgated by the Securities and Exchange Commission. The potential
     realizable value does not represent the Corporation's prediction of its
     stock price performance. This table does not take into account any
     appreciation or depreciation in the fair value of the Common Stock from
     the date of grant to date. There can be no assurance that the actual
     stock price appreciation over the 10-year option term will be at the
     assumed 5% and 10% levels or at any other defined level.
(2)  These options have terms of 10 years from the date of grant and become
     exercisable over four years at the rate of 25% on the date of grant, an
     additional 12.5% six months thereafter, an additional 12.5% six months
     thereafter and an additional 6.25% at the end of each three-month period
     thereafter until such options are fully exercisable.
(3)  Options to purchase a total of 1,572,863 shares were granted to employees
     (including the Named Executive Officers) in fiscal year 1998 under the
     Corporation's Third Amended and Restated 1995 Stock Plan.
(4)  The exercise price was the fair market value of a share of the
     Corporation's Common Stock at the time of grant as determined in
     accordance with the Corporation's Third Amended and Restated 1995 Stock
     Plan. The exercise price may be paid in cash or in shares of the
     Corporation's Common Stock valued at fair market value on the exercise
     date.
 
                                       7
<PAGE>
 
  Option Exercises and Unexercised Option Holdings. The following table sets
forth certain information concerning option exercises and unexercised stock
options held as of December 31, 1998 by each of the Named Executive Officers:
 
            Aggregated Option Exercises and Year End Option Values
 
<TABLE>
<CAPTION>
                                                   Number of Securities            Value of
                                                  Underlying Unexercised   Unexercised In-the-Money
                           Shares                   Options at Year-End     Options at Year-End(2)
                          Acquired      Value    ------------------------- -------------------------
  Name                   on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
  ----                   ----------- ----------- ----------- ------------- ----------- -------------
<S>                      <C>         <C>         <C>         <C>           <C>         <C>
Santanu Das.............        0     $      0     173,000      227,500    $5,959,220   $5,973,050
Terrence S. Rogers......        0            0           0      100,250             0    2,774,578
Michael F. Stauff.......   31,000      753,980      31,581       59,089     1,011,601    1,552,303
</TABLE>
- --------
 
(1)  Calculated as the difference between the fair market value of the
     underlying securities at the exercise date of the underlying options and
     the aggregate exercise price.
(2)  Value is based on the difference between the option exercise price and
     the fair market value of the Corporation's Common Stock on December 31,
     1998, multiplied by the number of shares underlying the options.
 
  Employment Agreements and Severance Policy. None of the Named Executive
Officers has a long-term employment agreement with the Corporation. The
employment of each of the Named Executive Officers may be terminated by the
Corporation at any time. To help retain the continued services of Dr. Das, the
Corporation has entered into a Severance Agreement with Dr. Das providing for
a severance payment equal to his then-current annual base salary and the
highest annual bonus paid to him over the preceding five years if the
Corporation terminates his employment other than for cause or if Dr. Das
resigns from his position due to a substantial reduction in his responsibility
or authority. The Corporation has also entered into Executive Agreements with
Dr. Das and each of the other Named Executive Officers, which provide for
severance payments equal to, in the case of Dr. Das, his then-current annual
base salary and the highest annual bonus paid to him over the previous five
years and, in the case of each of the other Named Executive Officers, fifty
percent (50%) of his then-current annual base and fifty percent (50%) of the
highest annual bonus paid to him over the preceding five years in the event of
a termination without cause within 12 months of a change in control of the
Corporation. In the event that Dr. Das is entitled to payments under both
agreements, the maximum amount payable to him is equal to the payment required
under one of the agreements. Notwithstanding the foregoing, the Corporation's
policy is to pay a severance payment of three months' base salary to any of
the Named Executive Officers whose employment is terminated by the Corporation
for any reason. Letters sent by the Corporation to Terrence S. Rogers and
Michael F. Stauff offering them employment with the Corporation expressly
contain this latter three-month severance provision.
 
Compensation Committee Report on Executive Compensation
 
  During fiscal year 1998, the Compensation Committee of the Board of
Directors consisted of Albert E. Paladino (Chairman), Steward S. Flaschen,
Charles Lee (who resigned from the Board of Directors effective April 8, 1999)
and Erik H. van der Kaay, each of whom was an independent, non-employee
director. The Compensation Committee reviews and evaluates the compensation
and benefits of all executive officers of the Corporation, reviews general
policy matters relating to compensation and benefits of employees of the
Corporation and administers the Corporation's 1989 Stock Option Plan, Third
Amended and Restated 1995 Stock Plan, 1995 Non-Employee Director Stock Option
Plan and 1995 Employee Stock Purchase Plan.
 
  The Corporation's executive compensation program established by the
Compensation Committee is designed to provide levels of compensation in
formats that assist the Corporation in attracting,
 
                                       8
<PAGE>
 
motivating and retaining qualified executives by providing a competitive
compensation package geared to individual and corporate performance. The
Compensation Committee strives to establish performance criteria, evaluate
performance and establish base salary, annual bonuses and long-term incentives
for the Corporation's key decision makers based upon performance and designed
to provide appropriate incentives for maximization of the Corporation's short-
and long-term financial results for the benefit of the Corporation's
stockholders.
 
  To meet its objectives, the Compensation Committee has chosen three basic
components for the Corporation's executive compensation program to meet the
Corporation's compensation philosophy. Base salaries, the fixed regular
component of executive compensation, are based upon (i) base salary levels
among a competitive peer group, (ii) the Corporation's past financial
performance and future expectations, (iii) the general and industry-specific
business environment and (iv) individual performance. Annual bonuses, which
are directly linked to the Corporation's yearly performance, are designed to
provide additional cash compensation based on short-term performance of
certain key employees. Stock option grants, under the long-term component of
executive compensation, are designed to provide performance incentives to and
reward executive officers and key employees for delivering value to the
Corporation's stockholders over a longer, measurable period of time.
Historically, the Corporation has used the grant of stock options that vest
over some measurable period of time, currently four years, to accomplish this
objective.
 
  Santanu Das is the President, Chief Executive Officer and Chairman of the
Board of Directors of the Corporation. His fiscal year 1998 performance was
evaluated on the basis of the factors described above applicable to executive
officers generally. His base salary was based on a number of factors,
including the base salaries of executives performing similar functions for
peer companies. The annual bonus and stock option grant components of his
compensation, as well as his salary, reflect the Corporation's improved
financial performance, the continued introduction and commercialization of new
products and progress toward achieving business goals, as well as the
achievement by Dr. Das of other non-financial goals. In assessing Dr. Das'
performance for fiscal year 1998, the Compensation Committee took into account
the degree to which the financial and non-financial goals on which his
compensation was based had been achieved.
 
  In general, under Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"), the Corporation cannot deduct, for federal income tax
purposes, compensation in excess of $1,000,000 paid to certain executive
officers. This deduction limitation does not apply, however, to compensation
that constitutes "qualified performance-based compensation" within the meaning
of Section 162(m) of the Code and the regulations promulgated thereunder. The
Compensation Committee has considered the limitations on deductions imposed by
Section 162(m) of the Code, and it is the Compensation Committee's present
intention that, for so long as it is consistent with its overall compensation
objective, substantially all tax deductions attributable to executive
compensation will not be subject to the deduction limitations of Section
162(m) of the Code.
 
Members of the Compensation Committee:
 
  Albert E. Paladino (Chairman)
  Steward S. Flaschen
  Charles Lee(1)
  Erik H. van der Kaay
- --------
(1)  Charles Lee resigned from the Board of Directors effective April 8, 1999.
     James M. Pagos replaced Dr. Lee on the Compensation Committee as of such
     date.
 
                                       9
<PAGE>
 
Compensation of Directors
 
  Directors who are not employees of the Corporation receive a stipend of
$10,000 per year, payable quarterly, and a participation fee of $1,250 for
each meeting of the Board of Directors attended. Likewise, each non-employee
director receives a participation fee of $1,250 for each meeting of the Board
of Directors of any subsidiary of the Corporation. No employee of the
Corporation receives separate compensation for services rendered as a
director. All directors are reimbursed for expenses in connection with
attending Board and committee meetings.
 
  Each non-employee director of the Corporation is also entitled to
participate in the Corporation's 1995 Non-Employee Director Stock Option Plan.
See "Proposal to Amend the 1995 Non-Employee Director Stock Option Plan."
 
  The Corporation has purchased directors' and officers' liability insurance
from General Star Indemnity and Zurich Insurance covering all of the
Corporation's directors and executive officers. The aggregate premium for this
insurance policy in 1998 was $123,750.
 
                                      10
<PAGE>
 
                            STOCK PERFORMANCE GRAPH
 
  The following performance graph compares the percentage change in the
cumulative total stockholder return on the Corporation's Common Stock during
the period from the Corporation's initial public offering on June 14, 1995
through December 31, 1998, with the cumulative total return on (i) a group
consisting of 40 corporations in the Corporation's Standard Industrial
Classification (SIC) Code 3674--Semiconductors and Related Devices (the "SIC
Code 3674 Index") and (ii) the Nasdaq Composite Index (Total Return) (the
"Nasdaq Composite Index"). The comparison assumes $100 was invested on June
14, 1995 in the Corporation's Common Stock, the SIC Code 3674 Index and the
Nasdaq Composite Index and assumes reinvestment of dividends, if any.
 

                          [LINE GRAPH APPEARS HERE]


                    ASSUMES $100 INVESTED ON JUNE 14, 1995
                         ASSUMES DIVIDENDS REINVESTED
                      FISCAL YEAR ENDED DECEMBER 31, 1998
 
 
<TABLE>
<CAPTION>
                         June 14, December 31, December 31, December 31, December 31,
                           1995       1995         1996         1997         1998
                         -------- ------------ ------------ ------------ ------------
                           (%)        (%)          (%)          (%)          (%)
<S>                      <C>      <C>          <C>          <C>          <C>
TranSwitch Corporation
 Common Stock...........  100.00     121.92        57.53        82.19       426.71
SIC Code 3674 Index.....  100.00     100.77       162.23       169.06       254.53
Nasdaq Market Index.....  100.00     116.80       145.15       177.55       250.41
</TABLE>
- --------
* Prior to June 14, 1995, the Corporation's Common Stock was not publicly
  traded. Comparative data is provided only for the period from that date
  through December 31, 1998.
 
                                      11
<PAGE>
 
                 SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE
 
  Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Corporation's directors, executive officers and
holders of more than 10% of the Corporation's Common Stock (collectively,
"Reporting Persons") to file with the SEC initial reports of ownership and
reports of changes in ownership of Common Stock. Such persons are required by
regulations of the SEC to furnish the Corporation with copies of all such
filings. Based on its review of the copies of such filings received by it with
respect to fiscal 1998 and written representations from certain Reporting
Persons, the Corporation believes that all Reporting Persons complied with all
Section 16(a) filing requirements in 1998 except as noted below. Dr. Santanu
Das was late in filing his Statement of Changes in Beneficial Ownership of
Securities on Form 4 to reflect his disposition of 15,000 shares of Common
Stock on August 3, 1998. This transaction was reported on the Annual Statement
of Changes in Beneficial Ownership of Securities on Form 5 filed on February
16, 1999.
 
               AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
 
  At the Annual Meeting, the stockholders will be requested to consider and
act upon a proposal to approve an amendment to the Corporation's Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation") to
increase the number of authorized shares of Common Stock by an additional
75,000,000 shares. (See "Proposal to Amend the Amended and Restated
Certificate of Incorporation.")
 
  Under the Certificate of Incorporation (and prior to the approval of this
amendment), the Corporation can issue up to 25,000,000 shares of Common Stock
and 1,000,000 shares of Preferred Stock, $.01 par value per share (the
"Preferred Stock"). As of the Record Date, there were 16,850,394 shares of
Common Stock issued and outstanding and 8,149,606 shares of Common Stock
available for future issuance. If the amendment is approved, there will be
approximately 83,149,606 shares of Common Stock available for future issuance.
As of the Record Date, there were no shares of Preferred Stock issued and
outstanding and 1,000,000 shares of Preferred Stock available for future
issuance. The Board of Directors does not intend to solicit stockholder
approval before issuing additional shares of Common Stock or Preferred Stock.
 
  If the amendment is approved, the Board of Directors will issue
approximately 8,425,197 shares of Common Stock to effectuate a 3-for-2 stock
split in the form of a stock dividend (the "Stock Dividend") declared by the
Board of Directors on April 8, 1999. The Stock Dividend will be payable on the
date on which the amendment to the Certificate of Incorporation is filed with
the Secretary of State of the State of Delaware. All stockholders of record as
of April 26, 1999 will be entitled to participate in the Stock Dividend. The
Board of Directors believes that the authorized number of shares of Common
Stock should be increased to enable the Corporation to effect the Stock
Dividend and to provide sufficient shares for such additional corporate
purposes as may be determined by the Board of Directors to be necessary or
desirable. These purposes may include, without limitation, acquiring other
businesses in exchange for shares of Common Stock, raising capital or
acquiring technology rights through the sale of Common Stock and attracting or
retaining valuable employees through the issuance of stock options. Other than
the Stock Dividend, the Corporation has no commitments, agreements or
undertakings to issue any such additional shares.
 
  The issuance of additional shares of the Common Stock could have the effect
of diluting earnings per share and book value per share, which could adversely
affect the Corporation's existing stockholders. Issuance of shares of Common
Stock could be used to make a change in control of the Corporation more
difficult or costly by diluting the stock ownership of persons seeking to
obtain control of the Corporation. The Corporation is not aware, however, of
any pending or threatened efforts to obtain control of the Corporation.
 
                                      12
<PAGE>
 
                  THIRD AMENDED AND RESTATED 1995 STOCK PLAN
 
  At the Annual Meeting, the stockholders will be requested to consider and
act upon a proposal to approve an amendment to the Corporation's Third Amended
and Restated 1995 Stock Plan (the "Stock Plan") to increase the number of
shares of Common Stock available for issuance thereunder by an additional
1,700,000 shares. (See "Proposal to Amend the Third Amended and Restated 1995
Stock Plan.") A summary of the Stock Plan is set forth below.
 
The Stock Plan
 
  The Stock Plan was adopted by the Board of Directors on March 5, 1998, and
was approved by the Corporation's stockholders on May 27, 1998. The Stock Plan
currently provides for the issuance of a maximum of 3,500,000 shares of Common
Stock pursuant to the grant to employees of Incentive Stock Options ("ISOs")
within the meaning of Section 422 of the Code and the grant of Non-Qualified
Stock Options (the "NQSOs"), stock awards ("Awards") or opportunities to make
direct purchases of stock in the Corporation ("Purchases") to employees,
consultants, directors and executive officers of the Corporation. Upon
approval of the amendment set forth herein, the Stock Plan will provide for
the issuance of a maximum of 5,200,000 shares of Common Stock. As of the
Record Date, 152 employees (including directors who are also employees of the
Corporation and executive officers) and 6 non-employee directors are eligible
to participate in the Stock Plan.
 
  The Stock Plan is administered by the Compensation Committee of the Board of
Directors. Subject to the provisions of the Stock Plan, the Compensation
Committee has the authority to select the optionees and determine the terms of
the options granted, including: (i) the number of shares subject to each
option, (ii) when the option becomes exercisable, (iii) the exercise price of
the option, (iv) the duration of the option and (v) the time, manner and form
of payment upon exercise of an option. The Compensation Committee determines
the exercise price per share for NQSOs, Awards and Purchases under the Stock
Plan, so long as such exercise price is no less than the minimum legal
consideration required therefor under the laws of any jurisdiction in which
the Corporation may be organized. The exercise price per share for each ISO to
be granted under the Stock Plan may not be less than the fair market value per
share of Common Stock on the date of such grant. In the case of an ISO to be
granted to an employee owning stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Corporation,
the price per share for such ISO shall not be less than one hundred ten
percent (110%) of the fair market value per share of Common Stock on the date
of grant. An option is not transferable by the option holder except by will or
by the laws of descent and distribution or, in the case of a NQSO only,
pursuant to a valid domestic relations order. Each option will expire on the
date specified by the Compensation Committee, but not more than (i) ten years
from the date of grant in the case of options generally and (ii) five years
from the date of grant in the case of ISOs granted to an employee owning stock
possessing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Corporation. Generally, no ISO may be exercised
more than 90 days following termination of employment. However, in the event
that termination is due to death or disability, the option is exercisable for
a maximum of 180 days after such termination.
 
                                      13
<PAGE>
 
  On the Record Date, the closing market price, as reported by the Nasdaq
National Market, of Common Stock, the class of stock underlying all options,
awards and purchases subject to the Stock Plan was $44.875 per share. As of
the Record Date, options to purchase 2,664,584 shares of Common Stock at a
weighted average exercise price of $12.07 per share were outstanding under the
Stock Plan. The following table sets forth the number of shares of Common
Stock underlying options granted under the Stock Plan as of the Record Date.
 
<TABLE>
<CAPTION>
                                                               Number of
                                                           Shares Underlying
                                                          Options Outstanding
                                                         Under the Stock Plan
       Name and Position                                 as of the Record Date
       -----------------                                 ---------------------
<S>                                                      <C>
Santanu Das............................................          333,000
 President, Chief Executive Officer and Chairman of the
 Board of Directors
Michael F. Stauff......................................           90,650
 Senior Vice President, Chief Financial Officer and
 Treasurer
Terrence S. Rogers.....................................          100,250
 Vice President, Worldwide Sales
All current executive officers as a group (3 persons)..          523,900
All current directors who are not executive officers as
 a group (6 persons)...................................                0
All employees who are not executive officers as a
 group.................................................        2,140,684
                                                               =========
</TABLE>
 
United States Federal Income Tax Consequences
 
  The following discussion of United States federal income tax consequences of
the issuance and exercise of options, Awards and Purchases granted under the
Stock Plan is based upon the provisions of the Code as in effect on the date
of this Proxy Statement, current regulations and existing administrative
rulings of the Internal Revenue Service. It is not intended to be a complete
discussion of all of the United States federal income tax consequences of
these plans or of the requirements that must be met in order to qualify for
the described tax treatment. In addition there may be foreign, state, and
local tax consequences that are not discussed herein.
 
  The following general rules will be applicable under current United States
federal income tax law to ISOs granted under the Stock Plan:
 
    1. In general, no taxable income results to the optionee upon the grant
  of an ISO or upon the issuance of shares to him or her upon the exercise of
  the ISO, and the Corporation is not entitled to a federal income tax
  deduction upon either the grant or exercise of an ISO.
 
    2. If shares acquired upon exercise of an ISO are not disposed of within
  (i) two years following the date the ISO was granted or (ii) one year
  following the date the shares are issued to the optionee pursuant to the
  ISO exercise (the "Holding Periods"), the difference between the amount
  realized on any subsequent disposition of the shares and the exercise price
  will generally be treated as capital gain or loss to the optionee.
 
    3. If shares acquired upon exercise of an ISO are disposed of and the
  optionee does not satisfy the requisite Holding Periods (a "Disqualifying
  Disposition"), then in most cases the lesser of (i) any excess of the fair
  market value of the shares at the time of exercise of the ISO over the
  exercise price or (ii) the actual gain on disposition, will be treated as
  compensation to the optionee and will be taxed as ordinary income in the
  year of such disposition.
 
    4. In any year that an optionee recognizes ordinary income on a
  Disqualifying Disposition of stock acquired by exercising an ISO, the
  Corporation generally will be entitled to a corresponding deduction for
  federal income tax purposes.
 
    5. The difference between the amount realized by the optionee as the
  result of a Disqualifying Disposition and the sum of (i) the exercise price
  and (ii) the amount of ordinary income recognized under the above rules
  will be treated as capital gain or loss.
 
                                      14
<PAGE>
 
    6. Capital gain or loss recognized by an optionee on a disposition of
  shares will be long-term capital gain or loss if the optionee's holding
  period for the shares exceeds 12 months.
 
    7. An optionee may be entitled to exercise an ISO by delivering shares of
  the Corporation's Common Stock to the Corporation in payment of the
  exercise price, if the optionee's ISO agreement so provides. If an optionee
  exercises an ISO in such fashion, special rules will apply.
 
    8. In addition to the tax consequences described above, the exercise of
  ISOs may result in a further "alternative minimum tax" under the Code. The
  Code provides that an "alternative minimum tax" (at a maximum rate of 28%)
  will be applied against a taxable base which is equal to "alternative
  minimum taxable income," reduced by a statutory exemption. In general, the
  amount by which the value of the Common Stock received upon exercise of the
  ISO exceeds the exercise price is included in the optionee's alternative
  minimum taxable income. A taxpayer is required to pay the higher of his
  regular tax liability or the alternative minimum tax. A taxpayer who pays
  alternative minimum tax attributable to the exercise of an ISO may be
  entitled to a tax credit against his or her regular tax liability in later
  years.
 
    9. Special rules apply if the Common Stock acquired through the exercise
  of an ISO is subject to vesting, or is subject to certain restrictions on
  resale under federal securities laws applicable to directors, officers or
  10% stockholders.
 
  The following general rules are applicable under current federal income tax
law to NQSOs to be granted under the Stock Plan.
 
    1. The optionee generally does not recognize any taxable income upon the
  grant of a NQSO, and the Corporation is not entitled to a federal income
  tax deduction by reason of such grant.
 
    2. The optionee generally will recognize ordinary compensation income at
  the time of exercise of the NQSO in an amount equal to the excess, if any,
  of the fair market value of the shares on the date of exercise over the
  exercise price. The Corporation may be required to withhold income tax on
  this amount.
 
    3. When the optionee sells the shares acquired through the exercise of a
  NQSO, he or she generally will recognize a capital gain or loss in an
  amount equal to the difference between the amount realized upon the sale of
  the shares and his or her basis in the stock (generally, the exercise price
  plus the amount taxed to the optionee as ordinary income). If the
  optionee's holding period for the shares exceeds 12 months, such gain or
  loss will be a long-term capital gain or loss.
 
    4. The Corporation generally should be entitled to a federal income tax
  deduction when ordinary income is recognized by the optionee pursuant to
  the exercise of a NQSO.
 
    5. An optionee may be entitled to exercise a NQSO by delivering shares of
  the Corporation's Common Stock to the Corporation in payment of the
  exercise price. If an optionee exercises a NQSO in such fashion, special
  rules will apply.
 
    6. Special rules apply if the Common Stock acquired through the exercise
  of a NQSO is subject to vesting, or is subject to certain restrictions on
  resale under federal securities laws applicable to directors, officers or
  10% stockholders.
 
  The following general rules are applicable under current federal income tax
law to the grant of Awards and Purchases under the Stock Plan:
 
  Under current federal income tax law, persons receiving Common Stock
pursuant to an award of Common Stock ("Award") or a grant of an opportunity to
purchase Common Stock ("Purchase") generally recognize ordinary income equal
to the fair market value of the shares received, reduced by any purchase price
paid. The Corporation generally will be entitled to a corresponding federal
income tax deduction. When such stock is sold, the seller generally will
recognize capital gain or loss.
 
  Special rules apply if the stock acquired pursuant to an Award or Purchase
is subject to vesting, or is subject to certain restrictions on resale under
federal securities laws applicable to directors, officers or 10% stockholders.
 
                                      15
<PAGE>
 
                 1995 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
 
  At the Annual Meeting, the stockholders will be requested to consider and
act upon a proposal to approve an amendment to the Corporation's 1995 Non-
Employee Director Stock Option Plan (the "Non-Employee Director Plan") to (a)
increase the number of shares of Common Stock available for issuance
thereunder by 100,000 shares and (b) to amend Section 10(d) thereof to
appropriately increase or decrease the number of shares of Common Stock that a
Non-Employee Director receives options to purchase on the date he or she is
first elected to the Board of Directors and on each one-year anniversary of
the date he or she is first elected to the Board of Directors to reflect stock
dividends, stock splits, reorganizations or any other changes in the corporate
structure or shares of the Corporation. (See "Proposal to Amend the Non-
Employee Director Plan.") A summary of the Non-Employee Director Plan is set
forth below.
 
The Non-Employee Director Plan
 
  The Non-Employee Director Plan, as amended, was originally adopted by the
Board of Directors on April 11, 1995, approved by the stockholders on April
19, 1995 and became effective on June 12, 1995. Upon approval of the amendment
set forth herein, the Non-Employee Director Plan will provide that the
aggregate number of shares available for issuance thereunder to directors who
are not employees or officers of the Corporation (each a "Non-Employee
Director") shall increase from 250,000 shares to 350,000 shares of Common
Stock. As of the Record Date, Alfred R. Boschulte, Steward S. Flaschen, Erik
H. van der Kaay, Ljubomir Micic, James M. Pagos and Albert E. Paladino are
Non-Employee Directors and, thus, eligible to participate in the Non-Employee
Director Plan.
 
  The Non-Employee Director Plan is currently administered by the Compensation
Committee of the Board of Directors, subject to the terms of the Non-Employee
Director Plan. Under the Non-Employee Director Plan, each Non-Employee
Director receives upon the date of his or her initial election as a director
an option to purchase 12,500 shares of Common Stock, which option is one-third
vested on the date of grant and vests as to an additional one-third on each of
the first and second anniversaries of the date of grant. In addition, each
Non-Employee Director receives on each one-year anniversary of the date that
such director is first elected an option to purchase 9,600 shares, vesting in
full on the first anniversary of the date of grant. If the amendment is
approved, the number of shares of Common Stock of which each Non-Employee
Director receives options to purchase will increase or decrease as appropriate
to reflect stock dividends, stock splits, reorganizations or any other changes
in the corporate structure or shares of the Corporation. The Board of
Directors or the Compensation Committee shall determine the specific
adjustment in any such case and its determination shall be conclusive. Upon
and after the effective date of the Stock Dividend approved by the Board of
Directors on April 8, 1999, each Non-Employee Director would receive on the
date of his or her initial election as a director an option to purchase 18,750
shares of Common Stock and would receive on each one-year anniversary of the
date that such director is first elected an option to purchase 14,400 shares
of Common Stock. All options granted under the Non-Employee Director Plan have
an exercise price equal to the fair market value of the Common Stock on the
date of grant. The term of each option is for a period of five years from the
date of grant. Options may not be assigned or transferred except by will, by
the laws of descent and distribution or pursuant to a valid domestic relations
order and are exercisable to the extent vested only while the optionee is
serving as a director of the Corporation or within 90 days after the optionee
ceases to serve as a director of the Corporation (except that if a director
dies or becomes disabled while he or she is serving as a director of the
Corporation, the option automatically becomes fully vested and is exercisable
until the scheduled expiration date of the Option).
 
                                      16
<PAGE>
 
  On the Record Date, the closing market price, as reported by the Nasdaq
National Market, of Common Stock, the class of stock underlying all options,
awards and purchases subject to the Non-Employee Director Plan, was $44.875
per share. As of the Record Date, options to purchase 105,900 shares of Common
Stock at a weighted average exercise price of $13.86 per share were
outstanding under the Non-Employee Director Plan. The following tables set
forth the number of shares of Common Stock underlying options granted under
the Non-Employee Director Plan as of the Record Date and the number of shares
of Common Stock underlying options to be granted annually.
 
<TABLE>
<CAPTION>
                                                  Number of Shares Underlying
                                                 Options Outstanding Under the
                                                  Non-Employee Director Plan
Non-Employee Director                                as of the Record Date
- ---------------------                            -----------------------------
<S>                                              <C>
Alfred R. Boschulte.............................             12,500
Steward S. Flaschen.............................             17,100
Erik H. van der Kaay............................             22,100
Ljubomir Micic..................................             32,100
James M. Pagos..................................             12,500
Albert E. Paladino..............................              9,600
All Non-Employee Directors as a group (6
 persons).......................................            105,900
                                                           ========
 
<CAPTION>
                                                  Number of Shares Underlying
                                                          Options to
Name and Position                                   be Granted Annually(1)
- -----------------                                -----------------------------
<S>                                              <C>
All current directors who are not executive
 officers as a group (6 persons)................           57,600(2)
                                                           ========
</TABLE>
- --------
(1)  Dr. Das and Messrs. Stauff and Rogers, the Corporation's Executive
     Officers, as well as other officers and employees of the Corporation, are
     not eligible to participate in the Non-Employee Director Plan.
(2)  Consists of options to purchase 9,600 shares of Common Stock awarded to
     each Non-Employee Director on each one-year anniversary of the date he or
     she is first elected to the Board of Directors.
 
United States Federal Income Tax Consequences
 
  The following discussion of United States federal income tax consequences of
the issuance and exercise of options, granted under the Non-Employee Director
Plan is based upon the provisions of the Code as in effect on the date of this
Proxy Statement, current regulations, and existing administrative rulings of
the Internal Revenue Service. It is not intended to be a complete discussion
of all of the United States federal income tax consequences of these plans or
of the requirements that must be met in order to qualify for the described tax
treatment. In addition there may be foreign, state, and local tax consequences
that are not discussed herein.
 
  The following general rules are applicable under current federal income tax
law to NQSOs, which are the only options that may be granted under the Non-
Employee Director Plan.
 
    1. The optionee generally does not recognize any taxable income upon the
  grant of a NQSO, and the Corporation is not entitled to a federal income
  tax deduction by reason of such grant.
 
    2. The optionee generally will recognize ordinary compensation income at
  the time of exercise of the NQSO in an amount equal to the excess, if any,
  of the fair market value of the shares on the date of exercise over the
  exercise price. The Corporation may be required to withhold income tax on
  this amount.
 
    3. When the optionee sells the shares acquired through the exercise of a
  NQSO, he or she generally will recognize a capital gain or loss in an
  amount equal to the difference between the
 
                                      17
<PAGE>
 
  amount realized upon the sale of the shares and his or her basis in the
  stock (generally, the exercise price plus the amount taxed to the optionee
  as ordinary income). If the optionee's holding period for the shares
  exceeds 12 months, such gain or loss will be a long-term capital gain or
  loss.
 
    4. The Corporation generally should be entitled to a federal income tax
  deduction when ordinary income is recognized by the optionee pursuant to
  the exercise of a NQSO.
 
    5. An optionee may be entitled to exercise a NQSO by delivering shares of
  the Corporation's Common Stock to the Corporation in payment of the
  exercise price. If an optionee exercises a NQSO in such fashion, special
  rules will apply.
 
    6. Special rules apply if the Common Stock acquired through the exercise
  of a NQSO is subject to vesting, or is subject to certain restrictions on
  resale under federal securities laws applicable to directors, officers or
  10% stockholders.
 
                      PROPOSALS FOR CONSIDERATION AT THE
                        ANNUAL MEETING OF STOCKHOLDERS
 
ITEM NO. 1:
 
                  PROPOSAL RELATING TO ELECTION OF DIRECTORS
 
  The Board of Directors of the Corporation has nominated seven persons for
election as directors of the Corporation at the Annual Meeting (the
"Nominees"). All of the Nominees are currently members of the Corporation's
Board of Directors. The Nominees and the year they first joined the Board of
Directors are:
 
<TABLE>
<CAPTION>
       Nominee                                           Year First Joined Board
       -------                                           -----------------------
     <S>                                                 <C>
     Santanu Das........................................          1988
     Alfred R. Boschulte................................          1998
     Steward S. Flaschen................................          1988
     Erik H. van der Kaay...............................          1997
     Ljubomir Micic.....................................          1994
     James M. Pagos.....................................          1999
     Albert E. Paladino.................................          1988
</TABLE>
 
  Dr. Lee resigned as a director of the Corporation for personal reasons
effective April 8, 1999. The Corporation expresses its thanks to Dr. Lee for
his years of service on the Board of Directors.
 
   THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR ELECTION OF THE
                   NOMINEES AS DIRECTORS OF THE CORPORATION
 
  The directors of the Corporation are elected annually and hold office until
the next annual meeting of stockholders and until their successors have been
elected and qualified or until their earlier death, resignation or removal.
Shares represented by all proxies received by the Board of Directors and not
marked so as to withhold authority to vote for any individual Nominee or for
all Nominees will be voted (unless one or more Nominees are unwilling or
unable to serve) FOR the election of the Nominees. The Board of Directors
knows of no reason why any Nominee should be unwilling or unable to serve, but
if such should be the case, proxies will be voted for the election of another
person or the Board of Directors may vote to fix the number of directors at a
lesser number. A plurality of the votes cast by the stockholders present or
represented by proxy and entitled to vote at the Annual Meeting is required
for the election of directors. (See "Voting Procedures.")
 
ITEM NO. 2:
 
    PROPOSAL TO AMEND THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
 
  The Corporation's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") was filed with the Secretary of State of the
State of Delaware on June 19, 1995. On April 8, 1999, the Board of Directors
voted to recommend that the Corporation's stockholders approve an amendment to
the Certificate of Incorporation to increase the number of authorized shares
of the Corporation's Common Stock by an additional 75,000,000 shares.
 
                                      18
<PAGE>
 
  The stockholders will be requested at the Annual Meeting to consider and act
upon a proposal to approve the amendment. The Board of Directors believes that
it is in the best interests of the Corporation to facilitate broader ownership
of its Common Stock. To that end, the Board of Directors approved on April 8,
1999, pending stockholder approval of the amendment, a 3-for-2 stock split in
the form of a stock dividend (the "Stock Dividend") for holders of the
Corporation's Common Stock as of April 26, 1999. The Corporation must increase
the number of authorized shares of Common Stock available under the
Certificate of Incorporation to effect the Stock Dividend. In addition, the
Board of Directors believes that it is in the best interests of the
Corporation to have additional shares authorized and available for issuance
for other corporate purposes, including without limitation acquiring other
businesses in exchange for shares of Common Stock, raising capital or
acquiring technology rights through the sale of Common Stock and attracting or
retaining valuable employees through the issuance of stock options. An
affirmative majority of the votes cast by the holders of Common Stock present
or represented by proxy and entitled to vote at the Annual Meeting is required
to approve the proposed amendment to the Certificate of Incorporation.
 
ITEM NO. 3:
 
        PROPOSAL TO AMEND THE THIRD AMENDED ANDRESTATED 1995 STOCK PLAN
 
  The Corporation's Third Amended and Restated 1995 Stock Plan (the "Stock
Plan") was adopted by the Board of Directors on March 5, 1998 and approved by
the stockholders of the Corporation on May 27, 1998. On March 17, 1999, the
Board of Directors approved, subject to stockholder approval at the Annual
Meeting, an amendment to the Stock Plan to increase the number of shares of
Common Stock available for issuance thereunder by an additional 1,700,000
shares.
 
  The stockholders will be requested at the Annual Meeting to consider and act
upon a proposal to approve the amendment. The Board of Directors believes that
the Corporation's ability to continue to attract and retain qualified
employment candidates is in large part dependent upon the Corporation's
ability to provide such employment candidates long-term, equity-based
incentives in the form of stock options as part of their compensation. As of
the Record Date, 236,907 shares of Common Stock remained available for
issuance under the Stock Plan. The Board of Directors believes that the
remaining shares available for issuance under the Stock Plan are insufficient
for such purposes, and that the approval of the amendment, which provides for
1,700,000 additional shares available for issuance, is therefore necessary. An
affirmative majority of the votes cast by the stockholders present or
represented by proxy and entitled to vote at the Annual Meeting is required to
approve the amendment.
 
                 THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
                    A VOTE FOR AMENDMENT OF THE STOCK PLAN
 
ITEM NO. 4:
 
      PROPOSAL TO AMEND THE 1995 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
 
  The Corporation's 1995 Non-Employee Director Stock Option Plan (the "Non-
Employee Director Plan"), as amended, was originally adopted by the Board of
Directors on April 11, 1995 and approved by the stockholders of the
Corporation on April 19, 1995. On March 17, 1999, the Board of Directors
approved, subject to stockholder approval at the Annual Meeting, an amendment
to the Non-Employee Director Plan to (a) increase the number of shares of
Common Stock available for issuance thereunder by an additional 100,000 shares
and (b) to amend Section 10(d) thereof to appropriately increase or decrease
the number of shares of Common Stock that a Non-Employee Director receives
options to purchase on the date he or she is first elected to the Board of
Directors and on each one-year anniversary of the date he or she is first
elected to the Board of Directors to reflect stock dividends, stock splits,
reorganizations or any other changes in the corporate structure or shares of
the Corporation.
 
                                      19
<PAGE>
 
  The stockholders will be requested at the Annual Meeting to consider and act
upon a proposal to approve the amendment. The Board of Directors believes that
the Corporation's ability to attract and retain highly qualified individuals
who are not employees or officers of the Corporation to serve on the Board of
Directors also depends in large part upon the Corporation's ability to provide
such individuals long-term, equity-based incentives in the form of stock
options as part of their compensation. As of the Record Date, 45,750 shares of
Common Stock remained available for issuance under the Non-Employee Director
Plan. The Board of Directors believes that the remaining shares available for
issuance under the Non-Employee Director Plan are insufficient for such
purposes. In addition, without such amendment, stock dividends, stock splits
and other such changes in corporate structure or shares in the Corporation
may, unintentionally, dilute or magnify the value of the options granted to
Non-Employee Directors. An affirmative majority of the votes cast by the
holders of Common Stock present or represented by proxy and entitled to vote
at the Annual Meeting is required to approve the proposed amendments to the
Non-Employee Director Plan.
 
                 THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
            A VOTE FOR AMENDMENT OF THE NON-EMPLOYEE DIRECTOR PLAN
 
ITEM NO. 5:
 
                     RATIFICATION OF SELECTION OF AUDITORS
 
  The Board of Directors, upon the recommendation of the Audit Committee, has
selected the firm of KPMG LLP, independent certified public accountants, to
serve as auditors for the fiscal year ending December 31, 1999. KPMG LLP has
served as the Corporation's auditors since fiscal year 1993. It is expected
that a member of KPMG LLP will be present at the Annual Meeting with the
opportunity to make a statement if so desired and will be available to respond
to appropriate questions.
 
             THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
                   FOR RATIFICATION OF KPMG LLP AS AUDITORS
 
                               VOTING PROCEDURES
 
  The presence, in person or by proxy, of at least a majority of the
outstanding shares of capital stock entitled to vote at the meeting is
necessary to constitute a quorum for the transaction of business. Votes
withheld from any nominee, abstentions and broker "non-votes" are counted as
present or represented for purposes of determining the presence or absence of
a quorum for the meeting. A "non-vote" occurs when a broker or other nominee
holding shares for a beneficial owner votes on one proposal, but does not vote
on another proposal because, in respect of such other proposal, the broker or
other nominee does not have discretionary voting power and has not received
instructions from the beneficial owner. In the election of directors, the
nominee receiving the highest number of affirmative votes of the shares
present or represented and entitled to vote at the meeting shall be elected as
director. On all other matters being submitted to stockholders of this
meeting, the affirmative majority vote of the shares present, in person or
represented by proxy, and voting on that matter is required for approval. An
automated system administered by the Corporation's transfer agent tabulates
the votes. The vote on each matter submitted to stockholders is tabulated
separately. Shares voted to abstain, since they are not affirmative votes for
this matter, will have the same effect as votes against the matter. Shares
subject to broker "non-votes" are not considered to have been voted for the
particular matter and have the practical effect of reducing the number of
affirmative votes required to achieve a majority for such matter by reducing
the total number of shares from which the majority is calculated.
 
 
                                      20
<PAGE>
 
                             STOCKHOLDER PROPOSALS
 
  Proposals of stockholders intended for inclusion in the proxy statement to
be furnished to all stockholders entitled to vote at the next annual meeting
of stockholders of the Corporation must be received at the Corporation's
principal executive offices not later than December 22, 1999 and not before
November 22, 1999. Notice should be sent to the attention of the Secretary of
the Corporation and must contain specified information concerning the matters
to be brought before such meeting and concerning the stockholder proposing
such matters. In order to curtail controversy as to the date on which a
proposal was received by the Corporation, it is suggested that proponents
submit their proposals by Certified Mail, Return Receipt Requested.
 
                           EXPENSES AND SOLICITATION
 
  The cost of solicitation of proxies will be borne by the Corporation, and in
addition to soliciting stockholders by mail through its regular employees, the
Corporation may request banks, brokers and other custodians, nominees and
fiduciaries to solicit their customers who have stock of the Corporation
registered in the names of a nominee and, if so, will reimburse such banks,
brokers and other custodians, nominees and fiduciaries for their reasonable
out-of-pocket costs. Solicitation by officers and employees of the Corporation
may also be made of some stockholders in person or by mail, telephone or
telegraph following the original solicitation.
 
                                      21
<PAGE>
SIDE A
- ------
                             TRANSWITCH CORPORATION
                    Proxy for Annual Meeting of Stockholders
                                  May 27, 1999

                THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
                            OF TRANSWITCH CORPORATION

         The undersigned, revoking all prior proxies, hereby appoints Dr.
Santanu Das and Michael F. Stauff, and each of them alone, proxies, with full
power of substitution, to vote all shares of Common Stock (the "Common Stock")
of TranSwitch Corporation (the "Corporation"), par value $.001 per share, that
the undersigned is entitled to vote at the Annual Meeting of Stockholders of the
Corporation to be held on Thursday, May 27, 1999, at 10:00 A.M., Eastern time,
at the Ramada Plaza Hotel, 780 Bridgeport Avenue, Shelton, Connecticut 06484,
and at any adjournments thereof, upon the matters set forth in the Notice of
Annual Meeting of Stockholders and related Proxy Statement dated April 26, 1999,
a copy of which has been received by the undersigned, and in their discretion
upon any other business that may properly come before the meeting or any
adjournments thereof. Attendance of the undersigned at the meeting or at any
adjourned session thereof will not be deemed to revoke this proxy unless the
undersigned shall affirmatively indicate thereat the intention of the
undersigned to vote said shares in person. 

     THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO
DIRECTION IS GIVEN, WILL BE VOTED FOR THE ELECTION OF DIRECTORS, FOR THE
PROPOSALS IN ITEMS 2, 3, 4 AND 5, AND DISCRETIONARY AUTHORITY WILL BE DEEMED
GRANTED UNDER ITEM 6.  

         PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE 
ENCLOSED ENVELOPE.


         (If signing as attorney, executor, trustee or guardian, please give
your full title as such. If stock is held jointly, each owner should sign.)

HAS YOUR ADDRESS CHANGED?               DO YOU HAVE ANY COMMENTS?

- ----------------------------------      ---------------------------------- 

- ----------------------------------      ---------------------------------- 

- ----------------------------------      ---------------------------------- 

<PAGE>
SIDE B
- ------

[X] Please mark votes as in this example.

                            TranSwitch Corporation

     1.    To elect a Board of Directors for the ensuing year.

                Santanu Das
                Alfred R. Boschulte          FOR ALL     WITH-     FOR ALL
                Steward S. Flaschen          NOMINEES    HOLD      EXCEPT
                Erik H. van der Kaay           [_]        [_]        [_}
                Ljubomir Micic
                James M. Pagos
                Albert E. Paladino


     INSTRUCTIONS: To withhold authority to vote "For" any individual nominee,
     mark the "For All Except" box and write that nominee's name in the space 
     provided below:

     ------------------------------------------------------

     2.   To approve an amendment to the Corporation's Amended and Restated
          Certificate of Incorporation to increase the number of authorized
          shares of Common Stock by an additional 75,000,000 shares.

     [ ]  FOR                  [ ]      AGAINST               [ ]    ABSTAIN

     3.   To approve an amendment to Corporation's Third Amended and Restated
          1995 Stock Plan to increase the number of shares of Common Stock
          available for issuance thereunder by an additional 1,700,000 
          shares. 
 
     [ ]  FOR                  [ ]      AGAINST               [ ]    ABSTAIN

     4.   To approve an amendment to the Corporation's 1995 Non-Employee
          Director Stock Option Plan to (a) increase the number of shares of
          Common Stock available for issuance thereunder by an additional
          100,000 shares and (b) to amend Section 10(d) thereof to appropriately
          increase or decrease the number of shares of Common Stock that a Non-
          Employee Director receives options to purchase on the date he or she
          is first elected to the Board of Directors and on each one-year
          anniversary of the date he or she is first elected to the Board of
          Directors to reflect stock dividends, stock splits, reorganizations or
          any other changes in the corporate structure or shares of the
          Corporation. 

     [ ]  FOR                  [ ]      AGAINST               [ ]    ABSTAIN
 
     5.   To ratify the selection of the firm of KPMG LLP as independent
          auditors of the Corporation for the fiscal year ending December 31,
          1999. 

     [ ]  FOR                  [ ]      AGAINST               [ ]    ABSTAIN

     6.   To transact such other business as may properly come before the
          meeting. 

         Mark box at right if an address change or comment has been noted on the
reverse side of this card.     [_]

                                Please be sure to sign and date this Proxy.



                                -------------------------------------------
                                Date
                                                                  

                                -------------------------------------------
                                Stockholder sign here


                                -------------------------------------------
                                Co-owner sign here

<PAGE>
 
                           CERTIFICATE OF AMENDMENT
                                        
                                      OF

               AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

                                      OF

                            TRANSWITCH CORPORATION

                         (INCORPORATED APRIL 26, 1988)
                                        
                                  * * * * * *
                                        
     TranSwitch Corporation (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:

     FIRST: That the Board of Directors of the Corporation adopted
resolutions proposing and declaring advisable the following amendment to the
Amended and Restated Certificate of Incorporation of the Corporation:

            RESOLVED:  That the first paragraph of ARTICLE FOURTH of the 
            Corporation's Amended and Restated Certificate of Incorporation
            shall be amended to read in its entirety as follows:

            FOURTH.  The total number of shares of all classes of capital 
            stock which the Corporation shall have authority to issue is
            101,000,000 shares, consisting of 100,000,000 shares of Common Stock
            with a par value of $.001 per share (the "Common Stock") and
            1,000,000 shares of Preferred Stock with a par value of $.01 per
            share (the "Preferred Stock").

     SECOND: That the foregoing amendment to the Amended and Restated
Certificate of Incorporation of the Corporation was duly adopted by the
stockholders of the Corporation in accordance with the applicable provisions of
Section 242 of the General Corporation Law of the State of Delaware.

     IN WITNESS WHEREOF, the Corporation has caused this certificate of
Amendment to be executed by Dr. Santanu Das, its President, Chief Executive
Officer and Chairman of the Board of Directors, this ____th day of May, 1999.

 
                                     ------------------------------------------
                                     Dr. Santanu Das
                                     President, Chief Executive Officer and
                                     Chairman of the Board of Directors
<PAGE>
 
                            TRANSWITCH CORPORATION

                          THIRD AMENDED AND RESTATED
                                1995 STOCK PLAN
                                ---------------
                                        

     1.  PURPOSE. The purpose of the TranSwitch Corporation Third Amended and
         -------                                                             
Restated 1995 Stock Plan (the "Plan") is to encourage key employees of
TranSwitch Corporation (the "Company") and of any present or future parent or
subsidiary of the Company (collectively, "Related Corporations") and other
individuals who render services to the Company or a Related Corporation, by
providing opportunities to participate in the ownership of the Company and its
future growth through (a) the grant of options which qualify as "incentive stock
options" ("ISOs") under Section 422(b) of the Internal Revenue Code of 1986, as
amended (the "Code"); (b) the grant of options which do not qualify as ISOs
("Non-Qualified Options"); (c) awards of stock in the Company ("Awards"); and
(d) opportunities to make direct purchases of stock in the Company
("Purchases").  Both ISOs and Non-Qualified Options are referred to hereafter
individually as an "Option" and collectively as "Options."  Options, Awards and
authorizations to make Purchases are referred to hereafter collectively as
"Stock Rights."  As used herein, the terms "parent" and "subsidiary" mean
"parent corporation" and "subsidiary corporation," respectively, as those terms
are defined in Section 424 of the Code.

     2.  ADMINISTRATION OF THE PLAN.
         ---------------------------

         A.  BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered
             --------------------------------- 
by the Board of Directors of the Company (the "Board") or by a committee
appointed by the Board (the "Committee"); provided that the Plan shall be
administered: (i) to the extent required by applicable regulations under Section
162(m) of the Code, by two or more "outside directors" (as defined in applicable
regulations thereunder) and (ii) to the extent required by Rule 16b-3
promulgated under the Securities Exchange Act of 1934 or any successor provision
("Rule 16b-3"), by a disinterested administrator or administrators within the
meaning of Rule 16b-3. Hereinafter, all references in this Plan to the
"Committee" shall mean the Board if no Committee has been appointed. Subject to
ratification of the grant or authorization of each Stock Right by the Board (if
so required by applicable state law), and subject to the terms of the Plan, the
Committee shall have the authority to (i) determine to whom (from among the
class of employees eligible under paragraph 3 to receive ISOs) ISOs shall be
granted, and to whom (from among the class of individuals and entities eligible
under paragraph 3 to receive Non-Qualified Options and Awards and to make
Purchases) Non-Qualified Options, Awards and authorizations to make Purchases
may be granted; (ii) determine the time or times at which Options or Awards
shall be granted or Purchases made; (iii) determine the purchase price of shares
subject to each Option or Purchase, which prices shall not be less than the
minimum price specified in paragraph 6; (iv) determine whether each Option
granted shall be an ISO or a Non-Qualified Option; (v) determine (subject to
paragraph 7) the time or times when each Option shall become exercisable and the
duration of the exercise period; (vi) extend the period during which 
<PAGE>
 
                                      -2-

outstanding Options may be exercised; (vii) determine whether restrictions such
as repurchase options are to be imposed on shares subject to Options, Awards and
Purchases and the nature of such restrictions, if any, and (viii) interpret the
Plan and prescribe and rescind rules and regulations relating to it. If the
Committee determines to issue a Non-Qualified Option, it shall take whatever
actions it deems necessary, under Section 422 of the Code and the regulations
promulgated thereunder, to ensure that such Option is not treated as an ISO. The
interpretation and construction by the Committee of any provisions of the Plan
or of any Stock Right granted under it shall be final unless otherwise
determined by the Board. The Committee may from time to time adopt such rules
and regulations for carrying out the Plan as it may deem advisable. No member of
the Board or the Committee shall be liable for any action or determination made
in good faith with respect to the Plan or any Stock Right granted under it.

          B.  COMMITTEE ACTIONS. The Committee may select one of its members as
              -----------------  
its chairman, and shall hold meetings at such time and places as it may
determine. A majority of the Committee shall constitute a quorum and acts of a
majority of the members of the Committee at a meeting at which a quorum is
present, or acts reduced to or approved in writing by all the members of the
Committee (if consistent with applicable state law), shall be the valid acts of
the Committee. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies
however caused, or remove all members of the Committee and thereafter directly
administer the Plan.

          C.  GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Subject to the provisions
              -------------------------------------- 
of the first sentence of paragraph 2(A) above, if applicable, Stock Rights may
be granted to members of the Board. All grants of Stock Rights to members of the
Board shall in all other respects be made in accordance with the provisions of
this Plan applicable to other eligible persons. Consistent with the provisions
of the first sentence of Paragraph 2(A) above, members of the Board who either
(i) are eligible to receive grants of Stock Rights pursuant to the Plan or (ii)
have been granted Stock Rights may vote on any matters affecting the
administration of the Plan or the grant of any Stock Rights pursuant to the
Plan, except that no such member shall act upon the granting to himself or
herself of Stock Rights, but any such member may be counted in determining the
existence of a quorum at any meeting of the Board during which action is taken
with respect to the granting to such member of Stock Rights.

     3.   ELIGIBLE EMPLOYEES AND OTHERS.  ISOs may be granted only to employees
          -----------------------------                                        
of the Company or any Related Corporation.  Non-Qualified Options, Awards and
authorizations to make Purchases may be granted to any employee, officer or
director (whether or not also an employee) or consultant of the Company or any
Related Corporation.  The Committee may take into consideration a recipient's
individual circumstances in determining whether to grant a Stock Right.  The
granting of any Stock Right to any individual or entity shall neither entitle
that individual or entity to, nor disqualify such individual or entity from,
participation in any other grant of Stock Rights.

     4.   STOCK.  The stock subject to Stock Rights shall be authorized but
          -----                                                            
unissued shares of Common Stock of the Company, par value $.001 per share (the
"Common Stock"), or shares 
<PAGE>
 
                                      -3-

of Common Stock reacquired by the Company in any manner. The aggregate number of
shares which may be issued pursuant to the Plan is 5,200,000, subject to
adjustment as provided in paragraph 13. If any Stock Right granted under the
Plan shall expire or terminate for any reason without having been exercised in
full or shall cease for any reason to be exercisable in whole or in part or
shall be repurchased by the Company, the shares of Common Stock subject to such
Stock Right shall again be available for grants of Stock Rights under the Plan.

     No employee of the Company or any Related Corporation may be granted
Options to acquire, in the aggregate, more than 400,000 of shares of Common
Stock under the Plan.  If any Option granted under the Plan shall expire or
terminate for any reason without having been exercised in full or shall cease
for any reason to be exercisable in whole or in part or shall be repurchased by
the Company, the shares subject to such Option shall be included in the
determination of the aggregate number of shares of Common Stock deemed to have
been granted to such employee under the Plan.

     5.  GRANTING OF STOCK RIGHTS.  Stock Rights may be granted under the Plan
         ------------------------                                             
at any time on or after April 11, 1995 and prior to April 11, 2005.  The date of
grant of a Stock Right under the Plan will be the date specified by the
Committee at the time it grants the Stock Right; provided, however, that such
date shall not be prior to the date on which the Committee acts to approve the
grant.  Options granted under the Plan are intended to qualify as performance-
based compensation to the extent required under Proposed Treasury Regulation
Section 1.162-27.

     6.  MINIMUM OPTION PRICE; ISO LIMITATIONS.
         ------------------------------------- 

         A.  PRICE FOR NON-QUALIFIED OPTIONS, AWARDS AND PURCHASES. The exercise
             -----------------------------------------------------
price per share specified in the agreement relating to each Non-Qualified Option
granted, and the purchase price per share of stock granted in any Award or
authorized as a Purchase, under the Plan shall in no event be less than the
minimum legal consideration required therefor under the laws of any jurisdiction
in which the Company or its successors in interest may be organized. Non-
Qualified Options granted under the Plan, with an exercise price less than the
fair market value per share of Common Stock on the date of grant, and Awards and
Purchases under the Plan with a purchase price per share less than the fair
market value per share of Common Stock on the date of grant or authorization, as
applicable, are intended to qualify as performance-based compensation under
Section 162(m) of the Code and any applicable regulations thereunder. Any such
Non-Qualified Options granted under the Plan or Awards made or Purchases
authorized under the Plan shall be exercisable or issued, as the case may be,
only upon the attainment of a pre-established, objective performance goal
established by the Committee. If the Committee grants Non-Qualified Options with
an exercise price less than the fair market value per share of Common Stock on
the date of grant, or makes Awards or authorizes Purchases under the Plan with a
purchase price per share less than the fair market value per share of Common
Stock on the date of grant or authorization, as applicable, such grant or
authorization will be submitted for, and will be contingent upon, shareholder
approval.

         B.  PRICE FOR ISOS.  The exercise price per share specified in the
             --------------                                                
agreement relating to each ISO granted under the Plan shall not be less than the
fair market value per share
<PAGE>
 
                                      -4-

of Common Stock on the date of such grant. In the case of an ISO to be granted
to an employee owning stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any Related
Corporation, the price per share specified in the agreement relating to such ISO
shall not be less than one hundred ten percent (110%) of the fair market value
per share of Common Stock on the date of grant. For purposes of determining
stock ownership under this paragraph, the rules of Section 424(d) of the Code
shall apply.

          C.  $100,000 ANNUAL LIMITATION ON ISO VESTING. Each eligible employee
              -----------------------------------------
may be granted Options treated as ISOs only to the extent that, in the aggregate
under this Plan and all incentive stock option plans of the Company and any
Related Corporation, ISOs do not become exercisable for the first time by such
employee during any calendar year with respect to stock having a fair market
value (determined at the time the ISOs were granted) in excess of $100,000. The
Company intends to designate any Options granted in excess of such limitation as
Non-Qualified Options.

          D.  DETERMINATION OF FAIR MARKET VALUE.  If, at the time an Option is
              ----------------------------------                               
granted under the Plan, the Company's Common Stock is publicly traded, "fair
market value" shall be determined as of the date of grant or, if the prices or
quotes discussed in this sentence are unavailable for such date, the last
business day for which such prices or quotes are available prior to the date of
grant and shall mean (i) the average (on that date) of the high and low prices
of the Common Stock on the principal national securities exchange on which the
Common Stock is traded, if the Common Stock is then traded on a national
securities exchange; or (ii) the last reported sale price (on that date) of the
Common Stock on the Nasdaq National Market, if the Common Stock is not then
traded on a national securities exchange; or (iii) the closing bid price (or
average of bid prices) last quoted (on that date) by an established quotation
service for over-the-counter securities, if the Common Stock is not reported on
the Nasdaq National Market.  If the Common Stock is not publicly traded at the
time an Option is granted under the Plan, "fair market value" shall mean the
fair value of the Common Stock as determined by the Committee after taking into
consideration all factors which it deems appropriate, including, without
limitation, recent sale and offer prices of the Common Stock in private
transactions negotiated at arm's length.

     7.   OPTION DURATION.  Subject to earlier termination as provided in
          ---------------                                                
paragraphs 9 and 10 or in the agreement relating to such Option, each Option
shall expire on the date specified by the Committee, but not more than (i) ten
years from the date of grant in the case of Options generally and (ii) five
years from the date of grant in the case of ISOs granted to an employee owning
stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Related Corporation, as determined
under paragraph 6(B).  Subject to earlier termination as provided in paragraphs
9 and 10, the term of each ISO shall be the term set forth in the original
instrument granting such ISO, except with respect to any part of such ISO that
is converted into a Non-Qualified Option pursuant to paragraph 16.

     8.   EXERCISE OF OPTION.  Subject to the provisions of paragraphs 9 through
          ------------------                                                    
12, each Option granted under the Plan shall be exercisable as follows:
<PAGE>
 
                                      -5-

          A.  VESTING. The Option shall either be fully exercisable on the date
              -------   
of grant or shall become exercisable thereafter in such installments as the
Committee may specify.

          B.  FULL VESTING OF INSTALLMENTS. Once an installment becomes
              ---------------------------- 
exercisable it shall remain exercisable until expiration or termination of the
Option, unless otherwise specified by the Committee.

          C.  PARTIAL EXERCISE. Each Option or installment may be exercised at
              ---------------- 
any time or from time to time, in whole or in part, for up to the total number
of shares with respect to which it is then exercisable.

          D.  ACCELERATION OF VESTING.  The Committee shall have the right to
              -----------------------                                        
accelerate the date that any installment of any Option becomes exercisable;
provided that the Committee shall not, without the consent of an optionee,
accelerate the permitted exercise date of any installment of any Option granted
to any employee as an ISO (and not previously converted into a Non-Qualified
Option pursuant to paragraph 16) if such acceleration would violate the annual
vesting limitation contained in Section 422(d) of the Code, as described in
paragraph 6(C).

     9.   TERMINATION OF EMPLOYMENT. Unless otherwise specified in the agreement
          ------------------------- 
relating to such ISO, if an ISO optionee ceases to be employed by the Company
and all Related Corporations other than by reason of death or disability as
defined in paragraph 10, no further installments of his or her ISOs shall become
exercisable, and his or her ISOs shall terminate on the earlier of (a) ninety
(90) days after the date of termination of his or her employment, or (b) their
specified expiration dates, except to the extent that such ISOs (or unexercised
installments thereof) have been converted into Non-Qualified Options pursuant to
paragraph 16. For purposes of this paragraph 9, employment shall be considered
as continuing uninterrupted during any bona fide leave of absence (such as those
attributable to illness, military obligations or governmental service) provided
that the period of such leave does not exceed 90 days or, if longer, any period
during which such optionee's right to re-employment is guaranteed by statute. A
bona fide leave of absence with the written approval of the Committee shall not
be considered an interruption of employment under this paragraph 9, provided
that such written approval contractually obligates the Company or any Related
Corporation to continue the employment of the optionee after the approved period
of absence. ISOs granted under the Plan shall not be affected by any change of
employment within or among the Company and Related Corporations, so long as the
optionee continues to be an employee of the Company or any Related Corporation.
Nothing in the Plan shall be deemed to give any grantee of any Stock Right the
right to be retained in employment or other service by the Company or any
Related Corporation for any period of time.

     10.  DEATH; DISABILITY.
          ----------------- 

          A.  DEATH. If an ISO optionee ceases to be employed by the Company and
              -----   
all Related Corporations by reason of his or her death, any ISO owned by such
optionee may be 
<PAGE>
 
                                      -6-

exercised, to the extent otherwise exercisable on the date of death, by the
estate, personal representative or beneficiary who has acquired the ISO by will
or by the laws of descent and distribution, until the earlier of (i) the
specified expiration date of the ISO or (ii) 180 days from the date of the
optionee's death.

          B.  DISABILITY.  If an ISO optionee ceases to be employed by the
              ----------   
Company and all Related Corporations by reason of his or her disability, such
optionee shall have the right to exercise any ISO held by him or her on the date
of termination of employment, for the number of shares for which he or she could
have exercised it on that date, until the earlier of (i) the specified
expiration date of the ISO or (ii) 180 days from the date of the termination of
the optionee's employment. For the purposes of the Plan, the term "disability"
shall mean "permanent and total disability" as defined in Section 22(e)(3) of
the Code or any successor statute.

     11.  ASSIGNABILITY.  No Stock Right shall be assignable or transferable by
          -------------                                                        
the grantee except by will, by the laws of descent and distribution or, in the
case of Non-Qualified Options only, pursuant to a valid domestic relations
order.  Except as set forth in the previous sentence, during the lifetime of a
grantee each Stock Right shall be exercisable only by such grantee.

     12.  TERMS AND CONDITIONS OF OPTIONS.  Options shall be evidenced by
          -------------------------------                                
instruments (which need not be identical) in such forms as the Committee may
from time to time approve.  Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options.  The Committee may specify that any Non-
Qualified Option shall be subject to the restrictions set forth herein with
respect to ISOs, or to such other termination and cancellation provisions as the
Committee may determine.  The Committee may from time to time confer authority
and responsibility on one or more of its own members and/or one or more officers
of the Company to execute and deliver such instruments.  The proper officers of
the Company are authorized and directed to take any and all action necessary or
advisable from time to time to carry out the terms of such instruments.

     13.  ADJUSTMENTS.  Upon the occurrence of any of the following events, an
          -----------                                                         
optionee's rights with respect to Options granted to such optionee hereunder
shall be adjusted as hereinafter provided, unless otherwise specifically
provided in the written agreement between the optionee and the Company relating
to such Option:

          A.  STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock
              -------------------------------- 
shall be subdivided or combined into a greater or smaller number of shares or if
the Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the exercise of Options shall be appropriately increased or decreased
proportionately, and appropriate adjustments shall be made in the purchase price
per share to reflect such subdivision, combination or stock dividend.
<PAGE>
 
                                      -7-

     B.  CONSOLIDATIONS OR MERGERS.  If the Company is to be consolidated with
         -------------------------                                            
or acquired by another entity in a merger, sale of all or substantially all of
the Company's assets or otherwise (an "Acquisition"), the Committee or the board
of directors of any entity assuming the obligations of the Company hereunder
(the "Successor Board"), shall, as to outstanding Options, either (i) make
appropriate provision for the continuation of such Options by substituting on an
equitable basis for the shares then subject to such Options either (a) the
consideration payable with respect to the outstanding shares of Common Stock in
connection with the Acquisition, (b) shares of stock of the surviving
corporation or (c) such other securities as the Successor Board deems
appropriate, the fair market value of which shall not materially exceed the fair
market value of the shares of Common Stock subject to such Options immediately
preceding the Acquisition; or (ii) upon written notice to the optionees, provide
that all Options must be exercised, to the extent then exercisable, within a
specified number of days of the date of such notice, at the end of which period
the Options shall terminate; or (iii) terminate all Options in exchange for a
cash payment equal to the excess of the fair market value of the shares subject
to such Options (to the extent then exercisable) over the exercise price
thereof.

     C.  RECAPITALIZATION OR REORGANIZATION.  In the event of a recapitalization
         ----------------------------------                                     
or reorganization of the Company (other than a transaction described in
subparagraph B above) pursuant to which securities of the Company or of another
corporation are issued with respect to the outstanding shares of Common Stock,
an optionee upon exercising an Option shall be entitled to receive for the
purchase price paid upon such exercise the securities he or she would have
received if he or she had exercised such Option prior to such recapitalization
or reorganization.

     D.  MODIFICATION OF ISOS.  Notwithstanding the foregoing, any adjustments
         --------------------                                                 
made pursuant to subparagraphs A, B or C with respect to ISOs shall be made only
after the Committee, after consulting with counsel for the Company, determines
whether such adjustments would constitute a "modification" of such ISOs (as that
term is defined in Section 424 of the Code) or would cause any adverse tax
consequences for the holders of such ISOs.  If the Committee determines that
such adjustments made with respect to ISOs would constitute a modification of
such ISOs or would cause adverse tax consequences to the holders, it may refrain
from making such adjustments.

     E.  DISSOLUTION OR LIQUIDATION.  In the event of the proposed dissolution
         --------------------------                                           
or liquidation of the Company, each Option will terminate immediately prior to
the consummation of such proposed action or at such other time and subject to
such other conditions as shall be determined by the Committee.

     F.  ISSUANCES OF SECURITIES.  Except as expressly provided herein, no
         -----------------------                                          
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
subject to Options.  No adjustments shall be made for dividends paid in cash or
in property other than securities of the Company.

     G.  FRACTIONAL SHARES.  No fractional shares shall be issued under the Plan
         -----------------                                                      
and the optionee shall receive from the Company cash in lieu of such fractional
shares.
<PAGE>
 
                                      -8-

          H.  ADJUSTMENTS.  Upon the happening of any of the events described in
              -----------                                                       
subparagraphs A, B or C above, the class and aggregate number of shares set
forth in paragraph 4 hereof that are subject to Stock Rights which previously
have been or subsequently may be granted under the Plan shall also be
appropriately adjusted to reflect the events described in such subparagraphs.
The Committee or the Successor Board shall determine the specific adjustments to
be made under this paragraph 13 and, subject to paragraph 2, its determination
shall be conclusive.

     14.  MEANS OF EXERCISING OPTIONS.  An Option (or any part or installment
          ---------------------------                                        
thereof) shall be exercised by giving written notice to the Company at its
principal office address, or to such transfer agent as the Company shall
designate.  Such notice shall identify the Option being exercised and specify
the number of shares as to which such Option is being exercised, accompanied by
full payment of the purchase price therefor either (a) in United States dollars
in cash or by check, (b) at the discretion of the Committee, through delivery of
shares of Common Stock having a fair market value equal as of the date of the
exercise to the cash exercise price of the Option, (c) at the discretion of the
Committee, by delivery of the grantee's personal recourse note bearing interest
payable not less than annually at no less than 100% of the lowest applicable
Federal rate, as defined in Section 1274(d) of the Code, (d) at the discretion
of the Committee and consistent with applicable law, through the delivery of an
assignment to the Company of a sufficient amount of the proceeds from the sale
of the Common Stock acquired upon exercise of the Option and an authorization to
the broker or selling agent to pay that amount to the Company, which sale shall
be at the participant's direction at the time of exercise, or (e) at the
discretion of the Committee, by any combination of (a), (b), (c) and (d) above.
If the Committee exercises its discretion to permit payment of the exercise
price of an ISO by means of the methods set forth in clauses (b), (c), (d) or
(e) of the preceding sentence, such discretion shall be exercised in writing at
the time of the grant of the ISO in question.  The holder of an Option shall not
have the rights of a shareholder with respect to the shares covered by such
Option until the date of issuance of a stock certificate to such holder for such
shares.  Except as expressly provided above in paragraph 13 with respect to
changes in capitalization and stock dividends, no adjustment shall be made for
dividends or similar rights for which the record date is before the date such
stock certificate is issued.

     15.  TERM AND AMENDMENT OF PLAN.  This Plan was adopted by the Board on
          --------------------------                                        
April 11, 1995, subject, with respect to the validation of ISOs granted under
the Plan, to approval of the Plan by the stockholders of the Company at the next
Meeting of Stockholders or, in lieu thereof, by written consent.  If the
approval of stockholders is not obtained prior to April 11, 1996, any grants of
ISOs under the Plan made prior to that date will be rescinded.  The Plan shall
expire at the end of the day on April 10, 2005 (except as to Options outstanding
on that date).  Subject to the provisions of paragraph 5 above, Options may be
granted under the Plan prior to the date of stockholder approval of the Plan.
The Board may terminate or amend the Plan in any respect at any time, except
that, without the approval of the stockholders obtained within 12 months before
or after the Board adopts a resolution authorizing any of the following actions:
(a) the total number of shares that may be issued under the Plan may not be
increased (except by adjustment pursuant to paragraph 13); (b) the benefits
accruing to participants under the Plan 
<PAGE>
 
                                      -9-

may not be materially increased; (c) the requirements as to eligibility for
participation in the Plan may not be materially modified; (d) the provisions of
paragraph 3 regarding eligibility for grants of ISOs may not be modified; (e)
the provisions of paragraph 6(B) regarding the exercise price at which shares
may be offered pursuant to ISOs may not be modified (except by adjustment
pursuant to paragraph 13); (f) the expiration date of the Plan may not be
extended; and (g) the Board may not take any action which would cause the Plan
to fail to comply with Rule 16b-3. Except as otherwise provided in this
paragraph 15, in no event may action of the Board or stockholders alter or
impair the rights of a grantee, without such grantee's consent, under any Option
previously granted to such grantee.

     16.  CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS.  The Committee, at the
          ---------------------------------------------                        
written request or with the written consent of any optionee, may in its
discretion take such actions as may be necessary to convert such optionee's ISOs
(or any installments or portions of installments thereof) that have not been
exercised on the date of conversion into Non-Qualified Options at any time prior
to the expiration of such ISOs, regardless of whether the optionee is an
employee of the Company or a Related Corporation at the time of such conversion.
Such actions may include, but shall not be limited to, extending the exercise
period or reducing the exercise price of the appropriate installments of such
ISOs.  At the time of such conversion, the Committee (with the consent of the
optionee) may impose such conditions on the exercise of the resulting Non-
Qualified Options as the Committee in its discretion may determine, provided
that such conditions shall not be inconsistent with this Plan.  Nothing in the
Plan shall be deemed to give any optionee the right to have such optionee's ISOs
converted into Non-Qualified Options, and no such conversion shall occur until
and unless the Committee takes appropriate action.

     17.  APPLICATION OF FUNDS.  The proceeds received by the Company from the
          --------------------                                                
sale of shares pursuant to Options granted and Purchases authorized under the
Plan shall be used for general corporate purposes.

     18.  NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION.  By accepting an ISO
          ----------------------------------------------                      
granted under the Plan, each optionee agrees to notify the Company in writing
immediately after such optionee makes a Disqualifying Disposition (as described
in Sections 421, 422 and 424 of the Code and regulations thereunder) of any
stock acquired pursuant to the exercise of ISOs granted under the Plan.  A
Disqualifying Disposition is generally any disposition occurring on or before
the later of (a) the date two years following the date the ISO was granted or
(b) the date one year following the date the ISO was exercised.

     19.  WITHHOLDING OF ADDITIONAL INCOME TAXES.  Upon the exercise of a Non-
          --------------------------------------                             
Qualified Option, the grant of an Award, the making of a Purchase of Common
Stock for less than its fair market value, the making of a Disqualifying
Disposition (as defined in paragraph 18), the vesting or transfer of restricted
stock or securities acquired on the exercise of an Option hereunder, or the
making of a distribution or other payment with respect to such stock or
securities, the Company may withhold taxes in respect of amounts that constitute
compensation includable in gross income.  The Committee in its discretion may
condition (i) the exercise of an Option, (ii) the grant of an Award, (iii) the
making of a Purchase of Common Stock for less than its fair market value, or
(iv) the vesting or transferability of restricted stock or 
<PAGE>
 
                                     -10-

securities acquired by exercising an Option, on the grantee's making
satisfactory arrangement for such withholding. Such arrangement may include
payment by the grantee in cash or by check of the amount of the withholding
taxes or, at the discretion of the Committee, by the grantee's delivery of
previously held shares of Common Stock or the withholding from the shares of
Common Stock otherwise deliverable upon exercise of a Option shares having an
aggregate fair market value equal to the amount of such withholding taxes.

     20.  GOVERNMENTAL REGULATION.  The Company's obligation to sell and deliver
          -----------------------                                               
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares.

     Government regulations may impose reporting or other obligations on the
Company with respect to the Plan.  For example, the Company may be required to
send tax information statements to employees and former employees that exercise
ISOs under the Plan, and the Company may be required to file tax information
returns reporting the income received by grantees of Options in connection with
the Plan.

     21.  GOVERNING LAW.  The validity and construction of the Plan and the
          -------------                                                    
instruments evidencing Options shall be governed by the laws of the State of
Delaware, or the laws of any jurisdiction in which the Company or its successors
in interest may be organized.


Date Approved by the Board of Directors of the Company:  April 11, 1995

Date Approved by the Stockholders of the Company:  April 19, 1995

Amended and restated by the Board of Directors of the Company:  January 25,
1996.

Amended and restated by the Stockholders of the Company:  May 9, 1996.

Amended and restated by the Board of Directors of the Company:  March 6, 1997.

Amended and restated by the Stockholders of the Company:  May 29, 1997.

Amended and restated by the Board of Directors of the Company:  March 5, 1998.

Amended and restated by the Stockholders of the Company:  May 27, 1998.

Amended by the Board of Directors of the Company:  April 8, 1999.
<PAGE>
 
                            TRANSWITCH CORPORATION

                 1995 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN


     1.  Purpose.  This Non-Qualified Stock Option Plan, to be known as the 1995
         -------                                                                
Non-Employee Director Stock Option Plan (hereinafter, this "Plan"), is intended
to promote the interests of TranSwitch Corporation (hereinafter, the "Company")
by providing an inducement to obtain and retain the services of qualified
persons who are not employees or officers of the Company to serve as members of
its Board of Directors (the "Board").

     2.  Available Shares.  The total number of shares of Common Stock, par
         ----------------                                                  
value $.001 per share, of the Company (the "Common Stock") for which options may
be granted under this Plan shall not exceed 350,000 shares, subject to
adjustment in accordance with paragraph 10 of this Plan.  Shares subject to this
Plan are authorized but unissued shares or shares that were once issued and
subsequently reacquired by the Company.  If any options granted under this Plan
are surrendered before exercise or lapse without exercise, in whole or in part,
the shares reserved therefor shall continue to be available under this Plan.

     3.  Administration.  This Plan shall be administered by the Board or by a
         --------------                                                       
committee appointed by the Board (the "Committee").  In the event the Board
fails to appoint or refrains from appointing a Committee, the Board shall have
all power and authority to administer this Plan.  In such event, the word
"Committee" wherever used herein shall be deemed to mean the Board.  The
Committee shall, subject to the provisions of the Plan, have the power to
construe this Plan, to determine all questions hereunder, and to adopt and amend
such rules and regulations for the administration of this Plan as it may deem
desirable.  No member of the Board or the Committee shall be liable for any
action or determination made in good faith with respect to this Plan or any
option granted under it.

     4.  Automatic Grant of Options.  Subject to the availability of shares
         --------------------------                                        
under this Plan,

     (a) each person who first becomes a member of the Board after the effective
date of an initial public offering of the Company's Common Stock and who is not
an employee or officer of the Company (a "Non-Employee Director") shall be
automatically granted on the date such person becomes a member of the Board,
without further action by the Board, an option to purchase 12,500 shares of the
Common Stock, and

     (b) after the effective date of an initial public offering of the Company's
Common Stock, each person who is a Non-Employee Director on each successive one-
year anniversary (during the term of this Plan) of the date of such person's
first election to the Board shall be automatically granted on each such date an
option to purchase 9,600 shares of the Common Stock.

     The options to be granted under this paragraph 4 shall be the only options
ever to be granted at any time to such member under this Plan.  The number of
shares of Common Stock covered by options granted under this paragraph 4 shall
be subject to adjustment in accordance 

<PAGE>
 
                                      -2-

with the provisions of paragraph 10 of this Plan. Notwithstanding anything to
the contrary set forth herein, if this Plan is not approved by a majority of the
Company's stockholders present, or represented, and voting on such matter at the
first meeting of Stockholders of the Company following April 11, 1995, then the
Plan and the options granted pursuant to this Section 4 shall terminate and
become void, and no further options shall be granted under this Plan.

     5.  Option Price.  The purchase price of the stock covered by an option
         ------------                                                       
granted pursuant to this Plan shall be 100% of the fair market value of such
shares on the day the option is granted.  The option price will be subject to
adjustment in accordance with the provisions of paragraph 10 of this Plan.  For
purposes of this Plan, if, at the time an option is granted under the Plan, the
Company's Common Stock is publicly traded, "fair market value" shall be
determined as of the last business day for which the prices or quotes discussed
in this sentence are available prior to the date such option is granted and
shall mean (i) the average (on that date) of the high and low prices of the
Common Stock on the principal national securities exchange on which the Common
Stock is traded, if the Common Stock is then traded on a national securities
exchange; or (ii) the last reported sale price (on that date) of the Common
Stock on the Nasdaq Stock Market, if the Common Stock is not then traded on a
national securities exchange; or (iii) the closing bid price (or average of bid
prices) last quoted (on that date) by an established quotation service for over-
the-counter securities, if the Common Stock is not reported on the Nasdaq Stock
Market.  However, if the Common Stock is not publicly traded at the time an
option is granted under the Plan, "fair market value" shall be deemed to be the
fair value of the Common Stock as determined by the Committee after taking into
consideration all factors which it deems appropriate, including, without
limitation, recent sale and offer prices of the Common Stock in private
transactions negotiated at arm's length; provided, however, that the "fair
market value" of the stock issuable upon exercise of an option granted pursuant
to the Plan within 120 days prior to the time the Company's Common Stock is
publicly traded shall be deemed to be equal to the initial per share purchase
price at which the Company's Common Stock is offered to the public.

     6.  Period of Option.  Unless sooner terminated in accordance with the
         ----------------                                                  
provisions of paragraph 8 of this Plan, an option granted hereunder shall expire
on the date which is five (5) years after the date of grant of the option.

     7.  (a)  Vesting of Shares and Non-Transferability of Options.  Options
              ----------------------------------------------------          
granted under this Plan shall not be exercisable until they become vested.
Options granted under this Plan shall vest in the optionee and thus become
exercisable as follows, provided that the optionee has continuously served as a
member of the Board through such vesting date:

              (i) For options granted pursuant to Section 4(a) hereof:

         Percentage of Option
           Shares for which
         Option Will be Exercisable               Date of Vesting  
         --------------------------               ---------------   

                33 1/3%               Less than one year from the date of grant
                                 
<PAGE>
 
                                      -3-

                66 2/3%               One year from the date of grant

                   100%               Two years from the date of grant

The number of shares as to which options may be exercised shall be cumulative,
so that once the option shall become exercisable as to any shares it shall
continue to be exercisable as to said shares, until expiration or termination of
the option as provided in this Plan.

               (ii) For options granted pursuant to Section 4(b) hereof, all
     such options shall vest in full on the one-year anniversary of the date of
     grant.

          (b)  Non-transferability.  Any option granted pursuant to this Plan
               -------------------                                           
shall not be assignable or transferable other than by will or the laws of
descent and distribution or pursuant to a domestic relations order and shall be
exercisable during the optionee's lifetime only by him or her.

     8.   Termination of Option Rights.
          ---------------------------- 

          (a)  Except as otherwise specified in the agreement relating to an
option, in the event an optionee ceases to be a member of the Board for any
reason other than death or permanent disability, any then unexercised portion of
options granted to such optionee shall, to the extent not then vested,
immediately terminate and become void; any portion of an option which is then
vested but has not been exercised at the time the optionee so ceases to be a
member of the Board may be exercised, to the extent it is then vested, by the
optionee within 90 days of the date the optionee ceased to be a member of the
Board; and all options shall terminate after such 90 days have expired.

          (b)  In the event that an optionee ceases to be a member of the Board
by reason of his or her death or permanent disability, any option granted to
such optionee shall be immediately and automatically accelerated and become
fully vested and all unexercised options shall be exercisable by the optionee
(or by the optionee's personal representative, heir or legatee, in the event of
death) until the scheduled expiration date of the option.

     9.   Exercise of Option. Subject to the terms and conditions of this Plan
          ------------------                                              
and the option agreements, an option granted hereunder shall, to the extent then
exercisable, be exercisable in whole or in part by giving written notice to the
Company by mail or in person addressed to TranSwitch Corporation, at its
principal executive offices, stating the number of shares with respect to which
the option is being exercised, accompanied by payment in full for such shares.
Payment may be (a) in United States dollars in cash or by check, (b) in whole or
in part in shares of the Common Stock of the Company already owned by the person
or persons exercising the option or shares subject to the option being exercised
(subject to such restrictions and guidelines as the Board may adopt from time to
time), valued at fair market value determined in accordance with the provisions
of paragraph 5 or (c) consistent with applicable law, through the delivery of an
assignment to the Company of a sufficient amount of the proceeds from the sale
of the Common Stock acquired upon exercise of the option and an 
<PAGE>
 
                                      -4-

authorization to the broker or selling agent to pay that amount to the Company,
which sale shall be at the participant's direction at the time of exercise.
There shall be no such exercise at any one time as to fewer than one hundred
(100) shares or all of the remaining shares then purchasable by the person or
persons exercising the option, if fewer than one hundred (100) shares. The
Company's transfer agent shall, on behalf of the Company, prepare a certificate
or certificates representing such shares acquired pursuant to exercise of the
option, shall register the optionee as the owner of such shares on the books of
the Company and shall cause the fully executed certificate(s) representing such
shares to be delivered to the optionee as soon as practicable after payment of
the option price in full. The holder of an option shall not have any rights of a
stockholder with respect to the shares covered by the option, except to the
extent that one or more certificates for such shares shall be delivered to him
or her upon the due exercise of the option.

     10.  Adjustments Upon Changes in Capitalization and Other Events. Upon the
          -----------------------------------------------------------  
occurrence of any of the following events, an optionee's rights with respect to
options granted to him or her hereunder shall be adjusted as hereinafter
provided:

          (a)  Stock Dividends and Stock Splits.  If the shares of Common Stock
               --------------------------------                                
shall be subdivided or combined into a greater or smaller number of shares or if
the Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the exercise of options shall be appropriately increased or decreased
proportionately, and appropriate adjustments shall be made in the purchase price
per share to reflect such subdivision, combination or stock dividend.

          (b)  Recapitalization Adjustments.  If the Company is to be
               ----------------------------                          
consolidated with or acquired by another entity in a merger, sale of all or
substantially all of the Company's assets or otherwise, each option granted
under this Plan which is outstanding but unvested as of the effective date of
such event shall become exercisable in full thirty (30) days prior to the
effective date of such event.  In the event of a reorganization,
recapitalization, merger, consolidation, or any other change in the corporate
structure or shares of the Company, to the extent permitted by Rule 16b-3 under
the Securities Exchange Act of 1934, adjustments in the number and kind of
shares authorized by this Plan and in the number and kind of shares covered by,
and in the option price of outstanding options under this Plan necessary to
maintain the proportionate interest of the optionee and preserve, without
exceeding, the value of such option, shall be made.  Notwithstanding the
foregoing, no such adjustment shall be made which would, within the meaning of
any applicable provisions of the Internal Revenue Code of 1986, as amended,
constitute a modification, extension or renewal of any option or a grant of
additional benefits to the holder of an option.

          (c)  Issuances of Securities.  Except as expressly provided herein, no
               -----------------------                                          
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
subject to options.  No adjustments shall be made for dividends paid in cash or
in property other than securities of the Company.
<PAGE>
 
                                      -5-

          (d)  Adjustments.  Upon the happening of any of the foregoing events,
               -----------                                                     
the class and aggregate number of shares set forth in paragraphs 2 and 4 of this
Plan that are subject to options which previously have been or subsequently may
be granted under this Plan shall also be appropriately adjusted to reflect such
events.  The Board shall determine the specific adjustments to be made under
this paragraph 10 and its determination shall be conclusive.

     11.  Restrictions on Issuance of Shares. Notwithstanding the provisions of
          ----------------------------------                      
paragraphs 4 and 9 of this Plan, the Company shall have no obligation to deliver
any certificate or certificates upon exercise of an option until one of the
following conditions shall be satisfied:

          (a)  The issuance of shares with respect to which the option has been
exercised is at the time of the issue of such shares effectively registered
under applicable Federal and state securities laws as now in force or hereafter
amended; or

          (b)  Counsel for the Company shall have given an opinion that the
issuance of such shares is exempt from registration under Federal and state
securities laws as now in force or hereafter amended; and the Company has
complied with all applicable laws and regulations with respect thereto,
including without limitation all regulations required by any stock exchange upon
which the Company's outstanding Common Stock is then listed.

     12.  Legend on Certificates. The certificates representing shares issued
          ----------------------                                       
pursuant to the exercise of an option granted hereunder shall carry such
appropriate legend, and such written instructions shall be given to the
Company's transfer agent, as may be deemed necessary or advisable by counsel to
the Company in order to comply with the requirements of the Securities Act of
1933 or any state securities laws.

     13.  Representation of Optionee. If requested by the Company, the optionee
          --------------------------                                   
shall deliver to the Company written representations and warranties upon
exercise of the option that are necessary to show compliance with Federal and
state securities laws, including representations and warranties to the effect
that a purchase of shares under the option is made for investment and not with a
view to their distribution (as that term is used in the Securities Act of 1933).

     14.  Option Agreement. Each option granted under the provisions of this
          ----------------                                              
Plan shall be evidenced by an option agreement, which agreement shall be duly
executed and delivered on behalf of the Company and by the optionee to whom such
option is granted. The option agreement shall contain such terms, provisions and
conditions not inconsistent with this Plan as may be determined by the officer
executing it.

     15.  Termination and Amendment of Plan. Options may no longer be granted
          ---------------------------------   
under this Plan after April 11, 2005, and this Plan shall terminate when all
options granted or to be granted hereunder are no longer outstanding. The Board
may at any time terminate this Plan or make such modification or amendment
thereof as it deems advisable; provided, however, that the Board may not,
                               --------  -------                         
without approval by the affirmative vote of the holders of a majority of the
shares of Common Stock present in person or by proxy and voting on such matter
at a meeting,
<PAGE>
 
                                      -6-

(a) increase the maximum number of shares for which options may be granted under
this Plan (except by adjustment pursuant to Section 10), (b) materially modify
the requirements as to eligibility to participate in this Plan, (c) materially
increase benefits accruing to option holders under this Plan or (d) amend this
Plan in any manner which would cause Rule 16b-3 under the Securities Exchange
Act (or any successor or amended provision thereof) to become inapplicable to
this Plan; and provided further that the provisions of this Plan specified in
               -------- -------                       
Rule 16b-3(c)(2)(ii)(A) (or any successor or amended provision thereof) under
the Securities Exchange Act of 1934 (including without limitation, provisions as
to eligibility, amount, price and timing of awards) may not be amended more than
once every six months, other than to comport with changes in the Internal
Revenue Code, the Employee Retirement Income Security Act, or the rules
thereunder. Termination or any modification or amendment of this Plan shall not,
without consent of a participant, affect his or her rights under an option
previously granted to him or her.

     16.  Withholding of Income Taxes. Upon the exercise of an option, the
          ---------------------------                                      
Company, in accordance with Section 3402(a) of the Internal Revenue Code, may
require the optionee to pay withholding taxes in respect of amounts considered
to be compensation includable in the optionee's gross income.

     17.  Compliance with Regulations. It is the Company's intent that the Plan
          ---------------------------                                      
comply in all respects with Rule 16b-3 under the Securities Exchange Act of 1934
(or any successor or amended provision thereof) and any applicable Securities
and Exchange Commission interpretations thereof. If any provision of this Plan
is deemed not to be in compliance with Rule 16b-3, the provision shall be null
and void.

     18.  Governing Law. The validity and construction of this Plan and the
          -------------                                                 
instruments evidencing options shall be governed by the laws of the State of
Delaware, without giving effect to the principles of conflicts of law thereof.


Date Approved by Board of Directors of the Company:   April 11, 1995

Date Approved by the Stockholders of the Company:   April 19, 1995

Date Amended and Restated by the Board of Directors of the Company: March 5,
1998

Date Amended and Restated by the Stockholders of the Company:   May 27, 1998.

Date Amended by the Board of Directors of the Company:   April 8, 1999.


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