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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

FOR THE TRANSITION PERIOD FROM                          TO

COMMISSION FILE NUMBER 000-31851

MULTILINK TECHNOLOGY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.

          Indicate by check mark that disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

          The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average closing bid and asked prices of such stock, as of June 28, 2002 was approximately $14,205,709. (All officers and directors of the registrant are considered affiliates.)

          At March 18, 2003 the registrant had 5,098,314 shares of Class A Common Stock issued and outstanding and 2,600,000 shares of Class B Common Stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

          Portions of the registrant’s definitive proxy statement for its Annual Meeting of Shareholders to be filed with the Commission within 120 days after the close of its fiscal year are incorporated by reference into Part III of this Form 10-K.

MULTILINK TECHNOLOGY CORPORATION

FORM 10-K ANNUAL REPORT

FISCAL YEAR ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

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CAUTIONARY STATEMENT

          This Report contains forward-looking statements which include, but are not limited to, statements concerning projected revenues, expenses, gross profit and income (loss), the need for additional capital, market acceptance of our products, the competitive and cyclical nature of  our markets, our ability to achieve further product integration, the status of evolving technologies and their growth potential, the timing of new product introductions, the adoption of future industry standards,  our ability to migrate to smaller process geometries and new technologies. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section “Risk Factors” at the end of Item 7 of this Report. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

          As used in this Form 10-K, “company,” “we,” “us,” “our,” “Multilink” and “Multilink Technology” refer to Multilink Technology Corporation and its subsidiary companies. We were incorporated in California in July 1994.

PART I.

Item 1.      BUSINESS

          We design, develop and market advanced integrated circuits, modules and higher-level assemblies that enable next generation optical networking systems. Our current products address the markets for DWDM and SONET/SDH optical networking equipment. We focus on the fastest commercially available speeds of OC-192, or 10 gigabits per second, or higher, and are developing products that are designed to address systems for the Metro/Access and Enterprise markets. We seek to be first to develop innovative products with system functions that allow communications equipment manufacturers to rapidly build and deliver high performance fiber optic systems ahead of their competitors.

Realignment Plan

          In August 2002, we announced a corporate realignment plan to create a more efficient cost structure and realign our business to reflect the current telecommunication market environment, which will permit us to focus our employees on our key business strategies.  The major initiatives of the plan include a reduction of 40 to 45 percent in our worldwide headcount, the consolidation of facilities through the closure of certain locations and the reduction in the level of activity at other locations. During 2002, we recorded an $11.0 million charge in connection with this plan.  During the three months ended December 31, 2002, we expanded the plan by deciding to close facilities in addition to those already included in the charge recorded during the third quarter of 2002.

          Upon completion of the plan, we anticipate that our worldwide headcount will decrease to approximately 150 people as compared to 382 at December 31, 2001.  The headcount reduction portion of the plan was substantially completed by December 2002 and is expected to be fully completed by April 2003.  The headcount reductions have occurred at all of our locations in Europe, Israel and the United States.  We have estimated that the total cash cost of the realignment plan is approximately $4.7 million and that the plan, combined with our other cost saving initiatives, will contribute approximately $35.0 million of annual cash savings.  The estimated remaining cash outflows related to the plan are expected to be $2.2 million in 2003, less than $0.6 million in 2004 and $0.7 million thereafter. The estimated cash outflow and annual cash savings related to the plan will, however, be negatively impacted if it takes us longer than anticipated to sublease some of our closed facilities or if our planned further headcount reductions are delayed. 

          Although we undertook cost reduction programs and initiated our corporate realignment plan during 2002 to reduce expenses, we cannot assure that our realignment plan will be successful, and we may need to restructure further, or raise additional capital.  As another alternative to raising capital, we may need to explore the opportunity to merge with or be acquired by another company.

Background

          The volume of data traffic across communications networks has grown rapidly over the past decade. This growth has been driven by the increased use of data-intensive applications such as electronic commerce, Internet access, e-mail, streaming audio and video, remote access and other new applications.  Data traffic currently exceeds voice traffic in communicating networks and, despite the current downturn in the telecommunications market, should be the key driver for growth in the coming years.   

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     Development of Fiber Optic Networks

          Much of the public network’s infrastructure was originally designed to transmit voice communications utilizing copper wire as the primary transmission medium. This copper wire-based infrastructure is ill-suited for high-speed data transmission due to bandwidth limitations and high maintenance and administration costs. Communications service providers will need to upgrade their network architectures by increasing bandwidth and switching capabilities for high-speed data and voice transmissions and are replacing conventional copper wire technology with fiber optic technology. Fiber optics offers substantially greater capacity than copper wire and is less error-prone and, as a result has become the transmission medium of choice for both incumbent and emerging service providers. SONET/SDH, or Synchronous Optical Network/Synchromous Digital Hierarchy, are the standards, or protocols, for the transmission of communications traffic over optical fiber. SONET and SDH facilitate high data integrity and improve network reliability at the higher transmission rates demanded in newly developed optical networking systems.

     Innovations in Optical Networking Systems

          The two primary approaches for increasing bandwidth capacity are higher transmission speeds and higher channel density. The majority of new optical networking systems deployed by service providers addressing the network core operate at 10 gigabits per second, or Gb/s. We believe future network deployments will incorporate systems that operate at 40 Gb/s or faster when the technology becomes commercially available. DWDM, or dense wavelength division multiplexing, is a technology development that increases the capacity of existing fiber optic networks by combining multiple light beams of information, each at a different wavelength, or channel, onto a single strand of optical fiber. Higher transmission speeds and increased deployments of DWDM technology have significantly increased the complexity of optical networking systems. In addition, we believe that next generation optical networks will add substantial functionality and innovations to the optical transport layer to further optimize available capacity.

     Components for Optical Networking Systems

          As communications equipment manufacturers develop systems that enable higher transmission speeds and deploy DWDM technology to increase bandwidth, they must integrate a greater number of complex components that generate, manipulate, transmit and receive electrical and optical signals. The complexities associated with the design and development of state-of-the-art components have caused communications equipment manufacturers to rely upon sophisticated component suppliers.

     Requirements for Supplying Components in Optical Networking Systems

          To meet the performance and functionality requirements of optical networking systems, communications equipment manufacturers often seek suppliers that can deliver increasingly sophisticated component solutions. These component suppliers must provide each of the following:

          Systems Level Expertise. Component suppliers must understand the performance, functionality and integration requirements of the system into which their components are incorporated. Without this critical systems knowledge, a component supplier will have difficulty meeting the time-to-market and functionality requirements of the communications equipment manufacturers, thereby resulting in costly delays and missed revenue opportunities.

          Advanced Technologies and Processes that Enable High-Speed Transmission. Building high-speed integrated circuits requires access to specialized process technologies and advanced circuit design approaches. The vast majority of the semiconductor industry employs a Complementary Metal Oxide Semiconductor, or CMOS, transistor built on silicon material. Because of demanding performance requirements, alternatives to traditional CMOS have emerged in the communications industry. Specifically, Gallium Arsenide, or GaAs, and Silicon Germanium, or SiGe, as well as new CMOS processes have emerged as semiconductor technologies that are effective in addressing high-speed optical communications requirements. Component suppliers are also exploring other semiconductor technologies, such as Indium Phosphide, or InP, as well as new generations of GaAs, SiGe and CMOS, to address the requirements of future, higher speed communications systems. Each of these processes poses significant challenges and has distinct characteristics that require extensive knowledge and expertise. Communications equipment manufacturers often seek component suppliers that have the necessary expertise to use the optimal processes in order to provide next generation optical systems solutions for their customers.

          Highly Integrated Product Solutions. In order to rapidly and cost effectively introduce new products and simplify the design and manufacture of optical networking systems, communications equipment manufacturers often seek component suppliers that can provide highly integrated solutions, thereby eliminating the time and expense associated with sourcing and integrating components from multiple manufacturers. These integrated solutions are modules or higher-level assemblies that combine numerous discrete components into a package or board to be sold as a single product, which eliminates the time and expense associated with sourcing and integrating components from multiple suppliers. As systems are manufactured in greater volumes, communications equipment manufacturers require that modules and higher-level assemblies be integrated further into multi-chip or single- chip solutions. This integration provides for faster and more efficient production, reduced part count and smaller design for placement into the network equipment, significantly reducing manufacturing costs for communications equipment manufacturers.

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Strategy

          Our goal is to become a global supplier of high value component solutions for optical networking systems. Key elements of our strategy include:

     Leveraging Core Competencies to Rapidly Introduce Products that Enable Next Generation Optical Systems

          We have developed substantial competencies in mixed-signal circuit and module design and advanced semiconductor process technologies. We have also developed core competencies in Very Large Scale Integration, or VLSI, circuit architecture and design including forward error correction, or FEC, framer/mapper and data encapsulation/aggregation technologies.  We intend to continue providing sophisticated products that meet the requirements of next generation optical networking systems. We will continue to capitalize on our design competencies and our integration capabilities to provide our customers with new modules and higher-level assemblies so they can quickly and cost-effectively introduce new systems with greater functionality. We intend to develop new products using leading-edge technologies that allow us to transition these modules and higher-level assemblies into highly integrated, multi-chip or single-chip solutions, enabling us to address our customers’ production requirements.

     Expanding Our Customer Relationships and the Breadth of Our Customer Base

          We seek to strengthen our existing customer relationships and expand our customer base by targeting leading edge communications equipment manufacturers, anticipating their needs through a collaborative design and development process and providing ongoing, in-depth customer support. We participate early in the design process of our customers’ potential products and aid in the design of their future systems architecture. Our application engineers and marketing personnel work closely with our customers to define and implement the appropriate solution and to provide continuous support. This extensive customer interaction allows us to further develop our systems expertise and to expand the functionality of our products in our customers’ optical networking systems.

     Maintaining Technology Leadership

          We seek to maintain our technological advantage in the design and development of components for next generation optical networking systems by further investing in research and development, focusing on high bit rate component solutions and vigorously recruiting and retaining talented engineers. We will also continue to work closely with our foundry and technology partners to drive the development of future generation process technologies.

     Pursuing Strategic Relationships

          We seek to continue to establish strategic relationships to expand our technology leadership and secure access to advanced process technologies. We believe that establishing strategic relationships with companies with products or technologies that we deem complementary to our current and future offerings will enable us to more effectively penetrate new and existing market segments and offer our customers additional high value solutions.

     OEM and Licensing

          We may pursue relationships with other vendors of semiconductor products in which they will market and sell Multilink-designed products.  We may also pursue relationships wherein an integrated circuit designer will license Multilink-developed intellectual property for incorporation into application specific integrated circuits, or ASICs, being developed by that partner.

     Addressing the Core and Metropolitan Portions of the Optical Transport Network, while Expanding into the Access and Enterprise Markets

          We provide product solutions for optical networking systems in the innovative network core market. We will continue to build on our expertise in DWDM and long-haul applications for the core of the network. We have also leveraged this expertise and seek to provide  product solutions for emerging metropolitan or regional optical networking systems as OC-192 is beginning to be deployed in this portion of the network.  We are expanding into the Access and Enterprise markets by leveraging our intellectual property portfolio of mixed-signal, analog and digital signal processing technologies. During the past two years, we have made significant research and development investments in developing mixed-signal products that utilize 0.13um CMOS technology. We expect to announce products related to a new family of Serialization/De-serialization, or SerDes devices targeted at local area and storage area networks that can utilize our mixed-signal expertise.

Products

          We design and develop advanced products targeted for use in high bandwidth optical networking systems. These products consist of integrated circuits, modules and higher-level assemblies that generate, manipulate, transmit and receive electrical and optical signals.

          Our products focus on three segments of optical networking systems: the physical media dependent layer, or PMD, the physical

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layer and the datalink layer. Collectively, the products within these segments connect data processing devices to optical fiber and constitute an integral part of optical networking systems.

          The following is a diagram that shows the different functions required for fiber optic transmission systems:

          PMD devices perform the conversion between electrical and optical signals and can be categorized as either transmitters or receivers. Transmitters convert voice and data transmissions carried as electrical signals into optical signals for transmission over optical fiber, while receivers convert optical signals into electrical signals. Transmitters are composed of an electrical-to-optical, or E/O, converter, which converts electrical signals to optical pulses, and a driver, which amplifies and conditions signals for use by the E/O converter. E/O converters are composed of a light source, or laser, and an external modulator, which creates individual pulses of light, or optical signals. Receivers consist of a semiconductor device that converts an optical signal into electrical pulses, an optical-to-electrical, or O/E, converter, and a transimpedance amplifier, or TIA, which amplifies these electrical pulses.

          The physical layer is composed of mixed-signal devices, which include both digital and analog circuits and can be categorized as either multiplexers or demultiplexers. Multiplexers combine multiple slower signals into a single high-speed signal, while demultiplexers perform the reverse function.

          Datalink layer devices connect the physical layer to networking equipment. Datalink layer devices have three primary functions: framing, mapping and forward error correction, or FEC. In framing and mapping, which generally occur simultaneously, data is placed in formatted frames, prior to being transmitted over fiber, to make the data recognizable at the receiving end of the transmission. In FEC, data is placed in special frames that can be used to correct errors that occur during transmission.

     Our PMD Products

          There are two primary types of modulators: crystal-based modulators, which offer optimal performance for long-haul systems but consume significant power and cannot be integrated with lasers; and semiconductor-based modulators, which use less power and can feature on-chip integration with lasers. We currently produce several drivers for crystal-based modulators. These products have been designed to improve signal quality and system efficiency. We have developed Micro-Module^TM technology that allows us to integrate several high-speed devices into a single Ball Grid Array, or BGA, package, which is used in our next generation of PMD devices.  This technology provides a dramatic reduction in size and cost for this type of product.  We are investing in development of future versions of these drivers, integrating more functions and improving performance.

     Our Physical Layer Products

          We have broad experience in the production of physical layer products. We have designed our multiplexers with exceptionally low jitter, which is a type of noise in optical channels, directly improving signal quality and transmission distance. We have designed our demultiplexers with highly sensitive signal processing that eliminates the need for additional components to perform the same function. Our demultiplexers are highly insensitive to jitter, allowing for longer optical transmission distances. We are currently broadening our portfolio of multiplexers and demultiplexers to include product offerings that incorporate greater functionality, higher levels of integration, smaller physical size, lower power consumption and tighter integration with our datalink layer components.

          Our physical layer products can incorporate the following functions:

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     Datalink Layer Products

          We are currently investing in the development of numerous datalink layer products, including FEC devices and Framer/Mappers that integrate the framing and mapping functions. In FEC, we have invested heavily in algorithm, architecture and product development for both standards-based FEC and advanced FEC. FEC allows communications equipment manufacturers to increase the number of DWDM optical channels in a fiber strand and/or to increase the length of the fiber transmission system. In addition, FEC devices can be designed to support new optical networking standards.

          Our first FEC device, the MTC6130, is currently available, while a second FEC device, the MTC6131 SuperFEC^TM is shipping to customers.  Future FEC products will address higher performance, higher levels of integration, and/or higher bit rates. We have announced the MTC6134 EFEC which greatly reduces the power while increasing the functionality of high-performance FEC. Framer/Mappers that are currently in development include advanced products for 10 Gb/s systems, as well as devices targeted for Gigabit Ethernet applications in the Metro market. We have also announced the MTC 6210 framer/mapper for support of 10Gb/s systems utilizing Ethernet over SONET/SDN functionality.

Customers

          In 2002, we shipped our products to over 30 customers, including Alcatel, Ciena, Cisco,  Lucent, Marconi, Nortel, Siemens and TyCom. We sell our integrated circuits, modules and higher-level assemblies to leading and emerging communications equipment manufacturers that develop high-speed optical transport networking systems.

          TyCom, Alcatel and Lucent accounted for approximately 25%, 19% and 10% of our revenues in 2002, respectively.  During 2001, TyCom with 34% and Alcatel with 29% accounted for more than 10% of our revenues and four other customers each accounted for greater than 5% of our revenues. Lucent, Alcatel, and Cisco accounted for approximately 34%, 28% and 11% of our revenues in 2000, respectively.

Strategic Relationships

          We have established strategic relationships with both TRW (a wholly-owned subsidiary of Northrop Grumman) and IBM. We have entered into these strategic relationships with the objective of building and maintaining relationships with leading suppliers of semiconductor process technologies in order to diversify our product and technology base. We previously entered into supply agreements with TRW pursuant to which TRW supplied us with a certain number of processed GaAs and Indium Phosphide wafers annually. These agreements expired in December 2002. During May 2000, we entered into a series of agreements with IBM. Our semiconductor development agreement with IBM provides us with certain models and design kits for use in the fabrication process to develop new integrated circuits. We provide IBM with prototype designs, and IBM fabricates mask sets corresponding to our designs, schedules wafers starts and processes the wafers. Under our joint development agreement with IBM, we jointly developed integrated circuits. We are both permitted to sell the jointly created products to third parties, subject to a fixed royalty fee payable to the other party.  The joint development agreement was cancelled during the first quarter of 2002.  In addition, during July 2001, we entered into a volume purchase agreement with IBM pursuant to which IBM provides us with SiGe wafers for a fixed price per wafer.  There are no minimum purchase requirements under this agreement, which expires in May 2005. 

Sales, Marketing and Customer Support

     Sales

          We target leading and emerging communications equipment manufacturers that develop high-speed optical transport networking systems. We manage the sales process by interacting with our customers at multiple layers of our organization. Our initial contact with a potential customer generally begins with either direct contact by our management or sales force or through third-party manufacturers’ or independent sales representatives. Our strategic account managers and marketing personnel manage the customer relationship throughout the pre-and post-sales process. As needed, systems engineering personnel have detailed technical interactions with our customers during product definition. Our application engineers assist the customer in designing the solution into the customer’s systems. Close interaction further enables us to establish strategic customer programs or relationships.

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          We sell our products through our direct sales force and through independent sales representatives working under the direction of our strategic account managers. As of December 31, 2002, our direct sales force consisted of 20 direct sales professionals, application engineers, managers and administrative personnel located at our headquarters in Somerset, New Jersey and other locations in the United States, and in Germany, Italy and China.

     Marketing

          We have traditionally marketed our products in North America and Europe and have recently begun to market our products in Asia. As of December 31, 2002, our marketing staff included 5 marketing professionals and administrative personnel. Our marketing activities include:

     Customer Service and Support

          Our customer support activities are primarily managed by our applications engineering group consisting of both field applications engineers and internal applications experts. This group supports customers during their design activities to facilitate our customers’ success, and can perform experiments to validate customers’ design ideas including insertion into our fiber optic test facility. Our philosophy is to provide comprehensive customer support to facilitate the design of our complex products into our customers’ systems. Our applications engineering group is also the initial point of contact for our customers should they experience any problems with a product after purchase.

Manufacturing

          We outsource the fabrication and assembly of our semiconductor devices, modules, high-level assemblies and transceivers. We have in-house semiconductor testing capabilities that allow us to develop and perform testing for low volume production.  We also have in-house final assembly and test for our high-level assemblies and transceivers.  We expect to continue our outsource strategy and to continue to move our testing from our in-house capabilities to outside vendors.  As a fabless semiconductor company, we are able to concentrate our resources on supply chain management design, development and marketing of our products. During October 2001, we obtained our ISO 9001:2000 certification from the International Organization of Standardization.  ISO 9001:2000 refers to an international set of quality management system standards that organizations use worldwide.  ISO 9001:2000 requires that we plan and manage the process necessary for the continual improvement of our quality management system.

     Wafer Manufacturing

          We outsource our semiconductor fabrication to several foundries for high bit-rate technologies, including TRW, IBM, TriQuint Semiconductor, and Conexant.  The older generation of our mixed-signal products, which comprised a significant portion of our 2001 revenue, is based predominantly on GaAs HBT wafers supplied by TRW.  The wafers for the third and fourth generation of our mixed-signal products are based on SiGe technology supplied by IBM.  Our manufacturing strategy is to qualify and utilize leading process technology for the fabrication of high bit-rate semiconductor devices and to utilize these external foundries for a variety of different semiconductor technologies. There are certain risks associated with our dependence upon external foundries, including reduced control over delivery schedules, quality assurance, manufacturing yields and costs, the potential lack of adequate capacity during periods of excess demand, limited warranties on wafers or products supplied to us, increases in the prices and potential misappropriation of our intellectual property.  Finding alternative sources for these wafers will result in substantial delays in production and additional costs.  

     Packaging, Assembly and Testing

          The primary vendors for the packaging, assembly and testing of our integrated circuit products are Kimbell Electronics Group, ASAT Inc. and Siliconware Precision Industries Co., Ltd.  ASAT is currently building product for us in their Hong Kong facility.  The primary outsource vendor for the assembly and testing of our driver module products is Natel Engineering Co., Inc., and the majority of our surface mount technology assembly is being contracted from SMTEK International and Flextronics.

          We operate in-house module manufacturing facilities that allow rapid prototyping and development of new products and also serve to complement our outsource module manufacturing partners. We have in-house module and integrated circuits testing facilities in California,  New Jersey and Israel. We maintain comprehensive review and inspection of our outsourcing facilities to ensure compliance

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with our quality standards for manufacturing assembly and test. Our manufacturing processes and outsource vendors utilize stringent quality controls, including incoming material inspection, in-process testing and final test, and all are ISO 9001 certified.

Research and Development

          As of December 31, 2002, we had 125 employees dedicated to research and development, of whom 65 hold advanced degrees, including 19 PhDs. We have additional engineering employees dedicated to marketing, application engineering and business development. These employees are involved in advancing our core technologies and applying these core technologies to product development and activities in our targeted markets.

          We believe that the achievement of higher-levels of integration, functionality and performance and the introduction of new products in our target markets is essential. As a result, we have made and will continue to make substantial investments in research and development. Our research and development expenses, exclusive of deferred stock compensation and warrant issuances, for 2002, 2001 and 2000 were approximately $46.1 million, $54.7 million and $24.6 million, respectively.

Competition

          We compete with component suppliers for optical networking systems. We believe that the principal factors of competition for these markets are:

                    We compete with a number of major domestic and international suppliers. We compete primarily against Agere, Applied Micro Circuits, Intel, Infineon, JDS Uniphase, Maxim, MindSpeed (a Conexant company), Nortel (microelectronics division), NTT Electronics, Philips, PMC-Sierra and Vitesse. In addition to these established companies, we also compete with various start-up entities.  In certain circumstances, most notably with respect to ASICs supplied to Lucent and Nortel, our customers or potential customers have internal integrated circuit and/or manufacturing capabilities.

          In addition, suppliers may begin to offer product solutions, including both electronic and optical components. This creates the potential that suppliers of optical components, which are currently complementary to suppliers of electronic components, may become competitors as they broaden their product portfolio with electronic components, or vice versa. Companies with existing capabilities or products in both areas may benefit from significant competitive advantages.

Intellectual Property

          We rely on a combination of copyright, patent, trademark, trade secret and other intellectual property laws, nondisclosure agreements and other protective measures to protect our proprietary rights. We also utilize unpatented proprietary know-how and trade secrets and employ various methods to protect such intellectual property. To date, we have one U.S. patent issued and 14 U.S. patent applications pending.

          Although we employ a variety of intellectual property in the development and manufacturing of our products, we believe that none of such intellectual property is individually critical to our current operations.Taken as a whole, we believe, however, that our intellectual property rights are significant and that the loss of all or a substantial portion of such rights could have a material adverse effect on our results of operations. There can be no assurance that our intellectual property protection measures will be sufficient to prevent misappropriation of our technology. In addition, the laws of many foreign countries do not protect our intellectual properties to the same extent as the laws of the United States. From time to time, we may desire or be required to renew or to obtain licenses from others in order

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to further develop and market commercially viable products effectively. There can be no assurance that any necessary licenses will be available on reasonable terms.

Backlog

          Our sales are made primarily pursuant to standard purchase orders for delivery of products. Quantities of our products to be delivered and delivery schedules are frequently revised to reflect changes in customer needs. For these reasons, our backlog as of any particular date is not representative of actual sales for any succeeding period. Accordingly, our actual sales could be materially different than our recorded backlog.

Environmental Matters

          We are subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing process. Any failure to comply with present or future regulations could result in the imposition of fines on us, the suspension of production or a cessation of operations. In addition, such regulations could restrict our ability to operate or expand any of our manufacturing facilities or could require us to acquire costly equipment or incur other significant expenses to comply with environmental regulations or clean up prior discharges.

Employees

          As of December 31, 2002, we had a total of 187 employees, including 25 in sales, marketing and application engineering, 17 in manufacturing, purchasing and quality, 125 in research and development and 20 in general and administrative functions. Of these employees, approximately 147 were located in North America, 27 were located in Europe, 12 were located in Israel and one was located in Asia. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppages.

Company

          Our website address is www.mltc.com.  We make our filings with the Securities and Exchange Commission, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, available free of charge on our website as soon as reasonably practicable after we file these reports.

Item 2.     PROPERTY

          Our corporate headquarters facility, consisting of approximately 36,000 square feet, is located in Somerset, New Jersey. We lease our corporate headquarters facility pursuant to a sublease agreement that expires in April 2007 for approximately 12,000 square feet and pursuant to a lease agreement that expires in February 2006 for approximately 24,000 square feet. We also lease our principal design facility, consisting of approximately 31,000 square feet, in Somerset, New Jersey, pursuant to a lease agreement that expires in October 2006. Pursuant to our corporate realignment plan whereby we have consolidated facilities, we have substantially vacated the Somerset, New Jersey design facility and are attempting to sublease the entire facility for the remaining lease term.  We lease approximately 29,600 square feet of design space in Santa Monica, California pursuant to a lease agreement that expires in December 2005 and we are currently attempting to sublease approximately 5,000 square feet of this facility. We lease approximately 7,000 square feet for a design center in Allentown, Pennsylvania pursuant to a lease agreement that expires in September 2006. We are actively searching for a sub-leasee for the remainder of the Allentown, Pennsylvania lease term as we have completely vacated this facility pursuant to our realignment plan and have consolidated the functions performed at this location into our corporate headquarters location.   We also lease approximately 1,800 square feet for a sales office in Los Altos, California pursuant to a lease agreement that expires in August 2003 that we are also attempting to sublease.   We also lease approximately 6,600 square feet for a design center in Santa Clara, California pursuant to a lease agreement that expires in May 2005.

          In addition, we have lease agreements for an approximate 11,800 square feet facility in Bochum, Germany, which expires in January 2011 and an approximate 19,400 square feet facility in Munich, Germany, which expires in December 2005.  Subsequent to December 31, 2002, we have terminated our Bochum lease for less than $0.1 million in termination costs and now lease on a month-to-month basis.  We have also reduced our Munich lease square footage by approximately one-half and revised the remaining lease term to expire in December 2003 for less than $0.1 million in termination costs.

     We have lease agreements for an approximate 3,500 square feet facility in Kaunas, Lithuania, which expires in November 2004, an approximate 13,000 square feet facility in Israel, of which approximately 6,500 square feet expires in each of February 2003 and January 2004, and an approximate 2,200 square feet facility in Milan, Italy, which expires in July 2007. These facilities are used predominantly for research and development and sales activities.

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Item 3.     LEGAL PROCEEDINGS

          In the ordinary course of our business, we are the subject of, or party to, various pending or threatened legal actions. We believe that any liability arising from these actions will not have a material adverse effect on our financial position, results of operations or cash flows.

Item 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          No matters were submitted to a vote of security holders during the quarter ended December 31, 2002.

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PART II

Item 5.     MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Recent Market Prices

          Our Class A common stock began trading under the symbol MLTC on the NASDAQ National Market System on June 21, 2001.  Preceding June 21, 2001, there had been no public market for our common stock.  On September 6, 2002, our shareholders and board of directors approved a one-for-ten reverse stock split of our Class A and Class B common stock.  All share prices have been restated to reflect the retroactive effect of the reverse stock split.

          The markets for securities such as our common stock historically have experienced extreme price and volume fluctuations during certain periods.  These broad market fluctuations and other factors, such as new product developments and trends in our industry and the investment markets generally, as well as economic conditions and quarterly variations in our results of operations, may adversely affect the market price of our common stock.

          The high and low bid prices for our Class A common stock as reported by the NASDAQ Stock Market for the periods indicated are as follows.  Such prices are inter-dealer prices without retail markups, markdowns or commissions, and may not necessarily represent actual transactions.

          Our Class B common stock is not publicly traded. Each share of Class B common stock is convertible at any time at the option of the holder into one share of Class A common stock and is automatically converted upon sale and most other transfers.

Dividend Policy

          We have never declared or paid cash dividends on shares of our capital stock.  We currently intend to retain all of our earnings, if any, for use in our business and in acquisitions of other businesses, products or technologies. We do not anticipate paying any cash dividends in the foreseeable future.

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Equity Compensation Plan Information

          We have two classes of common stock outstanding.  Our Class A common stock has one vote per share and our Class B common stock has ten votes per share.  Only our Class A common stock is issuable under our equity plans.  The following table provides information as of December 31, 2002 with respect to our Class A common shares issuable under our equity compensation plans:

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Item 6.     SELECTED FINANCIAL DATA

          The statement of operations data set forth below for the years ended December 31, 2002, 2001, and 2000 and the balance sheet data as of December 31, 2002 and 2001 have been derived from our audited consolidated financial statements included elsewhere herein, and should be read in conjunction with those financial statements (including notes thereto).  The selected financial data as of December 31, 2000, 1999 and 1998 and for the years ended December 31, 1999 and 1998 have been derived from audited consolidated financial statements not included herein, but which were previously filed with the Securities and Exchange Commission, or SEC.

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Item 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

          You should read the following discussion and analysis in conjunction with our Consolidated Financial Statements and related Notes thereto, included in Part IV, Item 15 of this Report, and the “Risk Factors” section at the end of this Item 7, before deciding to invest in our company or to maintain or increase your investment. In this Report, all share numbers and per share amounts have been retroactively adjusted to reflect our 1-for-10 reverse stock split effective September 6, 2002.

OVERVIEW

          We design, develop and market advanced integrated circuits, modules and higher-level assemblies that enable next generation optical networking systems. We are expanding into the Access and Enterprise markets by leveraging our intellectual property portfolio of mixed-signal, analog and digital signal processing technologies. During the past two years, we have made significant research and development investments in developing mixed-signal products that utilize 0.13um CMOS technology. We expect to announce products related to a new family of SerDes devices targeted at local area and storage area networks that can utilize our mixed-signal expertise.  We outsource substantially all of our semiconductor fabrication and focus our efforts on the design, development and marketing of our products.

          From our inception on July 26, 1994 through December 31, 1996, our operations consisted primarily of start-up activities, including development of our initial products. During 1996, we began generating development revenues through technology development contracts with several of our customers. In July 1997, we began shipping our first product for customer evaluation. During the first quarter of 1998, we recognized our first significant product revenues and further invested in research and development, sales and marketing, operations and our general and administrative infrastructure.

          To date, we have generated a substantial portion of our revenues from a limited number of customers. During the year ended December 31, 2002, our top three customers were TyCom, Alcatel and Lucent, representing 25%, 19% and 10% of our revenues, and three other customers each accounted for greater than 5% of our revenues.  During the year ended December 31, 2001, TyCom with 34% and Alcatel with 29% accounted for more than 10% of our revenues, and four other customers each accounted for greater than 5% of our revenues. 

          A number of telecommunication service providers have announced plans to curtail the level of their capital expenditures on their infrastructure build-out, which has significantly reduced the demand for our products by communications equipment manufacturers, including these principal customers.  Our revenues declined substantially in 2002 as compared to 2001.   Due to general economic conditions and slowdowns in purchases of optical networking equipment, it has become increasingly difficult for us to predict the purchasing activities of our customers and we expect that our operating results will fluctuate substantially in the future. 

          During August 2002, we commenced a significant corporate realignment plan that included workforce reductions, the consolidation of facilities through closure of certain locations, a reduction in the level of activity at other locations and asset impairment charges.  As a result of our corporate realignment plan, we recorded a charge of  $11.0 million.  Upon completion of the plan, we anticipate that our worldwide headcount will decrease to approximately 150 people as compared to 382 at December 31, 2001.  The headcount reduction portion of the plan was substantially completed by December 2002 and is expected to be fully completed by April 2003.  The headcount reductions have occurred at all of our locations in Europe, Israel and the United States. 

          We focus our sales and marketing efforts on North American, European and Asian communications equipment manufacturers. During the year ended December 31, 2002, we derived 83% of our total revenues from communications equipment manufacturers in North America compared with 76% during the comparable period in 2001.  We currently sell through our direct sales force in North America and Europe and through selected independent sales representatives in the United States, Germany, Italy, France, Israel, China, Korea and Japan.  International revenues are denominated in U.S. dollars, which reduces our exposure to foreign currency risks. We expect international revenues to continue to account for a significant percentage of total revenues.

          Revenues.  We recognize product revenues at the time of shipment. Our customers are not obligated by long-term contracts to purchase our products and can generally cancel or reschedule orders on short notice. The recent slowdown in the build-out of the communications infrastructure has caused our revenues to grow less rapidly than they otherwise would have.  Our revenues substantially declined in  2002, compared to 2001, and we recently announced that we expect our revenues in the first quarter of 2003 to be in the low single-digit million-dollar range.  In the ordinary course of business, we receive order cancellations and rescheduled shipments.  To the extent possible, we pursue order cancellation fees from our customers.  Depending upon the facts and circumstances surrounding these cancellation fees, the receipt of such fees may have an immediate impact on revenues in the period that such fees are collected or the fees may need to be deferred and then recognized as revenue over some future period.  We cannot ensure that we will be able to collect an order cancellation fee for each order cancelled and we cannot project how such fees will affect revenue.

          Cost of Revenues.  Cost of revenues consists of component and materials cost, direct labor, deferred stock compensation relating to manufacturing labor, manufacturing, overhead costs and estimated warranty costs. Cost of revenues also includes adjustments to write

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down inventory to its net realizable value resulting from such items as customer order cancellations and excess and obsolete inventory.  We outsource substantially all of the fabrication and assembly, and a portion of the testing, of our products. Accordingly, a significant portion of our cost of revenues consists of payments to our third-party manufacturers. If revenues increase, we believe favorable trends should occur in manufacturing costs due to our ability to absorb overhead costs over higher volumes. Nevertheless, there is a substantial fixed component to cost of revenues, and the decline in our revenues in 2002, compared to 2001, has materially adversely affected our gross margins.

          Research and Development.  Research and development expenses consist primarily of salaries and related personnel costs,  material, third-party costs and fees related to the development and prototyping of our products and depreciation associated with engineering and design software costs. We expense our research and development costs as they are incurred, except for the purchase of engineering and design software licenses, which are capitalized and depreciated over their estimated useful life. Research and development is key to our future success and we will continue to strategically invest in research and development in order to maximize our product offerings. We expect that research and development expenses will decrease during 2003 in absolute dollar amounts due to the effects of our previously announced corporate realignment plan.

          Sales and Marketing.  Sales and marketing expenses consist primarily of salaries, commissions and related expenses for personnel engaged in sales, marketing, customer service and application engineering support functions. As a result of our corporate realignment plan, we expect that sales and marketing expenses will decrease in 2003 in absolute dollar amounts as we execute on our corporate realignment plan.

          General and Administrative.  General and administrative expenses consist primarily of salaries and related expenses for executive, finance, accounting, facilities, information services, human resources, recruiting, professional fees and other corporate expenses. We expect that general and administrative expenses will decrease in 2003 in absolute dollar amounts due to the effects of our corporate realignment plan and various cost reduction programs that were initiated in 2001 with the purpose of maximizing the leverage within general and administrative functions.

          Deferred Stock Compensation.  In connection with stock option and restricted stock grants to our employees, officers and directors, we recorded deferred stock compensation. Deferred stock compensation represents the difference between the grant price and the fair value of the common stock underlying options and restricted stock granted during these periods. Deferred stock compensation is presented as a reduction of shareholders’ equity. We are amortizing our deferred stock compensation using the graded vesting method, in accordance with FASB Interpretation No. 28, over the vesting period of each respective option, generally three to four years.  Based on our balance of deferred stock compensation as of December 31, 2002, we estimate our amortization of deferred stock compensation for each of the periods below to be as follows:

          Approximately $0.2 million of the remaining amortization of deferred stock compensation will be charged to cost of revenues. Subsequent to our initial public offering, we did not issue any stock options that required the recognition of any deferred stock compensation.

          Net Income (Loss).  In addition to the items discussed above, net income (loss) also includes interest expense, other income, income or loss associated with our equity investments and a provision or benefit for income taxes. Interest expense relates to interest associated with capital leases and equipment and software financings. Other income represents investment earnings on our cash and cash equivalents and short-term investments.

RESULTS OF OPERATIONS

Years Ended December 31, 2002 and 2001

          Revenues . Revenues decreased to $18.3 million in 2002, compared with $130.5 million in 2001.  The decrease was due to a continuing dramatic decline in demand for products in our sector generally, resulting in reduced component purchases by communications equipment manufacturers.

          Gross Profit.  Cost of revenues decreased to $18.5 million in 2002, compared with $59.4 million in 2001.  During 2002, cost of revenues included $1.6 million of deferred stock compensation.  Gross margin decreased to negative 1% in 2002 compared with 54% in 2001.  The significant reduction in gross margin during 2002 is partially a result of the significant charges, offset by certain credits,

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recorded against cost of revenues during 2002.  The significant items that affected gross margin during 2002 and 2001 were as follows:

          Excluding the impact of the above-mentioned items, gross margins would have been 34% and 63% during 2002 and 2001, respectively.  As discussed above, the decrease in gross margin is due to the decrease in sales volume as a result of reduced spending by communications equipment manufacturers.

          Inclusive of the above-mentioned items, the decrease in gross margin was due predominantly to $5.7 million of inventory charges to reduce inventories to their net realizable value and to write off an advance made to a supplier. Included in the $5.7 million is a $4.8 million inventory write-down.  The inventory was written down to its net realizable value based upon our determination that excess quantities of certain modules and raw materials existed.  The excess quantities of the modules are the result of forecasted demand not developing as expected and the introduction of two new modules.  The new modules have enhanced performance and cost less to produce thereby rendering the prior modules obsolete.  Accordingly, after allowing for forecasted demand and warranty issues, we wrote down this product to its net realizable value.  Certain raw materials were also written down based upon the reduction in forecasted demand for the finished goods that these raw materials were used to manufacture.   The remaining raw materials in excess of required demand have no alternative uses and therefore will be disposed.  

          As part of our corporate realignment plan, we discontinued manufacturing transponders.  As a result of this decision, we wrote down $0.4 million of transponder raw material inventory to its net realizable value.   We have no alternative uses for these raw materials.  Also included in this inventory charge is $0.5 million that represents an advance made to a finished goods supplier in 2000.  We agreed to

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reduce amounts owing under the advance by receiving a discount on purchases we made from the supplier.   Our agreement stated that if we did not make sufficient purchases to utilize the entire advance through such discounts, we would not require the supplier to repay the remaining balance.  Based upon our review of forecasted demand for the products that this supplier manufactures, we believe that it is unlikely that we will utilize the remaining advance. 

          In conjunction with the lower forecasted demand discussed above, we performed an impairment analysis of our manufacturing assets.  Based upon review of future undiscounted cash flows, which indicated impairment, we recorded a $1.1 million impairment charge to write down these assets, which are all equipment, to their fair value.  Fair value was predominantly determined based upon used equipment prices quoted by independent third parties.

          The foregoing charges were offset by the reversal of $1.0 million of certain accruals (predominantly bonus accruals) and the sale of inventory, with a cost of $0.7 million that was previously written down to its net realizable value during the first quarter of 2001.  The $1.0 million of accrual reversals pertains to accruals that existed at December 31, 2001.  During 2002, when final information used to determine the adequacy of these accruals was obtained, the accruals were adjusted accordingly.  The sale of previously written down inventory relates to inventory that was written down during the first quarter of 2001 based upon information from the sole customer that it was moving from GaAs to SiGe technology.  The customer’s transition from GaAs to SiGe has been delayed resulting in immaterial purchases of this inventory by the customer.  We do not expect any material orders for this product during 2003; however, we will continue to disclose the effect of such sales on gross margin. 

          During 2002, stock-based compensation expense associated with cost of revenues decreased $0.5 million compared to 2001.  The decrease in stock-based compensation expense in 2002 compared with the comparable period in 2001 is due predominantly to headcount reductions and the reduction in the rate of amortization of deferred stock-based compensation as a result of being further into vesting periods.  As the vesting period progresses, the amount of deferred stock-based compensation amortized into expense decreases.  As discussed below, stock-based compensation includes additional charges of $0.3 million relating to stock-based compensation that was accelerated into the statement of operations as a result of our stock option exchange program that concluded on August 30, 2002. 

          Included in the $8.8 million inventory charge during 2001 is a $4.3 million inventory write-down required as a result of a migration by certain of our customers from GaAs-based products to comparable SiGe-based products.  Also included in this inventory charge is $3.4 million relating to order cancellations as a result of decreased carrier spending, $0.6 million that relates to inventory shrink and lower than expected production yields of consigned inventories located at our finished goods suppliers and $0.5 million of raw materials used in a previous generation of our transponder that is no longer being utilized in the newer, more advanced version of our transponder.

          Research and Development.  Research and development expenses, excluding deferred stock compensation, decreased to $46.1 million in 2002, compared with $54.7 million in 2001. As a percentage of revenues, research and development expenses increased to 253% in 2002, compared with 42% in 2001.  The increase in research and development expenses as a percent of revenues was due to the significant reduction in our revenues during this period.  The decrease in absolute dollars is the result of our focused spending on projects that we believe will be accretive to revenues in the near term, our Company-wide expense reduction programs and our corporate realignment program.  The decrease in absolute dollars is partially due to the reversal of certain accruals (predominantly bonus accruals) of $1.2 million during 2002.  Additional data was obtained which provided us with enough information to adjust these accruals downward.  Despite the reduction in communications equipment manufacturer spending, we will continue to strategically invest in research and development and seek to build relationships with a global customer base of communications equipment manufacturers.   We are targeting investments in research and development on expanding our addressable markets to include Metro/Access and Enterprise applications.  Our research and development spending will be adversely impacted if forecasted 2003 revenues do not meet our expectations.

          During 2002, stock-based compensation expense associated with research and development increased $1.5 million as compared to 2001.  The increase was due to restricted stock grants to engineering personnel and the acceleration of $1.3 million of additional expense.  The additional stock compensation expense relates to deferred stock-based compensation that was accelerated into the statement of operations as a result of our stock option exchange program that concluded on August 30, 2002.

          Sales and Marketing.  Sales and marketing expenses, excluding deferred stock compensation, decreased to $12.4 million in 2002, compared with $17.4 million in 2001. As a percentage of revenues, sales and marketing expenses increased to 68% during 2002, compared with 13% during 2001.  The decrease in absolute dollars was due primarily to our concentrated effort to reduce expenses as we began to execute on our corporate realignment plan.  The increase in sales and marketing expense as a percentage of revenues is due to the reduced revenues discussed above. 

          In conjunction with our stock option exchange program, we accelerated $0.5 million of stock-based compensation into the statement of operations relating to option grants to sales and marketing personnel that were tendered as part of the option exchange.  After adjusting for the accelerated expense associated with our stock option exchange program, the decrease in stock-based compensation expense associated with sales and marketing expenses during 2002 compared with 2001 is due predominantly to the reduction in the rate of amortization of deferred stock-based compensation as a result of being further into vesting periods and headcount reductions.  As the vesting period progresses, the amount of deferred stock-based compensation amortized into expense decreases.

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          General and Administrative.  General and administrative expenses, excluding deferred stock compensation, decreased to $7.7 million in 2002, compared with $11.8 million in 2001.  As a percentage of revenues, general and administrative expenses were 42% in 2002, compared with 9% in 2001.  The decrease in absolute dollars was primarily due to our focused efforts to leverage our general and administrative expenses by reducing spending and the execution of our corporate realignment plan.  The increase in general and administrative expense as a percentage of revenues is due to the reduced revenues discussed above. 

          In conjunction with our stock option exchange program, we accelerated $0.5 million of stock-based compensation into the statement of operations relating to option grants to general and administrative personnel that were tendered as part of the option exchange.  The decrease in stock-based compensation expense associated with general and administrative expenses during 2002 compared with 2001 is due to the same reasons discussed above under sales and marketing.

         Deferred Stock Compensation.  Operating expenses included amortization of deferred stock compensation of $11.2 million in 2002, compared with $9.9 million in 2001.   As discussed below, the increase is due predominantly to our stock option exchange program.

          As previously disclosed herein, in June 2002 we initiated a voluntary stock option exchange program to our employees, officers and board members located in the United States and Europe. The program commenced on June 24, 2002, and as amended in July 2002, participants were able to tender for cancellation stock options to purchase our Class A common stock that have an exercise price equal to or greater than $1.35 per share (calculated prior to the one-for-ten reverse stock split) for replacement options to purchase Class A common stock to be granted on a date which is at least six months plus one day from the date of cancellation of the tendered options.   The cancellation date was August 30, 2002.  The exercise price of the replacement options will be the market price of our Class A common stock on the grant date of the replacement options. The remaining terms and conditions of the replacement options, including the vesting schedules, will be substantially the same as the terms and conditions of the options cancelled.  During 2002, $2.6 million of deferred stock compensation associated with the stock options that were tendered in connection with this offer was accelerated into our statement of operations.

          Deferred stock compensation associated with stock options decreased offset by deferred stock compensation associated with restricted stock grants since 2001.  The decrease in the deferred stock compensation associated with stock options is due to a greater proportion of deferred stock compensation expense being recognized earlier in the vesting period and the cancellation of options due to employee terminations.  Under the graded vesting method of amortization, a greater proportion of deferred stock compensation is recorded in the earlier years of the vesting period.  Since the most significant portion of deferred stock-based compensation was recorded on option grants in 2000 and early 2001, much of the deferred stock-based compensation associated with these grants has already been amortized as expense.  Since our initial public offering in June 2001, we have not issued any stock options with an exercise price below fair value that would require the recognition of any deferred stock compensation.   We have, however, issued restricted stock to certain of our employees. The deferred stock compensation associated with these restricted stock grants is being amortized over the vesting period, which generally ranges from six months to three years.  The deferred stock compensation associated with the restricted stock grants will increase deferred stock compensation expense in future quarters.

          Investment Impairments and Related Charges.  During 2002, we recorded impairment and related charges associated with our investments in ASIP and Internet Machines Corporation, or IMC. ASIP is a privately held, optical device start-up company that is subject to many of the same risks as us.  We account for our investment in ASIP under the equity method of accounting.  During 2002, we recorded a $3.5 million charge associated with our relationship with ASIP.  This charge consists of (i) an impairment charge on the remaining net investment balance of $0.4 million, (ii) a $0.7 million write off of goodwill associated with the ASIP investment and (iii) a $2.4 million asset impairment charge on equipment that was consigned to ASIP in accordance with an existing development and license agreement that expires in May 2003. 

          In determining whether our investment in ASIP and related goodwill was impaired, we considered several factors such as, but not limited to, the reduction in market valuations for optical device companies, the continued reduction in spending by communications equipment manufacturers, the historical and forecasted operating results of ASIP and changes in technology.   Upon review of these and other qualitative and quantitative factors, we concluded that our remaining net investment in ASIP and corresponding goodwill was impaired.   We also performed a recoverability analysis of the consigned equipment at ASIP.  We have no alternative uses for this equipment and cannot project any future cash flows from such equipment.  Accordingly, we recorded an asset impairment charge to write down the consigned equipment to fair value.

          We have also provided a guarantee for a facility lease of ASIP.  The guarantee is through December 31, 2005, provided that ASIP continues to meet all terms and conditions of the lease.  Assuming that ASIP is current on their lease payments, the total remaining lease payments to be made by ASIP during the guarantee period are $1.0 million.  Because the likelihood that we would have to satisfy this guarantee is not probable, no liability has been recorded for the guarantee.  In addition, we are obligated to incur an additional $1.0 million of development expenses and to expend an additional $0.8 million for capital in accordance with the development and license agreement. 

          Also during 2002, we recognized an other than temporary reduction in the value of our investment in IMC.  We reduced the carrying value of our investment in IMC by $1.4 million from an original cost basis of $1.6 million.  IMC is an optical device company and is subject to many of the same industry risks as us.  We concluded that a write down was required as a result of market valuation reductions in our and IMC’s industries, coupled with new financial projections received from IMC.

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          Corporate Realignment.  During 2002, we recorded an $11.0 million charge in connection with the corporate realignment plan that we announced in August 2002.  We commenced this plan to create a more efficient cost structure and realign our business to reflect the current telecommunication market environment, which will permit us to focus our employees on our key business strategies.  The major initiatives of the plan include a reduction of 40 to 45 percent in our worldwide headcount, the consolidation of facilities through the closure of certain locations and the reduction in the level of activity at other locations. The headcount reduction portion of the plan was substantially completed by December 2002 and is expected to be fully completed by April 2003.  During the three months ended September 30, 2002, we recorded $12.3 million of this charge.  The charge includes (i) $1.9 million for workforce reductions that represents predominantly severance costs, (ii) $3.9 million predominantly representing lease termination costs relating to the consolidation of facilities through closure of certain locations and/or a reduction in the level of activity at other locations and (iii) asset impairment charges of $6.5 million.  As a result of the employee terminations associated with the realignment plan, a portion of our purchased research and development software, equipment and leasehold improvements will not be fully utilized.  The asset write down charge of $6.5 million was determined upon the review of the future undiscounted cash flows related primarily to purchased research and development software, equipment and leasehold improvements.  We concluded that an impairment charge was necessary to write down these assets to their fair value.  

          During the three months ended December 31, 2002, we expanded the plan by deciding to close facilities in addition to those already included in the charge recorded during the third quarter of 2002.  During the three months ended December 31, 2002, we recorded a net credit of $1.3 million to the realignment charge.  This net credit represents (i) asset impairment charges of $0.6 million relating predominantly to research and development equipment as determined upon the review of the future undiscounted cash flows related to such assets, (ii) $0.3 million of lease costs resulting from the decision to close or consolidate additional facilities, (iii) a credit of $1.4 million resulting from favorable contract termination costs and (iv) a $0.8 million credit as a result of a favorable settlement for certain software licenses that were financed with the vendor.  We recognized the $1.4 million from favorable contract termination costs because we successfully negotiated a reduction in certain liabilities recorded during the three months ended September 30, 2002 relating to three operating facility leases and one purchase contract. When these liabilities were originally recorded, we recorded a liability for the expected cost of terminating these contracts.  In regard to operating leases for facilities, we recorded a liability for the remaining lease term less estimated sublease income and for the purchase contract, we recorded a liability for the quantity of test boards that we believed would not be purchased.  We expect to purchase fewer test boards as a result of the headcount reductions and the rationalization of our research and development resources to different projects in accordance with our realignment plan.  We successfully negotiated favorable termination settlements for the three facility operating leases and the purchase commitment contract.    We settled these liabilities for $1.4 million less than originally estimated.  The $0.8 million is the result of favorable negotiations with a software vendor relating to financed software licenses.  We successfully negotiated a reduction in the remaining financed obligation and recorded such amount as a credit to the asset write down charge. 

          Upon completion of the plan, we anticipate that our worldwide headcount will decrease to approximately 150 people as compared to 382 at December 31, 2001.  The headcount reductions will occur at all of our locations in Europe, Israel and the United States.  This reduction in headcount is due to both terminations in accordance with our realignment plan and attrition in the normal course of business.  Generally, as attrition occurs, we are allocating current resources to fill the vacancies.  After adjusting for the favorable contract terminations discussed above, we have estimated that the total cash cost of the realignment plan is approximately $4.7 million and that the plan, combined with our other cost saving initiatives, will contribute approximately $35.0 million of annual cash savings.  The estimated remaining cash outflows related to the plan are expected to be $2.2 million in 2003, less than $0.6 million in 2004 and $0.7 million thereafter. The estimated cash outflow and annual cash savings related to the plan will, however, be negatively impacted if it takes us longer than anticipated to sublease some of our closed facilities or if our planned terminations are delayed. 

          Other Income and Expenses, Net.  Other income decreased to $0.4 million in 2002, compared with $1.0 million in 2001.  The decrease is due primarily to higher interest expense resulting from software and equipment financings during 2001 and the first half of 2002 and lower interest income as a result of having a lower average cash and short term investment balance during 2002, as compared to 2001 which included proceeds of our June 2001 initial public offering.  We expect that other income will continue to decrease as our cash and short term investments decrease during 2003, offset by a decrease in interest expense related to software and equipment financing.

          Net Income (Loss).  Net loss was $106.2 million in 2002,  compared with $12.4 million in 2001.  The increase in net loss is predominantly due to the items discussed above including the reduction in revenue and the corresponding decrease in gross profit, corporate realignment expenses, the inventory write downs and related charges, investment impairments and related charges and the fixed asset impairment charge.  In addition to the items discussed above, the net loss is also increased by our recognition of a valuation allowance against all of our deferred tax assets. 

          During the three months ended June 30, 2002, we concluded that significant uncertainty existed surrounding the recoverability of our deferred tax assets. On a quarterly basis, we assess the recoverability of our deferred tax assets by reviewing a number of factors, including operating trends, the scheduled reversal of deferred tax liabilities and future projections of taxable income, to determine whether a valuation allowance is required to reduce such deferred tax assets to an amount that is more likely than not to be realized.  We considered the following factors that occurred during the three months ended June 30, 2002 in assessing the recoverability of our deferred tax assets: (i) further announced reductions in 2002 capital spending by the major telecommunication service providers and industry analysts forecasting a further reduction in capital spending in 2003, (ii) significant workforce reductions within the telecommunications and related

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industries, (iii) continued poor visibility of customer orders, (iv) a depressed capital market which makes obtaining new capital difficult and (v) a lower than expected demand for 10 gigabit products. 

          Based on the projections for future taxable income over the periods in which the deferred tax assets are realizable, we believe that significant uncertainty exists surrounding the recoverability of the deferred tax assets.  Accordingly, during 2002, we recorded a valuation allowance equal to our deferred tax assets.  As a result of recording the valuation allowance, $12.2 million was charged against additional paid-in capital.  The $12.2 million charge represents deferred tax assets that were recorded as a result of employee stock option and warrant exercises.  The $12.2 million benefit was originally recorded as a credit to additional paid-in capital and not as a credit to the income tax benefit. 

Years Ended December 31, 2001 and 2000

          Revenues.  Revenues increased to $130.5 million in 2001, compared with $72.7 million in 2000. The increase was due to higher unit volume shipments of integrated circuits, modules and higher-level assemblies to existing and new customers and the introduction of new products.  Sales of modules and higher-level assemblies accounted for approximately 60% of revenues in 2001.

          Gross Profit.  Cost of revenues, including $2.1 million of deferred stock compensation, increased to $59.4 million in 2001, compared with $27.9 million in 2000. Gross profit as a percentage of revenues, or gross margin, decreased to 54% in 2001 compared with 62% in 2000. The decrease in gross margin was due predominantly to (i) increased deferred stock compensation of $1.2 million due to stock option grants to manufacturing employees coupled with increased manufacturing headcount and (ii) $8.8 million of charges to reduce inventories to their net realizable value and to record order cancellation charges due to our vendors.  Included in the $8.8 million is a $4.3 million inventory write-down required as a result of a migration by certain of our customers from GaAs-based products to SiGe-based comparable products.  This has resulted in cancellation of orders by certain customers, the most significant of which was by Alcatel’s submarine networks division, which has moved to a new design system more rapidly than expected, and certain other customers indicating that they will be utilizing SiGe products instead of GaAs products in the future.   This inventory charge also includes a $3.4 million inventory write-down required as a result of order cancellations as a result of decreased spending by telecommunication service providers.  Also included in this inventory charge is $0.6 million that relates to consigned inventories located at our finished goods suppliers. The charge is the result of inventory shrink and lower than expected production yields during the three months ended March 31, 2001 at these finished goods suppliers. We performed procedures to ensure that the entire charge is associated with the first quarter of 2001 including conducting a physical count of the consigned inventory during the fourth quarter of 2000. We identified this inventory shortage as our suppliers’ utilized consigned raw materials for the production of our products. As the consigned raw material inventory balance was reduced, we realized that a discrepancy existed between our perpetual records and the actual physical quantity on hand at our suppliers’ locations. We will no longer consign inventory to these suppliers as we are allowing these suppliers to purchase their own raw materials to manufacture our finished good products. This will improve cash flows by maintaining lower raw material inventory levels.  The remaining inventory charge of $0.5 million represents raw materials used in a previous generation of our transponder that is no longer being utilized in the newer, more advanced version of our transponder.

          Excluding the impact of the $8.8 million inventory charge and of deferred stock compensation, gross margins would have been 63% in 2001 and 2000. 

          Research and Development.  Research and development expenses, excluding deferred stock compensation, increased to $54.7 million in 2001 compared with $24.6 million in 2000. As a percentage of revenues, research and development expenses increased to 42% in 2001 compared with 34% in 2000.  The increase in both dollars and as a percent of revenues was due primarily to the addition of engineering personnel in the United States and three new research and development centers located within Europe and Israel as we continue the development of new products to support revenue growth, costs associated with a joint development agreement that we entered into during May 2000 and depreciation and amortization on research and development equipment and software purchased during late 2000 and early 2001.  A significant portion of the 2001 research and development spending was on complex VLSI devices that perform critical edge framing and client aggregation functions and for high speed CMOS to drive integration of these functions across the entire line card. 

          Stock-based compensation expense associated with research and development increased $2.5 million due to stock option grants to engineering personnel coupled with increased headcount.

          Sales and Marketing.  Sales and marketing expenses, excluding deferred stock compensation, increased to $17.4 million in 2001 compared with $7.1 million in 2000. As a percentage of revenues, sales and marketing expenses increased to 13% in 2001 compared with 10% in 2000. The increase in both dollars and as a percent of revenues was due primarily to the addition of sales and marketing and application engineering personnel as we have begun to expand our internal domestic and international sales force. Stock-based compensation expense associated with sales and marketing increased $1.5 million due to stock option grants to sales and marketing personnel coupled with increased headcount.

          General and Administrative.  General and administrative expenses, excluding deferred stock compensation, increased to $11.8 million in 2001 compared with $7.6 million in 2000. As a percentage of revenues, general and administrative were 9% in 2001 compared with 10% in 2000. The increase in dollars was due primarily to the addition of personnel in the latter half of 2000 and the associated

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payroll and related costs within the areas of senior management, finance and human resources.  The decrease as a percentage of revenues is due to getting better leverage of such costs in 2001.  There was no material change in stock-based compensation expense associated with general and administrative expenses.

        Deferred Stock Compensation.  Operating expenses included amortization of deferred stock compensation of $9.9 in 2001 compared with $6.1 in 2000 due to a greater number of option grants to new and existing employees and a full year of amortization of deferred stock compensation associated with 2000 option grants.

          Other Income and Expenses, Net.  Other income decreased to $1.0 million in 2001 compared with other income of $1.6 in 2000. The decrease was primarily due to higher interest expense resulting from software and equipment financings during 2001 and $0.7 million of losses from our investment accounted for under the equity method of accounting. 

          Net Income (Loss).  Net loss increased to $12.4 million in 2001 compared with $3.7 million in 2000.  The increase in net loss is predominantly due to the items discussed above including the inventory write-off, increased spending in the areas of research and development, sales and marketing and general and administrative and an increase in deferred stock compensation expense offset by an income tax benefit.  The tax benefit was predominantly created as a result of our determination that the valuation allowance against our deferred tax assets was no longer necessary coupled with the current year net loss.

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LIQUIDITY AND CAPITAL RESOURCES

          A summary of our contractual obligations and commercial commitments as of December 31, 2002 are as follows:

          As of December 31, 2002, we had cash and cash equivalents and short-term investments of $47.6 million.

          Cash used in operating activities was $33.7 million during 2002 compared with cash provided by operations of $5.9 million during 2001.  Net loss of $106.2 million includes $11.0 million of corporate realignment charges and non-cash charges of $11.7 million for depreciation and amortization, $12.7 million for amortization of deferred stock compensation, $1.1 million of asset impairment charges that are not included in the corporate realignment charge, $5.7 million of inventory write down and related charges, $4.9 million of investment impairments and related charges and deferred tax expense of $14.5 million.  The increase in cash used in operating activities is due to the significant reduction in revenues discussed above.

          Cash provided by investing activities was $21.6 million for 2002 compared with $62.4 million of cash used in investing activities for 2001.  The increase is due to the net sale of $27.9 million of marketable securities during 2002 as compared with a net purchase of $42.8 million of marketable securities during 2001, coupled with a decrease in fixed asset purchases.  In addition, during 2001, we made $2.0 million of investments in non-marketable securities (ASIP and IPAG).  The proceeds from the sale of marketable securities were used predominantly for operating purposes and to pay certain financing obligations that were due.

          Cash used in financing activities was $5.1 million for 2002 compared with $77.1 million of cash provided by financing activities for 2001. The decrease in cash provided by financing activities is predominantly due to the proceeds from our initial public offering in June 2001.  During 2002, our debt payments increased due to software and equipment financings that we entered into during the latter part of 2001 and during the first half of 2002.  In addition, we made a $0.5 million loan to our Co-chairman and Executive Vice President.  The loan was made to assist the officer with the purchase of a new home upon his transfer from our European headquarters in Germany to our California facility.  In October 2002, we entered into a separation agreement with this officer, which was amended in December 2002, requiring  a $125,000 separation payment, the vesting of  the officer’s unvested stock options and the extension of the exercise period to 18 months for all options, the payment of COBRA benefits for up to six months, and the reimbursement of up to $25,000 for relocation expenses.   During December 2002, the officer fully paid all outstanding principal and interest due under the promissory note and we paid severance and adjusted the officer’s options according to the separation agreement. 

          During 2002, we secured financing of $7.2 million through vendor financings and negotiated extended payment terms (generally payable within 12 months from purchase date) for another $2.6 million for some of our equipment and software needs.  We also received $1.3 million of proceeds from the exercise of employee stock options.

          During April 2002, we entered into an unsecured $6.0 million credit facility which was amended in December 2002.  The agreement provided for two separate draw downs, referred to as Tranche A and Tranche B, and required that we maintain (i) a liabilities to tangible net worth ratio of .50 to 1, (ii) a minimum cash balance of $50 million and (iii) at least $12 million invested at the financial institution. During December 2002, we amended this facility to eliminate these covenants, remove the draw down ability for Tranche B and to cash secure the outstanding balance under Tranche A.  The cash collateral is equal to 110% of the amount outstanding under the facility.  No further amounts will be borrowed under this facility.

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          As of December 31, 2002, cash equivalents of $3.1 million were considered restricted and is held as collateral pursuant to the amended credit facility and $2.8 million was outstanding under Tranche A described above, of which $1.2 million, plus interest, is due within the next 12 months.  Interest under this facility is fixed at 4.0 percent per annum.

          As discussed below under “Risk Factors”, we operate in the semiconductor industry, which is cyclical and subject to rapid technological change and evolving industry standards. The semiconductor industry is currently experiencing a significant downturn. This downturn is characterized by diminished product demand, excess customer inventories and excess production capacity. These factors have caused a substantial decrease in our revenues and in our results of operations. For example, during 2002 we reported a net loss of $106.2 million and, as compared to 2001, reported a net reduction in cash, cash equivalents and short-term investments of $45.0 million and a reduction in shareholders’ equity of $103.2 million.  The substantial decrease in cash, cash equivalents and short-term investments is predominantly due to cash used in operations and for debt service requirements.  At December 31, 2002, we had cash, cash equivalents and short-term investments of $47.6 million and working capital of $30.2 million.  Cash and cash equivalents and short-term investments are expected to decrease throughout 2003.  We expect that our net cash usage will range from $36 to $38 million during 2003.  Given the short maturity of our short-term investments and their high liquidity, a material change in interest rates will not materially affect our liquidity. 

          The current downturn and future downturns in the semiconductor industry may be severe and prolonged, and any failure of this industry to recover from the current downturn will seriously impact our revenue and harm our business, financial condition and results of operations.  We will continue to experience losses and use our cash, cash equivalents and short-term investments if we do not receive sufficient product orders and our costs are not controlled.  We will continue to (i) focus on cash preservation and expense reductions, (ii) expand market share with existing and new products by focusing on our strength in mixed signal and digital signal processing technology, (iii) rationalize research and development spending on projects that will be accretive to revenues in the near term and (iv) secure system design wins with Tier I and emerging communication equipment and optical module manufacturers.

          As a result of the continuing significant economic slowdown and the related uncertainties in the technology sector and semiconductor industry, we initiated our corporate realignment plan as discussed above.  The plan included workforce reductions of approximately 150 employees, the consolidation of facilities through closure of certain locations, a reduction in the level of activity at other locations and asset impairment charges.  We recorded a charge during 2002 of $11.0 million associated with this realignment.   The realignment plan will significantly reduce expenses and cash usage while permitting our crucial personnel to focus on key business strategies such as expanding market share and securing design wins.  Excluding the $4.7 million of cash necessary to execute the realignment plan, we estimate that such plan, combined with the our other cost saving initiatives, will provide annual cash savings of approximately $35.0 million.

          Although we undertook cost reduction programs and initiated our corporate realignment plan during 2002 to reduce expenses, we may still need additional capital. The market for our products has declined substantially; accordingly, we will continue to utilize significant amounts of capital.  In the event that we are required, or elect, to raise additional funds, we may not be able to do so on favorable terms, if at all.  Our inability to raise additional capital may result in the need to further restructure our operations.  As another alternative to raising capital, we may need to explore the opportunity to merge with or be acquired by another company.  We cannot give any assurance that such a merger can occur or how favorable the terms of such a merger would be for our existing shareholders.

          Our decrease in revenues continues to reflect the limited demand for optical equipment in our end markets and the additional reductions in carrier spending during 2002 and 2003.  Our business prospects depend substantially on the continued build-out of the communications infrastructure.  Almost all telecommunication service providers have curtailed the level of their capital expenditures on their infrastructure build-out, which has significantly reduced the demand for our products by communications equipment manufacturers.  This slowdown has caused our  revenues and backlog to decline substantially.  Our revenues declined in each quarter of 2002, compared to the comparable periods in 2001.  Because of general economic conditions and slowdowns in purchases of optical networking equipment, it has become increasingly difficult for us to predict the purchasing activities of our customers.  Our success in emerging from this prolonged downturn requires that we significantly reduce our cost structure to preserve cash and enhance our ability to invest in opportunities that expand market share and grow revenues in new markets.  We will continue to focus on our strength in mixed-signal and digital signal processing technology and will expand into new markets based upon this strength.  We have continued to secure a significant number of design wins with Tier I and emerging communication equipment and optical module manufacturers in North America, Europe and Asia Pacific regions.  Our exclusive focus is now on building discrete components for communication equipment and optical module manufacturers.  By focusing on components, we ensure that our customers will have access to the best component technology and will avoid us competing with our transceiver and transponder customers. 

          Exclusive of obtaining any new capital or material increases in revenues, we believe that if we execute on the items discussed above, we will have sufficient cash, cash equivalents and short-term investments for at least the next eighteen months.  The eighteen months assumes that we can execute on the items discussed above and that revenues meet our forecast.  If we cannot satisfactorily execute on the above items or if 2003 revenues are lower than we expect, we will be required to make further expense reductions which may limit certain operational abilities including, but not limited to, making new product introductions in a timely manner, obtaining design wins, procuring required raw materials and meeting customer shipping schedules.  If we are able to obtain new capital and/or revenues grow

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greater than expected, our liquidity will exceed eighteen months.  Based upon our cost reduction efforts, revenues of approximately $10 to $12 million per quarter will be cash neutral to us and any revenues in excess of this amount will generate positive cash flows from operations.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

          Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life.  Rather, goodwill is subject to at least an annual assessment for impairment by applying a fair-value-based test.  Similarly, goodwill associated with equity method investments is no longer amortized.  Equity method goodwill is not, however, subject to the new impairment rules; the impairment guidance in existing rules for equity method investments continues to apply.  The adoption of this standard did not have a material impact on our financial position or results of operations.  As of December 31, 2002, we had no unamortized goodwill recorded.

          In June and August 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 143, “Accounting for Asset Retirement Obligations” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” respectively.  SFAS No. 143, which is effective for us on January 1, 2003, requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made.  The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset.  SFAS No. 144, which was effective for us on January 1, 2002, establishes a single accounting model for the accounting of a discontinued segment of a business as well as addresses significant implementation issues related to SFAS No. 121. We do not expect that the adoption of SFAS No. 143 will have a material impact on our financial position, results of operations or cash flows.  We implemented the provisions of SFAS No. 144 to record the asset impairment charges discussed above.

          In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  This statement requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred.  This differs from prior guidance, which required the liability to be recognized when a commitment plan was put into place. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability.  This Statement is effective for exit or disposal activities that are initiated after December 31, 2002.  We do not expect that the adoption of this standard will have a material impact on our financial position, results of operations or cash flows.

          In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of SFAS No. 123,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  We have adopted the disclosure requirements of SFAS No. 148 as of December 31, 2002.  We account for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and comply with the disclosure provisions of SFAS No. 123, as amended.  Under APB Opinion No. 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of our stock and the exercise price. 

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RISK FACTORS

          Set forth below and elsewhere in this Annual Report and in the other documents we file with the Securities and Exchange Commission are risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report.

The continuing worldwide economic slowdown and related uncertainties may continue to adversely impact our revenues and operating results.

          Slower economic activity, concerns about inflation, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns in the telecommunications and related industries, and recent international conflicts and terrorist and military activity have resulted in a continuing downturn in worldwide economic conditions. As a result of these unfavorable economic conditions, beginning in the first half of 2002, we experienced a significant slowdown in customer orders, an increase in the number of cancellations and reschedulings of backlog, and higher overhead costs as a percentage of our reduced net revenue, from which we have not recovered. We cannot predict the timing, strength and duration of any economic recovery in the semiconductor industry. In addition, the events of September 11, 2001 and subsequent international conflicts and terrorist acts can be expected to place further pressure on economic conditions in the United States and worldwide. These conditions make it extremely difficult for our customers, our vendors and for us to accurately forecast and plan future business activities. If such conditions continue or worsen, our business, financial condition and results of operations will likely be materially and adversely affected.

We are using our available cash to fund our operating activities.

          During 2002, we used $45.0 million of our available cash, cash equivalents and short term investments to fund our operating, investing and financing activities.  We anticipate that we will use approximately $36 to $38 million in cash, cash equivalents and investments during fiscal year 2003 to fund our operations, investments and financing activities.  We believe that we will continue to use our available cash, cash equivalents and investments in the future although we believe that we have sufficient cash for our needs for at least the next eighteen months.  We will continue to experience losses and use our cash, cash equivalents and investments if we do not receive sufficient product orders and our costs are not controlled.

          Although we undertook cost reduction programs and initiated our corporate realignment plan during 2002 to reduce expenses, we may still need additional capital. The market for our products has declined substantially; accordingly, we have continued to utilize significant amounts of capital.  In the event we are required, or elect, to raise additional funds, we may not be able to do so on favorable terms, if at all.  Our inability to raise additional capital could result in the need to further restructure our operations.

Our corporate realignment plan may not be successful and could result in the erosion of employee morale, legal actions against us and management distractions.

          As a result of the continuing significant economic slowdown and the related uncertainties in the technology sector and semiconductor industry, we initiated a corporate realignment plan during the third quarter of 2002.  The plan included workforce reductions, the consolidation of facilities through closure of certain locations, a reduction in the level of activity at other locations and expected asset impairment charges.  We recorded a charge during 2002 of $11.0 million associated with our realignment plan.  Although we are making every effort to reduce our expenses, we still expect to incur significant net losses in the foreseeable future due predominantly to the significant and continuing decrease in our revenues.  In establishing the realignment plan, we may have incorrectly anticipated the demand for our products and our ability to execute on the plan.  We may be forced to restructure further and our plan may not be successful.

          These workforce reductions could result in an erosion of morale, and a lack of focus and reduced productivity by our remaining employees, including those directly responsible for revenue generation, which in turn may affect our revenue in the future. In addition, employees directly affected by the reductions may seek future employment with our business partners, customers, or competitors. Although all employees are required to sign a confidentiality agreement with us at the time of hire, there can be no assurances that the confidential nature of our proprietary information will be maintained in the course of such future employment. Additionally, we may face wrongful termination or other claims relating to compensation asserted by employees directly affected by the reduction. We could incur substantial costs in defending ourselves or our employees against such claims, regardless of the merits of such actions. Furthermore, such matters could divert the attention of our management away from our operations, harm our reputation and increase our expenses and we may fail to achieve our targeted goals. 

Our operating results may fluctuate significantly due to the cyclicality of the semiconductor industry. Any such variations could adversely affect the market price of our Class A common stock.

          We operate in the semiconductor industry, which is cyclical and subject to rapid technological change and evolving industry standards. From time to time, the semiconductor industry has experienced significant downturns such as the current one. These downturns are characterized by diminished product demand, excess customer inventories, accelerated erosion of prices and excess production

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capacity. These factors could cause substantial fluctuations in our revenues and in our results of operations. The current downturn and future downturns in the semiconductor industry may be severe and prolonged, and any failure of this industry to fully recover from the current downturn would seriously impact our revenue and harm our business, financial condition and results of operations. The semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our ability to ship products in future periods. Our quarterly results may vary significantly as a result of the general conditions in the semiconductor industry, which could cause our stock price to decline.  During the current downturn, our revenues have decreased for the last five quarters. We can give no assurances that this trend will not continue.

We have incurred net losses in the past and expect to incur net losses in the future.

          We had net losses of $106.2 million in 2002, $12.4 million in 2001 and $3.7 million in 2000.  Despite our corporate realignment plan, our ability to achieve profitability will be materially and adversely affected if we fail to significantly increase our revenues.  We anticipate incurring net losses for the foreseeable future.

Our quarterly revenues and operating results have declined substantially and could continue to decline because of a number of factors, any one of which could adversely affect our stock price.

          Our revenues have declined substantially during the past several quarters.  Because of general economic conditions and slowdowns in purchases of optical networking equipment, it has become increasingly difficult for us to predict the purchasing activities of our customers.  We expect that our operating results will fluctuate substantially in the future and could continue to decline.  Our revenues were significantly lower and loss per share was significantly greater in fiscal 2002 than in fiscal 2001.  Future declines in revenues and increased losses may be caused by a number of factors, many of which are outside our control.  Factors that could negatively affect our future operating results include the following:

Any of the above-mentioned factors could have a material adverse effect on our business and on our financial results.

          In the past, we have recorded significant new product and process development costs because our policy is to expense these costs at the time that they are incurred.  We may incur these types of expenses in the future.  These additional expenses will have a material and adverse effect on our results in future periods. 

The market price for our Class A common stock has declined substantially and could continue to decline.

          Our stock price has declined significantly in the context of announcements made by us and other semiconductor suppliers of reduced revenues, declining operating performance, reduced expectations and a significant slowdown in the technology sector, particularly the optical networking equipment sector.  Given these general economic conditions and the reduced demand for our products that we have experienced, we expect that our stock price will continue to be volatile and could decline further.  In addition, the value of our company could decline due to the impact of any of the following factors, among others, upon the market price of our Class A common stock:

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          In addition, many of the risks described elsewhere in this section could materially and adversely affect our stock price, as discussed in those risk factors.  The stock markets have recently experienced substantial price and volume volatility.  Fluctuations such as these have affected and are likely to continue to affect the market price of our common stock.

          In the past, securities class action litigation has often been instituted against companies following periods of volatility and decline in the market price of such companies’ securities.  If instituted against us, regardless of the outcome, such litigation could result in substantial costs and diversion of our management’s attention and resources and have a material adverse effect on our business, financial condition and results of operations.  We could be required to pay substantial damages, including punitive damages, if we were to lose such a lawsuit.

Our reverse stock split may adversely affect the market price of our stock.

          On September 5, 2002, our board of directors authorized, and our shareholders approved, an amendment to our articles of incorporation to effect a reverse stock split for the purpose of increasing the market price of our Class A common stock above the Nasdaq minimum of $1.00 and avoiding delisting of our Class A common stock from the NASDAQ National Market.  Under the amendment, each outstanding ten shares of our Class A common stock and Class B common stock was converted into one share of Class A common stock or Class B common stock, as applicable.  The effective date of the reverse split was September 6, 2002. 

          The long-term effect of the reverse stock split upon the market prices for our Class A common stock cannot be accurately predicted.  In particular, there is no assurance that prices for shares of the Class A common stock after the reverse stock split will return to or maintain levels higher than the prices for shares of the Class A common stock immediately prior to the reverse stock split.  Moreover, because some investors may view the reverse stock split negatively, there can be no assurance that the reverse stock split has not and will not continue to adversely impact the market price of our Class A common stock.

Our Class A common stock may still be delisted from the Nasdaq National Market.

          Despite the completion of our reverse stock split, if the closing bid price for the Class A common stock is less than $1.00 per share during thirty consecutive trading days, we may not qualify for continued inclusion of the Class A common stock on the NASDAQ National Market, and our Class A common stock could be delisted.  Additionally, there are other requirements for continued listing, in particular the requirement that we maintain a “public float” of at least $5 million, that could also cause our Class A common stock to be delisted.  If a delisting were to occur, our Class A common stock may trade on the NASDAQ SmallCap Market, on the OTC Bulletin Board, or in the “pink sheets” maintained by the National Quotation Bureau, likely adversely affecting its liquidity.  In addition, some institutional investors have internal policies preventing the purchase of stocks trading on the NASDAQ SmallCap Market, the OTC Bulletin Board, or the “pink sheets”, which could also negatively affect the marketability of the Class A common stock.  Accordingly, if our Class A common stock were no longer to trade on the NASDAQ National Market, its market price could be adversely impacted.

Declining activity in the build-out of the communications infrastructure and uncertainties in network service providers’ purchasing programs, as well as consolidation in the network service provider industry, may adversely affect our future business and operating results.

          Our business prospects depend substantially on the continued build-out of the communications infrastructure.  Almost all telecommunication service providers have curtailed the level of their capital expenditures on their infrastructure build-out, which has significantly reduced the demand for our products by communications equipment manufacturers.  This slowdown has caused our revenues and backlog to decline substantially.  Our revenues declined in each quarter of 2002, compared to the comparable periods in 2001.  In addition, network service providers typically purchase network equipment pursuant to multi-year purchasing programs that may increase or decrease on a monthly basis as the providers adjust their capital equipment budgets and purchasing priorities.  Network service providers’ further curtailment or termination of purchasing programs or decreases in capital budgets could materially and adversely affect our revenue and business prospects.  This is particularly true if significant and unanticipated by our communications equipment manufacturer customers and us.  Additionally, consolidation among network service providers may cause delays in the purchase of our products and a reexamination of strategic and purchasing decisions by these network service providers and our current and potential communications equipment manufacturer customers, including delaying the expansion of 10 Gb/s systems and the migration to 40 Gb/s systems, which could harm our business and financial condition.

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We may not immediately benefit from a recovery in the communications equipment industry.

          Our industry is currently experiencing a significant and prolonged downturn due to a corresponding downturn in the communications equipment industry.  As noted above, this downturn could continue for some time. We expect to be positively affected when the communications equipment industry recovers.  Many of our customers, however, may have significant inventory on hand and a recovery in the communications equipment industry, when it occurs, may not benefit us in the short or intermediate term.  Our customers will first utilize their current inventory levels before placing orders with us.  If our customers or potential customers are maintaining a substantial amount of inventory, it may take a significant period of time before we benefit from an improvement in the communications equipment industry.  We attempt to estimate inventory levels at our customers but we cannot ensure that such estimates are materially accurate.

We must incur substantial research and development expenses.  If we do not have sufficient resources to invest in research and development, our business would be seriously harmed.

          In order to remain competitive, we must continue to make substantial investments in research and development to develop new and enhanced products.  We cannot assure you that we will have sufficient resources to invest in the development of new and enhanced technologies and competitive products.  Our failure to continue to make sufficient investments in research and development programs could further significantly reduce our revenue and harm our business.  Additionally, our products have a short life cycle; therefore, we have limited time to capitalize upon our research and development investments and generate revenues.  We cannot assure you that our research and development investments will result in revenues in excess of our expenses, if at all, or will result in any commercially accepted products.

A few customers account for a majority of our sales, and the loss of one or more key customers could significantly reduce our cash flows, revenues and operating results.

          A relatively small number of customers have historically accounted for a majority of our revenues.  Our three largest customers accounted for approximately 54% of our revenues for fiscal year 2002, 71% of our revenues in 2001, and 73% of our revenues in 2000.  Our top three customers for the year ended December 31, 2002 were TyCom, Alcatel and Lucent, representing approximately 25%,  19% and 10% of our revenues, respectively.  Our top three customers in 2001 were TyCom, Alcatel and Marconi, representing approximately 34%, 29% and 8% of our revenues, respectively.  Our top three customers in 2000 were Lucent, Alcatel and Cisco, representing approximately 34%, 28% and 11% of our revenues, respectively.  We anticipate that relatively few customers will continue to account for a significant portion of our revenues.  A reduction, delay or cancellation of orders from one or more significant customers or the loss of one or more key customers in any period could significantly reduce our already declining revenues.

Our industry is subject to consolidation.

          There has been a trend toward consolidation among companies in our industry for several years.  We expect this trend toward industry consolidation to continue as communications integrated circuit companies attempt to strengthen or hold their positions in evolving markets.  Consolidation may result in stronger competitors, which in turn could have a material adverse effect on our business, operating results, and financial condition.  There has also been consolidation among communication equipment manufacturers, which could reduce the quantity of systems into which we could sell, which in turn could have a material adverse effect on our business.

We sell substantially all of our products based on individual purchase orders, and we cannot predict the size or timing of our orders.  Our failure to effectively plan production levels and inventory could materially harm our business and operating results.

          We sell substantially all of our products based on individual purchase orders, rather than long-term contracts.  As a result, our customers generally can cancel or reschedule orders on short notice and are not obligated to purchase a specified quantity of any product.  For example, we had significant order cancellations during 2001.  We cannot assure you that our existing customers will continue to place orders with us, that orders by existing customers will be repeated at current levels or that we will be able to obtain orders from new customers.  We cannot predict the size, timing or terms of incoming purchase orders; therefore, decreases in the number or size of orders or the development of customer orders with new terms may adversely affect our business and operating results.

          Because we do not have substantial non-cancelable backlog, we typically plan our production and inventory levels based on internal forecasts of customer demand that are highly unpredictable and can fluctuate substantially.  In anticipation of long lead times to obtain certain inventory and materials, we order materials in advance of anticipated customer sales.  This advance ordering might result in excess inventory levels or unanticipated inventory write-downs if our customers cancel orders or change the specifications for their orders.  If we are unable to plan inventory and production levels effectively, our business and operating results could be materially harmed.

We compete in highly competitive markets, against competitors with longer operating histories, greater name recognition, greater resources or larger market capitalization.  Our failure to compete effectively would harm our business.

          The markets in which we compete are highly competitive.  Our ability to compete successfully in our markets depends on a number of factors, including:

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          We compete primarily against Agere, Applied Micro Circuits, Broadcom, Infineon, JDS Uniphase, Maxim, Mindspeed (a Conexant company), NEL, Nortel (microelectronics division), NTT Electronics, Philips, PMC-Sierra, Transwitch, Vitesse and various start-ups.  Many of our competitors operate their own fabrication facilities and have longer operating histories and a greater presence in key markets, greater name recognition, access to larger customer bases and significantly greater financial, sales and marketing, distribution, technical and other resources.  As a result, our competitors may be able to adapt more quickly to new or emerging technologies, changes in customer requirements or devote greater resources to the promotion and sale of their products.  In addition, our competitors may develop technologies that more effectively address the transmission of digital information through existing analog infrastructures at a lower cost, thereby rendering our products obsolete.  Our competitors that have large market capitalization or cash reserves are also better positioned than we are to acquire other companies, thereby obtaining new technologies or products.  Any of these acquisitions could give our competitors a strategic advantage that could adversely affect our business, financial condition and results of operations.  Additionally, these competitors’ resources place them in a stronger position to weather a continued downturn in our industry.

          Current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers or other third parties.  Accordingly, it is possible that new competitors or alliances forged by competitors could emerge and rapidly acquire significant market share.

We incur research and development expenses in advance of obtaining access to emerging process technology, and as a result, these investments may not result in the production of any marketable products.

          We often incur substantial research and development expenses for the development of products incorporating emerging process technologies.  We make these substantial investments in the product design stage and prior to gaining access to these process technologies.  Failure to gain access to these process technologies could prevent our products’ development and commercialization and materially harm our business.

Our future success depends in part on strategic relationships with certain of our customers. If we cannot maintain these relationships or if these customers develop their own solutions or adopt a competitor’s solutions instead of buying our products, our operating results would be adversely affected.

          In the past, we have relied on our strategic relationships with certain customers who are technology leaders in our target markets. We intend to pursue and continue to form these strategic relationships in the future but we cannot assure you that we will be able to do so. These relationships often require us to develop new products that typically involve significant technological challenges. Our partners frequently place considerable pressure on us to meet their tight development schedules. Accordingly, we may have to devote a substantial amount of our limited resources to our strategic relationships, which could detract from or delay our completion of other important development projects. Delays in development could impair our relationships with our strategic partners and negatively impact sales of the products under development. Moreover, it is possible that our customers may develop their own solutions or adopt a competitor’s solution for products that they currently buy from us. If that happens, our business, financial condition and results of operations could be materially and adversely affected.

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We will lose customer sales and may not be successful if customers and prospective customers do not qualify our products to be designed into their systems.

          Because our products must function as part of a larger system or network, our customers often undertake extensive qualification processes prior to placing large product orders.  Once communications equipment manufacturers decide to use a particular supplier’s products or components, they incorporate those products or components into their system design, which are known as design-wins.  Suppliers who fail to achieve design-wins are unlikely to make sales to those customers for particular projects until at least the adoption of future redesigned systems.  Even then, many companies may be reluctant to incorporate entirely new products into their new system designs, as this could involve significant additional redesign efforts.  If we fail to achieve design-wins we will lose the opportunity for sales to those customers for a lengthy period of time.  Although a design-win increases the likelihood that our products will be incorporated into the systems of our customers or prospective customers, it does not obligate that customer or prospective customer to purchase specified quantities of our products.

Our success is dependent upon our ability to develop new products and reduce costs in a timely manner.

          Our operating results will depend largely on our ability to continue to introduce new and enhanced products on a timely basis. Successful product development and introduction depends on numerous factors, including, among others:

          Furthermore, we are required to continually evaluate expenditures for planned product development and to choose among alternative technologies based on our expectations of future market growth. We cannot assure you that we will be able to develop and introduce new or enhanced products in a timely and cost-effective manner, that our products will satisfy customer requirements or achieve market acceptance, or that we will be able to anticipate new industry standards and technological changes.  We also cannot assure you that we will be able to respond successfully to new product announcements and introductions by competitors.

          In addition, prices of established products may decline, sometimes significantly, over time. We believe that in order to remain competitive we must continue to reduce the cost of producing and delivering existing products at the same time that we develop and introduce new or enhanced products. We cannot assure you that we will be able to continue to reduce the cost of our products to remain competitive.

The markets we serve are subject to rapid technological change, and if we are unable to develop and introduce new products, our revenues could decline further.

          The markets we serve frequently undergo transitions in which products rapidly incorporate new features and performance standards on an industry-wide basis.  Products for communications applications, as well as for high-speed computing applications, are based on continually evolving industry standards.  A significant portion of our revenues in recent periods has been, and is expected to continue to be, derived from sales of products based on existing transmission standards.  Our ability to compete in the future will, however, depend on our ability to identify and ensure compliance with evolving industry standards.

          The emergence of new industry standards could render our products incompatible with products developed by major communications equipment manufacturers.  If our products are unable to support the new features, the enhanced integration of functions or the performance levels required by communications equipment manufacturers in these markets, we would likely lose business from an existing or potential customer.  Moreover, we would not have the opportunity to compete for new business until the next product transition occurs.  As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards.  If our products are not in compliance with prevailing industry standards for a significant period of time, we could miss opportunities to achieve crucial design-wins.

          Moreover, to improve the cost-effectiveness and performance of our products, we may be required to transition one or more of our products to process technologies with smaller components, other materials or higher speeds.  We may not be able to improve our process technologies and develop or otherwise gain access to new process technologies in a timely or cost-effective manner.  We could record expenses or charges associated with such a transition. For example, we wrote off $4.3 million of our inventory in the first quarter of 2001, which resulted from a transition from certain GaAs products to SiGe products and an order cancellation, reducing our gross profit.

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Customers may be inclined to purchase 0.13um CMOS technologies rather than products that incorporate SiGe, GaAs or InP processes because of lower power requirements and lower cost.

          These risks may lead to increased costs or delay product delivery, which would harm our revenues and customer relationships.  Consequently, our revenues could be reduced for a substantial period if we fail to develop products with required features or performance standards, if we experience a delay as short as a few months in bringing a new product to market, or if our customers fail to achieve market acceptance of their products.

Necessary licenses of third-party technology may not be available to us or may be prohibitively expensive, which could adversely affect our ability to produce and sell our products.

          From time to time we may be required to license technology from third parties to develop new products or product enhancements.  We cannot assure you that third-party licenses will be available to us on commercially reasonable terms, if at all.  Our inability to obtain any third-party license required to develop new products and product enhancements could require us to obtain substitute technology of lower quality or performance standards or at greater cost, if at all, any of which could seriously harm our ability to sell our products.

Our future success depends on the continued service of our engineering, technical and key management personnel, and our failure to retain such personnel would be harmful to our ongoing operations and business prospects.

          We may not be able to continue to retain engineers or other qualified personnel necessary for the development of our products and business or to replace engineers or other qualified personnel who may leave us in the future.  Loss of the services of engineers or other technical and key management personnel could be significantly detrimental to our product and process development programs and adversely affect our business and operating results.

Our future success depends in part on the continued service of our key executives, and the loss of any of these key executives could adversely affect our business and operating results.

          Our success depends in part upon the continued service of our executive officers, particularly Dr. Richard Nottenburg, our President, Chief Executive Officer and Chairman of the Board.  Dr. Nottenburg does not have an employment or non-competition agreement with us.  The loss of Dr. Nottenburg would be detrimental to our ongoing operations and prospects.  In August 2002, Eric Pillmore, our Senior Vice President of Finance and Chief Financial Officer, resigned to pursue other opportunities.  In November 2002, Joseph Cole, our Vice President of Worldwide Sales, and Ronald Krisanda, our Senior Vice President of Operations, resigned to pursue other opportunities.  Dr. Jens Albers, our Executive Vice President and Co-Chairman of the Board, retired from his full-time duties as an officer and director in August 2002 and left our company to pursue other opportunities in December 2002.  While we have replaced Mr. Pillmore and reassigned Dr. Albers’, Mr. Cole’s and Mr. Krisanda’s responsibilities to other members of management, our future success will depend in part on how effectively we can carry out our business plan in their absence.

Several of our key personnel are relatively new to their positions and must be integrated into our organization.  Our failure to integrate these individuals could adversely affect our business.

          Several of our key personnel have recently been promoted to their current positions, including John U. Soenksen, who was promoted to his current position of Chief Financial Officer in August 2002, and Richard Mannherz, who was promoted to Vice President of Sales in November 2002.  Therefore, in combination with the executive departures described above, there has been little or no opportunity to evaluate the effectiveness of our current executive management team as a combined unit.  Our future performance will depend in part on our ability to successfully integrate our newly appointed officers and key personnel into our management team, and our ability to develop an effective working relationship among management.

Our failure to protect our intellectual property adequately could adversely affect our business, and patents obtained by our competitors may preclude us from certain product development.

          Our intellectual property is critical to our ability to successfully design products for the optical networking systems market.  We currently have 1 U.S. patent issued and 14 U.S. patent applications pending.  We cannot assure you that our pending patent applications or any future applications will be approved.  Further, we cannot assure you that any issued patents will provide us with competitive advantages or will not be challenged by third parties, or that if challenged, will be found to be valid or enforceable.  Additionally, we cannot assure you that the patents of others will not have an adverse effect on our ability to do business.  Furthermore, others may independently develop similar products or processes, duplicate our products or processes or design around any patents that may be issued to us.

          We rely on the combination of maskwork protection under the Semiconductor Chip Protection Act of 1984, trademarks, copyrights, trade secrets, employee and third-party nondisclosure agreements and licensing arrangements to protect our intellectual property.  Despite these efforts, we cannot be certain that others will not independently develop substantially equivalent intellectual

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property or otherwise gain access to our intellectual property, or disclose such intellectual property, or that we can meaningfully protect our intellectual property.

We could be harmed by litigation involving patents and proprietary rights.

          The semiconductor industry is characterized by substantial litigation regarding patent and other intellectual property rights.  We may be accused of infringing upon the intellectual property rights of third parties.  Additionally, we have indemnification obligations to our customers with respect to intellectual property infringement claims by third parties.  Such intellectual property infringement claims by third parties or indemnification claims by our customers could harm our business.

          Any litigation relating to the intellectual property rights of third parties, whether or not determined in our favor or settled by us, could be costly and could divert the efforts and attention of our management and technical personnel.  In the event of any adverse ruling in any litigation, we could be required to:

Our operating results are subject to fluctuations because of sales to foreign customers.

          International sales accounted for approximately 17% of our revenues for the year ended December 31, 2002, 24% of our revenues in 2001, and 27% of our revenues in 2000.  International sales will continue to account for a significant portion of our revenues, and as a result, we will be subject to certain risks associated with international sales, including:

          We are subject to the risks associated with the imposition of legislation and regulations relating to the import or export of high technology products.  We cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of our products will be implemented by the United States or other countries.  Some of our customer purchase orders and agreements are governed by foreign laws, which may differ significantly from U.S. laws.  Therefore, we may be limited in our ability to enforce our rights under these agreements and to collect damages, if awarded.

          Because sales of our products are denominated in U.S. dollars, increases in the value of the U.S. dollar could increase the price of our products so that they become more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country.  Future international activity may result in increased foreign currency denominated sales.  Gains and losses

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on the conversion to U.S. dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in our results of operations.

If we become subject to unfair hiring claims we could incur substantial costs in defending ourselves, or our management’s attention could be diverted away from our operations.

          Companies in our industry often hire individuals formerly employed by their competitors.  In such cases, these competitors frequently claim that the hiring company has engaged in unfair hiring practices.  We have received claims of this kind in the past from our competitors, and we cannot assure you that we will not receive claims of this kind in the future or that those claims will not result in material litigation.  We could incur substantial costs in defending ourselves or our employees against such claims, regardless of the merits of the claims.  In addition, defending ourselves from such claims could divert the attention of our management away from our operations.

Our dependence on third-party manufacturing and supply relationships could negatively impact the production of our products and significantly harm our business.

          We do not own or operate manufacturing facilities necessary for the production of most of our products.  We rely on several outside foundries and other outsource partners for the manufacture and assembly of most of our products, and we expect this to continue for the foreseeable future.  Finding alternative sources for these products will result in substantial delays in production and additional costs.

          Our dependence upon third parties that manufacture, assemble, package or supply components for our products may result in:

Any one of these factors could adversely affect our business.

          While we believe we have good relations with our outside foundries and suppliers, we cannot be certain that we will be able to maintain these favorable relations.  Additionally, because there are a limited number of foundries and suppliers that can produce our products, establishing relationships and increasing production with new outside foundries takes a considerable amount of time.  Thus, there is no readily available alternative source of supply for our production needs.  A manufacturing disruption, such as a raw material shortage, experienced by any of our outside foundries and suppliers could impact the production of some of our products for a substantial period of time.  Our outside foundries’ and suppliers’ inability to increase their production capacity or to continue to allocate capacity to manufacture our components could also limit our ability to grow our business.

          In addition, our internal manufacturing operations, though limited, are complex and subject to disruption due to causes beyond our control. The fabrication of integrated circuits is an extremely complex and precise process consisting of hundreds of separate steps. It requires production in a highly controlled, clean environment. Minute impurities, errors in any step of the fabrication process, defects in the masks used to print circuits on a wafer or a number of other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer not to function.

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We may face production delays if the subcontractors we use to manufacture our wafers or products discontinue the manufacturing processes needed to meet our demands or fail to advance the process technologies needed to manufacture our products.

          Our wafer and product requirements represent a small portion of the total production of the third-party foundries that manufacture our products.  As a result, we are subject to the risk that our external foundries may not continue to devote resources to the continued development and improvement of the process technologies on which the manufacturing of our products are based.  This could increase our costs and harm our ability to deliver our products on time.

Our operating results substantially depend on manufacturing output and yields, which may not meet expectations.

          Manufacturing semiconductors requires manufacturing tools that are unique to each product produced.  If one of these unique manufacturing tools of our outside foundries were damaged or destroyed, then the ability of these foundries to manufacture the related product would be impaired and our business would suffer.  In addition, our manufacturing yields decline whenever a substantial percentage of wafers must be rejected or significant portions of each wafer are nonfunctional.  Such declines can be caused by many factors, including minute levels of contaminants in the manufacturing environment, design imperfections, defects in masks used to print circuits on a wafer and difficulties in the fabrication process.  Many of these problems are difficult to diagnose, are time consuming and expensive to remedy and can result in shipment delays.

          Difficulties associated with adapting our technology and product design to the proprietary process technology and design rules of our outside foundries can lead to reduced yields.  Since low yields may result from either design or process technology failures, yield problems may not be effectively determined or resolved until an actual product exists that can be analyzed and tested.  As a result, yield problems may not be identified until well into the production process, and resolution of yield problems may require cooperation between our manufacturers and us.  In some cases this risk could be compounded by the offshore location of some of our manufacturers, increasing the effort and time required to identify, communicate and resolve manufacturing yield problems.  Manufacturing defects that we do not discover during the manufacturing or testing process may lead to costly product recalls.  Difficulties in diagnosing and solving the complicated problems of assembling these types of semiconductors could also reduce our yields.

If we are unable to commit to deliver sufficient quantities of our products to satisfy our customers’ needs, it may be difficult for us to attract new orders and customers or we may lose current orders and customers.

          Our customers typically require that we commit to provide specified quantities of products over a given period of time.  We may be unable to deliver sufficient quantities of our products for any of the following reasons: