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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

|x         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
|-------------------------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

Commission File Number:
000-31851

|MULTILINK TECHNOLOGY CORPORATION                                   
|-------------------------------------------------------------------
|                                                                   
|(Exact Name of Registrant as Specified in its Charter)             
|                                                                   
|California                                                         
|                                                                   
|(State or other jurisdiction of Incorporation or organization)     
|                                                                   
|300 Atrium Drive, 2nd Floor, Somerset, New Jersey                  
|                                                                   
|(Address of principal executive offices)                           
|                                                                   
|Registrants telephone number, including area code:  (732) 537-3700

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

|Yes | x | No | o
|--- | - | -- | -

As of November 11, 2002, the number of shares of the
Registrants common stock, $0.0001 par value per share, issued and outstanding, were: 4,984,930 shares of Class A Common Stock and 2,600,000 shares of Class B Common Stock.

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MULTILINK TECHNOLOGY CORPORATION

FORM 10-Q

INDEX

|         |                                                                                                                 | PAGE
|-------- | --------------------------------------------------------------------------------------------------------------- | ----
|         |                                                                                                                 |     
|PART I.  | FINANCIAL INFORMATION                                                                                           |     
|         |                                                                                                                 |     
|Item 1.  | Financial Statements (unaudited):                                                                               |     
|         |                                                                                                                 |     
|         | Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001                            | 1   
|         |                                                                                                                 |     
|         | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001 | 2   
|         |                                                                                                                 |     
|         | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001           | 3   
|         |                                                                                                                 |     
|         | Notes to Unaudited Condensed Consolidated Financial Statements                                                  | 4   
|         |                                                                                                                 |     
|Item 2.  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           | 12  
|         |                                                                                                                 |     
|Item 3.  | Quantitative and Qualitative Disclosures About Market Risk                                                      | 36  
|         |                                                                                                                 |     
|Item 4.  | Controls and Procedures                                                                                         | 38  
|         |                                                                                                                 |     
|PART II. | OTHER INFORMATION                                                                                               |     
|         |                                                                                                                 |     
|Item 1.  | Legal Proceedings                                                                                               | 39  
|         |                                                                                                                 |     
|Item 2.  | Changes in Securities and Use of Proceeds                                                                       | 39  
|         |                                                                                                                 |     
|Item 3.  | Defaults Upon Senior Securities                                                                                 | 39  
|         |                                                                                                                 |     
|Item 4.  | Submission of Matters to a Vote of Security Holders                                                             | 39  
|         |                                                                                                                 |     
|Item 5.  | Other Information                                                                                               | 39  
|         |                                                                                                                 |     
|Item 6.  | Exhibits and Reports on Form 8-K                                                                                | 40  
|         |                                                                                                                 |     



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Part I.  
FINANCIAL INFORMATION

Item 1.  
Financial Statements

MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS  (in thousands, except for per share amounts) (unaudited)

|                                                        |                                                  | September 30, 2002 |        | December 31, 2001 |  
|------------------------------------------------------- | ------------------------------------------------ | ------------------ | ------ | ----------------- | -
|                                                        |                                                  |                    |        |                   |  
|ASSETS                                                  |                                                  |                    |        |                   |  
|Current assets:                                         |                                                  |                    |        |                   |  
|                                                        | Cash and cash equivalents                        |                    | $      | 44,226            |  
|                                                        | Short term investments                           |                    |        | 21,291            |  
|                                                        | Accounts receivable, net                         |                    |        | 811               |  
|                                                        | Inventories                                      |                    |        | 2,686             |  
|                                                        | Prepaid expenses and other current assets        |                    |        | 4,040             |  
|                                                        |                                                  |                    |        |                   |  
|                                                        | Total current assets                             |                    |        | 73,054            |  
|                                                        |                                                  |                    |        |                   |  
|Property and equipment, net                             |                                                  |                    | 24,257 |                   |  
|Deferred income taxes                                   |                                                  |                    |       |                   |  
|Other assets                                            |                                                  |                    | 1,362  |                   |  
|                                                        |                                                  |                    |        |                   |  
|                                                        | Total assets                                     |                    | $      | 98,673            |  
|                                                        |                                                  |                    |        |                   |  
|LIABILITIES AND SHAREHOLDERS EQUITY                    |                                                  |                    |        |                   |  
|Current liabilities:                                    |                                                  |                    |        |                   |  
|                                                        | Accounts payable                                 |                    | $      | 6,228             |  
|                                                        | Accrued expenses                                 |                    |        | 19,257            |  
|                                                        | Accrued warranty costs                           |                    |        | 435               |  
|                                                        | Software and equipment financingcurrent portion |                    |        | 5,213             |  
|                                                        | Lease obligationscurrent portion                |                    |        | 976               |  
|                                                        | Income taxes payable                             |                    |        | 1,059             |  
|                                                        |                                                  |                    |        |                   |  
|                                                        | Total current liabilities                        |                    |        | 33,168            |  
|                                                        |                                                  |                    |        |                   |  
|Lease obligationsnet of current portion                |                                                  |                    |       |                   |  
|Software and equipment financingnet of current portion |                                                  |                    | 6,430  |                   |  
|                                                        |                                                  |                    |        |                   |  
|Commitments and contingencies                           |                                                  |                    |        |                   |  
|Shareholders equity:                                   |                                                  |                    |        |                   |  
|                                                        | Common stock, $.0001 par value:                  |                    |        |                   |  
|                                                        | Class A                                          |                    |        | 1                 |  
|                                                        | Class B                                          |                    |        |                  |  
|                                                        | Additional paid-in-capital                       |                    |        | 183,288           |  
|                                                        | Deferred stock compensation                      |                    |        | (5,291            | )
|                                                        | Accumulated deficit                              |                    |        | (118,632          | )
|                                                        | Accumulated other comprehensive income           |                    |        | 310               |  
|                                                        | Shareholder loan                                 |                    |        | (483              | )
|                                                        | Treasury stock, at cost                          |                    |        | (118              | )
|                                                        |                                                  |                    |        |                   |  
|                                                        | Total shareholders equity                       |                    |        | 59,075            |  
|                                                        |                                                  |                    |        |                   |  
|                                                        | Total liabilities and shareholders equity       |                    | $      | 98,673            |  
|                                                        |                                                  |                    |        |                   |  
|                                                        |                                                  |                    |        |                   |  

See accompanying notes to condensed consolidated financial statements.

-1-



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MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except for per share amounts) (unaudited)

|                                                                                  |                                                                                                                                                                           | Three Months Ended September 30, |         | Nine Months Ended September 30, |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | ------- | ------------------------------- | -
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|                                                                                  |                                                                                                                                                                           | 2002                             |         | 2001                            |  
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|Total revenues                                                                    |                                                                                                                                                                           | $                                | 1,771   |                                 | $
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|Cost of revenues                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|                                                                                  | Product                                                                                                                                                                   |                                  |         | 1,847                           |  
|                                                                                  | Inventory write down and related charges                                                                                                                                  |                                  |         |                                |  
|                                                                                  | Fixed asset impairment                                                                                                                                                    |                                  |         |                                |  
|                                                                                  | Deferred stock compensation                                                                                                                                               |                                  |         | 549                             |  
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|Total cost of revenues                                                            |                                                                                                                                                                           |                                  | 2,396   |                                 |  
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|Gross (loss) profit                                                               |                                                                                                                                                                           |                                  | (625    | )                               |  
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|Operating expenses:                                                               |                                                                                                                                                                           |                                  |         |                                 |  
|                                                                                  | Research and development, excluding deferred stock compensation                                                                                                           |                                  |         | 11,566                          |  
|                                                                                  | Sales and marketing, excluding deferred stock compensation                                                                                                                |                                  |         | 3,059                           |  
|                                                                                  | General and administrative, excluding deferred stock compensation                                                                                                         |                                  |         | 1,874                           |  
|                                                                                  | Deferred stock compensation                                                                                                                                               |                                  |         | 4,762                           |  
|                                                                                  | Investment impairments and related charges                                                                                                                                |                                  |         | 4,906                           |  
|                                                                                  | Corporate realignment                                                                                                                                                     |                                  |         | 12,255                          |  
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|                                                                                  | Total operating expenses                                                                                                                                                  |                                  |         | 38,422                          |  
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|Operating loss                                                                    |                                                                                                                                                                           |                                  | (39,047 | )                               |  
|Other income and expenses                                                         |                                                                                                                                                                           |                                  |         |                                 |  
|                                                                                  | Interest expense                                                                                                                                                          |                                  |         | (198                            | )
|                                                                                  | Other income, net (including $362 and $676 of equity losses in affiliate during the three and nine months in 2002, respectively, and $176 and $383 in 2001,
respectively) |                                  |         | 36                              |  
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|Loss before provision (benefit) for income taxes                                  |                                                                                                                                                                           |                                  | (39,209 | )                               |  
|Provision (benefit) for income taxes                                              |                                                                                                                                                                           |                                  | 61      |                                 |  
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|Net income (loss)                                                                 |                                                                                                                                                                           |                                  | (39,270 | )                               |  
|Accretion of redeemable convertible preferred stock to redemption value           |                                                                                                                                                                           |                                  |        |                                 |  
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|Net income (loss) attributable to common shareholders                             |                                                                                                                                                                           | $                                | (39,270 | )                               | $
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|Net income (loss) per share, basic                                                |                                                                                                                                                                           | $                                | (5.18   | )                               | $
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|Net income (loss) per share, diluted                                              |                                                                                                                                                                           | $                                | (5.18   | )                               | $
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|Weighted average shares of common stock, basic                                    |                                                                                                                                                                           |                                  | 7,580   |                                 |  
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|Weighted average shares of common stock, diluted                                  |                                                                                                                                                                           |                                  | 7,580   |                                 |  
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|The composition of the amortization of deferred stock compensation is as follows: |                                                                                                                                                                           |                                  |         |                                 |  
|Research and development                                                          |                                                                                                                                                                           | $                                | 2,831   |                                 | $
|Sales and marketing                                                               |                                                                                                                                                                           |                                  | 745     |                                 |  
|General and administrative                                                        |                                                                                                                                                                           |                                  | 1,186   |                                 |  
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|                                                                                  | Total                                                                                                                                                                     |                                  | $       | 4,762                           |  
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  
|                                                                                  |                                                                                                                                                                           |                                  |         |                                 |  

See accompanying notes to condensed consolidated financial statements.

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MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)

|                                                                                              |                                                                                           | Nine Months Ended September 30, |       
|--------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------- | ------
|                                                                                              |                                                                                           |                                 |       
|                                                                                              |                                                                                           | 2002                            |       
|                                                                                              |                                                                                           |                                 |       
|Cash flows from operating activities:                                                         |                                                                                           |                                 |       
|                                                                                              | Net loss                                                                                  |                                 | $     
|                                                                                              | Adjustments to reconcile net loss to net cash used in (provided by) operating activities: |                                 |       
|                                                                                              | Depreciation and amortization.                                                            |                                 |       
|                                                                                              | Fixed asset impairment                                                                    |                                 |       
|                                                                                              | Inventory write down & related charges                                                    |                                 |       
|                                                                                              | Corporate realignment                                                                     |                                 |       
|                                                                                              | Deferred stock compensation                                                               |                                 |       
|                                                                                              | Deferred income taxes                                                                     |                                 |       
|                                                                                              | Investment impairments and related charges                                                |                                 |       
|                                                                                              | Equity losses in affiliate                                                                |                                 |       
|                                                                                              | Changes in working capital items, net                                                     |                                 |       
|                                                                                              | Other                                                                                     |                                 |       
|                                                                                              |                                                                                           |                                 |       
|                                                                                              | Net cash (used in) provided by operating activities                                       |                                 |       
|                                                                                              |                                                                                           |                                 |       
|Cash flows from investing activities:                                                         |                                                                                           |                                 |       
|                                                                                              | Proceeds from sale of property and equipment                                              |                                 |       
|                                                                                              | Purchases of property and equipment                                                       |                                 |       
|                                                                                              | Purchases of non-marketable securities                                                    |                                 |       
|                                                                                              | Proceeds from sales of marketable securities                                              |                                 |       
|                                                                                              | Purchases of marketable securities                                                        |                                 |       
|                                                                                              |                                                                                           |                                 |       
|                                                                                              | Net cash provided by (used in) investing activities                                       |                                 |       
|                                                                                              |                                                                                           |                                 |       
|Cash flows from financing activities:                                                         |                                                                                           |                                 |       
|                                                                                              | Issuance of common stock, net                                                             |                                 |       
|                                                                                              | Proceeds from stock option exercises                                                      |                                 |       
|                                                                                              | Proceeds from credit facility                                                             |                                 |       
|                                                                                              | Proceeds from software and equipment financing                                            |                                 |       
|                                                                                              | Payments on lease obligations and software and equipment financing                        |                                 |       
|                                                                                              | Treasury stock purchase                                                                   |                                 |       
|                                                                                              | Shareholder loan                                                                          |                                 |       
|                                                                                              |                                                                                           |                                 |       
|                                                                                              | Net cash (used in) provided by financing activities                                       |                                 |       
|                                                                                              |                                                                                           |                                 |       
|Effect of exchange rate changes on cash                                                       |                                                                                           |                                 | (255  
|                                                                                              |                                                                                           |                                 |       
|Net (decrease) increase in cash and cash equivalents                                          |                                                                                           |                                 | (5,553
|Cash and cash equivalents, beginning of period                                                |                                                                                           |                                 | 49,779
|                                                                                              |                                                                                           |                                 |       
|Cash and cash equivalents, end of period                                                      |                                                                                           | $                               | 44,226
|                                                                                              |                                                                                           |                                 |       
|Supplemental disclosures of cash flow informationCash paid (received) during the period for: |                                                                                           |                                 |       
|                                                                                              | Income taxes                                                                              |                                 | $     
|                                                                                              | Interest                                                                                  |                                 | $     
|                                                                                              |                                                                                           |                                 |       

See accompanying notes to condensed consolidated financial statements.

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MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.   BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations.  In the opinion of management, all adjustments consisting of normal recurring items considered necessary for the fair presentation have been included.  The results of operations for the three and
nine months ended September 30, 2002 are not necessarily indicative of the results to be expected for the entire year.

The financial statements included herein have been prepared with the understanding that the users of the interim financial information
have read or have access to the audited financial statements for the preceding fiscal year.  Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto contained in
the Companys Annual Report on Form 10-K for the year ended December 31, 2001.

Derivative
Financial Instruments  During the nine months ended September 30, 2002, the Company utilized foreign currency forward contracts. The Company is exposed to market risk from changes in foreign currency exchange rates associated with
forecasted foreign currency-denominated expenses. The Company uses foreign currency forward contracts designated as cash flow hedges to hedge this exposure and the fair value changes of the forward contracts related to the effective portion of the
hedges are initially recorded as a component of other comprehensive income. The Company utilizes these foreign currency forward contracts to hedge its variability in U.S. dollar cash flows associated with probable forecasted foreign inter-company
Euro denominated expenses because the Company reimburses its German subsidiary for such expenses. Unrealized and realized gains and losses on cash flow hedges accumulate in other comprehensive income and are reclassified into earnings in the periods
in which earnings are impacted by the variability of the cash flows of the hedged item. Gains and losses on derivatives that are terminated prior to their maturity are also reclassified into earnings when the underlying hedged items impact earnings,
unless it is no longer probable that the hedged forecasted transaction will occur, whereby such gains and losses are recognized immediately in earnings. The Company hedges forecasted exposures up to 12 months in the future. For the three and nine
months ended September 30, 2002, hedge ineffectiveness associated with instruments designated as cash flow hedges was not significant. For the three and nine months ended September 30, 2002, net gains of less than $0.2 million were reclassified into
earnings as an adjustment to research and development expense. These net gains were offset by gains and losses on the transactions being hedged. At September 30, 2002, less than $0.2 million of net derivative gains/losses included in accumulated
other comprehensive income will be reclassified into earnings within three months from that date. The unrealized amounts in accumulated other comprehensive income will fluctuate based on changes in fair value of open contracts at each reporting
period. At September 30, 2002, the Companys liability of less than $0.2 million relating to these forward contracts is included in accrued expenses in the accompanying condensed consolidated balance sheet.

Reclassifications  Certain prior period amounts have been reclassified in order to conform to the current period
presentation.

2.    REVERSE STOCK SPLIT

In July 2002, the Company was notified by Nasdaq that, based upon its review of price data for the Companys Class A common stock,
the closing bid price for the Class A common stock was less than $1.00 per share during the relevant review period of thirty consecutive trading days, which is a requirement for continued inclusion of the Class A common stock on the Nasdaq National
Market.  On July 18, 2002, the Companys board of directors authorized an amendment to the Companys articles of incorporation to effect a reverse stock split for the purpose of increasing the market price of the Companys Class
A common stock above the Nasdaq minimum of $1.00.

On September 6, 2002, the Companys shareholders and
board of directors approved a one-for-ten reverse stock split of the Companys Class A and Class B common stock.  The par value of the Class A and Class B common stock will remain at $0.0001 per share and the number of authorized shares of
Class A and Class B

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MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-continued

common stock will remain at 200 million and 100 million, respectively.  As a result of the reverse stock split, the accompanying consolidated financial statements reflect a decrease in the number of outstanding shares of
Class A and B common stock and the transfer of the par value of these reduced shares to additional paid-in capital.  All share and per share amounts have been restated to reflect the retroactive effect of the reverse stock split, except for the
capitalization of the Company.  Previously awarded stock options, restricted stock awards and warrants have been adjusted or amended to reflect the reverse split.

3.   CORPORATE REALIGNMENT

During the third quarter of 2002, the
Company commenced a corporate realignment program (the Realignment Plan) to create a more efficient cost structure and realign its business to reflect the current telecommunication market environment which will permit the Company to
focus its personnel on its key business strategies.  The major initiatives of the Realignment Plan include a reduction of 40 to 45 percent in the Companys worldwide headcount and the consolidation of facilities through the closure of
certain locations and the reduction in the level of activity at other locations.

In connection with the
implementation of the Realignment Plan, the Company recorded a realignment charge of $12.3 million on a pre-tax basis in the third quarter ended September 30, 2002.  The major components of the realignment charge and the activity through
September 30, 2002 were as follows:

|(Amounts in thousands)        |  | Severance and Termination Benefits |       | Asset Write Down |   | Lease and Contract Termination Costs |  | Other Costs |       | Total |  
|----------------------------- |  | ---------------------------------- | ----- | ---------------- | - | ------------------------------------ |  | ----------- | ----- | ----- | -
|                              |  |                                    |       |                  |   |                                      |  |             |       |       |  
|2002 Charges                  |  | $                                  | 1,914 |                  | $ | 6,477                                |  | $           | 3,667 |       | $
|2002 Activity                 |  |                                    | 493   |                  |   | 0                                    |  |             | 0     |       |  
|                              |  |                                    |       |                  |   |                                      |  |             |       |       |  
|Balance at September 30, 2002 |  | $                                  | 1,421 |                  | $ | 6,477                                |  | $           | 3,667 |       | $
|                              |  |                                    |       |                  |   |                                      |  |             |       |       |  

Total
severance and termination benefits as a result of the Realignment Plan relates to approximately 150 employees of which the majority will be terminated by December 2002 and the remainder will be terminated by June 2003.  As a result of the
employee terminations associated with the Realignment Plan, a portion of the Companys purchased research and development software and equipment 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.  The Company concluded that an impairment charge was necessary to write down these assets
to their fair value.   Total cash outlays related to the Realignment Plan are approximately $5.8 million, less than $0.5 million of which has been paid through September 30, 2002.  Assuming that the lease termination costs are paid
out through the end of the corresponding lease, cash payments are expected to be $1.7 million during each 2002 and 2003 and $2.4 million thereafter.

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MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-continued

4.   INVESTMENT IMPAIRMENTS AND RELATED CHARGES

ASIP, Inc.
(ASIP) is a privately held, optical device start-up company that is subject to many of the same risks as the Company.  The Company accounts for its investment in ASIP under the equity method of accounting.  During the three
months ended September 30, 2002, the Company recorded a $3.5 million charge associated with its 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 April
2003.

In determining whether its investment in ASIP and related goodwill was impaired, the Company
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, the Company concluded that its remaining net investment in ASIP and corresponding goodwill was impaired. The Company also performed a
recoverability analysis of the consigned equipment at ASIP. The Company has no alternative uses for this equipment and cannot project any future cash flows from such equipment. Accordingly, the Company recorded an asset impairment charge to write
down the consigned equipment to fair value.

The Company has 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 $1.1 million.  Because the likelihood that the Company would have to satisfy this guarantee is not probable, no liability has been recorded for the guarantee.  In addition, the Company is 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.

During the three months ended September 30, 2002, the Company recorded a $1.4 million impairment charge against its investment in
Internet Machines Corporation (IMC).  The Company believes that the reduction in the value of the IMC investment is other than temporary. IMC is an optical device company and is subject to many of the same industry risks as the
Company.  Given the market valuation reductions in the Companys and IMCs industries coupled with new financial projections received from IMC, the Company concluded that a write down was required.

5.   INVENTORIES

Inventories consisted of the following:

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MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-continued

|(Amounts in thousands) |       | September 30, 2002 |       | December 31, 2001 |  
|---------------------- | ----- | ------------------ | ----- | ----------------- | -
|                       |       |                    |       |                   |  
|Finished goods         |       | $                  | 791   |                   | $
|Work-in-progress       |       |                    | 84    |                   |  
|Raw materials          |       |                    | 1,811 |                   |  
|                       |       |                    |       |                   |  
|                       | Total |                    | $     | 2,686             |  
|                       |       |                    |       |                   |  
|                       |       |                    |       |                   |  

During the nine months ended September 30, 2002, the Company recorded a charge of
$5.3 million to reduce inventories to their net realizable value and to write off an advance made to a supplier. Included in the $5.3 million is a $4.8 million inventory write-down.  The inventory was written down to its net realizable value
based upon the Companys determination that excess quantities existed of certain modules and raw materials.  The excess quantities of the modules are the result of forecasted demand not developing as expected and the introduction of two
new modules.  The Company also wrote off an advance made to a finished good supplier of $0.5 million.

During the nine months ended September 30, 2001, the Company recorded a charge of $4.9 million to reduce inventories to their net
realizable value. Of this charge, $4.3 million resulted primarily from order cancellations as customers are transitioning from certain Gallium Arsenide products to Silicon Germanium products and $0.6 million relates to inventory shrink and lower
than expected production yields at three of the Companys finished good suppliers.

6.   SEGMENT INFORMATION AND CONCENTRATION OF REVENUES

Revenues to geographic locations are as follows:

|                       |  | Three Months EndedSeptember 30, |       | Nine Months Ended September 30, |  
|---------------------- |  | ------------------------------- | ----- | ------------------------------- | -
|                       |  |                                 |       |                                 |  
|(Amounts in thousands) |  | 2002                            |       | 2001                            |  
|                       |  |                                 |       |                                 |  
|North America          |  | $                               | 937   |                                 | $
|Europe                 |  |                                 | 714   |                                 |  
|Asia                   |  |                                 | 120   |                                 |  
|                       |  |                                 |       |                                 |  
|                       |  | $                               | 1,771 |                                 | $
|                       |  |                                 |       |                                 |  

Revenues
to certain geographic locations within Europe are as follows:

|France         |  | $ | 306 |  |  | * |  |  | * |  | $ | 12,725 | 
|-------------- |  | - | --- |  |  | - |  |  | - |  | - | ------ | 
|               |  |   |     |  |  |   |  |  |   |  |   |        | 
|United Kingdom |  |   | *   |  |  | * |  |  | * |  |   | *      | 
|               |  |   |     |  |  |   |  |  |   |  |   |        | 

The
following is a summary of the percentage of revenues from major customers:

|        |  | Three Months Ended September 30, |    | Nine Months Ended September 30, | 
|------- |  | -------------------------------- | -- | ------------------------------- | 
|        |  |                                  |    |                                 | 
|        |  | 2002                             |    | 2001                            | 
|        |  |                                  |    |                                 | 
|Alcatel |  |                                  | *  |                                 | 
|Cisco   |  |                                  | 16 | %                               | 
|Xtera   |  |                                  | 15 | %                               | 
|Algety  |  |                                  | 15 | %                               | 
|TyCom   |  |                                  | *  |                                 | 
|Ciena   |  |                                  | *  |                                 | 
|Lucent  |  |                                  | *  |                                 | 

* Customers or countrys revenues represents less than 10% of total
revenue in the respective period.

7.   RELATED PARTY TRANSACTIONS

During the three and nine months ended September 30, 2002, the Company incurred expenses relating to services performed by Innovative
Processing AG (IPAG) of zero and $0.3 million, respectively.  Also during the

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MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-continued

three and nine months ended September 30, 2002, the Company incurred expenses of $0.3 million and $0.7 million, respectively, relating to services performed by ASIP.  These payments were made under existing development
agreements with these entities.

The Company did not incur any expenses during the three months ended
September 30, 2002 and incurred $0.1 million of expenses during the nine months ended September 30, 2002 relating to services performed by TRW.   During the three and nine months ended September 30, 2002, the Company incurred $0.5 million
and $1.3 million of expenses related to services performed by IBM.

In January 2002, the Company entered into
a full-recourse promissory note with its Executive Vice President and Co-Chairman, to assist the officer with the purchase of a new home upon his transfer from the Companys European headquarters in Germany to its California facility. The note
is for $0.5 million, bears interest at 5.5% per annum and is due in January 2007 (including all accrued and unpaid interest). The note is secured by a portion of the officers Class B common stock pursuant to a pledge agreement between the
Company and the officer and is payable upon the earlier of the stated due date or 30 days after the officers employment with the Company ceases.  On August 8, 2002, the Company announced that the officer would depart from the Company on
December 31, 2002, which will result in the note and related accrued interest becoming payable on or before January 30, 2003.  In October 2002, the Company entered into a separation agreement with this officer.  The significant terms of
the separation agreement include (i) a $125,000 separation payment, (ii) the immediate vesting of 140,000 of the officers remaining unvested stock options and the extension of the exercise period to 18 months for all vested options for a total
of 580,000 vested options, (iii)  the payment of COBRA benefits for up to six months, (iv) the reimbursement of up to $50,000 for brokerage commissions paid (to be reduced dollar-for-dollar by the amount which the net proceeds (as defined) of
the sale exceeds original purchase price of the residence) by the officer in connection with a closing on or before December 31, 2002 of the sale of his California residence and (v) the reimbursement of up to $25,000 for relocation expenses incurred
in moving from the United States to Germany. The Companys obligations are conditioned upon the sale by the officer of his California residence by December 31, 2002.

8.   CREDIT FACILITY

During April 2002, the Company entered into
an unsecured $6.0 million credit facility.  All amounts drawn down under this facility must be used for the purchase of capital assets.  The amount drawn down under the facility from May 2002 through October 2002 will be converted into a
30-month term loan (referred to as Tranche A).  The amount drawn down under the facility from November 2002 through April 2003 will also be converted into a 30-month term loan (referred to as Tranche B).  The Tranche A and B term loans
will have a fixed interest rate determined at 150 basis points above the three year Treasury Note at the time such amounts are converted into their respective term loan.  During each six-month draw down period, only monthly interest payments
are due.  During this period, interest is calculated at the London Interbank Offered Rate (LIBOR) plus 150 basis points.  The agreement requires that the Company 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.

As of  September 30, 2002, $3.0 million was outstanding under Tranche A described above, of which $1.1 million, plus interest, is
due within the next 12 months.

As a result of significant reductions in our net assets during the nine
months ended September 30, 2002, the Company did not meet its liabilities to tangible net worth ratio covenant discussed above.  The asset reduction is principally due to the following factors, all of which are discussed herein; (i) the
impairments and related charges associated with of the Companys investments in ASIP and IMC, (ii) fixed asset impairment charges, (iii) additional inventory obsolescence reserves and (iv) a valuation allowance against all of the Companys
deferred tax assets.  The Company received a waiver for this covenant violation and is currently in the process of amending the covenant.  The Company has previously announced that it expects its cash usage during the fourth quarter of
2002 will be in the range of $17 to $19 million. Based upon this projected cash usage, the Company would not be in compliance with the minimum cash balance covenant of $50 million. Subsequent to September 30, 2002, the Company began negotiations
with the financial institution to amend the credit facility to address the liabilities to tangible net worth covenant discussed above and the projected noncompliance of the minimum cash balance covenant. The Company cannot give any assurance that in
the future it will be able to obtain a waiver in the event of noncompliance or that it can successfully amend the credit facility.  In accordance with the credit facility agreement, if a covenant noncompliance is not cured, the bank has the
right to demand immediate payment of the outstanding balance under the facility.

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MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-continued

9.   INCOME TAXES

On a quarterly basis, the Company assesses the
recoverability of its 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.  The Company considered the following factors that occurred during the three months ended June 30, 2002 in assessing the recoverability of its
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 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 revised projections for future taxable income over the periods in which the deferred tax assets
are realizable, management believes that significant uncertainty exists surrounding the recoverability of the deferred tax assets.  Accordingly, during the three months ended June 30, 2002, the Company recorded a valuation allowance equal to
its deferred tax assets.  As a result of recording the valuation allowance, $20.8 million was charged to income tax expense and $12.2 million was charged against additional paid-in capital.  The $12.2 million charge against additional
paid-in capital represents deferred tax assets that were originally recorded as a credit to additional paid-in capital as a result of employee stock option and warrant exercises.

10.  STOCK OPTION EXCHANGE OFFER

In June 2002, the Company initiated
a voluntary stock option exchange program to its 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 be able to tender for cancellation
stock options to purchase the Companys Class A common stock that had 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.  Pursuant to the offer, the Company accepted for exchange and
cancelled options to purchase an aggregate of 11.4 million shares (calculated prior to the one-for-ten reverse stock split) of the Companys Class A common stock from 206 eligible participants representing 63% of the options subject to the
offer.  The exercise price of the replacement options will be the market price of the Companys 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 the third quarter ended September 30, 2002, $2.6 million of deferred stock compensation associated with the stock options that were
tendered in connection with this offer was accelerated into the statement of operations.

11.  ASSET IMPAIRMENT

During 2000 and 2001, the Company expanded its manufacturing capacity in order to meet demand. As a result of the sharp decrease in
product demand during 2002, the Company recorded a charge of approximately $1.1 million during the nine months ended September 30, 2002 for the elimination of certain excess manufacturing equipment.  The Company reviewed the future undiscounted
cash flows related to this equipment and concluded that an impairment charge was necessary to write down these assets to their fair value.  The remaining net book value of this equipment after the impairment charge is less than $0.2
million.  The Company intends to sell this equipment within the next twelve months.  This asset impairment is incremental to those impairments recorded as part of the Companys Realignment Plan.

12.  COMPREHENSIVE INCOME (LOSS)

The components of comprehensive
income (loss), net of tax, are as follows:

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MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-continued

|                                                                |  | Three Months Ended September 30, |         | Nine Months Ended September 30, |  
|--------------------------------------------------------------- |  | -------------------------------- | ------- | ------------------------------- | -
|                                                                |  |                                  |         |                                 |  
|(Amounts in thousands)                                          |  | 2002                             |         | 2001                            |  
|                                                                |  |                                  |         |                                 |  
|Net income (loss)                                               |  | $                                | (39,270 | )                               | $
|Change in net unrealized loss on available-for-sale investments |  |                                  | 4       |                                 |  
|Cash flow hedge reclassification adjustments                    |  |                                  | (42     | )                               |  
|Foreign currency translation adjustment                         |  |                                  | (180    | )                               |  
|                                                                |  |                                  |         |                                 |  
|Comprehensive income (loss)                                     |  | $                                | (39,488 | )                               | $
|                                                                |  |                                  |         |                                 |  

13.  COMMITMENTS AND CONTINGENCIES

In May 2002, a complaint was filed in Los Angeles Superior Court against the Company, its Chief Executive Officer and its former
Executive Vice President arising out of an alleged oral joint venture agreement between the plaintiff, the Company and the named officers in connection with the development of a subsidiary of the Company in Israel.  The action claims that the
Company and the named officers breached an oral agreement to deliver to the plaintiff a warrant to purchase at least 10,000 shares of the Companys stock at a price of $13.00 per share, and seeks damages in excess of $1.0 million. 
Although the Company has denied the allegations in the complaint and believes that they are without merit, it cannot predict the outcome of the litigation.

The Company, in the ordinary course of its business, is the subject of, or party to, various pending or threatened legal actions. The
Company believes that an ultimate liability arising from these actions will not have a material adverse effect on its financial position, results of operations or cash flows.

14.  SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS

During the three
and nine months ended September 30, 2002, the Company financed the acquisition of equipment or software in the amount of $0.6 million and $9.0 million, respectively.  During the three and nine months ended September 30, 2001, the Company
financed the acquisition of equipment or software in the amount of $0.1 million and $1.9 million, respectively.

During the three and nine months ended September 30, 2002, the Company issued approximately 67,000 and 240,000 shares of restricted
Class A common stock, respectively, and recorded $0.3 million and $3.3 million of deferred stock compensation, respectively.  Such shares were issued to employees with either tenure vesting of six months or vesting upon the attainment of
certain performance criteria in 2002.  Also during the nine months ended September 30, 2002, a shareholder converted 200,000 shares of the Companys Class B common stock into the same number of shares of Class A common stock.

15.  EARNINGS PER SHARE

Basic net income or loss per
share excludes dilution for potentially dilutive securities and is computed by dividing net income or loss attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income or loss
per share reflects the potential dilution that could occur if securities or other instruments to issue common stock were exercised or converted into common stock. Potentially dilutive securities are excluded from the computation of diluted net
income or loss per share when their inclusion would be antidilutive. All amounts have been restated for the one-for-ten reverse stock split discussed above.  A reconciliation between basic and diluted weighted average shares outstanding is as
follows:

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MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-continued

|                                                             |  | Three Months Ended September 30, |       | Nine Months Ended September 30, | 
|------------------------------------------------------------ |  | -------------------------------- | ----- | ------------------------------- | 
|                                                             |  |                                  |       |                                 | 
|(Amounts in thousands)                                       |  | 2002                             |       | 2001                            | 
|                                                             |  |                                  |       |                                 | 
|Weighted average shares outstanding, basic                   |  |                                  | 7,580 |                                 | 
|Dilutive shares issuable in connection with stock plans      |  |                                  | 606   |                                 | 
|Dilutive shares issuable in connection with warrants granted |  |                                  | 9     |                                 | 
|Conversion of preferred stock to common stock                |  |                                  |      |                                 | 
|                                                             |  |                                  |       |                                 | 
|Weighted average shares outstanding, diluted                 |  |                                  | 8,195 | *                               | 
|                                                             |  |                                  |       |                                 | 

* Since there was a loss attributable to common shareholders in these periods, the basic weighted
average shares outstanding were used in calculating diluted loss per share, as inclusion of the incremental shares shown in this calculation would be antidilutive.  During the nine months ended September 30, 2002, stock options and warrants
totaling 2,026,000 were excluded from the computation of diluted shares outstanding due to their antidilutive effect.

16.  RECENTLY ISSUED OR ADOPTED ACCOUNTING
PRONOUNCEMENTS

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets. With the adoption of Statement 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 the Companys financial position or results of operations.  As of September 30, 2002, the Company had $0.7 million of
unamortized goodwill recorded resulting from one of its equity investments.

In June 2001, the Financial
Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations.  Statement No. 143, which is effective for the Company 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.  The Company does not expect that the adoption of this standard will have a material impact on its financial position, results of operations or cash flows.

In July 2002, the FASB issued Statement of Financial Accounting Standards (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.   Statement 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.  The Company does not expect that the adoption of this standard will have a material impact on its financial position, results of operations or cash flows.

17.  SUBSEQUENT EVENTS

During November 2002, the Companys
Senior Vice President of Operations and its Vice President of Wordlwide Sales resigned from the Company to pursue other interests. All of the responsibilities related to these two officers have been reassigned to other members of management.



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Item 2.  
Managements Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement

You should read the following discussion and analysis in conjunction with the consolidated financial statements and related notes
thereto contained elsewhere in this report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review
and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2001 and our Quarterly Reports on
Form 10-Q for the periods ended March 31, 2002 and June 30, 2002.

This Report contains forward-looking
statements which include, but are not limited to, statements concerning projected revenues, expenses, gross profit and income, the need for additional capital, market demand for and acceptance of our products, the competitive nature of and
anticipated changes in 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 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 herein. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

OVERVIEW

As used in this Form 10-Q, company, we,
us, our, Multilink and Multilink Technology refer to Multilink Technology Corporation and its subsidiary companies.

We design, develop and market advanced integrated circuits, modules, transponders and higher-level assemblies that enable next
generation optical networking systems. 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. Our top three customers for the
three months ended September 30, 2002 were Cisco, Xtera and Algety, representing 16%, 15% and 15% of our revenues, respectively, with an additional five customers each accounting for more than 5% of our revenues.   Our top three customers
for the nine months ended September 30, 2002 were TyCom, Alcatel and Lucent, representing 27%, 24% and 13% of our revenues, respectively, with an additional two customers accounting for more than 5% of our revenues.  During the year ended
December 31, 2001, TyCom and Alcatel accounted for 34% and 29% of our revenues, respectively, and four other customers each accounted for greater than 5% of our revenues.

A number of telecommunication service providers have continued 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 have declined substantially during the past several
quarters.    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.  Our revenues will be substantially lower and loss per share will be substantially greater in fiscal 2002 than in fiscal 2001.

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 during the third quarter of 2002 of
$12.3 million.

We have focused our sales and marketing efforts on North American and European communications
equipment manufacturers. We have also established a sales organization in Asia and have developed relationships with most of the major communications equipment manufacturers within Asia.  During the three and nine months ended September 30,
2002, we derived 53% and 80%, respectively, of our total revenues from communications equipment manufacturers in North America compared with 87% and 72%, respectively, during the comparable periods in 2001.  We currently sell through our direct
sales force in North America and Europe as well as through selected independent sales representatives in the United States, Canada, Germany, the United Kingdom, Italy, France, Israel, China, Korea and Japan. We have also opened sales offices in
Canada, Italy, and the United Kingdom.  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.

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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 slowdown in the build-out of the communications infrastructure has caused our revenues to decrease as
compared with prior years.  Our revenues declined substantially during the 2002 quarters, compared to the comparable quarters in 2001. 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 canceled 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 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 announced decline in our revenues in 2002, as compared with 2001, has adversely affected our gross margins.

Research and Development.Research and development expenses consist primarily of salaries and related personnel costs,
equipment, 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 the fourth quarter of 2002 in absolute dollar amounts as we execute on 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 during the fourth quarter of 2002 in absolute dollar amounts as we execute on our previously announced 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 the fourth quarter of 2002 in absolute
dollar amounts as we continue to execute on 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.

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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 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 September 30, 2002, we estimate our amortization of deferred stock compensation for each of the periods below to be as
follows:

|Year Ending December 31,                |       | Amount         |      
|--------------------------------------- | ----- | -------------- | -----
|                                        |       |                |      
|                                        |       | (in thousands) |      
|2002 (subsequent to September 30, 2002) |       | $              | 1,967
|2003                                    |       |                | 2,606
|2004                                    |       |                | 708  
|2005                                    |       |                | 10   
|                                        |       |                |      
|                                        | Total |                | $    
|                                        |       |                |      
|                                        |       |                |      

Less than $0.5 million of the remaining amortization of deferred stock compensation
will be charged to cost of revenues.

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 and any income or loss associated with our equity investments.

RESULTS OF OPERATIONS

Revenues.   Revenues decreased $35.8
million to $1.8 million for the three months ended September 30, 2002, compared with $37.6 million for the three months ended September 30, 2001.  Revenues decreased $87.0 million to $16.8 million for the nine months ended September 30, 2002,
compared with $103.8 million for the nine months ended September 30, 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.

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Gross Profit.

For the three months ended September 30, 2002 and 2001

Cost of revenues decreased to $2.4 million for the three months ended September 30, 2002, compared to $13.9 million for the three months
ended September 30, 2001. During the three months ended September 30, 2002, cost of revenues included $0.5 million of deferred stock compensation.  Gross profit as a percentage of revenues, or gross margin, decreased to a negative 35% for the
three months ended September 30, 2002, compared with 63% for the three months ended September 30, 2001.  The negative gross margin during the three months ended September 30, 2002 is predominantly due to the reduced sales volume discussed above
as communications equipment manufacturers continue to reduce spending, offset by $0.3 million of cancellation fee revenue included in revenues.

Excluding the impact of the cancellation fee revenue during the three months ended September 30, 2002 and deferred stock compensation,
gross margins would have been a negative 23% and 65% for the three months ended September 30, 2002 and 2001, respectively.  As discussed above, this decrease in gross margin is due to the decrease in sales volume as a result of reduced spending
by communications equipment manufacturers.

During the three months ended September 30, 2002, stock-based
compensation expense associated with cost of revenues did not fluctuate significantly compared to the three months ended September 30, 2001.  For the three months ended September 30, 2002, 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.

For the nine months ended September 30, 2002 and 2001

Cost of revenues decreased to $17.2 million for the nine months ended September 30, 2002, compared with $43.8 million for the nine
months ended September 30, 2001. During the nine months ended September 30, 2002, cost of revenues included $1.4 million of deferred stock compensation.  Gross margin decreased to negative 2% for the nine months ended September 30, 2002
compared with 58% for the nine months ended September 30, 2001.  The significant reduction in gross margin during the nine months ended September 30, 2002 is the result of the significant charges, offset by certain credits, recorded against
cost of revenues during the three months ended June 30, 2002.  The significant items that affected gross margin during the nine months ended September 30, 2002 and 2001 were as follows:

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|                                                                |  | Nine Months Ended September 30, 2002 |        | Nine Months Ended September 30, 2001 | 
|--------------------------------------------------------------- |  | ------------------------------------ | ------ | ------------------------------------ | 
|                                                                |  |                                      |        |                                      | 
|                                                                |  | In $ (000s omitted)                 |        | Effect on gross margin               | 
|                                                                |  |                                      |        |                                      | 
|Total cost of revenues                                          |  | $                                    | 17,179 |                                      | 
|Inventory write down and related charges                        |  |                                      | (5,307 | )                                    | 
|Fixed asset impairment charge                                   |  |                                      | (1,051 | )                                    | 
|Deferred stock compensation                                     |  |                                      | (1,437 | )                                    | 
|Accrual adjustments                                             |  |                                      | 1,038  |                                      | 
|Sale of written-off inventory                                   |  |                                      | 735    |                                      | 
|Cancellation fees (displayed herein as a reduction in revenues) |  |                                      |       |                                      | 
|                                                                |  |                                      |        |                                      | 
|Adjusted cost of revenues                                       |  | $                                    | 11,157 |                                      | 
|                                                                |  |                                      |        |                                      | 

Excluding
the impact of the above-mentioned items, gross margins would have been 33% and 64% for the nine months ended September 30, 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 $5.3 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 $5.3 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.   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 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 all
of the 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 an 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 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 and March 31, 2002.  During the three
months ended June 30, 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

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material orders for this product during the remainder of 2002; however, we will continue to disclose the effect of such sales on gross margin.

During the nine months ended September 30, 2002, stock-based compensation expense associated with cost of revenues did not fluctuate
significantly compared to the nine months ended September 30, 2001.  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 $4.9 million inventory charge during the nine months ended September 30, 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 $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.

Research and Development.Research and development expenses, excluding deferred stock compensation, decreased to
$11.6 million for the three months ended September 30, 2002, compared with $14.4 million for the three months ended September 30, 2001. As a percentage of revenues, research and development expenses increased to 653% for the three months ended
September 30, 2002, compared with 38% for the three months ended September 30, 2001.  During the nine month period ended September 30, 2002 compared with the nine month period ended September 30, 2001, research and development expenses,
excluding deferred stock compensation, decreased to $36.3 million compared with $40.2 million, respectively and, as a percentage of revenues, increased to 216% compared with 39%, respectively.

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 an accrual of $0.4 million during the three months ended September 30, 2002 and $1.2 million during the nine months ended September 30, 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.

For
the three and nine months ended September 30, 2002, stock-based compensation expense associated with research and development increased $1.7 million and $2.0 million, respectively, as compared to the three and nine months ended September 30,
2001.  The increase was due to restricted stock grants to engineering personnel and the acceleration of $1.3 million of additional expense during the three months ended September 30, 2002.  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 $3.1 million
for the three months ended September 30, 2002, compared with $5.1 million for three months ended September 30, 2001. As a percentage of revenues, sales and marketing expenses increased to 173% during the three months ended September 30, 2002,
compared with 13% during the three months ended September 30, 2001. During the nine month period ended September 30, 2002, compared with the nine month period ended September 30, 2001, sales and marketing expenses, excluding deferred stock
compensation, decreased to $10.7 million compared with $13.1 million, respectively and, as a percentage of revenues, increased to 64% compared with 13%, respectively. 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 decrease in absolute dollars for the nine months ended September 30, 2002 was further assisted by an accrual reversal of $0.5 million during the second quarter of
2002. The increase in sales and marketing expense as a percentage of revenues is due to the reduced revenues discussed above.  For the three and nine months ended September 30, 2002, there was no material change in stock-based compensation
expense associated with sales and marketing as compared with the three and nine months ended September 30, 2001.

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We concluded our stock option exchange program on August 30, 2002.  In conjunction
with the stock option exchange, we accelerated $0.5 million of stock-based compensation into our statement of operations relating to option grants to sales and marketing personnel that were tendered as part of the option exchange.

General and Administrative.   General and administrative expenses, excluding deferred stock
compensation, decreased to $1.9 million for the three months ended September 30, 2002, compared with $2.9 million for the three months ended September 30, 2001.  As a percentage of revenues, general and administrative expenses were 106% for the
three months ended September 30, 2002, compared with 8% for the three months ended September 30, 2001. During the nine month period ended September 30, 2002, compared with the nine month period ended September 30, 2001, general and administrative
expenses, excluding deferred stock compensation, decreased to $6.3 million compared with $9.1 million, respectively and, as a percentage of revenues, increased to 38% compared with 9%, respectively.  The decrease in absolute dollars was
primarily due to our focused efforts to leverage our general and administrative expenses by reducing spending and to execution of our corporate realignment plan.

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.  After adjusting for the accelerated expense associated with our stock option exchange program, the decrease in
stock-based compensation expense associated with general and administrative expenses during the three and nine months ended September 30, 2002 compared with the three and nine months ended September 30, 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.  As the vesting period progresses, the amount of deferred stock-based compensation amortized into expense decreases.

Deferred Stock Compensation.Operating expenses included amortization of deferred stock compensation
of $4.8 million and $9.5 million for the three and nine months ended September 30, 2002, respectively, compared with $2.3 million and $7.2 million for the three and nine months ended September 30, 2001, respectively.   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 the third quarter ending September 30, 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 the fourth quarter of 2001.  The decrease in the deferred stock compensation associated with stock options is due to the reduction in headcount, 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.

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Investment Impairments and Related Charges.  During the three months ended
September 30, 2002, we recorded impairment and related charges associated with our investments in ASIP and IMC.  ASIP is a privately held, optical device start-up company that is subject to many of the same risks as the Company.  We
account for our investment in ASIP under the equity method of accounting.  During the three months ended September 30, 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 April 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 atASIP. 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 $1.1 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.

During the three months ended September 30, 2002, we recognized an other than temporary reduction in the value of 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 the Company.  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.

Corporate Realignment.  During the three months ended September 30, 2002, we recorded a $12.3 million corporate realignment
charge in connection with the corporate realignment plan that we announced in August 2002.  The plan will be substantially completed by December 31, 2002 and fully completed by June 30, 2003.  The charge includes (I) $1.9 million for
workforce reductions that represents predominantly severance costs, (ii) $3.9 million representing predominantly 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 and equipment 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

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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.

Upon completion of the plan, our worldwide headcount will decrease to approximately 170
people as compared to 329 at June 30, 2002.  The headcount reductions will occur at all of our locations including an 87% reduction in Europe, a 67% reduction in Israel and a 38% reduction in 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.  We have estimated that the
cash cost of the realignment plan is approximately $5.8 million and that the plan will contribute approximately $17.0 million of annual cash savings.  The estimated cash outflow and annual cash savings will, however, be negatively impacted if
it takes us longer than anticipated to sublease some of our closed facilities.

Other Income and
Expenses, Net.  Other expense was $0.2 million for the three months ended September 30, 2002, compared with other income of $0.5 million for the three months ended September 30, 2001. The fluctuation from income to expense is due to lower
interest income as a result of having a lower average cash and short term investment balance during the three months ended September 30, 2002, as compared to the three months ended September 30, 2001 that included proceeds of our June 2001 initial
public offering offset by an increase of $0.2 million of losses from our investment accounted for under the equity method of accounting and higher interest expense resulting from software and equipment financings during 2001 and the first half of
2002.

Other income decreased to $0.3 million for the nine months ended September 30, 2002, compared with $0.7
million during the nine months ended September 30, 2001.  The decrease is due primarily to an increase of  $0.3 million during the nine months ended September 30, 2002 of losses from our investment accounted for under the equity method of
accounting and higher interest expense resulting from software and equipment financings during 2001 and the first half of 2002.

Net Income (Loss).  Net loss was $39.3 million and $93.8 million for the three and nine months ended September 30, 2002,
respectively, compared with net income of $1.4 million and net loss of $3.9 million for the three and nine months ended September 30, 2001, respectively.  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 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 the three months ended June 30, 2002, we recorded a
valuation allowance equal to our deferred tax assets.  As a result of recording the valuation allowance, $20.8 million was charged to income tax expense and $12.2 million was charged against additional paid-in capital.  The $12.2 million
charge against additional paid-in capital represents deferred tax assets that were recorded as a result of employee stock option and warrant exercises.

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LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2002, we had cash and cash equivalents and short-term investments of  $65.5 million.

Cash used in operating activities was $19.8 million during the nine months ended September 30, 2002 compared with cash provided
by operations of $5.6 million during the nine months ended September 30, 2001.  Net loss of $93.8 million includes $12.3 million of corporate realignment charges and non-cash charges of $9.6 million for depreciation and amortization, $10.9
million for amortization of deferred stock compensation, $1.1 million of asset impairment charges that are not included in the corporate realignment charge, $5.3 million of inventory write down and related charges, $4.9 million of investment
impairments and related charges and deferred tax expense of $14.4 million.  The increase in cash used in operating activities is due to the significant reduction in revenues discussed above.

Cash provided by investing activities increased to $15.4 million for the nine months ended September 30, 2002 from $49.6 million of cash
used in investing activities for the nine months ended September 30, 2001.  The increase is due to the net sale of $21.6 million of marketable securities during the nine months ended September 30, 2002 coupled with a decrease in fixed asset
purchases.  In addition, during the nine months ended September 30, 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 $0.9 million for the nine months ended September 30, 2002 compared with $77.0 million of cash provided by financing activities for the nine months ended September 30, 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.  During August 2002, we announced that this officer will depart from the Company on December 31, 2002 and accordingly, such loan and accrued interest is due on or before January 30, 2003.   In October 2002, we entered into a
separation agreement with this officer.  The significant terms of the separation agreement include (i) a $125,000 separation payment, (ii) the immediate vesting of 140,000 of the officers remaining unvested stock options and the extension
of the exercise period to 18 months for all vested options for a total of 580,000 vested options, (iii)  the payment of COBRA benefits for up to six months, (iv) the reimbursement of up to $50,000 for brokerage commissions paid (to be reduced
dollar-for-dollar by the amount which the net proceeds (as defined) of the sale exceeds original purchase price of the residence) by the officer in connection with a closing on or before December 31, 2002 of the sale of his California residence and
(v) the reimbursement of up to $25,000 for relocation expenses incurred in moving from the United States to Germany. Our obligations are conditioned upon the sale by the officer of his California residence by December 31, 2002.

During the nine months ended September 30, 2002, we secured financing of $9.0 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 $1.2 million of proceeds from the exercise of employee stock
options.

During April 2002, we entered into an unsecured $6.0 million credit facility.  All amounts
drawn down under this facility must be used for the purchase of capital assets.  The amount drawn down under the facility from May 2002 through October 2002 will be converted into a 30-month term loan (referred to as Tranche A).  The
amount drawn down under the facility from November 2002 through April 2003 will also be converted into a 30-month term loan (referred to as Tranche B).  The Tranche A and B term loans will have a fixed interest rate determined at 150 basis
points above the three year Treasury Note at the time such amounts are converted into their respective term loan.  During each six-month draw down period, only monthly interest payments are due.  During this period, interest is calculated
at the London Interbank Offered Rate (LIBOR) plus 150 basis points.  The agreement requires that the Company 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 the six months ended June 30, 2002, $3.0 million was drawn down under Tranche A described above, of which $1.1 million, plus interest, is due within the next 12 months.

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As a result of significant reductions in our net assets during the nine months ended
September 30, 2002, we did not meet our liabilities to tangible net worth ratio covenant discussed above.  The asset reduction is principally due to the following factors, all of which are discussed above; (i) the impairments and related
charges associated with our investments in ASIP and IMC, (ii) fixed asset impairment charges, (iii) additional inventory obsolescence reserves and (iv) a valuation allowance against all of our deferred tax assets.  We received a waiver for this
covenant violation and we are in the process of amending the covenant.  As discussed below, we expect that our cash usage during the fourth quarter of 2002 will be in the range of $17 to $19 million. Based upon this projected cash usage, we
would not be in compliance with the minimum cash balance covenant of $50 million. Subsequent to September 30, 2002, we began negotiations with the financial institution to amend the credit facility to address the liabilities to tangible net worth
covenant discussed above and the projected noncompliance of the minimum cash balance covenant. We cannot give any assurance that in the future we will be able to obtain a waiver in the event of noncompliance or that we can successfully amend the
credit facility. In accordance with the credit facility agreement, if a covenant noncompliance is not cured, the bank has the right to demand immediate payment of all amounts outstanding under the facility.  If we are required to immediately
pay these amounts, we will use more of our existing cash, cash equivalents and short term investments for operating purposes.

Cash and cash equivalents and short-term investments decreased to $65.5 million at September 30, 2002 from $92.7 million on December 31,
2001 due predominantly to the use of cash in operating activities coupled with fixed asset purchases discussed above.

Cash and cash equivalents and short-term investments are expected to decrease throughout the remainder of 2002.  We expect that our
net cash usage will range from $17 to $19 million during the fourth quarter of 2002.  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.  We believe that our current cash position and the availability of vendor financings will satisfy our projected working capital and capital expenditure requirements through at least the next twelve months.  As discussed above,
given the covenant noncompliance that was waived during the quarter ended September 30, 2002 and the possibility that we may be in noncompliance of a covenant at December 31, 2002, we do not intend to draw down any further amounts under our credit
facility.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards (SFAS)
No. 143, Accounting for Asset Retirement Obligations.  Statement No. 143 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.  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 July 2002, the Financial Accounting Standards Board, or
FASB, issued Statement of Financial Accounting Standards (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.   Statement 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.

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RISK FACTORS

Set forth below and elsewhere in this Quarterly 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 Quarterly Report.

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 will be significantly lower and loss per share will be 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:

| |  | a continuing downturn in the telecommunications industry;                                       
| | - | ------------------------------------------------------------------------------------------------
| |   |                                                                                                 
| |  | lower demand for our products and our customers products;                                      
| |   |                                                                                                 
| |  | the failure of our corporate realignment plan;                                                  
| |   |                                                                                                 
| |  | the reduction, rescheduling or cancellation of orders by our customers or prospective customers;
| |   |                                                                                                 
| |  | general communications and semiconductor industry conditions;                                   
| |   |                                                                                                 
| |  | the amounts and timing of investments in research and development;                              
| |   |                                                                                                 
| |  | competitive pressures on selling prices and the loss of customers;                              
| |   |                                                                                                 
| |  | our ability to introduce new products and technologies on a timely basis;                       
| |   |                                                                                                 
| |  | the amounts and timing of costs associated with warranties and product returns;                 
| |   |                                                                                                 
| |  | the ability of our customers to obtain components from their other suppliers; and               
| |   |                                                                                                 
| |  | general economic conditions.                                                                    

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.

Our corporate realignment plan may not be successful.

We initiated a corporate realignment plan during the third quarter of 2002 that we expect will be substantially completed by December
31, 2002.  The plan includes 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 the three months ended September 30, 2002 of $12.3 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 decrease in our revenues.

Realignment plans require significant
managerial resources to execute and we may fail to achieve our targeted goals.  In establishing the realignment plan, we may have incorrectly anticipated the demand for our products.  We may be forced to restructure further or may incur
further operating charges due to poor business conditions.

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

During the first nine months of 2002, we have used $27.2 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

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approximately $17 to $19 million in cash, cash equivalents and investments during the fourth quarter of 2002 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 twelve 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 during the past several quarters and initiated our corporate realignment plan during the
third quarter of 2002 to further 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.

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
revenue expectations and of 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:

| |  | additional declines in our revenues and continued increased losses;                                      
| | - | ---------------------------------------------------------------------------------------------------------
| |   |                                                                                                          
| |  | additional changes in financial analysts estimates of our revenues and earnings (losses);               
| |   |                                                                                                          
| |  | our failure to meet financial analysts performance expectations; and                                    
| |   |                                                                                                          
| |  | changes in market valuations of other companies in the semiconductor or fiber optic equipment industries.

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 10 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 market price of our Class A common stock has declined since the effective date of the reverse stock split.

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 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

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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, possibly 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.

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

We had net losses of $3.7 million in 2000, $12.4 million in 2001 and $93.8 million for the
nine months ended September 2002.   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.

A continued downturn in the communications equipment industry would further negatively impact our revenues and cash flows.

We derive substantially all of our revenues from communications equipment manufacturers.  The communications equipment industry,
which is highly cyclical, is experiencing a significant and prolonged downturn.  This downturn has had a significantly negative effect on the demand for our products. We cannot predict how long this downturn will last.  A continued
downturn would further adversely affect our revenues and cash flows and will result in continued net losses and reduced cash balances for us.  In addition, our need to continue investment in research and development during this downturn and to
maintain ongoing customer service and support capability constrains our ability to reduce expenses.  We may not be able to generate sufficient cash to maintain spending levels, even after our corporate realignment, if this prolonged downturn
continues for an extended period of time.

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.

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

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equipment manufacturers.  This slowdown has caused our revenues and backlog to decline substantially.  Our revenues declined in the first, second and third quarters of
2002, compared to the comparable periods in 2001 and the fourth quarter of 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.

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 any profits.

A relatively small number of customers have historically
accounted for a majority of our revenues.  Our three largest customers accounted for approximately 64% of our revenues for the nine months ended September 30, 2002, 71% of our revenues in 2001, and 73% of our revenues in 2000.  Our top
three customers for the nine months ended September 30, 2002 were TyCom, Alcatel and Lucent, representing approximately 27%, 24% and 13% of our revenues, respectively.  Our top three customers for the year ended December 31, 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 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

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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:

| |  | product time-to-market;                                                                                 
| | - | --------------------------------------------------------------------------------------------------------
| |   |                                                                                                         
| |  | product performance;                                                                                    
| |   |                                                                                                         
| |  | product price;                                                                                          
| |   |                                                                                                         
| |  | product quality; product reliability;                                                                   
| |   |                                                                                                         
| |  | success in designing and subcontracting the manufacture of new products that implement new technologies;
| |   |                                                                                                         
| |  | market acceptance of our competitors products;                                                         
| |   |                                                                                                         
| |  | efficiency of production;                                                                               
| |   |                                                                                                         
| |  | expansion of production of our products for particular systems manufacturers; and                       
| |   |                                                                                                         
| |  | customer support and reputation.                                                                        

We compete primarily against Agere, Applied Micro Circuits, Broadcom, Giga (acquired by Intel), Infineon, JDS Uniphase, Maxim, Mindspeed
(a Conexant company), NEL, Nortel (microelectronics division), NTT Electronics, Philips, PMC-Sierra, 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.

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We incur research and development expenses in advance of obtaining access to the required 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 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 N. 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 Vice President of Finance and Chief Financial Officer, resigned to pursue other opportunities, and Dr.
Jens Albers, our Executive Vice President and Co-chairman of the Board, retired from his full-time duties as an officer and director, and announced that he will leave our company on December 31, 2002.  In November 2002, Joseph Cole, our Vice
President of Worldwide Sales and Ronald M. Krisanda, our Senior Vice President of Operations, resigned to pursue other opportunities.  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 Worldwide Sales in November 2002.  Therefore, in combination with the executive departures described in the risk
factor 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.

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

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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 products are incorporated into sophisticated systems, and defects may be discovered only after full deployment, which could seriously harm our
business.

Our products are complex and are designed to be deployed in large quantities across
sophisticated networks.  Because of the nature of our products, they can only be fully tested when completely deployed in large networks with high amounts of traffic.  Our customers may discover errors or defects in our products, or our
products may not operate as expected, after they have been fully deployed.  If our products have defects or do not operate as expected, we could experience:

| |  | loss of, or delay in, revenues and loss of market share;                       
| | - | -------------------------------------------------------------------------------
| |   |                                                                                
| |  | loss of existing customers;                                                    
| |   |                                                                                
| |  | failure to attract new customers or achieve market acceptance for our products;
| |   |                                                                                
| |  | diversion of development resources;                                            
| |   |                                                                                
| |  | increased service and warranty costs;                                          
| |   |                                                                                
| |  | legal actions by our customers;                                                
| |   |                                                                                
| |  | increased insurance costs; and                                                 
| |   |                                                                                
| |  | damage to our reputation and customer relationships.                           

The occurrence of any of these problems could seriously harm our business and result in decreased revenues and increased operating
expenses.  Defects, integration issues or other performance problems in our products could result in financial or other damages to our customers or could negatively affect market acceptance for our products.

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 11 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 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.

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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:

| |  | pay substantial damages;                                                                                                 
| | - | -------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                          
| |  | cease the manufacturing, use and sale of certain products;                                                               
| |   |                                                                                                                          
| |  | discontinue the use of certain process technologies; and                                                                 
| |   |                                                                                                                          
| |  | obtain a license from the third-party claiming infringement, which might not be available on reasonable terms, if at all.

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:

| |  | our ability to anticipate customer and market requirements and changes in technology and industry standards;  
| | - | --------------------------------------------------------------------------------------------------------------
| |   |                                                                                                               
| |  | our ability to accurately define new products;                                                                
| |   |                                                                                                               
| |  | our ability to timely complete development of new products and bring our products to market on a timely basis;
| |   |                                                                                                               
| |  | our ability to differentiate our products from offerings of our competitors;                                  
| |   |                                                                                                               
| |  | our ability to understand overall system and network architecture; and                                        
| |   |                                                                                                               
| |  | overall market acceptance of our products.                                                                    

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.

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

International sales accounted for approximately 20% of our revenues for the nine months ended September 30, 2002, 24% of our
revenues for the year ended December 31, 2001, and 27% of our revenues in 2000.  International sales may 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:

| |  | changes in regulatory requirements;                                                    
| | - | ---------------------------------------------------------------------------------------
| |   |                                                                                        
| |  | increases in tariffs and other trade barriers;                                         
| |   |                                                                                        
| |  | timing and availability of export licenses;                                            
| |   |                                                                                        
| |  | political and economic instability;                                                    
| |   |                                                                                        
| |  | difficulties in accounts receivable collections;                                       
| |   |                                                                                        
| |  | difficulties in staffing and managing foreign subsidiary and branch operations;        
| |   |                                                                                        
| |  | difficulties in managing distributors;                                                 
| |   |                                                                                        
| |  | difficulties in obtaining governmental approvals for communications and other products;
| |   |                                                                                        
| |  | foreign currency exchange fluctuations;                                                
| |   |                                                                                        
| |  | the burden of complying with a wide variety of complex foreign laws and treaties; and  
| |   |                                                                                        
| |  | potentially adverse tax consequences.                                                  

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 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

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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:

| |  | lack of assured semiconductor wafer supply and reduced control over delivery schedules and quality;
| | - | ---------------------------------------------------------------------------------------------------
| |   |                                                                                                    
| |  | the unavailability of, or delays in obtaining access to, key process technologies;                 
| |   |                                                                                                    
| |  | limited control over manufacturing yields and quality assurance;                                   
| |   |                                                                                                    
| |  | inadequate capacity during periods of excess demand;                                               
| |   |                                                                                                    
| |  | inadequate allocation of production capacity to meet our needs;                                    
| |   |                                                                                                    
| |  | increased costs of materials or manufacturing services;                                            
| |   |                                                                                                    
| |  | difficulties selecting and integrating new subcontractors;                                         
| |   |                                                                                                    
| |  | limited warranties on wafers or products supplied to us;                                           
| |   |                                                                                                    
| |  | inability to take advantage of price reductions; and                                               
| |   |                                                                                                    
| |  | misappropriation of our intellectual property.                                                     

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 is 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.

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

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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:

| |  | our reliance on third-party manufacturers;                  
| | - | ------------------------------------------------------------
| |   |                                                             
| |  | our limited infrastructure, including personnel and systems;
| |   |                                                             
| |  | the limited availability of raw materials;                  
| |   |                                                             
| |  | competing customer demands; and                             
| |   |                                                             
| |  | transportation.                                             

If we are unable to commit to deliver sufficient quantities of our products to satisfy a
customers anticipated needs, we may lose the order and the opportunity for significant sales to that customer and may be unable to attract new orders and customers.

Our business depends on
the continued availability of raw materials and advanced process technologies at reasonable prices.  If adequate amounts of raw materials or advanced process technologies are unavailable, our operating results would be adversely
affected.

Highly specialized raw materials and advanced process technologies are needed for the
production of our products.  In some cases, there are only two or three suppliers of such materials and technologies in the world.  We depend on the continued availability of these materials and technologies at reasonable prices.  We
may not be able to fulfill customer purchase requests if there is a substantial increase in the price for these materials or if our outside suppliers cannot provide adequate quantities of raw materials for the production of our products.  This
may result in decreased revenues and adversely affect our operating results.

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.

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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.

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.

The communications industry is subject to U.S. and foreign government regulations that could harm our business.  Our failure to timely comply with regulatory requirements, or obtain
and maintain regulatory approvals, could materially harm our business.

The Federal Communications
Commission, or FCC, has jurisdiction over the entire communications industry in the United States and, as a result, our products and our customers products are subject to FCC rules and regulations.  Current and future FCC rules and
regulations affecting communications services, our products or our customers businesses or products could negatively affect our business.  In addition, international regulatory standards could impair our ability to develop products in the
future.  Delays caused by our compliance with regulatory requirements could result in postponements or cancellations of product orders, which would harm our business, results of operations and financial condition.  Further, we cannot be
certain that we will be successful in obtaining or maintaining any regulatory approvals that may, in the future, be required to operate our business.

Our business is subject to environmental
regulations.

We are subject to various governmental regulations related to toxic, volatile and other
hazardous chemicals used in our manufacturing process.  If we fail to comply with these regulations, this failure could result in the imposition of fines or in the suspension or cessation of our operations.  Additionally, we may be
restricted in our ability to expand operations at our present locations, or we may be required to incur significant expenses to comply with these regulations.

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If a significant number of shares become available for sale and are sold in a short period of time, the market price of our stock could further decline.

The lock-up agreements in effect as of our initial public offering in June 2001 expired in December 2001. 
Following the expiration of these agreements, approximately 5.5 million shares, as well as additional shares issuable upon exercise of options, became immediately eligible for sale in the public market, subject to certain exceptions.  We also
had, as of September 30, 2002, 1,757,000 shares subject to vested but unexercised options and warrants which may currently be exercised and sold in the public market.  If our shareholders now sell substantial amounts of our common stock in the
public markets, the market price of our stock could be materially adversely affected.

In addition,
under certain investors rights agreements, some of our current shareholders have demand and/or piggyback registration rights in connection with future offerings of our common stock.  Demand rights
enable shareholders to demand that their shares be registered and may require us to file a registration statement under the Securities Act at our expense.  Piggyback rights require us to notify the shareholders of our stock if we
propose to register any of our securities under the Securities Act, and grant such shareholders the right to include their shares in the registration statement.  Registration of these additional shares would make them generally available to be
sold in the public market.

Certain of our directors, executive officers and their affiliates can control the outcome of matters that require the approval of our shareholders, and accordingly we
will not be able to engage in certain transactions without their approval.

We currently have
approximately 5,000,000 shares of Class A common stock outstanding, with each share entitling the holder to one vote.  We currently have 2,600,000 shares of Class B common stock outstanding, each of which entitles the holder to ten
votes.  All of the Class B common stock is held by officers, directors or other persons or entities owning 5% or more of the total voting control held by our shareholders.

Our executive officers, directors and their affiliates beneficially own approximately 50% of our outstanding common stock and over 50%
of the total voting control held by our shareholders.  In particular, Dr. Richard Nottenburg, as a result of his stock ownership and a voting trust agreement with Dr. Jens Albers, alone controls approximately 50% of the outstanding
voting power of our capital stock.  In addition, persons and entities owning more than 5% of our outstanding shares of common stock, in the aggregate, control over 90% of the outstanding voting power of our capital stock.  As a result, our
directors and 5% shareholders acting together have the ability to control all matters submitted to our shareholders for approval, including the election and removal of directors and the approval of any merger, consolidation or sale of all or
substantially all of our assets.  These shareholders may make decisions that are adverse to the interests of our other shareholders.

Our board of directors may issue, without shareholder
approval, shares of preferred stock that have rights and preferences superior to those of our shares of common stock and that may prevent or delay a change of control.

Our articles of
incorporation provide that our board of directors may issue new shares of preferred stock without shareholder approval.  Some of the rights and preferences of these shares of preferred stock would be superior to the rights and preferences of
shares of our common stock.  Accordingly, the issuance of new shares of preferred stock may adversely affect the rights of the holders of shares of our common stock.  In addition, the issuance of new shares of preferred stock may prevent
or delay a change of control of our company.

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Item 3.  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

We develop and market our products in North America, Europe and Asia. As a result, our financial results could be affected by factors
such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As our sales are currently made or denominated in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign
markets. Although we recognize our revenues in U.S. dollars, we incur expenses in currencies other than U.S. dollars.

We are exposed to fluctuations in the Euro, lita and the Israeli shekel.  During 2001, we opened sales offices in Canada, Italy and
the United Kingdom and are now exposed to fluctuations in the Canadian dollar and British pound. The expenses of our foreign sales offices are not material.  During the nine months ended September 30, 2002, total expenses denominated in
these currencies were $15.8 million or 17% of total expenses before income taxes.  For the nine months ended September 30, 2002, expenses denominated in the Euro represented approximately $10.8 million of foreign expenses and expenses
denominated in the shekel were approximately $4.8 million for the same time period. We expect that our foreign expenses will decrease as we continue to execute on our corporate realignment plan.

During 2002, we entered into foreign forward contracts for 4.5 million Euros with a notional amount of $3.9 million. The contracts
mature through December 2002 and were entered into to hedge a portion of Euro denominated expenses. Although we have not experienced significant foreign exchange rate losses to date, we may in the future, especially to the extent that we do not
engage in hedging.  We do not enter into derivative financial instruments for trading or speculative purposes.

The economic impact of currency exchange rate movements on our operating results is complex because such changes are often linked to
variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, may cause us to adjust our financing and operating strategies. Consequently, isolating the effect of changes in currency does
not incorporate these other important economic factors.

Interest Rate Risk

Software and Equipment Financings

All of our vendor software and equipment financings have a fixed interest rate and are not subject to interest rate fluctuations. 
The Tranche A and B term loans of our credit facility have a fixed interest rate determined at 150 basis points above the three year Treasury Note at the time such amounts are converted into their respective term loan.  During each six-month
draw down period under the credit facility, only monthly interest payments are due.  During this period, interest is calculated at the London Interbank Offered Rate (LIBOR) plus 150 basis points.   An immediate 100 basis
point fluctuation in these rates would not have a material impact on our financial condition, results of operations or cash flows.

Short-term Investments

At September 30, 2002, our investment portfolio included fixed and floating rate securities of $21.3 million.  The maximum maturity
of these investments is generally 12 months with an overall dollar-weighted maturity of the portfolio of less than six months.  Fixed rate securities are subject to interest rate risk and will decline in value if interest rates increase whereas
floating rate securities may produce less income than expected if interest rates decrease.  Accordingly, our future investment income may not meet expectations as a result of interest rate fluctuations or a loss of principal may occur if we
were to sell securities that have declined in market value as a result of interest rate fluctuations.  As a result of the relatively short average maturity of the portfolio, an immediate 100 basis point increase in interest rates would not have
a material impact on our financial condition, results of operations or cash flows.

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---

We do not attempt to reduce our exposure to interest rate risk through the use of
derivative financial instruments due to the short-term nature of our portfolio.

Other
Investments

Our other investments include several strategic investments in privately held
companies.  These investments have an inherent level of risk associated with them, as they are comprised of investments in start-up or development stage companies.  We consider these investments long-term strategic investments.  The
market for these technologies or products that they have under development is typically in the early stages, and may never materialize.  Accordingly, we could lose our entire investment in these companies.  In fact, during the three months
ended September 30, 2002, we recorded an impairment charge of $1.1 million and $1.4 million on our investment in ASIP and IMC, respectively, because we believe that the reduction in these investments value is other than temporary.  We
also recorded an impairment charge of $2.1 million on equipment that we consigned to ASIP.  We have also provided a guarantee for a lease of ASIP, which is an equity basis investment.  The guarantee is through December 31, 2005, provided
that ASIP continues to meet all terms and conditions of the lease.  The total remaining lease payments to be made by ASIP during the guarantee period are $1.1 million.

Critical Accounting
Policies

The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  We believe the most critical accounting policies that are significantly affected by these estimates include
allowance for doubtful accounts receivable, inventory reserves, valuation allowance for deferred tax assets, warranty accruals, related party transactions and equity-based compensation.

Allowance for doubtful accounts receivable.  Accounts receivable are reduced by a valuation allowance to estimate the amount
that will actually be collected from our customers.  Many of our customers have been adversely affected by reduced carrier spending and have been paying us slower than in the past and are attempting to negotiate longer payment terms.  Our
customers are aggressively managing their cash flows while other customers have virtually no cash flows and have filed for bankruptcy protection.  If the financial condition of our customers were to materially deteriorate, resulting in an
impairment of their ability to make payments, additional allowances would be required.

Inventory
reserves.  Inventories are stated at the lower of cost or market with cost being determined on the first-in, first-out method.  Reserves for slow moving and obsolete inventories are provided based on historical experience and current
product demand.  If our estimate of future demand is not correct or if our customers place significant order cancellations, actual inventory reserves could materially differ from our estimate. We may also receive orders for inventory that has
been fully or partially reserved.  To the extent that the sale of reserved inventory has a material impact on our financial results, we will appropriately disclose such effects.  Our inventory carrying costs are not material; thus we may
not physically dispose of reserved inventory immediately.

Valuation allowance for deferred tax
assets.  We record a valuation allowance to reduce our deferred tax assets to an amount that is more likely than not to be realized.  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 assesses 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. 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 the three months ended June 30, 2002, we
recorded a valuation allowance equal to our deferred tax assets.

Warranty accruals.  Our
warranty costs are predominantly driven by product failure rates.  Should actual failure rates differ from our estimates and vary significantly from historical trends, revisions in the estimated

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warranty liability would be required. We have also recently introduced many new products with no historical failure data.  A material failure in a new product would
materially affect the required warranty accrual.

Related party transactions.  We enter into
transactions with some of our equity holders for various products used in both the manufacturing and research and development functions. We enter into these transactions, as these parties are predominant, well-established suppliers in our industry
for these products.

Equity-based compensation.  As part of our compensation and retention
structure, we grant employees, officers and directors stock options and restricted stock.  Prior to our initial public offering during June 2001, most of our stock options were issued at an exercise price lower than our estimated fair market
value.  The difference between the exercise price and the estimated fair market value of the options is recorded as a separate component of shareholders equity as deferred stock compensation and amortized into expense over the vesting
period of the options.  Subsequent to our initial public offering, we did not issue any options with an exercise price lower than the fair market value of our stock on the option grant date.  When we issue restricted stock, we also record
deferred stock compensation for the difference between the exercise price, which is zero, and the fair market value of our stock on the grant date of the restricted stock.  This amount is also amortized into expense over the vesting period of
the restricted stock.  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
complies with the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Under APB Opinion No. 25, compensation expense is based on the difference, if
any, on the date of grant, between the fair value of the Companys stock and the exercise price.  We account for stock options issued to non-employees in accordance with the provisions of SFAS No. 123, and Emerging Issues Task Force
Consensus on Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.  We are amortizing deferred stock compensation using the
graded vesting method, in accordance with Financial Accounting Standards Board Interpretation No. 28, over the vesting period of each respective option or restricted stock award, which ranges from six months to four years.

Corporate Realignment.  We recorded a corporate realignment charge that includes estimated costs for severance and costs to
exit leased facilities.  If actual severance costs are higher than our estimate or if we cannot sublease our vacant facilities as quickly as we anticipate and/or if the actual sublease income is less than our estimate, we may be required to
record additional charges for these items in future periods.

Item 4.   
CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, we
carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information
relating to us (including our consolidated subsidiaries) required to be included in our periodic SEC filings.

There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent
to the date of the evaluation referred to above.



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PART II.  
OTHER INFORMATION

Item 1.   
Legal Proceedings

In May 2002, a complaint was filed in Los Angeles Superior Court
against us, our Chief Executive Officer and our former Executive Vice President arising out of an alleged oral joint venture agreement between the plaintiff, us and the named officers in connection with the development of our subsidiary in
Israel.  The action claims that we and the named officers breached an oral agreement to deliver to the plaintiff a warrant to purchase at least 10,000 shares of our common stock at a price of $13.00 per share, and seeks damages in excess of
$1.0 million.  Although we have denied the allegations in the complaint and believe that they are without merit, we cannot predict the outcome of the litigation.

Item 2.   
Changes in Securities and Use of Proceeds

(a)           None

(b)           None

(c)           None

(d)           None

Item 3.   
Defaults Upon Senior Securities

None

Item 4.   
Submission of Matters to a Vote of Security Holders

We held a Special Meeting of
Shareholders on September 5, 2002 for the purposes of approving an amendment to our Amended and Restated Articles of Incorporation, to effect a reverse stock split of our Class A Common Stock and Class B Common Stock, whereby each outstanding 5, 6,
7, 8, 9 or 10 shares would be combined, converted and changed into one share of Class A Common Stock or Class B Common Stock, as applicable, with our Board of Directors having authority to determine which, if any, of the conversion ratios within
this range would be used.

The proposed amendment was approved by our shareholders and on September 5, 2002,
our board of directors authorized a ten for one reverse split.  The effective date of the reverse split was September 6, 2002.  The voting is set forth below:

|For        |  | Against |         | Abstain | 
|---------- |  | ------- | ------- | ------- | 
|           |  |         |         |         | 
|45,195,662 |  |         | 255,902 |         | 
|           |  |         |         |         | 

Item 5.   
Other Information

None

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Item 6.   
Exhibits and Reports on Form 8-K

The following exhibits are filed
herewith:

|Exhibit Number |  | Description                                                                                                                                                   
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|               |  |                                                                                                                                                               
|               |  |                                                                                                                                                               
|10.18          |  | Separation Agreement and General Release dated as of October 30, 2002 between the Registrant and Jens Albers                                                  
|               |  |                                                                                                                                                               
|99.1           |  | Certifications of the Chief Executive Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|               |  |                                                                                                                                                               
|99.2           |  | Certifications of the Chief Financial Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

We filed the following current reports on Form 8-K during the three months ended September 30, 2002:

1)       On August 7, 2002, we filed a Current Report on Form 8-K to announce the
issuance of our press release that addressed the appointment of our new Chief Financial Officer.

2)       On August 9, 2002, we filed a Current Report on Form 8-K to announce the issuance of our
press release that addressed our corporate realignment plan and the departure of our Co-chairman.

3)       On August 14, 2002, we filed a Current Report on Form 8-K to announce the issuance of our
press release that addressed second quarter 2002 results.

4)       On
August 14, 2002, we filed a Current Report on Form 8-K to provide the certifications required pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

5)       On September 6, 2002, we filed a Current Report on Form 8-K to announce the issuance of our
press release that addressed the shareholder and board of director approval of a one-for-ten reverse stock split.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

|                        |  | MULTILINK TECHNOLOGY CORPORATION                                                                                 
|----------------------- |  | -----------------------------------------------------------------------------------------------------------------
|                        |  |                                                                                                                  
|                        |  |                                                                                                                  
|Date: November 14, 2002 |  | /s/ JOHN U. SOENKSEN                                                                                             
|                        |  |                                                                                                                  
|                        |  | John U. Soenksen Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer)

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---

CERTIFICATION

I, Richard N.
Nottenburg, certify that:

1.          I have reviewed this quarterly report on Form 10-Q of Multilink Technology Corporation;

2.          Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.          Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.          The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) for the registrant and we have:

| | (a)          designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                             
| | (b)          evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the Evaluation Date); and                                                                                                  
| |                                                                                                                                                                                                                                                                                                             
| | (c)          presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;                                                                                                                        

5.          The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):

| | (a)          all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                            
| | (b)          any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        

6.          The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

| | /s/    Richard N.Nottenburg                                            
| | -----------------------------------------------------------------------
| |                                                                        
| | Richard N. Nottenburg Chairman of the Board and Chief Executive Officer
| |                                                                        



---

CERTIFICATION

I, John U. Soenksen, certify that:

1.          I have reviewed this quarterly report on Form 10-Q of Multilink Technology Corporation;

2.          Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.          Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.          The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) for the registrant and we have:

| | (a)          designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                             
| | (b)          evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the Evaluation Date); and                                                                                                  
| |                                                                                                                                                                                                                                                                                                             
| | (c)          presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;                                                                                                                        

5.          The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):

| | (a)          all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                            
| | (b)          any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        

6.          The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

| | /s/ JOHN U. SOENKSEN                    
| | ----------------------------------------
| |                                         
| | John U. Soenksen Chief Financial Officer