---




SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





---




FORM 10-K





x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001





OR


 ̈

TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD
FROM                         TO





COMMISSION FILE NUMBER 000-31851





---




MULTILINK TECHNOLOGY CORPORATION


(Exact Name of Registrant as Specified in Its Charter)





CALIFORNIA (State or Other jurisdiction of Incorporation Organization)

95-4522566 (I.R.S. Employer Identification No.)300 ATRIUM DRIVE, 2nd FLOOR, SOMERSET, NEW
JERSEY (Address of Principal Executive Offices)

08873 (Zip Code)





Registrants telephone number, including area code: (732) 537-3700





Securities registered pursuant to Section 12(b) of the Act: NONE





Securities registered pursuant to Section 12(g) of the Act:





CLASS A COMMON STOCK,
$0.0001 PAR VALUE





---




Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to filing requirements for the past 90 days.  Yes  x   No  ̈





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





The
aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average closing bid and asked prices of such stock, as of March 18, 2002 was approximately $84,120,644. (All officers and directors of
the registrant are considered affiliates.)





At March 18, 2002 the registrant had 47,185,391 shares of Class A Common Stock
issued and outstanding and 27,000,000 shares of Class B Common Stock issued and outstanding.





DOCUMENTS INCORPORATED BY REFERENCE





Portions of the registrants definitive proxy statement for its Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the close of its fiscal year are incorporated by reference into Part III.





---



---




MULTILINK TECHNOLOGY CORPORATION





FORM 10-K ANNUAL REPORT





FISCAL YEAR ENDED DECEMBER 31, 2001





TABLE OF CONTENTS





Item



PagePART I1.

Business

12.

Property

83.

Legal Proceedings

84.

Submission of Matters to a Vote of Security Holders

8PART II5.

Market for Registrants Common Equity and Related Stockholder Matters

96.

Selected Financial Data

107.

Managements Discussion and Analysis of Financial Condition and Results of Operations

127A.

Quantitative and Qualitative Disclosures About Market Risk

288.

Financial Statements and Supplementary Information

299.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

29PART III10.

Directors and Executive Officers of the Registrant

3011.

Executive Compensation

3012.

Security Ownership of Certain Beneficial Owners and Management

3013.

Certain Relationships and Related Transactions

30PART IV14.

Exhibits, Financial Statement Schedules and Reports on Form 8-K

31







i




---




CAUTIONARY STATEMENT





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





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





PART I.





Item 1.    BUSINESS





We design, develop and market advanced integrated circuits, modules and
higher-level assemblies that enable next generation optical networking systems. Our products address the markets for DWDM and SONET/SDH optical networking equipment. We focus exclusively on the fastest commercially available speeds of OC-192, or 10
gigabits per second, or higher and are in the early stages of developing products that are designed to address future systems that may operate at speeds of OC-768, or 40 gigabits per second or higher. We seek to be first to develop innovative
products with system functions that allow communications equipment manufacturers to rapidly build and deliver high performance fiber optic systems ahead of their competitors. We work closely with our customers to design and deliver integrated
product solutions utilizing our semiconductor, circuit design and systems level expertise. We sell our products to leading and emerging communications equipment manufacturers that develop high-speed optical networking systems. Our customers include
Alcatel, Ciena, Cisco, JDS Uniphase, Lucent, Marconi, Nortel, ONI, Sycamore and TyCom.





Background





Dramatic Increase in the Volume of Communications Traffic





The volume of data traffic across communications networks has grown rapidly over the past decade. This growth has been driven by the increased use of data-intensive applications such as
electronic commerce, Internet access, e-mail, streaming audio and video, remote access and other new applications. Currently, data traffic exceeds voice traffic in communicating networks, and should be the key driver for growth in the coming years.
Current estimates from Telechoice, Inc., a leading market research and consulting firm, are that data traffic will continue to grow between 70% and 120% per year during the next three years driven by web browsing, e-mail, enterprise data networking
and other applications. According to International Data Corporation (IDC), a leading market research and consulting firm, the number of internet users worldwide will double in the next three years, and the percentage of those users who have
broadband access will increase from under 15% of users to over 25%.





Development of Fiber Optic Networks





Much of the public networks infrastructure was originally designed to transmit voice communications utilizing copper wire as the
primary transmission medium. This copper wire-based infrastructure is ill-suited for high-speed data transmission due to bandwidth limitations and high maintenance and administration costs. The inadequacy of the legacy public network infrastructure
is particularly acute in the backbone, or core portion of the network. The core is the portion of the network characterized by long distance transmissions at high-speeds, or bit rates. Communications service providers are upgrading their network
architectures by increasing bandwidth and switching capabilities for high-speed data and voice transmissions and are replacing conventional copper wire technology with fiber optic technology. Fiber optics offers substantially greater capacity than
copper wire and is less error-prone and, as a result has become the transmission medium of choice for both incumbent and emerging service providers. SONET/SDH, or Synchronous Optical Network/Synchromous Digital Hierarchy, are the standards,




1




---

or protocols, for the transmission of communications traffic over optical fiber. SONET and SDH facilitate high data integrity and improve network reliability at
the higher transmission rates demanded in newly developed optical networking systems.





Innovations in Optical Networking
Systems





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





Components for Optical Networking Systems





As communications equipment manufacturers develop systems that enable higher transmission speeds and deploy DWDM technology
to increase bandwidth, they must integrate a greater number of complex components that generate, manipulate, transmit and receive electrical and optical signals. These components include integrated circuits, modules and higher-level assemblies and
are becoming increasingly important for the manufacture of optical networking systems. These components are viewed as critical to communications equipment manufacturers seeking competitive advantages. The need for communications equipment
manufacturers to focus on their core competencies and meet aggressive time-to-market demands for new optical networking systems, along with the complexities associated with the design and development of state-of-the-art components, have caused
communications equipment manufacturers to increasingly rely upon sophisticated component suppliers.





Requirements for
Supplying Components in Optical Networking Systems





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





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





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





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




2




---




Strategy





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





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





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





Expanding Our Customer Relationships and the Breadth of Our Customer
Base





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





Maintaining and Extending Technology Leadership





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





Pursuing Strategic Acquisitions and Strategic Relationships





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





Continuing to Address Both the Core and Metropolitan Portions of the Optical Transport Network





We provide product solutions for optical networking systems in the innovative and high-growth network core market. We will continue to build on our expertise in DWDM and long-haul
applications for the core of the network. We have also leveraged this expertise and are providing product solutions for emerging metropolitan or regional optical networking systems as OC-192 is beginning to be deployed in this portion of the
network.





Products





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





Our products focus on three segments of optical networking systems: the physical media dependent layer, or
PMD, the physical layer and the datalink layer. Collectively, the products within these segments connect data processing devices to optical fiber and constitute an integral part of optical networking systems.





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




3




---




LOGO





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





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





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





Our PMD Products





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





Our Physical Layer Products





We have broad experience
in the production of physical layer products. We have designed our multiplexers with exceptionally low jitter, which is a type of noise in optical channels, directly improving signal quality and transmission distance. We have designed our
demultiplexers with highly sensitive signal processing that eliminates the need for additional components to perform the same function. Our demultiplexers are highly insensitive to jitter, allowing for longer optical transmission distances. We are
currently broadening our portfolio of multiplexers and demultiplexers to include product offerings that incorporate greater functionality, higher-levels of integration, smaller physical size, lower power consumption and tighter integration with our
datalink layer components. We are currently involved in the development of products that will operate at speeds of 40 Gb/s.





Our
physical layer products can incorporate the following functions:





| |  |  | Clock Multiplier Unit, or CMU, converts the clock at the input of the multiplexers into the higher speed clock needed at the output. Clocks synchronize the movement of data
throughout communications systems;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Input Phase Locked Loop, or IPLL, synchronizes the transfer of data from Datalink devices into a multiplexer;
| | - |  | -------------------------------------------------------------------------------------------------------------




| |  |  | Loss of Signal, or LOS, is an alarm that SONET/SDH systems need to analyze potential system faults;
| | - |  | ---------------------------------------------------------------------------------------------------




| |  |  | Clock and Data Recovery, or CDR, extracts data from the noisy signals received from optical systems; and
| | - |  | --------------------------------------------------------------------------------------------------------




| |  |  | Jitter filtering.
| | - |  | -----------------




Datalink Layer
Products





We are currently investing in the development of numerous datalink layer products, including FEC devices and
Framer/Mappers that integrate the framing and mapping functions. In FEC, we have invested heavily in algorithm, architecture and product development for both




4




---




standards-based FEC and advanced FEC. FEC allows communications equipment manufacturers to increase the number of DWDM
optical channels in a fiber strand and/or to increase the length of the fiber transmission system. In addition, FEC devices can be designed to support new optical networking standards.





Our first FEC device, the MTC6130, is currently available, while a second FEC device, the MTC6131 SuperFEC TM is sampling to customers. Future FEC products will address higher performance, higher levels of integration, and/or higher bit rates. Framer/Mappers in development include advanced products
for 10 Gb/s and 40 Gb/s systems, as well as devices targeted for Gigabit Ethernet applications in the Metro market.





Customers





In 2001, we shipped our products to over 30 customers, including Alcatel, Nortel, Ciena, ONI, Cisco, JDS Uniphase, Sycamore, Lucent, TyCom,
and Marconi. We sell our integrated circuits, modules and higher-level assemblies to leading and emerging communications equipment manufacturers that develop high-speed optical transport systems.





TyCom and Alcatel accounted for approximately 34% and 29% of our revenues in 2001. Lucent, Alcatel and Cisco accounted for approximately 34%, 28% and 11% of our revenues in 2000.
Lucent, Alcatel, and TyCom accounted for approximately 36%, 20% and 18% of our revenues in 1999.





Strategic Relationships





We have established strategic relationships with both TRW and IBM. We have entered into these strategic relationships with the objective of building and
maintaining relationships with leading suppliers of semiconductor process technologies in order to diversify our product and technology base. In June 1997, we entered into a supply agreement with TRW pursuant to which TRW supplies us with a certain
number of processed GaAs wafers annually for a fixed price per wafer. The agreement was amended in June 1999 to revise the wafer delivery requirement. In October 2000, we entered into a short-term foundry agreement with TRW to purchase Indium
Phosphide development wafers or wafers designed using Indium Phosphide technology, for a fixed price per wafer. This agreement was amended in November 2000 and December 2000 to revise the number of development wafers to be purchased. During May
2000, we entered into a series of agreements with IBM. Our semiconductor development agreement with IBM provides us with certain models and design kits for use in the fabrication process to develop new integrated circuits. We provide IBM with
prototype designs, and IBM fabricates mask sets corresponding to our designs, schedules wafers starts and processes the wafers. In exchange for IBMs development efforts and access to their fabrication process, we make certain fixed payments to
IBM. Under our joint development agreement with IBM, pursuant to which we licensed to IBM and IBM licensed to us, certain technology, we jointly develop integrated circuits. We are both permitted to sell the jointly created products to third
parties, subject to a fixed royalty fee payable to the other party. In addition, during July 2001, we entered into a volume purchase agreement with IBM pursuant to which IBM will provide us with SiGe wafers for a fixed price per wafer. There are no
minimum purchase requirements under this agreement that expires in May 2005. The terms of the IBM agreements are intended to serve our strategic objectives by providing us with access to key technologies, which are instrumental in the development of
our business.





Sales, Marketing and Customer Support





Sales





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





We sell our products through our direct sales
force and through independent sales representatives working under the direction of our strategic account managers. As of December 31, 2001, our direct sales force consisted of 48 direct sales professionals, application engineers, managers and
administrative personnel located at our headquarters in Somerset, New Jersey and other locations in the United States, and in Germany, Canada, Italy and the United Kingdom. We expect to open additional sales offices and to increase our direct sales
force worldwide.





Marketing





We market our products extensively in North America and Europe to establish our visibility as a leading supplier of high value components for optical networking systems and have begun to expand into Asian markets. As
of December 31, 2001, our marketing staff included 16 marketing professionals and administrative personnel. Our marketing activities include:




5




---

| |  |  | seminar programs, trade shows, guest speaker invitations and technical conferences;
| | - |  | -----------------------------------------------------------------------------------




| |  |  | public relations activities and customer events;
| | - |  | ------------------------------------------------




| |  |  | advertising, technical articles in industry publications and marketing collateral materials; and
| | - |  | ------------------------------------------------------------------------------------------------




| |  |  | communication on the Internet.
| | - |  | ------------------------------




Customer Service and Support





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





Manufacturing





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





Wafer Manufacturing





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





Packaging, Assembly and Testing





The primary vendors for the packaging, assembly and
testing of our integrated circuit products are Kimbell Electronics Group, ASAT Inc. and Siliconware Precision Industries Co., Ltd. ASAT is currently building product for us in their facility in Nancy, France. We have also begun to qualify
ASATs manufacturing process in their Hong Kong facility and we may begin to utilize this facility in the future. The primary outsource vendor for the assembly and testing of our driver module products is Natel Engineering Co., Inc., and the
majority of our surface mount technology assembly is being contracted from SMTEK International and Flextronics.





We operate
in-house module manufacturing facilities that allow rapid prototyping and development of new products and also serve to complement our outsource module manufacturing partners. We have in-house module and integrated circuits testing facilities in
California, New Jersey, Germany and Israel. We maintain comprehensive review and inspection of our outsourcing facilities to ensure compliance with our quality standards for manufacturing assembly and test. Our manufacturing processes and outsource
vendors utilize stringent quality controls, including incoming material inspection, in-process testing and final test, and all are ISO 9001 certified.





Research and Development





As of December 31, 2001, we had 208 employees dedicated to research and development,
of whom 118 hold advanced degrees, including 26 PhDs. We have additional engineering employees dedicated to marketing, application engineering and business development. These employees are involved in advancing our core technologies and applying
these core technologies to product development and activities in our targeted markets.




6




---




We believe that the achievement of higher-levels of integration, functionality and performance
and the introduction of new products in our target markets is essential. As a result, we have made and will continue to make substantial investments in research and development. Our research and development expenses, exclusive of deferred stock
compensation and warrant issuances, for 2001, 2000 and 1999 were approximately $54.7 million, $24.6 million, and $8.8 million, respectively.





Competition





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





| |  |  | 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 competitors products;
| | - |  | -------------------------------------------




| |  |  | efficiency of production;
| | - |  | -------------------------




| |  |  | expansion of production of our products for particular systems manufacturers; and
| | - |  | ---------------------------------------------------------------------------------




| |  |  | customer support and reputation.
| | - |  | --------------------------------




We
believe we compete favorably with respect to each of these factors.





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





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





Intellectual Property





We rely on a combination
of copyright, patent, trademark, trade secret and other intellectual property laws, nondisclosure agreements and other protective measures to protect our proprietary rights. We also utilize unpatented proprietary know-how and trade secrets and
employ various methods to protect such intellectual property. To date, we have one U.S. patent issued and 11 U.S. patent applications pending.





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





Backlog





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




7




---




Environmental Matters





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





Employees





As of December 31, 2001, we had a total of 382 employees, including
64 in sales and marketing and application engineering, 72 in manufacturing, purchasing and quality, 208 in research and development and 38 in general and administrative functions. Of these employees, approximately 277 were located in North America,
76 were located in Europe and 29 were located in Israel. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppages. We consider our relations with our employees to be good.





Item 2.    PROPERTY





Our corporate headquarters facility, of approximately 36,000 square feet, is located in Somerset, New Jersey. We lease our corporate headquarters facility pursuant to a sublease agreement that expires in April
2007 for approximately 12,000 square feet and pursuant to a lease agreement that expires in February 2006 for approximately 24,000 square feet. We also lease our principal design facility, consisting of approximately 31,000 square feet, in Somerset,
New Jersey, pursuant to a lease agreement that expires in October 2006. We lease approximately 29,600 square feet of design space in Santa Monica, California pursuant to a lease agreement that expires in December 2005. We lease approximately 7,000
square feet for a design center in Allentown, Pennsylvania pursuant to a lease agreement that expires in September 2006 and 1,800 square feet for a sales office in Los Altos, California pursuant to a lease agreement that expires in August 2003.





In addition, we have lease agreements for an approximately 11,800 square feet facility in Bochum, Germany, which expires in
January 2011, an approximately 19,400 square feet facility in Munich, Germany, which expires in December 2005, an approximately 5,400 square feet facility in Berlin, Germany, which expires in December 2005, an approximately 3,500 square feet
facility in Kaunas, Lithuania, which expires in November 2004, an approximately 13,000 square feet facility in Israel, of which approximately 6,500 square feet expires in each of February 2003 and January 2004, and an approximately 2,200 square feet
facility in Milan, Italy, which expires in July 2007. These facilities are used predominantly for research and development and sales activities.





Item
3.    LEGAL PROCEEDINGS





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





As disclosed in prior filings, in May and June 2001, a former employee, Matthias Bussmann, sent correspondence to us claiming, among other things, that
our Chief Executive Officer and our Executive Vice President breached a promise relating to Dr. Bussmanns compensation and misused their power to reward themselves while engaging in a scheme to oust Dr. Bussmann from the Company. Dr. Bussmann
alleged that his claims form the basis for a claim of breach of fiduciary duty by those officers. The correspondence proposed settlement payments by us of up to $1.0 million in cash and the transfer of one million shares of common stock. We received
no correspondence regarding this matter during the fourth quarter of 2001. While we believe the allegations set forth in Dr. Bussmanns letters to us are without merit, we cannot predict the ultimate outcome of any litigation, should it be
initiated.





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





No matters were submitted to a vote of security holders during the quarter ended December 31, 2001.




8




---




PART II





Item 5.

MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS





Recent Market Prices





Our Class A common stock began trading under the symbol MLTC on the NASDAQ National Market System on June 21, 2001. Preceding June 21, 2001, there had been no public market for our
common stock.





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





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





2001

High

LowSecond Quarter (1)

$14.74

$9.32Third Quarter

$18.40

$4.31Fourth Quarter

$  8.33

$3.20


---

|(1) |  | For the period from June 21, 2001 to June 30, 2001.
|--- |  | ---------------------------------------------------




As of March 18, 2002 there were approximately 3,800 record holders of our Class A common stock and there were 4 record holders of our Class B common stock. On March 20, 2002 the last reported sale price of the Class A
common stock on the Nasdaq National Market was $2.02 per share.





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





Dividend Policy





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




9




---




Item 6.    SELECTED FINANCIAL DATA





The statement of operations data set forth below for the years ended December 31, 2001, 2000, and 1999 and the balance sheet data as of December 31, 2001 and 2000 have been derived from
our audited consolidated financial statements included elsewhere herein, and should be read in conjunction with those financial statements (including notes thereto). The selected financial data as of December 31, 1999, 1998 and 1997 and for the
years ended December 31, 1998 and 1997 have been derived from audited consolidated financial statements not included herein, but which were previously filed with the Securities and Exchange Commission, or SEC.





Year Ended December 31,1997


1998


1999


2000


2001Statement of Operations Data:Revenues:Product

$
94


$
2,126


$
19,383


$
72,721


$
130,468Development


1,447



1,726



1,012







Total revenues


1,541



3,852



20,395



72,721



130,468Cost of revenues:Product and development


1,178



1,847



6,748



27,048



48,574Inventory write down


















8,788Deferred stock compensation










19



834



2,051Total cost of revenues


1,178



1,847



6,767



27,882



59,413Gross profit


363



2,005



13,628



44,839



71,055Operating expenses:Research and development, excluding deferred stock compensation


650



2,219



8,779



24,624



54,741Research and developmentwarrant issuance














6,375



Sales and marketing, excluding deferred stock compensation


190



349



2,292



7,130



17,387General and administrative, excluding deferred stock compensation


266



391



1,767



7,611



11,795Deferred stock compensation






344



803



6,076



9,895Total operating expenses


1,106



3,303



13,641



51,816



93,818Operating loss


(743
)


(1,298
)


(13
)


(6,977
)


(22,763
)Other income and expenses, net


(61
)


(189
)


56



1,561



953Income (loss) before provision (benefit) for income taxes


(804
)


(1,487
)


43



(5,416
)


(21,810
)Provision (benefit) for income taxes


1



1



19



(1,748
)


(9,446
)Net income (loss)

$
(805
)

$
(1,488
)

$
24


$
(3,668
)

$
(12,364
)Accretion of redeemable convertible preferred stock to redemption value










48



95



24Dividend related to warrant issuance














6,375



Net loss attributable to common shareholders

$
(805
)

$
(1,488
)

$
(24
)

$
(10,138
)

$
(12,388
)Net loss per share basic and diluted

$
(0.03
)

$
(0.05
)

$



$
(0.34
)

$
(0.25
)Weighted average shares basic and diluted


30,000



30,000



30,000



30,000



49,989







10




---




Year Ended December 31,1997

1998

1999

2000

2001Deferred Stock Compensation:Research and development

$


$
344

$
216

$
2,824

$
5,287Sales and marketing








31


537


2,021General and administrative








556


2,715


2,587Total

$


$
344

$
803

$
6,076

$
9,895





As of December 31,1997


1998


1999


2000

2001Balance Sheet Data:Cash and cash equivalents

$
273


$
303


$
8,997


$
29,159

$
49,779Short-term investments

















42,903Working capital (deficit)


(90
)


(34
)


15,108



41,648


98,531Total assets


793



1,747



22,644



90,266


187,053Long-term obligations, net of current


926



2,189



3,926



1,018


1,673Redeemable convertible preferred stock










14,978



55,073


Total shareholders equity (deficit)


(856
)


(1,995
)


(714
)


9,092


152,160







11




---




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





The following discussion should be read in conjunction with our
consolidated financial statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors including those set forth under Risk Factors herein.





OVERVIEW





We design, develop and market advanced integrated circuits, modules 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. During the year ended December 31, 2001, Tycom with 34% and Alcatel with 29%
accounted for more than 10% of our revenues and four other customers each accounted for greater than 5% of our revenues. Our top three customers for the year ended December 31, 2000 were Lucent, Alcatel and Cisco, representing 34%, 28% and 11% of
our revenues, respectively. A number of telecommunication service providers have announced plans to curtail the level of their capital expenditures on their infrastructure build-out, which has significantly reduced the demand for our products by
communications equipment manufacturers, including these principal customers. Our revenues declined substantially in the fourth quarter of 2001, and we anticipate an additional, substantial decline in the first quarter of 2002. 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. In particular, we expect our revenues to be lower and loss per share to be greater for fiscal 2002 than in fiscal 2001. We expect that in future periods our customer base will become less concentrated both generally and within our top
three customers.





We have focused our initial sales and marketing efforts on North American and European communications
equipment manufacturers. During the year ended December 31, 2001, we derived 76%, of our total revenues from communications equipment manufacturers in North America compared with 73% during the comparable period in 2000. We currently sell through
our direct sales force in North America and Europe and through selected independent sales representatives in the United States, Canada, Germany, the United Kingdom, Italy, France, Israel, China, Korea and Japan. We have started to build an
infrastructure to support an internal international sales force by opening sales offices in Canada, Italy, and 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.





Revenues.    We recognize product revenues at the time of shipment. Our customers are not obligated by long-term contracts to purchase our products and can generally cancel or reschedule orders on short notice.
The recent slowdown in the build-out of the communications infrastructure has caused our revenues to grow less rapidly than they otherwise would have. Our revenues declined in the fourth quarter of 2001, compared to the third quarter of 2001, and we
recently announced that we expect our revenues to decline substantially in the first quarter of 2002, compared to the fourth quarter of 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 revenue will be
affected by such fees.





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. 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. As revenues increase, we believe favorable trends should occur in manufacturing costs due to our ability to absorb overhead
costs over higher volumes. However, there is a fixed component to cost of revenues, and the recently announced decline in our revenues in the first quarter of 2002, compared to the fourth quarter of 2001, will adversely effect our gross margins.




12




---




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 intend to increase our research and development expenses in future periods in absolute dollar amounts.





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. We
expect that sales and marketing expenses will decrease in 2002 in absolute dollar amounts as we reduce certain personnel and external sale representative costs offset by hiring additional sales personnel, initiate additional marketing programs,
establish sales offices in additional domestic and international locations and expand our customer service and support organizations.





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 2002 in absolute dollar amounts as we continue to execute various cost reduction programs that were initiated in 2001
with the purpose of maximizing the leverage within general and administrative functions.





Deferred Stock
Compensation.    In connection with the granting of stock options 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 four years. Based on our balance of deferred stock compensation as of December 31, 2001, we estimate our amortization of
deferred stock compensation for each of the periods below to be as follows:





Amount(in thousands)Year Ending December 31,2002

$  9,1472003

4,3682004

1,5672005

125Total

$15,207





Approximately $2.3 million of the remaining amortization of deferred stock
compensation will be charged to cost of revenues. Subsequent to our initial public offering, we did not issue any stock options that required the recognition of any deferred stock compensation.





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





RESULTS OF OPERATIONS





Years Ended December 31, 2001 and 2000





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





Gross Profit.Cost of revenues, including $2.1 million of deferred stock compensation, increased to $59.4 million in 2001, compared with $27.9 million in 2000.
Gross profit as a percentage of revenues, or gross margin, decreased to 54% in 2001 compared with 62% in 2000. The decrease in gross margin was due predominantly to (i) increased deferred stock compensation of $1.2 million due to stock option grants
to manufacturing employees coupled with increased manufacturing headcount and (ii) $8.8 million of charges to reduce inventories to their net realizable value and to record order cancellation charges due to our vendors. Included in the $8.8 million
is a $4.3 million inventory write-down required as a result of a migration by certain of our customers from GaAs-based products to SiGe-based comparable products. This has resulted in cancellation of orders by certain customers, the most significant
of which was by Alcatels submarine networks division, which has moved to a new design system more rapidly than expected, and certain other customers indicating




13




---




that they will be utilizing SiGe products instead of GaAs products in the future. This inventory charge also includes a
$3.4 million inventory write-down required as a result of order cancellations as a result of decreased spending by telecommunication service providers. Also included in this inventory charge is $0.6 million that relates to consigned inventories
located at our finished goods suppliers. The charge is the result of inventory shrink and lower than expected production yields during the three months ended March 31, 2001 at these finished goods suppliers. We performed procedures to ensure that
the entire charge is associated with the first quarter of 2001 including conducting a physical count of the consigned inventory during the fourth quarter of 2000. We identified this inventory shortage as our suppliers utilized consigned raw
materials for the production of our products. As the consigned raw material inventory balance was reduced, we realized that a discrepancy existed between our perpetual records and the actual physical quantity on hand at our suppliers
locations. We will no longer consign inventory to these suppliers as we are allowing these suppliers to purchase their own raw materials to manufacture our finished good products. This will improve cash flows by maintaining lower raw material
inventory levels.





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





Research and Development.Research and development
expenses, excluding deferred stock compensation, increased to $54.7 million in 2001 compared with $24.6 million in 2000. As a percentage of revenues, research and development expenses increased to 42% in 2001 compared with 34% in 2000. The increase
in both dollars and as a percent of revenues was due primarily to the addition of engineering personnel in the United States and three new research and development centers located within Europe and Israel as we continue the development of new
products to support revenue growth, costs associated with a joint development agreement that we entered into during May 2000 and depreciation and amortization on research and development equipment and software purchased during late 2000 and early
2001. A significant portion of the 2001 research and development spending was on complex VLSI devices that perform critical edge framing and client aggregation functions and for high speed CMOS to drive integration of these functions across the
entire line card. In addition, we are making investments in products that increase intelligence in the network core and reduce the power and size of 10  giga-bit line cards. We will continue to make investments at these levels in areas that we
believe will provide future growth to ensure that we gain market share, increase our total available market and grow our competitive position in the market for optical transport hardware.





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





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





General and
Administrative.    General and administrative expenses, excluding deferred stock compensation, increased to $11.8 million in 2001 compared with $7.6 million in 2000. As a percentage of revenues, general and administrative
were 9% in 2001 compared with 10% in 2000. The increase in dollars was due primarily to the addition of personnel in the latter half of 2000 and the associated payroll and related costs within the areas of senior management, finance and human
resources. The decrease as a percentage of revenues is due to getting better leverage of such costs in 2001. There was no material change in stock-based compensation expense associated with general and administrative expenses.





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





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





Net Income (Loss).    Net loss increased to $12.4 million in 2001 compared with $3.7 million in 2000. The increase in net
loss is predominantly due to the items discussed above including the inventory write-off, increased spending in the areas of research and development, sales and marketing and general and administrative and an increase in deferred stock compensation
expense offset by an income tax benefit. The tax benefit was predominantly created as a result of our determination that the valuation allowance against our deferred tax assets was no longer necessary coupled with the current year net loss. We
continue to believe that we will be able to realize the benefits of our deferred tax assets and have recorded a tax benefit in 2001. We have recorded the benefit associated with the increase in deferred tax assets, as we believe it is more likely
than not that we will be able to generate sufficient taxable income in future periods to utilize such deferred tax assets. The utilization of our deferred tax assets depends heavily on projected taxable income in future years. If




14




---




such taxable income is not recognized, we may be required to record a valuation allowance against all or a portion of
such assets. We evaluate the recoverability of our deferred tax assets on a regular basis.





Years Ended December 31, 2000 and 1999





Revenues.    Revenues increased to $72.7 million in 2000, compared with $20.4 million in 1999. The increase was
due to higher unit volume shipments of integrated circuits, modules and higher-level assemblies to existing and new customers and the introduction of new products. We recognized no development revenues in 2000, compared to $1.0 million of
development revenues in 1999.





Gross Profit.    Cost of revenues, including $0.8 million of deferred
stock compensation, increased to $27.9 million in 2000, compared with $6.8 million in 1999. Excluding deferred stock compensation, gross profit as a percentage of revenues, or gross margin, declined to 63% in 2000 compared with 67% in 1999. The
decline was predominantly due to a contractual reduction in selling price during 2000 for an integrated circuit product that was first introduced in 1999 for a specific customer, offset by an absence of development revenues which have lower margins
than our product revenues. In accordance with an agreement with the customer, the selling price was reduced as certain volume thresholds were attained. No further selling price reductions are required under this agreement. During 1999, gross margin
for development revenues was 37%. No development revenues were recognized during 2000 and we do not expect development revenues to be material in the future. Gross profit including deferred stock compensation increased to $44.8 million in 2000
compared with $13.6 million in 1999 due to the items noted above coupled with increased deferred stock compensation charges. Stock based compensation expense associated with cost of revenues increased $0.8 million due to stock option grants to
manufacturing employees coupled with increased manufacturing headcount.





Research and
Development.    Research and development expenses, excluding deferred stock compensation, increased to $24.6 million in 2000, compared with $8.8 million in 1999. The increase was due primarily to the addition of engineering
personnel and increased costs for engineering and design software. Research and development expenses as a percentage of revenues decreased in 2000 to 34%, compared with 43% in 1999. The decrease was attributable to a higher growth in revenues. Stock
based compensation expense associated with research and development increased $2.6 million due to stock option grants to engineering personnel coupled with increased headcount.





Research and DevelopmentWarrant Issuance.    We incurred a non-cash charge of $6.4 million related to a warrant issuance in 2000. This charge represents
the fair value of a warrant issued to a third party in conjunction with a development agreement. This warrant is fully exercisable and non-forfeitable. We have expensed the value of this warrant because there is no third party performance required
with respect to the warrant, and the activities underlying the development agreement relate to research and development efforts for which we cannot determine the benefit, if any, which may result.





Sales and Marketing.    Sales and marketing expenses, excluding deferred stock compensation, increased to $7.1 million in
2000, compared with $2.3 million in 1999. The increase was due primarily to the addition of sales and marketing personnel. Sales and marketing expenses as a percentage of revenues were 10% in 2000, compared with 11% in 1999. The decrease was a
result of higher growth in revenues. Stock based compensation expense associated with sales and marketing increased $0.5 million due to stock option grants to sales and marketing personnel coupled with increased headcount.





General and Administrative.    General and administrative expenses, excluding deferred stock compensation, increased to $7.6
million in 2000, compared with $1.8 million in 1999. The increase was due primarily to the addition of personnel and the associated payroll and related costs within the areas of finance and human resources. General and administrative expenses as a
percentage of revenues were 10% in 2000, compared with 9% in 1999. Stock based compensation expense associated with general and administrative expenses increased $2.2 million due to stock option grants to personnel in the areas of finance and human
resources coupled with increased headcount.





Deferred Stock Compensation.    Operating expenses
included amortization of deferred stock compensation of $6.1 million in 2000, compared with $0.8 million in 1999, due to a greater number of option grants to new and existing employees.





Other Income and Expenses, Net.    Other income increased to $1.6 million in 2000, compared with $57,068 in 1999. The increase was due primarily to increased
interest income of $1.6 million related to higher cash and cash equivalent balances due primarily to the issuances of preferred stock from March to May 2000 offset by a $83,561 increase in interest expense resulting from realizing a full year of
interest expense in 2000 on a capital lease entered into in late 1999 and interest expense on fixed asset additions financed in 2000 coupled with lower interest expense on the line of credit to a shareholder which was paid in full in May 2000.





Net Income (Loss).    Net loss increased to $3.7 million in 2000, compared with net income of
$24,540 in 1999. The net loss was primarily due to increased deferred stock compensation of $6.1 million and expenses of $6.5 million associated with warrant issuances offset by an income tax benefit of $1.7 million. The provision for income taxes
was not material during 1999 as we utilized a net operating




15




---




loss carryforward to offset substantially all of our taxable income. The tax benefit in 2000 is the result of our
recognizing a portion of our deferred tax assets because we believe that it is more likely than not that we will have sufficient income to utilize such assets.





Years Ended December 31, 1999 and 1998





Revenues.    Revenues increased to $20.4
million in 1999, compared with $3.9 million in 1998. The increase was due to increases in shipments of integrated circuits, modules and higher-level assemblies to existing and new customers and the introduction of new products. Development revenues
declined to $1.0 million in 1999, compared with $1.7 million in 1998.





Gross Profit.    Cost of
revenues, including $19,031 of deferred stock compensation, increased to $6.8 million in 1999, compared with $1.8 million in 1998. Gross margin increased to 67% in 1999, compared with 52% in 1998. The increase in gross margin in 1999 was due to
increased sales of higher margin products relative to revenues associated with lower margin development contracts in 1998. Gross margin for product revenues increased to 68% in 1999, compared with 63% in 1998. The increase in product gross margin
was due to the introduction of new products with higher gross margins. A decline in gross margin for development revenues to 37% in 1999, compared with 39% in 1998, partially offset product gross margin increases. There was no stock based
compensation expense associated with cost of revenues during 1998 and $19,031 during 1999.





Research and
Development.    Research and development expenses increased to $8.8 million in 1999, compared with $2.2 million in 1998. The increase was due primarily to the addition of engineering personnel and increased costs for
engineering and design software. Research and development expenses as a percentage of revenues decreased in 1999 to 43%, compared with 58% in 1998, due primarily to higher growth in revenues during this period.





Sales and Marketing.    Sales and marketing expenses increased to $2.3 million in 1999, compared with $0.3 million in
1998. The increase was due primarily to the addition of personnel and related costs in the areas of sales, application engineering and marketing activities.





General and Administrative.    General and administrative expenses increased to $1.8 million in 1999 compared with $0.4 million in 1998. The increase was due primarily to the addition of
human resources and administrative personnel and the relocation of our headquarters facility to Somerset, New Jersey.





Deferred Stock Compensation.    Amortization of deferred stock compensation increased to $0.8 million in 1999 from $0.3 million in 1998 due to a greater number of option grants made to new and existing employee
predominantly in general and administrative functions.





Other Income and Expenses, Net.    Other
income was $57,068 in 1999, compared with other expense of $188,417 in 1998. The increase was due primarily to increased interest income of $283,632 related to higher cash and cash equivalent balances due primarily to the issuance of preferred stock
in June 1999 offset by a $38,147 increase in interest expense due primarily to higher interest on the line of credit to a shareholder which had a higher average outstanding balance during 1999.





Net Income (Loss).    Net income increased to $24,540 in 1999, compared with a net loss of $1.5 million in 1998. The decrease
in the net loss was predominantly due to improved gross profit and an increase in other income offset by the expense increases discussed above.





Liquidity and Capital Resources





On June 21, 2001, we concluded our initial public offering of 9.2 million
shares (including the underwriters over-allotment) at $9.00 per share. After deducting underwriters discount but before other offering costs such as legal, printing and accounting, we received net proceeds of $77.0 million. As of
December 31, 2001, we had cash and cash equivalents and short-term investments of $92.7 million.





Cash provided by operating
activities was $5.9 million and $0.6 million during 2001 and 2000, respectively. Net loss of $12.4 million includes non-cash charges of $9.3 million for depreciation and amortization, $11.9 million for amortization of deferred stock
compensation and $0.7 million of equity losses in our equity investment offset by deferred tax benefits of $8.8 million. The improvement in cash provided by operating activities is due to improved accounts receivable collections and improved
inventory management due to better materials management and by implementing a turn-key approach with several of our key suppliers.





Cash used in investing activities increased to $62.4 million in 2001 from $17.4 million in 2000. The increase was due to the purchase of $42.8 million of short-term investments as we maximize our investment income on idle cash, $17.6
million of property and equipment as we continue to invest in research and development, to an additional $1.7 million purchase in one of our existing non-marketable investments and a $0.3 million investment in a new non-marketable investment.




16




---




Cash provided by financing activities was $77.1 million in 2001 compared with $36.9 million in
2000. The increase in cash provided by financing activities is predominantly due to the completion of our initial public offering that provided us with net proceeds of $75.7 million. Also during 2001, we received proceeds from stock option exercises
of $1.6 million and proceeds of $2.3 million from an equipment financing offset by an increase in debt payments and the purchase of treasury stock. During 2001, we secured financing through vendor financings for some of our equipment and software
needs.





Cash and cash equivalents and short-term investments increased to $92.7 million at December 31, 2001 from $29.2 million
on December 31, 2000 due to the proceeds from our initial public offering and cash provided by operations offset by the use of cash in investing activities discussed above.





We believe that our current cash position and anticipated funds from operations will satisfy our projected working capital and capital expenditure requirements through the end of 2002.





Recently Issued Accounting Pronouncements





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





In June 2001, the FASB,
issued SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method
of accounting. With the adoption of Statement 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be 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. We do not expect that the adoption of these standards will have a material impact on our financial position, results of operations or cash flows. We currently do not have any business combinations in progress. As of December 31, 2001, we had
$0.7 million of unamortized goodwill recorded resulting from one of our equity investments and no other intangibles being amortized. Effective January 1, 2002, we adopted Statement 142 and thus discontinued amortizing this goodwill whose annual
amortization expense is less than $0.2 million.




17




---




Risk Factors





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





Our revenues declined substantially in the fourth quarter of 2001, and we anticipate an additional, substantial decline in the first quarter of 2002.
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. In particular, we expect our revenues to be lower and loss per share to be greater for fiscal 2002 than in fiscal 2001. Future fluctuations in operating results may be caused by a number of factors, many of which are
outside our control. Factors that could affect our future operating results include the following:





| |  |  | the loss of major customers;
| | - |  | ----------------------------




| |  |  | the reduction, rescheduling or cancellation of orders by any of our customers or prospective customers;
| | - |  | -------------------------------------------------------------------------------------------------------




| |  |  | our ability to introduce new products and technologies on a timely basis;
| | - |  | -------------------------------------------------------------------------




| |  |  | the announcement or introduction of new products and technologies by our competitors;
| | - |  | -------------------------------------------------------------------------------------




| |  |  | competitive pressures on selling prices;
| | - |  | ----------------------------------------




| |  |  | the amounts and timing of costs associated with warranties and product returns;
| | - |  | -------------------------------------------------------------------------------




| |  |  | the amounts and timing of investments in research and development;
| | - |  | ------------------------------------------------------------------




| |  |  | market acceptance of our products and of our customers products;
| | - |  | -----------------------------------------------------------------




| |  |  | the ability of our customers to obtain components from their other suppliers;
| | - |  | -----------------------------------------------------------------------------




| |  |  | fluctuations in manufacturing yields and inventory levels;
| | - |  | ----------------------------------------------------------




| |  |  | the availability of external foundry capacity, purchased parts and raw materials;
| | - |  | ---------------------------------------------------------------------------------




| |  |  | costs associated with acquisitions and the integration of acquired operations;
| | - |  | ------------------------------------------------------------------------------




| |  |  | general communications and semiconductor industry conditions; and
| | - |  | -----------------------------------------------------------------




| |  |  | general economic conditions.
| | - |  | ----------------------------




In the
quarter ended December 31, 2001, we implemented cost reductions in an effort to bring our expenses in line with our reduced revenue expectations. However, for at least the next several quarters, we do not expect that these measures will be
sufficient to offset lower revenues, and as such, we expect to continue to incur net losses. In the past, we have recorded significant new product and process development costs because our policy is to expense these costs at the time that they are
incurred. We may incur these types of expenses in the future. These additional expenses will have a material and adverse effect on our results in future periods. The occurrence of any of the above-mentioned factors could have a material adverse
effect on our business and on our financial results.





The market price for our Class A common stock has been volatile and future volatility could
cause the value of an investment in our company to decline.





Our stock price has experienced significant volatility
recently. In particular, our stock price declined significantly in the context of announcements made by us and other semiconductor suppliers of reduced revenue expectations and of a general slowdown in the technology sector, particularly the optical
networking equipment sector. Given these general economic conditions and the reduced demands for our products that we have experienced recently, we expect that our stock price will continue to be volatile. 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 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.
| | - |  | ---------------------------------------------------------------------------------------------------------



18




---




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 or 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.





A long lasting downturn in the communications equipment industry could negatively impact our revenues, profitability 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 downturn. This downturn has had a negative effect on the demand for our products. We cannot predict how long this downturn will last. A prolonged downturn will adversely affect or profitability and cash flows
and will result in 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 extensive ongoing customer service and support capability constrains our
ability to reduce expenses. We may not be able to generate sufficient cash to maintain our current spending levels if this downturn continues for an extended period of time.





A few customers account for a majority of our sales, and the loss of one or more key customers could significantly reduce our revenues and any profits.





Historically, a relatively small number of customers has accounted for a majority of our revenues. Our three largest customers accounted for approximately 71% of our revenues for the
year ended December 31, 2001, 73% of our revenues in 2000 and 74% of our revenues in 1999. 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. Our top three customers in 1999 were Lucent, Alcatel and TyCom, representing approximately 36%,
20% and 18% 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 and any profits.





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





We incurred net losses of $0.8 million in 1997 and $1.5 million in 1998. We had net
income of $24,540 in 1999. We had net losses of $3.7 million in 2000 and $12.4 million in 2001. We expect to continue to incur amortization of deferred stock compensation and to increase our expenses for research and development in the next few
years. Consequently, our ability to achieve and maintain profitability would be materially affected if we fail to significantly increase our revenues.





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. A number of network service providers have curtailed the level of their capital expenditures on their infrastructure build-out, which has significantly reduced the demand for our products by communications equipment
manufacturers. This slowdown has caused our revenues and backlog to decline substantially. Our revenues declined in the fourth quarter of 2001, compared to the third quarter of 2001, and we recently announced that we expect our revenues to decline
substantially in the first quarter of 2002, compared with 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, including with respect to undersea cable
transmission systems which constitute a significant portion of our sales, could materially and adversely affect our revenue and business prospects. This is particularly true if significant and unanticipated by us and our communications equipment
manufacturer customers. 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.




19




---




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





Our industry is currently experiencing a downturn due to a corresponding downturn in the communications equipment industry. We expect to be positively
affected when the communications equipment industry begins to recover. However, some of our customers may have significant inventory on hand and a recovery in the communications equipment industry may not immediately benefit us. 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.





Our industry is subject to consolidation.





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





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





We sell substantially all of our products based on individual purchase orders, rather than long-term contracts. As a result, our customers generally can
cancel or reschedule orders on short notice and are not obligated to purchase a specified quantity of any product. For example, we had significant order cancellations during 2001. We cannot assure you that our existing customers will continue to
place orders with us, that orders by existing customers will be repeated at current or historical 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 noncancelable 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.





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





There is intense competition for qualified personnel in our industry, particularly for engineers and senior level management. Loss of the services of, or failure to recruit, 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. We may not be able to continue to attract and 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. Our anticipated growth is expected to place increased demands on our
resources and likely will require the addition of new management personnel.





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 Co-Chairman of the Board, and Dr. Jens Albers, our Executive Vice President and
Co-Chairman of the Board. Neither Dr. Nottenburg nor Dr. Albers has an employment or noncompetition agreement with us. The loss of either of these key individuals would be detrimental to our ongoing operations and prospects.





We will lose significant 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.




20




---




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 significant sales to those customers for a lengthy period of time. Although a design-win increases the likelihood that our products will be incorporated into the systems of our customers or prospective
customers, it does not obligate that customer or prospective customer to purchase specified quantities of our products.





Our 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.





We compete in highly
competitive markets, against competitors with longer operating histories, greater name recognition, greater resources or larger market capitalizations. 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 capitalizations or cash reserves are also better positioned than we are to acquire other companies, thereby obtaining new technologies
or products. Any of these




21




---

acquisitions could give our competitors a strategic advantage that could adversely affect our business, financial condition and results of operations.





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.





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





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.





We must incur substantial research and development expenses. If we do not have sufficient resources to invest in research and development, our business could 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 significantly reduce our revenue growth 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.





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 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




22




---

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.





We may need to make acquisitions in order to remain competitive in our market. Our
business or the value of your investment could be adversely affected as a result of any potential acquisitions.





To compete
effectively, we may find it necessary to acquire additional businesses, products or technologies. If we identify an appropriate acquisition candidate, we may not be able to negotiate the terms of the acquisition successfully, finance the acquisition
or effectively integrate the acquired business, products, technologies or personnel into our existing business and operations. Further, completing a potential acquisition and integrating an acquired business will cause significant diversions of
managements time and resources. If we consummate one or more significant acquisitions in which the consideration consists of stock or other securities, the value of your investment in our company could be significantly diluted. If we were to
proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash, including proceeds from our initial public offering in June 2001. In addition, we
may be required to amortize significant amounts of intangible assets in connection with future acquisitions, which could significantly reduce our operating and net income.





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





International sales accounted for approximately 24% of our revenues for the year ended December 31, 2001, 27% of our revenues in 2000 and 16% of our revenues in 1999. 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.




23




---




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





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





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





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





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





| |  |  | 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.




24




---




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





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





Difficulties associated with adapting our technology and product design to the proprietary process technology and design rules of our outside foundries
can lead to reduced yields. Since low yields may result from either design or process technology failures, yield problems may not be effectively determined or resolved until an actual product exists that can be analyzed and tested. As a result,
yield problems may not be identified until well into the production process, and resolution of yield problems may require cooperation between our manufacturers and ourselves. 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 stop growing or could decline.





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. However, our ability to compete in the future will depend on our ability to identify and ensure compliance with evolving industry standards.





The emergence of new industry standards could render our products incompatible with products developed by major communications equipment manufacturers. If our products are unable to
support the new features, the enhanced integration of functions or the performance levels required by communications equipment manufacturers in these markets, we would likely lose business from an existing or potential customer. Moreover, we would
not have the opportunity to compete for new business until the next product transition




25




---

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 profitability and customer
relationships. Consequently, our revenues could be significantly reduced for a substantial period if we fail to develop products with required features or performance standards, if we experience a delay as short as a few months in bringing a new
product to market, or if our customers fail to achieve market acceptance of their products.





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





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





Our 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 one 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.





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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



26




---




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.





Failure to effectively manage growth could place a significant strain on our limited personnel and other resources and could adversely affect our business and operating results.





Our current organizational structure and systems are not adequate for our near-term growth plans. However, if substantial communications infrastructure
spending begins to occur, we may be required to grow our organizational structure and systems significantly. To manage expanded operations effectively, we must continue to improve our operational, financial and management systems and successfully
hire, train, motivate and manage our employees. In addition, the expansion of our manufacturing requirements and our ability to outsource our manufacturing needs in the future will require significant additional management, technical and
administrative resources. We cannot be certain that we will be able to effectively manage any required growth.





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.





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 decline.





The lock-up agreements in effect as of our initial public offering in June 2001 expired in December 2001. 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. Following the expiration of these agreements, approximately 55 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.





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 47,185,391 shares of Class A common stock outstanding, with
each share entitling the holder to one vote. We currently have 27,000,000 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 outstanding shares of our common stock.





Our executive officers, directors and their
affiliates beneficially own approximately 50.4% of our outstanding common stock and 56.3% 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 48.1% 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 88.2%
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.




27




---




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.





We may need additional capital, which may not be available, and our ability to grow may be limited as a result.





We may be required, or could elect, to seek additional funding at any time. We anticipate incurring significant expenses in
connection with increased research and development activities, and we may engage in acquisitions. The hiring of additional personnel to support these functions, including the expansion of our sales and marketing organizations, will also require a
significant commitment of resources. In addition, if the market for our products develops at a slower pace than anticipated, or if we fail to continue to expand our market share, we may continue to utilize significant amounts of capital. If cash
from available sources is insufficient, or if cash is used for acquisitions or other unanticipated uses, we may need additional capital sooner than anticipated. 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.





Item 7A.    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.





Historically, we were exposed to fluctuations in the mark, lita and the Israeli shekel. During the year ended December 31, 2001, we opened
sales offices in Canada, Italy and the United Kingdom and accordingly, and are now exposed to fluctuations in the Canadian dollar, Euro and British pound. The expenses of our foreign sales offices are not material. During the year ended December 31,
2001, total expenses denominated in these currencies were $18.3 million or 12% of total expenses before a benefit for income taxes. Expenses denominated in the mark and shekel represented approximately $10.3 million and $7.8 million, respectively,
of foreign expenses. We expect that our foreign expenses will increase as we expand our research and development and sales efforts in foreign countries.





During 2000, we did not engage in currency hedging activities. During 2001, we entered into foreign forward contracts for 9.4 million Euros with a notional amount of $8.8 million. At December 31, 2001, we had
outstanding foreign currency forward contracts with aggregate notional amounts of $2.0 million. The contracts mature throughout March 2002 and were entered into to hedge a portion of Euro and mark 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 software and
equipment financings have a fixed interest rate and are not subject to interest rate fluctuations. 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 December 31, 2001, our investment portfolio included fixed and floating rate securities of $42.9 million. The maximum maturity of these investments is 12 months with an overall dollar-weighted maturity of the
portfolio of less than six months. Fixed rate




28




---

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.





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.





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 and related party transactions.





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. While we have considered future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance, we cannot ensure that such future events will occur. In the event that we determine that we will not be
able to realize all or portion of our deferred tax assets, an adjustment to reduce assets and increase deferred tax expense would be recorded.





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 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.





Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION





The financial statements and related financial information required to be filed hereunder are indexed under Item 14 of this report and are incorporated herein by reference.





Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE





None.




29




---




PART III





Item 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT





The information required by
this Item is incorporated by reference from the information under the captions entitled Election of Directors-Nominees, Executive Officers, and Section 16(a) Beneficial Ownership Reporting Compliance in our
definitive proxy statement to be filed with the SEC no later than April 30, 2002.





Item 11.    EXECUTIVE COMPENSATION





The information required by this Item is incorporated by reference from the information under the caption entitled
Executive Officer Compensation in our definitive proxy statement to be filed with the SEC no later than April 30, 2002.





Item
12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





The information required by this
Item is incorporated by reference from the information under the caption entitled Security Ownership of Certain Beneficial Owners and Management in our definitive proxy statement to be filed with the SEC no later than April 30, 2002.





Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





The information required by this Item is incorporated by reference from the information under the caption entitled Transactions with Management and Others in our definitive
proxy statement to be filed with the SEC no later than April 30, 2002.




30




---




PART IV





Item 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K





(a)  1.    Financial StatementsPageReport of Independent Auditors

F1Consolidated Balance Sheets as of December 31, 2001 and 2000

F2Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999

F3Consolidated Statements of Shareholders Equity (Deficit) for the Years Ended December 31, 2001, 2000 and 1999

F4Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999

F5Notes to Consolidated Financial Statements

F6





2.Financial Statement
Schedules.    Schedule II  Valuation and Qualifying Accounts for the three years ended December 31, 2001.





All other schedules are omitted because they are not applicable or are not required.





3.Exhibits.    The following exhibits are either filed herewith or incorporated herein by reference:





Exhibit Number

Description3.1*

Amended and Restated Articles of Incorporation of the Registrant, as amended3.2*

Amended and Restated Bylaws of the Registrant4.1*

Specimen Class A Common Stock certificate9.1*

Amended and Restated Voting Trust Agreement dated March 8, 199910.1*

Form of Indemnification Agreement entered into by the Registrant and each of its directors and officers10.2*

1998 Stock Option Plan, as amended10.3*

1999 Stock Option Plan, as amended10.4*

2000 Stock Incentive Plan, as amended10.5*

2000 Employee Stock Purchase Plan, as amended10.6*

Amended and Restated Investors Rights Agreement, dated March 31, 2000, among the Registrant and the shareholders named therein, as amended10.7*

Lease dated March 10, 1999, between the Registrant and Spieker Properties, L.P., as amended10.8*

Facilities Use Agreement dated April 5, 1999, between the Registrant and TRW, Inc.10.9*

Sublease Agreement dated August 1999, between the Registrant and IMS Health Incorporated10.10*

Lease Agreement dated November 18, 1999, between the Registrant and First Industrial, L.P.10.11*

Master Lease Agreement dated September 14, 1999, between the Registrant and Imperial Bank Equipment Leasing, a Division of Imperial Bank10.12*+

Supply Agreement dated June 29, 1997, between the Registrant and TRW, Inc., as amended10.13*+

Semiconductor Development Agreement dated May 18, 2000, between the Registrant and International Business Machines Corporation10.14*+

Joint Development Agreement effective as of May 18, 2000, between the Registrant and International Business Machines10.15*+

Development Agreement dated September 1, 1999, by and between the Registrant and Tyco Submarine Systems Ltd.10.16*

Second Amendment to Lease dated October 12, 2000 by and between the Registrant and Spieker Properties L.P10.17*+

Development and License Agreement dated as of May 25, 2001, by and between the Registrant and ASIP, Inc.21.1*

Subsidiaries of the Registrant23.1

Consent of Deloitte & Touche LLP, Independent Accountants


---

| | *    Incorporated |  | by reference to the similarly numbered exhibit to the Registration Statement on Form S-1 filed by the Registrant (Reg. No. 333-47376).
| | ----------------- |  | --------------------------------------------------------------------------------------------------------------------------------------

| | +    Confidential |  | treatment has previously been granted by the Commission for certain portions of the referenced exhibit pursuant to Rule 406.
| | ----------------- |  | ----------------------------------------------------------------------------------------------------------------------------

| | (b)    Reports |  | on Form 8-K.
| | -------------- |  | ------------




The Company filed the
following current reports on Form 8-K during the quarter ended December 31, 2001:





Form 8-K filed on October 23, 2001 to
announce the issuance of our press release that addressed third quarter 2001 earnings results (Item 9).




31




---




SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) 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.





DATED: March 22, 2002


MULTILINK TECHNOLOGY CORPORATIONBy:

/s/    RICHARD N. NOTTENBURGRichard N. Nottenburg Co-Chairman of the Board, President and Chief Executive Officer





Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





Name

Title

Date/S/    RICHARD N. NOTTENBURG Richard N. Nottenburg

Co-Chairman of the Board, President and Chief Executive Officer (Principal Chief Executive)

March 22, 2002/s/    ERIC M. Pillmore ErIC M. PILLMORE

Senior Vice President and Chief Financial Officer

March 22, 2002/s/     JENS ALBERS Jens Albers

Co-Chairman of the Board and Executive Vice President

March 22, 2002/s/    STEPHEN FORREST Stephen Forrest

Director

March 22, 2002/s/    G. BRADFORD JONES G. Bradford Jones

Director

March 22, 2002/s/    JAMES SCHNEIDER James Schneider

Director

March 22, 2002/s/    JOHN WALECKA John Walecka

Director

March 22, 2002/s/    EDWARD ZANDER Edward Zander

Director

March 22, 2002







32




---




INDEPENDENT AUDITORS REPORT





To the Board of Directors and Shareholders of


Multilink Technology
Corporation





We have audited the consolidated financial statements of Multilink Technology Corporation and subsidiaries as of
December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, and have issued our report thereon dated January 29, 2002 (included elsewhere in this Form 10K). Our audits also included the financial
statement schedule listed in Item 14 of this Form 10K. This financial statement schedule is the responsibility of the Corporations management. Our responsibility is to express an opinion based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.





/s/    DELOITTE & TOUCHE LLP





Parsippany, New Jersey


January 29, 2002




33




---




Independent Auditors Report





To the Board of Directors and Shareholders


Multilink Technology
Corporation:





We have audited the accompanying consolidated balance sheets of Multilink Technology Corporation and subsidiaries
(the Company) as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders equity (deficit), and cash flows for each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.





We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.





In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.











/s/    DELOITTE & TOUCHE LLP





Parsippany, New Jersey


January 29, 2002




F-1




---




MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS





December 31,
2001 and 2000


(in thousands, except for per share amounts)





December 31,2001


2000ASSETSCurrent assets:Cash and cash equivalents

$
49,779


$
29,159Short-term investments


42,903



Accounts receivable, net of allowance for uncollectible accounts of $709 and $133 as of December 31, 2001 and 2000,
respectively


19,849



13,771Inventories


8,735



17,264Prepaid expenses and other current assets


10,485



6,537Total current assets


131,751



66,731Property and equipment, net


28,160



17,765Deferred income taxes


22,790



2,573Other assets


4,352



3,197Total assets

$
187,053


$
90,266LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
8,366


$
10,987Accrued expenses


20,506



11,288Accrued warranty costs


1,293



785Software and equipment financingcurrent portion


1,995



685Lease obligationscurrent portion


1,060



636Income taxes payable






702Total current liabilities


33,220



25,083Lease obligationsnet of current portion


221



773Software and equipment financingnet of current portion


1,452



245Commitments and contingenciesRedeemable convertible preferred stock:Series A: $.0001 par value; 9,000 share authorized; no shares issued and outstanding as of December 31, 2001; 1,712 issued and
outstanding as of December 31, 2000






15,073Series B: $.0001 par value; 1,000 shares authorized; no shares issued and outstanding as of December 31, 2001; 1,000 issued and
outstanding as of December 31, 2000






40,000Shareholders equity:Common stock, $.0001 par value:Class A: 200,000 shares authorized, 42,926 and 2,049 issued and outstanding at December 31, 2001 and 2000, respectively


4



Class B: 100,000 shares authorized; 28,000 issued and outstanding


3



3Additional paid-in-capital


192,212



34,162Deferred stock compensation


(15,207
)


(12,601
)Accumulated deficit


(24,851
)


(12,487
)Accumulated other comprehensive income (loss)


117



15Treasury stock


(118
)


Total shareholders equity


152,160



9,092Total liabilities and shareholders equity

$
187,053


$
90,266





See accompanying notes to consolidated financial statements.







F-2




---




MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS





Years Ended December 31, 2001, 2000 and 1999


(in thousands, except for per share amounts)





Year Ended December 31,2001


2000


1999RevenuesProduct

$
130,468


$
72,721


$
19,383Development










1,012Total revenues


130,468



72,721



20,395Cost of revenuesProduct


48,574



27,048



6,114Development










634Inventory write down and related charges


8,788







Deferred stock compensation


2,051



834



19Total cost of revenues


59,413



27,882



6,767Gross profit


71,055



44,839



13,628Operating expenses:Research and development, excluding deferred stock compensation


54,741



24,624



8,779Research and developmentwarrant issuance






6,375



Sales and marketing, excluding deferred stock compensation


17,387



7,130



2,292General and administrative, excluding deferred stock compensation


11,795



7,611



1,767Deferred stock compensation


9,895



6,076



803Total operating expenses


93,818



51,816



13,641Operating loss


(22,763
)


(6,977
)


(13
)Other income and expensesInterest expense


(428
)


(310
)


(227
)Other income, net (including $671 of equity losses in affiliate during 2001)


1,381



1,871



283Income (loss) before provision (benefit) for income taxes


(21,810
)


(5,416
)


43Provision (benefit) for income taxes


(9,446
)


(1,748
)


19Net income (loss)


(12,364
)


(3,668
)


24Accretion of redeemable convertible preferred stock to redemption value


24



95



48Dividend related to warrant issuance






6,375



Net loss attributable to common shareholders

$
(12,388
)

$
(10,138
)

$
(24
)Net loss per share basic and diluted

$
(0.25
)

$
(0.34
)

$
0.00Weighted average shares of common stock basic and diluted


49,989



30,000



30,000The composition of the amortization of deferred stock compensation is as follows:Research and development

$
5,287


$
2,824


$
216Sales and marketing


2,021



537



31General and administrative


2,587



2,715



556Total:

$
9,895


$
6,076


$
803





See accompanying notes to consolidated financial statements.







F-3




---




MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)





Years Ended December 31, 2001, 2000 and 1999


(in thousands)





Class A Common Stock

Class B Common Stock

Additional Paid-in Capital


Deferred Stock-Based Compensation


Accumulated Deficit


Accumulated Other Comprehensive Income (Loss)


Treasury Stock


TotalShares

Amount

Shares


AmountBALANCE, JANUARY 1, 1999






30,000


$
3

$
630


$
(155
)

$
(2,468
)

$
(5
)





$
(1,995
)Warrants issued in connection with the Series A preferred stock financing













331



















331Warrants issued in connection with equipment financing













131



















131Deferred stock compensation













6,033



(6,033
)














Amortization of deferred stock compensation

















822















822Accretion of redeemable convertible preferred stock













(48
)


















(48
)Comprehensive income:Net income





















24











24Other comprehensive incomeForeign currency translation adjustment

























20







20Comprehensive income

































44BALANCE, DECEMBER 31, 1999






30,000



3


7,077



(5,366
)


(2,444
)


15







(715
)Conversion of Class B common stock to Class A common stock

2,000




(2,000
)

























Stock option plan transactions including related income tax benefit

49











116



















116Deferred stock compensation













14,145



(14,145
)














Amortization of deferred stock compensation

















6,910















6,910Accretion of redeemable convertible preferred stock













(95
)


















(95
)Warrant issuances













6,544



















6,544Dividend related to warrant issuances













6,375







(6,375
)










Comprehensive income:Net loss





















(3,668
)










(3,668
)Other comprehensive loss  Foreign currency translation adjustment

































Comprehensive loss

































(3,668
)BALANCE, DECEMBER 31, 2000

2,049




28,000



3


34,162



(12,601
)


(12,487
)


15







9,092Stock option plan transactions including related income tax benefit

1,807











4,887



















4,887Issuance of common stock

9,200


1








74,562



















74,563Conversion of preferred stock to common

27,116


3








55,094



















55,097Warrant exercises including related income tax benefit

2,023











8,979



















8,979Deferred stock compensation













9,730



(9,730
)














Amortization of deferred stock compensation

















11,946















11,946Issuance of restricted stock

731











4,822



(4,822
)














Accretion of redeemable convertible preferred stock













(24
)


















(24
)Purchase of treasury stock, at cost





























(118
)


(118
)Comprehensive income:Net loss





















(12,364
)










(12,364
)Other comprehensive income:Foreign currency translation adjustment

























(18
)






(18
)Unrealized gain on available-for-sale securities

























133







133Cash flow hedge reclassification adjustments

























(13
)






(13
)Comprehensive loss

































(12,262
)BALANCE DECEMBER 31, 2001

42,926

$
4

28,000


$
3

$
192,212


$
(15,207
)

$
(24,851
)

$
117


$
(118
)

$
152,160





See accompanying notes to consolidated financial statements.




F-4




---




MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS





Years Ended December 31, 2001, 2000 and 1999


(in thousands)





Year Ended December 31,2001


2000


1999Cash flows from operating activities:Net income (loss)

$
(12,364
)

$
(3,668
)

$
24Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Warrant issuances






6,544



Depreciation and amortization


9,289



2,648



293Deferred stock compensation


11,946



6,910



822Deferred income taxes


(8,782
)


(5,728
)


Equity losses in affiliate


671







Interest expense on line of credit from shareholder






61



227Other


88







Changes in operating assets and liabilities:Accounts receivable


(6,078
)


(8,610
)


(4,555
)Inventories


8,530



(12,262
)


(4,634
)Prepaid expenses and other current assets


(2,944
)


(3,037
)


(316
)Other assets


184



(438
)


(275
)Accounts payable


(3,507
)


8,296



1,842Accrued expenses


9,070



8,617



744Accrued warranty costs


507



531



70Billings in excess of costs and estimated earnings on uncompleted contracts, net










(62
)Income taxes payable


(702
)


798



Net cash provided by (used in) operating activities


5,908



662



(5,820
)Cash flows from investing activities:Purchases of property and equipment


(17,594
)


(15,036
)


(695
)Purchase of non-marketable securities


(2,010
)


(2,389
)


Purchase of marketable securities


(42,772
)






Net cash used in investing activities


(62,376
)


(17,425
)


(695
)Cash flows from financing activities:Issuance of common stock, net


75,653







Payments on lease obligations and software and equipment financing


(2,238
)


(622
)


(46
)Proceeds from stock option exercises


1,551







Proceeds from equipment financing


2,257







Treasury stock purchase


(118
)






Issuance of preferred stock, net






37,551



15,261Net cash provided by financing activities


77,105



36,929



15,215Effect of exchange rate changes on cash


(17
)


(4
)


(5
)Net increase in cash and cash equivalents


20,620



20,162



8,695Cash and cash equivalents, beginning of period


29,159



8,997



302Cash and cash equivalents, end of period

$
49,779


$
29,159


$
8,997Supplemental disclosures of cash flow information - Cash paid during the period for:Income taxes

$
2,450


$
3,169


$
39Interest

$
428


$
249


$
4





See accompanying notes to consolidated financial statements.




F-5




---




MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





1.    BUSINESS AND BASIS OF PRESENTATION





Multilink Technology Corporation and its
subsidiaries (collectively, the Company) are in the business of designing, developing, and marketing high-bandwidth, advanced integrated circuits, modules and higher-level assemblies that enable next generation optical networking
systems. The Company was incorporated in 1994, and is headquartered in Somerset, New Jersey. The Company has wholly-owned subsidiaries located in Canada, Germany, Israel, Italy, Lithuania and the United Kingdom.





On May 31, 2000, the Companys board of directors approved a ten-for-one stock split. The Companys consolidated financial statements have
been retroactively adjusted to show the effect of this stock split for all periods presented.





2.    SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES





Principles of ConsolidationThe accompanying consolidated financial statements
include the accounts of Multilink Technology Corporation and all of its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.





Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires
management 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.





Concentration of Credit
RiskFinancial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents and accounts receivable. The Company places its cash and cash equivalents with high-credit,
quality institutions and limits the amount of credit exposure to any one institution. The Companys accounts receivable arise from sales directly to customers. The Company performs ongoing credit evaluations of its customers before granting
uncollateralized credit and provides allowances for estimated credit losses. To date the Company has not experienced any material credit losses. The following is a summary of the percentage of revenues from major customers:





Year Ended December 31,2001

2000

1999TyCom

34%

*

18%Alcatel

29%

28%

20%Lucent

*

34%

36%Cisco

*

11%

*


---

|* |  | Customers sales represented less than 10% of total sales in the respective period.
|- |  | -----------------------------------------------------------------------------------




December 31,2001

2000

1999Customer gross accounts receivable as a percent of total gross accounts receivable:Alcatel

33%

34%

29%TyCom

25%

12%

23%Nortel

20%

*

*Ciena

14%

*

*Lucent

*

21%

25%


---

|* |  | Customers accounts receivable represented less than 10% of total gross accounts receivable in the respective period.
|- |  | ---------------------------------------------------------------------------------------------------------------------




Foreign Currency TranslationAssets and liabilities of the Companys subsidiaries whose functional currency is not the U.S.
dollar, are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rates prevailing throughout the period. The aggregate effect of translating the
financial statements of these subsidiaries into U.S. dollars is included as a separate component of accumulated other comprehensive income (loss) in the accompanying statement of shareholders equity (deficit).





Cash EquivalentsThe Company classifies all highly liquid investments purchased with maturities of three months or less as cash
equivalents.





InventoriesInventories are stated at the lower of cost (first-in, first-out) or market.




F-6




---



MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Property and EquipmentProperty and equipment are recorded at
cost. Depreciation and amortization are provided for using the straight-line method over the estimated useful lives of the respective assets.





Research and DevelopmentResearch and development costs are expensed as incurred, except for engineering and design software, which is capitalized and amortized on a straight-line basis over the
life of the software, which generally ranges from 3 to 5 years.





Impairment of Long-Lived AssetsThe Company
evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may no longer be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the
use of an asset were less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value. For purposes of estimating future cash flows from possibly impaired assets, the Company groups assets at the
lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. Based upon the above described evaluation, the Company has concluded that its long-lived assets are not impaired.





InvestmentsShort-term investments represent marketable securities with readily determinable fair values.
The Companys short-term investments are classified and accounted for as available-for-sale securities and are reported at fair market value with the resulting net unrealized gains or losses reported as a separate component of accumulated other
comprehensive income (loss) in the accompanying statement of shareholders equity (deficit). The Companys long-term investments are reported as other assets in the accompanying consolidated balance sheets. The Companys long-term
investments in which it does not have significant influence over the investee are accounted for at cost. The Company reviews such investments for any unrealized losses deemed to be other than temporary. The Company will recognize an investment loss
currently when it deems that such unrealized losses are other than temporary.





The Companys investment in which it has
significant influence over the investee is accounted for in accordance with the equity method of accounting under which the consolidated results include the Companys share of income or loss of such investee.





Revenue RecognitionProduct revenue is recognized upon shipment. Development revenues are recognized using the
percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total costs for each contract. Contract costs include all direct material and labor costs and those indirect costs related to contract performance,
such as indirect labor, supplies, tools, repairs, and depreciation and amortization. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.





Warranty CostsSubstantially all of the Companys products are sold with a one-year warranty. Development contract costs include
a provision for estimated product warranties to be provided by the Company upon contract completion and product shipment. Estimated warranty costs for all other products are provided for upon shipment to customers.





Income TaxesDeferred income tax assets and liabilities are computed annually based on enacted tax laws and rates for temporary
differences between the financial accounting and income tax bases of assets and liabilities. A valuation allowance is established, when necessary, to reduce deferred income tax assets to the amount that is more likely than not to be realized.





Equity-Based CompensationThe Company accounts 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. The Company accounts 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. The Company is 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, which is generally four years.







F-7




---



MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Net Income (Loss) Per Share of Common Stock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. A reconciliation between basic and diluted weighted average shares outstanding is as follows:





(Amounts in thousands)

December 31,2001


2000


1999Weighted average shares outstanding, basic

49,989


30,000


30,000Dilutive shares issuable in connection with stock plans

19,106


21,081


7,418Dilutive shares issuable in connection with warrants granted

2,841


1,132


195Conversion of preferred stock to common stock

12,880


24,226


9,452Weighted average shares outstanding, diluted

84,816
*

76,439
*

47,065
*





* 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. In 2001, 3,033,125 stock options were excluded from the
computation of diluted shares outstanding due to their antidilutive effect.





SegmentsThe Company has adopted
SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, which requires companies to report selected information about operating segments, as well as enterprise-wide disclosures about products and services,
geographic areas and major customers. Operating segments are determined based on the way management organizes its business for making operating decisions and assessing performance. The Company has determined that it conducts its operations in one
business segment, the development and marketing of products that enable next generation optical networking systems.





Effects of Recent Accounting PronouncementsIn June and August 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 143, Accounting for Asset Retirement Obligations and No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, respectively. SFAS 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. SFAS No. 144, which is effective for
the Company on January 1, 2002, establishes a single accounting model for the accounting of a discontinued segment of a business as well as addresses significant implementation issues related to SFAS No. 121. The Company does not expect that the
adoption of these standards will have a material impact on its financial position, results of operations or cash flows.





In June
2001, the FASB issued SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the
purchase method of accounting. With the adoption of SFAS 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be 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 Company does not expect that the adoption of these standards will have a material impact on its financial position or results of operations. The Company currently does not have any business combinations in
progress. As of December 31, 2001, the Company had $0.7 million of unamortized goodwill recorded resulting from one of its equity investments and no other intangibles being amortized. Effective January 1, 2002, the Company will adopt the provisions
of SFAS 142 and discontinue amortizing this goodwill whose annual amortization expense is less than $0.2 million.





Derivative Financial
InstrumentsEffective January 1, 2001, the Company adopted SFAS No. 133, which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of
derivative transactions for which hedge accounting is applied. Depending on the nature of the underlying exposure being hedged, changes in the fair value of derivatives are recognized either in the statement of operations (no hedge or fair value
hedge) or other comprehensive income (cash flow hedge). The ineffective portion of the change in fair value of the derivative is recognized in earnings. The Company assesses the initial and ongoing effectiveness of its hedging relationships in
accordance with its documented policies. There was no cumulative effect of adopting SFAS No. 133 as of January 1, 2001 because the Company was not party to any derivatives as of that date.





Cash Flow HedgesDuring January 2001, the Company began utilizing 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 (loss). 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




F-8




---



MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







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 year ended December 31, 2001, hedge ineffectiveness associated with instruments designated as cash flow hedges was not significant. For the year ended December 31, 2001, net losses of $0.4
million were reclassified into earnings as an adjustment to research and development expense. These net losses were offset by gains and losses on the transactions being hedged. At December 31, 2001, less than $0.1 million of net derivative
gains/losses included in other comprehensive income (loss) will be reclassified into earnings within twelve months from that date. The unrealized amounts in other comprehensive income (loss) will fluctuate based on changes in fair value of open
contracts at each reporting period. At December 31, 2001, the Companys liability of less than $0.1 million relating to these forward contracts is included in accrued expenses in the accompanying consolidated balance sheet.





ReclassificationsCertain prior year amounts have been reclassified in order to conform to the current year presentation.





|3. |  | BALANCE SHEET DETAIL
|-- |  | --------------------




Short-Term Investments





The Companys investments consist primarily of investment grade marketable debt securities, all of which are
classified as available-for-sale and are recorded at fair value. The following is a summary of current available-for-sale marketable securities at December 31, 2001:





Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses


Estimated Fair Value(Amounts in thousands)Government & agency obligations

$
18,795

$
31

$
(2
)

$
18,824Other debt securities


22,683


105


(12
)


22,776Total debt securities


41,478


136


(14
)


41,600Certificate of deposits


1,303









1,303Total available-for-sale securities

$
42,781

$
136

$
(14
)

$
42,903





The amortized cost and estimated fair value of current debt securities at
December 31, 2001, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to repay obligations without prepayment penalties:





Amortized Cost

Estimated Fair Value(Amounts in thousands)Due in one year or less

$
41,478

$
41,600Due after one through five years





Total debt securities

$
41,478

$
41,600





During 2001, gross proceeds from available-for-sale securities were $6.4 million
and gross realized gains and losses were not material.





Inventories





Inventories consisted of the following:





December 31,(Amounts in thousands)


2001


2000Finished goods

$
2,007

$
2,736Work-in-progress


1,577


5,993Raw materials


5,151


8,535Total

$
8,735

$
17,264





During the year ended December 31, 2001, the Company recorded a charge of $7.9
million to reduce inventories to their net realizable value. The significant components of this charge include $4.3 million relating primarily to order cancellations as customers are transitioning from certain Gallium Arsenide products to Silicon
Germanium products and $3.4 million relating to order cancellations as a result of decreased carrier spending. In addition, $0.9 million was charged to cost of revenues as a result of order cancellation of supply contracts driven by the previously
mentioned customer cancellations.




F-9




---



MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Property and Equipment, Net





Property and equipment consisted of the following:Estimated Useful Life

December 31,(Years)

2001


2000(Amounts in thousands)Machinery and equipment

5

$
23,231


$
13,043Furniture and fixtures

3


3,095



1,298Leasehold improvements

Shorter of asset life or lease term


2,204



463Software

2-5


10,330



5,486Construction in progress




1,717



498Total




40,577



20,788Accumulated depreciation and amortization




(12,417
)


(3,023
)Property and equipment, net



$
28,160


$
17,765





Property leased under capital leases (which is included in property and equipment
in the accompanying balance sheets) consisted of the following:





December 31,2001


2000(Amounts in thousands)Machinery and equipment

$
2,034


$
2,092Furniture and fixtures


558



Total


2,592



2,092Accumulated amortization


(1,263
)


(860
)Capital leased property, net

$
1,329


$
1,232





Accrued Expenses





Accrued expenses consisted of the following:December 31,2001

2000(Amounts in thousands)Compensation, payroll taxes and related benefits

$
8,174

$
3,255Materials


2,934


2,864Other


9,398


5,169Total

$
20,506

$
11,288





4.         CAPITALIZATION





Initial Public OfferingOn June 26, 2001, the Company completed an initial public offering of 9.2 million shares (including exercise of the underwriters
over-allotment option) of its Class A common stock. Since the public offering was a qualified public offering as defined in the Series A and B redeemable convertible preferred stock agreements, the 2.7 million outstanding shares of the
Companys Series A and B preferred stock were converted into 27.1 million shares of Class A common stock. The 500,000 Series B convertible preferred stock warrants outstanding prior to the public offering converted automatically into warrants
to purchase 5.0 million shares of the Companys Class A common stock, 2.7 million of which were exercised as described in Note 5.





Preferred Stock FinancingIn May 2000, the Company completed a 1.0 million share, Series B convertible preferred stock offering for $40 per share, or gross proceeds of $40 million. Each share of the
Series B convertible preferred stock automatically converted into ten shares of Class A common stock upon the closing of the Companys initial public offering. In conjunction with the Series B




F-10




---



MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







offering, the Company issued 2.5 million warrants exercisable at $4 per share to Series A preferred
shareholders. Such grant was made in accordance with the original terms of the preferred stock investors rights agreement and the value of the warrants at the date of grant ($6.4 million), as determined by an independent appraisal, has been
treated as a dividend.





In June 1999, the Company issued 1.7 million shares of Series A redeemable convertible preferred stock
to an institutional investor for $9 per share, or proceeds of $14.9 million, net of $0.4 million in offering costs. Each share of the Series A redeemable convertible preferred stock automatically converted into ten shares of Class A common stock
upon the closing of the Companys initial public offering.





Capital ReorganizationEffective February
26, 1999, the Board of Directors amended the Companys articles of incorporation to reorganize its capital structure by authorizing three classes of stock designated, respectively, as Class A common stock, Class B common
stock and preferred stock. Under the amended articles, the total number of shares of stock the Company is authorized to issue is 310 million shares. 200 million shares are Class A common stock, par value $.0001 per share; 100
million shares are Class B common stock, par value $.0001 per share: and 10 million shares are preferred stock, par value $.0001 per share.





Upon the adoption of the restated articles of incorporation, each outstanding share of common stock (15,000 shares, par value $1 per share) was converted into 2,000 shares of Class B common stock. The accompanying
consolidated financial statements have been adjusted to give effect for the capital reorganization and conversion for all periods presented.





Each share of Class A common stock entitles the holder to one vote on all matters submitted to a vote of the shareholders of the corporation. Each share of Class B common stock entitles the holder to 10 votes on all
matters submitted to a vote of the shareholders of the corporation. Subject to the preferences that may be applicable to preferred stock outstanding at the time, upon liquidation, dissolution, or winding up of the corporation, all of the remaining
assets of the Company to be distributed will be distributed ratably to the holders of Class A and B common stock in proportion to the amount of stock owned by each holder.





5.    STOCK INCENTIVE PLANS AND WARRANTS





Stock Incentive Plans





Stock OptionsEffective with the Companys initial public offering in June 2001, the Companys 2000 Stock
Incentive Plan (the Plan) became the successor to the 1998 and 1999 stock option plans and no further options were granted under the 1998 plan or the 1999 plan. The Plan has five separate components:





| |  |  | The discretionary option grant program, under which the compensation committee may grant (1) non-statutory options in the Companys Class A common stock to employees,
non-employee board members and consultants at an exercise price not less than 85% of the fair market value of those shares on the grant date and (2) incentive stock options in the Companys Class A common stock to eligible employees at an
exercise price not less than 100% of the fair market value of those shares on the grant date;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | The stock issuance program, under which eligible individuals may be issued Class A common stock directly upon the attainment of performance milestones or the completion of a
specified period of service or as a bonus for past services;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | The salary investment option grant program, under which the Companys executive officers and other highly compensated employees may be given the opportunity to apply a
portion of their base salary each year to the acquisition of special below-market option grants;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | The automatic option grant program, under which option grants will automatically be made at periodic intervals to eligible non-employee board members to purchase Class A common
stock at an exercise price equal to 100% of the fair market value of those shares on the grant date; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | The director fee option grant program, under which the Companys non-employee board members may be given the opportunity to apply a portion of any retainer fee otherwise
payable to them in cash each year to the acquisition of special below-market option grants.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




No options were
issued pursuant to the salary investment option grant, automatic option grant or director fee option grant programs under the Plan.





The Company has
authorized up to 49,286,606 shares of its Class A common stock for issuance under the Plan. The share reserve under the Plan will automatically increase on the first trading day in January each calendar year, beginning with calendar year 2002, by an
amount equal to four percent of the total number of shares of the Companys common stock outstanding on the last trading day of December in the prior calendar year, but in no event will this annual increase exceed 5 million shares and in no
event will the total number of Class A common stock in the share reserve (as adjusted for all such annual increases) exceed 100 million shares.




F-11




---



MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Generally, options vest under the straight-line basis over periods of four or five
years and expire 10 years from the grant date. When the exercise price of employee stock options issued equals the fair value of the underlying stock, no compensation expense is recorded. Compensation expense is recognized for the fair value of
options granted to non-employees and to the extent the fair value of the underlying stock exceeds the exercise price of employee stock options. During 2001, 2000 and 1999, the Company issued employee common stock options with exercise prices less
than the fair value of the underlying common stock. The Company recorded $9.7 million, $14.1 million and $6.0 million of the intrinsic value of such options as deferred stock compensation in 2001, 2000 and 1999, respectively. At December 31, 2001,
$15.2 million of stock compensation is deferred as a component of shareholders equity and will be amortized to expense through 2005 as earned by the related employees.





A summary of the option transactions under the Plan follows:





Number of Shares


Weighted- Average Exercise Price

Range of Exercise PricesOutstanding, January 1, 1999

2,700,000


$0.015

$0.00-$0.025Granted

22,011,250


$0.393

$0.20-$0.707Cancelled

(2,000,000
)

$0.200

$0.20Outstanding, December 31, 1999

22,711,250


$0.365

$0.008-$0.707Granted

14,205,200


$3.060

$0.71-$5.75Exercised

(48,750
)

$0.400

$0.30-$0.55Cancelled

(509,250
)

$0.975

$0.30-$5.75Outstanding, December 31, 2000

36,358,450


$1.405

$0.008-$5.75Granted

8,726,500


$  6.66

$4.17-$12.91Exercised

(1,806,858
)

$  0.95

$0.008-$5.75Cancelled

(1,747,399
)

$  4.79

$0.20-$12.91Outstanding, December 31, 2001

41,530,693


$  2.38

$0.008-$12.91





As of December 31, 2001, there were 5,900,305 shares available for future grant
under the Plan.





Additional information regarding options outstanding as of December 31, 2001 is as follows:





Outstanding Options

Exercisable OptionsRange of Exercise Prices

Number of Shares

Weighted- Average Exercise Price

Weighted- Average Remaining Contractual Life (Years)

Number of Shares

Weighted- Average Exercise Price$0.008-$0.025

1,810,000

$  0.02

6.7

1,510,000

$0.02$0.20-$0.30

8,232,950

$  0.20

7.1

4,011,450

$0.20$0.55-$0.71

11,645,250

$  0.58

7.8

5,582,333

$0.57$1.35-$2.50

6,782,750

$  1.84

8.4

1,922,388

$1.94$3.90-$5.75

10,026,618

$  5.31

8.8

1,671,688

$5.05$6.60-$9.15

2,491,125

$  7.18

9.8

2,625

$8.00$11.50-$12.91

542,000

$12.77

9.6



$ 41,530,693

$  2.38

8.1

14,700,484

$1.10





As permitted under SFAS No. 123, the Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for stock-based awards to employees. Pro-forma information regarding net income is required by SFAS No. 123. This information is required to be determined as if the Company had accounted for its stock-based awards to
employees under the fair value method of that statement. The fair value of options granted during the years ended December 31, 2001, 2000 and 1999, as reported below has been estimated at the date of grant using the minimum value option pricing
model with the following assumptions:





Year Ended December 31,2001


2000


1999Risk-free interest rate

4.5
%

6.3
%

6.8
%Dividend yield







Expected life (years)

3.9


6.5


7Volatility

89
%

65
%






F-12




---



MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Predominantly all of the options granted during 2000 and 1999 were issued with an
exercise price less than the fair value of the underlying stock. The weighted-average estimated fair value of employee stock options granted during 2000 and 1999 was $2.41 and $0.417 per share, respectively. The weighted-average estimated fair value
of employee stock options granted during 2001 is as follows:





Number of Shares

Weighted- Average Grant Price

Weighted- Average Fair ValueOptions granted with grant price:Less than market value on grant date

5,417,000

$5.76

$5.23Equal to market value on grant date

3,309,500

$8.13

$5.34Total

8,726,500

$6.66

$5.27





For purposes of pro-forma disclosures, the estimated fair value of the options is
amortized to expense over the options vesting period. The Companys pro-forma information is as follows:





Year Ended December 31,2001


2000


1999(Amounts in thousands)Net loss attributable to common shareholders:As reported

$
(12,388
)

$
(10,138
)

$
(24
)Pro forma

$
(33,272
)

$
(14,446
)

$
(574
)Net loss per share attributable to common shareholders:As reported: Basic and diluted

$
(0.25
)

$
(0.34
)

$
0.00Pro forma: Basic and diluted

$
(0.67
)

$
(0.48
)

$
(0.02
)





The effects on pro-forma disclosures of applying SFAS No. 123 are not likely to
be representative of the effects on pro-forma disclosures of future years.





Restricted StockDuring December
2001, the Company awarded to certain key employees 730,500 restricted Class A common shares. The awards are subject to certain vesting requirements. The value of such stock was established by the market price on the date of grant. Unearned deferred
stock compensation of $4.8 million was recorded and will be amortized as stock based compensation expense over the vesting period, which is generally three years.





Stock Purchase PlanIn June 2001, the Company adopted the 2000 Employee Stock Purchase Plan (the Employee Stock Purchase Plan) and reserved 2,071,652
shares of Class A common stock for issuance there under. Under this plan, the Companys employees may elect payroll deductions ranging from 1% to 15% of cash earnings to be used for the purchase of Class A common stock. The purchase price under
the Employee Stock Purchase Plan is 85% of the lower of the closing prices for the stock at the beginning of a twenty-four month offering period or the end of each six month purchase period. No compensation expense is recorded in connection with
this plan. If the Company had elected to recognize the compensation cost based on the fair value of the employees purchase rights, the weighted average fair value of each purchase right granted in 2001 was $3.74. The assumptions used in
estimating this fair value includes an interest rate of 4.5%, zero dividend yield, an expected life of one-half year and expected volatility of 100%.





Warrants





In May 2000, the Company executed a Semiconductor Development Agreement (the
Agreement) with a third party, which provides the Company with access to one or more of the third partys semiconductor fabrication processes solely for the development of product prototypes. Upon the execution of the Agreement, the
Company granted the third party a fully exercisable warrant to purchase (a) 250,000 shares of Series B preferred stock for $40 per share from the grant date through the date of the closing of a Qualified Public Offering, as defined in the
Agreement, or (b) 2.5 million shares of Class A common stock, from the date, if any, of a Qualified Public Offering, through May 2005 for $4 per share. Neither the Agreement nor the terms of the warrant requires the third party to meet any
performance requirements or prohibit the third party from participating in other similar programs with other parties. As such, the warrant is not subject to any forfeiture for any reason. The Company has measured the value of the warrant at the date
of grant at $6.4 million, by utilizing an independent appraisal. The Company has expensed the value of this fully exercisable, nonforfeitable warrant as a research and development expense in the accompanying 2000 statement of operations, since there
is no third party performance required with respect to the warrant and the activities underlying the Agreement relate to research and development efforts for which the Company cannot determine the benefit, if any, which may result. Subsequent to the
Companys initial public offering, the 2.5 million warrants were exercised in a cashless transaction. The Company issued net 1.8 million Class A common shares in connection with this exercise and recorded a $9.0 million deferred tax asset that
was recorded as an increase to additional paid-in capital for the tax effect of the difference in fair value between the grant date and exercise date.





Also during 2000, the Company granted 133,406 Class A common stock purchase warrants to certain third parties in exchange for legal and employee recruiting services. Each warrant was fully vested and exercisable on
the grant date for one share of Class A common stock and will expire five years from the grant date. The weighted average exercise price of these warrants was $2.01. The fair




F-13




---



MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







value of the warrants was estimated at $0.2 million using the Black-Scholes option-pricing model and is
reflected as a general and administrative expense in the consolidated statement of operations and an increase to additional paid-in capital.





In June 1999, the Company granted 516,670 Class A common stock purchase warrants to certain third parties in exchange for their services rendered in connection with the Series A preferred stock financing (see Note 4).
The warrants were fully vested and exercisable on the grant date for $0.30 per option share into one share of Class A common stock and expire five years from the grant date. The fair value of the warrants was estimated at $0.3 million using the
Black-Scholes option-pricing model and was reflected as a reduction in the proceeds from issuance of the Series A preferred stock and an increase in additional paid-in capital.





In September 1999, the Company granted 163,640 Class A common stock purchase warrants to secure a capital equipment lease with a bank (see Note 6). The warrants were fully vested and
exercisable on the grant date for $0.55 per option share into one share of Class A common stock and expire five years from the grant date. The fair value of this warrant was estimated at $0.1 million using the Black-Scholes option-pricing model and
was reflected as an increase in deferred financing fees and an increase in additional paid-in capital. The deferred financing fees are being amortized to other expense on a straight-line basis over the three-year term of the lease. During 2001,
these warrants were exercised in a cashless transaction and the Company issued net 150,795 Class A common shares.





During 2000,
5.1 million warrants were granted with a weighted-average exercise price and weighted-average fair value of $3.95 and $2.52, respectively.





At December 31, 2001, there are 3.1 million Class A common stock purchase warrants outstanding with a weighted-average exercise price of $3.33. During 2001, no warrants were granted.





6.    COMMITMENTS AND CONTINGENCIES





Operating LeasesThe Company leases its office facilities and certain equipment under operating lease agreements expiring at various dates through 2007. The Companys future minimum rental payments are as follows:





(Amounts in thousands)2002

$
4,4482003


3,6592004


3,2882005


3,0492006


1,044Thereafter


767$
16,255





Rental expense under operating leases was $5.7 million, $2.4 million and $0.5
million for the years ended December 31, 2001, 2000 and 1999.





Lease ObligationsThe Company leases certain
equipment under capital leases. The following is a schedule of future minimum lease payments under the leases together with the present value of the net minimum lease payments as of December 31, 2001 and the fiscal years thereafter (Amounts in
thousands):





2002

$
1,1672003


230Total minimum lease payments


1,397Less amount representing interest


116Present value of minimum lease payments


1,281Less current portion of lease obligations


1,060Long-term portion of lease obligations

$
221




F-14




---



MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Software and Equipment FinancingDuring 2001 and 2000, the
Company obtained vendor financing for software and equipment purchases in the amount of $2.4 million and $2.7 million, respectively. The vendor financing is collateralized by the underlying assets. The aggregate maturities of these financings for
each of the five years subsequent to December 31, 2001 are as follows:





(Amounts in thousands)2002

$
1,9952003


1,0672004


2132005


1722006


Total software and equipment financing


3,447Less current portion


1,995Long-term software and equipment financing

$
1,452





Supply AgreementThe Company purchases silicon wafer material
and engineering services from a shareholder under the terms of a Supply Agreement, which was executed during 1997 (and amended in 1999) in connection with a Share Purchase Agreement with the shareholder. Under the terms of the Supply Agreement, as
amended, which expire in December 2002, the Company is obligated to purchase certain minimum quantities of wafer material at various fixed prices. The Company has met all such commitments as of December 31, 2001. The Company purchased $9.5 million,
$9.8 million and $4.4 million of materials and engineering services from the shareholder during the years ended December 31, 2001, 2000 and 1999, respectively.





Legal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.





In May
and June, 2001, a former employee and current shareholder sent correspondence to the Company claiming, among other things, that the Companys Chief Executive Officer and Executive Vice President breached a promise relating to his compensation
and misused their power to reward themselves while engaging in a scheme to oust him from the Company. The employee/shareholder alleged that his claims form the basis for a claim of breach of fiduciary duty by those officers. The correspondence
proposed settlement payments by the Company of up to $1.0 million in cash and the transfer of one million shares of common stock. The Company received no further correspondence regarding this matter subsequent to June 2001.





While the Company believes the allegations set forth in the employee/shareholders correspondence to it are without merit, it cannot predict the
ultimate outcome of any litigation, should it be initiated.





7.    FINANCIAL INSTRUMENTS





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. At December 31, 2001, the Company had outstanding foreign currency forward contracts with aggregate notional amounts of $2.0 million. All contracts have been entered into with a major financial
institution. The risk associated with these transactions is the cost of replacing these agreements, at current market rates, in the event of default by the counterparty. The Company believes the risk of incurring such losses is remote. The Company
does not hold financial instruments for trading or speculative purposes.





The Company, using available market information and
appropriate methodologies, has determined the estimated fair value of financial instruments. Considerable judgment is required in interpreting this information and developing these estimates. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a current market exchange. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to
estimate values:





Cash and short-term investmentsAll investments are considered
available-for-sale and the carrying amount approximates fair value because of the short-term maturity of these instruments.





Long-term investmentsIt is not practicable to estimate the fair value of the Companys long-term investments because of the lack of quoted market prices and the inability to estimate fair value
without incurring excessive costs.





Software and equipment financingThe fair values of the
Companys vendor financings are estimated using discounted cash flow analyses based on the Companys current incremental borrowing rates for similar types of borrowing arrangements.




F-15




---



MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Foreign currency forward contractsThe fair values of these financial
instruments represents the amount at which the contracts could be settled based on quotes provided by the counterparty.





The
carrying amounts and estimated fair values of financial instruments at December 31, 2001 and 2000 are as follows:





Year Ended December 31,2001


2000Carrying Amount


Estimated Fair Value


Carrying Amount


Estimated Fair Value(Amounts in thousands)Cash and short-term investments

$
92,682


$
92,682


$
29,159


$
29,159Software and equipment financing


(3,447
)


(3,687
)


(930
)


(930
)Foreign currency forward contracts


(1,940
)


(1,940
)












8.    INCOME TAXES





The provision (benefit) for income taxes consists of the following:





Year Ended December 31,2001


2000


1999(Amounts in thousands)Current:State

$
1,678


$
847


$
1Federal


9,205



2,808



18Foreign


603



325



Total current


11,486



3,980



19Deferred benefit


(18,328
)


(7,021
)


(351
)Valuation allowance


(2,604
)


1,293



351Total

$
(9,446
)

$
(1,748
)

$
19





The effective income tax rate differs from the Federal statutory income tax rate
applied to loss before income taxes due to the following:





Year Ended December 31,2001


2000


1999Federal statutory income tax rate

(35.0
)%

(35.0
)%

35.0
%State taxes net of Federal benefit

(3.3
)

(8.6
)

Meals and entertainment

0.2


0.4


17.2Effect of foreign income tax, net

1.5


(4.0
)

(26.1
)Research and development tax credits




(3.8
)

(342.8
)Valuation allowance

(12.1
)

24.5


363.7Other

5.4


(5.5
)

(3.1
)Total

(43.3
)%

(32.0
)%

43.9
%




F-16




---



MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The components of net deferred income taxes consist of the following:





December 31,2001


2000(Amounts in thousands)Current deferred income tax assets:Accounts receivable allowances

$
290

$
56Accrued expenses


277


302Inventory


3,234


1,472Warrant expense


69


2,773Valuation allowance





(1,448
)Total current deferred income tax assets


3,870


3,155Non-current deferred income tax assets:Net operating loss carryforwards


14,961


Tax credit carryforwards


232


Depreciation


590


472Deferred stock compensation


6,773


3,239Other


234


18Valuation allowance





(1,156
)Total non-current deferred income tax assets


22,790


2,573Net deferred income tax assets

$
26,660

$
5,728





The Company has $35.8 million and $41.4 million of Federal and state,
respectively, net operating loss carryforwards available to offset future taxable income. These net operating loss carryforwards expire in 2021. The current deferred tax asset is included in prepaid expenses and other current assets in the
consolidated balance sheet. At each period end, the Company assesses the recoverability of its deferred tax assets by reviewing a number of factors including operating trends, future projections and 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. At December 31, 2001 the Company has reviewed its deferred tax assets and believes that the valuation allowance reduces such assets to
an amount that is more likely than not to be realized.





During 2001, deferred tax assets of $12.2 million were recorded as a
credit to additional paid-in-capital as a result of employee stock option and warrant exercises.





Undistributed earnings of
certain of the Companys foreign subsidiaries, which are deemed to be permanently invested, aggregated to $0.9 million at December 31, 2001. It is not practicable to calculate the unrecognized deferred tax liability on those earnings.





9.    RELATED PARTY TRANSACTIONS





ASIPDuring April 2001, the Company guaranteed a lease for ASIP, Inc (ASIP) (See Note 11). 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 $1.3 million.





One of the Companys directors is a founder and director of ASIP. Additionally, the Companys President and Chief Executive Officer, and two of its directors, are each directors of ASIP.





In May 2001, the Company entered into a development and license agreement with ASIP, pursuant to which ASIP will design, develop and prototype certain optical components, and
the Company will reimburse ASIP a maximum of $2.5 million of its development expenses and consign up to $3.5 million of equipment to ASIP, which ASIP will later have the option to purchase at its then depreciated value. The agreement also provides
that the Company will enter into a supply agreement with ASIP upon ASIPs successful completion and delivery of the component prototypes. During 2001, the Company paid research and development expenses of $0.6 million to ASIP and expended $2.2
million for capital equipment under this agreement.





IPAGIn September 2001, the Company entered into a
development and license agreement with Innovative Processing AG (IPAG) (see Note 11) pursuant to which IPAG will design, develop and prototype certain optical components, and the Company


will reimburse IPAG a maximum of $0.8 million of its development expenses and consign up to approximately $0.5 million of equipment to IPAG, which IPAG will later have the option to purchase at its then-depreciated value. The agreement also
provides that the Company will enter into a supply agreement with IPAG upon IPAGs successful completion and delivery of the component prototypes. During 2001, the Company paid research and development expenses of $0.6 million to IPAG and
expended less than $0.1 million for capital items under this agreement.





OtherThe Company purchases certain
products from certain of its equity holders. During 2001, 2000, and 1999, purchases from such parties were $13.9 million, $10.7 million and $4.4 million, respectively. At December 31, 2001 and 2000, accounts payable to these parties was $1.2
million.




F-17




---



MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







10.    GEOGRAPHIC INFORMATION





Revenues to geographic locations are as follows:





2001

2000

1999(Amounts in Thousands)North America

$
98,719

$
53,260

$
17,154Europe


31,578


19,356


3,179Asia


171


105


62Total

$
130,468

$
72,721

$
20,395Revenues to certain geographic locations within Europe are as follows:Italy

$
*

$
7,751

$
1,065France

$
14,760

$
9,129

$
1,372


---

|* |  | Countrys revenues represent less than 10% of total revenue in the respective period.
|- |  | -------------------------------------------------------------------------------------




Substantially all identifiable assets are located in North America.





11.    LONG-TERM INVESTMENTS





In July 2000, the Company entered into a stock purchase and
option agreement with ASIP, an optical device start-up entity, pursuant to which the Company purchased 1,666,667 shares of ASIPs Series A voting and convertible preferred stock at an aggregate purchase price of $0.8 million which represented
approximately 18% of ASIPs outstanding voting stock. The Company was also granted an option to purchase, and the Company granted ASIP an option to require the Company to purchase upon the attainment of certain performance goals, 833,333 shares
of ASIPs Series B voting and convertible preferred stock at an aggregate purchase price of $1.7 million. In conjunction with this purchase, the Company received this option for no additional cost. Accordingly, such option is being carried at
its historical cost since ASIP is not a public entity. The other investors in these transactions are also investors in the Company.





During January 2001, the Company exercised its option and purchased 833,333 shares of Series B voting and convertible preferred stock for $1.7 million. After this additional purchase, the Company owns approximately 21% of ASIPs
outstanding voting stock and began accounting for this investment under the equity method of accounting. ASIPs 2000 results of operations were not material. Included in the carrying amount of the ASIP investment is goodwill of $0.9 million
that was being amortized over five years. Amortization of goodwill will cease effective January 1, 2002 upon the adoption of FAS 142. The unamortized balance of goodwill at December 31, 2001 was $0.7 million. Goodwill amortization and the
Companys equity in ASIPs losses for 2001 is included in other income in the accompanying consolidated statement of operations.





In July 2001, the Company entered into an investment agreement with the shareholders of IPAG, an optical components company located in Germany, pursuant to which the Company purchased 26,230 shares, or approximately
18%, of IPAGs ordinary shares for an aggregate purchase price of $0.3 million. The Companys Executive Vice President and Co-Chairman is a member of the Board of Supervisors of IPAG, and, in connection with his service on the board, this
officer owns 2,500 of IPAGs ordinary shares. In addition, this officer owns a 12.5% interest in AGITE! S.p.A. (AGITE!), an investment fund that has also invested in IPAG, and acts as a managing partner of AGITE!. AGITE! also
purchased 24,770 shares of IPAGs ordinary shares at the same price per share as the Company.





In October 2000, the Company
entered into a stock purchase agreement with Internet Machines Corporation (Internet Machines), a privately-held optical device company, pursuant to which it purchased 320,671 shares of Internet Machines Series B voting and convertible
preferred stock at an aggregate purchase price of $1.6 million. The Companys purchase represents less than 1% of Internet Machines outstanding voting stock. The Companys President and Chief Executive Officer, and one of its directors,
are each directors of Internet Machines.





The above investments are included in other assets in the accompanying consolidated
balance sheet.





12.    EMPLOYEE BENEFIT PLAN





The Company has a 401(k) defined contribution plan, in which all of its U.S. employees may participate. Plan participants


contribute up to 15% of their eligible
compensation to the plan, subject to the statutorily prescribed annual limit. The Company intends the plan to qualify under Section 401(k) of the Internal Revenue Code so that contributions by employees to the plan, and income earned, if any, on
plan contributions, are not taxable to employees until withdrawn from the plan. From the plans inception through March 31, 2000, the Company made matching contributions on behalf of the plan participants at the rate of 25% of participant
contributions up to 6% of compensation. The plan was amended on April 1, 2000 for a change in the matching contribution rate to 50% of participant contributions up to 6% of compensation. During 2001, 2000 and 1999 the Company made matching
contributions of $0.5 million, $0.2 million and less than $0.1 million, respectively.




F-18




---



MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







13.    LINE OF CREDIT FROM SHAREHOLDER





The Company had a line of credit facility from a shareholder that provided for borrowings up to $2.0 million. The credit facility was provided to the
Company pursuant to a Share Purchase Agreement executed in 1997. In connection with the Share Purchase Agreement, the Companys then existing shareholders granted to the party providing the credit facility a share purchase option, which expired
on October 31, 1998. The fair value of the option was estimated at $0.1 million and was reflected as a discount on borrowings under the line of credit agreement and an increase in additional paid-in capital. The discount was amortized to interest
expense on a straight-line basis over the 16-month option period (through October 31, 1998). The fair value of the option of approximately $0.1 million was determined as the present value of the difference between expected future cash flows under
the credit facility using the 6.0% interest rate implicit in the credit facility, compared to that using a 10.5% estimated market rate of interest. Outstanding borrowings under the credit facility accrued interest at 6.0%, compounded semiannually,
through expiration of the share purchase option on October 31, 1998, upon which date the interest rate converted to a certain banks prime rate plus 2.0% (10.5 percent). Outstanding unpaid interest (which amounted $0.4 million as of December
31, 1999) was due on October 31, 2002. Borrowings under the credit facility were not guaranteed or collateralized. In connection with the Series B convertible preferred stock offering discussed in Note 4, $2.4 million of principal and interest
outstanding under this credit facility as of such offering was forgiven by the shareholder as partial payment for the shareholders Series B convertible preferred stock.





14.    QUARTERLY INFORMATION





The following is a summary of
certain unaudited quarterly financial information:





First Quarter


Second Quarter


Third Quarter


Fourth Quarter(Amounts in thousands)2001Net Revenues

$
31,068


$
35,103


$
37,603


$
26,694Gross Profit


14,347



21,937



23,690



11,081Net income (loss)


(4,451
)


(853
)


1,375



(8,435
)Net income (loss) per sharebasic

$
(0.15
)

$
(0.03
)

$
0.02


$
(0.12
)Net income (loss) per sharediluted

$
(0.15
)

$
(0.03
)

$
0.01


$
(0.12
)2000Net Revenues

$
12,347


$
16,320


$
18,680


$
25,374Gross Profit


7,502



10,146



11,468



15,723Net income (loss)


371



(5,054
)


(859
)


1,872Net income (loss) per sharebasic

$
0.01


$
(0.38
)

$
(0.03
)

$
0.06Net income (loss) per sharediluted

$
0.01


$
(0.38
)

$
(0.03
)

$
0.02




F-19




---

Schedule IIValuation and Qualifying AccountsDescription

Balance at Beginning of Period

Charged to Costs and Expenses

Charged to Other Accounts

Deductions/ Write-offs

Balance at End of PeriodYear Ended December 31, 2001:Allowance for doubtful accounts

$
132,570

$
749,833

$


$
173,033

$
709,370Reserve for excess and obsolete inventory


3,616,646


9,042,730





1,940,169


10,719,207$
3,749,216

$
9,792,563

$


$
2,113,202

$
11,428,577Year Ended December 31, 2000:Allowance for doubtful accounts

$
51,000

$
81,570

$


$


$
132,570Reserve for excess and obsolete inventory





3,616,646








3,616,646$
51,000

$
3,698,216

$


$


$
3,749,216Year Ended December 31, 1999:Allowance for doubtful accounts

$
51,000

$


$


$


$
51,000Reserve for excess and obsolete inventory














$
51,000

$


$


$


$
51,000