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

                                   FORM 10-K

(MARK ONE)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
     FOR THE FISCAL YEAR ENDED JANUARY 1, 1999

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                         COMMISSION FILE NUMBER: 0-25688

                                    SDL, INC.
-------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

            Delaware                                77-0331449
--------------------------------  ---------------------------------------------
 (State or other jurisdiction of                   (IRS Employer
  incorporation or organization)                 Identification No.)

   80 Rose Orchard Way, San Jose, California                    95134
-----------------------------------------------------------   ----------
        (Address of principal executive offices)             (Zip code)

        Registrant's telephone number, including area code   (408) 943-9411

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

      Title of each class                 Name of exchange on which registered
      -------------------                 ------------------------------------
             None                                           N/A

Securities registered pursuant to Section 12(g) of the Act:   Common Stock,
                                                              $0.001 par value
                                                              ----------------
                                                              (Title of Class)





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

Indicate by check mark if 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant, based on the closing sale price of the
Common Stock on March 19, 1999, as reported by Nasdaq was $635,232,358.
Shares of Common Stock held by each officer and director and by each person who
owns 5 percent or more of the outstanding Common Stock have been excluded from
this computation in that such persons may be deemed to be affiliates. This
determination of affiliate status is not a conclusive determination for other
purposes.

                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

As of March 19, 1999 the registrant had outstanding 14,650,862 shares of
Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part II of this Report on Form 10-K incorporates information by reference from
Registrant's 1998 Annual Report to Stockholders. Part III of this Report on
Form 10-K incorporates information by reference from Registrant's Proxy
Statement for its 1999 Annual Meeting of Stockholders.



<PAGE>




















                                     PART I

ITEM 1. BUSINESS

Introduction

SDL, Inc. was established in 1983 as a joint venture between Xerox and 
Spectra-Physics to develop and commercialize semiconductor laser 
technology.  SDL management led a group to buy-out the joint venture 
partners in 1992 and the Company went public in 1995.  SDL designs, 
manufactures and markets semiconductor lasers, fiber optic related 
products and optoelectronic systems.  Historically, the Company has been 
technology-driven, leading the deployment of semiconductor laser 
technology into a wide variety of applications including fiber optic and 
satellite communications, cable television, materials processing, 
printing, data storage, cancer and other medical treatment, display, 
defense and scientific instrumentation.  The Company's technical staff, 
including over fifty PhDs, represents one of the largest investments in 
core technology in the photonics industry.  From the original products 
introduced in 1984, SDL has expanded its product offering to over 200 
standard products in addition to providing custom design and packaging 
for OEM customers.  The Company's revenue also includes revenue from 
customer-funded research programs.

By 1995, SDL management recognized that its core technical strengths of 
high reliability and high power were particularly well-suited to the 
growing market opportunity in fiber optic communications.  Since the 
acquisition of Seastar Optics in 1995, the Company's strategy has 
increasingly focused on providing solutions for optical communications.  
SDL's optical communications products power the transmission of data, 
voice and Internet information over fiber optic networks to meet the 
needs of telecommunications, dense wavelength division multiplexing 
(DWDM), cable television and satellite communications applications.  Led 
by growth in shipments of its flagship 980 nm semiconductor laser pump 
module, revenue from fiber optic products for terrestrial, undersea and 
cable television communications increased by greater than 100% in 1998 
over 1997.  Overall communications-related revenue increased to 66% of 
total revenue in the fourth quarter of 1998.

Demand for Company communications products is benefiting from the build-
out of fiber optic networks to meet the bandwidth needs created by the 
growth of the Internet.  The existing telecommunications infrastructure 
has proved insufficient to meet the massive traffic flow created by the 
Internet.  To solve the demand for bandwidth, network providers have 
begun implementing DWDM technology to increase the capacity of existing 
fiber optic systems as well as implementing DWDM in new construction.  
SDL's fiber optic products, such as its high power, wavelength-stabilized 
pump module, are essential elements in DWDM systems.

With the increased focus on commercial communications products, the 
proportion of revenue derived from U.S. government-related projects 
declined from 43% in 1996 to 28% for all of 1998 and to 21% in the fourth 
quarter of 1998.  SDL's revenue growth in 1997 - 1998 was constrained by 
a shortage in qualified manufacturing capacity, especially in the wafer 
fabrication area.  The Company's new wafer fabrication facility received 
full qualification in June 1998, allowing a faster ramp-up in production 
to meet customer's DWDM demand.  In order to satisfy customer 
requirements for DWDM products, the Company is also in the process of 
doubling the size of its semiconductor laser diode assembly and test 
facility, and constructing a new 40,000 square feet pump module packaging 
facility.

Company Strategy

SDL's objective is to be the customer's first choice for optoelectronics 
products by providing high levels of customer satisfaction, in terms of 
technology, value, quality, delivery and service.  The key elements of 
SDL's business strategy are as follows:

Focus on Fiber Optic (DWDM) Communications

The demand for greater bandwidth capacity over fiber optic networks has 
created a strong demand for DWDM systems.  DWDM offers the highest amount 
of bandwidth capacity for the lowest cost by enabling the transmission of 
multiple signals over a single optical fiber.  SDL is a market leader in 
supplying high power semiconductor laser and amplifier components that 
power DWDM systems.  DWDM-related revenue increased by greater than 100% 
in 1998 over 1997.  The Company believes that there is an excellent match 
between its core technical strengths in high power, high reliability and 
wavelength stabilization, and the growing product requirements in the 
DWDM market.

Expand and Leverage Technology Leadership

The Company believes it is a technology leader in the semiconductor pump 
laser area and in many other product and market areas in which the 
Company is a primary competitor.  With over 120 patents owned and over 90 
patents pending, and with over fifty PhDs on staff, SDL's proprietary 
photonics technology base has expanded rapidly in the past several years.  
The Company plans to leverage its strong technology base in power, 
reliability and wavelength stabilization to maximize its market share in 
the pump laser area, for terrestrial, undersea and cable television 
applications, and to expand into other DWDM fiber optic product areas 
requiring high power and high reliability.

Increase Breadth of Fiber Optic Product Offering to Existing Customer 
Base

SDL has over twenty customers for its DWDM  and fiber optics products.  
In the fourth quarter of 1998, six of these customers purchased over $1 
million of products while another two bought over $500,000.  Since SDL 
has already qualified its technology and manufacturing and quality 
processes with these customers, the Company believes it has the 
opportunity to successfully market additional products to these same 
customers.  Through both internal product development and acquisition of 
advanced products developed by others, the Company intends to provide a 
wide variety of solutions to the optical communications needs of its 
existing customer base.

Increase Level of Integration on the Wafer

SDL pioneered the design of, and commercially developed, the first 
optoelectronic integrated circuit (OEIC) containing multiple 
semiconductor lasers.  Semiconductor OEICs are expected to revolutionize 
the type and number of applications that can be served by 
optoelectronics.  The Company believes that, as with silicon integrated 
circuits, advanced semiconductor OEICs in conjunction with new fiber 
optic technologies will, in the long run, represent an increasing portion 
of the communication network's value. 

Upgrade Bellcore-Qualified Manufacturing Capability

The Company is pursuing programs to significantly expand manufacturing 
capacity, improve yields and reduce unit costs in key product areas.  
Bellcore-qualified wafer fabrication capacity is in place in San Jose, 
California to meet expected product demand into early 2000.  Two 
additional reactors are on order and scheduled to be qualified in time to 
meet the potential increased product demands in 2000-2001.  Construction 
is nearing completion on a doubling of semiconductor laser diode assembly 
and test floor space at the Company's Santa Clara, California facility.  
Construction of a new 40,000 square foot pump module packaging facility 
is also in process near Victoria, British Columbia, Canada; the Company 
expects to begin shipments from this facility by the fourth quarter of 
1999.  Due largely to improved yields in manufacturing, the Company was 
able to reduce pump laser costs in 1998 and increase overall corporate 
gross margins by over five percentage points.  Continuous yield 
improvement remains a high priority.

Partner with Leaders

SDL strives to be the market share leader in each of the product segments 
in which it competes, and seeks partnerships with the largest customers 
in each segment.  Typically, such major system business leaders are 
attracted by the Company's technical leadership at the component and 
subsystem level.  For example, many of the largest manufacturers of high-
channel-count optical amplifiers have partnered with SDL because its high 
power, wavelength-stabilized pump module improves amplifier performance.  
The Company continues to expand its worldwide sales and marketing 
organization with a goal of providing superior solutions and service.  
Examples of successful partnerships include DWDM-- Alcatel, Corning and 
Lucent; Printing-Kodak, Panasonic and Polaroid.

Increase Profitability of Non-Communications Businesses

Product and research revenue from non-communications markets, such as 
printing and materials processing, remains a significant proportion of 
total revenue (34% in the fourth quarter of 1998).  These products are 
also important to overall manufacturing overhead utilization because all 
of the Company's semiconductor laser products are made in the same wafer 
fabrication and assembly facilities.  This business area has been 
generally profitable but may not have the same growth prospects as SDL's 
communications business.  Therefore, the Company is investing in non-
communications product lines only where it has a credible plan for 
profitable growth.  The Company discontinued several low margin non-
communications product lines in 1998.  Conversely, responding to an 
opportunity to increase margins through more vertical integration, the 
Company invested $5.2 million to acquire the fiber laser business of 
Polaroid Corporation in early 1999.

Products and Markets

The Company derives revenue from three principal market areas:  fiber 
optic and satellite communications, printing and material processing and 
contract research.  

Fiber Optic Communications

Dense wavelength division multiplexing (DWDM) technology is 
revolutionizing modern communications by dramatically increasing the 
amount of information that can be transported across fiber optic 
networks.  It is very costly to install fiber cabling for long distance 
communication.  Once cable is installed, therefore, there is a great 
incentive to utilize it to the greatest extent possible, rather than 
having to install additional cable.  Rather than transmitting a single 
light signal over a fiber (as was historically done), with DWDM several 
different light signals each at a different wavelength, are combined 
(multiplexed) and transmitted over the fiber simultaneously.  At the 
output end of the fiber cable, the various signals can be separated 
(demultiplexed) because each signal is at a slightly different 
wavelength.  With technological improvements, the number of different 
wavelengths (or channels) that can be transmitted simultaneously 
continues to increase, from 28 to 40 to 80 to over 100.

With long haul fiber optic systems, light signals may travel over 
thousands of miles of fiber optic cable before reaching the destination.  
The light signals degrade and must be amplified periodically as they 
travel across the fiber.   Optical amplifiers accomplish this task, and 
one of the most important elements in an optical amplifier is the 
semiconductor laser pump module.




                   OPTICAL AMPLIFIER WITH PUMP MODULE
                | ----------------------------------------|
                |                                         |
                | |-------------|                         |
                | |Semiconductor|              OPTICAL    |
                | | Laser Pump  |             AMPLIFIER   |
                | |   Module    |                         |
                | |-------------|                         |
                |        |                                |
                |        |                                |
                |        |                                |
   INPUT        |        |      |---------|               |       OUTPUT
------------    |         ----> | Optical |               |      ---------
Transmitted     |               | Coupler |--------------------> Amplified
Light Signal------------------> |---------| Doped Optical |        Light
  (Source)      |                               Fiber     |       Signal
                |                                         |
                | ----------------------------------------|



As shown above, the incoming source signal is combined with laser light 
produced by a semiconductor laser pump module via an optical coupler.  
The energy from the pump module excites the erbium dopant atoms in the 
doped fiber cable.  When the input signal light enters the doped fiber, 
the input signal light causes the dopant atoms to "relax" and give off  
many photons at the same wavelength and with the same pulse shape as the 
input source signal.  As a result, the output of the optical amplifier is 
a greatly boosted or amplified version of the input source signal.  

SDL is a leading supplier of 980 nm pump modules for DWDM applications.  
The major component within a pump module is the semiconductor laser that 
actually produces the laser light.  The Company also sells stand-alone 
semiconductor lasers to certain customers that prefer to build their own 
fiber optic modules.  In addition to the laser, the module includes 
monitor photodiodes (to measure output of the module), a thermistor (to 
monitor temperature) and a cooler (to prevent overheating).  The module 
also aligns the laser output with an optical fiber.  Built into the 
output fiber of each SDL pump module is a proprietary fiber Bragg 
grating.  Fiber Bragg gratings are precise incisions made into the fiber 
that act as reflective mirrors for particular wavelengths.  Bragg 
gratings in conjunction with the semiconductor laser, produce more 
precise pump wavelengths resulting in improved DWDM amplifiers enabling 
greater bandwidth capacity.

SDL has also designed a series of powerful optical amplifiers, including  
erbium-doped fiber amplifiers, to complement its pump module product 
line.

The majority of SDL's DWDM revenue has been into the terrestrial long-
haul market.  However, the Company also provides products for DWDM 
systems for undersea and cable television communications.

The undersea market is emerging as the next large potential market for 
DWDM systems because it is very expensive to deploy fiber cable across 
oceans.  Qualification testing for undersea cable equipment is 
particularly rigorous and time consuming because once deployed, equipment 
generally cannot be repaired.  SDL was recently selected by Alcatel to 
supply its 980 nm pump lasers and fiber Bragg gratings for undersea DWDM 
systems.  The Company also has received contracts to qualify its 980 nm 
pump laser and module for two additional undersea DWDM system 
contractors.  Further, SDL recently announced the introduction of a 1480 
nm pump laser module which delivers 1.5 watts of optical power, or about 
ten times the power available from traditional pump lasers.  This product 
enables remote pumping of optical amplifiers for short-haul repeaterless 
undersea fiber optic networks such as those connecting islands or cities 
along a common coastline. 

Cable television (CATV) represents another major potential market for 
DWDM equipment. A large portion of the CATV infrastructure is fiber optic 
cable and CATV operators have begun implementing DWDM in order to offer 
bi-directional services and Internet access.  DWDM is well-suited for 
transmitting data between cable headends and hubs.  SDL supplies 980 nm 
pump modules for use in CATV amplifiers.



Satellite Communications

SDL has been the leading supplier of fiber optic semiconductor laser 
components to the satellite communications industry since the mid- 1980s.  
The expertise gained in developing high power, space-qualified laser 
devices provided the technical and reliability base from which to 
successfully enter the terrestrial and undersea fiber optic 
communications markets in the 1990s.  The Company's satellite products 
have been used for satellite-to-satellite and satellite-to-ground 
communications, and to provide a local area fiber optic network within a 
satellite.  Laser-based solutions are selected, over microwave or coaxial 
cable technology,  due to smaller size, lighter weight and greater 
efficiency or speed.  To date, most satellite laser sales have been to 
programs funded by the U.S. government or foreign governments.  However, 
recently, large commercial satellite projects have begun to consider 
laser-based communication solutions.

Printing and Material Processing

SDL offers a broad range of semiconductor laser-based products to a 
variety of non-communications markets.  Historically, most of these 
functions were accomplished either electronically or by using solid state 
or gas lasers.  These solutions had inherent performance limitations in 
terms of capacity, speed, noise, size, durability or reliability.  Using 
its advanced semiconductor laser technology, the Company designs and 
manufactures products to overcome certain of the limitations of 
traditional electronic and optical technology.

Printing

The thermal printing industry currently represents SDL's largest non-
communications market.  The Company's laser diodes and fiber lasers serve 
as heat sources or light sources in high quality printing systems.  SDL's 
fiber-coupled laser diodes enable customers to write high-resolution 
color images directly from computer files onto a printing press plate or 
film, thus eliminating a number of processing steps and resulting in 
significant cost savings for commercial printers.  The Company also 
offers a line of fiber lasers for thermal printing applications.  These 
are optical fibers which are pumped with high reliability semiconductor 
lasers.  Printing customers are attracted to SDL's fiber lasers because 
of their high optical power and good beam quality.  SDL recently 
announced the acquisition of Polaroid's fiber laser business.  This 
element of Polaroid was both a supplier and a customer in the chain of 
supply of fiber laser technology into the printing market.  Therefore, 
the Company believes that this acquisition will improve its ability to 
profitably service the needs of the printing industry.  

Medical

Lasers are increasingly being used in medical applications.  SDL provides 
high reliability laser diodes for these applications.  For example, in 
1998, the Company announced the highest-power, lowest-wavelength 
semiconductor laser for use in photo dynamic treatment of cancer cells.  
Treatment modalities include lung cancer and esophageal cancer. 


Material Processing

Lasers are used in a variety of material processing applications, 
including welding, cutting, soldering, heat treating and marking.  SDL 
provides high power semiconductor lasers and fiber laser-based systems 
for certain of these applications.  In the market for laser marking 
systems, SDL's laser pumped products are generally smaller, more reliable 
and more efficient than competing lamp-pumped systems.  Other laser pump 
products provide optical power to manufacturers of solid state lasers for 
material processing.  For example, in 1998, the Company was selected to 
supply high power laser diode pump arrays for an advanced solid state 
laser capable of generating extreme ultra violet light that is designed 
to enable advanced photolithography for next-generation semiconductor 
integrated circuit manufacturing.

Instrumentation

SDL offers a variety of instrumentation products which provide control, 
power, interface or scientific measurement functions.  For example, a 
fiber amplifier coupled to a wavelength tunable semiconductor laser, 
provides what the Company believes is the highest power tunable light 
source in the 1550 nm range of wavelengths serving the DWDM market.

Contract Research

In addition to developing standard products, SDL seeks contract research 
projects which complement its strategy.  Historically, a majority of 
these projects have been funded by agencies of the U.S. government.  
Under such programs, the Company may bill the customers for a fixed non-
recurring engineering charge or may bill for actual burdened costs.  On 
some of these projects, the Company teams with a group of contractors to 
present a vertically integrated system solution.  Certain of these 
projects also require research and development cost-sharing by the 
Company.  

While not a significant direct contributor to Company earnings, 
management believes that this business activity has benefited the Company 
in two principal ways.  First, the technology developed under these 
contracts is often directly or indirectly applicable to future product 
development.  Second, the projects attract top technical talent to the 
Company. 

Sales and Marketing

The Company markets its products through product line specific direct 
sales forces headquartered in San Jose, California.  The Company also 
maintains technical support in the U.K., Canada and Japan.  In addition, 
the Company sells its products through distributors in Europe, Japan and 
Southeast Asia and a worldwide network of representatives.

The Company seeks partnerships with the largest customers in each segment 
in which it competes.  It believes that the key elements in attracting 
and maintaining such partners are superior technology, value, quality, 
delivery and service, which the Company strives to provide.  Selected 
customers for communications products include Alcatel, Antec, Corning, 
JDS Fitel, Lockeed Martin, Lucent Technologies, Pirelli and Scientific  
Atlanta.  Selected customers for non-communication products include 
Kodak, Panasonic, Polaroid and TRW.

The Company received approximately 14 percent, 19 percent and 21 percent 
of its 1998, 1997 and 1996 revenue, respectively, from Lockheed Martin 
Corporation through several U.S. government and commercial satellite 
communications programs.  See "Factors Affecting Earnings and Stock Price 
-- Dependence Upon Government Programs and Contracts."

Research and Development

During 1998, 1997 and 1996, SDL incurred $10.7 million, $9.8 million and 
$6.7 million respectively, of research and development expense.  In 
addition, the Company recorded cost of sales on customer-funded research 
contracts of $7.5 million, $11.6 million and $9.6 million in 1998, 1997 
and 1996, respectively.

Research and development in the semiconductor laser and fiber optics 
industry is characterized primarily by product design and product 
engineering that invents new products or improves performance and 
functionality in existing products.  The Company believes that its 
ability to successfully compete will be substantially dependent on its 
ability to design, develop and introduce, in a timely manner, new product 
offerings.  In addition, the Company also focuses on reducing the cost of 
existing manufacturing processes, developing new process capabilities and 
adding new features to existing products.

The Company's product development strategy emphasizes highly 
differentiated standard products that are based on customer input and 
requests, as well as custom product design.  The Company often develops 
new products at the customer's systems design stage in order to better 
optimize compatibility with the customer's system or requirements and to 
better ensure market performance. 

The Company has successfully introduced what it believes to be leading 
edge products and has received numerous new product awards.  There can be 
no assurance that the Company will succeed in identifying new product 
opportunities, or in developing and bringing to market any such new 
products, or that the Company will be able to respond effectively to 
technological advances by others.  There also can be no assurance that 
the Company's end markets will accept the Company's new products.  
Moreover, the end markets for the Company's new standard products are 
subject to rapid technological change and there can be no assurance that 
as such markets change, the Company's product offerings will remain 
current.

Manufacturing

The Company's primary manufacturing operations are located at the 
Company's headquarters in San Jose, California, at a nearby facility in 
Santa Clara, California and near Victoria, British Columbia, Canada.  The 
Company's manufacturing operation is vertically integrated and has 
capabilities in computer-aided chip and package design, wafer 
fabrication, wafer processing, device packaging, hybrid microelectronic 
packaging, printed circuit board testing, and final assembly and testing.  
Many of the functions within the Company's manufacturing operation are 
computer monitored or controlled, which are designed to enhance 
reliability and yield.  The Company employs flexible manufacturing 
techniques, allowing the Company to switch readily, reliably and 
efficiently from one product to another.  The Company believes that its 
flexible manufacturing capability differentiates it from its competitors.  

The Company's semiconductor lasers and fiber optic products are 
fabricated using many proprietary processes and customized manufacturing 
equipment.  Therefore, almost all steps in the manufacturing of the 
semiconductor lasers are performed by the Company.  Any interruption in 
manufacturing resulting from shortages of parts or equipment, earthquake, 
fire, equipment failures, yield fluctuations or otherwise could have a 
material adverse effect on the Company's business and results of 
operations.  In particular, a significant portion of the Company's 
production relies or occurs on equipment for which the Company does not 
have a backup.  See "Factors Affecting Earnings and Stock Price -- 
Manufacturing Risks" and "Factors Affecting Earrings and Stock Price --
Need to Manage Growth".  Outside contractors and suppliers are used to 
supply raw materials, packages and standard components, and to assemble 
printed circuit boards.  The Company depends on a single or a limited 
number of suppliers.  The Company generally purchases these single or 
limited source products through standard purchase orders or one year 
agreements.  The Company seeks to maintain a sufficient safety stock to 
overcome shipping delays or supply interruptions by its suppliers.  The 
Company also endeavors to maintain ongoing communications with its 
suppliers to guard against interruptions in supply and has, to date, 
generally (although not always) been able to obtain sufficient supplies 
in a timely manner.  Operating results could be adversely affected by a 
stoppage or delay of supply, substitution of more expensive or less 
reliable alternate parts, receipt of defective parts or contaminated 
materials, an increase in pricing of such parts, or the Company's 
inability to obtain reduced pricing from its suppliers in response to 
competitive pressures.  See "Factors Affecting Earnings and Stock Price -
- Dependence on Single Source and Other Third Party Suppliers." 

The Company has on occasion been unable to manufacture certain products 
in quantities sufficient to meet the demand of its existing customer base 
and of new customers.  In addition, the delivery of certain products has 
on a number of occasions been late causing a loss of market share.  As a 
result, the Company expanded and requalified its wafer fabrication 
facility in San Jose, California in 1997-1998 and intends to further 
expand and remodel its manufacturing facilities in the near future.  In 
the first half of 1999, the Company plans to complete construction of a 
doubling of semiconductor laser assembly and test floor space in Santa 
Clara, California.  Construction of a new 40,000 square foot pump module 
packaging facility is also in process near Victoria, British Columbia, 
Canada.  In addition, two additional reactors are on order and scheduled 
to be qualified in time to meet potential increased wafer fabrication 
demands in 2000-2001.  The Company has experienced, and may in the future 
experience, lower than expected production yields on many of its 
products, including some of its key product lines.  This reduction in 
yields adversely affects gross margins and delays component, product and 
system shipments.  There can be no assurance that the Company will be 
able to achieve acceptable manufacturing yields or ship products on time 
in the future.  Further, the Company's sales contracts often include 
sizeable price discounts for volume orders which require future 
manufacturing cost reductions to achieve desired margins.  There is no 
guarantee that such manufacturing cost reduction activities will be 
successful in maintaining margins.  See "Factors Affecting Earnings and 
Stock Price -- Manufacturing Risks" and "Factors Affecting Earnings and 
Stock Price -- Need to Manage Growth."

Environmental Regulations

The Company is subject to a variety of federal, state and local laws and 
regulations concerning the storage, use, discharge and disposal of toxic, 
volatile, or otherwise hazardous or regulated chemicals or materials used 
in its manufacturing processes.  Further, the Company is subject to other 
safety, labeling and training regulations as required by local, state and 
federal law.  The Company has established an environmental and safety 
compliance program to meet the objective of applicable federal, state and 
local laws.  This compliance program is administered by the environmental 
and safety department of the Company and includes monitoring, measuring 
and reporting compliance, establishing safety programs and training 
Company personnel in environmental and safety matters.  There can be no 
assurance that changes in or failure to meet regulations or laws will not 
have an adverse economic effect on the Company.  Further, such 
regulations could restrict the Company's ability to expand its 
operations.  Any failure by the Company to obtain required permits or 
operate within regulations for, control the use of, or adequately 
restrict the discharge of hazardous or regulated substances or materials 
under present or future regulations could subject the Company to 
substantial liability, require costly changes in the Company's 
manufacturing processes or facilities or cause its operations to be 
suspended.

Backlog

As of December 31, 1998, the Company's backlog was approximately $40.1 
million.  Orders constituting the Company's backlog are subject to 
delivery rescheduling, price renegotiations and cancellation at the 
option of the buyer without significant penalty.  A significant portion 
of the Company's business, in line with that of much of the semiconductor 
and communications industries, is characterized by short lead-time orders 
and quick delivery schedules.

Competition

The Company's various markets are highly competitive.  The Company faces 
current or potential competition from four primary sources:  (i) direct 
competitors, (ii) potential entrants, (iii) suppliers of potential new 
technologies and (iv) suppliers of existing alternative technologies.  
Competitive factors in SDL's major markets include product performance, 
reliability, price, customer service, delivery and quality.  SDL's 
competitors' products may often be preferred by customers with regard to 
one or more of these competitive factors.  Also, many of the Company's 
competitors have significantly greater financial, technical, 
manufacturing, marketing, sales and other resources than SDL.  In 
addition, many of these competitors may be able to respond more quickly 
to new or emerging technologies, evolving industry trends and changes in 
customer requirements and to devote greater resources to the development, 
promotion and sale of their products than the Company.

SDL has numerous competitors worldwide in each of its business areas.  In 
communications, direct competitors include Uniphase, Nortel, Lasertron 
and Furukawa.  In printing and material processing, direct competitors 
include Spectra-Physics, Coherent, Sony and Sanyo.  The Company often 
competes with David Sarnoff Research Laboratories, among others, for 
research contract funding.  The Company also sells its products to 
current competitors and companies with the capability of becoming 
competitors.  Merger, joint ventures or acquisitions of the Company's 
customers with the Company's competitors has occurred in the past and 
could occur in the future causing the loss of sales by the Company.  If 
the markets for the Company's products continue to grow, new competitors 
are likely to emerge and present competitors may increase their market 
share.

Potential new technologies may emerge to compete with the Company's 
products.  In most of the Company's product lines, both the Company and 
competitors are working to develop or acquire new technologies, or 
improvements and modifications to existing technologies, which will 
obsolete present products.  There can be no assurances that the Company 
will continue its development efforts, or that such efforts, if 
continued, will be successful.  In addition, there can be no assurances 
that markets will develop for any such products, or that any such 
products would be competitive with other technologies or products that 
may be developed by others.  There can be no assurance that the Company's 
current or potential competitors or customers will not develop or acquire 
products comparable or superior to those developed by the Company, 
combine or merge to form significant competitors, or adapt more quickly 
than the Company to new technologies, evolving industry trends and 
changing customer requirements.  Increased competition has resulted and 
could, in the future, result in price reductions, reduced margins or loss 
of market share, any of which could materially and adversely affect the 
Company's business and results of operations.  There can be no assurance 
that the Company will be able to compete successfully against current and 
future competitors or that competitive pressures faced by the Company 
would not have a material adverse effect on its business and results of 
operations.  The Company expects that both direct and indirect 
competition will increase in the future.  Additional competition could 
adversely affect the Company's results of operations through price 
reductions and loss of market share.  See "Factors Affecting Earnings and 
Stock Price -- Competition"

Intellectual Property

The Company has been a leader in the development of new technologies in 
the optoelectronics field and as such, has actively sought to patent its 
inventions.  The Company frequently reviews it inventions, and attempts 
to determine which inventions will provide substantial differentiation, 
or represent substantial advancement, between the Company's products and 
those of its competitors.  In certain cases, the Company may also choose 
to keep an invention or a process as a trade secret.  Trade secrets are 
routinely employed in the Company's manufacturing processes.  The Company 
has entered into non-disclosure agreements to protect its proprietary 
technology with its employees and consultants, and in some instances, 
with its suppliers and customers.

To date, the Company owns over 120 U. S. Patents, domestic and foreign, 
on devices, processes, packages and systems.   Over 90 additional patent 
applications are pending.  The Company also has a royalty-free license to 
approximately 50 Xerox U.S. patents.  It also has five royalty-bearing 
licenses under which the Company licenses additional patents from third 
parties.  Management believes that the breadth of its issued and pending 
patents and licenses will allow the Company to compete effectively in its 
present and future businesses.  However, because of rapid technological 
developments in the communications, electronics, optics and semiconductor 
industries and the broad and rapidly developing patent coverage, the 
patent position of any manufacturer, including the Company, is subject to 
uncertainties and may involve complex legal and factual issues.  
Consequently, the Company may encounter patents from other parties which 
may require licensing or may keep the Company from designing, 
manufacturing or selling certain products, or using certain process and 
could materially adversely effect the Company's results of operations 
(See Litigation, Risk of Patent Infringement Claims).  Additionally,  
although the Company holds certain patents, is licensed under other 
patents and is currently prosecuting additional patent applications, 
there can be no assurance that patents will issue from any of the 
Company's  pending applications or that claims allowed by any existing or 
future patents issued or licensed to the Company will not be challenged, 
invalidated, or circumvented, or that any rights granted thereunder will 
provide adequate protection to the Company.  Moreover, the Company may be 
required to participate in interference proceedings to determine the 
priority of inventions, which could result in substantial cost to the 
Company.  See "Factors Affecting Earnings and Stock Price -- Risk of 
Patent Infringement Claims and -- Dependence on Proprietary Technology."

Due to collaborative efforts with others, some of the Company's pending 
patent applications or issued patents are filed under undivided joint 
ownership.  Approximately 39 of the Company's issued patents and pending 
applications were developed under Federal government funding and contain 
a provision for a non-exclusive, royalty-free license for Federal 
government use.

The Company participates in a number of research or product development 
consortia in which the Company has agreed to grant other partners or 
consortia members, along with the Federal government, a non-exclusive 
license to technologies developed with consortia funding.  Some of these 
cross-license grants are royalty-free while others provide for market 
rate license fees.  In certain situations, these consortia require the 
Company to invest its own research and development funds to match Federal 
government funds.  The inventions of the Company and other consortia or 
team members made with matching research and development funds are also 
often subject to such cross-license grant provisions.  Joint inventions 
made in such collaborations are normally jointly owned. 

The Company has registered the letters SDL and its logo with the U.S. 
Patent and Trademark Office as trademarks.

Employees

As of December 31, 1998, the Company employed 738 people, including  470 
in manufacturing, 170 in engineering, research and development, 34 in 
sales and marketing, and 64 in general and administrative capacities.  
The Company also employs, from time to time, a number of temporary 
employees and consultants on a contract basis.  As of December 31, 1998, 
the Company employed 19 such people.  None of the Company's employees is 
represented by a labor union.  The Company has not experienced any work 
stoppages and considers it relations with its employees to be good.

                 FACTORS AFFECTING EARNINGS AND STOCK PRICE

The statements contained in this Report on Form 10-K that are not purely 
historical are forward-looking statements within the meaning of Section 
27A of the Securities Act of 1933 and Section 21E of the Securities 
Exchange Act of 1934, including statements regarding the Company's 
expectations, hopes, beliefs, intentions or strategies regarding the 
future. Forward looking statements include: the Company's plans to 
leverage its technology base to maximize its market share; the Company's 
ability to market additional products to existing customers; the 
Company's plans to provide a wide variety of customer solutions; ability 
to ramp manufacturing to meet demand, ability to reduce manufacturing 
costs and maintain margins on volume orders,  the Company's ability to 
profitability serve the printing industry, all under the heading 
"Business-Company Strategy;" expected future levels of research and 
development (R&D) expenditures, under the heading "Business-Research and 
Development;" the Company's ability to switch readily, reliably and 
efficiently from manufacture of one product to another, under the heading 
"Business-Manufacturing," the Company's ability to compete effectively 
in the future, under the heading "Business-Intellectual Property;" the 
effect of R&D expenditures on manufacturing yields, gross margin and 
product introduction; the amount of future R&D and selling, general and 
administrative (SG&A) expenditures; the amount and realizability of the 
Company's net deferred tax assets; the amount and timing of capital 
equipment and leasehold improvements expenditures; the sufficiency of 
anticipated cash resources to meet the Company's future cash needs; and 
the expense, timing and impact of Year 2000 issues and solutions, all 
under the heading "Management's Discussion and Analysis of Financial 
Condition and Results of Operations." All forward-looking statements 
included in this document are based on information available to the 
Company on the date hereof and the Company assumes no obligation to 
update any such forward looking statement. It is important to note that 
the Company's actual results could differ materially from those in such 
forward looking statements. Among the factors that could cause actual 
results to differ materially are the factors detailed below. You should 
consult the risk factors listed from time to time in the Company's 
Reports on Forms 10-Q and 8-K and the Company's Annual Reports to 
Stockholders. 

Fluctuations In Quarterly Operating Results.

The Company has experienced and expects to continue to experience 
significant fluctuations in its quarterly results of operations due to a 
number of factors, many of which are beyond the Company's control.  Among 
the factors that have in the past and/or could in the future affect the 
Company's results are:  changes in market demand, market acceptance of 
new and existing products, receipt or cancellation of large customer 
orders, the Company's ability to timely and cost-effectively design, 
manufacture and ship products, the mix of products sold, the mix of 
customers, competitive pricing pressures, the introduction of new 
products by competitors and costs associated with the acquisition of 
businesses, products or technologies.  In addition, the Company sells its 
products to large OEM manufacturers, customers in the research and 
development market and government customers.  Sales to these customers 
can vary significantly due to many factors, including the development of 
markets for the Company's customers' products, market acceptance of the 
Company's customers' products, year-end budgetary constraints and 
government spending patterns.  As a result of the above factors, 
operations are subject to significant variability and uncertainty from 
quarter to quarter.

Manufacturing Risks. 

The manufacture of semiconductor lasers and related products and systems 
such as those sold by the Company is highly complex and precise, 
requiring production in a highly controlled and clean environment.  
Changes in the Company's or its suppliers' manufacturing processes or the 
inadvertent use of defective or contaminated materials by the Company or 
its suppliers has in the past and could in the future adversely affect 
the Company's ability to achieve acceptable manufacturing yields and 
product reliability. To the extent the Company does not achieve such 
yields or product reliability, its operating results and customer 
relationships would be adversely affected.  The Company relies almost 
exclusively on its own production capability in computer-aided chip and 
package design, wafer fabrication, wafer processing, device packaging, 
hybrid microelectronic packaging, printed circuit board testing, final 
assembly and testing of products. Because the Company manufactures, 
packages and tests these components, products and systems at its own 
facility, and such components, products and systems are not readily 
available from other sources, any interruption in manufacturing resulting 
from shortages of parts of equipment, fire, natural disaster, equipment 
failures, poor yields or otherwise would have a material adverse effect 
on the Company's business and results of operations.  A significant 
portion of the Company's production relies or occurs on equipment for 
which the Company does not have a backup. To alleviate, at least in part, 
this situation, the Company remodeled its front-end wafer fabrication 
facility and its packaging and test facility.   There can be no 
assurances that the Company will not experience further start-up costs 
and yield problems in fully utilizing its increased wafer capacity 
targeted by these remodeling efforts. In addition, the Company is 
deploying a new manufacturing execution software system designed to 
further automate and streamline its manufacturing processes, and there 
may be unforeseen deficiencies in this system which could adversely 
affect the Company's manufacturing processes.  In the event of any 
disruption in production by one of these machines or systems, the 
Company's business and results of operations could be materially 
adversely affected. Furthermore, the Company has a limited number of 
employees dedicated to the operation and maintenance of its equipment, 
loss of whom could affect the Company's ability to effectively operate 
and service such equipment.  The Company experienced lower than expected 
production yields on some of its products, including certain key product 
lines during 1997 and the first half of 1998. This reduction in yields 
adversely affected gross margins, delayed component, product and system 
shipments and, to a certain extent, new orders booked. Although more 
recently the Company's yields have improved, there can be no assurance 
yields will continue to improve or not decline in the future, nor that in 
the future the Company's manufacturing yields will be acceptable to ship 
products on time. To the extent the Company experiences lower than 
expected manufacturing yields or experiences any shipment delays, gross 
margins will likely be adversely affected and the Company could lose 
customers and experience reduced or delayed customer orders and 
cancellation of existing backlog. The Company presently is ramping 
production of certain of its product lines. This requires hiring and 
training of new personnel, acquiring new equipment, and expanding its 
packaging facilities and capabilities. Difficulties in ramping production 
to meet expected demand and schedules have occurred in the past and may 
occur in the future.  Quality problems could arise, yields could fall, 
and gross margins could be adversely impacted during such a ramp. 
Aggressive volume pricing for large long-term orders has been provided to 
certain customers. Cost reductions in manufacturing are required to avoid 
a drop in gross margins for certain products sold to such customers. Such 
cost reductions may not occur rapidly enough to avoid a decrease in gross 
margins on these products that could result from such volume pricing 
terms. In such event, the Company's business and results of operations 
would be materially adversely affected. 

Competition. 

The Company's various markets are highly competitive. The Company faces 
current or potential competition from four primary sources: (i) direct 
competitors, (ii) potential entrants, (iii) suppliers of potential new 
technologies and (iv) suppliers of existing alternative technologies. The 
Company offers a range of components, products and systems and has 
numerous competitors worldwide in various segments of its markets. As the 
markets for the Company's products grow, new competitors have recently 
emerged and are likely to continue to do so in the future. The Company 
also sells products and services to companies with which it presently 
competes or in the future may compete and certain of the Company's 
customers have been or could be acquired by, or enter into strategic 
relations with the Company's competitors. In most of the Company's 
product lines, both the Company and competitors are working to develop 
new technologies, or improvements and modifications to existing 
technologies, which will obsolete present products. Many of the Company's 
competitors have significantly greater financial, technical, 
manufacturing, marketing, sales and other resources than SDL. In 
addition, many of these competitors may be able to respond more quickly 
to new or emerging technologies, evolving industry trends and changes in 
customer requirements and to devote greater resources to the development, 
promotion and sale of their products than the Company. There can be no 
assurance that the Company's current or potential competitors have not 
already or will not in the future develop or acquire products or 
technologies comparable or superior to those developed by the Company, 
combine or merge with each other or the Company's customers to form 
significant competitors, expand production capacity to more quickly meet 
customer supply requirements, or adapt more quickly than the Company to 
new technologies, evolving industry trends and changing customer 
requirements. Increased competition has resulted and could, in the 
future, result in price reductions, reduced margins or loss of market 
share, any of which could materially and adversely affect the Company's 
business and results of operations. There can be no assurance that the 
Company will be able to compete successfully against current and future 
competitors or that competitive pressures faced by the Company would not 
have a material adverse effect on its business and results of operations. 
The Company expects that both direct and indirect competition will 
increase in the future. Additional competition could have a material 
adverse effect on the Company's results of operations through price 
reductions and loss of market share.

Dependence On Emerging Applications And New Products. 

The Company's current products serve many applications in the 
communications and materials processing and printing markets. In many 
cases, the Company's products are substantially completed, but the 
customer's product incorporating the Company's products is not yet 
completed or the applications or markets for the customer's product are 
new or emerging. In addition, the Company and certain of its customers 
are currently in the process of developing new products, in various 
stages of development, testing and qualification, sometimes in emerging 
applications or new markets. The Company believes that rapid customer 
acceptance of its new products is key to the Company's financial results. 
A substantial portion of the Company's products address markets that are 
not now, and may never become, substantial commercial markets. The 
Company has experienced, and is expected to continue to experience, 
fluctuation in customer orders and competitive, technological and pricing 
constraints that may preclude development of markets for its products and 
its customers' products. The Company's customers are often required to 
test and qualify laser pump modules, transmitters, and marking systems 
among other new products for potential volume applications. No assurances 
can be given that the Company or its customers will qualify these new 
products, will continue their existing product development efforts, or if 
continued that such efforts will be successful, that markets will develop 
for any of the Company's technology or pricing will enable such markets 
to develop, or that the Company's and its customer's products will not be 
superseded by other technology or products. The Company may also be 
unable to develop new products on a timely schedule.  Moreover, even if 
the Company is successful in the timely development of new products and 
such products are accepted in the market, the Company often initially 
experiences lower margins on new products due to lower yields and other 
factors, and thus the Company may be unable  to manufacture and sell such 
new products at an acceptable cost so as to achieve acceptable gross 
margins.

Need To Manage Growth. 

The Company has on occasion been unable to manufacture certain products 
in quantities sufficient to meet demand of its existing customer base and 
new customers. The expansion in the scope of its operations has placed a 
considerable strain on its management, financial, manufacturing and other 
resources and has required the Company to implement and improve a variety 
of operating, financial and other systems, procedures and controls. In 
addition, the Company is currently deploying a new enterprise resource 
planning (ERP) system. There can be no assurance that any existing or new 
systems, procedures or controls will be adequate to support the Company's 
operations or that its systems, procedures and controls will be designed, 
implemented or improved in a cost-effective and timely manner. Any 
failure to implement, improve and expand such systems, procedures and 
controls in an efficient manner at a pace consistent with the Company's 
business could have a material adverse effect on the Company's business 
and results of operations. The future success of the Company is 
dependent, in part, on its ability to attract, assimilate and retain 
additional employees, including certain key personnel. The Company will 
continue to need a substantial number of additional personnel, including 
those with specialized skills, to commercialize its products and expand 
all areas of its business in order to continue to grow. Competition for 
such personnel is intense, and there can be no assurance that the Company 
will be able to attract, assimilate or retain additional highly qualified 
personnel.

Risks Of Acquisitions. 

The Company's strategy involves the acquisition and integration of 
additional companies' products, technologies and personnel. The Company 
has limited experience in acquiring outside businesses. Acquisition of 
businesses requires substantial time and attention of management 
personnel and may require also additional equity or debt financings. 
Further, integration of newly established or acquired businesses is often 
disruptive. Since the Company has acquired or in the future may acquire 
one or more businesses, there can be no assurance that the Company will 
identify appropriate targets, will acquire such businesses on favorable 
terms, or will be able to successfully integrate such organizations into 
its business. Failure to do so could materially adversely affect the 
Company's business, financial condition and results of operations. 

Dependence Upon Government Programs And Contracts. 

The Company derived approximately 28%, 38%, and 43% of its revenue during 
fiscal 1998, 1997, and 1996, respectively, directly and indirectly from a 
variety of Federal government sources. The Company received approximately 
14%, 19% and 21% of its revenue for fiscal 1998, 1997 and 1996, 
respectively, from Lockheed Martin through several U.S. government and 
commercial programs. Almost all of the Company's revenue from Lockheed 
Martin during these periods was derived from Federally-funded programs. 
The demand for certain of the Company's services and products is directly 
related to the level of funding of government programs. The Company 
believes that the success and further development of its business is 
dependent, in significant part, upon the continued existence and funding 
of such programs and upon the Company's ability to participate in such 
programs. For example, substantially all of the Company's research 
revenue for 1998, 1997 and 1996 was funded by Federal programs. Most of 
the Company's Federally-funded programs are subject to renewal every one 
or two years, so that continued work by the Company under these programs 
in future periods is not assured. Federally-funded programs are subject 
to termination for convenience of the government agency, at which point 
the Company would be reimbursed for related allowable costs incurred to 
the termination date. Federally-funded contracts are subject to audit of 
pricing and actual costs incurred, which have resulted, and could result 
in the future, in price adjustments. The Federal government has in the 
past, and could in the future, challenge the Company's accounting 
methodology for computing indirect rates and allocating indirect costs to 
government contracts. The government is currently challenging certain 
indirect cost allocations. While management believes that amounts 
recorded on its financial statements are adequate to cover all related 
risks, the government has not concluded its investigation or agreed to a 
settlement with the Company. Although the outcome of this matter cannot 
be determined at this time, management does not believe that its outcome 
will have a material adverse effect on the Company's financial position, 
results of operations and cash flows. However, based on future 
developments, the Company's estimate of the outcome of these matters 
could change in the near term. In addition, a change in the Company's 
accounting practices in this area could result in reduced profit margins 
on government contracts. 

Dependence On Key Employees. 

The Company's future performance also depends in significant part upon 
the continued service of its key technical and senior management 
personnel. The loss of the services of one or more of the Company's 
officers or other key employees could have a material adverse effect on 
the Company's business, operating results and financial condition. While 
many of the Company's current employees have many years of service with 
the Company, there can be no assurance that the Company will be able to 
retain its existing personnel. If the Company is unable to retain and 
hire additional personnel, the Company's business and results of 
operations could be materially and adversely affected. See " -- Need to 
Manage Growth." 

Risk Of Patent Infringement Claims. 

The semiconductor, optoelectronics, communications, information and laser 
industries are characterized by frequent litigation regarding patent and 
other intellectual property rights. From time to time the Company has 
received, and may receive in the future, notice of claims of infringement 
of other parties' proprietary rights and licensing offers to 
commercialize third party patent rights. In addition, there can be no 
assurance that additional infringement claims (or claims for 
indemnification resulting from infringement claims) will not be asserted 
against the Company, or that existing claims or any other assertions will 
not result in an injunction against the sale of infringing products or 
otherwise materially adversely affect the Company's business and results 
of its operations. 

In 1985, the Company first received correspondence from Rockwell 
corporation alleging that a fabrication process used by the Company 
infringes Rockwell's patent rights. Those allegations led to two related 
lawsuits, one of which is still pending. The first lawsuit was filed in 
August 1993, when Rockwell sued the Federal government in the United 
States Court of Federal Claims, alleging infringement of these patent 
rights with respect to the contracts the Federal government has had with 
at least 15 companies, including the Company.  Rockwell International 
Corporation v. The United States of America, No. 93-542C (U.S. Ct. Fed. 
Cl.) (the "Government Lawsuit"). The Company was not originally named as 
a party to the Government Lawsuit. However, the Federal government has 
asserted that, if it was held liable to Rockwell for infringement of 
Rockwell's patent rights in connection with some of its contracts with the 
Company, then the Company would be liable to indemnify the Federal 
government for a portion of its liability on certain contracts. In June 
1995, after Rockwell filed a second lawsuit (the "California Lawsuit," 
described below), the Company filed a motion to intervene in the 
Government Lawsuit. That motion was granted on August 17, 1995. Upon 
intervening in the Government Lawsuit, the Company filed an answer to 
Rockwell's complaint, alleging that Rockwell's patent was invalid, that 
Rockwell's patent was not infringed by the Company, that Rockwell's patent 
was unenforceable under the doctrine of inequitable conduct, and that 
Rockwell's action is barred by the doctrines of laches and equitable 
estoppel. After extensive discovery, both the Government and the Company 
moved for summary judgment on the ground that Rockwell's patent was 
invalid. By order dated February 5, 1997, the Court of Federal Claims 
granted those motions and entered judgment in favor of the Government and 
the Company. However, Rockwell appealed the Court of Federal Claims' 
decision, and on June 15, 1998, the United States Court of Appeals for the 
Federal Circuit issued an opinion vacating the judgment that has been 
entered in favor of the Company and the Federal government.  The U.S. 
Circuit Court for the Federal Circuit held that the Court of Federal 
Claims had erred in finding that there were no genuine disputes of 
material fact concerning the obviousness of the Rockwell patent, and that 
the resolution of these disputes requires a trial. The Federal Circuit 
thus remanded the case back to the trial court for further proceedings. 
The Federal Circuit also affirmed the Court of Federal Claims' denial of 
the Company's motion for summary judgment of invalidity based on 
anticipation, as well as the Court of Federal Claims' claim construction. 
Subsequent to the Federal Circuit's action, Rockwell and the United States 
reached a settlement in the Government Lawsuit.  Pursuant to the 
settlement ending the Government Lawsuit, a judgment was entered in 
Rockwell's favor against the Federal government in the amount of 
$16,900,000.  The Company did not participate in the settlement. The 
Federal government has not again raised the issue of the Company's 
potential indemnity obligation.

As noted above, the Company's decision to intervene in the Government 
Lawsuit was made after Rockwell filed suit against the Company in the 
Northern District of California in May 1995, alleging that the Company had 
infringed the Rockwell patent in connection with the Company's manufacture 
and sale of products to customers other than the United States. Again, the 
complaint alleges that a fabrication process used by the Company infringes 
the Rockwell patent.(Rockwell International Corporation v. SDL, Inc., No. 
C95-01729 MHP (U.S. Dist.Ct., N.D. Cal.)). By its complaint, Rockwell 
seeks a permanent injunction against the Company enjoining it from 
infringement of the Rockwell patent, damages in an unspecified amount for 
the Company's alleged past infringement of the patent, treble damages and 
attorneys' fees. The complaint was served on the Company on June 30, 1995, 
and the Company filed an answer to the complaint on August 18, 1995, 
alleging that Rockwell's patent is invalid, that Rockwell's patent is not 
infringed by the Company, that Rockwell's patent is unenforceable under 
the doctrine of inequitable conduct, and that Rockwell's action is barred 
by the doctrines of laches and equitable estoppel. On August 11, 1995, 
prior to filing its answer, the Company filed a motion to stay this action 
based upon the pendency of the Government Lawsuit. The District Court 
granted the Company's motion to stay on September 15, 1995. Subsequent to 
the settlement of the Government Lawsuit, the District Court lifted this 
stay, and discovery has re-commenced for the California Lawsuit.  See 
"Factors Affecting Earnings and Stock Price--Risk of Patent Infringement 
Claims." 

Although the Court of Federal Claims ruled in the Company's favor, finding 
the patent invalid on motion for summary judgment, the Court of Appeals 
for the Federal Circuit reversed the summary judgment ruling, meaning that 
the issue of validity needed to go to trial. Such a trial would now occur 
before a jury in California.  The Company believes that it has meritorious 
defenses to Rockwell's allegations.  It should be noted that the 
resolution of intellectual property disputes is often fact intensive and, 
therefore, the results are inherently uncertain. There can be no assurance 
that Rockwell will not ultimately prevail in this dispute.  If Rockwell 
were to prevail, it could be awarded substantial monetary damages and/or 
an injunction against the sale of infringing products by the Company. If 
such an injunction were entered, the Company may seek to obtain a license 
to use Rockwell's patent. There can be no assurance, however, that a 
license would be available on reasonable terms or at all. The award of 
monetary damages against the Company, or the grant of an injunction and 
failure to obtain a license to use Rockwell's patent on commercially 
reasonable terms could have a material adverse effect on the Company's 
business and results of operations.  Litigation of Rockwell's claim 
against the Company is expected to involve significant expense to the 
Company and could divert the attention of the Company's technical and 
management personnel and could have a material adverse effect on the 
Company's business and results of operations. In addition, the Company is 
involved in various legal proceedings arising in the ordinary course of 
its business.

Customer Order Fluctuations. 

The Company's product revenue is subject to fluctuations in customer 
orders. Occasionally, some of the Company's customers have ordered more 
products than they need in a given period, thereby building up inventory 
and delaying placement of subsequent orders until such inventory has been 
reduced. The Company may also build inventory in anticipation of 
receiving new orders in the future. Also, customers have occasionally 
placed large orders which they have subsequently canceled.  In addition, 
due to the fact that the Company's sales of its 980 nm pump module 
products comprise a significant portion of the Company's total revenues, 
the Company's revenues are particularly susceptible to customer order 
fluctuations for this product.  Such fluctuations, cancellations and the 
failure to receive such new orders can have adverse effects on the 
Company's business and results of operations.  The Company may also have 
incurred significant inventory or other expenses in preparing to fill 
such orders prior to their cancellation. Virtually all of the Company's 
backlog is subject to cancellation. Cancellation of significant portions 
of the Company's backlog, delays in scheduled delivery dates, or failure 
of the Company to sell the inventory built up in anticipation of orders, 
could have a material adverse effect on the Company's business and 
results of operations. 

Dependence On Proprietary Technology. 

The Company's future success and competitive position is dependent in 
part upon its proprietary technology, and the Company relies in part on 
patent, trade secret, trademark and copyright law to protect its 
intellectual property. There can be no assurance that any of the more 
than 120 patents owned or approximately 13 patents licensed by the 
Company will not be invalidated, circumvented, challenged or licensed to 
others, that the rights granted thereunder will provide competitive 
advantages to the Company or that any of the Company's approximately 90 
pending or future patent applications will be issued with the scope of 
the claims sought by the Company, if at all. Furthermore, there can be no 
assurance that others will not develop technologies that are similar or 
superior to the Company's technology,  duplicate the Company's technology 
or design around the patents owned by the Company, or patent or assert 
patents on technology which the Company might use or intend to use. In 
addition, effective copyright and trade secret protection may be 
unavailable, limited or not applied for in certain foreign countries. 
Certain of the Company's technology is licensed on a non-exclusive basis 
from Xerox and other third parties which may license such technology to 
others, including competitors of the Company. There can be no assurance 
that steps taken by the Company to protect its technology will prevent 
misappropriation of such technology. In addition, litigation has been 
necessary and may be necessary in the future to enforce the Company's 
patents and other intellectual property rights, to protect the Company's 
trade secrets, to determine the validity and scope of the proprietary 
rights of others or to defend against claims of infringement or 
invalidity of intellectual property rights developed internally or 
acquired from third parties. Such litigation has resulted in substantial 
costs and diversion of resources and could have a material adverse effect 
on the Company's business and results of operations. Moreover, the 
Company may be required to participate in interference proceedings to 
determine the priority of inventions which could result in substantial 
cost to the Company.  See" Business -- Intellectual Property." 

International Distribution Risks. 

Revenues from customers outside of the United States  accounted for 
approximately 24 percent, 17 percent and 15 percent, of the Company's 
total revenue in 1998, 1997 and 1996, respectively. International revenue 
carries a number of inherent risks, including reduced protection for 
intellectual property rights in some countries, the impact of unstable 
environments in economies outside the United States, generally longer 
receivable collection periods, changes in regulatory environments, 
tariffs and other potential trade barriers. In addition, certain of the 
Company's international revenue is subject to export licensing and 
approvals by the DoC or other Federal governmental agencies.  Although 
not related to the distribution of any of the Company's products, a sales 
representative for the Company's products in China has been indicted for 
violation of the U.S. Export Control Act and, as a result, the Company is 
seeking another sale representative in China.  To date, the Company has 
experienced little difficulty in obtaining such export licenses or 
approvals.  However, the failure to obtain such export licenses or 
approvals or comply with such regulations in the future could have a 
material adverse effect on the Company's business and results of 
operations. 

The Company currently uses local distributors in key industrialized 
countries and local representatives in smaller markets. Although the 
Company has formal distribution contracts with certain of its 
distributors and representatives, some of the Company's relationships are 
currently on an informal basis. Most of the Company's international 
distributors and representatives offer only the Company's products; 
however, certain distributors offer competing products and there can be 
no assurance that additional distributors and representatives will not 
also offer products that are competitive with the Company's products. 
There can be no assurance that the Company's international distributors 
and representatives will enter into formal distribution agreements at all 
or on acceptable terms, will not terminate informal or contractual 
relationships, will continue to sell the Company's products or that the 
Company will provide the distributors and resellers with adequate levels 
of support. The loss of, or a significant reduction in revenue through, a 
significant number of the Company's international distributors and 
representatives would have a material adverse effect on the Company's 
business and results of operations. 

Environmental Risks.

The Company is subject to a variety of federal, state and local laws and 
regulations concerning the storage, use, discharge and disposal of toxic, 
volatile, or otherwise hazardous or regulated chemicals or materials used 
in its manufacturing processes. Further, the Company is subject to other 
safety, labeling and training regulations as required by local, state and 
federal law. The Company has established an environmental and safety 
compliance program to meet the objectives of applicable federal, state 
and local laws. This compliance program is administered by the 
environmental and safety department of the Company and includes 
monitoring, measuring and reporting compliance, establishing safety 
programs and training Company personnel in environmental and safety 
matters. There can be no assurance that changes in regulations and laws 
will not have an adverse economic effect on the Company. Further, such 
regulations could restrict the Company's ability to expand its 
operations. Any failure by the Company to obtain required permits or 
operate within regulations for, control the use of, or adequately 
restrict the discharge of hazardous or regulated substances or materials 
under present or future regulations could subject the Company to 
substantial liability, require costly changes in the Company's 
manufacturing processes or facilities or cause its operations to be 
suspended.

Dependence On Single Source And Other Third Party Suppliers. 

The Company depends on a single or limited number of outside contractors 
and suppliers for raw materials, packages and standard components, and to 
assemble printed circuitboards. The Company generally purchases these 
single or limited source products through standard purchase orders or one 
year supply agreements and has no long-term guaranteed supply agreements 
with such suppliers. The Company seeks to maintain a sufficient safety 
stock to overcome short-term shipping delays or supply interruptions by 
its suppliers. The Company also endeavors to maintain ongoing 
communications with its suppliers to guard against interruptions in 
supply and has, to date, generally been able to obtain sufficient 
supplies in a timely manner. However, the Company's business and results 
of operations have in the past been and could in the future be adversely 
affected by a stoppage or delay of supply, substitution of more expensive 
or less reliable parts, receipt of defective parts or contaminated 
materials, an increase in the price of such supplies or the Company's 
inability to obtain reduced pricing from its suppliers in response to 
competitive pressures. 

Potential Volatility Of Stock Price. 

Factors such as announcements of technological innovations, large 
customer orders, customer order delays or cancellations, customer 
qualification delays or new products by the Company, its competitors or 
third parties, possible acquisition of SDL by a third party, merger or 
acquisition announcements, acquisitions or mergers by competitors or 
customers, production problems as well as quarterly variations in the 
Company's actual or anticipated results of operations and developments in 
litigation involving the Company, may cause the market price of the 
Company's Common Stock to fluctuate significantly. Furthermore, the stock 
market has experienced extreme price and volume fluctuations, which have 
particularly affected the market prices of many high technology companies 
and which have often been unrelated to the operating performance of such 
companies. These broad market fluctuations may adversely affect the 
market price of the Company's Common Stock. Many companies in the optical 
communications industry have in the past year experienced historical 
highs in the market prices of their stock. There can be no assurance that 
the market price of the Company's Common Stock will not experience 
significant fluctuations in the future, including fluctuations that are 
unrelated to the Company's performance.

ITEM 2.  PROPERTIES

The company leases two adjacent buildings comprising approximately 64,000 
square feet of office and manufacturing space in San Jose, California.  
These facilities serve as the Company's headquarters and include 
manufacturing, marketing, research, engineering and administrative 
functions.  The present leases expire in November 2001.  The Company has 
renewal options to extend these leases through November 2016.

In January 1995, the Company leased an additional 50,000 square feet of 
manufacturing and office space in Santa Clara, California, approximately 
three miles from its headquarters.  In 1997, the Company exercised an 
option for an adjacent additional 50,000 square feet.  This lease, 
including the additional space, expires in March 2002.  The Company has 
renewal options to extend this lease through 2017.

In April 1996, the Company leased an additional 10,000 square feet of 
office space in Santa Clara, California.  This lease expires in April 
1999.

SDL Optics leases 23,100 square feet of manufacturing and office space, 
and adjacent parking space, near Victoria, British Columbia, Canada.  
These facilities serve as SDL Optics' headquarters and include 
manufacturing, marketing, research, engineering and administrative 
functions.  The present leases expire in December 1999.  SDL Optics has 
an option to extend the leases for an additional three months. 

During 1998, SDL Optics entered into a lease for a new building with an 
initial capacity of approximately 40,000 square feet located near 
Victoria, British Columbia, where it plans to expand in the third quarter 
of 1999.  The Company has options to extend this lease through July 2009.

The Company also leases smaller facilities in Cambridge, Massachusetts 
and Bensalem, Pennsylvania.

ITEM 3. LEGAL PROCEEDINGS  

In 1985, the Company first received correspondence from Rockwell 
corporation alleging that a fabrication process used by the Company 
infringes Rockwell's patent rights. Those allegations led to two related 
lawsuits, one of which is still pending. The first lawsuit was filed in 
August 1993, when Rockwell sued the Federal government in the United 
States Court of Federal Claims, alleging infringement of these patent 
rights with respect to the contracts the Federal government has had with 
at least 15 companies, including the Company.  Rockwell International 
Corporation v. The United States of America, No. 93-542C (U.S. Ct. Fed. 
Cl.) (the "Government Lawsuit"). The Company was not originally named as 
a party to the Government Lawsuit. However, the Federal government has 
asserted that, if it was held liable to Rockwell for infringement of 
Rockwell's patent rights in connection with some of its contracts with the 
Company, then the Company would be liable to indemnify the Federal 
government for a portion of its liability on certain contracts. In June 
1995, after Rockwell filed a second lawsuit (the "California Lawsuit," 
described below), the Company filed a motion to intervene in the 
Government Lawsuit. That motion was granted on August 17, 1995. Upon 
intervening in the Government Lawsuit, the Company filed an answer to 
Rockwell's complaint, alleging that Rockwell's patent was invalid, that 
Rockwell's patent was not infringed by the Company, that Rockwell's patent 
was unenforceable under the doctrine of inequitable conduct, and that 
Rockwell's action is barred by the doctrines of laches and equitable 
estoppel. After extensive discovery, both the Government and the Company 
moved for summary judgment on the ground that Rockwell's patent was 
invalid. By order dated February 5, 1997, the Court of Federal Claims 
granted those motions and entered judgment in favor of the Government and 
the Company. However, Rockwell appealed the Court of Federal Claims' 
decision, and on June 15, 1998, the United States Court of Appeals for the 
Federal Circuit issued an opinion vacating the judgment that has been 
entered in favor of the Company and the Federal government.  The U.S. 
Circuit Court for the Federal Circuit held that the Court of Federal 
Claims had erred in finding that there were no genuine disputes of 
material fact concerning the obviousness of the Rockwell patent, and that 
the resolution of these disputes requires a trial. The Federal Circuit 
thus remanded the case back to the trial court for further proceedings. 
The Federal Circuit also affirmed the Court of Federal Claims' denial of 
the Company's motion for summary judgment of invalidity based on 
anticipation, as well as the Court of Federal Claims' claim construction. 
Subsequent to the Federal Circuit's action, Rockwell and the United States 
reached a settlement in the Government Lawsuit.  Pursuant to the 
settlement ending the Government Lawsuit, a judgment was entered in 
Rockwell's favor against the Federal government in the amount of 
$16,900,000.  The Company did not participate in the settlement. The 
Federal government has not again raised the issue of the Company's 
potential indemnity obligation.

As noted above, the Company's decision to intervene in the Government 
Lawsuit was made after Rockwell filed suit against the Company in the 
Northern District of California in May 1995, alleging that the Company had 
infringed the Rockwell patent in connection with the Company's manufacture 
and sale of products to customers other than the United States. Again, the 
complaint alleges that a fabrication process used by the Company infringes 
the Rockwell patent.(Rockwell International Corporation v. SDL, Inc., No. 
C95-01729 MHP (U.S. Dist.Ct., N.D. Cal.)). By its complaint, Rockwell 
seeks a permanent injunction against the Company enjoining it from 
infringement of the Rockwell patent, damages in an unspecified amount for 
the Company's alleged past infringement of the patent, treble damages and 
attorneys' fees. The complaint was served on the Company on June 30, 1995, 
and the Company filed an answer to the complaint on August 18, 1995, 
alleging that Rockwell's patent is invalid, that Rockwell's patent is not 
infringed by the Company, that Rockwell's patent is unenforceable under 
the doctrine of inequitable conduct, and that Rockwell's action is barred 
by the doctrines of laches and equitable estoppel. On August 11, 1995, 
prior to filing its answer, the Company filed a motion to stay this action 
based upon the pendency of the Government Lawsuit. The District Court 
granted the Company's motion to stay on September 15, 1995. Subsequent to 
the settlement of the Government Lawsuit, the District Court lifted this 
stay, and discovery has re-commenced for the California Lawsuit.  See 
"Factors Affecting Earnings and Stock Price--Risk of Patent Infringement 
Claims." 

Although the Court of Federal Claims ruled in the Company's favor, finding 
the patent invalid on motion for summary judgment, the Court of Appeals 
for the Federal Circuit reversed the summary judgment ruling, meaning that 
the issue of validity needed to go to trial. Such a trial would now occur 
before a jury in California.  The Company believes that it has meritorious 
defenses to Rockwell's allegations.  It should be noted that the 
resolution of intellectual property disputes is often fact intensive and, 
therefore, the results are inherently uncertain. There can be no assurance 
that Rockwell will not ultimately prevail in this dispute.  If Rockwell 
were to prevail, it could be awarded substantial monetary damages and/or 
an injunction against the sale of infringing products by the Company. If 
such an injunction were entered, the Company may seek to obtain a license 
to use Rockwell's patent. There can be no assurance, however, that a 
license would be available on reasonable terms or at all. The award of 
monetary damages against the Company, or the grant of an injunction and 
failure to obtain a license to use Rockwell's patent on commercially 
reasonable terms could have a material adverse effect on the Company's 
business and results of operations.  Litigation of Rockwell's claim 
against the Company is expected to involve significant expense to the 
Company and could divert the attention of the Company's technical and 
management personnel and could have a material adverse effect on the 
Company's business and results of operations. In addition, the Company is 
involved in various legal proceedings arising in the ordinary course of 
its business.


ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the security holders of the 
Company during the fourth quarter of fiscal 1998.


                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 
        MATTERS

       The information required by this item is included under the 
heading "Corporate Information" in the Company's 1998 Annual Report to 
Stockholders, and is incorporated herein by reference.

ITEM 6.  SELECTED FINANCIAL DATA

       The information required by this item is included under the 
heading "Selected Consolidated Financial Data" in the Company's 1998 
Annual Report to Stockholders, and is incorporated by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
        RESULTS OF OPERATIONS.

        The information required by this item is included under the 
heading "Management's Discussion and Analysis of Financial Condition and 
Results of Operations" in the Company's 1998 Annual Report to 
Stockholders, and is incorporated by reference.

ITEM 7A Disclosures About Market Risk

        The information required by this item is included under the heading 
"Interest Rate Risk" in the Company's 1998 Annual Report to 
Stockholders and is incorporated by reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The information required by this item is included in the 
Company's 1998 Annual Report to Stockholders under the headings listed 
under Item 14(a). of Part IV of this Report on Form 10-K and under the 
heading "Unaudited Quarterly Consolidated Financial Data" in the 
Company's 1998 Annual Report to Stockholders, and is incorporated by 
reference.

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

        Not applicable.


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required by this item is incorporated by reference to 
the Company's Proxy Statement for the 1999 Annual Meeting of 
Stockholders.

ITEM 11.  EXECUTIVE COMPENSATION

        The information required by this item is incorporated by reference to 
the Company's Proxy Statement for the 1999 Annual Meeting of 
Stockholders.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this item is incorporated by reference to 
the Company's Proxy Statement for the 1999 Annual Meeting of 
Stockholders.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to 
the Company's Proxy Statement for the 1999 Annual Meeting of 
Stockholders.


                                    PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)1.   FINANCIAL STATEMENTS AND REPORT OF ERNST & YOUNG LLP, INDEPENDENT 
        AUDITORS

The following consolidated financial statements of the Registrant and 
Report of Ernst & Young LLP, Independent Auditors, are contained in the 
Company's 1998 Annual Report to Stockholders and are incorporated by 
reference in Item 8 of Part II of this Report on Form 10-K:


      Consolidated Balance Sheets as of December 31, 1998 and 1997.

      Consolidated Statements of Operations for the years Ended December 31, 
       1998, 1997 and 1996.

      Consolidated Statements of Stockholders' Equity for the years Ended
       December 31, 1998, 1997, and 1996.

      Consolidated Statements of Cash Flow for the years Ended December 31,
       1998, 1997, and 1996.

      Notes to Consolidated Financial Statements.

      Report of Ernst & Young LLP, Independent Auditors.

2.      FINANCIAL STATEMENT SCHEDULES. The following financial statement 
schedule is filed as part of this Report on Form 10-K on page 26 and 
should be read in conjunction with the Consolidated Financial Statements 
of SDL, Inc.:

        Schedule II--Valuation and Qualifying Accounts.

        Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
Consolidated Financial Statements or notes thereto.



3. EXHIBITS.

 Exhibit
  Number                        Exhibit Description
----------  ------------------------------------------------------------
      3.1   Form of Registrant's Restated Certificate of
            Incorporation.(1)

    3.1.1   Form of Registrant's Certificate of Designation of the Series B
            Preferred Stock.

    3.1.2   Form of Registrant's Certificate of Correction of Restated
            Certificate of Incorporation.

      3.2   Form of Registrant's Amended and Restated Bylaws.(1)

      4.1   Reference is made to Exhibits 3.1 and 3.2.

      4.2   Specimen Common Stock certificate.(1)

      4.3   Rights Agreement, dated as of November 6, 1997, between the
            Company and ChaseMellon Shareholder Services, L.L.C.
            together with: Exhibit A, Form of Rights Certificate;
            Exhibit B, Summary of Rights to Purchase Preferred Stock;
            and Exhibit C Form of Certificates of Designation of the
            Series B Preferred Stock.(2)

    4.3.1   First Amended and Restated Rights Agreement, dated as of 
            February 11, 1999, between the Company and Chase Mellon 
            Shareholder Services, L.L.C., a New Jersey limited 
            liability company. (3)

     10.3 * Form of Registrant's 1995 Stock Option Plan, including forms
            of option agreements thereunder.(1)

     10.4 * Form of Registrant's 1995 Employee Stock Purchase Plan, as
            amended.(1)

     10.5   Technology Agreement between Xerox Corporation,
            Spectra-Physics, Inc. and the Registrant effective March 31,
            1983 and Amendment No. 1 thereto, dated March 31, 1988.(1)

    10.10   Lease Agreement between Rose Orchard I a Joint Venture and
            the Registrant, dated May 16, 1986, as amended October 24,
            1989.(1)

    10.11   Lease Agreement between Rose Orchard I a Joint Venture and
            the Registrant, dated April 28, 1989, as amended October 24,
            1989.(1)

    10.12 * Employment Agreement between Donald R. Scifres and the
            Registrant, dated July 17, 1992, and amendments thereto,
            dated February 19, 1993 and July 29, 1994.(1)

    10.13 * Form of Employment Agreement between officers of the
            Registrant and the Registrant.(1)

    10.14   Lease Agreement between Triangle Development Company and
            Registrant dated January 13, 1995, and Addendum thereto,
            dated January 13, 1995.(1)

    10.15   Employment Agreement between Gregory P. Dougherty and the
            Registrant, dated October 1, 1998.

    10.16   Promissory Note Secured by Deed of Trust dated May 1, 1997
            made by Gregory P. Doughtery and Nancy E. Dougherty payable
            to the Company.

     13.1   SDL, Inc. 1998 Annual Report to Stockholders.  This Annual Report
            shall not be deemed to be filed except to the extent that the
            information is specifically incorporated by reference.

     21.1   Subsidiaries

     23.1   Consent of Ernst & Young LLP, Independent Auditors

     27.1   Financial data schedule

----------
(1)   Incorporated by reference to identically numbered Exhibit to the Company's
      Registration Statement on Form 8-1 (Commission File No. 33-87752), which
      became effective on March 15, 1995.

(2)   Incorporated by reference to Exhibit 1 to the Company's Registration
      Statement on Form 8-A (Commission File No. 000-25688), filed with the
      SEC on November 7, 1997.

(3)   Incorporated by reference to Exhibit 1 to the Company's Registration 
      Statement on Form 8-AA filed with the SEC on March 19, 1999.

(4)   Incorporated by reference to identically numbered Exhibit to the 
      Company's Registration Statement on Form 10-K, filed with the SEC on 
      March 4, 1998.

*     Management contracts or compensatory plans or arrangements.



<PAGE>



                                   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.

                                      SDL, INC.


March 24, 1999                         By: /s/ Michael L. Foster
                                          --------------------------------------
                                               Michael L. Foster
                                          Chief Financial Officer and Secretary
                                          (Duly Authorized Officer and Principal
                                          Financial and Accounting 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.

<TABLE>
<CAPTION>
         Signature                         Title                     Date
---------------------------- ---------------------------------  ---------------
<S>                          <C>                                <C>
/s/ Donald R. Scifres        Chairman of the Board and          March 24, 1999
    -----------------------    Chief Executive Officer  
    Donald R. Scifres          (Principal Executive Officer)


/s/ Michael L. Foster        Chief Financial Officer and        March 24, 1999
    -----------------------    Treasurer ( Principal Financial  
    Michael L. Foster          and Accounting Officer)


/s/ John P. Melton           Director                           March 24, 1999
    -----------------------
    John P. Melton

/s/ Keith B. Geeslin         Director                           March 24, 1999
    -----------------------
    Keith B. Geeslin

/s/ Anthony B. Holbrook      Director                           March 24, 1999
    -----------------------
    Anthony B. Holbrook

/s/ Mark B. Myers            Director                           March 24, 1999
    -----------------------
    Mark B. Myers

/s/ Frederic N. Schwettmann  Director                           March 24, 1999
    -----------------------
    Frederic N. Schwettmann
</TABLE>
<PAGE>


                                                                     Schedule II

                                    SDL, INC.

                        VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)

<TABLE>
<CAPTION>
                                    Balance at Additions
                                    Beginning   Charged              Balance at
                                        of         to       Deduc-     End of
Description                           Period    Expenses   tions(1)    Period
----------------------------------- ---------- ---------- ---------- ----------
<S>                                 <C>        <C>        <C>        <C>
Allowance for doubtful accounts
 receivable

Year ended December 31, 1998.....      $1,190       $401      ($586)    $1,005
                                    ========== ========== ========== ==========

Year ended December 31, 1997.....        $780       $442       ($32)    $1,190
                                    ========== ========== ========== ==========

Year ended December 31, 1996.....        $485       $355       ($60)      $780
</TABLE>                            ========== ========== ========== ==========

----------
(1)  Uncollectible accounts written off.



<PAGE>