<PAGE>
 
                       SECURITES AND EXCHANGE COMMISSION
                            WASHINGTON, D. C. 20549
                      -----------------------------------
                                   FORM 10-Q

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

               For the quarterly period ended October 31, 1998

[_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
     
      For the transition period from ___________ to ___________

                          Commission File No. 0-22598


                               ORTEL CORPORATION
            (Exact name of registrant as specified in its charter)

           DELAWARE                                       95-3494360
(State or Other Jurisdiction of                         (I.R.S.Employer
 Incorporation or Organization)                       Identification No.)


          2015 WEST CHESTNUT STREET, ALHAMBRA, CALIFORNIA 91803-1542
             (Address of Principal Executive Offices)  (Zip Code)

      Registrant's Telephone Number, Including Area Code: (626) 281-3636


                                not applicable
 ----------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)


    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 
                                               ----     ----
          
    As of October 31, 1998, there were 11,882,556 shares of the registrant's
$.001 par value Common Stock outstanding.
<PAGE>
 
                               ORTEL CORPORATION

                                     INDEX


<TABLE>
<CAPTION>
PART I.  FINANCIAL INFORMATION                                                           Page(s)
                                                                                         -------
<C>      <S>                                                                             <C>   
Item 1.  Financial Statements
 
                   Condensed Consolidated Balance Sheets as of October 31, 1998
                   (unaudited) and April 30, 1998 (audited)..........................       3
                                                                                         
                   Condensed Consolidated Statements of Income (unaudited) for the       
                   fiscal quarter and six months ended October 31, 1998 and 1997.....       4
                                                                                         
                   Condensed Consolidated Statements of Cash Flows (unaudited) for       
                   the months ended October 31, 1998 and 1997........................       5
                                                                                         
                   Notes to Condensed Consolidated Financial Statements..............       6
                                                                                         
Item 2.  Management's Discussion and Analysis of Financial Condition and                 
         Results of Operations.......................................................       8
                                                                                         
                                                                                         
PART II. OTHER INFORMATION                                                               
                                                                                         
Item 4.  Submission of Matters to a Vote of Security Holders.........................      18
                                                                                         
Item 6.  Exhibits and Reports on Form 8-K............................................      18
                                                                                         
Signatures...........................................................................      19
                                                                                         
Index to Exhibits....................................................................      20
</TABLE>

                                       2
<PAGE>
 
PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                               ORTEL CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                      October 31,        April 30,
                                                                                         1998              1998
                                                                                   ----------------   --------------
ASSETS                                                                               (unaudited &       (audited &
------                                                                               reclassified)     reclassified)
                                  
<S>                                                                                <C>                <C>
Current assets:
  Cash and cash equivalents....................................................        $12,925           $12,656
  Short-term investments.......................................................         16,071            16,012
  Accounts receivable (net)....................................................         15,560            12,819
  Other receivables............................................................          1,848             1,415
  Inventories..................................................................         10,906            10,492
  Income tax receivables.......................................................            150                71
  Deferred tax assets..........................................................          3,012             2,775
  Prepaid and other current assets.............................................            899             1,281
Current assets, discontinued operations........................................            ---               936
                                                                                       -------           -------
           Total current assets................................................         61,371            58,457
                                                                                                       
Property, equipment and improvements (net).....................................         19,192            19,492
Intangible assets..............................................................          2,352             2,581
Other assets...................................................................          8,248             8,802
Long-term assets, discontinued operations......................................            ---             1,009
                                                                                       -------           -------
           Total assets........................................................        $91,163           $90,341
                                                                                       =======           =======
                                                                                                       
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                   
------------------------------------                                                                   
                                                                                                       
Current liabilities:                                                                                   
  Accounts payable.............................................................          6,171             3,685
  Accrued payroll and related costs............................................          2,060             2,899
  Other accrued liabilities....................................................          2,681             2,538
  Income taxes payable.........................................................            183               172
  Accrued liabilities, discontinued operations.................................          2,854               ---
                                                                                       -------           -------
           Total current liabilities...........................................         13,949             9,294
Deferred income................................................................            397               400
Deferred income taxes..........................................................            ---              1598
Minority interest..............................................................            324               265
                                                                                                       
Stockholders' equity:                                                                                  
  Preferred stock, $.001 par value; authorized 5,000,000 shares, none issued               ---               ---
    and outstanding............................................................ 
    Common stock, $.001 par value; authorized 25,000,000 shares,                            12                12
    11,882,556 and 11,499,743 issued and outstanding at October 31, 1998                               
    and April 30, 1997, respectively...........................................                       
  Additional paid-in capital...................................................         54,781            53,101
  Retained earnings............................................................         23,027            27,449
  Loans receivable.............................................................           (988)           (1,460)
    Accumulated other comprehensive income (loss)..............................           (339)             (318)
                                                                                       -------           -------
           Net stockholders' equity............................................         76,493            78,784
                                                                                       -------           -------
Commitments and contingencies                                                                          
           Total liabilities and stockholders' equity..........................        $91,163           $90,341
                                                                                       =======           =======
</TABLE>

   Certain amounts related to discontinued operations have been reclassified to
   conform to current year presentation. See accompanying notes to condensed
   consolidated financial statements.

<PAGE>
 
                               ORTEL CORPORATION
                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                  (unaudited)
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                     Three Months Ended               Six Months Ended
                                                                         October 31,                     October 31,
                                                                   ----------------------         -----------------------
                                                                     1998          1997             1998           1997
                                                                     ----          ----             ----           ----
                                                                             Reclassified    Reclassified    Reclassified
<S>                                                                <C>            <C>             <C>             <C>
Revenues......................................................     $19,765        $21,701         $38,209         $41,321
Cost of revenues..............................................      11,830         11,908          22,341          22,679
                                                                   -------        -------         -------         -------
 
  Gross profit................................................       7,935          9,793          15,868          18,642
 
Operating expenses:...........................................
     Research and development.................................       3,004          3,189           6,120           5,899
     Sales and marketing......................................       3,444          2,571           6,109           5,005
     General and administrative...............................       1,772          1,491           3,313           2,828
                                                                   -------        -------         -------         -------
 
         Total operating expenses.............................       8,220          7,251          15,542          13,732
                                                                   -------        -------         -------         -------
 
Operating income (loss).......................................        (285)         2,542             326           4,910
 
Interest income (net).........................................         430            340             689             624
Other non-operating income (expense)..........................         119             28             163             (69)
                                                                   -------        -------         -------         -------
 
Income from continuing operations before income taxes.........         264          2,910           1,178           5,465
 
Provision for income taxes....................................          53            737             243           1,468
                                                                   -------        -------         -------         -------
 
Income from continuing operations.............................     $   211        $ 2,173         $   935         $ 3,997
 
Loss from discontinued operations, net of tax.................        (921)          (262)         (1,438)           (591)
 
Loss from disposal of discontinued operations, net of tax.....      (3,919)           ---          (3,919)            ---
                                                                   -------        -------         -------         -------
 
Net income (loss).............................................     $(4,629)       $ 1,911         $(4,422)        $ 3,406
                                                                   =======        =======         =======         =======
 
 
Net Income (loss) per share
   Basic
   Income from continuing operations..........................     $   .02        $   .18         $   .08         $   .34
   Loss from discontinued operations..........................     $  (.41)       $  (.02)        $  (.45)        $  (.05)
                                                                   -------        -------         -------         -------
   Net income (loss)..........................................     $  (.39)       $   .16         $  (.37)        $   .29
                                                                   =======        =======         =======         =======
 
   Diluted
   Income from continuing operations..........................     $   .02        $   .17         $   .07         $   .31
   Loss from discontinued operations..........................     $  (.39)       $  (.02)        $  (.42)        $  (.04)
                                                                   -------        -------         -------         -------
   Net income (loss)..........................................     $  (.37)       $   .15         $  (.35)        $   .27
                                                                   =======        =======         =======         =======
 
Shares used in per share computations
   Basic......................................................      11,860         11,624          11,897          11,555
                                                                   =======        =======         =======         =======
   Diluted....................................................      12,631         12,963          12,720          12,749
                                                                   =======        =======         =======         =======
</TABLE>

Certain amounts related to discontinued operations have been reclassified to
conform to current year presentation  See accompanying notes to condensed
consolidated financial statements.

                                       4
<PAGE>
 
                               ORTEL CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (unaudited)
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                        Six Months Ended
                                                                               -----------------------------------
                                                                                  October 31,         October 31,
                                                                                     1998                1997
                                                                               ---------------     ---------------
<S>                                                                            <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................. $ (4,422)            $ 3,406
Adjustments to reconcile net income to net
   cash provided by (used in) operating activities:
       Depreciation and amortization..........................................    3,208               2,911
       Gain on disposal of equipment..........................................       12                   2
       Increase (decrease) in minority interest in subsidiaries...............       60                  62
       Compensation expense related to Photon stock options...................       53                  55
       Anticipated costs of discontinued operations...........................    3,919                 ---
   Changes in operating assets & liabilities (net of effects of acquisitions)
    Receivables...............................................................   (3,372)             (1,443)
    Inventories...............................................................     (730)              2,014
    Deferred tax assets.......................................................     (237)                 32
    Prepaid and other assets..................................................      864                (135)
    Intangible assets.........................................................      ---                 (74)
    Accounts payable..........................................................    2,486              (2,467)
    Accrued payroll and related costs.........................................     (840)             (2,014)
    Other accrued liabilities.................................................      143                (137)
    Deferred income...........................................................       (3)                 18
    Deferred income taxes.....................................................     (618)                 18
    Income taxes payable......................................................      391                (713)
                                                                                -------             -------
          Net cash provided by operating activities...........................      914               1,535

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..........................................................   (2,663)             (3,187)
Investment in subsidiaries and affiliates (net of cash acquired)..............      ---              (5,437)
Short-term investments........................................................      (59)              1,433
                                                                                -------             -------
          Net cash (used in) investing activities.............................   (2,722)             (7,191)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net...................................    1,610                 945
Proceeds from repayment of stockholder loans..................................      488                  43
                                                                                -------             -------
          Net cash provided by financing activities...........................    2,098                 988

Effect of exchange rate.......................................................      (21)                170
                                                                                -------             -------
          Net increase (decrease) in cash and equivalents.....................      269              (4,498)
Cash and cash equivalents, beginning of period................................   12,656              18,865
                                                                                -------             -------
Cash and cash equivalents, end of period......................................   12,925             $14,367
                                                                                =======             =======

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the period for
  Interest....................................................................  $    21             $     7
  Income taxes................................................................  $   337             $ 1,976
  Supplemental disclosure of non-cash financing activities....................
       Loans to related parties for stock option exercises....................  $    17             $   ---
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       5
<PAGE>
 
                               ORTEL CORPORATION
              Notes to Condensed Consolidated Financial Statements

1.  Basis of Presentation
    ---------------------

    The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company without audit (except for the balance sheet
information as of April 30, 1998 which was derived from audited consolidated
financial statements) and, in the opinion of management, contain all adjustments
necessary to present fairly the consolidated financial position at October 31,
1998, and the condensed consolidated results of operations for the six-month
periods ended October 31, 1998 and October 31, 1997, and the condensed
consolidated cash flows for the six-month periods ended October 31, 1998, and
October 31, 1997 in accordance with generally accepted accounting principles.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to rules and regulations of
the Securities and Exchange Commission, although the Company believes that the
disclosures in the consolidated financial statements are adequate to ensure the
information presented is not misleading.

    The results of operations for the six-month period ended October 31, 1998
are not necessarily indicative of the results to be expected for the entire
fiscal year and should be read in conjunction with a discussion of risk factors
in the Company's annual report for the fiscal year ended April 30, 1998.

2.  Per Share Information
    ---------------------

    Net income per share is based on the weighted average common and common
equivalent shares outstanding for each period including common shares issuable
upon the exercise of stock options.


<TABLE>
<CAPTION>
                                                                 Three Months Ended            Six Months Ended
                                                                     October 31,                  October 31,
                                                             --------------------------     -------------------------
                                                                 1998          1997            1998          1997
                                                             -----------    -----------     -----------   -----------
<S>                                                              <C>           <C>             <C>          <C>
Shares used in per share computations                                                                      
   Basic...............................................           11,860        11,624          11,897       11,555
   Stock Options.......................................              771         1,339             823        1,194 
                                                                 -------       -------         -------      -------
   Diluted.............................................           12,631        12,963          12,720       12,749 
                                                                 =======       =======         =======      =======
</TABLE>                                                      
                                                              
                                       6                      
<PAGE>
 
                               ORTEL CORPORATION
        Notes to Condensed Consolidated Financial Statements (continued)


3.    Income taxes
      ------------

    Income taxes for the respective periods were computed using the effective
tax rate estimated to be applicable for the fiscal year, which is subject to
ongoing review and evaluation by management.

4.    Inventories
      -----------

    Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                October  31, 1998         April 30, 1998
                                                                -----------------         --------------
                                                                   (unaudited)               (audited)
          
           <S>                                                  <C>                       <C>
           Raw materials...................................         $ 4,690                   $ 4,641
                                                                                              
           Work-in-process.................................           4,778                     4,886
                                                                                                   
           Finished goods..................................           1,438                       965
                                                                    -------                   -------
                                                                                           
              Total inventories............................         $10,906                   $10,492
                                                                    =======                   =======
</TABLE>

5.    Cash equivalents
      ----------------

    Cash equivalents (defined as marketable securities with original maturities
of 90 days or less which can be liquidated in a manner that is equivalent to
cash). were $7.9 million and $7.8 million as of October 31, 1998 and April 30,
1998, respectively, and short-term investments (marketable securities with
maturities of more than 90 days) were $16.1 million and $16.0 million as of
October 31, 1998, and April 30, 1998, respectively.

    Under Financial Accounting Standards Board Statement 115, the Company has
classified its short-term investments as available-for-sale.  Available-for-sale
securities are stated at market value and unrealized holding gains and losses,
net of the related tax effect, are excluded from earnings and are reported as a
separate component of stockholders' equity until realized.  A decline in the
market value of the security below cost that is deemed other than temporary is
charged to earnings resulting in the establishment of a new cost basis for the
security.  At October 31, 1998 and April 30, 1998, the Company's marketable
investment securities consisted principally of highly liquid investments in tax
free municipal obligations with various maturity dates through June 15, 2001.

6.    Other Comprehensive Income
      --------------------------

    The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," as of the first quarter of fiscal
1999.  SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components, however, it has no impact on the
Company's net income or stockholders' equity.

                                       7
<PAGE>
 
The components of comprehensive (loss) income, net of tax are as follows: (in
thousands)

<TABLE>
<CAPTION>
                                                         Three Months Ended                 Six Months Ended
                                                             October 31                        October 31
                                                    -----------------------------     ---------------------------
                                                        1998            1997             1998            1997
                                                    -------------   -------------     ------------   ------------

     <S>                                            <C>             <C>               <C>             <C>
     Net income (loss).............................    $(4,629)         $1,911          $(4,422)        $3,406
                                                       =======          ======          =======         ======
     Change in unrealized gain (loss) on
     available-for-sale investments................        ---             (25)             ---            (28)
     Gain (loss) on foreign currency translation...         22             233              (17)           134
                                                       -------          ------          -------         ------
     Comprehensive income (loss)...................    $(4,607)         $2,119          $(4,439)        $3,512
                                                       =======          ======          =======         ======
</TABLE>

    Accumulated other comprehensive income (loss) presented on the accompanying
consolidated balance sheets consists of the following: (in thousands)

<TABLE>
<CAPTION>
                                                          October  31,               April 30,            
                                                              1998                     1998               
                                                       -----------------         ----------------         
                                                          (unaudited)               (audited)             
      <S>                                                 <C>                        <C>                  
      Unrealized losses on available-                                                                     
      for-sale investments............................       $  24                   $   24               
                                                                                                          
      Foreign currency translation....................        (363)                    (342)              
                                                             -----                   ------               
                                                                                                          
      Total accumulated comprehensive income (loss)...       $(339)                  $ (318)              
                                                             =====                   ======               
</TABLE>

7.  Discontinued operations

    The Company discontinued its 980 nm pump laser business in early November
1998. Certain amounts on the Balance Sheets and Statements of Income related to
discontinued operations have been reclassified to conform to current period
presentation. See below for further discussion on the discontinuance.

    All assets related to the discontinued business were written off including
accounts receivable, inventory and fixed assets. The remaining liability of $2.9
million related to discontinued operations includes provisions for expected
product warranty costs, severance costs associated with the related reduction in
force, cancellation charges and other expenses related to the discontinuance.

PART I - FINANCIAL INFORMATION

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

    The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the unaudited condensed consolidated
financial statements included herein.  The discussion in this section contains
forward-looking statements that involve risks and uncertainties.  The Company's
actual results could differ materially from those discussed herein.  Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in the Company's annual report for the year ended April 30,
1998.

                                       8
<PAGE>
 
                               ORTEL CORPORATION
       Notes to Condensed Consolidated Financial Statements (continued)

RESULTS OF OPERATIONS

    The following table sets forth the statements of income as a percentage of
revenues adjusted for the discontinued operations:

<TABLE>
<CAPTION>
                                                                Three Months Ended            Six Months Ended
                                                                    October 31,                  October 31,
                                                              ----------------------       -----------------------
                                                                 1998         1997            1998         1997
                                                              ---------    ---------       ---------     ---------
                                                                         Reclassified     Reclassified  Reclassified
<S>                                                         <C>          <C>                 <C>           <C>
Revenues....................................................   100.0%       100.0%           100.0%        100.0%
                                                                                                          
Cost of revenues............................................    59.9         54.9            58.5          54.9
                                                               -----        -----           -----         -----
                                                                                                          
     Gross profit...........................................    40.1         45.1            41.5          45.1
                                                                                                          
Operating expenses:.........................................                                              
                                                                                                          
  Research and development..................................    15.2         14.7            16.0          14.3
                                                                                                          
  Sales and marketing.......................................    17.4         11.8            16.0          12.1
                                                                                                          
  General and administrative................................     8.9          6.9             8.6           6.8
                                                               -----        -----           -----         -----
                                                                                                          
  Total operating expenses..................................    41.5         33.4            40.6          33.2
                                                               -----        -----           -----         -----
                                                                                                          
Operating income (loss).....................................    (1.4)        11.7              .9          11.9
                                                                                                          
Interest income.............................................     2.2          1.6             1.8           1.5
                                                                                                          
Other income, net...........................................      .6           .1              .4           (.2)
                                                               -----        -----           -----         -----
                                                                                                          
  Income from continuing operations before income taxes.....     1.4         13.4             3.1          13.2
                                                                                                          
Provision for income taxes..................................      .3          3.4              .6           3.6
                                                               -----        -----           -----         -----
                                                                                                          
Income from continuing operations...........................     1.1         10.0             2.5           9.6
                                                                                                          
Loss from discontinued operations, net of tax...............    (4.7)        (1.2)           (3.8)         (1.4)
                                                                                                          
Loss from disposal of discontinued operations, net of tax...   (19.8)         ---           (10.3)          ---
                                                               -----        -----           -----         -----
                                                                                                          
Net income (loss)...........................................   (23.4%)        8.8%          (11.6%)         8.2%
                                                               =====        =====           =====         =====
</TABLE>

                                       9
<PAGE>
 
PART I - FINANCIAL INFORMATION


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.  (continued)

    The following table highlights certain aspects of the Company's revenues for
the three-month and six-month periods ended October 31, 1998 and 1997 adjusted 
for the discontinued operations:

<TABLE>
<CAPTION>
                                                      Three Months Ended                             Six Months Ended
                                                          October 31,                                   October 31,
                                              ----------------------------------            ----------------------------------
                                                    1998               1997                       1998               1997
                                              ----------------   ---------------            ---------------   ----------------
                                                                   Reclassified               Reclassified       Reclassified
                                                                 ===============            ===============   ================
 
<S>                                           <C>                <C>                        <C>                <C>
Revenues (thousands)                              $19,765            $21,701                    $38,209            $41,321
                                                  =======            =======                    =======            =======
                                                  
  Broadband products.......................       $13,053            $12,485                    $25,117            $25,326
  Other products...........................         6,712              9,216                     13,092             15,995
                                                  -------            -------                    -------            -------
               Total.......................       $19,765            $21,701                    $38,209            $41,321
                                                  =======            =======                    =======            =======
                                                  
Geographic coverage (thousands):                  
  Domestic.................................       $13,149            $10,635                    $25,268            $19,367
  International............................         6,616             11,066                     12,941             21,954
                                                  -------            -------                    -------            -------
               Total.......................       $19,765            $21,701                    $38,209            $41,321
                                                  =======            =======                    =======            =======
                                                  
As a percent of revenues:                         
       Broadband products..................          66.0%              57.5%                      65.7%              61.3%
       Other products......................          34.0               42.5                       34.3               38.7
                                                  -------            -------                    -------            -------
               Total.......................         100.0%             100.0%                     100.0%             100.0%
                                                  =======            =======                    =======            =======
                                                  
Geographic coverage:                              
       Domestic............................          66.5%              49.0%                      66.1%              46.9%
       International.......................          33.5               51.0                       33.9               53.1
                                                  -------            -------                    -------            -------
               Total.......................         100.0%             100.0%                     100.0%             100.0%
                                                  =======            =======                    =======            =======
</TABLE>

Discontinued Operations

    In early November 1998, the Company announced it would discontinue its 
980 nm pump laser business.  Sales of the 980 nm product  began fifteen
months ago in the first quarter of fiscal year 1998 and have totaled 
$1.4 million. Such revenue was below the Company's expectations due largely to
rapid and continual price reductions in the marketplace. The necessary research
and development costs which would further differentiate Ortel's product were not
merited under these market conditions.

                                       10
<PAGE>

    For selected periods, the table below is a summary of the financial
performance of this product line when segregated from continuing operations.
Consolidated financial statements for the Company have been reclassified to
remove the impact of this discontinued operation: (in thousands)

<TABLE>
<CAPTION>
                                                      Three Months Ended                  Six Months Ended
                                                          October 31                         October 31
                                                 -----------------------------      -----------------------------
                                                     1998            1997                1998            1997
                                                 -------------   -------------      --------------   ------------
<S>                                              <C>             <C>                <C>              <C>
Revenue.....................................       $   429         $   388             $   795        $   478
                                                                             
Cost of Sales...............................           828             317               1,248            501
                                                   -------         -------             -------        -------
                                                                             
Gross Margin................................          (399)             71                (453)           (23)
                                                                             
Research and Development....................           471             345                 917            633
Sales & Marketing...........................           281              56                 428             88
General and Administrative..................           ---             ---                 ---            ---
                                                   -------         -------             -------        -------
Total operating expenses....................           752             401               1,345            721
                                                   -------         -------             -------        -------
                                                                             
Operating loss on discontinued operations...        (1,151)           (330)             (1,798)          (744)
                                                                             
Income tax on discontinued operations.......          (230)            (68)               (360)          (153)
                                                   -------         -------             -------        -------
                                                                             
Net loss on discontinued operations.........          (921)           (262)             (1,438)          (591)
                                                                             
Loss from disposal of discontinued..........        (3,919)            ---              (3,919)           ---
 operations, net of tax.....................       -------         -------             -------        -------
                                                                             
Combined net loss on discontinued                                            
 operations and loss from disposal                                          
 of discontinued operations, net of tax.....        (4,840)           (262)             (5,357)          (591)
                                                   =======         =======             =======        =======
                                                                             
                                                                             
Combined net loss per share on                                               
 discontinued operations and loss from                                       
 disposal of discontinued operations,                                        
 net of tax                                                                  
   Basic....................................       $  (.41)        $  (.02)            $  (.45)       $  (.05)
                                                   =======         =======             =======        =======
   Diluted..................................       $  (.39)        $  (.02)            $  (.42)       $  (.04)
                                                   =======         =======             =======        =======
                                                                             
Shares used in per share computation                                         
   Basic....................................        11,860          11,624              11,897         11,555
   Diluted..................................        12,631          12,963              12,720         12,749
</TABLE>

    In addition to the operating losses shown above, the Company has incurred or
expects it will incur costs as a result of its exit from the market.  These
costs were recognized in the second quarter of this fiscal year and totaled $4.9
million before income tax and $3.9 million after tax.  Significant items
included in this write-off were expected product warranty costs, write-off of
inventory, equipment and accounts receivable plus severance costs of the
associated reduction in workforce.

    The discussion which follows is based on continuing operations and is based
on the reclassified Balance Sheets and Income Statements presented in this
report.

                                       11
<PAGE>

CONTINUING OPERATIONS 
SECOND QUARTER
 
Revenues

     Revenues of $19.8 million for the second quarter ended October 31, 1998,
decreased by 8.9% from $21.7 million in the comparable quarter of the previous
year.  This decrease was the result of total revenues from broadband products
increasing  4.6% from $12.5 million in the prior year to $13.1 million in the
current period while total revenues from all other products decreased 27.2% from
$9.2 million in the prior year to $6.7 million in the current period.  The
increase in broadband product sales is the net impact of a significant reduction
in demand from international customers (down 49%), particularly in Asia, more
than offset by a surge in domestic demand (up 58%).  The increased demand for
domestic broadband products is related in part to the renewal of network upgrade
programs at TCI as well as the continuation of upgrade projects by other  U.S.
CATV operators in anticipation of offering new interactive services such as high
speed data and telephony.  The reduction in other product revenues compared to
the prior year reflects lower sales of the Company's wireless and satellite
communications products as the former continues to reflect the slow pace of
deployment of repeater products by wireless PCS operators while the Company's
satellite communications business is subject to quarterly fluctuations.

                                       12
<PAGE>
 
PART I - FINANCIAL INFORMATION


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.  (continued)

    Sales to international customers totaled $6.6 million or 34% of revenues for
the second quarter of fiscal 1999 compared to $11.1 million or 51% of revenues
for the comparable quarter last year.   The 40% decrease in sales to
international customers was primarily concentrated in Asia as various countries
in that region continue to suffer from a number of economic ills. 

Gross Profit

     Gross profit of $7.9 million for the second quarter ended October 31, 1998,
was 40.1% of revenues compared to 45.1% in the prior year period.  The lower
gross margins in the current period reflect lower average pricing and a higher
mix of products with lower margins.

Research and Development

    Research and development expense of $3.0 million for the second quarter
ended October 31, 1998, decreased $.2 million or 5.8% from $3.2 million in the
comparable quarter last year. With lower total revenues compared to last year,
research and development expense as a percent of revenue was 15.2% as compared
to 14.7% in the second quarter of the prior year.

Sales and Marketing

     Sales and marketing expense of $3.4 million in the second quarter ended
October 31, 1998, increased 34% or $.9 million from $2.6 million in the
comparable quarter last year.  The increase was related in part to several non-
recurring charges related to recent new hires and additional commitments for
personnel to be added in the near future, additional product support costs
related to attendance at a number of trade shows during the quarter, and start-
up costs associated with additional sales offices in China and Singapore. With
lower revenues, sales and marketing expense as a percent of revenue was 17.4% 
as compared to 11.8% in the prior year period.

                                       13
<PAGE>
 
General and Administrative

    General and administrative expenses of $1.8 million for the second quarter
of fiscal 1999 increased by $.3 million or 19% from $1.5 million in the
comparable period last year and increased as a percentage of revenues to 68.9%
compared to 6.9% for the same quarter of fiscal 1998. The increase over the
prior year is primarily related to recruiting efforts and additional expenses in
support of business efforts in Asia and other strategic issues.

                                       14
<PAGE>
 
PART I - FINANCIAL INFORMATION


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.  (continued)

Other Non-Operating Income (Expense)  WHERE ARE YOU GETTING YOUR NUMBERS???

    Interest income, net of interest expense, of $430,000 for the second quarter
of fiscal 1999 increased by $90,000 from the comparable period last year
primarily due to higher average cash balances. Other net income of $119,000 for
the second quarter compares to $28,000 in the comparable quarter last year and
represents a more favorable impact of foreign currency translation.

YEAR-TO-DATE

Revenues

    Revenues of $38.2 million for the first six months ended October 31, 1998
decreased by $3.1 million or 8% from $41.3 million in the comparable period of
the previous year.  Total revenues from broadband products at $25.1 million were
equivalent to the comparable period of the previous year.  Revenues of $13.1
million from the sale of wireless, satellite communications and other product
applications decreased by $2.9 million or 18% compared to the prior year period.

    Sales to international customers totaled $12.9 million or 66% of revenues
for the first six months of fiscal 1999 compared to $22 million or approximately
53% of revenues for the comparable period last year. As in the second quarter,
the 41% decrease in sales to international customers was primarily concentrated
in Asia as various countries in that region continue to suffer from a number of
economic ills.

Gross Profit

    Gross profit of $15.9 million for the first six months of fiscal 1999
represented 41.5% of revenues compared to 45.1% in the comparable period last
year. The decrease in gross margin compared to the prior year is primarily the
result of lower sales volume in conjunction with lower average prices.

Research and Development

    Research and development expenses of $6.1 million for the first six months
of fiscal 1999 increased by $.2 million or less than 4% from $5.9 million in the
comparable period last year. With lower revenues compared to the prior year
period, Research and Development expense as a percent of revenue increased to
16% compared to 14.3% in the comparable period last year.

                                       15
<PAGE>
 
PART I - FINANCIAL INFORMATION

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.  (continued)


Sales and Marketing

    Sales and marketing expenses of $6.1 million for the first six months of
fiscal 1999 increased by $1.1 million or 22% from $5.0 million for the
comparable period last year. With an 8% reduction in revenues, sales and
marketing expenses as a percentage of revenues increased to 16% from 12.1% for
the comparable period of fiscal 1998. The increase in spending compared to the
prior year is primarily additional to hiring and relocation costs associated
with enhancing the Company's worldwide sales organization, including opening
sales offices in Singapore and Beijing.

General and Administrative

    General and administrative expenses of $3.3 million for the first six months
of fiscal 1999 increased by $.5 million  or 17% compared to $2.8 million for the
comparable period last year and increased as a percentage of revenues to 8.6%
from 6.8% for the same period.  The increase is primarily related to recruiting
costs and expenses in support of expanding business in Asia.

Other Non-Operating Income (Expense)

    Interest income, net of interest expense, of $689,,000 for the first six
months of 1999 increased by $65,000 from the comparable period last year
primarily due to higher average cash balances. Other non-operating expense of
$163,000 for the first six months compares to a loss of $69,000 in the
comparable period last year and is primarily due to favorable changes in foreign
currency during this period of time.

LIQUIDITY AND CAPITAL RESOURCES

    At October 31, 1998, the Company had working capital of $47.4 million,
including $12.9 million in cash and cash equivalents and $16.1 million in short-
term investments.  For the six-month period ended October 31, 1998, the
Company's operating activities generated $838,000 in cash.  Cash from operating
activities includes net loss of  $4.4 million offset by non-funded future costs
related to discontinued operations.  Depreciation and amortization of $3.2
million also offset the operating loss.  Trade accounts receivable increased
$3.4  million which was partially offset by an increase in accounts payable of
$2.5 million.

The Company considers cash flow from operations and available sources of
liquidity to be adequate to meet business requirements in the foreseeable
future, including planned capital expenditure programs, working capital
requirements, and any Year 2000 remediation plans.

                                       16
<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.  (continued)

    The Company has maintained an unsecured line of credit totaling $5 million
with Bank of America which was renewed from time to time.  No borrowings were
ever made under this credit facility.  The line of credit, originally set to
expire on September 30, 1998, was first extended to October 31, 1998, and then
allowed to expire.  The Company may reactivate this credit line in the future.

YEAR 2000

    ASSESSMENT
    
    The Company has formed a committee and begun the assessment process of how
it may be impacted by the Year 2000 issue. The committee will develop a plan
which outlines additional steps required to complete the assessment and
remediation including timeframe. The Company engaged outside consultants to
perform an initial assessment and provide the Company with guidance in the
assessment phase. It may be necessary to continue to contract with third parties
during remediation.

    COST
    
    The Company's cost estimate for becoming Year 2000 compliant is not yet
complete.  Incremental spending to date has been less than $100,000.

    RISKS
    
    If all Year 2000 issues are not properly identified, or assessment,
remediation and testing are not affected in a timely manner with respect to
problems that are identified, there can be no assurance that the Year 2000 issue
will not have a material adverse impact on the Company's results of operations
or adversely affect the Company's relationships with customers, vendors or
others.  Additionally, there can be no assurance that the Year 2000 issues of
other entities will not have a material adverse impact on the Company's systems
or results of operations.

    CONTINGENCY PLAN
  
    The Company has not yet completed a comprehensive analysis of the
operational problems and costs that would be reasonably likely to result from
the failure by the Company and certain third parties to complete efforts
necessary to achieve Year 2000 compliance on a timely basis.  As a result, the
Company has not developed a plan for dealing with the most reasonably likely
worst case scenario.

TRANSITION TO THE EURO

    The Euro is scheduled to be introduced on January 1, 1999, at which time the
conversion rates between legacy currencies and the Euro will be set for the
eleven participating EMU member countries.  However, the legacy currencies in
those countries 

                                       17
<PAGE>
 
will continue to be used as legal tender through January 1, 2002. Thereafter,
the legacy currencies will be canceled and Euro bills and coins will be used in
the eleven participating countries.

    Transition to the Euro may create a few business issues for the Company
include product pricing policies and ensuring the continuity of business and
financial contracts.  For its European subsidiaries, accounting systems, tax
books, payroll systems and bank accounts will all require conversion.  The
Company is addressing these transition issues and does not expect the transition
to the Euro to have a material effect on the results of operations or financial
condition of the Company.


PART II - OTHER INFORMATION

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

    The Annual Meeting of Stockholders was held September 25, 1998 for the
         following purposes:

    1.  Proposal One: The election of the following members of the Board of
        Directors was approved as follows:

<TABLE>
<CAPTION>
        Name                      For                 Withhold
        ----                      ---                 --------
        <S>                       <C>                 <C>
        Wim H.J. Selders          10,097,756          259,183
        Amnon Yariv               10,097,756          259,183
</TABLE>

    2.  Proposal Two: The ratification of KPMG Peat Marwick LLP as the Company's
        independent public accountants for the fiscal year ended April 30, 1999
        was approved as follows:

<TABLE>
<CAPTION> 

        For                       Against             Abstain
        ---                       -------             -------
        <S>                       <C>                 <C>
        10,347,423                2,691               6,825
</TABLE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.
 
     a.  Exhibits.

         Reference is hereby made to the Exhibit Index commencing on page 20.

     b.  Shortly after the end of the second fiscal quarter, the Company
         announced the discontinuance of its 980nm pump laser business. A report
         on Form 8-K discussing this fact was filed on November 12, 1998.

                                       18
<PAGE>
 
                                   SIGNATURES

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

DATE: December 14, 1998                ORTEL CORPORATION

                                          (Registrant)



                                       By: /s/WIM H.J. SELDERS
                                           -------------------
                                           Wim H.J. Selders,
                                           President and Chief Executive 
                                           Officer
 


                                       By: /s/STEPHEN K. WORKMAN
                                           ---------------------
                                           Stephen K. Workman,
                                           Vice President, Finance and Chief 
                                           Financial Officer

                                       19
<PAGE>
 
EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit No.                              Document Description                                    Page No.
-----------                              --------------------                                    --------
<C>                 <S>                                                                          <C>
      3.1           Certificate of Incorporation.                                                 (Note 1)
      3.2           Bylaws of Ortel Corporation.                                                  (Note 1)
      4.1           Common Stock Purchase Agreement, dated March 26, 1990, between                (Note 1)
                    Sumitomo Cement Co., Ltd. and Ortel Corporation.                             
      4.2           Modification Agreement, dated 1985, between Ortel Corporation and             (Note 1)
                    certain investors.                                                           
     10.1           Lease, dated September 23, 1991, between Ortel Corporation and Rim            (Note 1)
                    Development Co.                                                              
     10.2           Lease, dated May 20, 1994, between Ortel Corporation and                      (Note 1)
                    Wai Fong Un.                                                                 
     10.3           Employment Agreement, dated September 14, 1990, between Ortel                 (Note 1)
                    Corporation and Wim H.J. Selders.                                            
     10.4           Employment Agreement, dated September 14, 1990, between Ortel                 (Note 1)
                    Corporation and Israel Ury.                                                  
     10.5           Employment Agreement, dated September 14, 1990, between Ortel                 (Note 1)
                    Corporation and Nadav Bar-Chaim.                                             
     10.6           1981 Incentive Stock Option Plan of Ortel Corporation.                        (Note 1)
     10.7           1990 Stock Option Plan of Ortel Corporation.                                  (Note 1)
     10.8           Form of Indemnification Agreement.                                            (Note 1)
     10.9           Key Shareholders Agreement, dated as of March 26, 1990, among Wim             (Note 1)
                    H.J. Selders, Dr. Ury, Dr. Yariv, Dr. Bar-Chaim, Sumitomo Cement             
                    Co., Ltd., The Ury Family Trust and Ortel Corporation.                       
    10.10           Agreement Concerning Certain Financial and Business Arrangements,             (Note 1)
                    dated as of March 26, 1990 between Sumitomo Cement Co., Ltd. and             
                    Ortel Corporation.                                                           
    10.11           1994 Equity Participation Plan of Ortel Corporation.                          (Note 1)
    10.12           Severance Agreement, dated as of August 26, 1994, between Ortel               (Note 1)
                    Corporation and Stephen K. Workman.                                          
    10.13           Stock Purchase Agreement dated March 12, 1996 between Hakan                   (Note 2)
                    Samuelsson and Ortel Corporation.                                            
    10.14           Loan Agreement, dated June 2, 1995 between Ortel Corporation and              (Note 3)
                    Bank of America.                                                             
    10.15           Amendment No. 2 dated September 9, 1997 to Loan Agrmt dated June 2,           (Note 5)
                    1995 between Ortel Corporation and Bank of America.                          
    10.16           Severance Agreement, dated December 1, 1997, between Ortel                    (Note 6)
                    Corporation and Douglas H. Morais.                                           
    10.17           Severance Agreement, dated March 6, 1998, between Ortel Corporation           (Note 7)
                    and Lyle B. Boarts                                                           
    10.18           Amendment No. 3 dated August 20, 1998 to Loan Agreement dated June           
                    2, 1995 between Ortel Corporation and Bank of America NT & SA                 
    10.19           Severance Agreement dated November 6, 1998, between Ortel                    
                    Corporation and William J. Moore                                             
    10.20           Severance Agreement, dated November 9, 1998, between Ortel                   
                    Corporation and George B. Holmes                                             
    10.21           Amendment dated November 9, 1998 to Severance Agreement, dated               
                    August 26, 1994, between Ortel Corporation and  Stephen K. Workman           
</TABLE> 
                                       20
<PAGE>
<TABLE> 
<C>                 <S>                                                                           <C>                
    10.22           Amendment dated November 9, 1998 to Severance Agreement, dated               
                    March 6, 1998, between Ortel Corporation  and Lyle B. Boarts.                
     21.1           Subsidiaries of Ortel Corporation.                                            (Note 7)
     23.1           Consent of KPMG Peat Marwick LLP.                                             (Note 7)
     27.0           Financial Data Schedule                                                      
</TABLE> 
                                       21
<PAGE>
<TABLE> 
<C>                 <S>                                       
     Note 1         Previously filed by the Registrant in Registration No. 33-79188 and
                      incorporated by reference herein pursuant to Rule 12b-32 of the
                      Exchange Act.

     Note 2         Previously filed by the Registrant in its 8K filing dated March 26, 
                      1996

     Note 3         Previously filed by the Registrant in its 10-K filing for the year ended 
                      April 30, 1996

     Note 4         Previously filed by the Registrant in its 10-K filing for the
                      year-ended April 30, 1997.

     Note 5         Previously filed by the Registrant in its 10-Q filing for the quarter 
                      ended October 31, 1997.

     Note 6         Previously filed by the Registrant in its 10-Q filing for the quarter 
                      ended January 31, 1998.

     Note 7         Previously filed by the Registrant in its 10-K filing for the year
                      ended April 30, 1998.

</TABLE>

                                       22