The employees at Lambda Crossing's small microchip plant in Caesarea have been burning the midnight oil, working on completing samples to be sent to 12 potential customers - including telecommunications systems giants Cisco Systems (Nasdaq:CSCO), Lucent Technologies (NYSE:LU) and Nortel (NYSE:NT) .

The Israeli startup, which makes optics components, is trying to exploit the industry's crisis to gain an edge on its competitors.

"The R&D departments of big companies like Corning (NYSE:GLW) and JDS Uniphase (Nasdaq:JDSU, TSE:JDU) have frozen exotic projects," say sources at Lambda. "This provides an opening for small companies that are continuing to develop them."

It's a big gamble, because the systems manufacturing market is in its deepest crisis ever.

Lambda Crossing was founded in 1999 by Moti Margalit and Prof. Meir Orenstein and has since raised $30 million. Its last round of financing was in April 2002, during which $7.75 million was raised to complete a $21-million fund-raising campaign that began in July 2001. Financiers include China's Industrial Development Bank, which is one of the largest investment groups in Taiwan, Young Associates, Lucent, Agilent, and the veteran Israeli venture capital fund Gemini, which has accompanied Lambda since day one.

Orna Berry, former chief scientist at the Ministry of Industry and Trade, is Lambda's chairman and Gemini's representative on the board. After the campaign she said its completion at a time like this is an indication of investor confidence in the company.

Lambda recently received a $4 million line of credit from an Israeli bank. Sources at the company say that this is the best stamp of approval any startup with zero sales - could hope for.

The components being developed by Lambda are designed to improve the use of bandwidth. Organizations that use optical communications extensively are trying to reduce costs and are looking for solutions such as bandwidth access on demand. Banks, for example, have to do backup procedures that require massive broadband use for short periods of time. They could get the band width they need from their service provider at specified times and the rest of the day they would not be charged.

At present this is done by manual switching and mechanical or electronic systems. Lambda is developing optical components based on semiconductors for directly switching the optic signals. Lambda's flexible optical filter allows for changes in wavelength allocations with advanced notice or immediately on demand, via an optical chip that does not require auxiliary systems, and at a price that is considered relatively low ($5,000 per unit).

Rafi Koriat, Lambda CEO, believes that within a decade semiconductors will control the optical components market, a field that is Lambda's main focus. "We didn't go wild during the [high-tech] bubble period and now we have our feet firmly on the ground," says Koriat.

At this stage the company is focusing on the technical advantage it has developed - a tunable filter that can transmit 200 different wavelengths (channels) in a single optic fiber and reach a bandwidth of 52 gigaHertz. The filters developed by the competition can handle only 20 wavelengths.

Manufacturing will provide the edge

Other Israeli optics companies focus on development and design, not manufacturing. Lambda thinks its plant will give it the edge it needs to make it.

"The establishment of the plant accelerated development ten-fold," says Koriat. "We discovered it is important for developers to be close to the manufacturing process. The lack of a production line is one of the problems other companies in Israel have."

This consideration was also behind the decision to establish the plant in Israel and not in less expensive countries such as the United States, where most of Lambda's potential customers are. "Israel has skilled quality manpower and we have no reason to leave," says Koriat.

Koriat says Lambda has a technical advantage of at least a year over its competitors, but admits that due to the industry crisis the company is operating according to a new business model. "When the company was established we planned to have hundreds of workers and massive sales by mid-2002," recalls Koriat. "We currently employ only 50 workers. Although we have raised $30 million so far, we have frozen salaries and are trying to save on costs."

Savings sometimes have a surprising side effect. To test the components it had developed, Lambda had to conduct simulations of their operations, but could not afford to buy a super-computer for the tests. Instead, Lambda developed a software program that could simultaneously run on 30 networked personal computers that provided the computing power needed. Koriat says the decentralized computer program Lambda developed is one of the company's technological advantages.

"We also set unrealistic goals for ourselves and anticipated rapid and easy growth," admits Koriat. "Most of the company's employees joined after the beginning of the crisis, so we didn't have to make adjustments in salary expectations."