A semiconductor tunable laser (10) and an interferometer (12) coupled to the tunable laser (10) are monolithically fabricated in a semiconductor heterostructure. The laser also comprises a buried ridge stripe waveguide laser. The interferometer (12) has a semiconductor optical amplifier (38) coupled in each arm. A cross-gain semiconductor optical amplifier converter is coupled to the interferometer (12). The semiconductor optical amplifier (38) coupled in each arm is biased so that an optical path length difference between the two arms is in antiphase which results in destructive interference. The output of the tunable laser (10) is coupled to a coupler. A semiconductor optical amplifier (38) is used as a gain controller for the semiconductor optical amplifiers in the interferometer (12) to allow wavelength conversion over a larger range of input signal powers. The heterostructure substrate comprises a low bandgap waveguide layer and thinner multi-quantum well active regions disposed above the low bandgap waveguide layer. The heterostructure substrate has nonabsorbing passive elements formed therein by selectively removing the quantum wells regions above the waveguide layer to allow formation of active and passive sections in the waveguide layer without having to perform a butt joint regrowth. The invention is also characterized as a method of fabricating an integrated optical device as disclosed above in the heterostructure substrate.