<PAGE>
                                  UNITED STATES
                       SECURITIES 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 SEPTEMBER 30, 2001

                                       OR

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

          FOR THE TRANSITION PERIOD FROM ___________ TO ____________.

                       COMMISSION FILE NUMBER: 000-31393

                                 LUMINENT, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                DELAWARE                               95-4798130
   (STATE OR OTHER JURISDICTION OF                 (I.R.S. EMPLOYER
   INCORPORATION OR ORGANIZATION)                  IDENTIFICATION NO.)

             20550 NORDHOFF ST.
      CHATSWORTH, CALIFORNIA 91311
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)               (ZIP CODE)
                                                    (818) 773-9044

              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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 30, 2001 156,000,000 shares of the registrant's common stock were
outstanding.


<PAGE>
                                 LUMINENT, INC.

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

                     INDEX TO QUARTERLY REPORT ON FORM 10-Q

<TABLE>
<S>                                                                                <C>
                          PART I. Financial Information

Item 1  Financial Statements

            Consolidated Condensed Balance Sheets as of September 30, 2001
             (unaudited) and December 31, 2000                                      1
            Unaudited Consolidated Condensed Statements of Operations for
              the three months and nine months ended September 30, 2001 and
              2000                                                                  3

            Unaudited Consolidated Condensed Statements of Cash Flows for the
              nine months ended September 30, 2001 and 2000                         4
            Notes to Consolidated Condensed Financial Statements                    5
Item 2  Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                                 9
Item 3  Quantitative and Qualitative Disclosures About Market Risk                 25

                       PART II. Other Information

Item 1  Legal Proceedings                                                          25
Item 2  Changes in Securities and Use of Proceeds                                  25
Item 5  Other Information                                                          27
Item 6  Exhibits and Reports on Form 8-K                                           28
        Signatures                                                                 29
</TABLE>
<PAGE>
                          PART I. FINANCIAL INFORMATION

ITEM 1.  Financial Statements


                                 LUMINENT, INC.
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                                 (in thousands)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                      December 31,   September 30,
                                                                         2000            2001
                                                                      -----------    ------------
                                                                                      (unaudited)
<S>                                                                   <C>            <C>
Current assets:
     Cash and cash equivalents                                         $131,778        $ 93,646
     Short-term investments                                               1,082              55
     Accounts receivable, net of allowance of $4,455
          at December 31, 2000 and $6,889 at September 30, 2001          22,463          18,484
     Inventories                                                         39,428          24,282
     Deferred income taxes                                                6,220           6,977
     Prepaids and other current assets                                    9,106          17,023
                                                                       --------        --------
          Total current assets                                          210,077         160,467

Property and equipment, net                                              51,366          53,403
Goodwill, net                                                           341,540         283,076
Other assets                                                              3,247           8,298
                                                                       --------        --------
          TOTAL ASSETS                                                 $606,230        $505,244
                                                                       ========        ========
</TABLE>

              The accompanying notes are an integral part of these
                     consolidated condensed balance sheets.


                                       1
<PAGE>
                                 LUMINENT, INC.
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                        (in thousands, except share data)

                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                      December 31,     September 30,
                                                                          2000             2001
                                                                      -----------      -------------
                                                                                        (unaudited)
<S>                                                                    <C>             <C>
Current liabilities:
     Current portion of long-term debt                                 $   2,607         $   2,191
     Short-term borrowings                                                 7,957            10,289
     Accounts payable                                                     20,021             9,406
     Accrued expenses                                                     10,337            15,111
     Accrued returns and warranty                                            850             3,964
     Income taxes payable                                                  6,634             5,764
                                                                       ---------         ---------
          Total current liabilities                                       48,406            46,725

Long-term debt, net of current portion                                     9,550             8,284
Other long-term liabilities                                                  779               540

Commitments and Contingencies

Minority interest                                                            444               349

Stockholders' equity:
     Preferred stock, $.001 par value, 30,000,000 shares
          authorized; none issued and outstanding                             --                --
     Common stock, $.001 par value, 300,000,000 shares
          authorized; 156,000,000 shares issued and outstanding              156               156
     Additional paid-in capital                                          635,066           635,066
     Accumulated deficit                                                 (29,241)         (168,792)
     Deferred stock compensation, net                                    (55,570)          (12,062)
     Accumulated other comprehensive loss                                 (3,360)           (5,022)
                                                                       ---------         ---------
          Total stockholders' equity                                     547,051           449,346
                                                                       ---------         ---------
          TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                   $ 606,230         $ 505,244
                                                                       =========         =========
</TABLE>



              The accompanying notes are an integral part of these
                     consolidated condensed balance sheets.


                                       2
<PAGE>



                                 LUMINENT, INC.
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                            Three Months Ended September 30,     Nine Months Ended September 30,
                                                            -------------------------------      -------------------------------
                                                                  2000              2001              2000              2001
                                                               ---------         ---------         ---------         ---------
<S>                                                         <C>                  <C>             <C>                 <C>
Net Sales                                                      $  35,958         $  18,754         $  78,964         $ 108,098
Cost of sales(1)(2)(3)                                            25,866            15,189            53,667           105,335
                                                               ---------         ---------         ---------         ---------
      Gross Profit                                                10,092             3,565            25,297             2,763

Operating costs and expenses:
      Selling, general and administrative(1)(2)(3)                12,826            30,076            20,522            69,605
      Research and development(1)(2)(3)                            6,128             3,853            12,752            13,882
      Parent company allocations                                     200                --               588                --
      Amortization of goodwill                                    18,353            19,488            27,933            58,464
                                                               ---------         ---------         ---------         ---------
                                                                  37,507            53,417            61,795           141,951

            Operating loss                                       (27,415)          (49,852)          (36,498)         (139,188)

Other income, net(3)                                                 334               746               526             3,569
                                                               ---------         ---------         ---------         ---------
      Loss before provision for income taxes
            and minority interest                                (27,081)          (49,106)          (35,972)         (135,619)

Provision for income taxes                                         1,240             2,174             2,709             4,027
Minority interest                                                     73                19               391               (95)
                                                               ---------         ---------         ---------         ---------

      Net loss                                                 $ (28,394)        $ (51,299)        $ (39,072)        $(139,551)
                                                               =========         =========         =========         =========

Net loss per share, basic and diluted                          $   (0.20)        $   (0.33)        $   (0.27)        $   (0.89)
                                                               =========         =========         =========         =========

Shares used in per-share calculation, basic and diluted          144,000           156,000           144,000           156,000
                                                               =========         =========         =========         =========
</TABLE>



(1)     Includes amounts relating to deferred stock compensation of $1.2 million
        and $477,000 presented in "cost of sales", $9.0 million and $23.4
        million presented in "selling, general and administrative", and $1.7
        million and $749,000 presented in "research and development" for the
        three months ended September 30, 2000 and 2001, respectively.

(2)     Includes amounts relating to deferred stock compensation of $1.9 million
        and $1.7 million presented in "cost of sales", $10.1 million and $39.1
        million presented in "selling, general and administrative", and $2.9
        million and $2.7 million presented in "research and development" for the
        nine months ended September 30, 2000 and 2001, respectively.

(3)     Includes additional charges of $863,000 and $1.6 million presented in
        "cost of sales" and "selling, general and administrative", respectively,
        for the three months ended September 30, 2001 to adjust estimated
        facilities cost, write-down inventory and record purchase commitments.
        Includes restructuring and other charges of $30.1 million, $13.0
        million, $501,000 and $16,000 presented in "cost of sales", "selling,
        general and administrative", "research and development"and "other
        income, net", respectively, for the nine months ended September 30, 2001
        to write-down inventory, purchase commitments, asset impairment,
        workforce reduction, restructuring costs and other non-recurring items.
        These charges, taken in the second and third quarter of 2001, resulted
        from the lower demand for our products and pricing pressures steming
        from the continuing downturn in the communication equipment industry
        generally and the optical components sector in particular.



              The accompanying notes are an integral part of these
                  consolidated condensed financial statements.




                                       3
<PAGE>
                                 LUMINENT, INC.
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                      Nine Months Ended September 30
                                                                      ------------------------------
                                                                          2000              2001
                                                                        --------         ---------
<S>                                                                   <C>                <C>
Cash Flows from Operating Activities:
    Net loss                                                            $(39,072)        $(139,551)
    Adjustments to reconcile net loss to net cash
       provided by (used in) operating activities:
         Depreciation and amortization                                    30,693            65,627
         Amortization of deferred stock compensation                      14,943            43,508
         Impairment loss on property and equipment                            --             8,904
         Minority interest                                                   391               (95)
         Deferred income taxes                                            (3,463)             (757)
    Changes in operating assets and liabilities:

         Accounts receivable                                               1,288             3,979
         Inventories                                                      (6,286)           15,146
         Prepaid and other current assets                                 (5,390)           (7,917)
         Payable to MRV Communications                                     5,812                --
         Accounts payable                                                  5,024           (10,615)
         Accrued expenses                                                    485             4,774
         Accrued returns and warranty                                        850             3,114
         Income taxes payable                                              2,412              (870)
                                                                        --------         ---------
             Net cash provided by (used in) operating activities           7,687           (14,753)
Cash Flows from Investing Activities:
    Purchases of property and equipment                                  (11,993)          (18,519)
    Proceeds from sale of property and equipment                             550               415
    Net cash received in connection with acquisitions                      5,472                --
    Proceeds from sale of short-term investments                              --             1,027
    Other assets                                                            (757)           (5,051)
                                                                        --------         ---------
             Net cash used in investing activities                        (6,728)          (22,128)
Cash flows form financing activities:
    Payments on long-term debt                                            (2,413)           (1,682)
    Borrowings on long-term debt                                           4,794                --
    Payments on short-term debt                                           (6,476)          (15,975)
    Borrowings on short-term debt                                          7,600            18,307
    Net change in other long-term liabilities                                 (6)             (239)
    Net cash distributions to MRV Communications, Inc.                     7,247                --
                                                                        --------         ---------
             Net cash provided by financing activities                    10,746               411
Effect of exchange rate on cash and cash equivalents                         403            (1,662)
                                                                        --------         ---------
Net decrease in cash and cash equivalents                                 12,108           (38,132)
Cash and cash equivalents, beginning of period                               220           131,778
                                                                        --------         ---------
Cash and cash equivalents, end of period                                $ 12,328         $  93,646
                                                                        ========         =========

SUPPLEMENTAL CASH FLOW INFORMATION:
   Cash paid for
        Income taxes.................................................         --               314
        Interest.....................................................         --             1,001
</TABLE>



              The accompanying notes are an integral part of these
                  consolidated condensed financial statements.



                                       4
<PAGE>
                                 LUMINENT, INC.

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (unaudited)

1. BUSINESS AND BASIS OF PRESENTATION

Business

Luminent, Inc. ("Luminent" or the "Company") designs, manufactures, and sells a
comprehensive line of fiber optic components that enable communications
equipment manufacturers to provide optical networking solutions for the
metropolitan and access segments of the communications network. The Company's
products are designed to meet the increasing bandwidth requirements between
long-haul telecommunication networks and end users. Luminent specializes
in singlemode fiber optic components and subsystems for high-capacity data
transmission for long-reach applications in the metropolitan and access markets.


Luminent was incorporated in Delaware in March 2000 as a wholly owned subsidiary
of MRV Communications, Inc. ("MRV"). Since the completion of Luminent's initial
public offering in November 2000, MRV has owned approximately 92% of Luminent's
outstanding common stock.

On July 25, 2000, MRV and Luminent entered into a Master Separation and
Distribution Agreement (the "Separation Agreement") which became effective as of
September 8, 2000 (the "Separation Date"). MRV transferred to Luminent,
substantially all of the assets and liabilities associated with Luminent's
business.

As of the Separation Date, Luminent began operating independently from MRV. For
periods prior to the Separation Date, the accompanying Consolidated Condensed
Financial Statements reflect MRV's historical bases in the assets and
liabilities and the historical results of operations that were transferred to
Luminent. Additionally, the Consolidated Condensed Financial Statements include
allocations of certain MRV corporate expenses, including centralized legal,
accounting, employee benefits, real estate, insurance services, information
technology services, treasury and other MRV corporate and infrastructure costs.
The expense allocations have been determined on bases that MRV and Luminent
considered to be a reasonable reflection of the utilization of services provided
or the benefit received by Luminent. The allocation methods are based on
relative revenues, head counts or square footage. However, the financial
information included herein may not reflect the consolidated financial position,
operating results, changes in parent company investment and cash flows of
Luminent in the future or what they would have been had Luminent been a
separate, stand-alone entity during the periods presented.

Luminent faces risks common to many technology companies, including but not
limited to, operating in a sector that is new and characterized by rapid
technological change, evolving industry standards, the need to generate capital
to fund operations and uncertainty regarding market acceptance of its products
and products under development and rapid changes in demand for products.

MRV has announced plans to effect a short-form merger (the "Merger") with
Luminent whereby each outstanding share of Luminent common stock (except for
shares presently held by MRV and shares held by Luminent stockholders who
perfect their statutory appraisal rights under Delaware law) will be converted
into 0.43 of a share of MRV common stock. Upon completion of the Merger (which,
subject to obtaining regulatory approvals, is expected in the fourth quarter of
2001), Luminent will cease to be a public company.

Basis of Presentation

The accompanying Consolidated Condensed Financial Statements have been prepared
by the Company, in accordance with accounting principles generally accepted in
the United States for interim financial information and pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. These Consolidated Condensed
Financial Statements should be read in conjunction with the Consolidated
Financial Statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.

In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary to present a fair presentation have been
included. The operating results for the three months and nine months ended
September 30, 2001 are not necessarily indicative of the results that may be
expected for the fiscal year ended December 31, 2001.

Certain reclassifications have been made in the prior financial statements to
reflect the classifications in the current financial statements.

Loss per share

Basic and diluted loss per common share are computed using the weighted average
number of common shares outstanding. All share and per share amounts have been
retroactively restated to give effect to the Company's 144,000-for-one stock
split that occurred on July 25, 2000. The weighted average number of shares used
for computation of basic and diluted loss per share was 156,000,000 for
September 30, 2001, and 144,000,000 for September 30, 2000. The 12.2 million
stock options outstanding and 75,000 warrants outstanding as of September 30,
2001 and the 5.7 million stock options outstanding and 75,000 warrants
outstanding as of September 30, 2000 have been excluded from the diluted
computations of loss per share as their effect would be anti-dilutive.

2. BUSINESS ACQUISITIONS

On April 24, 2000, MRV completed the acquisition of approximately 97% of the
outstanding capital stock of Fiber Optic Communications, Inc., a Republic of
China corporation. Fiber Optic Communications is a manufacturer of passive fiber
optic components for Wavelength Division



                                       5
<PAGE>

Multiplexing. Under the terms of the purchase agreement, Fiber Optic
Communications shareholders received approximately $48.6 million in cash and
approximately 4.7 million shares of MRV common stock and options to purchase
680,000 shares of MRV common stock for a total purchase price of approximately
$310.4 million. The issuance price of the MRV common stock was approximately $53
per share, which was determined based on the average market price five days
before and after the terms were agreed upon. The options to purchase MRV common
stock are exercisable at $3.00 per share, have an aggregate intrinsic value of
$14.1 million at the acquisition date, and vest over a four-year period. The
acquisition is being accounted for using the purchase method of accounting. The
assets and liabilities of the acquired entity have been "pushed down" to
Luminent. The excess purchase price paid over the fair value of the net
identifiable assets acquired of $261.6 million has been recorded as goodwill and
is being amortized on a straight-line basis over 5 years. The deferred
compensation is being amortized using the graded vesting method over 4 years.

On July 12, 2000, MRV completed the acquisition of all of the outstanding
capital stock of Quantum Optech Inc., a Republic of China corporation. Quantum
Optech is a manufacturer of optical thin film coating and filters for Dense
Wavelength Division Multiplexing. Under the terms of the purchase agreement,
Quantum Optech shareholders received approximately 1.0 million shares of MRV
common stock and options to purchase approximately 160,000 shares of MRV common
stock for a total purchase price of approximately $36.2 million. The issuance
price of the MRV common stock was approximately $30 per share, which was
determined based on the average market price five days before and after the
terms were agreed upon. The options to purchase MRV common stock are exercisable
at $3.00 per share, have an aggregate intrinsic value of $4.0 million at the
acquisition date, of which $1.3 million is vested, and the remaining vest over a
four-year period. The acquisition is being accounted for using the purchase
method of accounting. The assets and liabilities of the acquired entity have
been "pushed down" to Luminent. The excess purchase price paid over the fair
value of the net identifiable assets acquired of $27.9 million has been recorded
as goodwill and is being amortized on a straight-line basis over 5 years. The
deferred compensation is being amortized using the graded vesting method over 4
years.

On July 21, 2000, MRV completed the acquisition of approximately 99% of the
outstanding capital stock of Optronics International Corp., a Republic of China
corporation. Optronics International is a manufacturer of high temperature
semiconductor lasers, transceivers and detectors for optical networks. Under the
terms of the purchase agreement, Optronics International shareholders received
approximately 3.4 million shares of MRV common stock and options to purchase
approximately 800,000 shares of MRV common stock for a total purchase price of
approximately $124.3 million. The issuance price of the MRV common stock was
approximately $30 per share, which was determined based on the average market
price five days before and after the terms were agreed upon. The options to
purchase MRV common stock are exercisable at $3.00 per share, have an aggregate
intrinsic value of $20.0 million at the acquisition date, of which $6.6 million
is vested, and the remaining vest over a four-year period. The acquisition is
being accounted for using the purchase method of accounting. The assets and
liabilities of the acquired entity have been "pushed down" to Luminent. The
excess purchase price paid over the fair value of the net identifiable assets
acquired of $99.5 million has been recorded as goodwill and is being amortized
on a straight-line basis over 5 years. The deferred compensation is being
amortized using the graded vesting method over 4 years.

The purchase price of Fiber Optic Communications, Quantum Optech and Optronics
International in the aggregate were allocated as follows (in thousands,
unaudited):

<TABLE>
<S>                                                          <C>
          Purchase price                                     $470,778
          Allocation of purchase price
              Net tangible assets                              51,667
              Deferred stock compensation                      30,150
              Goodwill                                        388,961
</TABLE>

The outstanding capital stock of Fiber Optic Communications, Quantum Optech and
Optronics International, purchased by MRV, has been contributed to Luminent. The
results of operations of these acquisitions have been included in Luminent's
Consolidated Financial Statements from the date of acquisition. The following
unaudited pro forma financial information presents the combined results of
operations of Luminent, Fiber Optic Communications, Quantum Optech and Optronics
International as if the acquisitions had occurred as of January 1, 2000, giving
effect to certain adjustments, including amortization of goodwill and deferred
compensation charges (in thousands).


<TABLE>
<CAPTION>
                                                 Three Months Ending September 30,  Nine Months Ending September 30,
                                                 --------------------------------   --------------------------------
                                                       2000              2001             2000             2001
                                                      -------          --------         --------         ---------
                                                            (unaudited)                        (unaudited)
<S>                                                   <C>              <C>              <C>              <C>
Pro forma net sales                                   $ 36,293         $ 18,754         $ 91,868         $ 108,098
Pro forma net loss                                    $(27,684)        $(50,784)        $(76,427)        $(137,602)
Pro forma basic and diluted net loss per share        $  (0.19)        $  (0.33)        $  (0.53)        $   (0.88)
</TABLE>

3. INVENTORIES

Inventories consisted of the following (in thousands):


<TABLE>
<CAPTION>
                         December 31,   September 30,
                            2000           2001
                         -----------    -------------
                                        (unaudited)
<S>                      <C>            <C>
Raw materials              $22,896        $15,585
Work in process             12,402          6,092
Finished goods               4,130          2,605
                           -------        -------
  Total inventories        $39,428        $24,282
                           =======        =======
</TABLE>



                                       6
<PAGE>
As a result of the dramatic slowdown in the communications equipment industry
generally and the optical components sector in particular, the Company has
recorded $3.1 million in specific inventory reserves during the three months
ended September 30, 2001 (see Note 5). The Company also increased its general
reserves by $1.5 million and $2.9 million during the three and nine months ended
September 30, 2001, respectively.

4. BUSINESS SEGMENTS AND CONCENTRATIONS OF RISK

Luminent operates under one reportable segment: fiber optic components and
modules. Fiber optic components and modules include discrete components such as
laser diodes and light emitting diodes and integrated components such as
transmitters, receivers and transceivers. These products are sold primarily to
original-equipment manufacturers and through distributors.

The Company depends on single or limited source suppliers for some of the key
components and materials in its products, which makes Luminent susceptible to
supply shortages or price fluctuations that could adversely affect operating
results. Management believes this will not have a significant impact on
operations.

For the three months ended September 30, 2001, the Company had two customers
that accounted for approximately 26% of net sales. For the nine months ended
September 30, 2001, the Company had two customers that accounted for
approximately 24% of net sales. As of September 30, 2001, one customer accounted
for approximately 27% of total accounts receivable. Certain geographical area
information follows (in thousands).

Geographical Area Net Sales (in thousands):

<TABLE>
<CAPTION>
                             Three Months Ending September 30,              Nine Months Ending September 30,
                             --------------------------------               -------------------------------
                                  2000                  2001                 2000                   2001
                                -------               -------               -------               --------
                                        (unaudited)                                 (unaudited)
<S>                          <C>                      <C>                   <C>                   <C>
North America                   $20,382               $ 8,003               $49,136               $ 62,332
Asia-Pacific                      8,472                 6,944                16,103                 27,977
Europe and others                 7,104                 3,807                13,725                 17,789
                                -------               -------               -------               --------
  Total net sales               $35,958               $18,754               $78,964               $108,098
                                =======               =======               =======               ========
</TABLE>


For the three and nine months ended September 30, 2001, the Company's sales
consist of active and passive optical components used by telecommunications
equipment manufacturers. Active optical components consist of transceivers,
lasers, and others. Passive optical components consist of couplers, jumpers,
micro-optic products and others.

The following table sets forth revenues from external customers for each product
group (in thousands):

<TABLE>
<CAPTION>
                                                   Three Months Ending September 30,                Nine Months Ending September 30,
                                                   ---------------------------------               ---------------------------------
                                                     2000                     2001                   2000                     2001
                                                   --------                 --------               --------                 --------
                                                              (unaudited)                                     (unaudited)
<S>                                                <C>                      <C>                    <C>                      <C>
   Active                                          $ 27,502                 $ 12,515               $ 63,096                 $ 83,310
   Passive                                            8,456                    6,239                 15,868                   24,788
                                                   --------                 --------               --------                 --------

     Total net sales                               $ 35,958                 $ 18,754               $ 78,964                 $108,098
                                                   ========                 ========               ========                 ========
</TABLE>



5. RESTRUCTURING AND OTHER CHARGES

In the second quarter of 2001, the Company's management approved and implemented
a restructuring plan and other actions in order to adjust operations and
administration as a result of the dramatic slowdown in the communications
equipment industry generally and the optical components sector in particular.
Major actions comprising the Company's restructuring activities primarily
involve the reduction of facilities in the U.S. and in Taiwan, the reduction of
workforce, the abandonment of certain assets, and the cancelation and
termination of purchase commitments. These actions are expected to realign the
business based on current and near term growth rates. All of these actions are
scheduled for completion by the second quarter of 2002.

During the three and nine months ended September 30, 2001, the Company recorded
restructuring charges totaling $3.0 million and $17.5 million, respectively.
Costs for restructuring activities are limited to either incremental costs that
directly result from the restructuring activities and provide no future revenue
generating benefit or costs incurred under contractual obligations that existed
before the restructuring plan and will continue with either no future revenue
generating benefit or become a penalty incurred for termination of the
obligation.

Employee severance costs and related benefits of $1.1 million are related to
approximately 500 and 600 layoffs during the three and nine months ended
September 30, 2001, respectively, bringing the Company's total workforce to
approximately 1,100 employees as of September 30, 2001. As of September 30,
2001, the employee severance reserve balance has been reduced by cash payments
of approximately $1.0 million resulting in an ending reserve balance of $38,000.
Affected employees came from all divisions and areas of the Company. The
majority of affected employees were in the manufacturing group.

In addition to the costs associated with employee severance, the Company
identified a number of assets, including leased facilities and equipment that
are no longer required due to current market conditions, operations and expected
growth rates. The net facility costs related to closed and abandoned facilities
of approximately $1.6 million and $2.7 million for the three and nine months
ended September 30, 2001, respectively, are primarily related to future
obligations under operating leases. The total lease charge is net of
approximately $3.7 million in expected sublease revenue on leases that the
Company cannot terminate. In connection with these closed and abandoned
facilities, the Company has recorded asset impairment charges of $8.9 million in
selling, general, and administrative for the nine months ended September 30,
2001, consisting of leasehold improvements and certain equipment to write-down
the value of this equipment. Due to the specialized nature of these assets, the
Company has determined that these assets have minimal or no future benefit and
has recorded a provision reflecting the net book value relating to these assets.
The Company expects to complete the disposal of this equipment early in 2002.
Purchase commitments of $1.5 million and $3.9 million, recorded in cost of
sales, for the three and nine months ended September 30, 2001, respectively, are
to cancel or renegotiate outstanding contracts for materials and capital assets
that are no longer required due to the Company's significantly reduced orders
for optical components and sales projections over the next twelve months.

As of September 30, 2001, the provision has been reduced by cash payments of
$1.1 million and $1.3 million for the three and nine months ended September 30,
2001, respectively, and non-cash related charges of $8.9 million for the nine
months ended September 30, 2001, resulting in an ending balance of $7.4 million.
The Company expects to utilize the remaining balance by the end of the second
quarter of 2002. The Company expects that it will spend approximately $4.5
million through the next three quarters to carry out the plan, which will be
paid through cash and cash equivalents and through operating cash flows. The
Company expects to begin to realize savings related to the workforce reductions
in late 2001 with estimated ongoing quarterly net savings of $2.4 million. In
addition, the Company will realize reduced depreciation charges of approximately
$384,000 per quarter through December 2004 and $163,000 per quarter through
December 2005 for facility costs. These savings are expected to be realized as
reductions in cost of sales, research and development and selling, general and
administrative expenses.

A summary of the restructuring costs for the nine months ended September 30,
2001 consist of the following:

<TABLE>
<CAPTION>
                                                                                                              Remaining
                                       Original Provision    Additional Provision       Utilized               Balance
                                       ------------------    --------------------     -------------         -------------
<S>                                    <C>                   <C>                      <C>                   <C>
   Exit costs
     Asset impairment                     $   8,904,000         $          --         $   8,904,000         $          --
     Closed and abandoned facilities          1,108,000             1,584,000                89,000             2,603,000
     Purchase commitments                     2,402,000             1,460,000               102,000             3,760,000
     Other                                      991,000                    --                41,000               950,000
                                          -------------         -------------         -------------         -------------

                                             13,405,000             3,044,000             9,136,000             7,313,000
   Employee severance costs                   1,072,000                    --             1,034,000                38,000
                                          -------------         -------------         -------------         -------------

                                          $  14,477,000         $   3,044,000         $  10,170,000         $   7,351,000
                                          =============         =============         =============         =============
</TABLE>

A summary of the restructuring costs by line item for the three and nine months
ended September 30, 2001 consist of the following:

<TABLE>
<CAPTION>
                                           Three Months Ended     Nine Months Ended
                                           September 30, 2001     September 30, 2001
                                           ------------------     ------------------
<S>                                        <C>                    <C>
Cost of sales                                  $ 1,460,000            $ 4,628,000
Selling, general and administrative              1,584,000             12,376,000
Research and development                                --                501,000
Other income, net                                       --                 16,000
                                               -----------            -----------
  Total restructuring costs                    $ 3,044,000            $17,521,000
                                               ===========            ===========
</TABLE>

As a result of the significant negative economic and industry trends impacting
the Company's expected sales over the next twelve months, the Company also
recorded a one-time $26.1 million charge to write-down the remaining book value
of certain inventory related to certain transceivers, duplexors, and triplexors
that are previous generation products to its realizable value during the three
months ended June 30, 2001. The one-time charge to write-down inventory was
subsequently reduced by $3.7 million during the three months ended September 30,
2001 to reflect the utilization of previously written-off items. Another $3.1
million of inventory was written-down during the three months ended September
30, 2001 to reflect the identification of additional inventory that is not
expected to be utilized as a result of the Company's significantly reduced
orders for optical components and sales projections for the next twelve months.
The inventory charges and recoveries were recorded in cost of sales. Also
included in one-time charges is a $598,000 charge to bad debt recorded in
selling, general and administrative expenses during the nine months ended
September 30, 2001 to reflect customer bankruptcies that have resulted from the
severe market downturn.

In addition, as part of the Company's review of the impairment of certain
long-lived assets, management performed an assessment of the carrying amount of
goodwill recorded in connection with its various acquisitions. This assessment,
based on the undiscounted future cash flows, determined that no write-down of
goodwill was required for the nine months ended September 30, 2001 (see Note 8).



                                       7
<PAGE>
6. SEPARATION FROM MRV COMMUNICATIONS, INC.

For purposes of governing the ongoing relationships between Luminent and MRV at
and after the separation, Luminent and MRV have entered into various agreements.
A brief description of each of the agreements (all of which will terminate upon
completion of the Merger) follows.

Luminent's sale of products to MRV and its affiliates was $2.5 million and $5.1
million for the nine months ended September 30, 2000 and 2001, respectively. As
of September 30, 2000, Luminent had received a total of $5.8 million from MRV to
fund payroll and other operations related matters. The Company repaid this
amount to MRV through operating cash and offsetting amounts due from MRV on or
before December 31, 2000. As of September 30, 2001, Luminent had incurred $6.2
million in estimated income tax liability due MRV. The Company repaid $4.7
million of this obligation through offsetting amounts due from MRV on or before
September 30, 2001.

Master Separation and Distribution Agreement

MRV and Luminent have entered into a Master Separation Agreement, which contains
key provisions relating to the separation, Luminent's initial funding, initial
public offering and the distribution of Luminent's common stock to MRV's
stockholders. The Master Separation and Distribution Agreement lists the
documents and items that the parties must deliver in order to accomplish the
transfer of assets and liabilities from MRV to Luminent, effective on the
separation date. The Master Separation and Distribution Agreement also contains
conditions that must occur prior to the distribution. The parties also entered
into ongoing covenants that survive the transactions, including covenants to
establish interim service level agreements, exchange information, engage in
certain auditing practices and resolve disputes in particular ways.

General Assignment and Assumption Agreement

The General Assignment and Assumption Agreement identifies the assets and
certain capital stock that MRV has transferred to Luminent and the liabilities
that Luminent has assumed from MRV in the separation. The General Assignment and
Assumption Agreement also describes when and how these transfers and assumptions
occurred. In general, these assets and liabilities were those that appeared in
the consolidated balance sheet as of September 30, 2000.

Intellectual Property Agreements

The Master Technology Ownership and License Agreement, the Master Patent
Ownership and License Agreement and the Master Trademark Ownership and License
Agreement collectively are referred to as the Intellectual Property Agreements.
Under the Intellectual Property Agreements, MRV confirmed that Luminent owns or
MRV transferred to Luminent certain rights in specified patents, patent
applications, invention disclosures, specified trademarks and other intellectual
property related to Luminent's current business, research and development
efforts.

Employee Matters Agreement

The Employee Matters Agreement outlines how MRV and Luminent allocated assets,
liabilities and responsibilities relating to current and former employees of
Luminent and their participation in the benefits plans, including stock plans,
that MRV currently sponsors and maintains. The Employee Matters Agreement also
contains provisions describing some of Luminent's employee benefit and employee
stock plans.

All eligible Luminent employees continue to participate in the MRV benefits
plans on comparable terms and conditions to those for MRV employees until the
distribution date or until Luminent establishes benefit plans for its employees,
or elects not to establish comparable plans if it is not legally or financially
practical. Luminent intends to establish its own benefit program no later than
the time of distribution.

Once Luminent establishes it own benefits plans, it may modify or terminate each
plan in accordance with the terms of that plan and its policies. No Luminent
benefit plan will provide benefits that overlap benefits under the corresponding
MRV benefit plan at the time of the distribution. Each Luminent benefit plan
will provide that all service, compensation and other benefit determinations
that, as of the distribution, were recognized under the corresponding MRV
benefits plan, will be taken into account under that Luminent benefit plan.

Following the date of MRV's distribution of its Luminent common stock to its
stockholders, Luminent will be under no obligation to maintain these plans in
the form in which they were established or at all. The transfer to Luminent of
employees at certain of MRV's international operations, and of certain employee
benefit plans, may not take place until Luminent receives consents or approvals
or has satisfied other applicable requirements.



                                       8
<PAGE>

Tax Sharing and Indemnification Agreement

The Tax Sharing and Indemnification Agreement allocates MRV's and Luminent's
responsibilities and rights for certain tax matters. The agreement requires
Luminent to pay MRV for the incremental tax costs of Luminent's inclusion in
consolidated, combined or unitary tax returns with affiliated corporations. In
determining these incremental costs, the Tax Sharing and Indemnification
Agreement takes into account not only the group's incremental tax payments to
the Internal Revenue Service or other taxing authorities, but also the
incremental use of tax losses of affiliates to offset Luminent's taxable income,
and the incremental use of tax credits of affiliates to offset the tax on
Luminent's income. The Tax Sharing and Indemnification Agreement also provides
for compensation or reimbursement as appropriate to reflect redeterminations of
Luminent's tax liability for periods during which Luminent joined in filing
consolidated, combined or unitary tax returns.

The Tax Sharing and Indemnification Agreement also requires Luminent to
indemnify MRV for certain taxes and similar obligations, including (a) sales
taxes on the sale of products purchased by MRV from Luminent before the
distribution, (b) customs duties or harbor maintenance fees on products exported
or imported by MRV on behalf of Luminent, (c) the additional taxes that would
result if an acquisition of a controlling interest in Luminent's stock after the
distribution causes the distribution not to qualify for tax-free treatment to
MRV, and (d) any taxes resulting from transactions undertaken in preparation for
the distribution.

Luminent's indemnity obligations include any interest penalties on taxes, duties
or fees for which Luminent must indemnify MRV.

Each member of a consolidated group for U.S. federal income tax purposes is
jointly and severally liable for the group's federal income tax liability.
Accordingly, Luminent could be required to pay a deficiency in the group's
federal income tax liability for a period during which Luminent was a member of
the group even if the Tax Sharing and Indemnification Agreement allocates that
liability to MRV or another member.

Master Transitional Services Agreement

The Master Transitional Service Agreement governs the individual transitional
services as requested by Luminent and provided by MRV, on an interim basis, for
one year from the date of separation, unless extended for specific services or
otherwise indicated in the agreement. The services include data processing and
telecommunications services, such as voice telecommunications and data
transmission, and information technology support services, for functions
including accounting, financial management, tax, payroll, stockholder and public
relations, legal, procurement, and other administrative functions. Specified
charges for such services are generally intended to allow the providing company
to recover the direct and indirect costs of providing the services. The Master
Transitional Services Agreement also will cover the provision of certain
additional transitional services identified from time to time after the
Separation Date that were inadvertently or unintentionally omitted from the
specified services, or that are essential to effectuate an orderly transition
under the Master Separation and Distribution Agreement, so long as the provision
of such services would not significantly disrupt MRV's operations or
significantly increase the scope of its responsibility under the agreement.

In addition, the Master Transitional Services Agreement will provide for the
replication of some computer systems, including hardware, software, data storage
or maintenance and support components. Generally, the party needing the
replicated system will bear the costs and expenses of replication. Generally,
the party purchasing new hardware or licensing new software will bear the costs
and expenses of purchasing the new hardware or obtaining the new software
licenses.

Real Estate Matters Agreement

The Real Estate Matters Agreement addresses real estate matters relating to
certain MRV leased and owned properties that MRV will transfer to or share with
Luminent. The Real Estate Matters Agreement describes the manner in which MRV
will transfer to or share with Luminent various leased and owned properties. The
Real Estate Matters Agreement provides that Luminent will be required to accept
the transfer of all sites allocated to Luminent, even if a site has been damaged
by a casualty before the separation date. The Real Estate Matters Agreement also
provides that all reasonable costs required to effect the transfers, including
landlord consent fees and landlord attorney's fees will be paid by MRV.

Indemnification and Insurance Matters Agreement

Effective as of the separation date, subject to specified exceptions, Luminent
and MRV released the other from any liabilities arising from events occurring on
or before the separation date, including events occurring in connection with the
activities to implement the separation, the initial public offering and the
distribution. The Indemnification and Insurance Matters Agreement also contains
provisions governing indemnification. In general, Luminent and MRV will each
indemnify the other from all liabilities arising from their respective
businesses or contracts, as well as liabilities arising from a breach of the
Master Separation and Distribution Agreement or any ancillary agreement. In
addition, MRV and Luminent will each indemnify the other against liability for
specified environmental conditions. Luminent will reimburse MRV for the cost of
any insurance coverage from the separation date to the distribution date.

Prior to Luminent's separation from MRV, the companies entered into various
agreements providing for MRV to supply transitional services and support to
Luminent. Services totaling $588,000 have been recorded for the year ended
December 31, 2000. There were no transitional services provided by MRV to
Luminent during 2001. Although the fees provided for in the agreements are
intended to represent the fair market value of these services, MRV and Luminent
cannot assure that these fees necessarily reflect the costs of providing these
services from unrelated third parties. However, the Company believes that
providing these services to Luminent provided an efficient means of obtaining
them. With the Merger, these agreements will be terminated.

7.   LITIGATION

Luminent has received notices from third parties alleging possible infringements
of patents with respect to product features or manufacturing processes.
Management believes such notices are common in the communications industry
because of the large number of patents that have been filed on these subjects.
The Company's policy is to discuss these notices with the senders in an effort
to demonstrate that the Company's products and/or processes do not violate any
patents. The Company is currently involved in such discussions with Ortel,
Rockwell and IBM. The Company is evaluating these claims and presently does not
believe that any of its products or processes violates any of the patents
asserted by these parties, and the claims are without merit. Additionally the
Company intends to vigorously defend its positions if any legal action is taken.
Management believes the ultimate outcome of such claims will not have a material
impact on the results of operations or financial position.

In September 2001, a lawsuit was filed against Luminent by Aram Precision Tool
and Die, Inc. (Aram) alleging failure to accept and pay for materials requested
under purchase orders. Aram claims compensatory damages in the amount of
$300,000, unspecified punitive damages, unspecified attorney's fees and
interest. The Company believes that the allegations of the lawsuit are without
merit due to product quality issues and intends to vigorously defend the action.
As such, Management believes the ultimate outcome of this claim will not have a
material impact on the results of operational or financial position.

8.   RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998 and June 1999, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Investments and Hedging Activities," and SFAS No. 137, which
delayed the effective date of SFAS No. 133. In June 2000, the FASB issued SFAS
No. 138 which provides additional guidance for the application of SFAS No. 133
for certain transactions. We adopted this statement on January 1, 2001 and the
adoption of this statement did not have a material impact on our financial
position or results of operations.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements," as amended. SAB
101 summarizes certain of the Securities and Exchange Commission's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. We have applied the provisions of SAB 101 in the
consolidated financial statements. The adoption of SAB 101 did not have a
material impact on our financial condition or results of operations.

In March 2000, the FASB issued interpretation No. 44 (FIN 44), "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25." FIN 44 clarifies the application of APB No. 25 for certain
issues, including the definition of an employee, the treatment of the
acceleration of stock options and the accounting treatment for options assumed
in business combinations. FIN 44 became effective on July 1, 2000, but is
applicable for certain transactions dating back to December 1998. The adoption
of FIN 44 did not have a significant impact on our financial position or results
of operations.

The FASB recently approved two statements: SFAS No. 141, "Business Combinations"
and SFAS No. 142, "Goodwill and Other Intangible Assets", which provide guidance
on the accounting for business combinations, requires all future business
combinations to be accounted for using the purchase method, discontinues
amortization of goodwill, defines when and how intangible assets are amortized,
and requires an annual impairment test for goodwill. We plan to adopt these
statements effective January 1, 2002. We are currently reviewing these standards
to determine the impact on our results of operation and financial position. The
most significant anticipated effect on our financial statements of this adoption
would be discontinuing goodwill amortization and the possible recognition of a
goodwill impairment loss measured as of the date of adoption.

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

All statements contained in this Report that are not historical facts, including
but not limited to, statements regarding our business strategies and
expectations concerning future operations, margins, profitability, liquidity,
capital expenditures and capital resources, are based on current expectations.
These statements are forward-looking in nature and involve a number of risks and
uncertainties. Generally, words including but not limited to "anticipates,"
"believes," "estimates," "expects" and similar expressions as they relate to the
Company and its management are intended to identify forward-looking statements.
Although management believes that the expectations in such forward-looking
statements are reasonable, it can give no assurance that any forward-looking
statement will prove to be correct and actual results may differ materially.
We caution readers not to place undue reliance on any forward-looking
statements, which statements are made pursuant to the Private Litigation Reform
Act of 1995. The factors identified under "Risk Factors" below and elsewhere in
this Report are among the factors that could cause actual results to differ
materially



                                       9
<PAGE>
from the forward-looking statements. The forward-looking statements contained in
this Report speak only as of the date that we have filed this Report. We
expressly disclaim any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained in this Report, including
to reflect any change in our expectations with regard to that forward-looking
statement or any change in events, conditions or circumstances on which that
forward-looking statement is based.

MARKET CONDITIONS AND CURRENT OUTLOOK

Macroeconomic factors, such as an economic slowdown in the U.S. and abroad, have
detrimentally impacted demand for communications products, thereby resulting in
reduced demand for optical components in general. The unfavorable economic
conditions and reduced capital spending detrimentally affected sales to service
providers, network equipment companies, e-commerce and Internet businesses, and
the manufacturing industry in the United States during 2001 to date, and appear
to continue to affect these industries in the forth quarter of 2001 and may
affect them beyond the forth quarter. Announcements by industry participants and
observers indicate there is a slowdown in industry spending and participants are
seeking to reduce existing inventories.

Our two largest customers, Cisco and Marconi, have announced during 2001 that
they expect declining revenues and profitability in the near term due to
softening demand for telecommunications and networking equipment. This has
resulted in reductions and rescheduling by Cisco and Marconi in purchases from
their suppliers such as us as they seek to reduce their existing inventories and
adjust to reduced demand in the market. This will likely result in lower sales
to Cisco and Marconi, and could result in lower revenues overall. Our sales may
decline significantly with resulting fluctuations or harm to our operating
results and financial condition if either Cisco or Marconi cancels, reduces or
delays purchases of our products or unduly delays qualifying them.

In the second quarter of 2001, our management approved and implemented a
restructuring plan and other actions in order to adjust operations and
administration as a result of the dramatic slowdown in the communications
equipment industry generally and the optical components sector in particular.
Major actions comprising our restructuring activities primarily involve the
reduction of facilities in the U.S. and in Taiwan, the reduction of workforce,
the abandonment of certain assets, and the cancelation and termination of
purchase commitments. These actions are expected to realign the business based
on current and near term growth rates. All of these actions are scheduled for
completion by the second quarter of 2002.

During the three and nine months ended September 30, 2001, we recorded
restructuring charges totaling $3.0 million and $17.5 million, respectively.
Costs for restructuring activities are limited to either incremental costs that
directly result from the restructuring activities and provide no future revenue
generating benefit or costs incurred under contractual obligations that existed
before the restructuring plan and will continue with either no future revenue
generating benefit or become a penalty incurred for termination of the
obligation.

Employee severance costs and related benefits of $1.1 million are related to
approximately 500 and 600 layoffs during the three and nine months ended
September 30, 2001, respectively, bringing the Company's total workforce to
approximately 1,100 employees as of September 30, 2001. As of September 30,
2001, the employee severance reserve balance has been reduced by cash payments
of approximately $1.0 million resulting in an ending reserve balance of $38,000.
Affected employees came from all divisions and areas of the Company. The
majority of affected employees were in the manufacturing group.

In addition to the costs associated with employee severance, we identified a
number of assets, including leased facilities and equipment that are no longer
required due to current market conditions, operations and expected growth rates.
The net facility costs related to closed and abandoned facilities of
approximately $1.6 million and $2.7 million for the three and nine months ended
September 30, 2001, respectively, are primarily related to future obligations
under operating leases. The total lease charge is net of approximately $3.7
million in expected sublease revenue on leases that we cannot terminate. In
connection with these closed and abandoned facilities, we have recorded asset
impairment charges of $8.9 million in selling, general, and administrative for
the nine months ended September 30, 2001, consisting of leasehold improvements
and certain equipment to write-down the value of this equipment. Due to the
specialized nature of these assets, we have determined that these assets have
minimal or no future benefit and has recorded a provision reflecting the net
book value relating to these assets. We expect to complete the disposal of this
equipment early in 2002. Purchase commitments of $1.5 million and $3.9 million,
recorded in cost of sales, for the three and nine months ended September 30,
2001, respectively, are to cancel or renegotiate outstanding contracts for
materials and capital assets that are no longer required due to the
significantly reduced orders for optical components and sales projections over
the next twelve months.

As of September 30, 2001, the provision has been reduced by cash payments of
$1.1 million and $1.3 million for the three and nine months ended September 30,
2001, respectively, and non-cash related charges of $8.9 million for the nine
months ended September 30, 2001, resulting in an ending balance of $7.4 million.
We expect to utilize the remaining balance by the end of the second quarter of
2002. We expect to spend approximately $4.5 million through the next three
quarters to carry out the plan, which will be paid through cash and cash
equivalents and through operating cash flows. We expect to begin to realize
savings related to the workforce reductions in late 2001 with estimated ongoing
quarterly net savings of $2.4 million. In addition, we will realize reduced
depreciation charges of approximately $384,000 per quarter through December 2004
and $163,000 per quarter through December 2005 for facility costs. These savings
are expected to be realized as reductions in cost of sales, research and
development and selling, general and administrative expenses.

A summary of the restructuring costs for the nine months ended September 30,
2001 consist of the following:

<TABLE>
<CAPTION>
                                                                                                              Remaining
                                       Original Provision    Additional Provision       Utilized               Balance
                                       ------------------    --------------------     -------------         -------------
<S>                                    <C>                   <C>                      <C>                   <C>
   Exit costs
     Asset impairment                     $   8,904,000         $          --         $   8,904,000         $          --
     Closed and abandoned facilities          1,108,000             1,584,000                89,000             2,603,000
     Purchase commitments                     2,402,000             1,460,000               102,000             3,760,000
     Other                                      991,000                    --                41,000               950,000
                                          -------------         -------------         -------------         -------------

                                             13,405,000             3,044,000             9,136,000             7,313,000
   Employee severance costs                   1,072,000                    --             1,034,000                38,000
                                          -------------         -------------         -------------         -------------

                                          $  14,477,000         $   3,044,000         $  10,170,000         $   7,351,000
                                          =============         =============         =============         =============
</TABLE>

A summary of the restructuring costs by line item for the three and nine months
ended September 30, 2001 consist of the following:

<TABLE>
<CAPTION>
                                           Three Months Ended     Nine Months Ended
                                           September 30, 2001     September 30, 2001
                                           ------------------     ------------------
<S>                                        <C>                    <C>
Cost of sales                                  $ 1,460,000            $ 4,628,000
Selling, general and administrative              1,584,000             12,376,000
Research and development                                --                501,000
Other income, net                                       --                 16,000
                                               -----------            -----------
  Total restructuring costs                    $ 3,044,000            $17,521,000
                                               ===========            ===========
</TABLE>

As a result of the significant negative economic and industry trends impacting
our expected sales over the next twelve months, we also recorded a one-time
$26.1 million charge to write-down the remaining book value of certain inventory
related to certain transceivers, duplexors, and triplexors that are previous
generation products to its realizable value during the three months ended June
30, 2001. The one-time charge to write-down inventory was subsequently reduced
by $3.7 million during the three months ended September 30, 2001 to reflect the
utilization of previously written-off items. Another $3.1 million of inventory
was written-down during the three months ended September 30, 2001 to reflect the
identification of additional inventory that is not expected to be utilized as a
result of our significantly reduced orders for optical components and sales
projections for the next twelve months. The inventory charges and recoveries
were recorded in cost of sales. Also included in one-time charges is a $598,000
charge to bad debt recorded in selling, general and administrative expenses
during the nine months ended September 30, 2001 to reflect customer bankruptcies
that have resulted from the severe market downturn.

In addition, as part of our review of the impairment of certain long-lived
assets, we performed an assessment of the carrying amount of goodwill recorded
in connection with its various acquisitions. This assessment, based on the
undiscounted future cash flows, determined that no write-down of goodwill was
required for the nine months ended September 30, 2001 (see Note 8).

In September 2001, MRV announced plans to effect a short-form merger with us.
Upon completion of the merger Luminent will cease to be a public company. At
the time the merger was announced, Dr. William Spivey resigned as our
President, Chief Executive Officer, and Board member, and Noam Lotan, our
Chairman, assumed the position of Chief Executive Officer at Luminent.

OVERVIEW

We design, manufacture and sell a comprehensive line of fiber optic components
that enable communications equipment manufacturers to provide optical networking
equipment for the rapidly growing metropolitan and access segments of the
communications network. Directly and through its subsidiaries, MRV designs,
manufactures and sells data networking products, including networking and
Internet infrastructure products such as switching and router management
systems, and through Luminent, MRV was engaged in the fiber optics components
business. Our fiber optic components business was the original business of MRV
when MRV began operations in July 1988. From inception in 1988 until our
separation on September 8, 2000, when MRV completed the contribution and
transfer to us of our business, we operated as a division of MRV and conducted
business using MRV's trade name. In March 2000, we were incorporated in Delaware
as a wholly owned subsidiary of MRV. In April 2000, we began operating under the
Luminent trade name.

As of September 30, 2001, MRV owned approximately 92% of the outstanding shares
of our common stock. MRV has announced plans to effect a short-form merger (the
"Merger") with us whereby each outstanding share of our common stock (except for
shares presently held by MRV and shares held by our stockholders who perfect
their statutory appraisal rights under Delaware law) will be converted into 0.43
of a share of MRV common stock. Upon completion of the Merger (which subject to
obtaining regulatory approvals is expected in the fourth quarter of 2001), we
will cease to be a public company.

On April 24, 2000, MRV acquired approximately 97% of the outstanding capital
stock of Fiber Optic Communications, a Taiwanese manufacturer of passive fiber
optic components with facilities in both Taiwan and the People's Republic of
China. The purchase price paid was approximately $310.4 million in cash, common
stock and options to purchase common stock of MRV, including amounts recorded as
deferred stock compensation. On July 12, 2000, MRV acquired all of the
outstanding capital stock of Quantum, a Taiwanese manufacturer of active and
passive fiber optic components. The purchase price paid was approximately $36.2
million in common stock and options to purchase common stock of MRV, including
amounts recorded as deferred stock compensation. On July 21, 2000, MRV acquired
approximately 99% of the outstanding capital stock of Optronics, a Taiwanese
manufacturer of active fiber optic components. The purchase price paid was
approximately $124.3 million in common stock and options to purchase common
stock of MRV, including amounts recorded as deferred stock compensation. The
acquisitions were made to expand our product offerings, enhance our technology
expertise and expand our manufacturing capabilities.

These acquisitions were accounted for using the purchase method and the
outstanding capital stock purchased by MRV in each of the acquisitions has been
contributed to us as of the dates of acquisition. Therefore, the results of
operations of Fiber Optic Communications, Optronics and Quantum have been
included in our consolidated financial statements from April 25, 2000, July 13,
2000 and July 22, 2000, respectively.



                                       10
<PAGE>

In connection with the acquisitions of Fiber Optic Communications, Optronics and
Quantum, a portion of the purchase prices paid represented deferred stock
compensation relating to options to purchase the common stock of MRV. These
options had fair values of approximately $14.1 million, $13.4 million and $2.7
million for Fiber Optic Communications, Optronics and Quantum, respectively.
Deferred stock compensation amortization expense for the three months and nine
months ended September 30, 2001 relating to these stock options was
approximately $2.3 million and $8.2 million, respectively. In connection with
these acquisitions, we expect to incur an additional $9.4 million of deferred
stock compensation until fully amortized in 2004. Deferred stock compensation is
amortized using the graded method over a four-year period.

Goodwill resulting from the Fiber Optic Communications, Optronics and Quantum
acquisitions totaled $261.6 million, $99.5 million and $27.9 million,
respectively. For the three months and nine months ended September 30, 2001, we
recorded amortization of goodwill of approximately $19.5 million and $58.5
million, respectively, relating to these acquisitions. We expect to record
amortization of goodwill for Fiber Optic Communications, Optronics and Quantum
of approximately $19.5 million per quarter through December 31, 2001. At January
1, 2002 we will implement SFAS No. 142 (see RECENT ACCOUNTING PRONOUNCEMENTS,
below), which requires us to cease amortizing goodwill, but regularly assess
existing goodwill for impairment.

Fiber Optic Communications produces margins similar to us; however, it has not
experienced the growth in net sales or operating income that we have experienced
during the last three fiscal years. We are not aware of any unusual trends
specific to the businesses of our acquired companies, except that they are
experiencing the same softness in demand and pricing that we and the rest of our
industry are experiencing.

In July 2000, MRV and Luminent entered into four-year employment agreements
with our former President and Chief Executive Officer and our Vice President of
Finance and Chief Financial Officer. The agreements provide for annual salaries,
performance bonuses and combinations of stock options to purchase shares of
MRV's common stock and Luminent's common stock. The options to purchase MRV's
common stock are immediately exercisable. The options to purchase Luminent's
common stock vest over four years. These options were granted to our former
President and Chief Executive Officer and our Vice President of Finance and
Chief Financial Officer at exercise prices below market value, resulting in
deferred stock compensation. Deferred stock compensation reported for the three
months and nine months ended September 30, 2001 for these agreements was $22.3
million and $35.3 million, respectively, including recognition of the remainder
of the deferred compensation generated from the options granted to our former
President and Chief Executive Officer under our employment agreement with him.
We will incur additional deferred stock compensation of approximately $2.6
million through 2004.

Our President and Chief Executive Officer resigned in September 2001. Dr.
Spivey's resignation was considered by the parties to be a termination other
than for cause under his employment agreement entitling him to the severance
benefits of his employment agreement, including payment over a one year period
of an amount equal to two times the sum of his annual salary plus bonus and the
vesting of all of his unvested Luminent options. Dr. Spivey's MRV and Luminent
stock options are now exercisable through September 11, 2003. During the quarter
ended September 30, 2001, we recorded a charge of $1.0 million to reflect
severance expense and an immediate write-down of deferred stock compensation
expense of $18.9 million.

We reported a net loss of approximately $51.3 million and $139.6 million for the
three and nine months ended September 30, 2001, respectively. The net loss was
primarily due to amortization of goodwill and deferred stock compensation
related to the acquisitions of Fiber Optic Communications, Optronics and Quantum
for the three months and nine months ended September 30, 2001, our employment
and severance arrangements with our former President and Chief Executive Officer
and our employment arrangement with our Vice President of Finance and Chief
Financial Officer for the three months and nine months ended September 30, 2001
and recording restructuring and other charges totaling $43.6 million resulting
from the lower demand for our products and pricing pressures stemming from the
continuing downturn in the communications equipment industry generally and the
optical components sector in particular generally for the nine months ended
September 30, 2001. These charges include the net write-down of inventory of
$25.5 million, asset impairment of $8.9 million, and other restructuring and
non-recurring items related to the recent market conditions of $9.2 million (see
RESULTS OF OPERATIONS section, below). In addition, we will record amortization
of goodwill (at least until December 31, 2001 -- see Recent Accounting
Pronouncements, below) or other intangible assets and deferred stock
compensation relating to the Fiber Optic Communications, Optronics and Quantum
acquisitions and the employment arrangement with our Vice President of Finance
and Chief Financial Officer going forward. As a consequence of these
amortization charges, we do not expect to report net income in the foreseeable
future.

We have entered into various agreements related to interim and ongoing
relationships with MRV. These agreements provide for transitional services and
support in the areas of data processing and telecommunications services (such as
voice telecommunications and data transmission and information technology
support services) for functions including accounting, financial management, tax,
payroll, stockholder and public relations, legal, procurement and other
administrative functions. Services are generally cost plus 5%, but may increase
to cost plus 10% if the services extend beyond a one-year period. Subsequent to
the Separation Date, certain of these services were discontinued, including
accounting, financial management, payroll, legal, procurement and other
administrative functions. The transition period varies depending on the
agreement but is generally one year. Although the fees provided for in the
agreements are intended to represent the fair market value of these services, we
cannot assure that these fees necessarily reflect the costs of obtaining the
services from unrelated third parties or of our providing these services
internally. However, we believe that purchasing these services from MRV provided
an efficient means of obtaining these services during the transition period.
These agreements terminate following the planned merger with MRV.

BASIS OF PRESENTATION

Our consolidated financial statements have been carved out from the consolidated
financial statements of MRV using the historical results of operations and
historical bases of the assets and liabilities of the MRV businesses that our
company comprises. The consolidated condensed financial statements through
September 30, 2001 also include allocations to us of certain MRV corporate
assets, liabilities and expenses, including centralized legal, accounting,
employee benefits, real estate, insurance services, information technology
services, treasury and other MRV corporate and infrastructure costs. The expense
allocations have been determined on bases that MRV and we considered to be a
reasonable reflection of the utilization of the services provided to us or the
benefit received by us. The expense allocation methods included relative sales,
headcount, square footage, transaction processing costs and adjusted operating
expenses. No intercompany interest income or expense has been allocated to, or
included in, our consolidated financial statements.



                                       11
<PAGE>

The financial information presented in this Report is not indicative of our
financial position, results of operations or cash flows in the future nor is it
necessarily indicative of what our financial position, results of operations or
cash flows would have been had we been a separate, stand-alone entity for the
periods presented. The financial information presented in this Report does not
reflect many of the significant changes that will occur in our funding and
operations as a result of our becoming a stand-alone entity and the
distribution.

RESULTS OF OPERATIONS

The following table sets forth selected consolidated condensed historical
financial data for the periods indicated, expressed as a percentage of net
sales:

<TABLE>
<CAPTION>
                                            Three Months Ending September 30,   Nine Months Ending September 30,
                                            ----------------------------------- --------------------------------
                                                    2000          2001                   2000         2001
                                                   ------        -------                ------       ------
                                                        (unaudited)                          (unaudited)

<S>                                                <C>           <C>                   <C>           <C>
Net sales                                            100%          100%                  100%          100%
Cost of sales                                         72            81                    68            97
  Gross profit                                        28            19                    32             3
Operating costs and expenses:
  Selling, general and administrative                 36           160                    26            64
  Research and development                            17            21                    16            13
  Amortization of goodwill                            51           104                    35            54
    Total operating costs                            104           285                    78           131
Operating loss                                       (76)         (266)                  (46)         (129)
Other income, net                                      1             4                     1             3
  Loss before provision for income taxes and
    minority interest                                (75)         (262)                  (46)         (125)

Provision for income taxes                             3            12                     3             4
Minority interest                                     --            --                    --            --
  Net loss                                           (79)%        (274)%                 (49)%        (129)%
</TABLE>

Net Sales

We generally recognize product revenue, net of sales discounts and allowances,
when persuasive evidence of an arrangement exists, delivery has occurred and all
significant contractual obligations have been satisfied, the fee is fixed or
determinable and collection is considered probable. Products are generally
shipped "FOB shipping point" with no rights of return. Sales with contingencies,
such as rights of return, rotations rights, conditional acceptance provisions
and price protection, are rare and are deferred until the contingencies have
been satisfied or the contingent period has lapsed.

Luminent generally warrants its products against defects in materials and
workmanship for one year. The estimated costs of warranty obligations and sales
returns and other allowances are recognized at the time of revenue recognition
based on contract terms and prior claims experience. Net sales for the three
months ended September 30, 2001 decreased 48%, to $18.8 million from $36.0
million for the three months ended September 30, 2000. The substantial decrease
in net sales for the three months ended September 30, 2001 compared to the three
months ended September 30, 2000 is due to a substantial decline across all
product groups as our customers reduced purchases to utilize existing
inventories in response to the decline in demand for communications equipment.
Overall, the downturn in the communications equipment industry, which was
initially experienced in the United States, has also severely impacted sales in
Europe and Asia. Net sales for the three months ended June 30, 2001 decreased
23% in North America, decreased 2% in Europe and stayed flat in Asia from those
for the three months ended March 31, 2001. Net sales for the three months ended
September 30 continued their rapid decline in North America and started to
significantly decline in Europe and Asia. In North America, they declined 65%,
Europe 45% and Asia 34% from net sales in these regions for the three months
ended June 30, 2001. Net sales for the three months ended September 30, 2001 are
also down due to expected product returns provided for from Cisco as a result of
a technical problem. We have recorded, in the nine months ended September 30,
2001, $2.9 million in accrued returns and warranty for total accrued returns and
warranty of $3.8 million pertaining to this issue. The problem has been resolved
and we will replace one product at Cisco. Net sales for the nine months ended
September 30, 2001 increased 37%, to $108.1 million from $79.0 million for the
nine months ended September 30, 2000. The increase in net sales during the nine
months ended September 30, 2001 is a result of strong sales in the first half of
2001, primarily in North America and Asia, as well as revenue contribution
through acquisitions which were completed in the second and third quarter of
2000. In the first half of 2001 our sales increased to $89.3 million from $43.0
million in the first half of 2000. Net sales for the nine months ended September
30, 2001 increased to $62.3 million in North America and $28.0 million in Asia
from $49.1 million and $16.1 million, respectively, for the nine months ended
September 30, 2000. For the nine months ended September 30, 2001, the revenue
contribution from our acquired subsidiaries, FOCI, OIC, and QOI, was $46.7
million, as compared to $18.5 million for the nine months ended September 30,
2000. Other revenue growth for the nine months ended September 30, 2001 was
experienced primarily within the active optical components product group. Net
sales of active components for the nine months ended September 30, 2001
increased to $83.3 million from $63.1 million, for the nine months ended
September 30, 2000. Net sales of passive components for the nine months ended
September 30, 2001 increased to $24.8 million from $15.9 million, for the nine
months ended September 30, 2000.

For the three and nine months ended September 30, 2001, the Company's sales
consist of active and passive optical components used by telecommunications
equipment manufacturers. Active optical components consist of transceivers,
lasers, and others. Passive optical components consist of couplers, jumpers,
micro-optic products and others.

The following table sets forth revenues from external customers for each product
group (in thousands):

<TABLE>
<CAPTION>
                                   Three Months Ending                Nine Months Ending
                                       September 30,                     September 30,
                                 ------------------------          -------------------------
                                  2000             2001             2000              2001
                                 -------          -------          -------          --------
                                        (unaudited)                      (unaudited)
<S>                              <C>              <C>              <C>              <C>
Active                           $27,502          $12,515          $63,096          $ 83,310
Passive                            8,456            6,239           15,868            24,788
                                 -------          -------          -------          --------
   Total net sales               $35,958          $18,754          $78,964          $108,098
                                 =======          =======          =======          ========
</TABLE>

The following table sets forth our net sales to certain customers as a
percentage of our total net sales (Cisco sales percentages stated below are
prior to accrued returns and warranty of $2.9 million for the nine months ended
September 30, 2001):

<TABLE>
<CAPTION>
                           Three Months Ending September 30,  Nine Months Ending September 30,
                           --------------------------------   -------------------------------
                                  2000            2001             2000          2001
                                --------        -------           ------        ------
                                      (unaudited)                      (unaudited)
<S>                             <C>             <C>               <C>            <C>
Marconi Communications.....        12%             16%             15%             14%
Cisco Systems..............        10              10              12              10
Other......................        78              74              73              76
                                  ---             ---             ---             ---

  Net sales................       100%            100%            100%            100%
                                  ===             ===             ===             ===
</TABLE>

We rely on one-time purchase orders rather than long-term contracts with both
Cisco and Marconi, and, as a result, we cannot predict the size, timing or terms
of their incoming orders. We have experienced variations in the purchase
patterns of Marconi and Cisco in the past, and we may experience continued
variation in the future. Material reasons for such variations in the purchase
patterns of these customers, particularly Marconi, have included weather
patterns that have delayed field installations of systems that incorporate our
products and delays by our customers in qualifying our products that employ new
components or features to assure compatibility with the components of other
suppliers that are integrated with our products into our customers' systems, and
their overall product demand. The timing of this qualification process is
totally within the control of these customers. Thus, even when our products
prove compatible with the components of other suppliers, as has typically been
the case in the past, delays by our customers in completing the qualification
process has resulted in corresponding delays in our receipt of orders for them.

Cisco and Marconi have announced during 2001 that they expect declining revenues
and profitability in the near term due to softening demand for
telecommunications and networking equipment. This has resulted in reductions and
rescheduling by Cisco and Marconi in purchases from their suppliers such as us
as they seek to reduce their existing inventories and adjust to reduced demand
in the market. This has resulted in lower sales



                                       12
<PAGE>

to Cisco and Marconi, and could result in lower revenues overall. Our sales may
decline significantly with resulting fluctuations or harm to our operating
results and financial condition if either Cisco, Marconi or other material
customers cancel, reduce or delay purchases of our products or unduly delays
qualifying them.

Recently, because of the slowdown in capital spending for telecommunications
equipment and its recent financial performance, Marconi announced a massive
restructuring that entails cutting 25 percent of its workforce, selling non-core
assets, suspending its dividend and cutting debt. Because of these events,
deteriorating funding conditions and the observation that Marconi's net debt
exceeds it enterprise value, at least one industry analyst concluded that
Marconi is not capable of lasting through the downturn in the telecommunication
markets. If Marconi does not survive, we will lose a major customer and our
business, results of operations and financial condition may be adversely
affected unless and until we are able to replace the lost sales with orders of
comparable size. As of September 30, 2001, Marconi accounted for approximately
27% of our total accounts receivable. While since September 30, 2001 Marconi has
substantially reduced the amount of the accounts receivable owing to us at that
date, we still extend credit terms to Marconi on the same terms we have in the
past and thus Marconi will continue to incur accounts receivable to us based on
our sales to it from time to time. If Marconi failed or was unable to pay our
outstanding accounts receivable in the future, our business, financial condition
and results of operations would likely be materially impaired.

Gross Profit

Gross profit is equal to our net sales less our cost of sales. Our cost of sales
includes materials, direct labor and overhead. Cost of inventory is determined
by the first-in, first-out method. Gross profit for the three months ended
September 30, 2001, decreased 65%, down to $3.6 million from $10.1 million for
the three months ended September 30, 2000. The reduction is mostly due to
substantial declines in net sales and the $2.9 million reduction to net sales
for the product sold to Cisco that will be replaced (see Net Sales, above).
Gross profit for the nine months ended September 30, 2001, decreased 89%, down
to $2.8 million from $25.3 million for the nine months ended September 30, 2000.
The major factor for the reduced gross profit for the nine months ended was the
$30.1 million in restructure and other charges recorded as a result of from the
lower demand for our products and pricing pressures stemming from the continuing
downturn in the communications equipment industry generally and the optical
components sector in particular. Pro forma gross profit for the three months
ended September 30, 2001, before restructuring charges, inventory recoveries and
other market-related charges of $863,000 for the three months ended September
30, 2001, and deferred compensation amortization expense of $1.2 million and
$477,000 for the three months ended September 30, 2000 and 2001, respectively,
would have decreased 56%, to $4.9 million. Pro forma gross profit for the nine
months ended September 30, 2001, before inventory write-downs and other
market-related charges of $30.1 million for the nine months ended September 30,
2001, and deferred compensation amortization expense of $1.9 million and $1.7
million for the nine months ended September 30, 2000 and 2001, respectively,
would have increased 28%, to $34.7 million.

Our pro forma gross margin, before restructuring charges, inventory write-downs
and other market-related one-time charges and deferred compensation amortization
expense, of 26% and 32% for the three months and nine ended September 30, 2001,
respectively decreased from 31% for the three months ended September 30, 2000
and decreased from 34% for the nine months ended September 30, 2000. Our gross
margins (defined as gross profit as a percentage of net sales) are generally
affected by price changes over the life of the products and improved production
efficiencies as a result of increased utilization. The former effect will
generally decrease gross margins over the products' respective life cycles,
whereas as the latter effect typically increases gross margins. Prices for
existing products are generally expected to continue to decrease over their
respective life cycles. Our lower margin customers typically operate in highly
competitive markets where the price of our products is a key factor. Although we
sacrifice margins to these customers, our volumes are typically greater than the
volumes achieved with higher margin customers. As we seek to continue to
diversify our customer base, we plan to target markets with improved margins and
less competitive end-markets. In the short term, our margins have declined due
to the integration of the acquired companies with historically lower margins and
the current economic and market slowdown. In the mid- to long term, as the
market recovers, we expect margins to improve due to increased operating
efficiencies associated with capacity utilization in Taiwan and the People's
Republic of China, diversification of sales to higher margin customers, and a
favorable shift towards a higher margin customer base.

Operating Costs and Expenses

Operating costs and expenses consist of selling, general and administrative,
research and development costs, costs associated with acquisitions, and other
operating related charges. Operating costs and expenses, increased to 285% of
net sales, or $53.4 million for the three months ended September 30, 2001, from
104% of net sales, or $37.5 million, for the three months ended September 30,
2000. Operating costs and expenses, increased to 131% of net sales, or $142.0
million, for the nine months ended September 30, 2001, from 78% of net sales, or
$61.8 million, for the nine months ended September 30, 2000. Pro forma operating
costs and expenses for the three months ended September 30, 2001, before
restructuring, severance and other one-time charges of $2.6 million, goodwill
amortization of $19.5 million and deferred compensation amortization expense of
$24.1 million would have decreased 13%, to $7.2 million, from pro forma
operating costs and expenses for the same period in 2000. Pro forma adjustments
for the three months ended September 30, 2000 include goodwill amortization of
$18.4 million and deferred compensation amortization expense of $10.8 million.
Pro forma operating costs and expenses for the nine months ended September 30,
2001, before market-related one-time charges of $11.9 million for the three
months ended June 30, 2001, restructuring, severance and other one-time charges
of $2.6 million incurred during the three months ended September 30, 2001,
goodwill amortization of $58.5 million and deferred compensation amortization
expense of $41.8 million for the nine months ended September 30, 2001, would
have increased 31%, to $27.2 million from $20.8 million for the nine months
ended September 30, 2000. Pro forma adjustments for the nine months ended
September 30, 2000 include goodwill amortization of $27.9 million and deferred
compensation amortization expense of $13.0 million. Pro forma operating costs
and expenses, as a percentage of net sales, are lower for the three months and
nine months ended September 30, 2001 than the three months and nine months
ending September 30, 2000 due to an effort to realize greater efficiencies in
the current down market.

Selling, general and administrative expenses for the three months ended
September 30, 2001, increased to 160% of net sales, or $30.1 million, from 36%
of net sales, or $13.0 million, for the three months ended September 30, 2000.
Selling, general and administrative expenses for the nine months ended September
30, 2001, increased to 64% of net sales, or $69.6 million, from 27% of net
sales, or $21.1 million, for the nine months ended September 30, 2000. In
September 2001 our President and Chief Executive Officer resigned. As a result,
for the quarter ended September 30, 2001, we recorded a charge of $1.0 million
to reflect severance expense and an immediate write-down of deferred stock
compensation expense of $18.9 million. Pro forma selling, general and
administrative expenses for the three months ended September 30, 2001, before
restructuring and severance charges of $2.6 million for the three months ended
September 30, 2001, and deferred stock compensation expense of $9.0 million and
$23.4 million for the three months ended September 30, 2000 and 2001,
respectively, would have been 22% of net sales, or $4.1 million, an increase
from the same period in the prior year by $99,000. Pro forma selling, general
and administrative expenses for the nine months ended September 30, 2001, before
restructure and market-related charges of $11.4 million for the three months
ended June 30, 2001, severance and restructure charges of $2.6 million incurred
during the three months ended September 30, 2001, and deferred compensation
amortization expense of $39.1 million for the nine months ended September 30,
2001, would have increased 50%, to $16.6 million from $20.0 million for the nine
months ended September 30, 2000. Pro forma adjustments for the nine months ended
September 30, 2000 include deferred compensation amortization expense of $13.0
million.



                                       13
<PAGE>
Research and development expenses, increased as a percentage of net sales from
17% to 21% during the three months ended September 30, 2001, and decreased from
16% to 13% of net sales during the nine months ended September 30, 2001, from
the same periods in 2000. In terms of absolute dollars, research and development
expenses decreased from the three months ended September 30, 2000 to the three
months ended September 30, 2001, from $6.1 million to $3.9 million,
respectively. In absolute dollars, research and development expenses increased
from the nine months ended September 30, 2000 to the nine months ended September
30, 2001, from $12.8 million to $13.9 million, respectively. Pro forma research
and development expenses for the three months ended September 30, 2001, before
deferred stock compensation of $1.7 million and $749,000 for the three months
ended September 30, 2000 and 2001, respectively, would have decreased to $3.1
million from $4.4 million for the same period in 2000. Pro forma research and
development expenses for the nine months ended September 30, 2001, before
restructure charges of $501,000 for the nine months ended September 30, 2001,
and deferred stock compensation of $3.0 million and 2.7 million for the nine
months ended September 30, 2000 and 2001, respectively, would have increased to
$10.7 million from $9.8 million for the same period in 2000. For the nine months
ended September 30, 2001, our spending on research and development increased
from the same period in the prior year due to the inclusion of Fiber Optic
Communications' and Optronics' research and development costs for the full
period, as well as an increase in research and development programs aimed at
developing the next generation products. For the three months ended September
30, 2001, our spending on research and development was lower than the same
period in the prior year due to reduced spending on some research and
development programs based expected future demand for the products, as well as
current market conditions. We continue to invest heavily in areas targeted at
broadening our customer base, product lines and end-product applications. We
expect absolute dollars spent on research and development to increase as we
invest in key technical personnel, expand our current product lines and develop
new product offerings.

During the three months ended September 30, 2001, we incurred amortization of
goodwill and deferred stock compensation of $19.5 million and $2.3 million,
respectively, relating to the acquisitions of Fiber Optic Communications,
Optronics and Quantum. During the nine months ended September 30, 2001, we
incurred amortization of goodwill and deferred stock compensation of $58.5
million and $8.2 million, respectively, relating to these acquisitions. We
expect to incur additional amortization of goodwill from these acquisitions of
approximately $19.5 million each quarter through December 31, 2001. At January
1, 2002 we intend to implement SFAS No. 142 (see RECENT ACCOUNTING
PRONOUNCEMENTS, below). Deferred stock compensation charges from these
acquisitions will generate an additional $9.4 million of expense through 2004.
Deferred stock compensation is amortized using the graded method over the
related expected employee service period, in this case four years.

Provision for Income Taxes

The provision for income taxes was $2.2 million and $4.0 million for the three
and nine months ended September 30, 2001, respectively. The effective tax rate
for the three months and nine months ended September 30, 2001 was (2%),
resulting from a tax provision computed based on a net loss position. The rate
was negatively impacted by the amortization of goodwill and certain deferred
stock compensation, which are not tax deductible. Our effective tax rates in
future years may fluctuate due to amortization of goodwill and deferred stock
compensation partially offset by favorable tax programs available in certain
foreign tax jurisdictions where we currently have operating facilities.

LIQUIDITY AND CAPITAL RESOURCES

We received $132.3 million in net proceeds from the sale of 12,000,000 shares of
our common stock in our initial public offering completed in November 2000.

On September 30, 2001, we had working capital of $113.7 million, compared with
$161.7 million at December 31, 2000. The ratio of current assets to current
liabilities at September 30, 2001 was 3.4 to 1, compared to 4.4 to 1 at December
31, 2000.

Cash used by operating activities was $14.8 million for the nine months ended
September 30, 2001. Cash flows from operating activities were adversely affected
by our net loss of $139.6 million for the nine months ended September 30, 2001,
as well as our reduction of accounts payable of $10.6 million, increase of $7.9
million in prepaid and other current assets, including short-term deposits for
capital acquisitions. The use of operating cash was offset by non-cash charges
for depreciation and amortization, including amortization of goodwill of $58.5
million, amortization of deferred stock compensation of $43.5 million and other
amortization and depreciation of $7.2 million, the decrease of accounts
receivable of $3.9 million, the accrual for warranty and reserves of $3.1
million, the accrual of expenses of $4.8 million, and by non-cash charges for
the restructure and other charges incurred as a result of the current slowdown
in the communication industry generally for the three months ended June 30,
2001. Inventory levels had increased during the three months ended March 31,
2001 in anticipation of increased sales. However, due to the dramatic downturn
in demand for communications equipment, we wrote-off $26.1 million of inventory
during the next three months ended June 30, 2001. The write-down of inventory
was subsequently reduced by $3.7 million during the three months ended September
30, 2001 to reflect the utilization of previously written-off items. An
additional $3.1 million of inventory was written down during the three months
ended September 30, 2001 to reflect the identification of additional inventory
that will not generate revenue in the future as a result of the Company's
significantly reduced orders for optical components and sales projections for
the next twelve months. Capital expenditures for property and equipment
represent the majority of cash used in investing activities. Capital
expenditures for the nine months ended September 30, 2001 of $18.5 million and
$5.1 million increase in other "long-term" assets during the nine months ended
September 30, 2001 for the acquisition of capital assets, reflect our investment
in expanding production and research and development capacity.

During the nine months ended September 30, 2001, the Company paid down long-term
borrowings by $1.7 million. We made no additional long-term borrowings during
this period. For the same period, the Company made borrowings against short-term
loan and credit arrangements of $18.3 million and repaid $16.0 million.

We believe that cash on hand, along with our cash flows from operations, will be
sufficient to satisfy our working capital, capital expenditure and research and
development requirements for at least the next 12 months. However, we may
require or choose to obtain additional debt or equity financing in order to
finance acquisitions or other investments in our business. We expect to continue
to devote resources to purchases of capital equipment as we continue to build
and relocate our manufacturing capabilities and continue to expand our research
and development programs. Our future capital requirements will depend on many
factors, including our rate of revenue growth, the timing and extent of spending
to support development of new products and expansion of sales and marketing, the
timing of new product introductions and enhancements to existing products and
market acceptance of our products.



                                       14
<PAGE>

FOREIGN CURRENCY

We operate on an international basis. A significant portion of our revenues and
cost of sales are incurred in U.S. dollars. For the three months and nine months
ended September 30, 2001, approximately 56% and 45%, respectively, of our
revenues and 50% and 47%, respectively, of our cost of sales were incurred in
currencies other than the U.S. dollar. For the three and nine months ended
September 30, 2001, approximately 46% and 60%, respectively, of our operating
expenses were incurred in currencies other than the U.S. dollar, including the
non-cash charges for deferred compensation expense and goodwill amortization
incurred with the foreign subsidiary acquisitions. For the three and nine months
ended September 30, 2001, the New Taiwan dollar is the most significant of such
currencies.

The New Taiwan dollar has been relatively stable in relation to the U.S. dollar
in recent years, and accordingly, we have not experienced any significant
fluctuations in operating results due to exchange rate fluctuations in the New
Taiwan dollar in relation to the U.S. dollar.

Fluctuations in the value of the currencies in which we conduct our business
relative to the U.S. dollar will cause U.S. dollar translation of such
currencies to vary from one period to another. We cannot predict the effect of
exchange rate fluctuations upon future operating results. However, because we
have expenses as well as revenues in each of the principal functional
currencies, the exposure to our financial results to currency fluctuations is
reduced. We have not historically attempted to reduce our currency risks through
hedging instruments, however, we may do so in the future.

INFLATION

We believe that our revenue and results of operations have not been
significantly impacted by inflation during the last three years.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998 and June 1999, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Investments and Hedging Activities," and SFAS No. 137, which
delayed the effective date of SFAS No. 133. In June 2000, the FASB issued SFAS
No. 138 which provides additional guidance for the application of SFAS No. 133
for certain transactions. We adopted this statement on January 1, 2001 and the
adoption of this statement did not have a material impact on our financial
position or results of operations.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements," as amended. SAB
101 summarizes certain of the Securities and Exchange Commission's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. We have applied the provisions of SAB 101 in the
consolidated financial statements. The adoption of SAB 101 did not have a
material impact on our financial condition or results of operations.

In March 2000, the FASB issued interpretation No. 44 (FIN 44), "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25." FIN 44 clarifies the application of APB No. 25 for certain
issues, including the definition of an employee, the treatment of the
acceleration of stock options and the accounting treatment for options assumed
in business combinations. FIN 44 became effective on July 1, 2000, but is
applicable for certain transactions dating back to December 1998. The adoption
of FIN 44 did not have a significant impact on our financial position or results
of operations.

The FASB recently approved two statements: SFAS No. 141, "Business Combinations"
and SFAS No. 142, "Goodwill and Other Intangible Assets", which provide guidance
on the accounting for business combinations, requires all future business
combinations to be accounted for using the purchase method, discontinues
amortization of goodwill, defines when and how intangible assets are amortized,
and requires an annual impairment test for goodwill. We plan to adopt these
statements effective January 1, 2002. We are currently reviewing these standards
to determine the impact on our results of operation and financial position. The
most significant anticipated effect on our financial statements of this adoption
would be discontinuing goodwill amortization and the possible recognition of a
goodwill impairment loss measured as of the date of adoption.

RISK FACTORS

Set forth below and elsewhere in this Report and in other documents we file with
the SEC are risks and uncertainties that could cause actual results to differ
materially from the results contemplated by the forward-looking statements
contained in this Report and in public statements and press releases we make
from time to time.

WE CURRENTLY DERIVE A SIGNIFICANT PORTION OF OUR NET SALES FROM TWO CUSTOMERS
BOTH OF WHOM HAVE BEEN ADVERSELY AFFECTED BY THE DOWNTURN IN THE
TELECOMMUNICATION MARKET. OUR NET SALES MAY DECLINE SIGNIFICANTLY IF EITHER OF
THESE CUSTOMERS CANCELS, FURTHER REDUCES, DELAYS OR CEASES PURCHASES OF OUR
PRODUCTS.

Our future success depends on our ability to develop and manage relationships
with significant customers. For the year ended December 31, 2000, our two
largest customers, Marconi Communications and Cisco Systems, together accounted
for approximately 29% of our net sales, with Marconi accounting for 18% and
Cisco accounting for 11% of our net sales. For the nine months ended September
30, 2001, Marconi and Cisco, together accounted for approximately 24% of our net
sales, with Marconi accounting for 14% of our net sales and Cisco accounting for
10% of our net sales for the nine months ended September 30, 2001. For the three
months ended September 30, 2001, Marconi and Cisco, together accounted for
approximately 26% of our net sales, with Marconi accounting for 16% of our net
sales and Cisco accounting for 10% of our net sales for the three months ended
September 30, 2001. The Cisco sales percentages are stated prior to taking an
adjustment of $2.9 million for product sold to them during fiscal 2000 and early
2001 where we have identified a technical problem. The problem has been resolved
and we will replace one product at



                                       15
<PAGE>

Cisco.

We rely on one-time purchase orders rather than long-term contracts with both
Cisco and Marconi, and, as a result, we cannot predict the size, timing or terms
of their incoming orders. We have experienced variations in the purchase
patterns of Marconi and Cisco in the past, and we may experience continued
variation in the future. Material reasons for historic variations in the
purchase patterns of these customers, particularly by Marconi, have included
weather patterns that have delayed field installations of systems that
incorporate our products and delays by our customers in qualifying our products
that employ new components or features to assure compatibility with the
components of other suppliers that our customers integrate with our products
into our customers' systems. The timing of this qualification process is totally
within the control of these customers. Thus, even when our products prove
compatible with the components of other suppliers, as has typically been the
case in the past, delays by our customers in completing the qualification
process have resulted in corresponding delays in our receipt of orders for them.
Both Cisco and Marconi have recently announced that they expect declining
revenues and profitability in the near term due to softening demand for
telecommunications and networking equipment. This has resulted in reductions and
rescheduling by Cisco and Marconi in purchases from their suppliers such as us
as they seek to reduce their existing inventories and adjust to reduced demand
in the market. This will likely result in lower sales to Cisco and Marconi, and
could result in lower revenues overall. Our sales may decline significantly with
resulting fluctuations or harm to our operating results and financial condition
if either Cisco or Marconi cancels, reduces or delays purchases of our products
or unduly delays qualifying them.

Recently, because of the slowdown in capital spending for telecommunications
equipment and its recent financial performance, Marconi announced a massive
restructuring that entails cutting 25 percent of its workforce, selling non-core
assets, suspending its dividend and cutting debt. Because of these events,
deteriorating funding conditions and the observation that Marconi's net debt
exceeds it enterprise value, at least one industry analyst concluded that
Marconi is not capable of lasting through the downturn in the telecommunication
markets. If Marconi does not survive, we will lose a major customer and our
business, results of operations and financial condition may be adversely
affected unless and until we are able to replace the lost sales with orders of
comparable size. As of September 30, 2001, Marconi accounted for approximately
27% of our total accounts receivable. While since September 30, 2001 Marconi has
substantially reduced the amount of the accounts receivable owing to us at that
date, we still extend credit terms to Marconi on the same terms we have in the
past and thus Marconi will continue to incur accounts receivable to us based on
our sales to it from time to time. If Marconi failed or was unable to pay our
outstanding accounts receivable in the future, our business, financial condition
and results of operations would likely be materially impaired.

WE INCURRED A NET LOSS IN THE YEAR ENDED DECEMBER 31, 2000 AND THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 PRIMARILY AS A RESULT OF THE AMORTIZATION OF GOODWILL
AND DEFERRED STOCK COMPENSATION FROM RECENT ACQUISITIONS AND EXECUTIVE
EMPLOYMENT ARRANGEMENTS. DUE TO THE AMORTIZATION OF INTANGIBLE ASSETS AND
DEFERRED STOCK COMPENSATION WE EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE
FORESEEABLE FUTURE.

Although we reported net income of $3.5 million and $4.2 million for the years
ended December 31, 1998 and 1999, respectively, we reported a net loss of $65.0
million for the year ended December 31, 2000 and a net loss of $51.3 and $139.6
million for the three and nine months ended September 30, 2001, respectively.
Major contributing factors to the net losses were the amortization of goodwill
and deferred stock compensation charges related to the acquisitions of Fiber
Optic Communications, Optronics International and Quantum Optech and our
employment and severance arrangements with our former President and Chief
Executive Officer and our employment arrangement with our Vice President of
Finance and Chief Financial Officer. We will continue to record amortization of
intangibles and deferred stock compensation relating to these acquisitions and
the employment arrangement with our Vice President of Finance and Chief
Financial Officer going forward. Effective January 1, 2002, with the adoption of
SFAS 142, we will stop amortization of goodwill, however, we may be required to
record an impairment charge (see Recently Issued Accounting Standards). As a
consequence of intangibles and deferred stock compensation charges, we do not
expect to report net income in the foreseeable future.

OUR BUSINESS HAS BEEN ADVERSELY IMPACTED BY THE WORLDWIDE ECONOMIC SLOWDOWN AND
RELATED UNCERTAINTIES.

Weaker economic conditions worldwide have contributed to the current technology
industry slowdown and impacted our business resulting in:

-       reduced demand for of our products;

-       increased risk of excess and obsolete inventories;

-       increased price competition for our products;

-       excess manufacturing capacity under current market conditions; and

-       higher overhead costs, as a percentage of revenues.

These unfavorable economic conditions and reduced capital spending in the
telecommunications industry detrimentally affected sales to service providers,
network equipment companies, e-commerce and Internet businesses, and the
manufacturing industry during 2001 to date and may affect them for the balance
of 2001 and thereafter. Announcements by industry participants and observers
indicate there is a slowdown in industry spending and participants are seeking
to reduce existing inventories and we are experiencing these reductions in our
business. As a result of these factors and the resignation our former President
and Chief Executive Officer, we recorded in the nine months ended September 30,
2001, charges which include the write-off of inventory, purchase commitments,
asset impairment, workforce reduction, restructuring costs, severance payments
and other unusual



                                       16
<PAGE>

items. The aggregate charges recorded for these matters during the nine months
ended September 30, 2001 were $43.6 million. These charges are primarily the
result of the lower demand for our products and pricing pressures stemming from
the continuing downturn in the communications equipment industry generally and
the optical components sector in particular.

Additionally, these economic conditions are making it very difficult for us, our
customers, and our vendors to forecast and plan future business activities. This
level of uncertainty severely challenges our ability to operate profitably or to
grow our businesses. In particular, it is difficult to develop and implement
strategy, sustainable business models and efficient operations, and effectively
manage manufacturing and supply chain relationships. Many analysts are
predicting a further downturn in the U.S. economy in the aftermath of the
terrorist attacks on the World Trade Center in New York and the Pentagon in
Washington DC in September 2001. We do not know how the consequences of these
attacks will affect our business. If the economic or market conditions continue
or further deteriorate, or if the economic downturn is exacerbated as a result
of political, economic or military conditions associated with current domestic
and world events, our businesses, financial condition and results of operations
could be further impaired.

OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS, AND YOU
SHOULD NOT RELY ON THEM AS AN INDICATION OF OUR FUTURE PERFORMANCE.

Our net sales and operating results have fluctuated significantly from
quarter-to-quarter in the past and may fluctuate significantly in the future as
a result of several factors, some of which are outside of our control. These
factors include:

        -       changes in our product mix, such as resulting from sales of
                passive components which typically have lower margins than
                active components;

        -       seasonality of customer demand typically resulting in lower
                demand in winter months and the observance of the Chinese New
                Year;

        -       the level of demand for our customers' products;

        -       the cancellation or postponement of orders;

        -       the timing and amount of significant orders from our largest
                customers;

        -       our success in developing, introducing and shipping product
                enhancements and new products;

        -       adverse effects to our financial statements resulting from, or
                necessitated by, past and future acquisitions or deferred
                compensation charges;

        -       new product introductions by our competitors;

        -       pricing actions by our competitors or us;

        -       the timing of delivery and availability of components from
                suppliers;

        -       changes in material costs; and

        -       general economic conditions.

Moreover, the volume and timing of orders we receive during a quarter are
difficult to forecast. From time to time, our customers encounter uncertain and
changing demand for their products. Customers generally order based on their
forecasts. If demand falls below these forecasts or if customers do not control
inventories effectively, they may cancel or reschedule shipments previously
ordered from us. Our expense levels during any particular period are based, in
part, on expectations of future sales. If sales in a particular quarter do not
meet expectations, our operating results could be materially adversely affected.

Because of these and other factors, you should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of our future
performance. It is possible that, in future periods, our results of operations
may be below the expectations of public market analysts and investors. This
failure to meet expectations could cause the trading price of our common stock
to decline. Similarly, the failure by our competitors or customers to meet or
exceed the results expected by their analysts or investors could have a ripple
effect on us and cause our stock price to decline.

THE LONG SALES CYCLES FOR OUR PRODUCTS MAY CAUSE NET SALES AND OPERATING RESULTS
TO VARY FROM QUARTER TO QUARTER, WHICH COULD CAUSE VOLATILITY IN OUR STOCK
PRICE.

The timing of our revenue is difficult to predict because of the length and
variability of the sales and implementation cycles for our products. We do not
recognize revenue until a product has been shipped to a customer, all
significant vendor obligations have been performed and collection is considered
probable. Customers often view the purchase of our products as a significant and
strategic decision. As a result, customers typically expend significant effort
in evaluating, testing and qualifying our products and our manufacturing
process. This customer evaluation and qualification process frequently results
in a lengthy initial sales cycle of up to one year or more. In addition, some of
our customers require that our products be subjected to life-time and
reliability testing, which can take up to nine months or more. While our
customers are evaluating our products and before



                                       17
<PAGE>

they place an order with us, we may incur substantial sales and marketing and
research and development expenses to customize our products to the customer's
needs. We may also expend significant management efforts, increase manufacturing
capacity and order long lead-time components or materials prior to receiving an
order. Even after this evaluation process, a potential customer may not purchase
our products. Even after acceptance of orders, our customers often change the
scheduled delivery dates of their orders or even cancel them. Because of the
evolving nature of the optical networking market, we cannot predict the length
of these sales, development or delivery cycles. As a result, these long sales
cycles may cause our net sales and operating results to vary significantly and
unexpectedly from quarter-to-quarter, which could cause volatility in our stock
price.

WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES AND OPERATIONS THAT COULD
HARM OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

For the year ended December 31, 2000 and the nine months ended September 30,
2001, sales to customers located outside of the North America were 38% and 42%,
respectfully, of our net sales. We expect that sales to customers located
outside of the United States will increase in the future. Our international
sales will be limited if we cannot establish relationships with international
distributors, establish additional foreign operations, expand international
sales channels, hire additional personnel and develop relationships with
international service providers. Even if we are able to successfully continue
international operations, we may not be able to maintain or increase
international market demand for our products.

In addition, the recent acquisition of our operations in Taiwan and People's
Republic of China has increased both the administrative complications we must
manage and our exposure to political, economic and other conditions affecting
Taiwan and People's Republic of China. There has been significant political
tension between Taiwan and People's Republic of China, which, if exacerbated,
could lead to hostilities.

Risks we face due to international sales and the use of overseas manufacturing
include:

        -       greater difficulty in accounts receivable collection and longer
                collection periods;

        -       the impact of recessions in economies outside the United States;

        -       unexpected changes in regulatory requirements;

        -       seasonal reductions in business activities in some parts of the
                world, such as during the summer months in Europe or in the
                winter months in Asia when the Chinese New Year is celebrated;

        -       certification requirements;

        -       potentially adverse tax consequences;

        -       unanticipated cost increases;

        -       unavailability or late delivery of equipment;

        -       trade restrictions;

        -       limited protection of intellectual property rights;

        -       unforeseen environmental or engineering problems; and

        -       personnel recruitment delays.

In addition, a portion of our international sales and expenses may be
denominated in foreign currencies in the future. Accordingly, we could
experience the risks of fluctuating currencies and may choose to engage in
hedging activities to reduce these risks.

IF THE OPTICAL NETWORKING MARKET DOES NOT RECOVER AND EXPAND OUR SALES MAY
CONTINUE TO DECLINE

Our business is completely dependent on the deployment of our optical component
products. Our future success depends on the continued deployment of the optical
networks in the metropolitan and access markets, the continuing increase in the
amount of data transmitted over communications networks, or bandwidth, and the
growth of optical networks to meet the increased demand for bandwidth. If the
deployment of optical networks in the metropolitan and access markets does not
recover or expand, the market for optical networking products may not continue
to develop. Future demand for our products is uncertain and will depend to a
great degree on the recovery of the communications equipment market generally
and the fiber optics component markets particularly. Moreover, even if these
markets recover, if the transition to optical networks occurs too slowly, the
market for our products and the growth of our business will be significantly
limited.

The optical networking market is new and characterized by rapid technological
change, frequent new product introductions, changes in customer requirements,
unpredictable rates of product deployment and evolving industry standards.
Because this market is new, it is difficult to predict its potential size or
future growth rate. Widespread adoption of optical networks is critical to our
future success. Potential end-user customers who have invested substantial
resources in their existing copper lines or other systems may be reluctant or
slow to adopt a new approach, like optical networks. Our success in generating
net sales in this emerging market will depend on:



                                       18
<PAGE>

        -       maintaining and enhancing our relationships with our customers;

        -       the awareness of potential end-user customers and network
                service providers about the benefits of optical networks; and

        -       our ability to accurately predict and develop our products to
                meet industry standards.

If we fail to address changing market conditions, the sales of our products may
continue to decline, which would harm our net sales and operating results.

IF WE FAIL TO MANAGE OUR GEOGRAPHICALLY DISPERSED OPERATIONS, OUR BUSINESS MAY
NOT SUCCEED.

Our ability to successfully offer our products and implement our business plan
in a rapidly evolving market requires an effective planning and management
process. We currently operate facilities in Chatsworth, California, Hsinchu,
Taiwan and Shanghai, People's Republic of China. The challenges of managing
geographically dispersed operations, has placed, and will continue to place, a
significant strain on our management systems and resources. We expect that we
will need to continue to improve our financial and managerial controls,
reporting systems and procedures and continue to expand, train and manage our
work force worldwide. We are currently implementing new systems that more
closely match our business needs and may incur significant additional expense
and diversion of management attention in connection with implementing those
systems. The failure to effectively manage our geographically dispersed
operations could adversely impact our ability to manufacture and sell our
products, which could reduce our net sales.

OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO SUCCESSFULLY DEVELOP AND INTRODUCE
NEW AND ENHANCED PRODUCTS THAT MEET THE NEEDS OF OUR CUSTOMERS.

Our future success depends on our ability to anticipate our customers' needs and
develop products that address those needs. Introduction of new products and
product enhancements will require that we effectively transfer production
processes from research and development to manufacturing and coordinate our
efforts with those of our suppliers to rapidly achieve volume production. If we
fail to effectively transfer production processes, develop product enhancements
or introduce new products that meet the needs of our customers as scheduled, our
net sales may decline.

COMPETITION IN THE OPTICAL NETWORKING MARKET MAY INCREASE, WHICH COULD REDUCE
OUR NET SALES AND GROSS MARGINS OR CAUSE US TO LOSE MARKET SHARE.

Competition in the optical networking market in which we compete is intense. We
face competition from several companies, including Agilent Technologies, Corning
Incorporated, Finisar Corporation, Fujitsu, Infineon AG, International Business
Machines Corporation, JDS Uniphase Corporation, Lucent Technologies, Inc.,
Sumitomo and Tyco International, Ltd. Many of our competitors are larger than we
are and have longer operating histories and significantly greater financial,
technical, marketing and other resources than we have. As a result, these
competitors are able to devote greater resources than we can to the development,
promotion, sale and support of their products. In addition, several of our
competitors have large market capitalizations or cash reserves, and are much
better positioned than we are to acquire other companies in order to gain new
technologies or products that may displace our product lines. Any of these
acquisitions could give our competitors a strategic advantage. Many of our
competitors have significantly more established sales and customer support
organizations than we do. In addition, many of our competitors have much greater
name recognition, more extensive customer bases, better-developed distribution
channels and broader product offerings than we have. These companies can
leverage their customer bases and broader product offerings and adopt aggressive
pricing policies to gain market share. Additional competitors may enter the
market, and we are likely to compete with new companies in the future. We expect
to encounter potential customers that, due to existing relationships with our
competitors, are committed to the products offered by these competitors. As a
result of the foregoing factors, as well as weakening demand, we expect that
competitive pressures may result in further price reductions, lower margins and
loss of market share.

In addition, the fiber optics networking industry is dominated by a small number
of large companies and is currently consolidating. Consolidation reduces the
number of potential customers in the industry, and may increase our dependence
on a small number of customers.

WE MUST CONTINUE TO GROW AND MAINTAIN OUR SALES ORGANIZATION IN ORDER TO
INCREASE MARKET AWARENESS AND SALES OF OUR PRODUCTS OR OUR NET SALES MAY NOT
INCREASE.

The sale of our products requires long and involved efforts targeted at several
key departments within our prospective customers' organizations. Sales of our
products require the prolonged efforts of executive personnel and specialized
systems and applications engineers working together with a small number of
dedicated salespersons. Currently, our sales organization is limited. We will
need to grow our sales force in order to increase market awareness and sales of
our products, although we have no plans to do so in the short term. Competition
for these individuals is intense, and we might not be able to hire the kind and
number of sales personnel and applications engineers we need. If we are unable
to expand our sales operations in the mid-to-long term, we may not be able to
increase market awareness or sales of our products, which would prevent us from
increasing our net sales.

OUR PRODUCTS ARE DEPLOYED IN LARGE AND COMPLEX SYSTEMS AND MAY CONTAIN DEFECTS
THAT ARE NOT DETECTED UNTIL AFTER OUR PRODUCTS HAVE BEEN INSTALLED, WHICH COULD
DAMAGE OUR REPUTATION AND CAUSE US TO LOSE CUSTOMERS.

We design some of our products for deployment in large and complex optical
networks. Because of the nature of these products, they can only be fully tested
for reliability when deployed in networks for long periods of time. Our fiber
optic products may contain undetected defects when first introduced or as new
versions are released, and our customers may discover defects in our products
only after they have been fully deployed and operated under peak stress
conditions. In addition, our products are combined with products from other
vendors. As a result, should problems occur,



                                       19
<PAGE>

it may be difficult to identify the source of the problem. If we are unable to
fix defects or other problems, we could experience, among other things:

        -       loss of customers;

        -       damage to our brand reputation;

        -       failure to attract new customers or achieve market acceptance;

        -       diversion of development and engineering resources; and

        -       legal actions by our customers.

The occurrence of any one or more of the foregoing factors could cause our net
sales to decline.

BECAUSE WE DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS, OUR CUSTOMERS MAY
CEASE PURCHASING OUR PRODUCTS AT ANY TIME.

We sell our products based on individual purchase orders, rather than long-term
contracts. Our customers can generally cancel or reschedule orders on short or
no notice and discontinue purchasing our products at any time. Because we cannot
predict the size, timing or terms of incoming purchase orders, decreases in
orders or failure to fulfill orders may cause our operating results to suffer.

WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL OR
RETAIN EXISTING PERSONNEL, OUR ABILITY TO SELL OUR PRODUCTS COULD BE HARMED.

Our future success depends upon the continued services of our executive officers
and other key engineering, sales, marketing, manufacturing and support
personnel. Any of our key employees may terminate his or her employment at any
time. In addition, we do not have key person life insurance policies covering
any of our employees.

Our ability to develop, manufacture and market our products, and our ability to
compete with our current and future competitors depend, and will depend, in
large part, on our ability to attract and retain qualified personnel.
Competition for executives and qualified personnel in the fiber optics
components industry is intense, and we will be required to compete for personnel
with companies having substantially greater financial and other resources than
we do. To attract executives, we have had to enter into compensation
arrangements, which have resulted in substantial deferred compensation charges
and adversely affected our results of operations. We may enter into similar
arrangements in the future to attract qualified executives. If we should be
unable to attract and retain qualified personnel, our business could be
materially adversely affected. We can give no assurance that we will be able to
attract and retain qualified personnel.

FUTURE ACQUISITIONS MAY HAVE AN ADVERSE EFFECT ON OUR FINANCIAL RESULTS OR COULD
OTHERWISE HARM OUR BUSINESS.

Our business has grown because of acquisitions of fiber optic components
manufacturers Fiber Optic Communications in April 2000 and Optronics and Quantum
in July 2000. In the event we make future acquisitions, we could:

        -       issue stock that would dilute our current stockholders'
                percentage ownership;

        -       incur debt such as the $12.6 million of consolidated debt
                incurred in connection with the acquisitions of Fiber Optic
                Communications, Optronics and Quantum;

        -       incur additional liabilities such as the $21.2 million of
                additional consolidated liabilities incurred in connection with
                the acquisitions of Fiber Optic Communications, Optronics and
                Quantum; or

        -       incur expenses related to the amortization of intangible assets
                and deferred compensation, like the expenses related to goodwill
                and other intangible assets aggregating $389.0 million and
                deferred compensation charges aggregating $30.2 million incurred
                in connection with the acquisitions of Fiber Optic
                Communications, Optronics and Quantum.

Future acquisitions also involve numerous risks that could adversely affect our
business, including:

        -       problems integrating the acquired operations, technologies or
                products;

        -       unanticipated costs, capital expenditures or liabilities or
                changes related to in process research and development;

        -       diversion of management's attention from our core business;

        -       harm to our existing business relationships with suppliers and
                customers;

        -       risks associated with entering markets in which we have no or
                limited prior experience; and



                                       20
<PAGE>

        -       potential loss of key employees, particularly those of the
                acquired organizations.

We face all of the above-mentioned risks related to the acquisitions of Fiber
Optic Components, Optronics and Quantum. In particular, these acquisitions have
brought large new manufacturing facilities and we face significant challenges in
integrating these facilities before we can realize benefits from these
acquisitions. Our entire line of passive optical components was established
through our recent acquisitions of Fiber Optic Communications and Quantum and
successful integration of that product line and the associated manufacturing
facilities is essential to our business. We cannot assure that we will be able
to successfully integrate any businesses, products, technologies or personnel
that we might acquire in the future, and failure to successfully integrate them
may harm our business.

IF WE ARE UNABLE TO EXPAND OUR MANUFACTURING CAPACITY, EXPERIENCE DIFFICULTIES
AND DISRUPTIONS IN THE MANUFACTURE OF OUR PRODUCTS, ARE UNABLE TO OBTAIN NEEDED
CAPITAL EQUIPMENT, EXPERIENCE SHORTAGES IN RAW MATERIALS OR MANUFACTURING
PERSONNEL OR FACE OTHER PROBLEMS OR DELAYS IN MANUFACTURING, WE MAY NOT BE ABLE
TO MEET ORDERS TIMELY WHICH COULD ADVERSELY AFFECT SALES, GROSS MARGINS AND THE
RESULTS OF OUR OPERATIONS.

We currently manufacture a significant portion of our products in our facilities
located in Chatsworth, California. We also conduct manufacturing at our
facilities in Hsinchu, Taiwan and Shanghai, People's Republic of China. We could
experience difficulties and disruptions in the manufacture of our products,
which could prevent us from achieving timely delivery of products and could
result in lost sales. We could also face the inability to procure and install
additional capital equipment, a shortage of raw materials we use in our
products, a lack of availability of manufacturing personnel to work in our
facilities, difficulties in achieving adequate yields from new manufacturing
lines and an inability to predict future order volumes. We may experience
delays, disruptions, capacity constraints or quality control problems in our
manufacturing operations, and, as a result, product shipments to our customers
could be delayed, which would negatively impact our net sales, competitive
position and reputation. If we experience disruptions in the future, it may
result in lower yields or delays of our product shipments, which could adversely
affect our sales, gross margins and results of operations. If we are unable to
expand our manufacturing capacity in a timely manner, we will have insufficient
capacity, which could seriously harm our results of operations.

THE LOCATION OF OUR MANUFACTURING FACILITIES IN SOUTHERN CALIFORNIA AND TAIWAN
SUBJECTS US TO INCREASED RISK THAT A NATURAL DISASTER COULD DISRUPT OUR
OPERATIONS.

Substantially all of our products are manufactured at our facilities in
Chatsworth, California and Hsinchu, Taiwan. The risk of earthquakes in Southern
California and Taiwan is significant due to the proximity of major earthquake
fault lines to these manufacturing facilities. In January 1994 and September
1999, major earthquakes near Chatsworth and in Taiwan, respectively, affected
the facilities of manufacturers in these areas including ours, causing power and
communications outages and disruptions that impaired production capacity. While
our facilities did not suffer material damage and these earthquakes did not
materially disrupt our business, the occurrence of an earthquake or other
natural disaster could result in the disruption of our manufacturing facilities.
Any disruption in our manufacturing facilities arising from such events could
cause significant delays in the production or shipment of our products until we
are able to shift production to different facilities or arrange for third
parties to manufacture our products. We may not be able to obtain alternate
capacity on favorable terms or at all.

ENVIRONMENTAL REGULATIONS APPLICABLE TO OUR MANUFACTURING OPERATIONS COULD LIMIT
OUR ABILITY TO EXPAND OR SUBJECT US TO SUBSTANTIAL COSTS.

We are subject to a variety of environmental regulations relating to the use,
storage, discharge and disposal of hazardous chemicals used during our
manufacturing processes. Further, we are subject to other safety, labeling and
training regulations as required by local, state and federal law. Any failure by
us to comply with present and future regulations could subject us to future
liabilities or the suspension of production. In addition, such regulations could
restrict our ability to expand our facilities or could require us to acquire
costly equipment or to incur other significant expenses to comply with
environmental regulations. We cannot assure you that these legal requirements
will not impose on us the need for additional capital expenditures or other
requirements. If we fail to obtain required permits or otherwise fail to operate
within these or future legal requirements, we may be required to pay substantial
penalties, suspend our operations or make costly changes to our manufacturing
processes or facilities.

IF WE FAIL TO ACCURATELY FORECAST COMPONENT AND MATERIAL REQUIREMENTS FOR OUR
MANUFACTURING FACILITIES, WE COULD INCUR ADDITIONAL COSTS OR EXPERIENCE
MANUFACTURING DELAYS.

We use rolling forecasts based on anticipated product orders to determine our
component requirements. It is very important that we accurately predict both the
demand for our products and the lead times required to obtain the necessary
components and materials. Lead times for components and materials that we order
vary significantly and depend on factors such as specific supplier requirements,
the size of the order, contract terms and current market demand for the
components. For substantial increases in production levels, some suppliers may
need six months or more lead time. If we overestimate our component and material
requirements, we may have excess inventory, which would increase our costs. If
we underestimate our component and material requirements, we may have inadequate
inventory, which could interrupt our manufacturing and delay delivery of our
products to our customers. Any of these occurrences would negatively impact our
net sales.

Current softness in demand and pricing in the communications market have
necessitated a review of our inventory, facilities and headcount. As a result,
we recorded in the nine months ended September 30, 2001 charges for impairment
of assets, abandoned facilities, the write down of inventory and inventory
purchase commitments, among other things, of $43.6 million.



                                       21
<PAGE>

IF WE CANNOT INCREASE OUR SALES VOLUMES, REDUCE OUR COSTS OR INTRODUCE HIGHER
MARGIN PRODUCTS TO OFFSET ANTICIPATED REDUCTIONS IN THE AVERAGE SELLING PRICE OF
OUR PRODUCTS, OUR OPERATING RESULTS WILL SUFFER.

We have experienced decreases in the average selling prices of some of our
products. We anticipate that as products in the optical networking market
continue becoming commodities the average selling price of our products will
continue to decrease in response to competitive pricing pressures, new product
introductions by us or our competitors or other factors. In addition, the
current softness in the market has detrimentally affected the selling prices of
some of our products. If we are unable to offset the anticipated decrease in our
average selling prices by increasing our sales volumes or product mix, our net
sales and gross margins will continue to decline. In addition, to maintain our
gross margins, we must continue to reduce the manufacturing cost of our products
and we must develop and introduce new products and product enhancements with
higher margins. If our gross margins continue to erode, our financial position
will be harmed.

WE DEPEND ON SINGLE OR LIMITED SOURCE SUPPLIERS FOR SOME OF THE KEY COMPONENTS
AND MATERIALS IN OUR PRODUCTS, WHICH MAKES US SUSCEPTIBLE TO SUPPLY SHORTAGES OR
PRICE FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS.

We typically purchase our components and materials through purchase orders, and
in general we have no guaranteed supply arrangements with any of our suppliers.
We currently purchase several key components and materials used in the
manufacture of our products from single or limited source suppliers, including
Corning Incorporated, Mitsubishi Electric, Nippon Sheet Glass, Phillips
Semiconductor and Sumitomo. If our relationship with any of these key suppliers
terminates, we may not be able to find another manufacturer that can meet our
specifications and anticipated supply requirements. We may fail to obtain
required components in a timely manner in the future. We may experience
difficulty identifying alternative sources of supply for certain components used
in our products. We would experience further delays from evaluating and testing
the products of these potential alternative suppliers. Furthermore, financial or
other difficulties faced by these suppliers or significant changes in demand for
these components or materials could limit the availability of these components.
Any interruption or delay in the supply of any of these components or materials,
or the inability to obtain these components and materials from alternate sources
at acceptable prices and within a reasonable amount of time, would impair our
ability to meet scheduled product deliveries to our customers and could cause
customers to cancel orders.

IF WE DO NOT ACHIEVE ACCEPTABLE MANUFACTURING YIELDS OR SUFFICIENT PRODUCT
RELIABILITY, OUR ABILITY TO SHIP PRODUCTS TO OUR CUSTOMERS COULD BE AFFECTED AND
OUR NET SALES MAY SUFFER.

The manufacture of our products involves complex and precise processes. Changes
in our manufacturing processes or those of our suppliers, or the use of
defective components or materials, could significantly reduce our manufacturing
yields and product reliability. Our manufacturing costs are relatively fixed,
and, thus, manufacturing yields are critical to our results of operations. We
may experience manufacturing problems in the future, which could result in lower
than expected production yields, delayed product shipments and impaired gross
margins. In some cases, existing manufacturing techniques involve substantial
manual labor. In addition, we may experience manufacturing delays and reduced
manufacturing yields upon introducing new products to our manufacturing lines.
In order to improve our gross margins, we may need to develop new, more
cost-effective manufacturing processes and techniques, and if we fail to do so,
our gross margins may be adversely affected.

IF OUR CUSTOMERS DO NOT QUALIFY OUR MANUFACTURING LINES FOR VOLUME SHIPMENTS,
OUR OPERATING RESULTS COULD SUFFER.

Generally, customers do not purchase our products, other than limited numbers of
evaluation units, prior to qualification of the manufacturing line for volume
production. Our existing manufacturing lines, as well as each new manufacturing
line, must pass through varying levels of qualification with our customers. This
customer qualification process determines whether our manufacturing lines meet
the customers' quality, performance and reliability standards. If there are
delays in qualification of our products, our customers may drop the product from
a long-term supply program, which would result in significant lost revenue
opportunity over the term of that program. Moreover, customers may require that
we be registered under international quality standards, such as ISO 9000. Our
Taiwan facilities have received ISO 9001 certification and our facilities in the
People's Republic of China are certified ISO 9002. Our Chatsworth facilities
have no ISO certification and we do not expect to receive ISO 9000 certification
until sometime in 2002, at the earliest.

WE WILL LOSE SIGNIFICANT CUSTOMER SALES AND OPPORTUNITIES AND MAY NOT BE
SUCCESSFUL IF OUR CUSTOMERS DO NOT QUALIFY OUR PRODUCTS TO BE DESIGNED INTO
THEIR PRODUCTS AND SYSTEMS.

In the communications industry, service providers and communications equipment
manufacturers often undertake extensive qualification processes prior to placing
orders for large quantities of products such as ours, because these products
must function as part of a larger system or network. Once they decide to use a
particular supplier's product or component, these potential customers design the
product into their system, which is known as a design-in win. Suppliers whose
products or components are not designed in are unlikely to make sales to that
company until at least the adoption of a future redesigned system. Even then,
many companies may be reluctant to design entirely new products into their new
systems, as it could involve significant additional redesign efforts. If we fail
to achieve design-in wins in our potential customer's qualification process, we
will lose the opportunity for significant sales to that customer for a lengthy
period of time.

THE ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS MAY BE EXPENSIVE AND COULD
DIVERT VALUABLE RESOURCES.

We rely on a combination of trade secret laws and restrictions on disclosure and
patents, copyrights and trademarks to protect our intellectual property rights.
We may need to engage in litigation to enforce our intellectual property rights,
protect our trade secrets and determine the validity and scope of proprietary
rights of others. Any such litigation, regardless of outcome, could be expensive
and time consuming, and adverse



                                       22
<PAGE>

determinations in any such litigation could seriously harm our business.

WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD BE COSTLY AND SUBJECT US TO SIGNIFICANT LIABILITY.

From time to time, third parties, including our competitors, may assert patent,
copyright and other intellectual property rights to technologies that are
important to us. We expect we will increasingly be subject to infringement
claims as the number of products and competitors in our market grows and the
functioning of products overlaps. In this regard, in early 1999, we received a
written notice from Rockwell Corporation in which Rockwell claimed to have
patent rights in certain technology related to our metal organic chemical vapor
deposition processes. Rockwell requested that we review our processes in light
of one of Rockwell's issued patents, which we have done and determined that the
cited patent has expired. We believe that none of our product sales relates to
the Rockwell claim. In October 1999, we received a written notice from Ortel
Corporation, which has since been acquired by Lucent Technologies, Inc., in
which Ortel claimed to have patent rights in certain technology related to our
triplexer and duplexer products. Ortel requested that we review our products in
connection with one of Ortel's issued patents. We are evaluating the information
provided to us thus far by Ortel and are also evaluating the validity of Ortel's
patent noted in Ortel's letter. In January 2001, we were advised that Lucent had
assigned certain of its rights and claims to Agere Systems, Inc., including the
claim made on the Ortel patent. To date, we have not been contacted by Agere
regarding this patent claim. We are presently seeking to determine whether we
may have violated and the extent of our usage of, and related revenues from,
technology covered by this patent. Based on our evaluation to date, we have
concluded that the Ortel claim (evidently now the property of Agere) relates to
an aspect of our triplexers. Net sales of our triplexers accounted for
approximately 5% of total net sales during the year ended December 31, 2000. In
May 2001, we received written notice from IBM, which claims that several of our
optical components make use of inventions covered by certain patents claimed by
IBM. We are presently seeking to determine whether we may have violated and the
extent of our usage of, and related revenues from, technology covered by the IBM
patents. Based on our evaluation to date, we have concluded that the IBM claim
relates to certain of our transceivers. Net sales of the GBIC transceivers in
question accounted for approximately 7% of total net sales during the year ended
December 31, 2000. In April 1999, we received a written notice from Rockwell
International Corporation in which Rockwell claimed to have patent rights in
certain technology related to our metal organic chemical vapor deposition, or
MOCVD, processes. Rockwell requested us to review our processes in light of one
of Rockwell's issued patents, which has been done and we determined that the
cited patent has expired. We believe that none of our current product sales
could be affected by the Rockwell claim. The patents of Ortel, IBM and Rockwell
and other patents of which we are not presently aware that may relate to our
products may be determined to be valid, or some of our products may ultimately
be determined to infringe these patent, or those of other companies. Agere,
Rockwell, IBM or other companies may pursue litigation with respect to these or
other claims. The results of any litigation are inherently uncertain. In the
event of an adverse result in any litigation with respect to intellectual
property rights relevant to our products that could arise in the future, to pay
substantial damages under applicable law, to cease the manufacture, use and sale
of infringing products or to expend significant resources to develop
non-infringing technology. In addition, litigation frequently involves
substantial expenditures and can require significant management attention, even
if we ultimately prevail. Accordingly, any infringement claim or litigation
against us could significantly harm our business, operating results and
financial condition.

In the future, we may initiate claims or litigation against third parties for
infringement of our proprietary rights to protect these rights or to determine
the scope and validity of our proprietary rights or the proprietary rights of
competitors. These claims could result in costly litigation and the diversion of
our technical and management personnel.

NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY MAY NOT BE AVAILABLE TO US OR MAY
BE VERY EXPENSIVE, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO MANUFACTURE AND
SELL OUR PRODUCTS.

From time to time we may be required to license technology from third parties to
develop new products or product enhancements or to resolve infringement claims
with respect to intellectual property rights in our existing products. We cannot
assure you that third-party licenses such as from Rockwell, Agere or IBM will be
available to us on commercially reasonable terms, if at all. The inability to
obtain any third-party license required to develop new products and product
enhancements or to resolve infringement claims on our existing products could
require us to obtain substitute technology of lower quality or performance
standards or at greater cost, either of which could seriously harm our ability
to manufacture and sell our products.

OTHER COMPANIES WITH SIMILAR NAMES OR TRADEMARKS COULD CHALLENGE OUR USE OF
LUMINENT

There are numerous companies which have names or trademarks of varying degrees
of similarity to Luminent. Although we believe we have all necessary rights to
use this brand name, our rights to use it may be challenged by other who have
names or trademarks similar to our name. Challenges resulting in litigation,
regardless of outcome, could be expensive to defend and time consuming and
adverse determinations could harm our business.

PENDING COMPLETION OF OUR MERGER WITH MRV COMMUNICATIONS, OUR STOCK PRICE WILL
LIKELY BE AFFECTED BY EVENTS AFFECTING MRV'S STOCK PRICE

Our parent, MRV Communications, Inc., which owns 92.3% of our outstanding common
stock, has announced plans to effect a short-form merger with us whereby each
outstanding share of our common stock (except for shares presently held by MRV
and shares held by our stockholders who perfect their statutory appraisal rights
under Delaware law) will be converted into shares of MRV common stock. Since the
exchange ratio of 0.43 of a share of MRV common stock for each outstanding share
of our common stock was announced on October 8, 2001, the market price of our
shares have been trading in the range of 42% to 47% of the market price of MRV's
common stock. It is likely that the prevailing market price of our shares will
continue to parallel the prevailing market prices of MRV's common stock based on
the announced exchange ratio pending completion of the short-form merger.
Accordingly, until the merger is completed, events affecting MRV or its
businesses that influence the market price of MRV's common stock and which may
be unrelated to our performance or our business are likely to impact directly on
the prevailing market price of our shares. At the time the merger is completed,
public trading of our common stock will cease.



                                       23
<PAGE>

OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS
A SEPARATE COMPANY.

The historical financial information we have included in this report for periods
prior to January 1, 2001 has been carved out from MRV's consolidated financial
statements and may not accurately reflect what our financial position, results
of operations and cash flows would have been, had we been a separate,
stand-alone entity during the periods presented. MRV did not account for us as,
and we were not operated as, a single stand-alone entity for the periods
presented prior to January 1, 2001. In addition, the historical information is
not necessarily indicative of what our results of operations, financial position
and cash flows will be in the future. We have not made adjustments to reflect
many significant changes that will occur in our cost structure, funding and
operations as a result of our separation from MRV, including changes in our
employee base, changes in our tax structure, increased costs associated with
reduced economies of scale, increased marketing expenses related to establishing
a new brand identity and increased costs associated with being a public,
stand-alone company.

WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH MRV WITH RESPECT TO
OUR PAST AND ONGOING RELATIONSHIPS THAT COULD HARM OUR BUSINESS OPERATIONS.

Pending completion of the short-form merger with MRV, conflicts of interest may
arise between MRV and us in a number of areas relating to our past and ongoing
relationships, including:

        -       labor, tax, employee benefit, indemnification and other matters
                arising from our separation from MRV;

        -       intellectual property matters;

        -       employee retention and recruiting;

        -       major business combinations involving us;

        -       sales or distributions by MRV of all or any portion of its
                ownership interest in us;

        -       the nature, quality and pricing of transitional services MRV has
                agreed to provide us; and

        -       business opportunities that may be attractive to both MRV and
                us.

We also may face business conflicts of interest with MRV because MRV and certain
of its other subsidiaries are our customers. Like other customers, we do not
have long-term contracts with MRV or its other subsidiaries for the purchase of
our components. Because MRV controls all matters relating to us, MRV may be able
to require us to enter into customer relationships with it or its other
subsidiaries on terms that are less favorable to us than those we could
negotiate with an unrelated customer. Nothing restricts MRV from competing with
us.

We may not be able to resolve any potential conflicts, and even if we do, the
resolution may be less favorable than if we were dealing with an unaffiliated
party. The agreements we have entered into with MRV dealing with our separation
from MRV may be amended upon agreement between the parties. While we are
controlled by MRV, MRV may be able to require us to agree to amendments to these
agreements that may be less favorable to us than the current terms of the
agreement.

OUR DIRECTORS AND EXECUTIVE OFFICERS MAY HAVE CONFLICTS OF INTEREST BECAUSE OF
THEIR OWNERSHIP OF MRV COMMON STOCK.

Some of our directors and executive officers have a substantial amount of their
personal financial portfolios in MRV common stock and options to purchase MRV
common stock. Ownership of MRV common stock by our directors and officers after
our separation from MRV could create, or appear to create, potential conflicts
of interest when directors and officers are faced with decisions that could have
different implications for MRV and us.

WE ARE AT RISK OF SECURITIES CLASS ACTION OR OTHER LITIGATION THAT COULD RESULT
IN SUBSTANTIAL COSTS AND DIVERT MANAGEMENT'S ATTENTION AND RESOURCES.

In the past, securities class action litigation has been brought against a
company following periods of volatility in the market price of its securities.
Due to the to the volatility and potential volatility of our stock price
following our initial public offering, we may be the target of securities
litigation in the future. Additionally, while we informed investors that MRV was
under no obligation to, and might not, make the distribution to its stockholders
of our common stock and that MRV could and might eliminate public ownership of
us through a short-form merger, MRV's decision to abandon its distribution of
our common stock to its stockholders or to eliminate public ownership of our
common stock through the short-form merger may result in securities or other
litigation. Securities or other litigation could result in substantial costs and
divert management's attention and resources.

DELAWARE LAW AND OUR ABILITY TO ISSUE PREFERRED STOCK MAY HAVE ANTI-TAKEOVER
EFFECTS THAT COULD PREVENT A CHANGE IN CONTROL, WHICH MAY CAUSE OUR STOCK PRICE
TO DECLINE.

We are authorized to issue up to 30,000,000 shares of preferred stock. This
preferred stock may be issued in one or more series, the terms of which may be
determined at the time of issuance by the board of directors without further
action by stockholders. The terms of any such series of preferred stock may
include voting rights (including the right to vote as a series on particular
matters), preferences as to dividend, liquidation, conversion and redemption
rights and sinking fund provisions. No preferred stock is currently outstanding.
The issuance of any such preferred stock could materially adversely affect the
rights of the holders of our common stock, and therefore, reduce the value of
our common stock. In particular, specific rights



                                       24
<PAGE>

granted to future holders of preferred stock could be used to restrict our
ability to merge with, or sell our assets to, a third party and thereby preserve
control by the present management.

Certain provisions of Delaware law also may discourage, delay or prevent someone
from acquiring or merging with us, which may cause the market price of our
common stock to decline.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not hold any derivative securities. The majority of our net proceeds from
the initial public offering are currently maintained by leading investment
management firms in high-grade, short-term instruments that have maturities no
longer than 14 months, and an average maturity of six months or less. While we
believe such high-grade investments contain limited risk of loss of principal,
we recognize the yield on these funds could vary depending upon market
conditions.

We operate on an international basis. A majority of our revenues and cost of
sales are incurred in U.S. dollars. For the year ended December 31, 2000,
approximately 31% and 29% of our revenues and cost of sales, respectively, were
incurred in currencies other than the U.S. dollar. For the nine months ended
September 30, 2001, approximately 45% and 47% of our revenues and cost of sales,
respectively, were incurred in currencies other than the U.S. dollar. For the
year ended December 31, 2000 and the nine months ended September 30, 2001,
approximately 63% and 60%, respectively, of our operating expenses were incurred
in currencies other than the U.S. dollar, including the non-cash charges for
deferred compensation expense and goodwill amortization incurred with the
foreign subsidiary acquisitions. For the year ended December 31, 2000 the New
Taiwan dollar represents 87% and greater of transactions incurred in currencies
other than the U.S. dollar. For the nine months ended September 30, 2001 the New
Taiwan dollar represents 95% and greater of transactions incurred in currencies
other than the U.S. dollar.

The New Taiwan dollar has been relatively stable in relation to the U.S. dollar
in recent years, and accordingly, we have not experienced any significant
fluctuations in operating results due to exchange rate fluctuations in the New
Taiwan dollar in relation to the U.S. dollar. Although the New Taiwan dollar has
historically been stable, we cannot guarantee the same stability in the future.
The following provides an example of how fluctuations in the New Taiwan dollar
would affect our overall revenues and cost of sales based on the December 30,
2000 U.S. to New Taiwan dollar exchange rate of 33.17. We estimate that a
hypothetical 10% decrease in the New Taiwan dollar exchange rate would result in
our recognizing an increase of $3.4 million in our total revenues and an
increase of $2.5 in our total cost of sales. We estimate that a hypothetical
increase in the New Taiwan dollar exchange rate would result in our recognizing
a decrease of $3.1 million in our total revenues and a decrease of $2.3 million
in our total cost of sales.

Fluctuations in the value of the currencies in which we conduct our business
relative to the U.S. dollar will cause U.S. dollar translation of such
currencies to vary from one period to another. We cannot predict the effect of
exchange rate fluctuations upon future operating results. However, because we
have expenses as well as revenues in each of the principal functional
currencies, the exposure to our financial results to currency fluctuations is
reduced. We have not historically attempted to reduce our currency risks through
hedging instruments, however, we may do so in the future.

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Luminent has received notices from third parties alleging possible infringements
of patents with respect to product features or manufacturing processes.
Management believes such notices are common in the communications industry
because of the large number of patents that have been filed on these subjects.
The Company's policy is to discuss these notices with the senders in an effort
to demonstrate that the Company's products and/or processors do not violate any
patents. The Company is currently involved in such discussions with Ortel,
Rockwell, and IBM. The Company is evaluating these claims and presently does not
believe that any of its products or processes violate any of the patents
asserted by these parties. Additionally, the Company intends to vigorously
defend its position if any legal action is taken. Management believes the
ultimate outcome of such claims will not have a material impact on the results
of operation or financial position.

On September 26, 2001, a lawsuit was filed in the Los Angeles County Superior
Court entitled Aram Precision Tool and Die, Inc. vs. Luminent, Inc. In this
action, the plaintiff claims damages for the defendant's alleged failure to
accept and pay for materials allegedly requested under purchase orders. In the
lawsuit, the plaintiff claims compensatory damages in the alleged amount of
$300,000, unspecified punitive damages, unspecified attorney's fees and interest
at the legal rate from March 15, 2001. Registrant believes that the allegations
of the lawsuit are without merit and intends to vigorously defend the action.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

USE OF PROCEEDS

Our registration statement on Form S-1 filed under the Securities Act of 1933,
Commission File No. 333-42238, was declared effective by the Commission on
November 9, 2000. A total of 13,800,000 shares of our common stock were
registered pursuant to this registration statement, including 1,800,000 that
were subject to the underwriters' over allotment option which was not exercised.
The aggregate price of the offering amount registered was $207,000,000. The
managing underwriters for the offering were Credit Suisse First Boston
Corporation, CIBC World Markets Corp., Robertson Stephens, Inc., U. S. Bancorp
Piper Jaffray, Inc. and First Security Van Kasper, Inc.

The offering was completed on November 9, 2000. We sold 12,000,000 registered
shares at an initial public offering at an aggregate offering price of
$144,000,000 or $12.00 per share. From November 9, 2000 to September 30, 2001,
the aggregate underwriting discounts paid in connection with the offering was
$10.1 million. We estimate that other expenses of the offering total $1.6
million.

The net proceeds from the offering, after deducting the underwriting discounts
and the estimated offering expenses to be paid by us, were approximately $132.3
million. The net proceeds will be used for general corporate purposes, including
capital expenditures and working capital. From November 9, 2000 through
September 30, 2001, we believe that a reasonable estimate of the net proceeds
applied for such purposes was $92.7 million. Pending use of the remaining funds,
the net proceeds have been invested in interest bearing, investment grade
securities.





                                       25
<PAGE>

None of the net proceeds of the offering have been paid, directly or indirectly,
to any of our directors or officers or any of their associates, to any persons
owning 10% or more of our common stock, or to any of our affiliates. To the
extent net proceeds have been used, such proceeds have been paid to others.



                                       26

<PAGE>
ITEM 5. OTHER INFORMATION


                                 LUMINENT, INC.
          PRO FORMA(1) CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                            Three Months Ended September 30,     Nine Months Ended September 30,
                                                            -------------------------------      ------------------------------
                                                                 2000              2001             2000              2001
                                                              ---------         ---------         ---------         ---------
<S>                                                           <C>               <C>               <C>               <C>
Net Sales                                                     $  35,958         $  18,754         $  78,964         $ 108,098
Cost of sales                                                    24,666            13,850            51,771            73,421
                                                              ---------         ---------         ---------         ---------
    Gross Profit                                                 11,292             4,904            27,193            34,677
Operating costs and expenses
    Selling, general and administrative                           3,826             4,121            10,448            16,560
    Research and development                                      4,428             3,104             9,778            10,670
    Parent company allocations                                      200                --               588                --
                                                              ---------         ---------         ---------         ---------
                                                                  8,454             7,225            20,814            27,230
        Operating income                                          2,838            (2,321)            6,379             7,447
Other income, net                                                   334               746               526             3,585
                                                              ---------         ---------         ---------         ---------
    Income before provision for income taxes
        and minority interest                                     3,172            (1,575)            6,905            11,032
Provision for income taxes                                        1,240              (517)            2,708             3,341
Minority interest                                                    73                19               393               (95)
                                                              ---------         ---------         ---------         ---------
    Net income                                                $   1,859         $  (1,077)        $   3,804         $   7,786
                                                              =========         =========         =========         =========
Net income per share, basic                                        0.01             (0.01)             0.03              0.05
Net income per share, diluted                                      0.01             (0.01)             0.03              0.05

Shares used in per-share calculation, basic                     144,000           156,000           144,000           156,000
Shares used in per-share calculation, diluted                   144,000           156,000           144,000           156,000

(1) Reconciliation of pro forma net (loss) income
    to net (loss)
Pro forma net (loss) income                                   $   1,859         $  (1,077)        $   3,804         $   7,786
Cost of sales:
    Reduction in one-time charges recorded during the
        second quarter                                               --             3,723                --             3,723
    Increase in restructure and other one-time charges               --            (1,460)               --           (30,786)
    Increase in inventory reserves                                   --            (3,126)               --            (3,126)
    Deferred stock compensation                                  (1,200)             (476)           (1,896)           (1,725)
Selling, general and administrative
    Restructure and other one-time charges                           --            (2,584)               --           (13,974)
    Deferred stock compensation                                  (9,000)          (23,371)          (10,073)          (39,071)
Research and development:
    Restructure and other one-time charges                           --                --                --              (501)
    Deferred stock compensation                                  (1,700)             (749)           (2,974)           (2,712)
Amortization of goodwill and other intangibles                  (18,353)          (19,488)          (27,933)          (58,464)
Restructure and other one-time charges to other income               --                --                --               (16)
Income tax effect of pro forma adjustments                           --            (2,691)               --              (685)
                                                              ---------         ---------         ---------         ---------
                                                              $ (28,394)        $ (51,299)        $ (39,072)        $(139,551)
                                                              =========         =========         =========         =========
</TABLE>





                                       27
<PAGE>



 ITEM 6. EXHIBITS AND REPORTS ON FORM 8K

(a)     Exhibits.

Not applicable

(b)     Reports on Form 8-K.

No reports on Form 8-K were filed by the Registrant during the period covered by
this Report.



                                       28
<PAGE>
                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934
(the "Exchange Act"), the Registrant caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chatsworth,
State of California, on November 14, 2001.

                                       LUMINENT, INC.

                                       By: /s/ NOAM LOTAN
                                          --------------------------------------
                                           Noam Lotan
                                           Chairman and Chief Executive Officer

                                       By: /s/ ERIC I. BLACHNO
                                          --------------------------------------
                                           Eric I. Blachno
                                           Vice President, Finance and Chief
                                           Financial Officer



                                       29