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

                                    FORM 10-K

                                   (MARK ONE)

       [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

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

           FOR THE TRANSITION PERIOD FROM _____________ TO ___________

                         COMMISSION FILE NUMBER 0-25678

                            MRV COMMUNICATIONS, INC.
                (NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                   DELAWARE                                   06-1340090
        (STATE OR OTHER JURISDICTION OF                    (I.R.S. EMPLOYER
         INCORPORATION OR ORGANIZATION)                  IDENTIFICATION NUMBER)

            8943 FULLBRIGHT AVENUE                               91311
            CHATSWORTH, CALIFORNIA                            (ZIP CODE)
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

         ISSUER'S TELEPHONE NUMBER: (818) 773-9044; (818) 773-0906 (FAX)

       SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE

         SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:

                         COMMON STOCK, $0.0034 PAR VALUE

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

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which common equity was
sold, or the average bid and asked prices of such stock, as of a specified date
within the past 60 days: $2,983,799,000 based on the closing sale price of a
share of Common Stock at March 20, 2000 as reported by The Nasdaq National
Market.

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 28,659,291 shares of Common
Stock, $0.0034 par value at March 20, 2000.

DOCUMENTS INCORPORATED BY REFERENCE:

                                      None




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        The Annual Report on Form 10-K contains forward-looking statements.
These statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those anticipated in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the Section under Item 1 Description
of Business -- Risk Factors.

        Readers should not place undue reliance on forward-looking statements,
which reflect management's view only as of the date of this Report. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect subsequent events or circumstances. Readers should also carefully review
the risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission.

        As used in this Report, "MRV" or the "Company" refers to MRV
Communications, Inc., and its consolidated subsidiaries, except where the
context otherwise indicates. EdgeGuardian, Fiber Driver, GigaHub, MAXserver, MRV
Communications, NBase, Network 3000, Network 9000, RouteRunner, West Hills LAN
Systems, and Xyplex are trademarks or trade names of the Company. Trademarks of
other companies are also used in this Report and are the property of their
respective owners.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

OVERVIEW

        MRV is in the business of creating and managing growth companies in
optical technology and Internet infrastructure. The Company has created several
start-up companies and formed independent business units in the optical
technology and Internet infrastructure area. The Company's core operations
include the design, manufacture and sale of two groups of products: (i) optical
networking and internet infrastructure products, primarily subscribers'
management, Network Element Management, and physical layer, switching and
routing management systems in fiber optic metropolitan networks and (ii) fiber
optic components for the transmission of voice, video and data across
enterprise, telecommunications and cable TV networks. The Company's advanced
optical networking and Internet infrastructure solutions greatly enhance the
functionality of carrier and network service provider networks. The Company's
fiber optic components incorporate proprietary technology, which delivers high
performance under demanding environmental conditions.

        The Company's business units offer active optical components, optical
networking and Internet infrastructure products, including network element
management and physical layer management in fiber optic metropolitan networks.
MRV's In-Reach product line manages Internet elements through secure remote
monitoring of large service providers' sites. MRV's Optical Networks family of
products consist of multi-layer traffic management: at Layer 1 with the Fiber
Driver, at Layer 2 with the OptiSwitch and at Layer 3 and above, with the
OSR8000, Linux Router. The Company complements its optical networking and
Internet infrastructure products with a family of optical transmission
components and modules designed for transmission over fiber optic cable. These
products enable the transmission of voice, data, and video across fiber and are
also used in optical fiber test equipment. The Company's products include
discrete components, such as laser diodes and LEDs, and integrated components
such as transmitters, receivers and transceivers. The Company's components are
used in data networks, telecommunication transmission and access networks. Upon
completion of the Company's pending acquisition of Fiber Optic Communications,
Inc., MRV will offer passive optical components.

        MRV has also initiated and funded start-up companies including Zaffire,
Inc (formerly known as New Access Communications), Charlotte's Networks,
Hyperchannel and Zuma Networks.

        The Company's principal executive offices are located at 8943 Fullbright
Avenue, Chatsworth, California 91311 and its telephone and fax numbers are (818)
773-9044 and (818) 773-0906, respectively. The Company maintains Web




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sites at "http://www.mrv.com" and "http://www.nbase-xyplex.com. Information
contained in the Company's Web sites shall not be deemed part of this Report.

BACKGROUND

        The Company was organized in July 1988 as MRV Technologies, Inc., a
California corporation and reincorporated in Delaware in April 1992, at which
time it changed its name to MRV Communications, Inc.

        On May 1, 1995, the Company acquired certain assets and the distribution
business of Galcom Networking, Ltd. ("Galcom"), a network equipment company
located in Israel. The purchase price paid by the Company was approximately
$900,000 in cash and the assumption of approximately $1,800,000 in liabilities
and debt. In connection with the acquisition of assets from Galcom, the Company
issued to Galcom and certain of its employees five-year warrants to purchase an
aggregate of 300,000 shares at prices ranging from $4.25 to $7.38 per share.

        On June 29, 1995, the Company acquired certain assets and the
distribution business of Ace 400 Communications Ltd. ("Ace"), a network
equipment company also located in Israel. The purchase price paid by the Company
was approximately $4,477,000 comprised of $100,000 in cash, the assumption of
approximately $467,000 in liabilities and debt and the issuance of approximately
855,000 shares of Common Stock valued at approximately $3,910,000 and extended a
right to Ace to sell to the Company up to $400,000 of Ace's inventory. In
connection with the acquisition of assets from Ace, the Company issued to the
trustee and an employee of Ace five-year warrants to purchase an aggregate of
330,000 shares of Common Stock at prices ranging from $4.57 to $4.67 per share.

        The Galcom and Ace acquisitions provided the Company with experienced
personnel and technology for the Token Ring LAN, IBM Connectivity and
Multi-Platform, Network Management IBM NetView and HP OpenView markets.
Following the acquisitions, the Company consolidated these operations in Israel
with its networking operations in the U.S.

        On September 26, 1996, the Company completed an acquisition (the
"Fibronics Acquisition") from Elbit Ltd. ("Elbit") of certain of the assets and
selected liabilities of Elbit's wholly-owned subsidiary, Fibronics Ltd. and its
subsidiaries (collectively "Fibronics") related to Fibronics' computer
networking and telecommunications businesses (the "Fibronics Business") in
Germany, the United States, the United Kingdom, the Netherlands and Israel. The
assets acquired included Fibronics' technology in progress and existing
technology, its marketing channels, its GigaHub family of computer networking
products and other rights. The purchase price for the Fibronics Business was
approximately $22,800,000. The purchase price was paid using a combination of
cash and shares of Common Stock, all of which Elbit subsequently resold in the
open market.

        The Fibronics Business enabled MRV to enhance the development of Fast
Ethernet and Gigabit Ethernet functions through the Fibronics GigaHub family of
products, to offer a broader range of networking products and to benefit from
combined distribution channels and sales in both the United States and Europe
and greater product development capability.

        On January 30, 1998, MRV completed an acquisition from Whittaker
Corporation ("Whittaker") of all of the outstanding capital stock of Whittaker
Xyplex, Inc. a Delaware corporation (the "Xyplex Acquisition"). Whittaker
Xyplex, Inc. (whose name the Company has since changed to NBase Xyplex, Inc.),
is a holding corporation owning all of the outstanding capital stock of Xyplex,
Inc., a Massachusetts corporation ("Xyplex"). Xyplex is a leading provider of
access solutions between enterprise networks and wide area network and/or
Internet service providers ("ISPs"). The purchase price paid to Whittaker
consisted of $35,000,000 in cash and three-year warrants to purchase up to
421,402 shares of Common Stock of the Company at an exercise price of $35 per
share.

        The Xyplex Acquisition enabled MRV to expand its product lines with
products that have wide area network ("WAN") and remote access capabilities,
permitting the Company to offer these solutions not only to MRV's own existing
base of customers, but also to the customer base added by Xyplex. The
acquisition of Xyplex also increased MRV's sales force, distribution channels
and customer support and service capabilities.




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        On February 22, 2000, MRV announced plans to acquire Fiber Optic
Communications Inc. ("FOCI"), headquartered in Science-Based Industrial Park,
Hsinchu, Taiwan. FOCI designs, develops, manufactures and markets fiber optic
components, subsystems and systems, and installations of fiber optic related
products including fiber optic passive components, fiber optic testing systems,
fiber optic instruments, fiber optic network installations and fiber optic
sensing systems that serve to manage and increase the capacity, or bandwidth of
fiber optic telecommunications and data communications networks. The purchase
price to be paid to acquire FOCI will consist of $50,000,000 in cash and 2.4
million shares of MRV Common Stock.

RISK FACTORS

        The Company may from time to time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases, and in reports
to shareholders. The Private Securities Reform Act of 1995 contains a safe
harbor for forward-looking statements on which the Company relies in making such
disclosures. In connection with this "safe harbor" the Company is hereby
identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statements made by or on
behalf of the Company. Any such statement is qualified by reference to the
following cautionary statements:

        Risks of Technological Change; Development Delays. The Company is
engaged in the design and development of devices for data networking,
telecommunications and fiber optic communication industries. As with any new
technologies, there are substantial risks that the marketplace may not accept
the Company's new products. Market acceptance of the Company's products will
depend, in large part, upon the ability of the Company to demonstrate
performance and cost advantages and cost-effectiveness of its products over
competing products and the success of the sales efforts of the Company and its
customers. There can be no assurance that the Company will be able to continue
to market its technology successfully or that any of the Company's current or
future products will be accepted in the marketplace. Moreover, the data
networking, telecommunications and fiber optic communication industries are
characterized by rapidly changing technology, evolving industry standards and
frequent new product introductions, any of which could render the Company's
existing products obsolete. The Company's success will depend upon its ability
to enhance existing products and to introduce new products to meet changing
customer requirements and emerging industry standards. The Company will be
required to devote continued efforts and financial resources to develop and
enhance its existing products and conduct research to develop new products. The
development of new, technologically advanced products is a complex and uncertain
process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. There can be no assurance that
the Company will be able to identify, develop, manufacture, market or support
new or enhanced products successfully or on a timely basis, that new Company
products will gain market acceptance or that the Company will be able to respond
effectively to product announcements by competitors, technological changes or
emerging industry standards. Furthermore, from time to time, the Company may
announce new products or product enhancements, capabilities or technologies that
have the potential to replace or shorten the life cycle of the Company's
existing product offerings and that may cause customers to defer purchasing
existing Company products or cause customers to return products to the Company.

        Complexity of Product and Product Defects. Complex products, such as
those offered by the Company, may contain undetected software or hardware errors
when first introduced or when new versions are released. While the Company has
not experienced such errors in the past, the occurrence of such errors in the
future, and the inability to correct such errors, could result in the delay or
loss of market acceptance of the Company's products, material warranty expense,
diversion of engineering and other resources from the Company's product
development efforts and the loss of credibility with the Company's customers,
system integrators and end users, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.

        Potential Fluctuations in Operating Results. The Company expects that in
the future it revenues may grow at a slower rate than was experienced in
previous periods and that on a quarter-to-quarter basis, the Company's growth in
revenue may be significantly lower than its historical quarterly growth rates.
As a consequence, operating results for a particular quarter are extremely
difficult to predict. The Company's revenue and operating results could
fluctuate




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substantially from quarter to quarter and from year to year. This could result
from any one or a combination of factors such as the cancellation or
postponement of orders, the timing and amount of significant orders from the
Company's largest customers, the Company's success in developing, introducing
and shipping product enhancements and new products, the product mix sold by the
Company, adverse effects to the Company's financial statements resulting from,
or necessitated by, past and possible future acquisitions, new product
introductions by the Company's competitors, pricing actions by the Company or
its competitors, 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 received during a quarter are difficult to
forecast. From time to time, the Company's customers encounter uncertain and
changing demand for their products. Customers generally order based on their
forecasts. If demand falls below such forecasts or if customers do not control
inventories effectively, they may cancel or reschedule shipments previously
ordered from the Company. The Company's 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, operating results could be
materially adversely affected. Moreover, in certain instances, sales cycles are
becoming longer and more uncertain as MRV bids on larger projects. As a result,
MRV is finding it more difficult to predict the timing of the awards of
contracts and the actual placement of orders stemming from awards. There can be
no assurance that these factors or others, such as those discussed in
"International Operations" or those discussed immediately below would not cause
future fluctuations in operating results. Further, there can be no assurance
that the Company will be able to continue profitable operations.

        Share Prices Have Been and May Continue to Be Highly Volatile.
Historically, the market price of the Company's Common Stock has been extremely
volatile. The market price of the Common Stock is likely to continue to be
highly volatile and could be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, announcement of
technological innovations or new product introductions by the Company or its
competitors, changes of estimates of the Company's future operating results by
securities analysts, developments with respect to patents, copyrights or
proprietary rights, general market conditions and other factors. In addition,
the stock market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the common
stocks of technology companies. These broad market fluctuations may adversely
affect the market price of the Company's Common Stock. In addition, it is
possible that in a future fiscal quarter, the Company's results of operations
will fail to meet the expectations of securities analysts or investors and, in
such event, the market price of the Company's Common Stock would be materially
adversely affected. For example, as a result of some of the factors discussed in
"Potential Fluctuations in Operating Results" above, specifically, weaker
than anticipated demand for its networking products, especially in Europe, and
delays in its transitions to next generation, higher margin, networking
products, in August 1998, MRV announced that it expected operating results in
the third quarter of 1998 to be adversely affected. Following that announcement,
the market price of the Company's Common Stock dropped substantially. Similarly,
in February 1999 following its release of fourth quarter and 1998 financial
results, the Company announced it did not expect revenues in the first quarter
of 1999 to be as strong as revenues reported for the fourth quarter of 1998 and
the market price of the Company's Common Stock again dropped significantly. See
Item 5. Market for Common Equity and Related Stockholder Matters.

        Competition and Industry Consolidation. The markets for fiber optic
components, and telecommunication and data networking products are intensely
competitive and subject to frequent product introductions with improved
price/performance characteristics, rapid technological change and the continual
emergence of new industry standards. The Company competes and will continue to
compete with numerous types of companies including companies which have been
established for many years and have considerably greater financial, marketing,
technical, human and other resources, as well as greater name recognition and a
larger installed customer base, than the Company. This may give such competitors
certain advantages, including the ability to negotiate lower prices on raw
materials and components than those available to the Company. In addition, many
of the Company's large competitors offer customers broader product lines which
provide more comprehensive solutions than the Company currently offers. The
Company expects that other companies will also enter markets in which the
Company competes. Increased competition could result in significant price
competition, reduced profit margins or loss of market share. There can be no
assurance that the Company will be able to compete successfully with existing or
future competitors or that competitive pressures faced by the Company will not
materially and adversely affect the business, operating results and financial
condition of the Company. In particular, the Company expects that prices on many
of its products will continue to decrease in the future and that the pace and
magnitude of such price decreases may have an adverse impact on the results of
operations or



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financial condition of the Company.

        There has been a trend toward industry consolidation for several years.
The Company expects this trend toward industry consolidation to continue as
companies attempt to strengthen or hold their market positions in an evolving
industry. The Company believes that industry consolidation may provide stronger
competitors that are better able to compete. This could have a material adverse
effect on the Company's business, operating results and financial condition.

        Management of Growth. The Company has grown rapidly in recent years,
with revenues increasing from $39,202,000 for the year ended December 31, 1995,
to $88,815,000 for the year ended December 31, 1996, $165,471,000 for the year
ended December 31, 1997, $264,075,000 for the year ended December 31, 1998, and
$288,524,000 for the year ended December 31, 1999. The Company's recent growth,
both internally and through the acquisitions it has made since January 1, 1995,
has placed a significant strain on the Company's financial and management
personnel and information systems and controls, and the Company must implement
new and enhance existing financial and management information systems and
controls and must add and train personnel to operate such systems effectively.
While the strain placed on the Company's personnel and systems has not had a
material adverse effect on the Company to date, there can be no assurance that a
delay or failure to implement new and enhance existing systems and controls will
not have such an effect in the future. The Company's recent growth through the
acquisitions of the Fibronics Business and Xyplex discussed in "Risks Associated
with Recent Acquisitions" below and its intention to continue to pursue its
growth strategy through efforts to increase sales of existing and new products
can be expected to place even greater pressure on the Company's existing
personnel and compound the need for increased personnel, expanded information
systems, and additional financial and administrative control procedures. There
can be no assurance that the Company will be able to successfully manage
expanding operations.

        On January 30, 1998, MRV completed the Xyplex Acquisition from
Whittaker. Xyplex is a leading provider of access solutions between enterprise
networks and WAN and/or Internet service providers ("ISPs"). The purchase price
paid to Whittaker consisted of $35,000,000 in cash and three-year warrants to
purchase up to 421,402 shares of Common Stock of the Company at an exercise
price of $35 per share. During the year ended December 31, 1995, the period from
January 1, 1996 through April 9, 1996 (the day Xyplex was acquired by
Whittaker), the period from April 10, 1996 through October 31, 1996 and the
fiscal year ended October 31, 1997, Xyplex reported net revenues of
$107,617,000, $28,100,000, $52,021,000, and $75,663,000, respectively, and net
losses of $37,360,000, $2,269,000, $13,353,000 and $80,309,000, respectively. In
connection with the Xyplex Acquisition, the Company incurred charges of
$20,633,000 and $15,671,000 for purchased technology and restructuring during
the year ended December 31, 1998. While the Xyplex Acquisition added 11 months
of Xyplex' revenues to those of the Company, the charges resulting from the
Xyplex Acquisition resulted in MRV incurring a net loss of $20,106,000 or $0.86
per share during the year ended December 31, 1998.

        MRV originally recorded charges of $30,571,000 related to research and
development projects in progress at the time of the Xyplex Acquisition. Although
MRV reported these charges and its first, second and third quarter results of
1998 in accordance with established accounting practice and valuations of
Xyplex' purchased technology in progress provided by independent valuators,
these valuations were reconsidered in light of more recent Securities and



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Exchange Commission guidance regarding valuation methodology. Based on the new
valuation methodology, MRV reduced the value of the purchased technology in
progress related to the Xyplex Acquisition to $20,633,000 and increased the
amount of goodwill by $9,938,000. This has resulted in additional charges during
1998 of $759,000 for amortization of intangibles, including goodwill, resulting
from the Xyplex Acquisition and will result in additional charges of
approximately $828,000 annually as these intangibles are amortized through
January 2010.

     Recent actions and comments from the Securities and Exchange Commission
(the Commission) have indicated that the Commission continues to review the
current valuation methodology of purchased in-process research and development
related to business combinations. The Commission has not notified MRV of any
plans to review MRV's methodology for valuing purchased in-process research and
development. The Company's action to reconsider that valuation of in process
research and development related to the Xyplex Acquisition was voluntary. The
Company believes it is in compliance with all of the rules and related guidance
as they currently exist. However, there can be no assurance that the Commission,
in the future, will not review MRV's accounting for the Xyplex Acquisition and
seek to apply retroactively new guidance and change the amount of purchased
in-process research and development expensed by the Company. This would result
in an additional restatement of previously filed financial statements of the
Company and could have a material adverse impact on financial results for
periods subsequent to the acquisition.

        International Operations. International sales have become an
increasingly important segment of the Company's operations, with the
acquisitions of Galcom and Ace in 1995, the Fibronics Business in 1996 and
Xyplex in 1998. Approximately 60%, 59% and 58%, respectively, of the Company's
net revenues for the years ended December 1997, 1998 and 1999, respectively,
were from sales to customers in foreign countries. The Company has offices in,
and conducts a significant portion of its operations in and from Israel. MRV is,
therefore, directly influenced by the political and economic conditions
affecting Israel. Any major hostilities involving Israel, the interruption or
curtailment of trade between Israel and its trading partners or a substantial
downturn in the economic or financial condition of Israel could have a material
adverse effect on the Company's operations. Sales to foreign customers are
subject to government controls and other risks associated with international
sales, including difficulties in obtaining export licenses, fluctuations in
currency exchange rates, inflation, political instability, trade restrictions
and changes in duty rates. Although the Company has not experienced any material
difficulties in this regard to date, there can be no assurance that it will not
experience any such material difficulties in the future. The Company's sales are
currently denominated in U.S. dollars and to date its business has not been
significantly affected by currency fluctuations or inflation. However, the
Company conducts business in several different countries and thus fluctuations
in currency exchange rates could cause the Company's products to become
relatively more expensive in particular countries, leading to a reduction in
sales in that country. In addition, inflation or fluctuations in currency
exchange rates in such countries could increase the Company's expenses. The
Single European Currency (Euro) was introduced on January 1, 1999 with complete
transition to this new currency required by January 2002. The Company has made
and expects to continue to make changes to its internal systems in order to
accommodate doing business in the Euro. Any delays in the Company's ability to
be Euro-compliant could have an adverse impact on the Company's results of
operations or financial condition. To date, the Company has not hedged against
currency exchange risks. In the future, the Company may engage in foreign
currency denominated sales or pay material amounts of expenses in foreign
currencies and, in such event, may experience gains and losses due to currency
fluctuations. The Company's operating results could be adversely affected by
such fluctuations or as a result of inflation in particular countries where
material expenses are incurred. Moreover, the Company's operating results could
also be adversely affected by seasonality of international sales, which are
typically lower in Asia in the first calendar quarter and in Europe in the third
calendar quarter. These international factors could have a material adverse
effect on future sales of the Company's products to international end-users and,
consequently, the Company's business, operating results and financial condition.

        Slowdown in Industry Growth Rates. The Company's success is dependent,
in part, on the overall growth rate of the data networking and fiber optic
industries and the growth of the Internet. In 1997 and 1998, industry growth was
below historical rates according to industry reports. There can be no assurance
that the data networking and fiber optic industries will continue to grow or
that they will achieve higher growth rates. The Company's business, operating
results or financial condition may be adversely affected by any decrease in
industry growth rates. In addition, there can be no assurance that the Company's
results in any particular period will fall within the ranges for growth forecast
by market researchers.



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        Dependence on Third Party Contract Manufacturers and Risks from Internal
Manufacturing. The Company outsources the board-level assembly, test and quality
control of material, components, subassemblies and systems relating to its data
networking products to third party contract manufacturers. Though there are a
large number of contract manufacturers which the Company can use for its
outsourcing, it has elected to use a limited number of vendors for a significant
portion of board assembly requirements in order to foster consistency in quality
of the products. These independent third party manufacturers also provide these
services to other companies. Risks associated with the use of independent
manufacturers include unavailability of or delays in obtaining adequate supplies
of products and reduced control of manufacturing quality and production costs.
If the Company's contract manufacturers fail to deliver products in the future
on a timely basis, or at all, it could be difficult for the Company to obtain
adequate supplies of products from other sources in the near term. There can be
no assurance that the Company's third party manufacturers will provide adequate
supplies of quality products on a timely basis, or at all. While the Company
could outsource with other vendors, a change in vendors may require significant
lead time and may result in shipment delays and expenses. The inability to
obtain such products on a timely basis, the loss of a vendor or a change in the
terms and conditions of the outsourcing would have a material adverse effect on
the Company's business, operating results and financial condition.

        The Company relies heavily on its own production capability for critical
semiconductor lasers and light emitting diodes ("LEDs") used in its products.
Because the Company manufactures these and other key components of its products
at its own facility and such components are not readily available from other
sources, any interruption of the Company's manufacturing process could have a
material adverse effect on the Company's operations. Furthermore, the Company
has a limited number of employees dedicated to the operation and maintenance of
its wafer fabrication equipment, the loss of any of whom could result in the
Company's inability to effectively operate and service such equipment. Wafer
fabrication is sensitive to many factors, including variations and impurities in
the raw materials, the fabrication process, performance of the manufacturing
equipment, defects in the masks used to print circuits on the wafer and the
level of contaminants in the manufacturing environment. There can be no
assurance that the Company will be able to maintain acceptable production yields
and avoid product shipment delays. In the event adequate production yields are
not achieved, resulting in product shipment delays, the Company's business,
operating results and financial condition could be materially adversely
affected.

        Risks Associated with Potential Future Acquisitions. An important
element of management's strategy is to review acquisition prospects that would
complement the Company's existing products, augment its market coverage and
distribution ability or enhance its technological capabilities. For example, in
February 2000, MRV announced plans to acquire FOCI for total consideration of
approximately $263 million in cash and stock and the Company may acquire
additional businesses, products or technologies in the future. The FOCI
acquisition and future acquisitions by the Company could result in charges
similar to those incurred in connection with the Fibronics Acquisition and the
Xyplex Acquisition, dilutive issuances of equity securities, the incurrence of
debt and contingent liabilities and amortization expenses related to goodwill
and other intangible assets, any of which could materially adversely affect the
Company's business, financial condition and results of operations. Acquisitions
entail numerous risks, including the assimilation of the acquired operations,
technologies and products, diversion of management's attention to other business
concerns, risks of entering markets in which the Company has no or limited prior
experience, the potential loss of key employees of acquired organizations and
difficulties in honoring commitments made to customers by management of the
acquired entity prior to the acquisition. Prior to the Fibronics Acquisition,
management had only limited experience in assimilating acquired organizations.
There can be no assurance as to the ability of the Company to successfully
integrate the products, technologies or personnel of any business that might be
acquired in the future, and the failure of the Company to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations.

        Investments in Affiliates. The Company has investments in affiliates
which are accounted for according to the equity or cost methods as required by
accounting principles generally accepted in the United States. The market value
of these investments may vary materially from the amounts shown as a result of
business events specific to these entities or their competitors or market
conditions. Actual or perceived changes in the market value of these investments
could have a material impact on the share price of the Company and in addition
could contribute significantly to volatility in the Company's share price.



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<PAGE>   9

        Present Lack of Patent Protection; Dependence on Proprietary Technology.
The Company holds no patents and only recently has filed two patent applications
and a provisional patent application in the United States with respect to
certain aspects of its technology. With the Xyplex Acquisition, MRV acquired
five additional provisional patent applications filed by Xyplex on certain
aspects of its technology. The Company currently relies on copyrights, trade
secrets and unpatented proprietary know-how, which may be duplicated by others.
The Company employs various methods, including confidentiality agreements with
employees and suppliers, to protect its proprietary know-how. Such methods may
not afford complete protection, however, and there can be no assurance that
others will not independently develop such know-how or obtain access to it or
independently develop technologies that are substantially equivalent or superior
to the Company's technology. In the event that protective measures are not
successful, the Company's business, operating results and financial condition
could be materially and adversely affected. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights to the same
extent as do the laws of the United States. There can be no assurance that any
patents will be issued as a result of the pending applications, including the
provisional patent application, or any future patent applications, or, if
issued, will provide the Company with meaningful protection from competition. In
addition, there can be no assurance that any patents issued to the Company will
not be challenged, invalidated or circumvented. The electronics industry has
been characterized by extensive litigation regarding patents and other
intellectual property rights, and companies in the electronics industry have
employed intellectual property litigation to gain a competitive advantage. Since
United States patent applications are presently maintained in secrecy until
patents issue and since the publication of inventions in technical or patent
literature tends to lag behind such patent application filings by several
months, the Company cannot be certain that it was the first inventor of
inventions covered by pending United States patent applications or that the
Company is not infringing on the patents of others. Litigation may be necessary
to enforce any patents that may be issued to the Company or other intellectual
property rights of the Company, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of operations
regardless of the final outcome of such litigation. In the event that any of the
Company's products are found to infringe on the intellectual property rights of
third parties, the Company would be required to seek a license with respect to
such patented technology, or incur substantial costs to redesign the infringing
products. There can be no assurance that any such license would be available on
terms acceptable to the Company or at all, that any of the Company's products
could be redesigned on an economical basis or at all, or that any such
redesigned products would be competitive with the products of the Company's
competitors.

        For a discussion of the intellectual property claims and litigation in
which the Company is currently involved, see Item 3. Legal Proceedings.

        Dependence on Key Personnel. The Company is substantially dependent upon
a number of key employees, including Dr. Shlomo Margalit, its Chairman of the
Board of Directors and Chief Technical Officer and Noam Lotan, its President and
Chief Executive Officer. The loss of the services of any one or more of these
officers could have a material adverse effect on the Company. The Company has
entered into employment agreements with each officer and is the beneficiary of
key man life insurance policies in the amounts of $1,000,000 on the lives of
both Dr. Margalit and Mr. Lotan. There can be no assurance that the proceeds
from these policies will be sufficient to compensate the Company in the event of
the death of any of these individuals, and the policies do not cover the Company
in the event that any of them becomes disabled or is otherwise unable to render
services to the Company.

        Attraction and Retention of Qualified Personnel. The Company's ability
to develop, manufacture and market its products and its ability to compete with
its current and future competitors depends, and will depend, in large part, on
its ability to attract and retain qualified personnel. Competition for qualified
personnel in the data networking and fiber optics industries is intense, and the
Company will be required to compete for such personnel with companies having
substantially greater financial and other resources than the Company. If the
Company should be unable to attract and retain qualified personnel, the business
of the Company could be materially adversely affected. There can be no assurance
that the Company will be able to attract and retain qualified personnel.

        Possible Issuance of Preferred Stock; Anti-takeover Provisions. The
Company is authorized to issue up to 1,000,000 shares of Preferred Stock, par
value $.01 per share (the "Preferred Stock"). The Preferred Stock may be issued



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<PAGE>   10

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 Common Stock, and therefore, reduce the value of the Common Stock. In
particular, specific rights granted to future holders of Preferred Stock could
be used to restrict the Company's ability to merge with, or sell its assets to,
a third party, thereby preserving control of the Company by the present owners.

        Forward-looking Statements. This Report contains forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Such forward-looking statements may be deemed to
include the Company's plans to develop and offer new and enhanced networking and
optical transmission products and its efforts to expand its customer base. Such
forward-looking statements may also be deemed to include the Company's
expectations concerning factors affecting the markets for its products, the
growth in those markets in general, the timing of new product introductions by
the Company and anticipated benefits from such product introductions or
technological developments. Such forward-looking statements also may include the
Company's expectations of benefits from the acquisition of Xyplex or its OEM or
other arrangements with certain of its customers. Actual results could differ
from those projected in any forward-looking statements for, among other things,
the reasons detailed in the other sections of this "Risk Factors" portion of
this Report. The forward-looking statements are made as of the date of this
Report and the Company assumes no obligation to update the forward-looking
statements or to update the reasons why actual results could differ from those
projected in the forward-looking statements.

INDUSTRY BACKGROUND

        As e-commerce and the Internet continue to proliferate, business
enterprises are increasingly reliant on communications networks and software
applications as critical strategic assets. Communications networks are being
expanded to deliver new services and distribute mission critical computing
applications such as customer network management, transaction processing,
enterprise resource planning, large enterprise databases, and sophisticated
on-line connections with vendors, and the increased use of traditional
applications, such as e-mail, video conferencing, to suppliers, customers and
employees. Bandwidth intensive applications that contain voice, video and
graphics through intranets and extranets, and growth in business-to-business
e-commerce and other on-line transactions are encumbering the optical networking
and internet infrastructure. Due to the significant growth of network users who
increasingly rely on secure access for higher speed and quality of
communications networks, even small network delays can result in lost revenue,
decreased employee productivity and customer dissatisfaction. As a result,
businesses and network service providers are realizing the critical nature of
network and application performance and the requirement for optical networking
and fiber optic equipment that increases the capacity through high speed and
more efficient transmission technologies.

        Optical networking and internet infrastructure systems enhance the
carrier and network service provider networks by handling bandwidth and
providing enhanced services. Fiber optic transmission components enhance the
functionality of enterprise and residential access networks by enabling
high-speed transmission of voice, video and data across fiber optic cable.
Network service providers and carriers are reliant on higher value data centric
network services and are accordingly rapidly deploying next generation solutions
to accommodate the data service requirements

        Growth in the use and availability of wide area networks is being
stimulated by many factors including the need to share information between
centralized repositories and remote enterprise locations, to access and use the
Internet for communications and marketing and to electronically access external
resources used by the enterprise. Growth is also being fueled by the increasing
availability of more cost-effective WAN services such as Frame Relay and
Integrated Service Digital Network ("ISDN") making it more affordable for many
organizations to set up a WAN or expand an existing one. The growth in the use
and availability of the Internet coupled with increasing use, power, speed and
complexity of metropolitan area networks ("MANs") and WANs has resulted in the
increasing need for equipment that permits high speed connections throughout the
infrastructure of the Internet.



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<PAGE>   11

OPTICAL NETWORKING AND INTERNET INFRASTRUCTURE ENVIRONMENT

        The Internet has evolved into a network of hundreds of public and
private networks interconnected using Internet Protocol ("IP"). International
Data Corporation, an industry research firm, forecasts continued dramatic growth
worldwide in the Internet and Internet traffic. As the Internet and e-commerce
continue to explode, business enterprises are increasingly reliant on
communications networks and software applications as strategic assets that are
critical to business success. Communications networks are being expanded to
deliver new services and distribute computing applications such as customer
networks management, e-mail, video, conferencing, and Voice Over Internet
Protocol ("VoIP") to suppliers, customers and employees.

        While consumers use the Internet for education and communication,
business and service providers are realizing the critical nature of network and
application performance.

        According to San Francisco-based market research firm RHK, network
bandwidth will have to increase by more than 2000% between 1998 and 2002 to
satisfy expected Internet and data traffic requirements.

        To meet the growth in the demand for high-speed data services, service
providers are investing heavily to construct and upgrade the transmission
foundation of the public network infrastructure worldwide. The public network
infrastructure, which was originally built for voice traffic, is inadequate to
handle data and must be rapidly upgraded. Current expenditures are spread across
fiber deployment, dense wavelength division multiplexing ("DWDM") products,
Synchronous Optical Network ("SONET") transmission equipment and more recently,
intelligent optical networking solutions.

        Advances in emerging intelligent optical networking market should
fundamentally change the architecture of the public network and create a host of
new opportunities in infrastructure development, service delivery and
applications. Intelligent optical networking offers a solution to public network
scaling and high-speed service delivery.

        Intelligent optical networking will eventually deliver high speed data
services provisioned over wavelengths and intelligent optical light paths. The
flexibility and scalability of wave service is expected to offer service
providers the ability to satisfy this demand for increased bandwidth while
creating competitive differentiation in their service portfolio with
"just-in-time" provisioning capability.

FIBER OPTIC ENVIRONMENT

        Fiber optic cable can generally carry more information at less expense
and with greater signal quality than copper wire. The higher the speed of
transmission, the greater the capacity and the larger the span of the network,
the more essential is fiber optic transmission. Fiber has long replaced copper
as the preferred technology for long distance communications and major backbone
telephony and data transmissions. Due to its advantages, fiber optic technology
is also increasingly used to enhance performance and capacity within enterprise
networks and access networks. As a result, the market for fiber optic products
continues to grow both domestically and internationally.

        Demand for fiber optic transmission components is driven by four
factors: (i) fiber applications have expanded beyond traditional telephony
applications and are being deployed in enterprise network backbones to support
high-speed data communications; (ii) within access networks, fiber is rapidly
expanding downstream toward end-users as access networks deploy
"Fiber-in-the-Loop" and fiber to the curb ("FTTC") architectures to support
services such as fast Internet access and interactive video; (iii) the growth of
cellular communications and PCs requires fiber to be deployed both within and
between cells; and (iv) the usage of fiber in short distances increases the
demand for components as more are used per mile of fiber. As the size, number
and complexity of these fiber networks increases, management expects that the
demand for fiber optic components will grow significantly.

        Fiber Optic Transmission in Data Communications. As higher speed
connections are implemented in LAN/WAN systems, fiber optic transmission becomes
an essential element in computer networks. For transmission speeds of 100 Mbps
and higher, and transmission distances of 100 meters and longer, fiber optic
transmission must be deployed. Virtually all high-speed transmission standards,
such as Fiber Distributed Data Interface ("FDDI"), Asynchronous



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<PAGE>   12

Transfer Mode ("ATM"), Fast Ethernet and Gigabit Ethernet, specify fiber optic
media as the most practical technology for transmission. The steady rise in
high-speed connections and the growth in the span of networks, including the
need to connect remote workgroups, are driving the deployment of fiber optic
cable throughout enterprise networks.

        Fiber Optic Transmission in Access Networks. To meet end users'
increased demand for content, software and services, network operators must
acquire additional bandwidth by either enhancing their existing networks or
constructing new ones. Cable TV operators are increasingly seeking to provide
general telecommunication services, high-speed Internet access and
video-on-demand. As a result, they are now faced with the need to transmit
"upstream," from customer premises to the cable TV operator and to send
different signals to individual end-users. Similarly, local exchange carriers
("LECs") are implementing new technological standards, such as SONET and
fiber-intensive architectures such as FTTC to enable high-speed Internet access
and the delivery of cable TV and Internet services to the home. Management
believes that deployment of and upgrades to these systems will increase the
demand for the Company's fiber optic components that typically are better able
to endure environmental factors, such as rain, snow, heat and wind,
cost-effectively. In addition, cellular and PCS communications represent a fast
emerging market for fiber optic networks, including their usage in the backbone
and landline portion of wireless networks.

PRODUCTS AND TECHNOLOGY

        The Company's products fall into two groups (i) optical networking and
internet infrastructure products, primarily subscribers' management, network
element management, and physical layer, switching and routing management systems
in fiber optic metropolitan networks and (ii) fiber optic components for the
transmission of voice, video and data across enterprise, telecommunications and
cable TV networks. The Company's advanced optical networking and Internet
infrastructure solutions greatly enhance the functionality of of carrier and
network service provider networks. The Company's fiber optic components
incorporate proprietary technology, which delivers high performance under
demanding environmental conditions.

OPTICAL NETWORKING AND INTERNET INFRASTRUCTURE PRODUCTS

        The Optical Networks family of products consist of multi-layer traffic
management: at Layer 1 primarily with the Fiber Driver, at Layer 2 primarily
with the OptiSwitch and at Layer 3 and above, with the OSR8000, Linux Router.
The Company complements its optical networking and Internet infrastructure
products with a family of optical transmission components and modules designed
for transmission over fiber optic cable. These products enable the transmission
of voice, data, and video across fiber and are also used in optical fiber test
equipment.

        In-Reach. This product line manages Internet elements through secure
remote monitoring of large service provider's sites.

        Fiber Driver. This line of products consists of high density,
multi-media, multi-protocol, optical media converters and switches. The Fiber
Driver family provides the interfaces between switches, hubs, routers and the
fiber or copper plan to allow existing fiber to be used more efficiently, while
providing network management across the entire LAN, WAN or metropolitan area
network infrastructure. The Fiber Driver family maximizes the use of existing
fiber by combining transmit and receive signals onto a single fiber strand
freeing up the second strand in a fiber paid for additional data. Fiber Driver
does this for all speeds of Ethernet as well as ATM, SONET, SDH ("Synchronous
Digital Hierarchy"), a standard for synchronous data transmission on optical
media and the international equivalent of SONET, and FDDI. In addition, the
Fiber Driver family increases efficiency through a wave division multiplexing
("WDM") module.

        Fiber Optic Transceivers. These products consist of Ethernet and Fast
Ethernet and converters fiber optic transceivers that enable campus or
metropolitan deployment of Ethernet or Fast Ethernet networks through fiber
optic interconnection of LANs to a distance of over 100 km, and multimode to
single mode fiber for FDDI, ATM and SONET that extend the range of FDDI, ATM and
SONET via fiber.

        Token Ring. These products consist of multimedia Token Ring hubs with
fiber, coax, UTP and STP connectivity



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<PAGE>   13

which extends the distance between segments of Token Ring networks, and fiber
optic transceivers with multimode and single mode fiber, which allow flexible
implementation of IBM mid-range and mainframe terminal connectivity.

        Mid-range Connectivity. These products consist of Twinax Star panels,
multiplexers and repeaters which allow flexible implementation of IBM mid-range
and mainframe terminal connectivity.

        WAN Connectivity Solutions.

        The Company provides access solutions between LANs and WANs and ISPs.
Principal network access and Internetworking products are summarized below.

        EdgeBlaster. EdgeBlaster is a multi-function WAN access router that
combines industry-standard routing protocols with state-of-the-art access
technologies to allow branch and enterprise offices to connect users, employees
and remote offices using the latest digital techniques. EdgeBlaster advances WAN
access convergence technology by integrating a full range of WAN protocols for
Internet and intranet, digital modems, voice technologies and VPNs in a single
unit, replacing multi-device solutions such as routers and Remote Access
Services.

        Network 9000. Network 9000 enables the integration of routing,
switching, access serving and media concentration technologies. Primarily used
at the central site of corporate networks and at the edge of ISP networks, the
Network 9000 supports any combination of Ethernet, Token Ring, FDDI, ISDN, ATM,
local and remote bridge/router connectivity.

        Network 3000. The Network 3000 family of branch office routers provides
a modular, scalable solution geared toward accessing the corporate network and
the Internet from remote offices. Any combination of Ethernet, ISDN, Frame Relay
and asynchronous connections is available. RouteRunner is a low-cost ISDN router
designed to meet the WAN needs of small offices, home offices and branch offices
such as doctors' offices or sales offices.

        MAXserver. The MAXserver family of low-cost, scalable remote access
server solutions enables terminals, PCs, modems, printers and other asynchronous
devices to connect to the LAN and/or WAN. Ideal for supporting workgroups, the
stackable MAXserver offers 8-40 ports (and up to 280 ports in the modular
Network 9000 solution) to provide network access locally and remotely via
dial-up services. A variety of protocols are supported including TCP/IP, IPX,
and Appletalk. Security capabilities such as Kerberos, RADIUS, SecurID, password
and dial-back are also offered.

FIBER OPTIC COMPONENTS

        The Company offers a family of optical transmission components and
modules designed for transmission over fiber optic cable. These products address
transmission of voice, data and video across fiber and are also used in optical
fiber test equipment. The Company's products include discrete components, such
as laser diodes and LEDs and integrated components such as transmitters,
receivers and transceivers. The Company's components are used in data networks,
telecommunication transmission and access networks. Management believes that the
Company is benefiting from three major demand trends in this area: first, the
growth of the market, especially computer networking and the access networks, by
both LECs and cable TV providers; second, the convergence of datacom and
telecom; and third, as transmission speed and capacity grow, a larger portion of
all network traffic is transmitted via fiber optic versus copper wires.

        Discrete Components. Discrete components include laser diodes and LEDs.
Every fiber optic communication system utilizes semiconductor laser diodes or
LEDs as its source of optical power. Laser diodes and LEDs are solid state
semiconductor devices that efficiently convert electronic signals into pulses of
light of high purity and brightness. The Company believes that its lasers and
LEDs, which can carry data over distances in excess of 20 kilometers are among
the most powerful in their wavelength range in terms of optical power coupled
into single mode fiber.

        Integrated Components. The Company's integrated components include an
LED and laser based



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transmitter/receiver product line, designed for computer networking applications
and data link products designed for SONET and ATM transmission standards. This
product line consists of products compatible with single mode fiber optic cable,
which is more suitable for long distance and high-speed transmission than
multimode fiber optic cable. As most currently available data link modules are
designed for multimode fiber optic cable, the Company has designed its products
to be adaptable, providing for easy conversion from a multimode type data link
to a single mode optical fiber.

        The Company recently began shipping a transmitter/receiver product
incorporating WDM and two-way transmission over single fiber, thus increasing
bandwidth and facilitating the deployment of FTTC in residential networks.

        Products for the Access Network. The Company offers a line of products
that addresses the rapidly growing deployment of the access network. These
products include fiber optic transmission by both LECs and cable TV providers to
address the increasing demand for telephony, Internet access and interactive
cable TV services. The following is a brief description of these products.

        FTTC: Telephone and High-speed Internet Access and Cable TV. The Company
offers a bidirectional optical transmission and reception module for two-way
simultaneous transmission of telephony and data over one fiber instead of the
two fibers normally used to transmit and receive information. This product is
integrated into a system currently deployed by Bell South and other LECs.

        The Company believes it is one of the few companies that offers
subsystems for an FTTC solution that can be deployed economically within 500
feet of the subscriber. Because the final drop is within 500 feet of the
subscriber, the physical characteristics of the drop cable (the "baseband"
characteristics) permit signal transmission at rates up to 155 Mbps without
requiring the addition of passband modulation electronics such as ISDN or xDSL.
In addition, the Company's fiber solution requires only a single fiber (as
opposed to separate upstream and downstream fibers). As a result, the Company
believes that its fiber solution, in certain new network buildouts, such as in
apartment complexes, can be currently deployed at a cost comparable to the cost
of deploying a copper-based system. In addition, the Company believes that the
lifetime cost of its fiber solution system will be significantly lower than
copper-based systems due to the inherently lower maintenance requirements of
fiber-based systems.

        The Company has developed WDM technology for its fiber solution that
allows users to deliver simultaneous high-speed Internet access, analog and
digital broadcast and interactive video services. This technology allows the
delivery of high-speed Internet access using an Ethernet connection. Individual
users connect to the Internet using broadly available traditional LAN connection
devices such as an Ethernet network interface card. Access via the Company's
fiber solution provides a reliable "always on" connection to the Internet with
lower power requirements than other FTTC alternatives.

        Downstream Cable TV. The Company has recently engaged in new business
opportunities for linear lasers and receivers for cable TV and believes its
products are well positioned to serve this market. The Company further believes
that the upgrade of existing cable networks and the deployment of fiber by the
telephone companies to provide cable TV delivery services is expected to
increase the demand for the Company's products.

        Return Path Laser Transmitters. The Company's return path laser
transmitters send video, voice and data signals from the end user to the cable
TV operator. For interactive applications such as cable modems and Fast Internet
access, a cable network must have two-way optical transmitters and receivers in
place before those services can be offered. Most of today's cable networks still
have just a one-way downstream path.

        DFB Laser Module for Cable TV (Narrowcasting). The Company offers DFB
laser modules with high power and stable analog transmission which enable cable
TV operators to send different signals to individual end users, a capability
known as narrowcasting.



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PRODUCT DEVELOPMENT

        All of the Company's research and development projects are geared toward
technological advances with the goal of enabling the Company to introduce
innovative products early to market. New networking and fiber optic components
are constantly introduced to the market. This product introduction is driven by
a combination of rapidly evolving technology and standards, as well as changing
customer needs. MRV's research and product development strategy emphasizes
continuing evaluation of emerging trends and technical challenges in order to
identify new markets and product opportunities. The Company believes that its
success is due in part to its ability to maintain sophisticated technology
research programs while simultaneously focusing on practical applications to its
customers' strategic needs. The following is a brief description of products
under development.

        Red Sea product line. A growing number of Internet and application
service providers as well as cable companies are rolling out new Internet
network elements to provide lucrative services to a rapidly expanding subscriber
base. Reliable, scaleable and customized subscriber management is therefore
imperative for service provider customers. Recognizing this, MRV's Xyplex
subsidiary is developing the Open Subscriber Management System. The Red Sea
platform incorporates and integrates a number of technologies (IP Routing, ATM,
RAS) and interfaces (DS1/DS3, OC-3, Digital Modems, Ethernet) that have been
core competencies of Xyplex for many years. Feature sets of the Red Sea series
encompass the termination of broadband traffic flowing from cable modem
termination systems ("CMTS"), Digital Subscriber Line Aggregation Multiplexers
("DSLAM"), FTTC and Fiber to the Home Systems ("FTTH") and wireless systems.

        In Reach product line. In recent years, carrier central office
facilities ("CO's") that were historically occupied by a single service provider
are being occupied by an ever-expanding group of new service providers as a
result of co-location agreements. Often such service providers demand new
installations with many proprietary network elements and create a need for a
solution that offers simple remote access, monitoring and control. Similar
trends of expansion and consolidation are occurring with Cable TV and wireless
providers. Each of these networks must have secure monitoring and management
capabilities and these must be available to a large and diverse support force
using different access methods. The Xyplex, NEBS compliant, In-Reach product
line provides a customizable universal management platform, offering secure
remote management for console access, alarm scan and distributions as well as
environmental and power monitoring and control. Xyplex's comprehensive solutions
offered in this product line are unmatched by the mostly smaller competitors who
tend to focus in specific areas because of limited capabilities.

        OptiSwitch product line. A new generation of switching technology
designed to provide fiber-rich solutions for service providers and carriers in
large campus and metropolitan access networks, the OptiSwitch is designed to
support applications such as FTTC, FTTH and even Fiber to the Desk. This product
line consists of flexible chassis based layer 2 switches, plus a wide variety of
high-performance fiber optic modules, with a relatively high port density. The
OptiSwitch family of products include about 30 modules supporting Ethernet, fast
Ethernet and Gigabit Ethernet, with a variety of fiber optic connectors.
Advanced features include powerful optical transmission to support long distance
transmission of over 100 km, wire speed performance to support a fully loaded
configuration without degradation of speed, full network management and
redundancy.

        Zuma Products. The Zuma Switch Router platform combines a high
performing switch router engine with supercomputer processing power. The switch
router engine provides 256 Gbps of wire speed bandwidth to support
configurations of up to 126 Gigabit or 504 10/100Mb Ethernet ports. Zuma
introduces a concept of network survivability with its intelligent fault
tolerance and built-in redundancy. It is designed to meet customer requirements
for traffic prioritization and bandwidth allocation with its ATM-like Quality of
Service ("QoS") implementation and fine granularity of policy-based flow
control. The supercomputing component consists of up to 64 high speed CPUs. A
256 Gbps system bus provides the necessary data transfer rates required for
maximizing the multi-CPU performance. This processing power can be used to
implement a wide range of standard and customized applications such as
network-wide probing, subscriber and traffic management and high-end access
device services.

        New products under development in the area of fiber optics include
transmission products for cellular and personal communication systems which
allow transmission over fiber optic cable between sites and also fiber optic
components that will improve cable TV transmission and technologies that add
intelligence and manageability to optical layers.



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<PAGE>   16

        There can be no assurance that the technologies and applications under
development by the Company will be successfully developed, or, if they are
successfully developed, that they will be successfully marketed and sold to the
Company's existing and potential customers.

        At December 31, 1999, the Company had 208 employees dedicated to
research and product development. Research and development expenditures totaled
approximately $13,093,000, $25,817,000, and $35,319,000 for years ended December
31, 1997, 1998 and 1999, respectively.

CUSTOMERS

        The Company has sold its products worldwide to over 500 diverse
customers in a wide range of industries; primarily, data communications,
telecommunications and cable. The Company anticipates that these customers will
continue to purchase its products in the foreseeable future. No customer
accounted for more than 10% of the Company's revenues in 1997, 1998 or 1999
Current customers include:

                  OPTICAL NETWORKING & INTERNET INFRASTRUCTURE

COMPUTERS AND ELECTRONICS                   GOVERNMENT AGENCIES
  - AMP Incorporated                          - General Services Administration
  - Black Box Corporation                     - Ministry of Agriculture, Germany
  - Engel GmbH & Co.                          - Ministry of Justice, Netherlands
  - Fujitsu Ltd. (Japan)                      - Ministry of Social Security
                                                (Belgium)
  - Intel Corporation                         - MITI (Japan)
  - International Business Machines Corp.     - South African Police
  - Newbridge Networks                        - US Coast Guard

BANKING, FINANCE AND INSURANCE               ISP, ASP & OTHER
  - Bankgarot Sweden                          - ADP
  - Chase Manhattan Bank                      - America OnLine
  - GE Capital                                - Eastman Kodak
  - HBOC                                      - Sprint North Supply
  - Nationsbank                               - The Walt Disney Co.

                             FIBER OPTIC COMPONENTS

DATA COMMUNICATIONS                          TELECOMMUNICATIONS
  - Cabletron                                  - Broadband Network Inc.
  - Cisco Systems, Inc.                        - Ciena
  - Alcatel                                    - Marconi North America
  - Nortel Networks                            - Tellabs
  - Extreme Networks                           - Transcom

VIDEO AND VOICE COMMUNICATIONS               INSTRUMENTATION
  - Augat Communication Products Inc.          - EXFO
  - C-COR                                      - GN Nettest
  - General Instrument                         - Noyes Fiber Systems
  - Kathrein Werke                             - 3M
  - Texscan                                    - Wandel & Goltermann

MARKETING

        The Company markets and sells its products under the NBase
Communications, MRV Communications, West Hills LAN Systems, Xyplex and Xyplex
Networks brand names. Each product line has a dedicated sales and marketing
organization. At December 31, 1999, the Company had 329 employees engaged in
marketing and sales. The Company



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employs various methods, such as public relations, advertising, and trade shows
to build awareness of its products. Public relations activities are conducted
both internally and through relationships with outside agencies. Major public
relation activities are focused around new product introductions, corporate
partnerships and other events of interest to the market. The Company supplements
its public relations through media advertising programs and attendance at
various trade shows throughout the year, both in the United States and
internationally.

        The Company also establishes working relationships with trade analysts,
testing facilities and high visibility corporate and government accounts. Since
the results obtained by these organizations can often influence customers'
purchase decisions, a positive response from these organizations regarding the
Company's technology is important to product acceptance and purchase. Other
activities include attendance at technology seminars, preparation of competitive
analyses, sales training, publication of technical and educational articles,
maintenance of a Web site and direct mailing of Company literature. The Company
also believes that its participation in high-profile interactive projects such
as Bell South's FTTC project significantly enhances its reputation and name
recognition among existing and potential customers.

SALES, SUPPORT AND DISTRIBUTION

        The Company continually seeks to augment and increase its distribution
channels and sales force to accelerate its growth. Products are sold through the
Company's direct sales force, VARs, systems integrators, distributors,
manufacturer's representatives and OEM customers. The Company's sales and
distribution divisions are organized along five primary lines: direct sales,
OEM, domestic and international distributors, VARs and systems integrators and
manufacturer's representatives; and domestic and international distributors.

        Direct Sales. The Company employs a worldwide direct sales force
primarily to sell its products to large OEM accounts and to a lesser extent to
end users of the Fibronics product line. MRV believes that a direct sales force
can best serve large customers by allowing salespeople to develop strong,
lasting relationships which can effectively meet the customers' needs. The
direct sales staff is located across the United States, Europe and Israel. The
acquisition of the Fibronics Business more than doubled the Company's sales
force from the period immediately preceding the acquisition and the Xyplex
Acquisition increased the total sales force again by over 70% from the period
immediately preceding the acquisition. The largest portion of the increase from
the Xyplex Acquisition was to the Company's domestic sales force which increased
over 175% from the level existing immediately preceding the acquisition.

        Domestic and International Distributors. The Company works with both
domestic and international distributors. Geographic exclusivity is normally not
awarded unless the distributor has exceptional performance. Distributors must
successfully complete the Company's training programs and provide system
installation, technical support, sales support and follow-on service to local
customers. Generally, distributors have agreements with a one year term subject
to automatic renewal unless otherwise canceled by either party. In certain cases
with major distributors, the agreements are terminable on 30 days' notice. The
Company uses stocking distributors, which purchase the Company's product and
stock it in their warehouse for immediate delivery, and non-stocking
distributors, which purchase the Company's product after the receipt of an
order. Internationally, the Company sells through approximately 80 distributors
in Asia, Africa, Europe, Australia, the Middle East, Canada and Latin America.

        Value-Added Resellers and Systems Integrators. MRV uses a select group
of VARs and system integrators in the U.S. which are generally selected for
their ability to offer the Company's products in combination with related
products and services, such as system design, integration and support. Such
specialization allows the Company to penetrate targeted vertical markets such as
telecommunications and cable TV. Generally, the Company uses a two-tier
distribution system to reach a broader range of customers, however VARs may
purchase the product directly from the Company if the volume warrants a direct
relationship.

        Through the Xyplex Acquisition, the Company added a network of over
300 VARs to its distribution channel. The Company seeks to build dedication and
loyalty from its resellers by offering special programs, the most recent
providing its reseller base of companies dedicated marketing resources and an
exclusive training and support program to help them grow their business.



17
<PAGE>   18

        Manufacturers' Representatives. To supplement the Company's direct sales
efforts, manufacturer's representatives are assigned by territory in the United
States and work exclusively on commission.

        Customer Support and Service. The Company is committed to providing
strong technical support to its customers. MRV operates a customer service
group, and provides support through its engineering group, sales staff,
distributors, OEMs and VARs. Customer support personnel are currently located at
the Company's offices in California, Massachusetts, Maryland, Germany, England,
Italy and Israel.

        International Sales. International sales accounted for approximately
60%, 59% and 58% of the Company's net revenues in 1997, 1998 and 1999,
respectively.

MANUFACTURING

        The Company outsources the board-level assembly, test and quality
control of its computer networking products to third party contract
manufacturers, thereby allowing it to react quickly to market demand, to avoid
the significant capital investment required to establish and maintain
manufacturing and assembly facilities and to concentrate its resources on
product design and development. Final assembly, burn-in, final testing and
pack-out are performed by the Company and selected third-party contract
manufacturers to maintain quality control. The Company's manufacturing team is
experienced in advanced manufacturing and testing, in engineering, in ongoing
reliability/quality assurance and in managing third party contract
manufacturer's capacity, quality standards and manufacturing process. Risks
associated with the use of independent manufacturers include unavailability of
or delays in obtaining adequate supplies of products and reduced control of
manufacturing quality and production costs. If the Company's contract
manufacturers fail to deliver products in the future on a timely basis, or at
all, it would be extremely difficult for the Company to obtain adequate supplies
of products from other sources on short notice. There can be no assurance that
the Company's third party manufacturers will provide adequate supplies of
quality products on a timely basis, or at all. The Company could outsource with
other vendors; however, such a change in vendors may require significant time
and result in shipment delays and expenses. The inability to obtain such
products on a timely basis, the loss of a particular vendor or a change in the
terms and conditions of the outsourcing would have a material adverse effect on
the Company's business, operating results and financial condition.

        The Company relies extensively on its own production capability for
critical semiconductor lasers and LEDs used in its products. The Company's
optical transmission production process involves (i) a wafer processing facility
for semiconductor laser diode and LED chip manufacturing under stringent and
accurate procedures using state-of-the-art wafer fabrication technology, (ii)
high precision electronic and mechanical assembly, and (iii) final assembly and
testing. Relevant assembly processes include die attach, wirebond, substrate
attachment and fiber coupling. The Company also conducts tests throughout its
manufacturing process using commercially available and in-house built testing
systems that incorporate proprietary procedures. The Company performs final
product tests on all of its products prior to shipment to customers. Many of the
key processes used in the Company's products are proprietary; and, therefore,
many of the key components of the Company's products are designed and produced
internally. Because the Company manufactures these and other key components of
its products at its own facility and such components are not readily available
from other sources, any interruption of the Company's manufacturing process
could have a material adverse effect on the Company's operations. Furthermore,
the Company has a limited number of employees dedicated to the operation and
maintenance of its wafer fabrication equipment, the loss of any of whom could
result in the Company's inability to effectively operate and service such
equipment. Wafer fabrication is sensitive to a wide variety of factors,
including variations and impurities in the raw materials, difficulties in the
fabrication process and performance of the manufacturing equipment. There can be
no assurance that the Company will be able to maintain acceptable production
yields and avoid product shipment delays. In the event adequate production
yields are not achieved resulting in product shipment delays, the Company's
business, operating results and financial condition could be materially
adversely affected. The Company believes that it has sufficient manufacturing
capacity for growth in the coming years. In addition, at various times there
have been shortages of parts in the electronics industry, and certain critical
components have been subject to limited allocations. Although shortages of parts
and allocations have not had a material adverse effect on the Company's results
of operations, there can be no assurance that any future shortages or
allocations would not have such an effect.



18
<PAGE>   19

        The Company is subject to a variety of federal, state, and local
governmental laws and regulations related to the storage, use, emission,
discharge, and disposal of toxic, volatile or otherwise hazardous chemicals used
in the manufacturing process. There can be no assurance that environmental laws
and regulations will not result in the need for additional capital equipment or
other requirements. Further, such laws and regulations could restrict the
Company's ability to expand its operations. Any failure by the Company to obtain
required permits for, control of use of, or adequately restrict the discharge,
emission or release of, hazardous substances under present or future laws and
regulations could subject the Company to substantial liability or could cause
its manufacturing operations to be suspended. Such liability or suspension of
manufacturing operations could have a material adverse effect on the Company's
operating results. To date, such laws and regulations have not had a material
adverse effect on the Company's operating results.

COMPETITION

        The communications equipment and component industry is intensely
competitive. The Company competes directly with a number of established and
emerging computer, communications and networking device companies. Direct
competitors in optical networking and Internet infrastructure, Cisco Systems
Inc., Lucent Technologies, Nortel Networks, and 3Com Corporation. Direct
competitors in fiber optic components include AMP Incorporated, Fujitsu,
Hewlett-Packard Company, Lucent Technologies Inc., Mitsubishi, NEC Electronics
Inc., Ortel Corporation and Siemens Components, Inc. Many of the Company's
competitors have significantly greater financial, technical, marketing,
distribution and other resources and larger installed customer bases than MRV.
Several of these competitors have recently introduced or announced their
intentions to introduce new competitive products. Many of the larger companies
with which the Company competes offer customers a broader product line which
provides a more comprehensive networking solution than the Company's products.

        In addition to competitors competing with products that perform similar
functions there are also several alternative network technologies. For example,
in the local access market, the Company's products compete with telephone
network technology known as "ADSL." In this technology, digital signals are
transmitted through existing telephone lines from the central office to the
home. The Company also expects that competitive pricing pressures could result
in price declines for the Company's and its competitors' products. Such
increased competition, if not accompanied by decreasing costs, could result in
reduced margins and loss of market share which would materially and adversely
affect the Company's business, operating results and financial condition.

        The communications industry has become increasingly concentrated in
recent years as a result of consolidation. This consolidation is likely to
permit the Company's competitors to devote significantly greater resources to
the development and marketing of new competitive products and the marketing of
existing competitive products to their larger installed bases. The Company
expects that competition will increase substantially as a result of these and
other industry consolidations and alliances, as well as the emergence of new
competitors.

PROPRIETARY RIGHTS

        To date, the Company has relied principally upon copyrights and trade
secrets to protect its proprietary technology. The Company generally enters into
confidentiality agreements with its employees and key suppliers and otherwise
seeks to limit access to and distribution of the source code to its software and
other proprietary information. There can be no assurance that such steps will be
adequate to prevent misappropriation of the Company's technology or that a third
party will not independently develop technology similar or superior to the
Company's technology. The Company has recently filed two patent applications and
a provisional patent application in the United States. With the Xyplex
Acquisition, MRV acquired five additional provisional patent applications filed
by Xyplex on certain aspects of its technology. There can be no assurance that
patents will be issued with respect to the pending applications or that, if
issued, such patents will be upheld as valid or will prevent the development of
competitive products. In addition, the laws of some foreign countries may not
permit the protection of the Company's proprietary rights to the same extent as
do the laws of the United States.

        On December 27, 1996 Datapoint Corporation ("Datapoint") brought an
action against NBase Communications,



19
<PAGE>   20

Inc., a subsidiary of the Company ("NBase"), and others alleging infringement of
two of Datapoint's patents. The other defendants include Dayna Communications,
Inc., Sun Microsystems, Inc., Adaptec, Inc., International Business Machines
Corporation, Lantronix and SVEC America Computer Corporation. Intel and Cisco
Systems, Inc. have also had actions brought against them by Datapoint with
respect to the same two patents. The Company is cooperating with several of
these companies in pursuit of common defenses and believes it has meritorious
defenses to this action. If a conclusion unfavorable to the Company is reached,
however, Datapoint's claim could materially and adversely affect the business,
operating results and financial condition of the Company.

        The Company has received notices from third party alleging possible
infringement 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
Lucent, Ortel, Rockwell and the Lemelson Foundation. The Company does not
believe that any of its products or processes violates any of the patents
asserted by these parties and the Company further believes that it has
meritorious defenses if any legal action is taken by any of these parties.
However if one or more of these parties was to assert a claim and gain a
conclusion unfavorable to the Company such claims could materially and adversely
affect the business, operating results and financial condition of the Company.

        In the future, litigation may be necessary to protect trade secrets and
other intellectual property rights owned by the Company, to enforce any patents
issued to the Company, to defend the Company against claimed infringement of the
rights of others and to determine the scope and validity of the proprietary
rights of others. Any such litigation could be costly and a diversion of
management's attention, which could have a material adverse effect on the
Company's business, operating results and financial condition. An adverse
determination in such litigation could further result in the loss of the
Company's proprietary rights, subject the Company to significant liabilities,
require the Company to seek licenses from third parties or prevent the Company
from manufacturing or selling its products, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company typically has agreed to indemnify its customers and key
suppliers for liability incurred in connection with the infringement of a third
party's intellectual property rights.

EMPLOYEES

        As of December 31, 1999, the Company had 996 full-time employees,
including 5 executive officers, 368 in production, 329 in marketing and sales,
208 in research and development and 86 in general administration. None of the
Company's employees are represented by a union or governed by a collective
bargaining agreement, and the Company believes its relationship with its
employees is good.



20
<PAGE>   21

ITEM 2. PROPERTIES

        The Company's principal administrative, sales and marketing, research
and development and manufacturing facility is located in Chatsworth, California.
The facility covers approximately 17,700 square feet and is leased from an
unaffiliated third party at an annual base rent of approximately $150,000
through the end of the lease term in February 2004. In addition, the Company
leases space in buildings near its primary facility in Chatsworth. One of these
facilities, consisting of approximately 49,900 square feet is leased from an
unaffiliated third party at an annual base rent of approximately $455,000 with a
term expiring in July 2004. A second facility, consisting of approximately
20,950 square feet, is leased from an unaffiliated third party at an annual base
rental of approximately $131,000 with a term expiring in January 2003. A third
facility covers approximately 12,800 square feet and is leased from an
unaffiliated third party at an annual base rent of approximately $102,500
through March 2002.

        Xyplex occupies a facility in Littleton, Massachusetts, consisting of
approximately 101,000 square feet under a lease that expires in September 2003.
Annual base rent under this lease is approximately $1,061,00 through September
2001 and $1,086,000 thereafter through expiration of the lease. Most of the
square footage is used for manufacturing, engineering, and product development,
while the remainder is used for sales, marketing, and other general and
administrative support.

        The Company's administrative, sales and marketing, research and
development and manufacturing operations in Israel are located in Yokneam,
Israel in facilities that cover approximately 23,400 square feet, are leased for
a total annual base rent of approximately $206,000 for a lease term expiring in
January 2002.

        The Company also occupies space under a capital lease with an
unaffiliated third party in Milan, Italy which it uses for sales offices and
warehousing. Annual payments under the lease are approximately $220,000 and the
lease expires in March 2004.

        The Company believes that its present facilities are sufficient to meet
its current needs and that adequate additional space will be available for lease
when required.




21
<PAGE>   22

ITEM 3. LEGAL PROCEEDINGS

        On December 27, 1996, Datapoint brought an action against NBase and
several other defendants in the United States District Court for the Eastern
District of New York alleging infringement of two of Datapoint's patents related
to LANs. More particularly Datapoint claims relate to allegedly improved LANs
which interoperatively combine additional enhanced capability and/or which
provide multiple different operational capabilities. In the same lawsuit,
Datapoint alleges that other defendants including Dayna Communications, Inc.,
Sun Microsystems, Inc., Adaptec, Inc., International Business Machines
Corporation, Lantronix and SVEC America Computer Corporation have infringed the
same two patents. The Company has been advised that several other companies,
including Intel Corporation and Cisco Systems, Inc. have also had actions
brought against them by Datapoint with respect to the same two patents. The
action against NBase and its codefendants seeks, among other things, an
injunction against the manufacture or sale of products which embody the
inventions set forth in the two patents and single and treble damages for the
alleged infringement. Datapoint's complaint also seeks to have the court
determine that the named defendants shall serve as representatives of a
defendant class of manufacturers, vendors and users of products allegedly
infringing on Datapoint's claimed patents from which defendant class Datapoint
seeks the same relief as from the individual defendants. In February 1999, the
court entered judgment in favor of the defendants and plaintiff filed a notice
of appeal. The Company is cooperating with several of the defendants in pursuit
of common defenses and believes it has meritorious defenses to this action. If a
conclusion unfavorable to the Company is reached, however, Datapoint's claim
could materially affect the business, operating results and financial condition
of the Company.

        The Company has received notices from third party alleging possible
infringement 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
Lucent, Ortel, Rockwell and the Lemelson Foundation. The Company does not
believe that any of its products or processes violates any of the patents
asserted by these parties and the Company further believes that it has
meritorious defenses if any legal action is taken by any of these parties.
However if one or more of these parties was to assert a claim and gain a
conclusion unfavorable to the Company such claims could materially and adversely
affect the business, operating results and financial condition of the Company.



22
<PAGE>   23

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

        On December 3, 1999, the Company held its Annual Meeting of Shareholders
(the "Annual Meeting") at which, among other things, the Company's entire board
of directors was elected. The name of each director elected at the Annual
Meeting, and the number of votes cast for and against (or withheld) were as
follows:

                                 Number of Votes


<TABLE>
<CAPTION>
          Name                           For               Against or Withheld
          ----                           ---               -------------------
<S>                                  <C>                  <C>
        Noam Lotan                    21,309,155                   27,960

        Shlomo Margalit               21,309,155                   27,960

        Igal Shidlovsky               21,309,155                   27,960

        Guenter Jaensch               21,309,155                   27,960

        Baruch Fischer                21,309,155                   27,960

        Daniel Tsui:                  21,309,155                   27,960
</TABLE>

        The other matters voted upon at the meeting and the number of votes cast
for, against or withheld, including abstentions and broker non-votes, as to each
matter were as follows:

<TABLE>
<CAPTION>
               PROPOSAL                                                                FOR             AGAINST            ABSTAIN
               --------                                                             ----------        ---------           ------
<S>                                                                                 <C>               <C>                 <C>
        To approve amendments to the Company's 1997 Incentive and
        Nonstatutory Stock Option Plan To increase by 600,000 shares the
        number of shares of Common Stock that can be optioned and sold
        under such Stock Option Plan                                                18,615,185        2,629,203           92,727

        To ratify the selection of Arthur Andersen LLP as independent
        auditors for the Company for the fiscal year ending December 31, 1999       21,260,711           39,930           36,474
</TABLE>



23
<PAGE>   24
                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The Company's Common Stock is traded in the over-the-counter market and
has been included in the Nasdaq National Market since February 28, 1994 under
the symbol "MRVC." The following table sets forth the high and low closing sale
prices of the Common Stock for the periods indicated as reported by The Nasdaq
National Market.


<TABLE>
<CAPTION>
                                                   HIGH                  LOW
                                                 ---------            ---------
<S>                                              <C>                  <C>
        1998:
          First Quarter ..........               $   29.00            $   21.13
          Second Quarter .........                   28.38                19.38
          Third Quarter ..........                   24.00                 5.06
          Fourth Quarter .........                    9.06                 5.13

        1999:
          First Quarter ..........               $    9.88            $    5.94
          Second Quarter .........                   14.06                 5.93
          Third Quarter ..........                   24.81                12.63
          Fourth Quarter .........                   65.63                19.44
</TABLE>

     At March 20, 2000, the Company had 211 stockholders of record, as indicated
on the records of the Company's transfer agent, who held, management believes,
for approximately 14,010 beneficial holders.

        The Company has never declared or paid cash dividends on the Common
Stock since its inception. The Company currently intends to retain all of its
earnings, if any, for use in the operation and expansion of its business and
does not intend to pay any cash dividends to its stockholders in the foreseeable
future.




24
<PAGE>   25

ITEM 6. SELECTED FINANCIAL DATA

        The following selected statement of operations data for the three years
in the period ended December 31, 1999 and the balance sheet data as of December
31, 1998 and 1999 are derived from the financial statements and notes thereto
included elsewhere herein audited by Arthur Andersen LLP, independent public
accountants, as set forth in their report included elsewhere herein. The
selected statement of operations data for the two years in the period ended
December 31, 1996 and the balance sheet data as of December 31, 1994, 1995 and
1996 were derived from audited financial statements of the Company not included
herein. The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company, including the notes
thereto, included elsewhere in this Report.

CONSOLIDATED STATEMENT OF OPERATIONS DATA:

<TABLE>
<CAPTION>
                                                                                   Year ended December 31,
                                                             -----------------------------------------------------------------
                                                               1995           1996         1997          1998          1999
                                                             ---------     ---------     ---------     ---------     ---------
                                                                     (In thousands, except per share amounts)
<S>                                                          <C>           <C>           <C>           <C>           <C>
Revenues, net ...........................................    $  39,202     $  88,815     $ 165,471     $ 264,075     $ 288,524
Cost of goods sold ......................................       22,608        51,478        94,709       162,284       197,442
Write-down of discontinued products .....................           --            --            --         3,101        13,761
Research and development expenses .......................        4,044         8,201        13,093        25,817        35,319
Selling, general and administrative expenses ............        6,799        14,025        27,365        56,753        71,757
                                                             ---------     ---------     ---------     ---------     ---------
Operating income (loss) before purchased technology in
progress and restructuring costs ........................        5,751        15,111        30,304        16,120       (29,755)
Purchased technology in progress(1) .....................        6,211        17,795            --        20,633            --
Restructuring costs(1) ..................................        1,465         6,974            --        15,671            --
                                                             ---------     ---------     ---------     ---------     ---------
Operating income (loss) .................................       (1,925)       (9,658)       30,304       (20,184)      (29,755)
Other income (expense), net .............................          654           153         2,744         6,819         4,822
Interest expense(2) .....................................           --        (4,357)         (843)       (2,480)       (4,500)
                                                             ---------     ---------     ---------     ---------     ---------
Income (loss) before provision for income taxes, minority
interests and extraordinary item ........................       (1,271)      (13,862)       32,205       (15,845)      (15,672)
Provision (credit) for income taxes .....................            2        (4,404)        9,474         5,707        (2,153)
Minority interests ......................................           --           196           146         1,345          (610)
Gain on repurchase of convertible notes, net of tax .....           --            --            --         2,791            --
                                                             ---------     ---------     ---------     ---------     ---------
Net income (loss)(1) ....................................    $  (1,273)    $  (9,654)    $  22,585     $ (20,106)      (12,909)
                                                             =========     =========     =========     =========     =========
Net income (loss)  per share - Basic(1) .................    $   (0.07)    $   (0.49)    $    0.95     $   (0.76)        (0.48)
                                                             =========     =========     =========     =========     =========
Net income (loss)  per share - Diluted(1) ...............    $   (0.07)    $   (0.49)    $    0.88     $   (0.76)        (0.48)
                                                             =========     =========     =========     =========     =========
Shares used in per share calculation - Basic ............       18,377        19,739        23,670        26,532        26,960
Shares used in per share calculation - Diluted ..........       18,377        19,739        25,734        26,532        26,960
</TABLE>

CONSOLIDATED BALANCE SHEET DATA:

<TABLE>
<CAPTION>
                                                                                        At December 31,
                                                             -----------------------------------------------------------------
                                                                1995          1996          1997          1998          1999
                                                             ---------     ---------     ---------     ---------     ---------
                                                                                  (In thousands)
<S>                                                          <C>           <C>           <C>           <C>           <C>
Working capital .........................................    $  22,019     $  56,973     $ 111,559     $ 115,318     $ 106,425
Total assets ............................................       33,307        96,943       236,236       320,192       314,533
Long-term  debt, net of current portion .................          271        18,892         2,853        94,317        94,409
Stockholders' equity ....................................       25,258        41,771       189,969       174,429       166,815
</TABLE>


(1) Purchased technology in progress and restructuring charges were incurred as
a result of acquisitions. Purchased technology in progress for the year ended
December 31, 1995 was for research and development ("R&D") projects in progress
at the time of acquisition of assets from Ace and Galcom. Restructuring costs
during the year ended December 31, 1995 were associated with a plan adopted by
the Company in 1995 calling for the merger of the newly acquired subsidiaries
and the Company's LAN product division. The plan also called for the closure of
some facilities, termination of redundant employees and cancellation of
representation agreements. Purchased technology in progress for the year ended
December 31, 1996 was in conjunction with the Fibronics Acquisition.
Restructuring costs during the year ended December 31, 1996 were associated with
a plan adopted by the Company on September 30, 1996 calling for the reduction of
workforce, closing of certain facilities, retraining of certain employees and
elimination of particular product lines due to this acquisition. Purchased
technology in progress for the year ended December 31, 1998 was in conjunction
with the Xyplex Acquisition. Restructuring costs during the year ended December
31, 1998 were associated with a plan adopted by the Company in March 1998
calling for the reduction of workforce, closing of certain facilities,
elimination of particular product lines, settlement of distribution agreements
and other costs.

(2) Interest expenses for the years ended December 31, 1996 and 1997 were in
connection with the private placement of $30 million principal amount of
Debentures, the proceeds from which the Company used to finance the cash portion
of the Fibronics Acquisition. Interest expenses for the year ended December 31,
1998 and 1999 were connected with the private placement of $100 million
principal amount of 5% Convertible Subordinated Notes.

25
<PAGE>   26

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

        This Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following and elsewhere in this Report. The
following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Report.

GENERAL

        Since its inception in 1988, the Company has manufactured and marketed
semiconductor optical transmission products for the fiber optics communications
industry. In 1993, the Company expanded its product line to include products
incorporating Ethernet switching technology that improved network throughput and
enhanced efficiency of LANs and introduced its first switch marketed under the
NBase trademark in the fourth quarter of 1993. During 1994, the Company expanded
commercial shipments of its LAN switching products. In 1995, the Company
augmented its networking products with the acquisitions of certain assets of
Galcom and Ace, which resulted in charges of $6,211,000 and $1,465,000 for
purchased technology in progress and restructuring, respectively. Net revenues
from sales of networking products and semiconductor optical transmission
products were approximately 76.1% and 23.9%, respectively, during the year ended
December 31, 1997,approximately 81.5% and 18.5%, respectively, during the year
ended December 31, 1998 and approximately 77.1% and 22.9%, respectively, during
the year ended December 31, 1999.

        In September 1996, the Company completed the Fibronics Acquisition,
acquiring assets related to Fibronics' computer networking and
telecommunications businesses in Germany, the United States, the United Kingdom,
the Netherlands and Israel. The assets acquired include Fibronics' technology in
progress and existing technology, its marketing channels, its GigaHub family of
computer networking products and other rights. This acquisition also resulted in
charges in the amount $17,795,000 and $6,974,000 for purchased technology in
progress and restructuring, respectively. Through the restructuring of September
30, 1996, the Company expected to improve Fibronics' operations in, among
others, the following key areas: (i) the elimination of unprofitable products
and operations that appeared detrimental to overall profit margins; (ii) the
reduction of payroll by eliminating redundant staff; (iii) the merger and
relocation of research and development resources to place qualified individuals
on the most appropriate projects; (iv) and the reduction of overhead costs by
the closure of redundant facilities. The costs incurred to complete the research
and development in process at the time of the Fibronics Acquisition have not had
a material effect on MRV's research and development expenses as a percentage of
net sales. These projects were completed as of 1997.

     In September 1996, the Company completed a private placement of an
aggregate of $30,000,000 principal amount of 5% convertible subordinated
debentures due August 6, 1999 (the "Debentures"). Proceeds from this private
placement were used to purchase the Fibronics Business. The Debentures were
convertible into Common Stock of the Company at any time at the option of the
holders at a discount from the market price of the Common Stock at the time of
conversion that decreased over the life of the Debentures until it reached a
floor. The Company recorded a non-recurring, non-cash charge to its results of
operations for the years ended December 31, 1996 and 1997 related to the
issuance of the Debentures in the amounts of $4,357,000 and $843,000,
respectively. The outstanding principal and accrued interest on the Debentures
were paid in full at April 4, 1997 through conversion into Common Stock. See
"Liquidity and Capital Resources" below.

        On January 30, 1998, MRV completed the Xyplex Acquisition from
Whittaker. The purchase price paid to Whittaker consisted of $35,000,000 in cash
and 3-year warrants to purchase up to 421,402 shares of common stock of the
Company at an exercise price of $35 per share. During the year ended December
31, 1995, the period from January 1,



26
<PAGE>   27

1996 through April 9, 1996 (the day Xyplex was acquired by Whittaker), the
period from April 10, 1996 through October 31, 1996 and the fiscal year ended
October 31, 1997, Xyplex reported net revenues of $107,617,000, $28,100,000,
$52,021,000, and $75,663,000, respectively, and net losses of $37,360,000,
$2,269,000, $13,353,000 and $80,309,000, respectively. In connection with the
Xyplex Acquisition, the Company incurred charges of $20,633,000 and $15,671,000
for purchased technology and restructuring.

        MRV originally recorded charges of $30,571,000 related to research and
development projects in progress at the time of the Xyplex Acquisition. Although
MRV reported these charges and its first, second and third quarter results of
1998 in accordance with established accounting practice and valuations of
Xyplex' purchased technology in progress provided by independent valuators,
these valuations have been reconsidered in light of very recent Securities and
Exchange Commission guidance regarding valuation methodology. Based on this new
valuation methodology, MRV has reduced the value of the purchased technology in
progress related to the Xyplex Acquisition to $20,633,000 and increased the
amount of goodwill by $9,938,000. This has resulted in additional charges during
1998 of $759,000 for intangibles, including goodwill, resulting from the Xyplex
Acquisition and will result in charges of approximately $828,000 annually as
these intangibles are amortized through January 2010.

        Recent actions and comments from the Securities and Exchange Commission
have indicated that the Commission is reviewing the current valuation
methodology of purchased in-process research and development related to business
combinations. Unlike the case of many other companies, the Commission has not
notified MRV of any plans to review MRV's methodology for valuing purchased
in-process research and development. The Company's action to reconsider that
valuation of in process research and development related to the Xyplex
Acquisition has been voluntary. The Company believes it is in compliance with
all of the rules and related guidance as they currently exist. However, there
can be no assurance that the Commission will not review MRV's accounting for the
Xyplex Acquisition and seek to apply retroactively new guidance and further
reduce the amount of purchased in-process research and development expensed by
the Company. This would result in an additional restatement of previously filed
financial statements of the Company and could have a material adverse impact on
financial results for periods subsequent to the acquisition.

        The Company's international sales are not concentrated in any specific
country. The estimated operating profit from international sales for the years
ended December 31, 1997, 1998 and 1999 were $18,113,000, $11,733,000 and $[ ]
respectively. At December 31, 1997, 17.1% of the Company's assets were located
in the Middle East. At December 31, 1998, and 1999, the Company's assets in the
Middle East were not material. At December 31, 1997, 1998 and 1999 14.4%, 20.7%
and [ ]%, respectively, of the Company's assets were located in the European
Community. Except for such assets, there were no significant assets located in
geographic regions outside of the U.S. at December 31, 1997, 1998 or 1999.


RESULTS OF OPERATIONS

        The following table sets forth, for the periods indicated, statements of
operations data of the Company expressed as a percentage of net revenues.


<TABLE>
<CAPTION>
                                                               Year ended December 31,
                                                             ---------------------------
                                                             1997        1998       1999
                                                             -----      -----      -----
<S>                                                          <C>        <C>        <C>
Revenues, net ...........................................    100.0%     100.0%     100.0%
Cost of goods sold ......................................     57.2       62.6       68.4
Research and development expenses .......................      7.9        9.8       12.2
Selling, general and administrative expenses ............     16.5       21.5       24.9
                                                             -----      -----      -----
</TABLE>





27
<PAGE>   28


<TABLE>
<S>                                                        <C>          <C>         <C>
Operating income (loss) before purchased technology in
  progress and restructuring costs ......................     18.3        6.1       (5.4)
Purchased technology in progress ........................       --        7.8         --
Restructuring costs .....................................       --        5.9         --
                                                             -----      -----      -----
Operating income (loss) .................................     18.3       (7.6)      (5.5)
Other income, net .......................................      1.7        2.6        0.3
Interest expense related to convertible debentures/notes      (0.5)      (0.9)      (1.6)
                                                             -----      -----      -----
Income (loss) before provision for income taxes, minority
  interests and extraordinary item ......................     19.5       (6.0)      (3.5)
Provision (credit) for income taxes .....................      5.7        2.2       (0.7)
Minority interests ......................................     (0.1)      (0.5)      (0.2)
Gain on repurchase of convertible notes, net of tax .....       --        1.1         --
                                                             -----      -----      -----
Net income (loss) .......................................     13.6%      (7.6)%     (4.5)%
                                                             =====      =====      =====
</TABLE>


YEARS ENDED DECEMBER 31, 1999 AND 1998

        Revenues. Revenues for the year ended December 31, 1999 were
$288,524,000, compared to $264,075,000 for the year ended December 31, 1998, an
increase of 9.3%. Revenues from sales of networking products and optical
transmission products were 77.1% and 22.9%, respectively, of total revenues
during the year ended December 31, 1999 as compared to 81.5% and 18.5%,
respectively, of total revenues during the year ended December 31, 1998.
Revenues increased as a result of greater marketing efforts and greater market
acceptance of the Company's products, both domestically and internationally.
International sales accounted for approximately 57.7% of revenues for year ended
December 31, 1999, as compared to 59.3% of revenues for year ended December 31,
1998.

        Gross Profit. Gross profit for the year ended December 31, 1999 was
$91,082,000 compared to $98,690,000 for the year ended December 31, 1998. Gross
Profit as a percentage of revenues decreased from 37.4% during the year ended
December 31, 1998 to 31.6% for the year ended December 31, 1999 as a result of
the Company's decision to exit the LAN switching business. During the last two
years the Company endured intense price competition from large competitors. The
Company had planned to compensate for such price competition by introducing new
lower cost products during 1998. The Company did begin shipping such products
during the last quarter of 1998 however the commoditization of these products
and the volume manufacturing advantages of larger competitors were too difficult
for the Company to overcome. Therefore the Company decided to exit the LAN
switching business and in connection with this decision recorded a charge of
$13,761,000 primarily to write off inventory in connection with this decision.

        Research and Development. For the years ended December 31, 1999 and
1998, research and development expenses ("R&D") expenses were $35,319,000 and
$25,817,000, respectively. R&D expenses as a percentage of revenues increased
from 9.8% of revenues during year ended December 31, 1998, to 12.2% of revenues
for year ended December 31, 1999. This increase was primarily caused by
additional development projects commenced during the year and associated
personnel costs as well as increased expenses resulting from personnel added to
existing projects. The Company intends to continue to invest in the research and
development of new products. Management believes that the ability of the Company
to develop and commercialize new products is a key competitive factor.

        Selling, General and Administrative. For the years ended December 31,
1999 and 1998, selling, general and administrative ("SG&A") expenses increased
to $71,757,000 from $56,753,000. As a percentage of revenues, SG&A increased
from 21.5% for the year ended December 31, 1998 to 24.9% for the year ended
December 31, 1999. The increases in SG&A expense, both in dollar amounts and as
a percentage of sales were due primarily to substantially increased marketing
efforts as well as the addition of personnel and overhead costs in additional
and expanded locations.

        Purchased Technology in Progress and Restructuring Costs. Purchased
technology in progress for the year ended December 31, 1998 was $20,633,000. The
purchased technology in 1998 was related to R&D projects of Xyplex in progress
at



28
<PAGE>   29

the time of the Xyplex Acquisition on January 30, 1998, which had not yet
reached technological feasibility and for which the Company had no alternative
future use. Restructuring costs during the year ended December 31, 1998 were
$15,671,000. The restructuring costs in 1998 were associated with a plan adopted
by the Company in March 1998 calling for the reduction of workforce, closing of
certain facilities, elimination of particular product lines, settlement of
distribution agreements and other costs. The restructuring costs incurred in
first quarter of 1998 as a result of the Xyplex Acquisition was offset by a
restructuring credit of $7,523,000 booked during the last quarter of 1998 in
connection with Company's decision to consolidate the Xyplex and NBase
organizations. This credit principally resulted from the renegotiation of
Xyplex' lease in Littletown, Massachusetts and a reevaluation reducing the
anticipated cost of discontinuing some of Xyplex' legacy products. The Company
did not incur these charges or receive a similar credit in 1999.

        On June 26, 1998, the Company sold $100,000,000 principal amount of 5%
convertible subordinated notes due 2003 (the "Notes") in a 144A private
placement to qualified institutional investors at 100% of their principal
amount, less a selling discount of 3% of the principal amount. In November 1998
the Company repurchased $10,000,000 face amount of these notes. The Company
recorded a gain of $2,791,000, net of tax, when it repurchased the notes at a
discount from par during the last quarter of 1998. The outstanding notes
resulted in interest expense of $2,480,000 for the year ended December 31, 1998
and $4,500,000 for the year ended December 31, 1999.

        Net Loss. The Company reported a net loss of $12,909,000 for the year
ended December 31, 1999. This compares to a net loss of $20,106,000 for the year
ended December 31, 1998. Net income for the year ended December 31, 1999 would
have been $852,000, excluding charges of $13,761,000 associated with the
decision to exit the LAN switching business compared to net income $14,869,000
for the year ended December 31, 1998 excluding charges related to the Xyplex
Acquisition of $20,633,000 for purchased technology in progress and $15,671,000
for restructuring and the $3,101,000 write-down of discontinued products and a
$4,430,000 gain on the repurchase of the Notes during the fourth quarter of
1998.

YEARS ENDED DECEMBER 31, 1998 AND 1997

        Revenues. Revenues for the year ended December 31, 1998 were
$264,075,000, compared to $165,471,000 for the year ended December 31, 1997, an
increase of 59.6%. Revenues from sales of networking products and optical
transmission products were 81.5% and 18.5%, respectively, of total revenues
during the year ended December 31, 1998 as compared to 76.1% and 23.9%,
respectively, of total revenues during the year ended December 31, 1997.
Revenues increased as a result of a larger sales force, greater marketing
efforts and greater market acceptance of the Company's products, both
domestically and internationally. The increase in sales of networking products
during the year ended December 31, 1998 over 1997 was the result of an increased
number of networking products available for sale and a larger sales, marketing
and customer support organization to support such sales. International sales
accounted for approximately 59.3% of revenues for year ended December 31, 1998,
as compared to 59.8% of revenues for year ended December 31, 1997.

     Gross Profit; Gross profit for the year ended December 31, 1998 was
$98,690,000 compared to $70,762,000 for the year ended December 31, 1997. The
changes represented an increase of $27,928,000 or 39.5% for the year ended
December 31, 1997. Gross Profit as a percentage of revenues decreased from 42.8%
during the year ended December 31, 1997 to 37.4% for the year ended December 31,
1998 as a result of intense price competition from competitors. The Company had
planned to compensate for such price competition by introducing new lower cost
products during the latter half of 1998. However, while the Company did begin
shipping such products during the last quarter of 1998, they were introduced too
late in the year to make meaningful contributions to revenue.

        During the last quarter of 1998, the Company determined to discontinue
some of its low-end networking products that were not sufficiently profitable
and this resulted in a write-down of $3,101,000.

        Research and Development. For the years ended December 31, 1998 and
1997, R&D expenses were $25,817,000 and $13,093,000, respectively. R&D expenses
as a percentage of revenues increased from 7.9% of revenues during year ended


29
<PAGE>   30

December 31, 1997, to 9.8% of revenues for year ended December 31, 1998. This
increase was primarily caused by additional developed projects commenced during
the year and associated personnel costs as well as increased expenses resulting
from personnel added to existing projects.. The Company intends to continue to
invest in the research and development of new products. Management believes that
the ability of the Company to develop and commercialize new products is a key
competitive factor.

        Selling, General and Administrative. For the years ended December 31,
1998 and 1997, SG&A expenses increased to $56,753,000 from $27,365,000. As a
percentage of revenues, SG&A increased from 16.5% for the year ended December
31, 1997 to 21.5% for the year ended December 31, 1998. The increases in SG&A
expense, both in dollar amounts and as a percentage of sales were due primarily
to substantially increased marketing efforts as well as the addition of
personnel and overhead costs in additional and expanded locations.

        Purchased Technology in Progress and Restructuring Costs. Purchased
technology in progress for the year ended December 31, 1998 was $20,633,000. The
purchased technology in 1998 was related to R&D projects of Xyplex in progress
at the time of the Xyplex Acquisition on January 30, 1998, which had not yet
reached technological feasibility and for which the Company had no alternative
future use. Restructuring costs during the year ended December 31, 1998 were
$15,671,000. The restructuring costs in 1998 were associated with a plan adopted
by the Company in March 1998 calling for the reduction of workforce, closing of
certain facilities, elimination of particular product lines, settlement of
distribution agreements and other costs. The restructuring costs incurred in
first quarter of 1998 as a result of the Xyplex Acquisition was offset by a
restructuring credit of $7,523,000 booked during the last quarter of 1998 in
connection with Company's decision to consolidate the Xyplex and NBase
organizations. This credit principally resulted from the renegotiation of
Xyplex' lease in Littletown, Massachusetts and a reevaluation reducing the
anticipated cost of discontinuing some of Xyplex' legacy products. The Company
did not incur these charges or receive a similar credit in 1997.

     Interest Expense Related to Convertible Debt. In September 1996, the
Company completed a private placement of $30,000,000 principal amount of
convertible Debentures. The value of the fixed discount has been reflected in
the Company's consolidated financial statements for the years ended December 31,
1996 and 1997 as additional interest expense and such fixed discount was
accreted through the first possible conversion date of the respective issuance.
These interest charges amounted to $843,000 from January 1 to April 4, 1997,
when the Company paid the outstanding principal and accrued interest of the
Debentures in full through conversion into Common Stock.

        On June 26, 1998, the Company sold $100,000,000 principal amount of 5%
convertible subordinated notes due 2003 (the "Notes") in a 144A private
placement to qualified institutional investors at 100% of their principal
amount, less a selling discount of 3% of the principal amount. This resulted in
interest expense of $2,480,000 for the year ended December 31, 1998.

        Gain on Repurchase of Notes. The Company recorded a gain of $2,791,000,
net of tax, when it repurchased at a discount from par during the last quarter
of 1998 $10,000,000 principal amount of the Notes.

        Net Income (Loss). The Company reported a net loss of $20,106,000 during
the year ended December 31, 1998. Net income for the year ended December 31,
1998 would have been $14,869,000, excluding charges associated with the Xyplex
Acquisition of $20,633,000 for purchased technology in progress and $15,671,000
for restructuring and the $3,101,000 write-down of discontinued products and a
$4,430,000 gain on the repurchase of the Notes during the fourth quarter of
1998. This compares to net income of $22,585,000 the Company reported for the
year ended December 31, 1997.

SELECTED QUARTERLY FINANCIAL DATA

        The following table sets forth certain selected operating data for the
quarters indicated. This information has been derived from the unaudited
consolidated financial statements of the Company which in the opinion of
management


30
<PAGE>   31

contain all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of such information. These operating results are not
necessarily indicative of results for any future period and results may
fluctuate significantly from quarter to quarter in the future.



<TABLE>
<CAPTION>
                                                      (Amounts in thousands)
                                                                1997                                          1998
                                         -----------------------------------------------------       ------------------------
                                            Q1             Q2             Q3             Q4             Q1             Q2
                                         --------       --------       --------       --------       --------        --------
<S>                                     <C>            <C>            <C>            <C>            <C>             <C>
Revenues, net ....................       $ 35,564       $ 39,528       $ 41,979       $ 48,400       $ 60,826        $ 65,742
Gross profit .....................         15,388         16,643         18,174         20,557         26,821          28,993

Operating income (loss) before
  purchased technology in progress
  and restructuring costs ........          6,865          7,370          8,131          7,938          9,978          11,385
Operating income (loss) ..........          6,865          7,370          8,131          7,938        (33,849)         11,385
Net income (loss) ................          4,343          5,209          5,922          7,111        (30,221)          8,528

<CAPTION>

                                         (Amounts in thousands)
                                                  1998                                            1999
                                        ------------------------        ------------------------------------------------------
                                            Q3             Q4              Q1               Q2             Q3            Q4
                                         --------       --------        --------        --------       --------       --------
<S>                                     <C>            <C>             <C>             <C>            <C>            <C>
Revenues, net ....................       $ 62,624       $ 74,883        $ 70,116        $ 73,251       $ 71,254       $ 73,903
Gross profit .....................         24,280         18,596          23,750          25,656         26,601         15,075

Operating income (loss) before
  purchased technology in progress
  and restructuring costs ........          1,619         (6,862)           (560)          1,192          1,593        (18,219)
Operating income (loss) ..........          1,619            661            (560)          1,192          1,593        (18,219)
Net income (loss) ................          1,348            239            (909)            525            567        (13,092)
</TABLE>


LIQUIDITY AND CAPITAL RESOURCES

        In September 1997, the Company completed a follow-on public offering of
2,785,000 shares of Common Stock raising net proceeds of approximately
$93,320,000 (the "1997 Public Offering"). In June 1998, the Company sold an
aggregate $100,000,000 principal amount of 5% convertible subordinated notes due
2003 (the "Notes") in a private placement raising net proceeds of $96,423,000
(the "1998 Private Placement"). The Notes are convertible into Common Stock of
the Company at a conversion price of $27.0475 per share (equivalent to a
conversion rate of approximately 36.97 shares per $1,000 principal amount of
notes), representing an initial conversion premium of 24%, for a total of
approximately 3.7 million shares of Common Stock of the Company. The Notes have
a five-year term and are not callable for the first three years. Interest on the
Notes is at 5% per annum and is payable semi-annually on June 15 and December
15, commencing on December 15, 1998.

        Net cash provided by operating activities for the year ended December
31, 1999 was $2,027,000. Net cash provided by investing activities for the year
ended December 31, 1999 was $6,225,000.  The net cash provided by investing
activities came primarily from the maturity or sale of U.S. Treasuries offset
by purchases of U.S. Treasuries and property and equipment.  Net cash provided
by financing activities was $10,914,000 out of which $8,000,000 came from the
exercise of warrants to purchase stock by Intel Corporation.

        Net cash used in operating activities for the year ended December 31,
1998 was $6,946,000. The funds were used primarily to pay down accounts payable
and accrued expenses and for restructuring costs in connection with the Xyplex
Acquisition. Net cash used in investing activities for the year ended December
31, 1998 was $84,164,000. Cash used in the Xyplex Acquisition and net purchases
of United States treasury securities accounted for the majority of the cash used
in investing activities for the year ended December 31, 1998 and cash provided
by the sale of investments to finance the Xyplex Acquisition accounted for most
of the cash provided by investing activities for the same period. The sale of
the Notes in the 1998 Private Placement accounted for substantially all of the
$92,438,000 of cash provided by financing activities during the year ended
December 31, 1998.

        Net cash used in operating activities for the years ended December 31,
1997 was $54,596,000. The funds were used primarily for increased inventories
and receivables as a result of increased revenues. Net cash provided by
financing activities for the years ended December 31, 1997 and 1996 were
$95,153,000 and $38,882,000, respectively. The cash provided by financing
activities in 1997 came principally from the proceeds from the 1997 Public
Offering, which were partially offset by the repurchase of the Common Stock from
Elbit. Net cash used in investing activities for the year ended December 31,
1997 was $87,454,000. The cash used in investing activities was primarily used
to purchase investments in U.S. Government securities.

        Accounts receivable were $60,637,000 at December 31, 1999 as compared to
$54,596,000 at December 31, 1998. The increase in accounts receivable was
primarily attributable to the increase in overall sales.



31
<PAGE>   32
     Inventories were $35,392,000 at December 31, 1999 as compared to
$47,467,000 at December 31, 1998. The decrease in inventories was primarily
attributable to the writedown of LAN switching inventories as a result of the
Company's decision to exit this business.

        Royalties are payable by the Company, as the successor to Galcom, Ace
and Fibronics, to the Office of the Chief Scientist of Israel ("OCS") at rates
of approximately 2% to 3% on proceeds from the sale of products arising from the
research and development activities for which OCS has provided grants. The total
amount of royalties may not exceed the amount of the grants. The Company does
not expect that revenues from royalty bearing products will result in material
royalty payment obligations in the future.

EFFECTS OF INFLATION AND CURRENCY EXCHANGE RATES

        The Company believes that the relatively moderate rate of inflation in
the United States over the past few years has not had a significant impact on
the Company's sales or operating results or on the prices of raw materials.
However, in view of the Company's recent expansion of operations in Israel which
has experienced substantial inflation, there can be no assurance that inflation
in Israel will not have a materially adverse effect on the Company's operating
results in the future.

        The Company's sales are currently denominated in U.S. dollars and to
date its business has not been significantly affected by currency fluctuations
or inflation. However, the Company conducts business in several different
countries and thus fluctuations in currency exchange rates could cause the
Company's products to become relatively more expensive in particular countries,
leading to a reduction in sales in that country. In addition, inflation or
fluctuations in currency exchange rates in such countries could increase the
Company's expenses. To date, the Company has not hedged against currency
exchange risks. In the future, the Company may engage in foreign currency
denominated sales or pay material amounts of expenses in foreign currencies and,
in such event, may experience gains and losses due to currency fluctuations. The
Company's operating results could be adversely affected by such fluctuations or
as a result of inflation in particular countries where material expenses are
incurred.

POST-RETIREMENT BENEFITS

        The Company does not provide post-retirement benefits affected by SFAS
106 "Employers' Accounting For Post-retirement Benefits Other Than pensions."

RECENTLY ISSUED ACCOUNTING STANDARDS

        In June 1998 and June 1999, the FASB issued SFAS No. 133, "Accounting
for Derivative Investments and Hedging Activities," and SFAS No. 137, which
delayed the effective date of SFAS No. 133. The Company will adopt the
statement in January 2001 and does not expect the adoption of this statement to
have a material impact on the Company's financial position or results of
operations.

YEAR 2000

        Many computer programs, including some programs used by the Company,
use only two digits to identify a year in the date field. These programs were
designed without considering the impact of the change in the century. Prior to
December 31, 1999 the Company completed a company-wide Year 2000 compliance
program ("Y2K Program"). The Y2K Program addressed the issue of computer
programs and embedded computer chips being unable to distinguish between the
year 1900 and the year 2000. The Company incurred approximately $500,000 to
implement its Y2K Program and believes that the Y2K Program was responsible for
a successful transition without interruption in, or a failure of, normal
business activities or operations at the turn of the century.




32
<PAGE>   33

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements are filed as part of this Report:


<TABLE>
<CAPTION>
                                                                                     PAGE
                                                                                     ----
<S>                                                                                  <C>
Report of Independent Public Accountants ......................................       F-1

Consolidated Balance Sheets as of December 31, 1998 and 1999 ..................       F-2

Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1999 .............................       F-5

Consolidated Statements of Stockholders' Equity and Compensation Income
for each of the three years in the period ended December 31, 1999 .............       F-7

Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1999 ............................................       F-8

Notes to Consolidated Financial Statements ....................................       F-10
</TABLE>

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

Not applicable.




33
<PAGE>   34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To MRV Communications, Inc.:

We have audited the accompanying consolidated balance sheets of MRV
COMMUNICATIONS, INC. (a Delaware corporation) and subsidiaries as of December
31, 1998 and 1999, and the related consolidated statements of operations,
stockholders' equity and comprehensive income (loss) and cash flows for each of
the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MRV Communications, Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States


ARTHUR ANDERSEN LLP




Los Angeles, California
February 22, 2000







                                      F-1
<PAGE>   35

MRV COMMUNICATIONS, INC.

Consolidated Balance Sheets - December 31, 1998 and 1999

<TABLE>
<CAPTION>
                                     Assets
                                 (in thousands)
                                                                      1998                1999
                                                                  ------------       ------------
<S>                                                               <C>                   <C>
Current Assets:
  Cash and cash equivalents                                          $  20,692          $   34,330
  Short-term investments                                                30,493              10,141
  Accounts receivable, net of allowance of
    $8,487 in 1998 and $8,451 in 1999                                   54,596              60,637
  Inventories                                                           47,467              35,392
  Refundable income taxes                                                   -                3,216
  Deferred income tax asset                                              5,035               6,907
  Other current assets                                                   5,508               6,336
                                                                --------------      --------------
          Total current assets                                         163,791             156,959
                                                                --------------      --------------

Property and Equipment, at cost:
  Building                                                               3,814               3,814
  Machinery and equipment                                               10,141              12,598
  Furniture and fixtures                                                 3,906               4,233
  Computer hardware and software                                         9,169              12,913
  Leasehold improvements                                                 1,528               3,053
                                                                --------------      --------------
                                                                        28,558              36,611
  Less - Accumulated depreciation and amortization                      (9,201)            (17,011)
                                                                --------------      --------------
                                                                        19,357              19,600
                                                                --------------      --------------
Other Assets:
  Investments                                                          100,138             101,936
  Deferred income tax asset                                              5,661               5,324
  Intangibles and goodwill, net of accumulated
    amortization of $3,405 in 1998
    and $7,380 in 1999                                                  26,666              27,214
  Other                                                                  4,579               3,500
                                                                --------------      --------------
                                                                       137,044             137,974
                                                                --------------      --------------
                                                                     $ 320,192          $  314,533
                                                                ==============      ==============
</TABLE>

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






                                      F-2
<PAGE>   36

MRV COMMUNICATIONS, INC.

Consolidated Balance Sheets - December 31, 1998 and 1999

<TABLE>
<CAPTION>
                      Liabilities and Stockholders' Equity
                                 (in thousands)
                                                                       1998                1999
                                                                   ------------       ------------
<S>                                                                <C>                  <C>
Current Liabilities:
  Current portion of capital
    lease obligations                                                $     185          $      198
  Accounts payable                                                      29,757              33,455
  Accrued liabilities                                                   13,606              15,403
  Accrued restructuring cost                                                82                  -
  Income taxes payable                                                     445                  -
  Deferred revenue                                                       4,398               1,478
                                                                 -------------       -------------
          Total current liabilities                                     48,473              50,534

Long-Term Liabilities:
  Convertible notes                                                     90,000              90,000
  Capital lease obligations, net of
    current portion                                                      1,400               1,481
  Other long-term liabilities                                            2,917               2,928
                                                                 -------------       -------------
          Total long-term liabilities                                   94,317              94,409
                                                                 -------------       -------------
Commitments and Contingencies (Note 9)

Minority Interest                                                        2,973               2,775

Stockholders' Equity:
  Preferred stock, $0.01 par value:
    Authorized - 1,000 shares;
      no shares issued or outstanding                                       -                   -
  Common stock, $0.0034 par value:
    Authorized - 80,000 shares
    Issued and outstanding - 26,639
      shares in 1998 and 28,117 in 1999, respectively                       88                 124
Additional paid-in capital                                             180,656             191,440
  Retained deficit                                                      (5,471)            (18,377)
  Treasury stock, at cost                                                 (133)               (133)
  Accumulated other comprehensive loss                                    (711)             (6,239)
                                                                 -------------       -------------
          Total stockholders' equity                                   174,429             166,815
                                                                 -------------       -------------
                                                                     $ 320,192           $ 314,533
                                                                 =============       =============
</TABLE>


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



                                      F-3
<PAGE>   37

MRV COMMUNICATIONS, INC.

Consolidated Statements of Operations
For the Three Years Ended December 31, 1999
(in thousands, except for per share data)


<TABLE>
<CAPTION>

                                                        1997                 1998               1999
                                                    ------------         ------------       ------------
<S>                                                 <C>                  <C>                <C>
Revenues, net:                                        $  165,471           $  264,075         $  288,524
                                                   -------------        -------------     --------------
Costs and Expenses:
  Cost of goods sold                                      94,709              165,385            197,442
  Research and development expenses                       13,093               25,817             35,319
  Selling, general and
    administrative expenses                               27,365               56,753             71,757
  Purchased technology in progress                            -                20,633                 -
  Restructuring costs                                         -                15,671                 -
                                                   -------------        -------------     --------------
                                                         135,167              284,259            304,518
                                                   -------------        -------------     --------------
          Operating income (loss)                         30,304              (20,184)           (15,994)
                                                   -------------        -------------     --------------
Other Income (Expense):
  Interest expense related to convertible
     debentures and acquisition                             (843)                  -                  -
  Interest expense related to convertible notes               -                (2,480)            (4,500)
  Minority interest                                         (146)              (1,345)               610
  Interest income, net                                     2,744                6,819              4,822
                                                   -------------        -------------     --------------
                                                           1,755                2,994                932
                                                   -------------        -------------     --------------
          Income (loss) before provision
            (benefit) for income taxes
            and extraordinary item                        32,059              (17,190)           (15,062)
Provision (Benefit) for Income Taxes                       9,474                5,707             (2,153)
                                                   -------------        -------------     --------------
Income (Loss) before Extraordinary Item                   22,585              (22,897)           (12,909)
                                                   -------------        -------------     --------------
Extraordinary Item--
  Gain on repurchase of convertible
  notes, net of tax of $1,639                                 -                 2,791                 -
                                                   -------------        -------------     --------------
Net Income (Loss)                                     $   22,585          $   (20,106)       $   (12,909)
                                                   =============        =============     ==============

Earnings (Loss) per Common Share Information:
   Basic earnings (loss) per common share             $     0.95          $     (0.76)       $     (0.48)
   Diluted earnings (loss) per common share           $     0.88          $     (0.76)       $     (0.48)
                                                   =============        =============     ==============
Weighted Average Number of Common
  Shares Outstanding:
    Basic                                                 23,670               26,532             26,960
    Diluted                                               25,734               26,532             26,960
                                                   =============        =============     ==============
</TABLE>







                                      F-4
<PAGE>   38

MRV COMMUNICATIONS, INC.

Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Loss) For the Three Years Ended December 31, 1999

<TABLE>
<CAPTION>
                                            Common Stock       Additional   Retained                  Other
                                        ---------------------    Paid-In    Earnings    Treasury   Comprehensive
                                          Shares      Amount     Capital    (Deficit)     Stock    Income (loss)     Total
                                        ---------   ---------  ----------   ---------   --------   -------------   ---------
<S>                                     <C>         <C>         <C>         <C>          <C>          <C>          <C>
Balance, December 31, 1996                21,286    $      70   $  49,636   $  (7,950)   $    --      $      15    $  41,771

  Issuance of common stock in
     connection with public offering       2,785            9      93,311        --           --           --         93,320
  Issuance of common stock in
     connection with the acquisition
     of Fibronics Ltd.                       275            1       6,299        --           --           --          6,300
  Return of shares held relating
     to Fibronics Ltd.                      (137)        --          --          --           --           --           --
  Conversion of debentures                 1,013            4      17,737        --           --           --         17,741
  Exercise of stock warrants
     and options                           1,138            4       8,464        --           --           --          8,468
  Interest expense related to
     convertible debentures and
    acquisition                             --           --           427        --           --           --            427
Comprehensive Income:
  Translation adjustments                   --           --          --          --           --           (643)        (643)
  Net income                                --           --          --        22,585         --           --         22,585
                                                                                                                   ---------
Comprehensive Income                        --           --          --          --           --           --         21,942
                                       ---------    ---------   ---------   ---------    ---------    ---------    ---------
Balance, December 31, 1997                26,360           88     175,874      14,635         --           (628)     189,969

  Exercise of stock warrants
     and options                             303         --         1,510        --           --           --          1,510
  Issuance of warrants in connection
     with the acquisition of Xyplex         --           --         3,272        --           --           --          3,272
  Purchase of treasury stock                 (24)        --          --          --           (133)        --           (133)
Comprehensive Income:
  Translation adjustments                   --           --          --          --           --            (83)         (83)
  Net loss                                  --           --          --       (20,106)        --           --        (20,106)
                                                                                                                   ---------
Comprehensive loss                          --           --          --          --           --           --        (20,189)
                                       ---------    ---------   ---------   ---------    ---------    ---------    ---------
Balance, December 31, 1998                26,639           88     180,656      (5,471)        (133)        (711)     174,429

  Exercise of stock warrants
     and options                           1,078           10       2,810        --           --           --          2,820
  Exercise of stock warrants
     by Intel Corporation                    400           26       7,974        --           --           --          8,000
  Other                                     --           --          --             3         --           --              3
Comprehensive Income:
  Translation adjustments                   --           --          --          --           --         (5,528)      (5,528)
  Net loss                                  --           --          --       (12,909)        --           --        (12,909)
                                                                                                                   ---------
Comprehensive loss                          --           --          --          --           --           --        (18,437)
                                       ---------    ---------   ---------   ---------    ---------    ---------    ---------
Balance, December 31, 1999                28,117    $     124   $ 191,440   $ (18,377)   $    (133)   $  (6,239)   $ 166,815
                                       =========    =========   =========   =========    =========    =========    =========
</TABLE>


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





                                      F-5
<PAGE>   39

MRV COMMUNICATIONS, INC.

Consolidated Statements of Cash Flows
For the Three Years Ended December 31, 1999
(in thousands)

<TABLE>
<CAPTION>

                                                                       1997                 1998               1999
                                                                   ------------         ------------       ------------
<S>                                                                 <C>                 <C>                <C>
Cash Flows from Operating Activities:
  Net income (loss)                                                $   22,585           $  (20,106)         $ (12,909)
  Adjustments to reconcile net income (loss) to
    net cash used in operating activities:
      Depreciation and amortization                                     1,439                7,902             12,501
      Provision for losses on accounts receivable                       1,951                2,591              1,414
      Deferred income taxes                                               185                1,408             (1,302)
      Realized gain on investment                                        (215)              (2,535)                -
      Purchased technology in progress                                     -                20,633                 -
      Extraordinary gain on repurchase
        of convertible notes                                               -                (2,791)                -
      Interest related to convertible
        debentures and acquisition                                        843                   -                  -
      Other                                                                37                  324                 -
      Minority interests' share of income (loss)                          146                1,345               (610)
Changes in assets and liabilities, net of effects
  from acquisitions:
    Accounts receivable                                               (22,568)              12,263             (7,455)
    Inventories                                                       (21,867)               3,453             12,075
    Other assets                                                       (2,824)               2,008               (519)
    Accounts payable                                                   17,435              (19,505)             3,698
    Accrued liabilities and
      restructuring                                                    (2,092)              (7,438)             1,715
    Income taxes payable                                                3,622               (7,006)            (3,661)
    Customer deposits                                                  (1,207)                  -                  -
    Accrued severance pay                                                (231)                  -                  -
    Deferred revenue                                                 -                         508             (2,920)
                                                                -------------        -------------       ------------
          Net cash used in (provided by) operating activities          (2,761)              (6,946)             2,027
                                                                -------------        -------------       ------------
</TABLE>






                                      F-6
<PAGE>   40
<TABLE>
<CAPTION>

                                                                      1997                 1998               1999
                                                                  ------------         ------------       ------------
<S>                                                              <C>                   <C>                <C>
Cash Flows from Investing Activities:
  Purchases of property and equipment                             $   (1,207)          $   (6,337)        $   (8,053)
  Purchases of investments                                          (148,948)            (206,846)           (19,242)
  Proceeds from sale of investments                                   67,990              173,714             38,293
  Cash used in acquisitions, net of cash received                     (5,289)             (44,695)            (4,773)
                                                               -------------        -------------       ------------
          Net cash (used in) provided by investing activities        (87,454)             (84,164)             6,225
                                                               -------------        -------------       ------------
Cash Flows from Financing Activities:
  Net proceeds from issuance of common stock                          99,638                1,510             10,820
  Repurchase of common stock issued in
    connection with acquisition                                       (4,230)                 -                   -
  Proceeds from issuance of
    convertible debentures                                                -                96,423                 -
  Principal payments on capital lease obligations                       (255)                 (62)                94
  Repurchase of convertible notes                                         -                (5,300)                -
  Purchase of treasury stock                                              -                  (133)                -
                                                               -------------        -------------       ------------
          Net cash provided by financing activities                   95,153               92,438             10,914
                                                               -------------        -------------       ------------
Effect of Exchange Rate Changes on
  Cash and Cash Equivalents                                             (151)                 (64)            (5,528)

Net Increase In Cash and Cash Equivalents                              4,787                1,264             13,638

Cash and Cash Equivalents, beginning of year                          14,641               19,428             20,692
                                                               -------------        -------------       ------------
Cash and Cash Equivalents, end of year                            $   19,428           $   20,692          $  34,330
                                                               =============        =============       ============
</TABLE>








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







                                      F-7
<PAGE>   41

MRV COMMUNICATIONS, INC.

Notes to Consolidated Financial Statements
December 31, 1999


1.   Business

MRV Communications, Inc. (the Company) is in the business of investing and
managing growth companies in optical technology and Internet infrastructure.
The Company's core operations design, manufacture, market and sell high speed
network switching and fiber optic transmission systems which enhance the
performance of existing data and telecommunications networks. The Company sells
two groups of products: (1) computer networking products, primarily Ethernet
local area network (LAN) switches, wide area network (WAN) and remote access
devices, and (2) fiber optic components for the transmission of voice, video and
data across enterprise telecommunications and cable TV networks. The Company's
networking solutions enhance the functionality of LAN's and WAN's by reducing
network congestion while allowing end users to preserve their investments in
pre-existing networks and providing cost-effective migration paths to next
generation technologies such as Gigabit Ethernet. The Company markets and sells
its products both domestically and internationally.

2.   Summary Of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, NBase Communications, Inc., NBase Communications,
Ltd. (Nbase Ltd.), NBase Europe GmbH (Nbase Europe), NBase Fibronics, Ltd.
(Fibronics), Netsoft Solutions, Ltd. (Netsoft), Turnkey, Kempton Communications,
Nbase-Xyplex, its 80 percent-owned subsidiary, EDSLAN SRL (EDS), its 60
percent-owned subsidiary, Tecnonet and its 62.5 percent-owned subsidiary, RDS.
All significant intercompany transactions and accounts have been eliminated.

Foreign Currency Translation

The financial statements of NBase Ltd. and Fibronics have been prepared in U.S.
dollars as the currency of the primary economic environment in which the
operations of these companies are conducted is the U.S. dollar. Thus, the
functional currency of these companies is the U.S. dollar.

Transactions and balances originally denominated in U.S. dollars are presented
at their original amounts. Transactions and balances in other currencies are
converted into U.S. dollars in accordance with Statement of Financial Accounting
Standards (SFAS) No. 52, "Foreign Currency Translation," and are included in
determining net income or loss.

The financial statements of NBase Europe, Netsoft, Turnkey, Kempton
Communications, EDS and RDS have been prepared in the companies' local
currencies and have been translated into U.S. dollars. The functional currency
for these companies is their local currency.







                                      F-8
<PAGE>   42

     Assets and liabilities are translated from the local currencies into U.S.
     dollars at the exchange rate prevailing at the balance sheet date.
     Revenues, expenses and cash flows are translated at weighted average
     exchange rates for the period to approximate translation at the exchange
     rates prevailing at the dates those elements are recognized in the
     financial statements. Translation adjustments resulting from the process of
     translating the local currency financial statements into U.S. dollars are
     included in determining comprehensive income(loss).

     Use of Estimates

     The preparation of financial statements in conformity with accounting
     principles generally accepted in the United States requires management to
     make estimates and assumptions that affect the reported amounts of assets
     and liabilities and disclosure of contingent assets and liabilities at the
     date of the financial statements and the reported amounts of revenues and
     expenses during the reporting period. Actual results could differ from
     those estimates.

     Revenue Recognition

     The Company realizes revenue from sales of hardware products, from the sale
     of related software and from maintenance contracts. Revenue on product
     sales is recognized at the time of shipment. Revenue related to software
     and software maintenance contracts is recognized in accordance with the
     American Institute of Certified Public Accountants (AICPA) Statement of
     Position No. 97-2, "Software Revenue Recognition." Maintenance revenues for
     customer support are deferred and recognized ratably over the term of the
     maintenance period, generally one to three years.

     The Company warrants its products against defects in materials and
     workmanship for one to five year periods. The estimated cost of warranty
     obligations is recognized at the time of revenue recognition.

     Cash and Cash Equivalents

     The Company considers all highly liquid investments with an original
     maturity of 90 days or less to be cash equivalents.

     Concentration of Credit Risk

     The Company maintains cash balances and investments in highly qualified
     financial institutions. At various times such amounts are in excess of
     insured limits.







                                      F-9
<PAGE>   43

     Investments

     The Company accounts for its investments under the provisions of SFAS No.
     115, "Accounting for Certain Investments in Debt and Equity Securities."

     At December 31, 1998 and 1999, short and long-term investments consisted
     principally of U.S. Treasury notes. As defined by SFAS No. 115, the Company
     has classified its investments in these debt securities as
     "held-to-maturity" investments and all investments are recorded at their
     amortized cost basis, which approximated their fair value at December 31,
     1998 and 1999. All short-term investments mature by December 2000.

     Inventories

     Inventories are stated at the lower of cost (first-in, first-out) or market
     and consist of material, labor and overhead.

     Inventories consisted of the following as of December 31, 1998 and 1999 (in
     thousands):

<TABLE>
<CAPTION>

                                                                  1998          1999
         <S>                                                 <C>            <C>
                                                              ------------ ------------

         Raw materials                                           $17,409     $  8,475
         Work-in-process                                          10,118        8,083
         Finished goods                                           19,940       18,834
                                                                --------     --------
                                                                 $47,467      $35,392
                                                                ========     ========
</TABLE>

     Software Development Costs

     In accordance with SFAS No. 86, "Accounting for the Costs of Computer
     Software to be Sold, Leased, or Otherwise Marketed," development costs
     related to software products are expensed as incurred until the
     technological feasibility of the product has been established.
     Technological feasibility in the Company's circumstances occurs when a
     working model is completed. After technological feasibility is established,
     additional costs would be capitalized.

     The Company believes its process for developing software is essentially
     completed concurrent with the establishment of technological feasibility,
     and, accordingly, no software development costs have been capitalized to
     date.







                                      F-10
<PAGE>   44


     Property and Equipment

     Property and equipment are stated at cost. Maintenance and repairs are
     charged to expense as incurred, while significant replacements and
     betterments are capitalized.

     Depreciation and amortization are provided using the straight-line method
     based upon the estimated useful lives of the related assets. Useful lives
     range from three to thirty-three years.

     Intangibles and Goodwill

     The intangibles and goodwill resulted from the Company's acquisitions
     between 1995 through 1999. It is amortized on a straight-line basis over 8
     to 12 years. The Company continually evaluates the recoverability of
     goodwill by assessing whether the recorded value will be recovered through
     future expected operating results.

     Statements of Cash Flows

     Cash paid for income taxes was $5,473,000 in 1997, $9,945,000 in 1998 and
     $1,652,000 in 1999. Cash paid for interest was $214,000 in 1997, $2,569,000
     in 1998 and $4,887,000 in 1999.

     In 1997, $17,325,000 of convertible debentures and $843,000 of interest
     were converted into approximately 1,013,000 shares of common stock. Also,
     the Company received $2,150,000 of tax benefits relating to the exercise of
     non-qualified stock options.

     These non-cash transactions are excluded from the accompanying consolidated
     statements of cash flows.

     Common Stock Splits

     On March 3, 2000, the Company announced a 2 for 1 stock split of its common
     stock to be effected on or around May 10, 2000. Share amounts set forth in
     these consolidated financial statements have not been retroactively
     restated to give effect to the stock split.







                                      F-11
<PAGE>   45


     Net Income (loss) per Common Share

     In February 1997, the Financial Accounting Standards Board (FASB) issued
     SFAS No. 128, "Earnings Per Share."

     The following schedule summarizes the information used to compute earnings
     per common share (in thousands except per share data) for the three years
     ended December 31, 1999:

<TABLE>
<CAPTION>
                                                                1997            1998              1999
                                                            ------------    ------------      ------------
         <S>                                                <C>             <C>               <C>
         Income (loss) before extraordinary item            $   22,585      $  (22,897)       $  (12,909)

         Extraordinary item-gain on repurchase
           of convertible notes, net of the tax (see
           Note 5)                                                 -             2,791               -
                                                            ----------      ----------        ----------
         Net income (loss)                                  $   22,585     $   (20,106)      $   (12,909)
                                                            ==========     ===========       ===========
         Weighted average number of common
           shares used to compute basic net income
           per common share                                     23,670          26,532            26,960

         Dilutive effect of common share equivalents             2,064              -                -
                                                            ----------      ----------        ----------
         Weighted average number of common
           shares used to compute diluted net income
           per common share                                     25,734          26,532            26,960
                                                             =========      ==========        ==========

         Basic income (loss) per common share
           before extraordinary item                             0.95            (0.86)           (0.48)

         Diluted  income (loss) per common
           share before extraordinary item                       0.88            (0.86)           (0.48)

         Effect of extraordinary item per basic
           common share                                          -                0.11             -

         Effect of extraordinary item per
           diluted common share                                  -                0.11             -

         Basic net income (loss) per common share                0.95            (0.76)           (0.48)

         Diluted net income (loss) per common share              0.88            (0.76)           (0.48)
</TABLE>






                                      F-12
<PAGE>   46

     Recently Issued Accounting Standards

     In June 1998 and June 1999 the FASB issued SFAS No. 133, "Accounting for
     Derivative Instruments and Hedging Activities," and SFAS No. 137, which
     delayed the effective date of SFAS No. 133. The Company will adopt the
     statement in January 2001 and does not expect the adoption of this
     statement to have a material impact on the Company's financial position or
     results of operations.

     Reclassifications

     Certain prior year amounts have been reclassified to conform with current
     year's presentation.

3.   Acquisitions

     EDSLAN

     In May 1996, the Company purchased 50 percent of the outstanding stock of
     EDSLAN SRL, an Italian networking company. The purchase price paid by the
     Company was approximately $1,050,000. The purchase agreement provides for
     the Company to receive 80 percent of EDS' profits or losses from the date
     of acquisition. In June and November 1997, the Company purchased an
     additional 10 percent of the outstanding stock of EDSLAN SRL for
     approximately $500,000. In April 1999, the Company purchased an additional
     10 percent of the stock of EDSLAN SRL for approximately $1,500,000.

     As of December 31, 1999, the Company receives 92% of EDS' profits or losses
     from the date of these investments.

     Tecnonet

     In January 1998, the Company purchased 50 percent of the outstanding stock
     of Tecnonet SRL, an Italian networking company. The purchase price paid by
     the Company was approximately $3,139,000. The agreement provides for the
     Company to receive 80 percent of Tecnonet's profits or losses from the date
     of acquisition. During 1999, the Company purchased an additional 10 percent
     of the outstanding stock of Tecnonet SRL for approximately $600,000.

     As of December 31, 1999, the Company receives 84% of Tecnonet's profits or
     losses from the date of these investments.





                                      F-13
<PAGE>   47

     Xyplex

     On January 30, 1998, the Company acquired all of the outstanding stock of
     Whittaker Xyplex, Inc. (whose name the Company subsequently changed to
     Nbase-Xyplex), a subsidiary of the Whittaker Corporation engaged in the
     design and manufacture of computer networking products primarily for use in
     WAN. The purchase price was $35,000,000 in cash and three-year warrants to
     purchase up to 421,402 shares of the Company's common stock at $35 per
     share.

     RDS

     In January 1998, the Company acquired 50 percent of the outstanding stock
     of RDS, a Swedish networking company. The purchase price was $8,000,000 in
     cash. In April 1999, the Company purchased an additional 12.5 percent of
     the outstanding stock of RDS for approximately $2,428,000.

     All acquisitions were accounted for using the purchase method of
     accounting, and accordingly, the purchase price was allocated to assets
     acquired and liabilities assumed based on their estimated fair values, as
     follows (in thousands):
<TABLE>
<CAPTION>

                                                                   1998
                                                               ----------
         <S>                                                   <C>

         Inventory                                               $ 9,231
         Accounts receivable                                      23,528
         Property and equipment                                    9,274
         Other assets                                              1,223
         Current liabilities and debt                            (38,026)
                                                               ---------
               Net assets acquired or liabilities assumed          5,230

         Cash paid for legal, consulting and other costs          (1,426)
         Accrued legal, consulting and others costs                 (574)
         Common stock issued to sellers                           (3,271)
         Cash paid to sellers                                    (44,695)
                                                               ---------
                   Paid or accrued                               (49,966)

         Allocated to purchased technology in progress            20,633
                                                               ---------
         Goodwill                                              $  24,103
                                                               =========
</TABLE>

4.   Convertible Debentures

In September 1996, the Company completed a private placement of $30,000,000
principal amount of convertible debentures, which bore interest at 5 percent per
annum. The proceeds from the private placement were primarily used to finance
the Company's 1996 acquisition of certain assets from Fibronics, Ltd. As of
December 31, 1997, all debentures had been converted to common stock based on
the conversion price at the date of conversion, as defined.





                                      F-14
<PAGE>   48

As part of the private placement, the Company also issued to the holders
three-year warrants to purchase an aggregate of up to 600,000 shares of common
stock at an exercise price of $26.67 per share. In accordance with SFAS 123, the
fair value of the warrants ($852,000) was recorded as an increase to
stockholders' equity and amortized as additional interest expense over the life
of the debentures.

5.   Convertible Notes

In June 1998, the Company completed a private placement of $100,000,000
principal amount five-year, convertible subordinated notes. The notes bear
interest at five percent per year, payable semi-annually, and are convertible
into common stock at any time after September 1998, at the option of the
holders. The conversion rate is 36.972 shares of common stock per $1,000
principal amount of notes, equivalent to a conversion price of $27.0475 per
share, an initial premium above market price. The conversion rate is subject to
adjustment in certain circumstances, including dividends payable in common
stock, issuance of stock rights to all holders of common stock or stock splits
or distributions to common stockholders in connection with a tender offer. If a
change in control, as defined, occurs, the holders of the notes have the right
to require the Company to repurchase the notes at face value together with
interest accrued. The Company has the right, after June 2001, to redeem the
notes at 102 percent of face value, and after June 2002 for 101 percent of face
value. The notes are not entitled to the benefits of any sinking fund.

In connection with the private placement, the Company incurred costs of
$4,004,000. These costs are being amortized over five years, the life of the
notes. Amortization expense for the years ended December 31, 1998 and 1999 was
$360,000 and $681,000, respectively.

In November 1998, the Company repurchased $10,000,000 of the notes for
$5,300,000. The Company recorded an extraordinary gain of $2,791,000, net of
tax, related to the repurchase of the notes. Included in this amount is the
portion of the amortization of expense of the costs attributable to the
repurchased notes.

6.   Common Stock Purchase Warrants

In connection with various public and private offerings of common stock and
acquisitions the Company has issued warrants to purchase additional shares of
common stock.







                                      F-15
<PAGE>   49

A summary of warrant activities for 1997, 1998 and 1999 is as follows (number of
shares in thousands):
<TABLE>
<CAPTION>
                                                             Number                 Exercise
                                                            Of Shares                Prices
                                                            ---------      ----------------------
         <S>                                                <C>            <C>

         Balance, December 31, 1996                           3,462                $0.27 to 26.65
           Issued                                                10                         32.50
           Exercised                                           (766)                1.67 to 14.25
           Canceled                                            (100)                        20.00
                                                           --------        ----------------------
         Balance, December 31, 1997                           2,606                 0.27 to 32.50
           Issued                                               421                         35.00
           Exercised                                             66                  4.25 to 5.60
           Canceled                                             (76)                         8.42
                                                           --------        ----------------------
         Balance, December 31, 1998                           3,017                 0.27 to 35.00
           Issued                                                -                        -
           Exercised                                            437                 4.80 to 20.00
           Canceled                                             778                 0.27 to 26.75
                                                           --------        ----------------------
         Balance, December 31, 1999                           1,802                $4.25 to 35.00
                                                           ========        ======================
</TABLE>

7.   Purchased Technology in Progress and Restructuring Costs

In connection with the Company's acquisitions (see Note 3), the Company acquired
incomplete research and development (R&D) projects that will be included in the
current R&D activities of the Company. For projects that will have no
alternative future use to the Company and where technological feasibility had
not yet been established, the Company allocated $20,633,000 to technology in
progress and recorded the expense during the year ended December 31, 1998.

The technology in progress acquired as part of the Xyplex transaction in 1998
was valued according to the "milestone" or percentage complete method. This
method established a total estimated cost to complete the projects that
constituted the purchased technology in progress. An estimate was then made as
to the percentage of completion that had been achieved in these projects at the
date of acquisition and this was applied to the overall estimated cost. The
large majority of the value was assigned to the "Edgeblaster", a multifunction
WAN access router designed to combine routing protocols with access technologies
to allow branch and enterprise offices to connect users, employees and remote
offices using digital techniques. The Edgeblaster was approximately 70 percent
complete at the time of the acquisition and its completion depended upon
successful development of digital signal processing technology required to
enable it to compete with similar products in development by other companies.
The development of the Edgeblaster has been substantially completed since the
acquisition.

Also in connection with the Company's acquisitions, during the year ended
December 31, 1998, the Company recorded $15,671,000 as restructuring costs,
which primarily related to the closing of facilities, a reduction of its
workforce, elimination of product lines and the settlement of distribution
agreements. The reduction of the workforce in 1998 related to 183 employees, of
which eight were upper management personnel.






                                      F-16
<PAGE>   50

8.   Income Taxes

Deferred income tax assets or liabilities are computed based on temporary
differences between the financial statement and income tax bases of assets and
liabilities using the enacted marginal income tax rate in effect for the year in
which the differences are expected to reverse. Deferred income tax expenses or
credits are based on the changes in the deferred income tax assets or
liabilities from period to period.

The components of the net deferred income tax asset at December 31, 1998 and
1999 are as follows (in thousands):
<TABLE>
<CAPTION>

                                                                  1998          1999
                                                              ----------      -------
         <S>                                                  <C>             <C>
         Allowance for bad debts                              $    2,203      $ 2,548
         Inventory reserve                                         1,512        3,811
         Warranty reserve                                            992        1,072
         State income taxes                                          400          -
         Other, net                                                  (72)        (524)
                                                              -----------     --------
         Current portion                                           5,035        6,907
         Purchased technology in progress                          5,778        5,724
         Depreciation                                               (117)        (490)
                                                              -----------     --------
                                                                   5,661        5,234
                                                              -----------     --------
                                                              $   10,696      $12,141
                                                              ==========      ========
</TABLE>

The provision (benefit) for income taxes for the years ended December 31, 1997,
1998 and 1999 (including provision of $1,639,000 related to the extraordinary
gain in 1998) is as follows (in thousands):
<TABLE>
<CAPTION>

                                                              1997            1998              1999
                                                          ------------    ------------      ------------
         <S>                                               <C>              <C>              <C>
         Current
           Federal                                          $    7,635       $   3,306        $   (2,139)
           State                                                   828           1,093              (413)
           Foreign                                               1,356           3,324             1,701
                                                        --------------    ------------     -------------
                                                                 9,819           7,723              (851)
                                                        --------------    ------------     -------------
         Deferred
           Federal                                                 157            (176)           (1,487)
           State                                                    28             (31)               45
           Foreign                                                (530)           (170)              140
                                                        --------------    ------------     -------------
                                                                  (345)           (377)           (1,302)
                                                        --------------    ------------     -------------
         Provision (benefit) for income taxes               $    9,474       $   7,346        $   (2,153)
                                                        ==============    ============     =============
</TABLE>







                                      F-17
<PAGE>   51

Differences between the provision (benefit) for income taxes and income taxes at
the statutory federal income tax rate based on U.S. pre-tax income for the years
ended December 31, 1997, 1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>

                                           1997                     1998                     1999
                                   --------------------     -------------------      -------------------
<S>                                <C>          <C>         <C>         <C>          <C>         <C>
                                   Amount       Percent     Amount      Percent      Amount      Percent

Income tax provision (benefit) at
  statutory federal rate           $11,222      35.0%       $ 6,017     35.0%        $ (5,121)    34.0%
State and local income taxes,
  net of federal income tax effect   1,924        6.0         1,031      6.0             (904)     6.0
Permanent differences                  175        0.5            -         -            2,222     14.8
Research and development credit     (1,669)      (5.2)       (1,024)    (6.0)            (900)    (6.0)
Income tax on extraordinary gain        -          -          1,639      9.5               -        -
Foreign taxes at rates different
  than domestic rates, other        (1,216)      (3.8)         (317)    (1.8)           2,550     16.9
Change in valuation reserve           (962)      (3.0)     -             -                 -        -
                                ----------    -------    ----------   ------       ----------    -------
                                   $ 9,474       29.6%      $ 7,346     42.7%        $ (2,153)  (14.3)%
                                ==========    =======    ==========   ======       ==========    =======
</TABLE>

In 1995, NBase Ltd. qualified for a program under which it will be eligible for
a tax exemption on its income for a period of ten years from the beginning of
the benefits period. This benefit is due to expire in 2006. NBase Ltd. received
a tax benefit of approximately $300,000 in 1999.

The Company does not provide United States federal income taxes on the
undistributed earnings of its foreign operations. The Company's policy is to
leave the income permanently invested in the country of origin. Such amounts
will only be distributed to the United States to the extent any federal income
tax can be fully offset by foreign tax credits.









                                      F-18
<PAGE>   52

9.   Commitments and Contingencies

     Lease Commitments

     The Company leases all of its facilities and certain equipment under
     noncancelable capital and operating lease agreements expiring in various
     years through 2000. The aggregate minimum annual lease payments under
     leases in effect on December 31, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>

                                                                Capital      Operating
                                                                 Leases        Leases
                                                              ----------    -----------
                  <S>                                         <C>           <C>

                  2000                                        $     241     $     3,793
                  2001                                              218           3,190
                  2002                                              212           2,725
                  2003                                              212           2,105
                  2004                                              163             502
                  Thereafter                                        156             -
                                                              ----------    -----------
                                                              $   1,202     $    12,315
                                                                            ===========
                  Less - Amount representing interest              (166)
                                                              ----------
                                                                  1,036
                  Less - Current portion                            221
                                                              ----------
                                                              $     815
                                                              ==========
</TABLE>

     Rent expense under noncancelable operating lease agreements for the years
     ended December 31, 1997, 1998 and 1999 was $706,000, $2,759,000, and
     $4,734,000, respectively.

     Royalty Commitment

     As part of the purchase agreements of the Israeli companies in 1996, the
     selling companies' commitments to pay royalties to the State of Israel were
     assigned to the Company. The commitments arose as a consequence of the
     participation of the Israeli Government in product development through the
     payment of grants.

     The royalties are payable at a rate of between 1.5 percent and 5.0 percent
     of the sales proceeds of the products developed up to 150 percent of the
     amount of the grants received. $314,000 was provided for in 1999 for
     royalties to be paid under these agreements.






                                      F-19
<PAGE>   53

     Accounts Receivable

     The Company (through foreign subsidiaries) has agreements with several
     financial institutions to sell its receivables with recourse; in the event
     of customer's default, the Company must repurchase the receivables. At
     December 31, 1999 the Company is contingently liable in the amount of
     $10,500,000 relating to such receivables sold with recourse. The Company
     believes that adequate provision has been made for losses on receivables
     with recourse.

     Litigation

     In December, 1996, Datapoint brought an action against Nbase
     Communications, Inc., a subsidiary of the Company ("Nbase") and several
     other defendants in the United States District Court, for the Eastern
     District of New York alleging infringement of two of Datapoint's patents
     related to LANs, more particularly to claimed improved LANs which
     interoperatively combine additional enhanced capability and/or which
     provide multiple different operational capabilities. In the same lawsuit,
     Datapoint alleges that other defendants including Dayna Communications,
     Inc., Sun Microsystems, Inc., Adaptec, Inc., International Business
     Machines Corporation, Lantronix and SVEC America Computer Corporation have
     infringed the same two patents. The Company has been advised that several
     other companies, including Intel Corporation and Cisco Systems, Inc., have
     also had actions brought against them by Datapoint with respect to the same
     two patents. The action against Nbase and its codefendants seeks, among
     other things, an injunction against the manufacture or sale of products
     which embody the inventions set forth in the two patents and single and
     treble damages for the alleged infringement. Datapoint's complaint also
     seeks to have the court determine that the named defendants shall serve as
     representatives of a defendant class of manufacturers, vendors and users of
     products allegedly infringing on Datapoint's claimed patents from which
     defendant class Datapoint seeks the same relief as from the individual
     defendants. In February 1999, the court entered judgement in favor of the
     defendants and Datapoint filed a notice of appeal. The Company is
     cooperating with several of the defendants in pursuit of common defenses
     and believes the claim is without merit. If a conclusion unfavorable to the
     Company is reached, however, Datapoint's claim could materially affect the
     business, operating results and financial condition of the Company.

     The Company has received notices from third party alleging possible
     infringement 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 Lucent, Ortel, Rockwell and the
     Lemelson Foundation. The Company does not believe that any of its products
     or processes violates any of the patents asserted by these parties and the
     Company further believes that it has meritorious defenses if any legal
     action is taken by any of these parties. However if one or more of these
     parties was to assert a claim and gain a conclusion unfavorable to the
     Company such claims could materially and adversely affect the business,
     operating results and financial condition of the Company.

10.  Stock-Based Compensation Plans

The Company's stock option plans (a 1992 and 1997 Plan) provide for the granting
of options to purchase up to 2,950,000 shares of common stock, consisting of
both incentive stock options and non-qualified options. Incentive stock options
are issuable only to employees of the Company. Non-qualified stock options may
be issued to non-employee directors, consultants and others, as well as to
employees. The exercise price of all stock options granted under the Plans have
been at least equal to the fair market value of such shares on the date of
grant. The options generally vest over three to five years and expire ten years
from the grant date.







                                      F-20
<PAGE>   54

The Company has two other outstanding option and warrant programs: (1) its 1998
Non-statutory Stock Option Plan provides for the granting of options to purchase
up to 1,500,000 shares of common stock to non-employees who perform consulting
or advisory services, as well as to employees of the Company. The exercise price
of all stock options granted must be at least equal to the fair market value of
the common stock on the date of grant. The options vest over a two year period
and expire five years from the grant date, and (2) its Foreign Employee Warrant
Programs which provide for the granting of warrants to purchase up to 2,000,000
shares of common stock to employees of its foreign subsidiaries, at fair market
value. The warrants vest over a five year period and expire six years from the
grant date. Directors and officers of the Company are not eligible to
participate in either of these plans.

Stock option information with respect to the Company's stock option and warrant
plans is as follows:
<TABLE>
<CAPTION>

                                           1997                     1998                     1999
                                 -----------------------   ---------------------    ---------------------
                                               Wtd. Avg.               Wtd. Avg.                Wtd. Avg.
                                 Shares        Ex. Price   Shares      Ex. Price    Shares      Ex. Price
                                 ------        ---------   ------      ---------    ------      ---------
     <S>                         <C>           <C>         <C>         <C>          <C>         <C>

     Outstanding at beginning
       of year                    1,475        $  6.02     1,208       $  8.77      2,041         $ 4.98
     Granted                        110          19.45     1,000         18.47        561          18.42
     Exercised                     (372)          4.86      (118)         4.51       (372)          4.62
     Forfeited                       (5)          4.86       (49)        11.09       (240)          5.25
     Cancelled in repricing          -              -     (1,498)        17.86         -              -
     Granted in repricing            -              -      1,498          5.25         -              -
     Outstanding at end of year   1,208        $  8.77     2,041       $  4.98      1,990         $ 8.71
</TABLE>

     Information about stock options outstanding at December 31, 1999 is
     summarized as follows:
<TABLE>
<CAPTION>

                                   Number             Weighted Average             Number
                                 Outstanding              Remaining              Exercisable at
     Exercise Price                  1999                Contract Life                1999
     ---------------            -------------         -----------------         ---------------
     <S>                        <C>                   <C>                       <C>
     $  3.63 - $5.25                 1,932                7.29 Years                 1,880
     $  5.50 - $5.88                   571                9.09 Years                   159
     $     35.25                       240                9.95 Years                    -
                                  --------                                         -------
                                     2,743                                           2,039
                                  ========                                        ========
</TABLE>






                                      F-21
<PAGE>   55

The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," under which no compensation cost has
been recognized. If the Company had elected to recognize compensation cost based
on the fair value at the date of grant for awards in 1999, 1998 and 1997,
consistent with the provisions of SFAS No. 123, net income (loss) and net income
(loss) per share would have been reduced to the following pro forma amounts
(amounts are in thousands, except per share data):
<TABLE>
<CAPTION>

                                            1997               1998              1999
                                           ------             ------            ------
<S>                                        <C>               <C>               <C>

Additional compensation expense           $  2,488         $   1,835           $   2,888
Pro forma net income (loss)               $ 20,943         $ (21,317)          $ (14,642)
Pro forma basic net income (loss)
  per share                               $   0.88         $   (0.80)          $   (0.54)
Pro forma diluted net income (loss)
  per share                               $   0.81         $   (0.80)          $   (0.54)
</TABLE>

The pro forma effect on net income (loss) for fiscal years 1997, 1998 and 1999
may not be representative of the pro forma effect on net income (loss) in future
years because the SFAS No. 123 method of accounting for pro forma compensation
expense has not been applied to options granted prior to December 31, 1995.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Option valuation models also require the input of highly
subjective assumptions such as expected option life and expected stock price
volatility. The following assumptions were applied: (i) no expected dividend
yield for all periods, (ii) expected volatility ranging from 22 percent to 162
percent, (iii) expected lives of 4 to 6 years for all years, (iv) and risk-free
interest rates ranging from 4.23 percent to 6.73 percent for all years.

Because the Company's employee stock-based compensation plans have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, the Company believes that the existing option valuation models do not
necessarily provide a reliable single measure of the fair value of awards from
those plans.

11.  Segment Reporting and Geographic Information

The Company designs, manufactures and sells computer networking products and
fiber optic components and modules. Each of these is a business segment with its
respective financial performance detailed in this report.

Computer networking consists of Ethernet LAN routing switches and WAN and remote
access devices. These products are sold to end user customers, distributors and
value added resellers.

Fiber optic components and modules include discrete components such as lazer
diodes and light emitting diodes and integrated components such as transmitters,
receivers and transceivers. These products are sold primarily to
original-equipment manufactures and through distributors.

Business Segment Net Revenues (in thousands):
<TABLE>
<CAPTION>

                                                     1997            1998              1999
                                                ------------    ------------      ------------

         <S>                                    <C>             <C>               <C>
         Computer Networking                        $125,968        $215,230          $222,415
         Fiber Optic Components and Modules           39,503          48,845            66,109
                                                ------------    ------------      ------------
                   Total revenues                   $165,471        $264,075          $288,524
                                                ============    ============      ============
</TABLE>

Intersegment Sales from Fiber Optic Components and Modules to Computer
Networking were $4,561,000, $6,152,000 and $4,161,000 in 1997, 1998 and 1999,
respectively.






                                      F-22
<PAGE>   56

Business segment profit (loss) (in thousands):
<TABLE>
<CAPTION>

                                                               1997              1998            1999
                                                             --------         ----------      ----------
         <S>                                                 <C>              <C>             <C>

         Operating income (loss):
           Computer Networking                               $ 23,070         $ (23,739)      $ (24,998)
           Fiber Optic Components and Modules                   7,234             3,555           9,004

         Other income (expense):
           Interest expense related to convertible
           debentures and acquisition                            (843)              -
           Interest expense related to convertible
             notes                                                 -             (2,480)         (4,500)
           Interest income, net                                 2,744             6,819           4,822
           Other                                                 (146)           (1,345)            610

         Extraordinary item, gross                                 -              4,430              -
                                                             --------         ---------       ---------
         Income (loss) before income taxes                   $ 32,059         $ (12,760)      $ (15,062)
                                                             ========         =========       =========

Business segment assets (in thousands):
<CAPTION>

                                                               1997              1998            1999
                                                             --------         ----------      ----------
<S>                                                          <C>              <C>             <C>
Computer Networking                                          $113,638         $ 170,758       $ 173,871
Fiber Optic Components and Modules                             17,229            16,871          25,526
Other                                                         105,369           132,563         115,136
                                                             --------         ---------       ---------
          Total                                              $236,236         $ 320,192       $ 314,533
                                                             ========         =========       =========
Business segment assets (in thousands):
<CAPTION>


                                                               1997              1998            1999
                                                             --------         ----------      ----------
<S>                                                          <C>              <C>             <C>
         Depreciation

         Computer Networking                                 $     928        $   3,994       $   6,719
         Fiber Optic Components and Modules                        225              443           1,091
                                                             ---------        ---------       ---------
                   Total                                     $   1,153        $   4,437       $   7,810
                                                             =========        =========       =========
</TABLE>






                                      F-23
<PAGE>   57

<TABLE>
<CAPTION>

                                                                1997            1998              1999
                                                            ------------    ------------      ------------
         <S>                                               <C>              <C>              <C>
         Additions

         Computer Networking                                $      623      $    5,481        $    5,815
         Fiber Optic Components and Modules                        584             856             2,238
                                                            ----------      ----------        ----------
         Total                                              $    1,207      $    6,337        $    8,053
                                                            ==========      ==========        ==========

Geographic Area Net Trade Revenue (attributed to regions based on location of
customer), (in thousands):
<CAPTION>

                                                                1997            1998              1999
                                                            ------------    ------------      ------------
         <S>                                               <C>              <C>              <C>
         United States                                      $   66,562      $  107,376        $  122,054
         European Community                                     68,719         118,881           129,994
         Middle East                                             5,178           5,634             4,166
         Pacific Rim                                            21,607          24,892            28,921
         All Other Areas                                         3,405           7,292             3,389
                                                            ----------      ----------        ----------
                   Total                                    $  165,471      $  264,075        $  288,524
                                                            ==========      ==========        ==========

Geographic Area Property, Plant and Equipment (in thousands):
<CAPTION>

                                                                1997            1998              1999
                                                            ------------    ------------      ------------
         <S>                                               <C>              <C>              <C>
         United States                                      $    2,437      $   11,035        $   10,756
         European Community                                      3,869           5,930             5,470
         Middle East                                             1,877           2,392             3,374
                                                            ----------      ----------         ---------
          Total                                             $    8,183      $   19,357         $  19,600
                                                            ==========      ==========         =========

Operating Income (Loss) from Continuing Operations before Other Income
(Expense), Provision (Benefit) for Income Taxes and Extraordinary Item (in
thousands):
<CAPTION>
                                                               U. S.          Non-U.S.            Total
                                                          ---------------   ------------     -------------
         <S>                                               <C>              <C>              <C>
         1997                                               $    21,915     $     8,389        $  30,304
         1998                                               $   (28,280)    $     8,096        $ (20,184)
         1999                                               $    (5,781)    $   (10,213)       $ (15,994)
</TABLE>

No customer accounted for more than ten percent of revenues in 1997, 1998 or
1999.






                                      F-24
<PAGE>   58

12.  401(k) Plans

The Company has 401(k) savings plans (the Plans) at certain subsidiaries under
which all eligible employees may participate. The Plans call for the Company to
make matching contributions to all eligible employees. In 1998 and 1999,
approximately $154,000 and $679,000, respectively, was charged to operations
related to these plans.

13.  Subsequent Event

On February 22, 2000, the Company announced that it will no longer support
products in their LAN business. In connection with this decision, the Company
recorded one-time charges of approximately $13,761,000 primarily related to the
write-down of inventories which are included in cost of sales in the
accompanying consolidated statement of operations.

On February 21, 2000, the Company entered into a definitive agreement to acquire
the outstanding stock of Fiber Optic Communications Inc. (FOCI), Headquartered
in Hsinchu, Taiwan. FOCI designs, develops, manufactures, and markets Fiber
Optic components and related products. The purchase price to be paid to acquire
FOCI will consist of approximately $50,000,000 in cash and approximately 2.4
million shares of the Company's common stock.








                                      F-25

<PAGE>   59

                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The current executive officers and directors of the Company are as follows:



<TABLE>
<CAPTION>
     NAME                    AGE                                       POSITION
     ----                    ---                                       --------
<S>                          <C>         <C>
Noam Lotan(1)                 48         President, Chief Executive Officer and Director
Shlomo Margalit(1)            58         Chairman of the Board of Directors, Chief Technical Officer and Secretary
Edmund Glazer                 40         Vice President of Finance and Administration and Chief Financial Officer
Khalid (Ken) Ahmad            47         Vice President of Marketing and Sales
Ofer Iny                      32         Vice President of Engineering
Igal Shidlovsky(2)(3)         63         Director
Guenter Jaensch(2)(3)         60         Director
Daniel Tsui                   60         Director
Baruch Fischer                49         Director
</TABLE>


(1)     Member of the Executive Committee.

(2)     Member of the Compensation Committee.

(3)     Member of the Audit Committee.


        Noam Lotan has been the President, Chief Executive Officer and a
Director of the Company since May 1990 and became Chief Financial Officer of the
Company in October 1993, in which position he served until June 1995. From March
1987 to January 1990, Mr. Lotan served as Managing Director of Fibronics (UK)
Ltd., the United Kingdom subsidiary of Fibronics International Inc.
("Fibronics"), a manufacturer of fiber optic communication networks. The Company
purchased the Fibronics Business in September 1996. From January 1985 to March
1987, Mr. Lotan served as a Director of European Operations for Fibronics. Prior
to such time, Mr. Lotan held a variety of sales and marketing positions with
Fibronics and Hewlett-Packard. Mr. Lotan holds a Bachelor of Science degree in
Electrical Engineering from the Technion, the Israel Institute of Technology,
and a Masters degree in Business Administration from INSEAD (the European
Institute of Business Administration, Fontainebleau, France).

        Dr. Shlomo Margalit, a co-founder of the Company, has been Chairman of
the Board of Directors and Chief Technical Officer since the Company's inception
in July 1988. From May 1985 to July 1988, Dr. Margalit served as a founder and
Vice President of Research and Development for LaserCom, Inc. ("LaserCom"), a
manufacturer of semiconductor lasers. From 1982 to 1985, Dr. Margalit served as
a Senior Research Associate at the California Institute of Technology
("Caltech"), and from 1976 to 1982, as a Visiting Associate at Caltech. From
1972 to 1982, Dr. Margalit served as a faculty member and Associate Professor at
the Technion. During his tenure at the Technion, Dr. Margalit was awarded the
"Israel Defense" prize for his work in developing infrared detectors for heat
guided missiles and the David Ben Aharon Award for Novel Applied Research. Dr.
Margalit holds a Bachelor of Science degree, a Masters degree and a Ph.D. in
Electrical Engineering from the Technion.

        Edmund Glazer was appointed Vice President of Finance and Administration
and Chief Financial Officer in June 1995. He has been with the Company since
October 1994 serving as Operations Manager. In 1993 and 1994, Mr. Glazer served
as a consultant providing document imaging and information systems to clients.
From 1986 to 1993, Mr. Glazer served as Vice President of Finance at Concord
Electrical Supply, a distributor of electrical and electronic products. From
1984 to 1986, Mr. Glazer worked as a certified public accountant at the
accounting firm of Singer, Lewak Greenbaum & Goldstein. From 1981 to 1984, Mr.
Glazer worked as an auditor at the accounting firm of Weber, Lipshie




<PAGE>   60

& Co. In 1983, Mr. Glazer qualified as a Certified Public Accountant from the
State of California. Mr. Glazer holds a Bachelor of Science Degree in Business
Administration from the University of Southern California.

        Khalid (Ken) Ahmad has been employed as Vice President of Marketing and
Sales since July 1990 and an Executive Officer since May 1992. From April 1990
to July 1990, Mr. Ahmad served as a consultant to the Company. From January 1990
to March 1990, Mr. Ahmad served as a consultant to Welwyn Microcircuits, a
British manufacturer, providing market research information on fiber optic
technology. From October 1988 to November 1989, Mr. Ahmad served as marketing
manager and regional sales manager for STC Components, a manufacturer of optical
transmission components. From 1985 to 1988, he served as marketing operations
manager for PCO, Inc., a manufacturer of optical transmission devices and data
links. From 1977 to 1985, Mr. Ahmad also held a variety of marketing and sales
management positions with Canoga Data Systems, a data communications equipment
manufacturer, and Deutsch Company, an aerospace manufacturer. Mr. Ahmad holds a
Bachelor of Science degree in Biology from California State University at San
Bernardino.

        Ofer Iny has been Vice President of Engineering of the Company since May
1994. From January 1993 to May 1994, he served as a consultant to the Company.
From September 1991 to January 1993, Mr. Iny was a researcher at Jet Propulsion
Laboratory, Microgravity and Microwave Group. From May 1990 to March 1992, Mr.
Iny held the position of Senior Engineer at Whittaker Electronic Systems, a
manufacturer. Mr. Iny holds a Bachelor of Science degree in Physics from
California State University, Northridge, and a Masters degree in Physics from
University of California, Los Angeles ("UCLA").

        Dr. Igal Shidlovsky became a Director of the Company in May 1997. Dr.
Shidlovsky serves as Managing Director of Global Technologies, an investment and
consulting organization, which he founded in 1994. He has extensive management
and consulting experience with international companies and start up technology
companies. Dr. Shidlovsky is a Director of the Omega Point Foundation. From 1982
to 1991, Dr. Shidlovsky was a Director of Sentex Sensing Technologies. Dr.
Shidlovsky held several executive positions including Vice President Corporate
Development at Siemens Pacesetter, a division of Siemens AG Medical Group,
Director of Strategic Planning and Technology Utilization, and Director of the
Microelectronics Department at Siemens Corporate Research. From 1969 to 1982 he
was with RCA Laboratories, a leading electronic R&D organization. Dr. Shidlovsky
holds a Bachelor of Science degree in Chemistry from the Technion and Master and
Ph.D. degrees from the Hebrew University in Israel.

        Dr. Guenter Jaensch became a Director of the Company in December 1997,
agreeing to serve after Mr. Eddie Kawamura, who had been elected a Director at
the Company's annual meeting of shareholders, became too ill to serve. Dr.
Jaensch serves as Managing Director of The McKenzie Companies, Inc. and McKenzie
Ventures LTD. and as President of Jaensch Enterprises, each firm engaged in
management consulting, mergers and acquisitions and investments. For over 20
years, Dr. Jaensch held several executive positions with Siemens or its
subsidiaries. Among his executive positions in the United States were service as
President of Siemens Communications Systems, Inc.; Chairman of Siemens Corporate
Research and Support, Inc.; Chairman and Chief Executive Officer of Pacesetter;
and head of the cardiac management division of Siemens AG Medical Group. Dr.
Jaensch also served as controller of Siemens Data Processing Group and Director
of Siemens Internal Accounting and Budgeting operations. Dr. Jaensch holds a
Master degree in Business Administration and Ph.D. degree in Finance from the
University of Frankfurt. He also served as an Associate Professor at the
University of Frankfurt prior to joining Siemens.

        Professor Daniel Tsui became a director of the Company in September
1999. He is the Arthur Le Grand Doty Professor of Electrical Engineering at
Princeton University and was awarded the 1998 Nobel prize in Physics for the
discovery and explanation of the fractional quantum hall effect. Professor Tsui
was a recipient of the American Physical Society 1984 Buckley Prize, the 1998
Benjamin Franklin Medal and was elected to the National Academy of Sciences. He
is a fellow of the American Physical Society and the American Association for
the Advancement of Science. He is currently engaged in research activity
relating to properties of thin films and microstructures of semiconductors and
solid state physics. He received his Ph.D. in physics from the University of
Chicago in 1967 and for 13 years was with Bell Laboratories before joining
Princeton University, where he spent the last 16 years.

        Professor Baruch Fischer became a director of the Company in September
1999. He currently serves as Dean of the




<PAGE>   61

Electrical Engineering Faculty at the Technion, Israel Institute of Technology.
Professor Fischer's current Research Activities include solid state devices,
lasers and optical amplifiers; WDM technology; fiber gratings; "all optical"
networks; non-linear effect in fiber, wave mixing; and optical computing,
optical data storage and optical image processing. He has authored or
co-authored approximately 180 papers and holds several patents in the field of
optics and opto-electronics. He received his Ph.D. from Bar-Ilan University,
Israel in 1980. He subsequently became a Post-Doctorate Fellow at Caltech and
joined the faculty of the Technion in 1983.

        Each director is elected for a period of one year at the Company's
annual meeting of stockholders and serves until the next annual meeting and
until his successor is duly elected and qualified. Officers are elected by, and
serve at the discretion of, the Board of Directors, subject to relevant
employment agreements. None of the Directors of the Company are related by
blood, marriage or adoption to any of the Company's Directors or executive
officers.

Compliance with Section 16(a) of the Securities Exchange Act of 1934.

        Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers and persons who own more than 10% of
a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Directors, executive officers and 10% or greater shareholders are required by
the SEC regulations to furnish the Company with copies of all Section 16(a)
forms they file.

        The Company believes, based solely on a review of the copies of such
reports furnished to the Company, that each report required of the Company's
executive officers, directors and 10% or greater shareholders was duly and
timely filed during the year ended December 31, 1999.

ITEM 11. EXECUTIVE COMPENSATION

        The following table sets forth a summary of all compensation paid by the
Company to its Chief Executive Officer and for the four other highest paid
executive officers whose total annual salary and bonus exceeded $100,000 (the
"Named Executive Officers") during the year ended December 31, 1999:





<TABLE>
<CAPTION>
                                                                                                    LONG-TERM
                                                            ANNUAL COMPENSATION                   COMPENSATION
                                                     --------------------------------------       -------------
                                                                                                    SECURITIES
                                                                                                    UNDERLYING
      NAME AND PRINCIPAL POSITIONS                   YEAR          SALARY           BONUS           OPTIONS (#)
--------------------------------------------         ----         --------         --------       -------------
<S>                                                 <C>          <C>              <C>                <C>
Noam Lotan                                           1999         $100,000         $      0                0
President and Chief Executive Officer                1998         $100,000         $      0           30,000(1)
                                                     1997         $100,000         $      0                0

Shlomo Margalit                                      1999         $110,000         $      0                0
Chairman of the Board of Directors,                  1998         $110,000         $      0                0
Chief Technical Officer and Secretary                1997         $110,000         $      0                0

Ken Ahmad                                            1999         $ 90,000         $118,807           30,000
Vice President of Marketing and Sales                1998         $ 90,000         $ 89,000                0
                                                     1997         $ 90,000         $ 45,000                0

Edmund Glazer                                        1999         $140,000         $      0           30,000
Vice President of Finance and Administration         1998         $107,000         $      0           89,000(2)
and Chief Financial Officer                          1997         $ 71,000         $      0           15,000
</TABLE>




<PAGE>   62

<TABLE>
<S>                                                 <C>           <C>             <C>                    <C>
Zeev Rav-Noy(3)                                      1999         $ 89,654         $ 30,000                0
Chief Operating Officer and Treasurer                1998         $110,000         $ 60,000                0
                                                     1997         $110,000         $ 60,000                0
</TABLE>


------------------

(1) Consists of repriced options granted under the Company's Stock Option Plans
that were issued in replacement of earlier options granted to the Named
Executive Officers under the Stock Option Plans. The Options vest at their
original vesting schedules.

(2) Includes 39,000 repriced options granted under the Company's Stock Option
Plans that were issued in replacement of earlier options granted to the Named
Executive Officers under the Stock Option Plans. The Options vest at their
original vesting schedules.

(3) Dr. Rav-Noy resigned in September 1999.

        Dr. Margalit, Dr. Rav-Noy or Mr. Lotan were not granted any stock
options during 1999. The following table provides certain information regarding
stock option grants made to the other Named Executive Officers during 1999.

                        OPTION GRANTS IN LAST FISCAL YEAR



<TABLE>
<CAPTION>
                                                                                                            POTENTIAL REALIZABLE
                                                     PERCENT OF                                               VALUE AT ASSUMED
                                 NUMBER OF             TOTAL                                                ANNUAL RATES OF STOCK
                                SECURITIES            OPTIONS                                                PRICE APPRECIATION
                                UNDERLYING           GRANTED TO       EXERCISE                               FOR OPTION TERM(1)
                                  OPTIONS             EMPLOYEES        PRICE            EXPIRATION          ---------------------
           NAME                   GRANTED               1999           ($/SH)              DATE              %5             10%
         ---------              ----------           ----------       --------          ----------          -----         ------
<S>                              <C>                    <C>           <C>                <C>                <C>           <C>
         Ken Ahmad                30,000               2.9 %           $  5.875            03/26/99         $  201,000  $   438,000
         Edmund Glazer            30,000               2.9 %           $ 35.250            12/09/99         $1,208,000  $ 2,630,000
</TABLE>

(1) The dollar amounts under these columns are the result of calculations
assuming the price of Common Stock on the date of the grant of the option
($5.25) increases at the hypothetical 5% and 10% rates set by the Securities and
Exchange Commission for the term of the option. Neither the amounts reflected
nor the rates applied are intended to forecast possible future appreciation, if
any, of the Company's stock price.

                          FISCAL YEAR-END OPTION VALUES

        Neither Dr. Margalit nor Mr. Lotan received or exercised any stock
options during 1999. The following table provides certain information concerning
stock options held by the other Named Executive Officers at December 31, 1999:



<TABLE>
<CAPTION>
                                            Number of Shares Underlying                  Value of Unexercised
                                              Unexercised Options at                    In-the-Money Options at
                                                 December 31, 1999                       December 31, 1999(1)
                                         ---------------------------------         ---------------------------------
            Name                         Exercisable         Unexercisable         Exercisable         Unexercisable
            ----                         -----------         -------------         -----------         -------------
<S>                                      <C>                   <C>                <C>                   <C>
         Noam Lotan                        30,000                     0            $1,698,750            $        0
         Edmund Glazer                     20,000                79,000            $1,152,500            $3,652,375
         Ken Ahmad                        150,000                30,000            $8,886,750            $        0
</TABLE>


(1) Based on the difference between $62.875 per share (the closing price per
share of Common Stock on December 31, 1999 as reported on The Nasdaq National
Market) and the per share exercise price.




<PAGE>   63

EMPLOYMENT AGREEMENTS

        In March 1992, the Company entered into three-year employment agreements
with Mr. Lotan and Dr. Margalit. Upon expiration, these agreements automatically
renew for one year terms unless either party terminates them by giving the other
three months' notice of non-renewal prior to the expiration of the current term.
Pursuant to the agreements, Mr. Lotan serves as President, Chief Executive
Officer and a Director of the Company and Dr. Margalit serves as Chairman of the
Board of Directors, Chief Technical Officer and Secretary. Mr. Lotan and Dr.
Margalit receive base annual salaries of $100,000 and $110,000, respectively,
and each is entitled to receive a bonus determined and payable at the discretion
of the Board of Directors upon the recommendation of the Compensation Committee
of the Board. Recommendations with respect to bonus levels are based on
achievement of specified goals, such as new product introductions, profitability
levels, revenue goals, market expansion and other criteria as established by the
Compensation Committee.

        Each officer also receives employee benefits, such as vacation, sick pay
and insurance, in accordance with the Company's policies which are applicable to
all employees. The Company has obtained, and is the beneficiary of, key man life
insurance policies in the amount of $1,000,000 on the lives of each of Drs.
Margalit and Mr. Lotan. All benefits under these policies will be payable to the
Company upon the death of an insured.

COMPENSATION OF OUTSIDE DIRECTORS

        Outside directors, i.e., directors who are not employees of the Company,
receive cash compensation of $800 per month and $500 for each Board of
Directors' meeting attended, while serving as Directors.  The following table
provides information concerning repriced options granted to outside
directors during 1999:

<TABLE>
<CAPTION>
                                                  Securities
                                                   underlying
                                                   number of
                              Date of               options               Exercise           Expiration
    Name                       Grant               repriced(#)            price($)              Date
    ----                      -------             ------------            --------           ----------
<S>                          <C>                    <C>                  <C>                 <C>
Igal Shidlovsky               12/9/99                15,000               $ 35.25             12/9/2005

Guenter Jaensch               12/9/99                15,000               $ 35.25             12/9/2005

Daniel Tsui                   12/9/99                15,000               $ 35.25             12/9/2005

Baruch Fischer                12/9/99                15,000               $ 35.25             12/9/2005

</TABLE>

STOCK OPTION PLANS

        1992 Plan. On March 27, 1992, the Board of Directors and stockholders of
the Company adopted the 1992 Stock Option Plan (the "1992 Plan"), which provides
for the grant to employees, officers, directors and consultants of options to
purchase up to 900,000 shares of Common Stock, consisting of both "incentive
stock options" within the meaning of Section 422 of the United States Internal
Revenue Code of 1986, as amended (the "Code"), and non-qualified options.
Incentive stock options are issuable only to employees of the Company, while
non-qualified options may be issued to non-employee directors, consultants and
others, as well as to employees of the Company. The Board increased the 1992
Plan by 900,000 shares in February 1995, which was approved by stockholders in
June 1995 and in May 1996 increased the 1992 Plan by 150,000 shares, which was
approved by stockholders in July 1996.

        Under the 1992 Plan, the Compensation Committee has the authority to
determine the persons to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are intended to be
incentive stock options, the duration and rate of exercise of each option, the
option price per share, the manner of exercise and the time, manner and form of
payment upon exercise of an option.




<PAGE>   64

        The exercise price per share of Common Stock subject to incentive stock
options may not be less than the fair market value of the Common Stock on the
date the option is granted. The exercise price per share of Common Stock subject
to non-qualified options will be established by the Board of Directors. The
aggregate fair market value (determined as of the date the option is granted) of
the Common Stock that any employee may purchase in any calendar year pursuant to
the exercise of incentive stock options may not exceed $100,000. No person who
owns, directly or indirectly, at the time of the granting of an incentive stock
option to him, more than 10% of the total combined voting power of all classes
of stock of the Company shall be eligible to receive any incentive stock options
under the 1992 Plan unless the exercise price is at least 110% of grant.
Nonqualified options are not subject to this limitation.

        No incentive stock option may be transferred by an optionee other than
by will or the laws of descent and distribution and, during the lifetime of an
optionee, the option will be exercisable only by the optionee. In the event of
termination of employment other than by death or disability, the optionee will
have three months after such termination or until the expiration of such option,
whichever occurs first, to exercise the option. Upon termination of employment
of an optionee by reason of death or permanent total disability, options remain
exercisable for one year thereafter or until the expiration of such option,
whichever occurs first, to the extent they were exercisable on the date of such
termination. No similar limitation applies to non-qualified options.

        Stock options under the 1992 Plan must be granted within 10 years from
the effective date of the 1992 Plan. Incentive stock options granted under the
1992 Plan cannot be exercised more than 10 years from the date of grant, except
that incentive stock options issued to 10% or greater stockholders are limited
to five year terms. All options granted under the 1992 Plan provide for the
payment of the exercise price in cash or by delivery to the Company of shares of
Common Stock already owned by the optionee having a fair market value equal to
the exercise price of the options being exercised, or by a combination of such
methods of payment. Therefore, an optionee may be able to tender shares of
Common Stock to purchase additional shares of Common Stock and may theoretically
exercise all of his stock options without making any additional cash investment.

        Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed with the Company become available once again for
issuance. At December 31 1999, options for 831,480 shares were outstanding under
the 1992 Plan and none were reserved thereunder for options available for future
grant.

     1997 Plan. On November 11, 1997 and December 12, 1997, respectively, the
Board of Directors and stockholders of the Company adopted the 1997 Incentive
and Nonstatutory Stock Option Plan (the "1997 Plan"), which provides for the
grant of options to purchase up to 500,000 shares of Common Stock. On October
30, 1998 and December 3, 1999 stockholders approved the board's proposals to
increase by 500,000 and 600,000 shares, respectively, the number of shares of
Company Stock that may be optioned and sold under the 1997 Plan. The Company's
1997 Plan provides for the granting of (i) incentive stock options to key
employees and (ii) nonstatutory stock options to key employees and non-employee
directors of the Company and any person who performs consulting or advisory
services for the Company and who is, by the Board of Directors or the Stock
Option Committee, determined to be eligible to participate. For information
concerning the federal income tax distinctions of incentive and nonstatutory
stock options, see "Federal Income Tax Consequences of Incentive Stock Options
and Nonstatutory Stock Options," below.

        The maximum number of shares of the Company's Common Stock that may be
issued pursuant to the exercise of options granted under the 1997 Plan is
1,600,000 shares (subject to adjustment in the event of stock dividends, splits,
reverse splits, recapitalizations, mergers or other similar changes in the
Company's capital structure). No more than 1,000,000 shares may be optioned and
sold to directors or non-director officers under the Stock Option Plan as
amended. All options must be granted, if at all, not later than November 10,
2007. The aggregate fair market value (determined as of the date the option is
granted) of the shares of Common Stock to which incentive stock options granted
under the Stock Option Plan are exercisable for the first time by



<PAGE>   65

any employee of the Company during any calendar year may not exceed $100,000.
This limitation does not apply with respect to nonstatutory stock options.

        The 1997 Plan is to be administered by Board of Directors, which will
determine the terms of options granted, including the exercise price, the number
of shares subject to the option and the terms and conditions of exercise. No
option granted under the 1997 Plan is transferable by the optionee other than by
will or the laws of descent and distribution and each option is exercisable
during the lifetime of the optionee only by such optionee. Incentive stock
options and nonstatutory stock options may be and typically are granted for
exercise for up to ten years from the date granted and typically vest in equal
installments over three years from the date of grant.

        Options granted under the 1997 Plan are evidenced by written agreements
specifying the number of shares covered thereby and the option price, the
exercise period and all other terms, restrictions and conditions of the option.
The exercise price of all stock options granted under the 1997 Plan must be at
least equal to the fair market value of such shares on the date of grant. With
respect to any optionee who owns stock possessing more than 10% of the voting
rights of the Company's outstanding capital stock, the exercise price of any
stock option must be not less than 110% of the fair market value on the date of
grant.

        Options must be exercised only by written notice from the optionee (or
his estate or other legal representative) to the Company accompanied by payment
of the option price in full. The option price may be paid in cash, cash
equivalents (certified or cashier's check), or with shares of Common Stock of
the Company.

     As of December 31, 1999, options to purchase an aggregate of 1,158,900
shares of Common Stock were outstanding and 360,000 were available for future
grant.

     Other Option Plans. The Company also has two other types of option/warrant
programs for employees: (1) its 1998 Nonstatutory Stock Option Plan, under which
the Company may grant nonstatutory stock options to purchase up to 1,500,000
shares of Common Stock to employees the Company and any person who performs
consulting or advisory services for the Company and who is, by the Board of
Directors or the Stock Option Committee, determined to be eligible to
participate, and (2) its Foreign Employee Warrant Programs under which the
Company may grant warrants to purchase up to 2,000,000 shares of Common Stock to
employees of its foreign subsidiaries. Directors and officers of the Company are
not eligible to participate in either of these plans. At December 31, 1999
options for 758,475 shares were outstanding under the 1998 Nonstatutory Stock
Option Plan and 509,165 were reserved thereunder for options available for
future grant. At December 31, 1999, warrants for 1,015,461 shares were
outstanding under the Foreign Employee Warrant Programs and 261,000 were
reserved thereunder for warrants available for future grant.

LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS

        The Company's Certificate of Incorporation includes a provision that
eliminates or limits the personal financial liability of the Company's
directors, except in situations where there has been a breach of the director's
duty of loyalty to the Company or its stockholders, acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, liability under Section 174 of the Delaware General Corporation Law
("Section 174") relative to unlawful payment of dividends, stock purchases or
redemptions, or any transaction from which the director derived an improper
personal benefit. Furthermore, Section 174 eliminates monetary liability for
gross negligence in exercising the duty of due care related to the directors'
fiduciary duties under state corporate law, however, such section does not
eliminate monetary liability of directors under the federal Securities laws. In
addition, the Company's Bylaws include provisions to indemnify its officers and
directors and other persons against expenses, judgments, fines and amounts paid
in settlement in connection with threatened, pending or completed suits or
proceedings against such persons by reason of serving or having served as
officers, directors or in other capacities, except that in relation to matters
with respect to which such persons shall be determined to be liable for
misconduct or negligence in the




<PAGE>   66

performance of their duties, the Company's Bylaws provide for indemnification
only to the extent that the Company determines that such person acted in good
faith and in a manner not opposed to the best interests of the Company. Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against the
public policy as expressed in the Act and is therefore unenforceable.






<PAGE>   67

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

        The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of March 20, 2000, of (i) each
person known by the Company to own beneficially 5% or more of the Common Stock,
(ii) each current director of the Company owning Common Stock, (iii) each of the
current Named Executive Officers owning Common Stock, and (iv) all current
directors and executive officers as a group.


<TABLE>
<CAPTION>
                                                 Number of Shares
          Name and Address(1)                      Beneficially          Percentage of
         of Beneficial Owner                         Owned(2)                Class
         --------------------                    ----------------        -------------
<S>                                                <C>                       <C>
Shlomo Margalit ........................            1,668,530                 5.8%
Noam Lotan(3) ..........................              763,437                 2.6%
Ken Ahmad(4) ...........................              294,464                 1.0%
Edmund Glazer ..........................               20,000                  *
All Directors and Executive Officers
  as a Group (8 persons)(5) ............            2,870,431                10.0%
</TABLE>

----------------------

* Less than 1%.

(1) Except as noted below, the address of each of the persons listed is c/o MRV
Communications, Inc., 8943 Fullbright Avenue, Chatsworth, CA 91311.

(2) Pursuant to the rules of the Commission, shares of Common Stock that an
individual or group has a right to acquire within 60 days pursuant to the
exercise of options or warrants are deemed to be outstanding for the purpose of
computing the percentage ownership of such individual or group but are not
deemed to be outstanding for the purpose of computing the percentage ownership
of any other person shown in the table.

(3) Includes 30,000 shares issuable pursuant to stock options exercisable
within 60 days from March 20, 2000.

(4) Includes 156,000 shares issuable pursuant to stock options exercisable
within 60 days from March 20, 2000.

(5) Includes 279,000 shares issuable pursuant to stock options exercisable
within 60 days from March 20, 2000.






<PAGE>   68

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


     In July 1998, the Company and Zaffire, Inc. (Formerly New Access
Communications, Inc.) ("Zaffire")entered into a Securities Purchase Agreement,
under which the Company purchased for $950,000 shares of the capital stock of
Zaffire equal to approximately 19% of the capital stock of Zaffire then
outstanding and warrants to purchase additional capital stock of Zaffire, which,
if fully exercised for an aggregate of $2,050,000, the Company would own an
aggregate of approximately 60% of Zaffire's capital stock (when the shares
purchased upon exercise of the warrants were added to the Company's existing
stake in Zaffire). The warrants were exercisable in two installments (provided
the first installment was exercised) by July 1, 1999 and January 4, 1999,
respectively. Both warrants were exercised. Subsequent financings have diluted
MRV's ownership interest in Zaffire to below 50% at December 31, 1999. Zaffire
is engaged in the development of new products based on wave division
multiplexing technology. Dr. Near Margalit is the Chairman of the Board and
Chief Executive Officer of Zaffire and a principal shareholder of it. Dr. Near
Margalit is the son of Dr. Shlomo Margalit, a principal shareholder of the
Company and the Company's Chairman of the Board of Directors and Chief Technical
Officer.




<PAGE>   69

                                     PART IV



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

(a)     (1) The financial statements filed as a part of this Report consist of
            the financial statements listed under Item 8.

        (2) The financial statements schedules filed as part of this report
            consist of the following:
              Schedule II Valuation and Qualifying Accounts
              Report of Independent Public Accountants on Financial Statement
                Schedule

        (3) The following exhibits are filed as part of this Report:



<TABLE>
<CAPTION>
 Exhibit No.                       Description
 ----------                        -----------
<S>             <C>
    2.1         Agreement and Plan of Merger by and between MRV Technologies,
                Inc. (a California corporation) and MRV Technologies, Inc. (a
                Delaware corporation), as amended (incorporated by reference to
                Exhibit 2a filed as part of Registrant's Registration Statement
                on Form S-1 (File No. 33-48003)).

    2.2         Certificate of Merger by and between MRV Technologies, Inc. (a
                California corporation) and MRV Technologies, Inc. (a Delaware
                corporation) (incorporated by reference to Exhibit 2b filed as
                part of Registrant's Registration Statement on Form S-1 (File
                No. 33-48003)).

    3.1         Certificate of Incorporation, as amended (incorporated by
                reference to Exhibit 3a filed as part of Registrant's
                Registration Statement on Form S-1 (File No. 33-48003)).

    3.2         Certificate of Amendment of Certificate of Incorporation filed
                with the Delaware Secretary of State on March 20, 1996
                (incorporated by reference to Exhibit 3.2 of the Company's Form
                10-Q for the quarter ended June 30, 1998 filed August 14, 1998).

    3.3         Certificate of Amendment of Certificate of Incorporation filed
                with the Delaware Secretary of State on July 29, 1996
                (incorporated by reference to Exhibit 3.3 of the Company's Form
                10-Q for the quarter ended June 30, 1998 filed August 14, 1998)

    3.4         Certificate of Amendment of Certificate of Incorporation filed
                with the Delaware Secretary of State on November 19, 1998
                (incorporated by reference to Exhibit 3.4 of the Company's Form
                10-K for the year ended December 31, 1998 filed March 31, 1999.

    3.5         Bylaws (incorporated by reference to Exhibit 3b filed as part of
                Registrant's Registration Statement on Form S-1 (File No.
                33-48003)).

    4.1         Specimen certificate of Common Stock (incorporated by reference
                to Exhibit 4.5 filed as part of Registrant's Registration
                Statement on Form S-3 (File No. 333-64017).

    4.2         Specimen of Restricted Global Security (incorporated by
                reference to Exhibit 4.3 of the Company's Form 10-Q for the
                quarter ended June 30, 998 filed August 14, 1998).

    10.1        Form of Underwriter's Warrant issued to Hampshire Securities
                (incorporated by reference to Exhibit 4f filed as part of
                Registrant's Registration Statement on Form S-1 (File No.
                33-86516)).

    10.2        Lease for premises at 8917 Fullbright Avenue, Chatsworth, CA
                dated August 5, 1991 (incorporated by reference to Exhibit 10a
                filed as part of Registrant's Registration Statement on Form S-1
                (File No. 33-48003)).

</TABLE>




<PAGE>   70


<TABLE>
<S>            <C>
    10.3        Lease for premises at 8943 Fullbright Avenue, Chatsworth, CA
                dated March 3, 1993 (incorporated by reference to Exhibit 10a(1)
                filed as part of Registrant's Registration Statement on Form S-1
                (File No. 33-48003)).

    10.4        Key Employee Agreement between the Company and Noam Lotan dated
                March 23, 1993 (incorporated by reference to Exhibit 10b(1)
                filed as part of Registrant's Registration Statement on Form S-1
                (File No. 33-48003)).

    10.5        Letter amending Key Employee Agreement between the Company and
                Noam Lotan (incorporated by reference to Exhibit 10b(1)1 filed
                as part of Registrant's Registration Statement on Form S-1 (File
                No. 33-48003)).

    10.6        Letter amending Key Employee Agreement between the Company and
                Noam Lotan (incorporated by reference to Exhibit 10b(1)2 filed
                as part of Registrant's Registration Statement on Form S-1 (File
                No. 33-48003)).

    10.7        Key Employee Agreement between the Company and Zeev Rav-Noy
                dated March 23, 1992 (incorporated by reference to Exhibit
                10b(2) filed as part of Registrant's Registration Statement on
                Form S-1 (File No. 33-48003)).

    10.8        Letter amending Key Employee Agreement between the Company and
                Zeev Rav-Noy (incorporated by reference to Exhibit 10b(2) filed
                as part of Registrant's Registration Statement on Form S-1 (File
                No. 33-48003)).

    10.9        Letter amending Key Employee Agreement between the Company and
                Zeev Rav-Noy (incorporated by reference to Exhibit 10b(2) filed
                as part of Registrant's Registration Statement on Form S-1 (File
                No. 33-48003)).

    10.10       Key Employee Agreement between the Company and Shlomo Margalit
                (incorporated by reference to Exhibit 10b(3) filed as part of
                Registrant's Registration Statement on Form S-1 (File No.
                33-48003)).

    10.11       Letter amending Key Employee Agreement between the Company and
                Shlomo Margalit (incorporated by reference to Exhibit 10b(3)1
                filed as part of Registrant's Registration Statement on Form S-1
                (File No. 33-48003)).

    10.12       Form of Letter amending Key Employee Agreement between the
                Company and Shlomo Margalit (incorporated by reference to
                Exhibit 10b(3) 2 filed as part of Registrant's Registration
                Statement on Form S-1 (File No. 33-48003)).

    10.13       Employment Letter between the Company and Khalid (Ken) Ahmad
                dated August 8, 1990 (incorporated by reference to Exhibit
                10b(4) filed as part of Registrant's Registration Statement on
                Form S-1 (File No. 33-48003)).

    10.14       MRV Communications Inc. Incentive Plan for Grant of Warrants to
                Employees Subsidiaries (incorporated by reference to Exhibit No.
                10.21 of Registrant's Annual Report on Form 10-K (0-23452) for
                the year ended December 31, 1996 filed April 15, 1997).

    10.15       Standard Industrial/Commercial Single-Tenant Lease dated October
                8, 1996 between the Company and Nordhoff Development relating to
                the premises located at 20415 Nordhoff Street, Chatsworth,
                California (incorporated by reference to Exhibit No. 10.23 of
                Registrant's Annual Report on Form 10-K for the year ended
                December 31, 1996 filed April 15, 1997).

    10.16       Common Stock Purchase Agreement dated November 26, 1996 between
                the Company and Intel Corporation (incorporated by reference to
                Exhibit No. 10.27 of Registrant's Annual Report on Form 10-K
                (0-23452) for the year ended December 31, 1996 filed April 15,
                1997).
</TABLE>



<PAGE>   71

<TABLE>
<S>            <C>
    10.17       Investor Agreement dated November 26, 1996 between the Company
                and Intel Corporation (incorporated by reference to Exhibit No.
                10.28 of Registrant's Annual Report on Form 10-K (0-23452) for
                the year ended December 31, 1996 filed April 15, 1997).

    10.18       Warrant to Purchase 300,000 shares of Common Stock in favor of
                Intel Corporation (incorporated by reference to Exhibit No.
                10.29 of Registrant's Annual Report on Form 10-K (0-23452) for
                the year ended December 31, 1996 filed April 15, 1997).

    10.19       Warrant to Purchase 100,000 shares of Common Stock in favor of
                Intel Corporation (incorporated by reference to Exhibit No.
                10.29 of Registrant's Annual Report on Form 10-K (0-23452) for
                the year ended December 31, 1996 filed April 15, 1997).

    10.20       Stock Purchase Agreement dated January 19, 1998 by and between
                Whittaker and Registrant (incorporated by reference to Exhibit
                No. 2.1(a) of Registrant's Report on Form 8-K filed February 13,
                1998 with respect to the Xyplex Acquisition).

    10.21       Warrant Agreement dated January 30, 1998 by and between
                Whittaker and Registrant (incorporated by reference to Exhibit
                No. 2.1(b) of Registrant's Report on Form 8-K filed February 13,
                1998 with respect to the Xyplex Acquisition).

    10.22       Warrant Certificate No. Whittaker # 1 to purchase 421,402 shares
                of Common Stock of Registrant issued to Whitaker on January 30,
                1998 (incorporated by reference to Exhibit No. 2.1(c) of
                Registrant's Report on Form 8-K filed February 13, 1998 with
                respect to the Xyplex Acquisition).

    10.23       American Industrial Real Estate Association, Standard
                Industrial/Commercial Single-Tenant Lease - Net dated November
                17, 1997 by and between Ruth G Fisher Living Trust U/D/T dated
                June 28 1990 and Registrant relating to the premises located at
                8928 Fullbright Avenue, Chatsworth, California (incorporated by
                reference to Exhibit No. 10.35 of Registrant's Report on Form
                10-K for the year ended December 31, 1997 filed April 15, 1998).

    10.24       New Lease dated February 22, 1993 by and between 495 Littleton
                Associates and Xyplex, Inc. relating to the premises located at
                295 Foster Street, Littleton, Mass, Amendments Nos. 1 through 4
                thereto (incorporated by reference to Exhibit No. 10.36 of
                Registrant's Report on Form 10-K for the year ended December 31,
                1997 filed April 15, 1998).

    10.25       Fifth Amendment to Lease relating to the premises located at 295
                Foster Street, Littleton, Mass. with attached Lease Guaranty of
                Registrant (incorporated by reference to Exhibit 10.31 of the
                Company's Form 10-K for the year ended December 31, 1998 filed
                March 31, 1999).

    10.26       Underwriting Agreement dated September 18, 1997 by and among
                Registrant, the Selling Stockholders named on Schedule I thereto
                and the Underwriters named on Schedule II thereto (incorporated
                by reference to Exhibit No. 10.37 of Registrant's Report on Form
                10-K for the year ended December 31, 1997 filed April 15, 1998).

    10.27       Indenture, dated as of June 26, 1998, between the Company and
                American Stock Transfer & Trust Company, as Trustee, relating to
                the Company's 5% Convertible Subordinated Notes Due 2003 (the
                "Notes") (incorporated by reference to Exhibit 4.2 of the
                Company's Form 10-Q for the quarter ended June 30, 1998, filed
                August 14, 1998).

    10.28       Purchase Agreement, dated June 23, 1998, between the Company and
                Prudential Securities Incorporated and Bear, Stearns & Co. Inc.
</TABLE>




<PAGE>   72


<TABLE>
<S>             <C>
                relating to the Notes (incorporated by reference to Exhibit 4.1
                of the Company's Form 10-Q for the quarter ended June 30, 1998
                filed August 14, 1998).

    10.29       Indenture, dated as of June 26, 1998, between the Company and
                American Stock Transfer & Trust Company, as Trustee, relating to
                the Notes (incorporated by reference to Exhibit 4.2 of the
                Company's Form 10-Q for the quarter ended June 30, 1998, filed
                August 14, 1998).

    10.30       Registration Rights Agreement dated June 26, 1998 between the
                Company and Prudential Securities Incorporated and Bear, Stearns
                & Co. Inc. relating to the shares of Common Stock issuable upon
                conversion of the Notes (incorporated by reference to Exhibit
                4.4 of the Company's Form 10-Q for the quarter ended June 30,
                1998 filed August 14, 1998).

    10.31       Underlease dated September 16, 1998 between Lowe Azure Limited,
                NBase Europe Gmbh and the Company relating to property at Unit
                16, Campbell Court, Campbell Road, Bramley Basingstoke
                Hampshire, England (incorporated by reference to Exhibit 10.37
                of the Company's Form 10-K for the year ended December 31, 1998
                filed March 31, 1999).

    10.32       Standard Industrial/Commercial Single-Tenant Lease - Net dated
                December 1, 1998 by and between Radar Investments, Inc. and
                Registrant relating to the premises located at 8943 Fullbright
                Avenue, Chatsworth, California (incorporated by reference to
                Exhibit 10.38 of the Company's Form 10-K for the year ended
                December 31, 1998 filed March 31, 1999).

    10.33       Stock Purchase Agreement Dated February 21, 2000 Relating To The
                Sale And Purchase Of Up To One Hundred Percent (100%) Of The
                Ordinary Shares In The Capital Of Fiber Optic Communications,
                Inc. And The Sale And Purchase Of Two Million Four Hundred
                Thousand Of Ordinary Shares In The Capital Of MRV
                Communications, Inc.

    21          Subsidiaries of the Registrant.

    23          Consent of Arthur Andersen LLP to incorporation of Report on
                Financial Statements into Company's Registration Statements on
                Form S-8 (File No. 33-96458), Form S-3 (File No. 333-17537) and
                Form S-3 (File No. 333-64017).

    25          Power of Attorney (contained on Signature Page).

    27          Financial Data Schedule.
</TABLE>


(b)     Reports on Form 8-K.

        No reports on Form 8-K were filed by registrant during the last quarter
of the period covered by this Report.





<PAGE>   73
                                   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 March 30, 2000.



                                               MRV COMMUNICATIONS, INC.

                                               By:  /s/  Noam Lotan

                                               Noam Lotan, President and
                                               Chief Executive Officer



                                POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes an appoints Noam Lotan, Shlomo Margalit and Edmund
Glazer, and each of them, as his true and lawful attorneys-in-fact and agents,
with full power of substitution for him in any and all capacities, to sign any
and all amendments to this Annual Report on Form 10-K and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated.


<TABLE>
<CAPTION>
              Names                                 Title                          Date
              -----                                 -----                          ----
<S>                                <C>                                          <C>
        /s/ Noam Lotan              President, Chief Executive Officer          March 30, 2000
-------------------------------     (Principal Executive Officer),
        Noam Lotan                  and a Director


        /s/ Shlomo Margalit         Chairman of the Board of Directors,         March 30, 2000
-------------------------------     Chief Technical Officer,
        Shlomo Margalit             Secretary, and a Director


        /s/ Edmund Glazer           Vice President of Finance  and              March 30, 2000
-------------------------------     Administration,
        Edmund Glazer               Chief Financial Officer
                                    (Principal Financial and
                                    Accounting Officer)


        /s/ Igal Shidlovsky         Director                                    March 30, 2000
-------------------------------
        Igal Shidlovsky


        /s/ Guenter Jaensch         Director                                    March 30, 2000
-------------------------------
        Guenter Jaensch
</TABLE>






<PAGE>   74


<TABLE>
<S>                               <C>                                        <C>
        /s/ Daniel Tsui            Director                                   March 30, 2000
-------------------------------
        Daniel Tsui


        /s/ Baruch Fischer         Director                                   March 30, 2000
-------------------------------
        Baruch Fischer
</TABLE>







<PAGE>   75



                            MRV COMMUNICATIONS, INC.

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

<TABLE>
<CAPTION>
                                   Balance at                Charged to             Balance at
                                    Beginning                Costs and                  End
                                     of Year       Other      Expenses   Deductions    of Year
                                  ------------    --------   ----------  ----------  ----------
<S>                               <C>             <C>        <C>         <C>         <C>
Year Ended December 31, 1997
----------------------------

  Allowance for doubtful accounts      $2,468         --       $1,872        (88)       $4,252

Year Ended December 31, 1998
----------------------------

  Allowance for doubtful accounts      $4,252      $2,647      $2,591      (1,003)      $8,487

Year Ended December 31, 1999
----------------------------

  Allowance for doubtful accounts      $8,487          --      $1,416      (1,452)      $8,451
</TABLE>
<PAGE>   76


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To MRV Communications, Inc.:

We have audited in accordance with generally accepted auditing standards, the
financial statements of MRV Communications, Inc. and subsidiaries included in
this Form 10-K and have issued our report thereon dated February 22, 2000. Our
audit was made for the purpose of forming an opinion on the basic financial
statements takes as a whole. The Schedule of Valuation and Qualifying Accounts,
Schedule II, for the years ended December 31, 1997, 1998 and 1999 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.



ARTHUR ANDERSEN LLP


Los Angeles, California
February 22, 2000