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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, 1997

   [ ] 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)

        8917 Fullbright Avenue                                91311
     Chatsworth, California 91311                           (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:

     $518,865,557 based on the closing sale price of a share of Common Stock 
     at March 31, 1998 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: 26,757,203 shares of Common
Stock, $0.0034 par value at March 31, 1998.


                      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., its predecessor and its wholly-owned consolidated
subsidiaries, except where the context otherwise indicates. Any Speed to Any
Speed Ethernet, BranchRunner, ControlPoint, Enterprise Hub, FocalPoint, GigaHub,
JavaMan, LANBus, MAXserver MegaStack, MegaSwitch, MegaSwitch II, MegaVision, MRV
Communications, NBase, Network 9000, RouteRunner, WANscape and West Hills LAN
System 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 a leading manufacturer and marketer of high speed network switching
and fiber optic transmission systems which enhance the performance of existing
data- and telecommunications networks. The Company designs, manufactures and
sells two groups of products: (i) computer networking products, primarily
Ethernet local area network ("LAN") switches, hubs and related equipment and
(ii) fiber optic components for the transmission of voice, video and data across
enterprise, telecommunications and cable TV networks. The Company's advanced
networking solutions greatly enhance the functionality of LANs by reducing
network congestion while allowing end users to preserve their legacy investments
in pre-existing networks and providing cost-effective migration paths to next
generation technologies such as Gigabit Ethernet. The Company's fiber optic
components incorporate proprietary technology which delivers high performance
under demanding environmental conditions.

     The Company offers a family of network, switching and related products that
enhance LAN performance and facilitate the migration to next generation
technologies such as Fast Ethernet, Gigabit Ethernet and Asynchronous Transfer
Mode ("ATM"). MRV's MegaSwitch family of switching products range from complete
switching systems to stackable switches which upgrade performance of existing
LANs by relieving congestion of overloaded transmission speeds without requiring
replacement of existing technologies. In addition, the Company offers GigaHub, a
multi-platform switchable hub, and MegaStack, a LAN stackable hub supporting
shared and switches connectivity in a multiplatform and protocol environment, as
well as a network management system and a number of other products that support
network connectivity.

     The Company complements its switching 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.

     To position the Company for growth, management's strategy has been to focus
on rapidly developing markets in the communications arena, such as LAN switching
and access networks, and to concentrate on improving



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performance of networks employing Ethernet protocols, thereby addressing the
largest installed base of network users. Management's strategy has also been to
emphasize development of innovative products that the Company may bring to
market early and to capitalize on MRV's manufacturing expertise and ability to
use proprietary fiber optic transmission and advanced switching technologies to
create high-speed, cost-effective networking solutions.

     The Company's principal executive offices are located at 8917 Fullbright
Avenue, Chatsworth, California 91311 and its telephone and fax numbers are (818)
773-9044 and (818) 773-0906, respectively. The Company maintains Web sites at
"http://www.mrv.com," "http://www.nbase.com" and "http://www.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 has 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 



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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
500,000 shares of Common Stock of the Company at an exercise price of $35 per
share.

     The Xyplex Acquisition is enabling MRV to expand its product lines with
products having wide area network ("WAN") and remote access capabilities,
permitting the Company to offer both individual networking products and a
complete end-to-end solution from LAN to WAN not only to MRV's own existing base
of customers but also to the customer base added by Xyplex. The
acquisition of Xyplex has also increased MRV's sales force, distribution 
channels, customer support and service organization.

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 and Product Defects. The
Company is engaged in the design and development of devices for the computer
networking telecommunications and fiber optic communication industries. As with
any new technologies, there is a substantial risk 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 computer
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.

     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 could, 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.



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     Potential Fluctuations in Operating Results. The Company's revenue and
operating results could fluctuate 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, 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. Although the Company has not had adverse fluctuations in results
from continuing operations in the past, there can be no assurance that these
factors or others, such as those discussed in "International Operations," would
not cause such fluctuations in the future. The volume and timing of orders
received during a quarter are difficult to forecast. The Company's customers
from time to time 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. Further,
there can be no assurance that the Company will be able to sustain its recent
rate of growth or continue profitable operations.

     Competition. The markets for fiber optic components and network switching
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
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.

     Management of Growth. The Company has grown rapidly in recent years, with
revenues increasing from $2,400,000 for the year ended December 31, 1991, to
$39,200,000, $88,815,000 and $165,471,000 for the years ended December 31, 1995,
1996 and 1997, respectively. 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
Acquisition and Potential Future 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.

     Risks Associated with Recent Acquisitions and Potential Future
Acquisitions. On September 26, 1996, the Company completed the Fibronics
Acquisition from Elbit of certain of the assets and selected liabilities of
Fibronics related to Fibronics' computer networking and telecommunications
businesses in Germany, the United States, the United Kingdom, the Netherlands
and Israel. The assets acquired included Fibronics' technology in progress and
existing 




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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, which was paid using a combination of cash and Common
Stock of the Company. During the years ended December 31, 1994 and 1995, and the
period from January 1, 1996 through September 25, 1996 (the day the Fibronics
Business was acquired by the Company), the Fibronics Business reported net
revenues of $33,355,000, $35,003,000 and $19,481,000, respectively, and net
income (losses) of $(11,557,000), $79,000 and $(6,143,000), respectively. In
connection with the Fibronics Acquisition, the Company incurred charges of
$17,795,000, $6,974,000 and $4,357,000 for purchased technology, restructuring
and interest expense related to financing, respectively. These charges caused
the Company to incur a net loss of $9,654,000 for the year ended December 31,
1996.

     On January 30, 1998, MRV completed the Xyplex Acquisition from Whittaker.
Xyplex is a leading provider of access solutions between enterprise networks and
wide area network and/or ISPs. The purchase price paid to Whittaker consisted of
$35,000,000 in cash and three-year warrants to purchase up to 500,000 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, 
$13,355,000 and $80,309,000, respectively. While adding 11 months of Xyplex' 
revenues to those of the Company, the charges resulting from the Xyplex 
Acquisition are expected to have a material adverse effect on the net operating
results the Company expects to report during and for the year ending 
December 31, 1998. The Company's ability to operate Xyplex profitably will 
depend upon its ability to integrate this business successfully, including 
(i) the completion of Xyplex' research and development projects in process, 
especially the EdgeBlaster program, (ii) the integration of the products, 
technologies and personnel of Xyplex into the Company, (iii) management's 
ability to reduce Xyplex' operating costs and (iv) the continued market 
acceptance of Xyplex' products and technology.

     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. Accordingly, the Company may acquire additional businesses,
products or technologies in the future. Future acquisitions by the Company could
result in charges similar to those incurred in connection with the Fibronics
Acquisition and the Xyplex Acquisition, potentially 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 and/or the price of the Company's Common Stock.
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 and potential loss of key employees of acquired
organizations. 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.

     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 45%, 53% and 60% of the Company's net revenues for the years ended
December 1995, 1996 and 1997, 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


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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, 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 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. 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.

     Manufacturing and Dependence on Suppliers and Third Party Manufacturers.
The Company uses internally developed Application Specific Integrated Circuits
("ASICs"), which provide the functionality of multiple integrated circuits in
one chip, in the manufacture of its Local Area Network ("LAN") switching
products. To develop ASICs successfully, the Company must transfer a code of
instructions to a single mask from which low cost duplicates can be made. Each
iteration of a mask involves a substantial up-front cost, which costs can
adversely affect the Company's result of operations and financial condition if
errors or "bugs" occur following multiple duplication of the masks. While the
Company has not experienced material expenses to date as a result of errors
discovered in ASIC masks, because of the complexity of the duplication process
and the difficulty in detecting errors, the Company could suffer a material
adverse effect to its operating results and financial condition if errors in
developing ASICs were to occur in the future. Moreover, the Company currently
relies on a single, unaffiliated foundry, Chip Express, to fabricate its ASICs.
The Company does not have a long-term supply contract with Chip Express, any
other ASIC vendor or any other of its limited source vendors, purchasing all of
such components on a purchase order basis under standard terms of sale. While
the Company believes it would be able to obtain alternative sources of supply
for the ASICs or other key components, a change in ASIC or other suppliers of
key components could require a significant lead time and, therefore, could
result in a delay in product shipments. While the Company has not experienced
delays in the receipt of ASICs or other key components, any future difficulty in
obtaining any of these key components could result in delays or reductions in
product shipments which, in turn, could have a material adverse effect on the
Company's business, operating results and financial condition.

     The Company outsources the assembly, test and quality control of material,
components, subassemblies and systems relating to its 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.



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     The Company relies exclusively 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.

     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.

     By letter to the Company dated March 19, 1997, a party has made a claim
against the Company alleging that the Company's DirectIP switching products make
use of unspecified information and know-how covered by a pending patent
application of such party. This allegation is under review by the Company and
the Company believes that the allegation is without merit. However, a complete
assessment cannot be made with respect to the merits of the allegation until
further details of the information and know-how are provided by such third
party. Currently, sales of DirectIP products are not material to the Company,
however, if the DirectIP switching products comprise a material part of the
Company's revenues in the future and a conclusion in respect of the claim
unfavorable to the Company is reached, the claim, if pursued by such party,
could materially and adversely affect the business, operating results and
financial 



                                       8
<PAGE>   9

condition of the Company. In addition, on December 27, 1996 Datapoint
Corporation ("Datapoint") brought an action against NBase Communications, 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. For further
information concerning this litigation, see Item 3. Legal Proceedings.

     Risks from Year 2000 Issues. Many existing 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
upcoming change in the century. If not corrected, these computer applications
and systems could fail or create erroneous results by, at, or after the year
2000. Based on the Company's investigation to date, management does not
anticipate that the Company will incur material operating expenses or be
required to incur material costs to be year 2000 compliant. To the extent the
Company's systems are not fully year 2000 compliant, there can be no assurance
that potential systems interruptions or the cost necessary to update software
would not have a material adverse effect on the Company's business, financial
condition, results or operations and business prospects.

     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, Dr. Zeev Rav-Noy, its Chief
Operating 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 owns and is the beneficiary of key man life
insurance policies in the amounts of $1,000,000 each on the lives of Drs.
Margalit and Rav-Noy 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 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.

     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. See Item 5. Market for Common Equity and Related Stockholder Matters.
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.

     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 may be issued in one or more series, 



                                       9
<PAGE>   10

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

     The global communications industry has undergone significant transformation
and growth since the mid-1980's as a result of increased demand for
communications services and applications, as well as advances in technology and
changes in network architectures and public policy. The client server network
architecture with its shared information and resources, the increased power of
conventional applications as well as the proliferation of graphic intensive
applications such as multimedia, the Internet and intranets, have resulted in a
strong demand for additional bandwidth. This trend is expected to continue as
additional bandwidth intensive applications, such as video conferencing, are
increasingly used. Further, as a result of changes in communications regulations
and the adoption of common standards, enterprise networks, such as LANs and
WANs, and access networks, such as telecommunications and cable TV, are expected
to converge. The demand for high bandwidth applications, as well as the
convergence of data communications and telecommunications, has significantly
increased the requirement for networking and fiber optic equipment that
increases the capacity of networks through high speed and more efficient
transmission technologies.

     High-speed switching systems enhance the bandwidth of LANs so that a
greater number of users can utilize more complex applications without
experiencing network congestion. Fiber optic transmission components also
enhance the functionality of enterprise and access networks by enabling
high-speed transmission of voice, video and data across fiber optic cable.
Market research firms forecast strong growth in both of these sectors. In
October 1997, an industry analyst estimated that the market for LAN switches
will grow from $4 billion in 1996 to $12 billion in 1999, a compounded annual
growth rate of 46%. The same analyst estimated that the fiber optics industry
was $6.1 billion in 1995 and will grow to $12.3 billion by 1999, a compounded
annual growth rate of 19%. The Company believes that the growth of fiber optic
components will outpace that of the overall fiber optics market.

     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 for outsourcing. 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 wide area networks coupled with increasing use,
power, speed and complexity of local area networks has resulted in the
increasing need for equipment that permits high speed connections between LANs
and WANs and ISPs. As a result of these factors, in March 1997 an industry
source 



                                       10
<PAGE>   11

estimated the market for products connecting LANs and WANs at $4.5 billion,
growing at 34 percent annually, and the market for products connecting LANs and
ISPs at $800 million, growing at 40% annually.

LAN ENVIRONMENT

     The most common LAN architecture, "shared-media" networking, cannot
effectively accommodate the market's requirements for high-speed networking.
Shared-media networks require computers to alternate communication over a single
LAN, thereby allowing a computer to send information only when other computers
are not doing so. As more computers are added to a single LAN, demand for access
to the network increases and, as a result, individual users experience slower
network response times and data transfer rates. Most of these networks operate
with the Ethernet protocol, which is significantly less expensive than the
closest competing technology, Token Ring.

     There are two fundamentally different but complementary approaches to
alleviating network congestion. The first approach, referred to as
"segmentation," reduces the number of desktops connected to a single LAN
segment, which increases the available bandwidth per user. The segmentation of
users into smaller LANs alleviates network congestion by allowing fewer users to
share a given amount of capacity. The second approach is to increase the
capacity of networks through new high-speed transmission technologies and high
bandwidth fiber optic applications. LAN switching technology is an innovation
that enables both of these solutions. A switch is a device that partitions a
network into multiple segments which enables several simultaneous
"conversations," thereby reducing the traffic on each segment while allowing
access to the entire network. A switch also allows connection with different
speeds, thereby facilitating faster backbones and migration to faster
technologies.

     Enhanced LAN Performance through Segmentation and Switching. LAN switching
systems have emerged as the preferred method for segmenting networks because
these systems are implemented more easily, efficiently and cost-effectively than
hub architectures which once dominated the networking equipment industry. In
contrast to hubs, which indiscriminately forward data to all ports, Ethernet
switches only forward network traffic to the designated receiving port or ports.
Ethernet switches can also support different data rates on different ports with
some ports operating at 10 Mbps and others at substantially higher speeds, thus
enabling "Any Speed to Any Speed" Ethernet transmission. A major driver to the
growth in Ethernet switching is the large installed base. Ethernet is the
dominant LAN/WAN architecture. As a result, Ethernet switching offers fast and
cost-effective upgrades without impacting network performance or requiring
infrastructure changes to existing cabling and network adapters. Switching also
allows LANs based on different architectures, such as Ethernet and Token Ring,
to be connected efficiently and allows these systems to access servers and
backbones which use a variety of high-speed technologies, such as Fast Ethernet,
Gigabit Ethernet, Fiber Distributed Data Interface ("FDDI") and ATM.

     Another important benefit of switches is their ability to combine groups of
computers into virtual LANs ("VLANs"). As a result, workgroups can be set up
according to business relationships rather than physical proximity. Unlike hub
and router systems, which require segment users to be physically grouped
together, VLANs simplify network administration as users relocate. VLANs can
also be used for controlling bandwidth and directing excess capacity to
workgroups and users as needed. Moreover, by confining traffic to desired
workgroups, VLANs improve network security.

     Enhanced LAN Performance Through High-speed Transmission Technologies and
Switching. While Ethernet switching is being used to increase the efficiency of
existing capacity, switching technology also incorporates high-speed
transmission technologies that increases a system's capacity. High-speed
technologies such as Fast Ethernet, Gigabit Ethernet, FDDI and ATM increase
transmission speeds from 10 Mbps to 100 Mbps and from 100 Mbps to 1,000 Mbps (1
Gbps). Higher transmission speeds have helped to increase the demand for LAN
switches in two important ways. First, LAN switches create uplinks between slow
desktop connections and high-speed fiber backbones, which are 



                                       11
<PAGE>   12

necessary if data transfer is to occur between devices that operate at different
speeds. Second, as high-speed file servers or fiber backbones are upgraded, the
system's switches must be upgraded as well.

     Two alternative high-speed networking technologies, FDDI and ATM, are used
in networking backbones, but because of their high cost for end-users they are
rarely used to connect desktop computers within a LAN. Both FDDI and ATM
transmit data in unique formats which also make them difficult to incorporate
into pre-existing Ethernet LANs.

     Fast Ethernet has emerged as a cost-effective, interoperable technology
that enables the integration of ATM and FDDI backbones with Ethernet switches
and provides a non-disruptive, tenfold increase in speed from 10 Mbps to 100
Mbps. Furthermore, unlike FDDI and ATM, Fast Ethernet is based on fully defined
standards which use the same data format and core communication protocol as
Ethernet. This similarity permits easy integration with existing Ethernet
networks and allows organizations to retain the benefit of network
administrators who have been trained in the management of Ethernet networks.
Thus, migration from Ethernet to Fast Ethernet involves a simple change of
adapter cards and an upgrade of hubs and switches. As a result of these factors,
in January 1998 an industry analyst reported market estimates that Fast Ethernet
revenues will increase from $513 million in 1996 to $1.8 billion in 1997 and
that the market was expected to exceed $3.5 billion during 1998.

     Many industry experts believe that similar benefits will be offered by the
next generation of Ethernet technology, Gigabit Ethernet, which is expected to
provide raw data bandwidth of 1,000 Mbps while maintaining full compatibility
with the installed base of Ethernet nodes. Management believes that demand for
Gigabit Ethernet is likely to grow as more LANs move to Fast Ethernet,
generating substantial traffic loads on backbone networks. In January 1998 an
industry analyst reported that the Gigabit Ethernet market will reach $1.2
billion by 2001.

     To promote the implementation of Gigabit Ethernet, the Gigabit Ethernet
Alliance ("GEA") was formed in May 1996. The Company is a member of the GEA
which also includes Advanced Micro Devices, Inc., Bay Networks, Inc., Cabletron
Systems, Inc., Cisco Systems, Inc., Compaq Computer Corporation, Digital
Equipment Corporation, Hewlett-Packard Company, Intel Corporation, Lucent
Technologies Inc., Newbridge Networks, Sun Microsystems, Inc. and 3Com
Corporation.

FIBER OPTIC ENVIRONMENT

     Fiber optic transmission 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 FTTC
architectures to support services such as fast Internet access and interactive
video; (iii) the growth of cellular communications and personal communications
systems ("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. From 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 FDDI, ATM, Fast Ethernet and Gigabit Ethernet, 



                                       12
<PAGE>   13

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 user's 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 enterprise carriers ("LECs") are implementing new
technological standards, such as Synchronous Optical Network ("SONET") and
fiber-intensive architectures such as FTTC to enable High-speed Internet Access
and the delivery of cable TV and ATM 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 which 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

     MRV offers advanced solutions for network connectivity requirements by
providing high speed LAN switching and fiber optic transmission products which
serve the computer networking and the broadband sections of the communications
industry. The Company designs and sells two groups of products: (i) high-speed
networking equipment, including LAN switches and (ii) fiber optic transmission
solutions for SONET, ATM, FDDI, Fast Ethernet, cable TV and wireless
infrastructure.

     ENTERPRISE NETWORKING SOLUTIONS

     The Company designs network switching systems that increase the
productivity and functionality of LANs. MRV offers its customers a family of
network, switching and related products that enhance LAN performance and
facilitate the migration to next generation technologies such as Fast Ethernet,
Gigabit Ethernet and ATM.

     The MegaSwitch Product Family. The Company's MegaSwitch products are a
family of Fast Ethernet switches which are marketed under MRV's NBase trade
name. The MegaSwitch products range from complete switching systems to stackable
switches which upgrade performance of existing LANs by relieving congestion of
overloaded network segments, enable full duplex and flow control and provide an
easy, cost-effective migration to higher transmission speeds without requiring
replacement of existing infrastructure. The MegaSwitch I, which was first
introduced in 1995, is a family of three Fast Ethernet switches, which enhance
the bandwidth of the corporate backbone to support higher traffic levels. These
systems are scalable and compatible with a wide range of existing network
protocols and technologies. The Company's MegaSwitch II products, introduced in
1996, are designed for corporate, campus and metropolitan deployment as a
cost-effective method of connecting existing networks with higher-speed
backbones and are based on "Any Speed to Any Speed" Ethernet switching,
including Gigabit Ethernet with access to ATM. Fast Ethernet, Gigabit and ATM
uplink modules incorporate InterSwitch VLAN capabilities. InterSwitch VLANs
enable the network administrator to define separate VLANs spanning multiple
switches in order to achieve optimal network performance and serve multiple
workgroups.



                                       13
<PAGE>   14

<TABLE>
<CAPTION>
Product Name                    Application and Functionality
------------                    -----------------------------
<S>                <C> 
MegaSwitch II      This cost-effective stackable switch is a 12 port, high
                   performance switch which provides an uplink to ATM and
                   Gigabit Ethernet backbones, supports Ethernet/Fast Ethernet
                   traffic by automatically configuring for 10 Mbps/100 Mbps,
                   provides for zero packet loss even at extended network links
                   of up to 110 km and incorporates VLAN capability. This switch
                   can be used as an upgrade for an existing workgroup or as a
                   fully configured enterprise switch.

MegaSwitch I       These stackable switches, with up to 13 ports, provide a
                   migration path to upgrade from a legacy 10 Mbps LAN to a 100
                   Mbps network. These switches provide segmentation of 10 Mbps
                   shared LAN and higher speed server or backbone connections
                   enabling interconnection of workgroups or high-speed
                   workstations.
</TABLE>

     Hubs and Network Management. To implement network segments, the Company
offers GigaHub, a multi-platform switchable hub, and MegaStack, a stackable
hub. In addition MRV has developed and offers MegaVision, which enables
management and control of its switching products and hub products.

<TABLE>
<CAPTION>
Product Name                    Application and Functionality
------------                    -----------------------------
<S>                <C> 
GigaHub            This enterprise network solution for medium to large
                   corporate networks requiring both shared and switched
                   connectivity in a mixed protocol environment, provides a 12
                   Gbps modular enterprise switching hub, supporting Ethernet,
                   Fast Ethernet, FDDI, ATM and Token Ring, as well as voice and
                   point-to-point protocols, and allowing integration of LAN
                   distribution and switching in a single hub.

MegaStack          This high-speed stackable hub system implements Ethernet and
                   Fast Ethernet LAN segments, provides performance for
                   mission-critical and bandwidth-intensive applications,
                   connects from 12 to 180 users, is stackable with fiber optic
                   connectivity to remote locations and offers plug-and-play
                   convenience and built-in auto-partitioning for instant
                   isolation of network failures.

MegaVision         This full-featured network management system provides
                   affordable and comprehensive management and control of all
                   MegaSwitch and MegaStack products and automatically detects
                   and monitors any SNMP compliant devices. It operates on all
                   major NMS platforms including Windows 3.1, Windows 95,
                   Windows NT Client, Novell NMS, HP/Open View for Windows or
                   UNIX.
</TABLE>


     Related Networking Products. The Company also offers a number of other
products supporting network connectivity. Examples of such products are
summarized in the table below.

<TABLE>
<CAPTION>
Product Name                    Description and Functionality
------------                    -----------------------------
<S>                <C> 
Fiber Optic        These products consist of Ethernet and Fast Ethernet fiber
Transceivers and   optic transceivers that enable campus or metropolitan 
Converters         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 converters 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 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 midrange and
                   mainframe terminal connectivity.

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



                                       14
<PAGE>   15

     WAN Connectivity Solutions. The Company provides access solutions between
LANs and WANs and ISPs. Principal network access and Internetworking products
are summarized in the table below.


<TABLE>
<CAPTION>
Product Name                    Application and Functionality
------------                    -----------------------------
<S>                <C> 
Network 9000       This hub 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       This 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 office home offices and branch
                   offices such as doctors' offices or sales offices.

MAXserver          This 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.
</TABLE>

     The Company's Advance in Gigabit Ethernet. Gigabit Ethernet aims to support
the extension of Ethernet and Fast Ethernet standards to higher speeds while
insuring full interoperability with existing networks. The Company developed an
advance in Gigabit technology which it proposed to the GEA and which proposal
was accepted in November 1996. The Company's technology maximizes bandwidth
utilization and doubles the span of the network while also providing for delay
sensitive applications such as video. At the core of this technology is the
ability to "save" one frame during a collision event. This way, at least one
frame transmitted will reach its destination, thereby doubling throughput. The
key advantages to the Company's Gigabit Ethernet implementation include
guaranteed bandwidth utilization not influenced by collision, multimedia support
and superior quality of service.

     Direct IP Switching. The Company has developed, and recently introduced as
part of its MegaSwitch product line, a series of DirectIP switching products
which provides the control and security of traditional routing with the
performance of switching.

     OPTICAL TRANSMISSION PRODUCTS

     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 benefitting 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 



                                       15
<PAGE>   16

Company believes that its lasers and LEDs, which can carry data over distances
in excess of 20 km 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 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.

     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. The Company offers a new
     "Bi-directional" 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 the DISC system currently deployed by Bell South
     in one of the largest FTTC projects in the United States.

     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.

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.

     In order to meet its customers' price and performance demands, MRV has
focused on developing custom ASICs to implement its core switching technologies.
The Company spends significant resources to maintain and extend its
comprehensive ASIC design and test expertise. All custom ASICs are developed
internally using third party state-of-the-art design tools and the Company's
proprietary methodologies. The Company's ASIC expertise in conjunction with its
innovative product architectures and firmware enable the Company to develop
products characterized by high performance, reliability and low cost.



                                       16
<PAGE>   17

     From its product development programs the Company expects to introduce a
number of new products within the next 12 months. One new product is JavaMan, a
platform independent, Internet-ready Network Management System ("NMS") which the
Company created to expand the reach of MegaVision over the Internet. All
necessary software is expected to reside on MegaSwitch II, pre-configured prior
to customer delivery. JavaMan's use of existing Web standards provides remote
manageability in both Internet and intranet environments.

     The Company also has a number of other new networking product development
programs underway, including Gigabit Ethernet switching, ATM and FDDI uplink
modules. These products are being developed in response to current technological
trends and end user demands for greater bandwidth and product flexibility. The
Company is in the process of consolidating Xyplex' research and development
projects with its own programs. As a result of its consolidation of Fibronics'
research and development projects with its programs, the Company integrated the
MegaSwitch II technology, including Gigabit Ethernet, with the GigaHub
architecture. In 1997, the Company recently announced a GigaFrame product
strategy, the architecture for which will consist of a Gigabit Ethernet Switch,
a GigaHub enterprise switch, MegaSwitch II and two new low cost 10 Mbps to 100
Mbps stackable switches, all of which are now available. The Company shipped its
first GigaFrame switch, the 12 port GFS 3012, in the fourth quarter of 1997.
This switch, which also provides Gigabit Ethernet transmission over fiber optic
cable to a distance of 100 kilometers, won a best switching product award at
ComNet '98 and the Editor's choice award by Communications News magazine.

     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. These products are expected
to be available within the next six months. MRV also has research and
development projects underway seeking to enhance its various fiber optic
transmission products and is participating in Bell South's FTTC project.

     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, 1997, the Company had 88 employees dedicated to research
and product development. Research and development expenditures totaled
approximately $4,000,000, $8,201,000 and $13,089,000 for years ended December
31, 1995, 1996 and 1997, 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 TV. 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 1995, 1996 or 1997.
Current customers include:

                                NETWORK SWITCHING
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
COMPUTERS AND ELECTRONICS                          GOVERNMENT AGENCIES
-------------------------                          -------------------
<S>   <C>                                          <C>   <C>
o     AMP Incorporated                             o     Ealing (Borough of London)
o     Data General Corporation                     o     Federal Bureau of Investigation
o     Fujitsu Ltd. (Japan)                         O     MITI (Japan)
o     International Business Machines Corporation  o     National Security Administration
O     Intel Corporation                            o     Police Department of Berlin/Potsdam
o     Matsushita (Germany)                         o     Social Security Administration
o     Newbridge Networks                           o     US Coast Guard
--------------------------------------------------------------------------------
</TABLE>



                                       17
<PAGE>   18

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
BANKING, FINANCE AND INSURANCE                     DIVERSIFIED AND OTHER
------------------------------                     ---------------------
<S>   <C>                                          <C>   <C>
o     Bankhaus Rinderknecht (Zurich)               o     Bayer AG
o     GE Capital                                   o     The Walt Disney Co.
o     NationsBank                                  O     Eastman Kodak
o     Trans America Corporation                    O     Tele-Communications, Inc.
--------------------------------------------------------------------------------
</TABLE>


FIBER OPTIC COMPONENTS

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
DATA  COMMUNICATIONS                               TELECOMMUNICATIONS
--------------------                               ------------------
<S>                                                <C>
o Bay Networks, Inc.                               o Asea Brown Boveri
o Canoga Perkins                                   o Broadband Network Inc.
o Cisco Systems, Inc.                              o Crosscom
o Connectware                                      o Lucent Technologies Inc.
o Network Systems Corporation                      o Photon Technology (China)
o Nortel                                           o Reltec
o Optical Data Systems                             o Transcom
--------------------------------------------------------------------------------
VIDEO AND VOICE COMMUNICATIONS                     INSTRUMENTATION
------------------------------                     ---------------
o Augat Communication Products Inc.                 o EXFO
o C-Cor                                             o GN Nettest
o General Instrument                                o Kingfisher International
O Optelecom, Inc.                                   o Noyes Fiber Systems
o Tektronix                                         O 3M
--------------------------------------------------------------------------------
</TABLE>

MARKETING

     The Company markets and sells its products under the NBase Communications,
NBase Switch Communications, MRV Communications, West Hills LAN Systems, Xyplex
and Xyplex Networks brand names. Each product line has a dedicated sales and
marketing organization. The Company 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 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 AND DISTRIBUTION

     The Company continually seeks to expand its distribution capability to
capitalize on its technological expertise and production capacity and to augment
and increase distribution channels to accelerate its growth. Products are sold
through the Company's direct sales force, VARs, systems integrators,
distributors, manufacturer's representatives and 



                                       18
<PAGE>   19

OEM customers. The Company's sales and distribution divisions are organized
along four primary lines: OEM sales and partnerships; VARs and systems
integrators; 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 has
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
Acquisiton was to the Company's domestic sales force which increased over 175%
from the level existing immediately preceding the acquisition.

     OEM. Each of the Company's OEM partners resells the products under its own
name. The Company believes that the OEM partnerships enhance its ability to sell
its products in significant quantities to large organizations. Since these OEM
partners provide their own technical and sales support to their customers, the
Company is able to focus on other sales channels. The Company customarily enters
into contracts with OEM customers to establish the terms and conditions of sales
made pursuant to orders from OEMs. These OEMs incorporate the Company's product
into systems or subsystems, which are then sold to end users via various
distribution channels. The Company has established OEM relationships in
connection with its switching equipment with leading communications and
networking companies including Newbridge Networks, Fujitsu and Intel. The
Company's fiber optic components are sold only to OEMs.

     Domestic and International Distributors. The Company works with
distributors domestically and internationally and has recently begun selling
products through Tech Data. 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. MRV uses a select group of VARs 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 has 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.

     Manufacturers' Representatives. To supplement the Company's direct sales
efforts, manufacturer's representatives are assigned by territory in the U.S.
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.




                                       19
<PAGE>   20

     International Sales. International sales accounted for approximately 45%,
53% and 60% of the Company's net revenues in 1995, 1996 and 1997, respectively.

MANUFACTURING

     The Company has developed proprietary ASICs to implement high level
component integration in its networking product development process. To develop
ASICs successfully, the Company must transfer a code of instructions to a single
mask from which low cost duplicates can be made. Each iteration of a mask
involves a substantial up-front cost, which costs can adversely affect the
Company's result of operations and financial condition if errors or "bugs" occur
following multiple duplication of the masks. While the Company has not
experienced material expenses to date as a result of errors discovered in ASIC
masks, because of the complexity of the duplication process and the difficulty
in detecting errors, the Company could suffer a material adverse effect to its
operating results and financial condition if errors in developing ASICs were to
occur in the future. Moreover, the Company currently relies on a single
unaffiliated foundry, Chip Express, to fabricate its ASICs. The Company does not
have a long-term supply contract with Chip Express, any other ASIC vendor or any
other of its limited source vendors, purchasing all of such components on a
purchase order basis under standard terms of sale. While the Company believes it
would be able to obtain alternative sources of supply for the ASICs or other key
components, a change in ASIC or other key suppliers of key components could
require a significant lead time and, therefore, could result in a delay in
product shipments. While the Company has not experienced delays in the receipt
of ASICs or other key components, any future difficulty in obtaining any of
these key components could result in delays or reductions in product shipments
which, in turn, could have material adverse effect on the Company's business,
operating results business and financial condition.

     The Company outsources the 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
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. Although
there are a large number of contract manufacturers which the Company can use for
its outsourcing, MRV has elected to use one vendor for a significant portion of
its board assembly requirements in order to foster consistency in quality of the
products. This independent third party manufacturer also provides 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 manufacturer fails 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 manufacturer will provide
adequate supplies of quality products on a timely basis, or at all. The Company
can outsource with another vendor or 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 such 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 exclusively 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 



                                       20
<PAGE>   21

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, financial condition and results of
operations 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.

     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 network switching include Bay Networks, Inc., Cabletron Systems,
Inc., Cisco Systems Inc. Digital Equipment Corporation, FORE Systems, Inc.,
Hewlett-Packard Company, International Business Machines Corporation, 3Com
Corporation and Xylan. Direct competitors in the network access market include
Ascend, Bay Networks, Cisco Systems Inc., Lucent Technologies and Shiva. Direct
competitors in fiber optic transmission products include AMP Incorporated,
Fujitsu, Hewlett-Packard Company, Lucent Technologies Inc., Mitsubishi, NEC
Electronics Inc., Ortel Corporation, Phillips Semiconductors 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. The ability to act as a single source vendor and
provide a customer with an enterprise-wide networking solution has increasingly
become an important competitive factor. In addition, there are a number of early
stage companies which are developing Fast Ethernet, Gigabit Ethernet switching
and alternative solutions. If developed successfully, these solutions could be
higher in performance or more cost-effective than the Company's products.

     Moreover, 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 networking 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 



                                       21
<PAGE>   22

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.

     There has been substantial industry litigation regarding intellectual
property rights involving technology companies. By letter to the Company dated
March 19, 1997, a party has made a claim against the Company alleging that the
Company's DirectIP switching products make use of unspecified information and
know-how covered by a pending patent application of such party. This allegation
is under review by the Company and the Company believes that the allegation is
without merit. However, a complete assessment cannot be made with respect to the
merits of the allegation until further details of the information and know-how
are provided by such third party. Currently, sales of DirectIP products are not
material to the Company, however, if the DirectIP switching products comprise a
material part of the Company's revenues in the future and a conclusion in
respect of the claim unfavorable to the Company is reached, the claim, if
pursued by such party, could materially and adversely affect the business,
operating results and financial condition of the Company. In addition, on
December 27, 1996 Datapoint Corporation ("Datapoint") brought an action against
NBase Communications, 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. For further information concerning this litigation, see Item 3. Legal
Proceedings. 

     In the future, additional 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, 1997, the Company had 438 full-time employees, including
six executive officers, 174 in production, 129 in marketing and sales, 88 in
research and development and 41 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.
As of January 30, 1998, the day Xyplex was acquired, Xyplex had 330 employees, 
including 45 in production, 142 



                                       22
<PAGE>   23

in marketing and sales, 82 in research and development and 61 in general
administration.

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 $122,256 (plus
local taxes) for a lease term expiring in March 1999. In addition, the Company
leases space in three buildings near its primary facility in Chatsworth,
consisting of approximately 5,000 square feet, approximately 12,800 square feet
and approximately 20,950 square feet from unaffiliated third parties at annual
base rentals of approximately $43,000, $91,000 and $131,000 respectively. The
terms of these leases expire in March 1999, March 1999 and January 31, 2003,
respectively.

     Xyplex occupies a facility in Littleton, Massachusetts, consisting of
approximately 101,000 square feet under a lease that expires in October 1998.
Annual base rent under this lease is approximately $425,000. Xyplex has
exercised an option to renew this lease through October 2001 on the same terms.
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 also leases space in Germantown, Maryland for its sales office
and warehouses. This facility covers approximately 4,800 square feet and is
leased from an unaffiliated third party at an annual base rent of approximately
$38,000 per year (plus local taxes) for a lease term expiring October 2001.

     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 total
annual base rents of approximately $206,000 for a lease term expiring in January
2002.

     The Company leases approximately 5,200 square feet of space from an
unaffiliated third party in Basingstoke, England which it uses for sales,
marketing and warehousing. The premises are leased for total annual base rents
of approximately $75,000 for a lease term expiring in August 1999.

     The Company leases approximately 1,600 square feet of space from an
unaffiliated third party in Frankfurt, Germany, which it uses for sales,
marketing and warehousing. The premises are leased for total annual base rents
of approximately $221,000 for a lease term expiring in August 1999.

     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 runs
through 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.

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 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 



                                       23
<PAGE>   24

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. 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. 

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

     On December 12, 1997, 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:

<TABLE>
<CAPTION>
                                                Number of Votes
                                     -------------------------------------------
         Name                               For            Against or Withheld
-----------------------------------  ------------------   ----------------------
<S>                                  <C>                  <C>
Noam Lotan                               20,518,439              193,250 

Shlomo Margalit                          20,518,639              193,050

Zeev Rav-Noy                             20,518,739              192,950

Igal Shidlovsky                          20,518,639              193,050         

Eddie Kawamura                           20,518,739              192,950
</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 the adoption of the Company's                                                     
1997 Incentive and Nonstatutory Stock
Option Plan covering options to purchase
up to 500,000 shares of Common Stock of
the Company.                               20,381,847     327,400        2,442

To ratify the selection of Arthur
Andersen LLP as independent auditors for
the Company for the fiscal year ending
December 31, 1997.                         20,707,289       1,700        2,700

To consider and act upon any matters
incidental to the foregoing and any
other matters which may properly come
before the meeting or any adjournment or
adjournments thereof.                      18,408,784   2,207,105       95,800    
</TABLE>



                                       24
<PAGE>   25

                                     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
  1996:                                                ------      ------
  -----
<S>                                                    <C>         <C>   
First Quarter* ...........................             $17.67      $ 8.42
Second Quarter* ..........................             $37.13      $15.63
Third Quarter* ...........................             $27.94      $15.00
Fourth Quarter ...........................             $24.88      $17.00
  1997
  ----
First Quarter ............................             $29.88      $18.25
Second Quarter ...........................             $30.75      $18.25
Third Quarter ............................             $38.75      $25.75
Fourth Quarter ...........................             $37.75      $21.13
</TABLE>
----------
*As adjusted for the 3-for-2 stock split effected May 20, 1996 and the 2-for-1
 stock split effected July 29, 1996.

     At March 31, 1998 the Company had 265 stockholders of record, as indicated
on the records of the Company's transfer agent, who held, management believes,
for approximately 13,197 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.




                                       25
<PAGE>   26

ITEM 6. SELECTED FINANCIAL DATA

     The following selected statement of operations data for the three years in
the period ended December 31, 1997 and the balance sheet data as of December 31,
1996 and 1997 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 also incorporated by reference herein.
The selected statement of operations data for the two years in the period ended
December 31, 1994 and the balance sheet data as of December 31, 1993, 1994 and
1995 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,
                                                                          ------------------------------------------------
                                                                           1993       1994      1995      1996      1997
                                                                          ------    -------   -------   --------   -------
                                                                               (In thousands, except per share amounts)
<S>                                                                       <C>       <C>       <C>       <C>        <C>    
Revenues, net........................................................... $ 7,426    $17,526   $39,202   $ 88,815  $165,471
Cost of goods sold......................................................   3,936     10,328    22,608     51,478    94,709
Research and development expenses.......................................   1,103      2,144     4,044      8,201    13,093
Selling, general and administrative expenses............................   1,259      2,615     6,799     14,025    27,365
                                                                          ------  ---------  --------  ---------  --------
Operating income before non-recurring charges...........................   1,128      2,439     5,751     15,111    30,304
Purchased technology in progress(1).....................................       -          -     6,211     17,795         -
Restructuring costs(1)..................................................       -          -     1,465      6,974         -
                                                                          ------  ---------  --------  ---------  --------
Operating income (loss).................................................   1,128      2,439    (1,925)    (9,658)   30,304
Other income (expense)..................................................     198        162       654        153     2,744
Interest expense related to convertible debentures and
   acquisition(1)                                                              -          -         -     (4,357)     (843)
                                                                          ------  ---------  --------  ---------  --------
Income (loss) before provision for income taxes, minority interests
   and extraordinary items..............................................   1,326      2,601    (1,271)   (13,862)   32,205
Provision (credit) for income taxes.....................................     487        983         2     (4,404)    9,474
Minority interests......................................................       -          -         -        196       146
                                                                          ------  ---------  --------  ---------  --------
Net income (loss)(1)................................................... . $  839   $  1,618   $(1,273)  $ (9,654)  $22,585
                                                                          ======  =========  ========  =========  ========
Net income (loss)  per share - Basic(1).................................  $ 0.07   $   0.13   $ (0.07)  $  (0.49)  $  0.95
                                                                          ======  =========  ========  =========  ========
Net income (loss)  per share - Diluted(1)...............................  $ 0.07   $   0.13   $ (0.07)  $  (0.49)  $  0.88
                                                                          ======  =========  ========  =========  ========
Shares used in per share calculation -- Basic                             11,771     12,335    18,377     19,739    23,670
Shares used in per share calculation -- Diluted                           12,050     12,560    18,377     19,739    25,734
</TABLE>


CONSOLIDATED BALANCE SHEET DATA:

<TABLE>
<CAPTION>
                                                            At December 31,
                                          ----------------------------------------------------
                                            1993      1994       1995       1996       1997
                                          --------   --------   --------   --------   --------
                                                             (In thousands)
<S>                                       <C>        <C>        <C>        <C>        <C>     
Working capital .......................   $  3,514   $ 11,303   $ 22,019   $ 56,973   $111,559
Total assets ..........................      7,328     16,667     33,307     96,943    236,236
Total liabilities .....................      1,537      3,761      8,049     43,790     45,610
Long-term  debt, net of current portion         --         --        271     18,892      2,853
Stockholders' equity ..................      5,791     12,906     25,258     41,771    189,969
</TABLE>
-----------
(1) The non-recurring charges consist of purchased technology in progress and
    restructuring charges incurred as a result of acquisitions. Purchased
    technology in progress for the year ended December 31, 1995 was $6,211,000.
    The purchased technology 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 $1,465,000
    and are associated with a plan adopted by the Company in 1995 calling for
    the merger


                                       26
<PAGE>   27
    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. Excluding
    the non-recurring charges, net of their tax effects, net income would have
    increased to $4,345,000 or $0.24 per share - basic and $0.22 per share -
    diluted for the year ended December 31, 1995. Purchased technology in
    progress for the year ended December 31, 1996 was $17,795,000 and was in
    conjunction with the Fibronics Acquisition. Restructuring costs during the
    year ended December 31, 1996 were $6,974,000 and 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.
    Interest expenses related to the acquisition for the years ended December
    31, 1996 and 1997 were $4,357,000 and $427,000, respectively, and were
    connected 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. Excluding the non-recurring charges,
    net of their tax effects, net income would have been $10,555,000 or $0.54
    per share - basic and $0.46 per share - diluted for the year ended December
    31, 1996. Non-recurring charges were not material to net income for the year
    ended December 31, 1997. 

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 60% and 40%, respectively, during the year ended December 31,
1995, approximately 69% and 31%, respectively, during the year ended December
31, 1996 and approximately 76% and 24%, respectively, during the year ended
December 31, 1997.

     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.



                                       27
<PAGE>   28

     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. At a meeting of the Emerging Issues Task Force held on March 13, 1997,
the staff of the Securities and Exchange Commission ("SEC") announced its
position on the accounting treatment for the issuance of convertible preferred
stock and debt securities with a beneficial conversion feature such as that
contained in the Debentures. As announced, the SEC requires that a beneficial
conversion feature attached to instruments such as the Debentures that are
convertible into equity be recognized and measured by allocating a portion of
the proceeds equal to the intrinsic value of that feature to additional paid-in
capital and charging it to interest expense. As a result of the SEC's position,
the Company added 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 Company
will not need to report future charges relating to the issuance of the
Debentures as the outstanding principal and accrued interest 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 500,000 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. 
While adding 11 months of Xyplex' revenues to those of the Company, the charges
resulting from the Xyplex Acquisition are expected to have a material adverse 
effect on the net operating results the Company expects to report during and 
for the year ending December 31, 1998. The Company's ability to operate Xyplex
profitably will depend upon its ability to integrate this business
successfully, including (i) the completion of Xyplex' research and
development projects in process, especially the EdgeBlaster program, (ii) the 
integration of the products, technologies and personnel of Xyplex into the 
Company, (iii) management's ability to reduce Xyplex' operating costs, 
and (iv) the continued market acceptance of Xyplex' products and technology.

     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, 1996 and 1995 were $18,113,000, $8,009,000, $2,646,000,
respectively. The amounts for the years ended December 31, 1996 and 1995 are
before non-recurring charges. Including non-recurring charges, operating losses
from international sales for the years ended December 31, 1995 and 1996 were
$2,789,000 and $16,054,000, respectively. At December 31, 1995, 1996 and 1997,
16%, 14% and 17%, respectively, of the Company's assets were located in the
Middle East and at December 31, 1996 and 1997, 17% and 14%, 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, 1995, 1996 or 1997. In years prior to 1995, substantially
all the assets were located in the U.S.



                                       28
<PAGE>   29

RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, statements of
operations data of the Company expressed as a percentage of revenues (except for
revenue growth rates).

<TABLE>
<CAPTION>
                                                                        Year ended December 31,
                                                                       -------------------------
                                                                        1995      1996      1997
                                                                       ------    ------    ------
<S>                                                                    <C>       <C>       <C>   
Revenues, net ....................................................     100.0%    100.0%    100.0%
Revenue growth rate from prior period ............................     124.0     126.6      86.3
Cost of goods sold ...............................................      57.7      58.0      57.2
                                                                       -----     -----     -----
Gross profit .....................................................      42.3      42.0      42.8
Operating expenses:
   Research and development expenses .............................      10.3       9.2       7.9
   Selling, general and administrative expenses ..................      17.3      15.8      16.5
                                                                       -----     -----     -----
Operating income before non-recurring charges ....................      14.7      17.0      18.3
   Purchased technology in progress ..............................      15.8      20.0      --
   Restructuring costs ...........................................       3.7       7.9      --
                                                                       -----     -----     -----
Operating income .................................................      (4.9)    (10.9)     18.3
Other income (expense), net ......................................       1.7       0.2       1.6
Interest expense related to convertible debentures and acquisition      --        (4.9)     (0.5)
                                                                       -----     -----     -----
Income (loss) before taxes .......................................      (3.2)%   (15.8)%    19.4%
                                                                       =====     =====     =====
Pro forma financial data (excluding non-recurring charges):
    Operating income .............................................      14.6%     17.0%     18.3%
    Income (loss) before taxes ...................................      16.3      17.2      20.0
</TABLE>


Years ended December 31, 1997 and 1996

     Revenues. Revenues for the year ended December 31, 1997 were $165,471,000,
compared to $88,815,000 for the year ended December 31, 1996, an increase of
86.3%. Revenues from sales of networking products and optical transmission
products were 76% and 24%, respectively, of total revenues during the year ended
December 31, 1997 as compared to 69% and 31%, respectively, of total revenues
during the year ended December 31, 1996. 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 60% of revenues for year ended December 31, 1997, as compared
to 53% of revenues for year ended December 31, 1996. International sales, as a
percentage of total revenues, increased mainly as a result of increased sales,
marketing and support resources in place in Europe and increased sales to the
Pacific Rim region. While the Company has achieved significant revenue growth in
previous periods, there can be no assurance that the Company will sustain such
growth.

     Gross Profit. Gross profit for the year ended December 31, 1997 was
$70,762,000 compared to $37,337,000 for the year ended December 31, 1996. The
changes represented an increase of $33,425,000 or 89.5% for the year ended
December 31, 1997. Gross Profit as a percentage of revenues increased from 42.0%
during the year ended December 31, 1996 to 42.8% for the year ended December
31, 1997 as a result of increased sales of higher margin products such as the
MegaSwitch family of products as well as lower cost production techniques.

     Research and Development. For the years ended December 31, 1997 and 1996,
research and development expenses ("R&D") expenses were $13,093,000 and
$8,201,000, respectively. In the case of absolute dollars, the 59.7% increase in
R&D spending during the year ended December 31, 1997 over the year ended
December 31, 1996 was attributable to the continued development of the Company's
networking and fiber optic products including Ethernet/Fast Ethernet/Gigabit
Ethernet switches, GigaHub modules, GigaFrame switch and fiber optic components.
Additional costs were also associated with the hiring of new research and
development personnel and consultants. R&D expenses as a percentage of revenues
declined from 9.2% of revenues during year ended December 31, 1996, to 7.9% of
revenues for year ended December 31, 1997. This decrease was primarily caused
because the Company's revenues during the periods 



                                       29
<PAGE>   30

increased at a faster rate than R&D expenses. 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, 1997
and 1996, selling, general and administrative ("SG&A") expenses increased to
$27,365,000 from $14,025,000. As a percentage of revenues, SG&A increased from
15.8% for the year ended December 31, 1996 to 16.5% for the year ended December
31, 1997. 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, 1996 was $17,795,000. The
purchased technology in 1996 was for R&D projects of Fibronics in progress at
the time of the Fibronics Acquisition on September 26, 1996. Restructuring costs
during the year ended December 31, 1996 were $6,974,000. The restructuring in
1996 was associated with a plan adopted by the Company on September 30, 1996, in
conjunction with the Fibronics Acquisition, calling for the reduction of
workforce, closing of certain facilities, retraining of certain employees and
elimination of particular product lines. Purchased technology in progress for
the year ended December 31, 1995 was $6,211,000. The Company did not incur these
charges in 1997.

     Interest Expense Related to Convertible Debentures and Acquisition. In
September 1996, the Company completed a private placement of $30,000,000
principal amount of convertible Debentures. See "Liquidity and Capital
Resources," below. To give effect to the accounting treatment announced by the
staff of the Securities and Exchange Commission at the March 13, 1997 meeting of
the Emerging Issues Task Force relevant to the Company's issuance of the
Debentures having "beneficial conversion" features, 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. The Company will not need to report future charges
relating to the issuance of the Debentures as the outstanding principal and
accrued interest were paid in full at April 4, 1997 through conversion into
Common Stock. See "Liquidity and Capital Resources" below.

     Net Income. Net income increased to $22,585,000 for the year ended December
31, 1997 from a net loss of $9,654,000 for the year ended December 31, 1996. Net
losses during the year ended December 31, 1996 were the result of aggregate
charges related to the Company's acquisition of Fibronics from Elbit, including
charges from purchased technology in progress, restructuring costs and the
interest on the Debentures. Excluding these non-recurring charges, net of tax
effects, of $20,209,000, net income for the year ended December 31, 1996 would
have been $10,555,000. Excluding non-recurring charges from interest on the
Debentures, net income for the year ended December 31, 1997 would have been
$23,428,000.

Years ended December 31, 1996 and 1995

     Revenues. Revenues for the year ended December 31, 1996 were $88,815,000
compared to $39,202,000 for the year ended December 31, 1995, an increase of
126%. Revenues from sales of networking products and optical transmission
products were 69% and 31%, respectively, of total revenues during the year ended
December 31, 1996 as compared to 60% and 40%, respectively, of total revenues
during the year ended December 31, 1995. The changes represented increases of
$38,140,000 or 162% and $11,473,000 or 73% in revenues from networking products
and optical transmission products, respectively, for the year ended December 31,
1996. Total revenues increased as a result of strong demand for LAN connectivity
and fiber optic products. Revenues from networking products increased primarily
due to sales of the MegaSwitch II product line and revenues from optical
transmission products increased primarily as a result of volume shipments,
beginning in the third quarter of 1996, of a new bidirectional optical
transmission and reception module for Fiber-to-the-Curb ("FTTC") applications
and sales to the cable TV industry. International sales accounted for
approximately 53% of revenues for the year ended December 31, 1996 as compared
to approximately 45% of revenues for the year ended December 31, 1995.
International sales, as a percentage of total revenues, increased because of
increased concentration of sales and marketing efforts overseas. The Company
estimates that most of the growth in international sales resulted from the
increased concentration of sales and marketing and that 



                                       30
<PAGE>   31

the acquisition of Fibronics accounted for approximately 12% of the growth. The
Fibronics Acquisition, which was not completed until September 26, 1996,
resulted in only a marginal increase in total revenues for 1996, primarily
caused from sales of older Fibronics products that were not eliminated as part
of the Company's restructuring of the Fibronics business.

     Gross Profit. Gross profit for the year ended December 31, 1996 was
$37,337,000 as compared to $16,594,000 for the year ended December 31, 1995. The
changes represented an increase of $20,743,000 or 125% for the year ended
December 31, 1996. Gross profit as a percentage of revenues was approximately
42% for both the years ended December 31, 1995 and 1996.

     Research and Development. For the years ended December 31, 1996 and 1995,
R&D expenses were $8,201,000 and $4,044,000, respectively, which represented
approximately 9.2% of revenues for 1996 and 10.3% for 1995. R&D expenses
increased primarily due to additions in engineering personnel and the
commencement of new R&D projects. Research and development expenses were lower
as a percentage of revenues in 1996 primarily because certain of the Company's
R&D programs in Israel were partially funded by the Chief Scientist of Israel
and R&D expenses were spread over a larger revenue base. The Company continues
to devote significant resources to its R&D efforts. During 1995 and 1996, the
Company's R&D activities were focused on expanding its family of networking
switching products and extending its fiber optic expertise into new product
areas.

     Selling, General and Administrative. For the year ended December 31, 1996,
SG&A expenses increased to $14,025,000 from $6,799,000 in 1995. The increase in
SG&A expenses is due primarily to increased marketing expenses, including those
associated with additions to personnel. As a percentage of sales, SG&A expenses
decreased from 17.3% to 15.8% for the years ended December 31, 1995 and December
31, 1996, respectively. The decrease as a percentage of sales in the year ended
December 31, 1996 resulted primarily due to increased sales in 1996.

     Purchased Technology in Progress and Restructuring Costs. Purchased
technology in progress for the year ended December 31, 1996 was $17,795,000. The
purchased technology in 1996 was for R&D projects of Fibronics in progress at
the time of the Fibronics Acquisition on September 26, 1996. Restructuring costs
during the year ended December 31, 1996 were $6,974,000. The restructuring in
1996 was associated with a plan adopted by the Company on September 30, 1996, in
conjunction with the Fibronics Acquisition, calling for the reduction of
workforce, closing of certain facilities, retraining of certain employees and
elimination of particular product lines. Purchased technology in progress for
the year ended December 31, 1995 was $6,211,000. The purchased technology was
for R&D projects in progress at the time of acquisition of assets from Galcom
and Ace. Restructuring costs during the year ended December 31, 1995 were
$1,465,000. The restructuring in 1995 was associated with a plan adopted by the
Company on June 30, 1995 calling for the merger of new subsidiaries acquired in
the Ace and Galcom acquisitions in 1995 and the Company's LAN products division.
The plan also called for the closure of some facilities, termination of
redundant employees and cancellation of representation agreements.

     Interest Expense Related to Convertible Debentures and Acquisition. To give
effect to the accounting treatment announced by the staff of the SEC at the
March 13, 1997 meeting of the Emerging Issues Task Force relevant to the
Company's issuance of the Debentures having "beneficial conversion" features,
the value of the fixed discount has been reflected in the 1996 financial
statements as additional interest expense and such discount has been accreted
through the first possible conversion date of the respective issuance.

     Net Loss. Net loss increased from a loss of $1,273,000 during the year
ended December 31, 1995 to a loss of $9,654,000 for the year ended December 31,
1996. The increase in net loss in 1996 was due to the Fibronics Acquisition,
which included charges for purchased technology in progress and restructuring
costs. Net income for the year ended December 31, 1996 would have been
$10,555,000, excluding $20,209,000 of charges, net of tax effects, associated
with the Fibronics Acquisition. Net income for the year ended December 31, 1995
would have been $4,345,000, excluding $5,618,000 of charges, net of tax effects,
associated with the acquisitions of Galcom and Ace. Excluding, these
non-recurring charges, net income increased by $6,210,000 or 143% for the year
ended December 31, 1996.



                                       31
<PAGE>   32

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 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)
                                            1995                               1996                               1997
                               --------------------------------  ----------------------------------  -------------------------------
                                 Q1      Q2      Q3       Q4       Q1       Q2       Q3        Q4      Q1      Q2       Q3      Q4
                               ------  ------  -------  -------  -------  -------  -------  -------  ------- ------- ------- -------
<S>                            <C>     <C>     <C>      <C>      <C>      <C>      <C>      <C>      <C>     <C>     <C>     <C>    
Revenues, net................  $6,737  $8,310  $11,135  $13,020  $15,529  $19,586  $22,664  $31,036  $35,564 $39,528 $41,979 $48,400
Gross profit.................   2,477   3,475    4,826    5,816    6,540    8,175    9,382   13,240   15,388  16,643  18,174  20,557
Operating income before
 non-recurring charges.......     858   1,221    1,645    2,027    2,720    3,224    3,558    5,609    6,865   7,370   8,131   7,938
Operating income (loss)......     858  (6,455)   1,645    2,027    2,720    3,224  (21,211)   5,609    6,865   7,370   8,131   7,938
Net income (loss)............     705  (4,707)   1,155    1,574    1,879    2,283  (15,504)   1,688    4,343   5,209   5,922   7,111
</TABLE>


LIQUIDITY AND CAPITAL RESOURCES

     In September 1996, the Company completed a private placement of $30,000,000
principal amount of Debentures. 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 increased
over the life of the Debentures until it reached a floor. Through June 30, 1997,
the entire $30,000,000 principal amount of Debentures and accrued interest had
been converted into 1,816,159 shares of Common Stock.

     In September 1996, the Company completed the Fibronics Acquisition from
Elbit. The purchase price for the Fibronics Business was approximately
$22,800,000, which was paid with Common Stock and cash. The cash was provided
from a portion of the proceeds of the private placement of Debentures. Elbit
subsequently resold the shares of Common Stock it received from the Company in
the open market.

     In November 1996, the Company completed a private placement of 200,000
shares of Common Stock to Intel Corporation ("Intel") for $4,000,000 ($20.00 per
share). As part of the private placement, the Company issued to Intel three-year
warrants to purchase up to an additional 500,000 shares of Common Stock at
$20.00 per share. Of such warrants, warrants to purchase 200,000 shares of
Common Stock are exercisable under certain conditions.

     In September 1997, the Company completed a follow-on public offering of
2,785,000 shares of Common Stock raising net proceeds of $93,320,000 (the "1997
Public Offering").

     Net cash used in operating activities for the years ended December 31, 1997
was $2,761,000. The funds were used primarily for increased inventories and
receivables as a result of increased revenues. Net cash provided by financing
activities for year 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 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.

     Net cash used in operating activities for the year ended December 31, 1996
was $148,000. The funds were used primarily for increased inventories and
receivables as a result of increased revenues. Net cash used in investing
activities for the year ended December 31, 1996 was $26,047,000, which primarily
related to the net purchases of investments and net cash used in acquisitions.
Cash provided by financing activities in 1996 was primarily from the private
placement of $30,000,000 principal amount of Debentures relating to the
Fibronics Acquisition and proceeds from the 



                                       32
<PAGE>   33

issuance of Common Stock. The majority of cash used for investing activities
during 1996 was for the purchase of the Fibronics Business and net purchases of
investments.

     Accounts receivable were $47,258,000 at December 31, 1997 as compared to
$24,296,000 at December 31, 1996. The increase in accounts receivable was
primarily attributable to the increase in overall sales.

     Inventories were $41,689,000 at December 31, 1997 as compared to
$18,238,000 at December 31, 1996. The increase in inventories was primarily
attributable to the Company's decision to add larger inventories to shorten lead
times for customers. Also contributing to the increase were a ramp-up of new
products which did not begin shipping until the end of the quarter and a drop in
orders anticipated from certain OEMs during the quarter. Management believes
that MRV's inventory levels at various points in time may not necessarily be
comparable to those of many other companies in its industry. This is because MRV
conducts significant in-house manufacturing of various components used in its
products and thus carries substantial raw materials and work-in-progress in
addition to finished products in its inventories. In contrast, many competitors
outsource to turnkey contract manufacturers substantial portions of their
production requirements and thus do not include material amounts of raw 
materials or work in progress in inventories and may not even include finished
products in inventory if the contract manufacturer ships directly to the
competitors' customers.

     Royalties are payable by 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.

     On December 27, 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. 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.

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 



                                       33
<PAGE>   34

more expensive in particular countries, leading to a reduction in sales in that
country. In addition, inflation 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.

YEAR 2000

     Many existing 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 upcoming change in
the century. If not corrected, these computer applications and systems could
fail or create erroneous results by, at, or after the year 2000. Based on the
Company's investigation to date, management does not anticipate that the Company
will incur material operating expenses or be required to incur material costs to
be year 2000 compliant. To the extent the Company's systems are not fully year
2000 compliant, there can be no assurance that potential systems interruptions
or the cost necessary to update software would not have a material adverse
effect on the Company's business, financial condition, results or operations and
business prospects.

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, 1996 and 1997.....................  F-2

Consolidated Statements of Operations for each of the three years in the period
ended December 31, 1997 .........................................................  F-4

Consolidated Statements of Stockholders' Equity for each of the three years in
the period ended December 31, 1997 ..............................................  F-5

Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1997 .........................................................  F-6

Notes to Consolidated Financial Statements ......................................  F-8
</TABLE>



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

Not applicable.



                                       34
<PAGE>   35
                    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, 1996 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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 generally accepted auditing
standards. 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, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.


                                                        
                                               /S/ ARTHUR ANDERSON LLP   

                                                   ARTHUR ANDERSEN LLP



Los Angeles, California
February 20, 1998










                                      F-1
<PAGE>   36
                            MRV COMMUNICATIONS, INC.

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

                                 (IN THOUSANDS)




<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                  --------------------------
                                                    1996               1997
                                                  --------           -------
<S>                                               <C>                <C>
CURRENT ASSETS:
  Cash and cash equivalents                         $14,641          $ 19,428
  Short-term investments                             17,659            36,413
  Accounts receivable, net of allowance of
    $2,468 in 1996 and $4,252 in 1997                24,296            47,258
  Inventories                                        18,238            41,689
  Deferred income tax asset                           2,660             2,280
  Other current assets                                4,377             7,248
                                                    -------           -------
               Total current assets                  81,871           154,316
                                                    -------           -------

PROPERTY, PLANT AND EQUIPMENT, at cost:
  Building                                            1,464             3,127
  Machinery and equipment                             3,941             4,294
  Furniture and fixtures                                286               560
  Computer hardware and software                      1,513             2,134
  Leasehold improvements                                533               710
                                                    -------           -------
                                                      7,737            10,825
  Less--Accumulated depreciation and
    amortization                                     (1,489)           (2,642)
                                                    -------           -------
                                                      6,248             8,183
                                                    -------           -------
OTHER ASSETS:
  Investments                                             -            62,382
  Deferred income tax asset                           6,036             6,231
  Goodwill, net of accumulated
    amortization of $210 in 1996
    and $372 in 1997                                  2,788             5,077
  Other                                                   -                47
                                                    -------           -------
                                                      8,824            73,737
                                                    -------           -------
                                                    $96,943          $236,236
                                                    =======           =======
</TABLE>


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




                                      F-2
<PAGE>   37
                            MRV COMMUNICATIONS, INC.

                           CONSOLIDATED BALANCE SHEETS

                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                 (IN THOUSANDS)



<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                       ------------------------
                                                         1996            1997
                                                       ---------      ---------
<S>                                                    <C>            <C>      
CURRENT LIABILITIES:
  Current portion of capital
    lease obligations                                  $     119      $     111
  Accounts payable                                        11,328         30,439
  Accrued liabilities                                      6,389          8,429
  Accrued restructuring costs                              3,549           --
  Customer deposit                                         1,500            293
  Income taxes payable                                     2,013          3,485
                                                       ---------      ---------
               Total current liabilities                  24,898         42,757
                                                       ---------      ---------

LONG-TERM LIABILITIES:
  Convertible debentures                                  17,325           --
  Capital lease obligations, net of
    current portion                                        1,035            788
  Other long-term liabilities                                532          2,065
                                                       ---------      ---------
               Total long-term liabilities                18,892          2,853
                                                       ---------      ---------

COMMITMENTS AND CONTINGENCIES (Note 7)

MINORITY INTEREST                                            852            657
COMMON STOCK ISSUED IN CONNECTION WITH 
  ACQUISITION (Note 3)                                    10,530           --
STOCKHOLDERS' EQUITY:
  Preferred stock, $0.01 par value:
    Authorized - 1,000 shares;
      no shares issued or outstanding                       --             --
  Common stock, $0.0034 par value:
    Authorized - 40,000 shares
    Issued and outstanding - 21,286
      shares in 1996 and 26,360 in 1997                       70             88
  Capital in excess of par value                          49,636        175,874
  Retained earnings (deficit)                             (7,950)        14,635
  Cumulative translation adjustments                          15           (628)
                                                       ---------      ---------
                                                          41,771        189,969
                                                       ---------      ---------
                                                       $  96,943      $ 236,236
                                                       =========      =========
</TABLE>



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




                                      F-3
<PAGE>   38
                            MRV COMMUNICATIONS, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                    (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)



<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                          -------------------------------------
                                            1995           1996          1997
                                          ---------     ---------     ---------
<S>                                       <C>           <C>           <C>      
REVENUES, net:                            $  39,202     $  88,815     $ 165,471
                                          ---------     ---------     ---------
COSTS AND EXPENSES:
  Cost of goods sold                         22,608        51,478        94,709
  Research and development expenses           4,044         8,201        13,093
  Selling, general and
    administrative expenses                   6,799        14,025        27,365
  Purchased technology in
    progress                                  6,211        17,795          --
  Restructuring costs                         1,465         6,974          --
                                          ---------     ---------     ---------
                                             41,127        98,473       135,167
                                          ---------     ---------     ---------
      Operating income (loss)                (1,925)       (9,658)       30,304
                                          ---------     ---------     ---------
OTHER INCOME (EXPENSE):
  Interest expense related to
    convertible debentures
    and acquisition                            --          (4,357)         (843)
  Minority interest                            --            (196)         (146)
  Interest income                               641           702         2,841
  Interest expense                             (102)         (743)         (118)
  Other                                         115           194            21
                                          ---------     ---------     ---------
                                                654        (4,400)        1,755
                                          ---------     ---------     ---------
      Income (loss) before provision
        (benefit) for income taxes           (1,271)      (14,058)       32,059

PROVISION (BENEFIT) FOR INCOME TAXES              2        (4,404)        9,474
                                          ---------     ---------     ---------
NET INCOME (LOSS)                         $  (1,273)    $  (9,654)    $  22,585
                                          =========     =========     =========
EARNINGS (LOSS) PER COMMON SHARE
  INFORMATION:

      Basic earnings (loss) per
        common share                      $    (.07)    $    (.49)    $    0.95
                                          =========     =========     =========
      Diluted earnings (loss)
        per common share                  $    (.07)    $    (.49)    $    0.88
                                          =========     =========     =========
WEIGHTED AVERAGE NUMBER OF
  COMMON SHARES OUTSTANDING:

      Basic                                  18,377        19,739        23,670
                                          =========     =========     =========
      Diluted                                18,377        19,739        25,734
                                          =========     =========     =========
</TABLE>


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




                                      F-4
<PAGE>   39
                            MRV COMMUNICATIONS, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                 (IN THOUSANDS)



<TABLE>
<CAPTION>
                                                              
                                          COMMON STOCK           CAPITAL IN      RETAINED     CUMULATIVE  
                                     -----------------------      EXCESS OF      EARNINGS     TRANSLATION 
                                      SHARES          AMOUNT      PAR VALUE      (DEFICIT)     ADJUSTMENTS          TOTAL
                                      ------          ------      ---------      ---------     -----------          -----
BALANCE,
<S>                                 <C>            <C>            <C>            <C>             <C>             <C>      
  December 31, 1995                   19,049              63      $  23,491      $   1,704       $    --        $  25,258

  Shares held by trustee
    relating to Fibronics
    acquisition                          137            --             --             --              --              --

  Conversion of
    debentures                           812               2         12,851           --              --            12,853

  Exercise of stock
    warrants and options               1,088               4          4,938           --              --             4,942

  Issuance of common
    stock for cash                       200               1          3,999           --              --             4,000

  Interest expense related
    to convertible debentures
    and acquisition
    (see Note 4)                        --              --            4,357           --              --             4,357

  Translation adjustments               --              --             --             --                15              15

  Net loss                              --              --             --           (9,654)           --            (9,654)
                                   ---------       ---------      ---------      ---------       ---------       ---------
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
  by trustee relating
  to Fibronics acquisition              (137)           --             --             --              --              --

Conversion of debentures               1,013               4         17,737           --              --            17,741

Exercise of stock warrants
  and options, including
  related tax benefit                  1,138               4          8,464           --              --             8,468

Interest expense related
  to convertible debentures
  and acquisition                       --              --              427           --              --               427


Translation adjustment                  --              --             --             --              (643)           (643)

  Net income                            --              --             --           22,585            --            22,585
                                   ---------       ---------      ---------      ---------       ---------       ---------
BALANCE,
  December 31, 1997                   26,360       $      88      $ 175,874      $  14,635       $    (628)      $ 189,969
                                   =========       =========      =========      =========       =========       =========
</TABLE>


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




                                      F-5
<PAGE>   40
                            MRV COMMUNICATIONS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)



<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                               -----------------------------------------
                                                 1995           1996             1997
                                               --------       --------       -----------
<S>                                            <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                            $ (1,273)      $ (9,654)      $22,585
  Adjustments to reconcile net income
    (loss) to net cash used in
    operating activities:
      Depreciation and amortization                 305            943         1,439
      Provision for losses on accounts
        receivable                                  525          1,643         1,951
      (Gain) loss on sale of property and
        equipment                                    (6)           192          --
      Realized (gain) loss on investment           --             (180)         (215)
      Purchased technology in progress            5,691         17,795          --
      Interest related to convertible
        debentures and acquisition                 --            4,357           843
      Amortization of premium 
        on U.S. Treasury notes                        8           --              37
      Minority interests' share of income          --              196           146
      Changes in assets and
        liabilities, net of effects
        from acquisitions:
        Decrease (increase) in:
          Accounts receivable                    (6,859)       (10,937)      (22,568)
          Inventories                            (5,397)        (5,697)      (21,867)
          Deferred income taxes                  (1,357)        (6,839)          185
          Other assets                              166         (3,031)       (2,824)
        Increase (decrease) in:
          Accounts payable                        1,457          1,912        17,435
          Accrued liabilities and
            restructuring                           154          6,623        (2,092)
          Income taxes payable                      425            798         3,622
          Customer deposits                         (15)         1,500        (1,207)
          Accrued severance pay                     (19)           231          (231)
          Deferred rent                              (3)          --            --
                                               --------       --------       --------
             Net cash used in operating
               activities                        (6,198)          (148)       (2,761)
                                               --------       --------       --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment            (1,035)        (2,593)       (1,207)
  Proceeds from the sale of property
    and equipment                                    14           --            --
  Purchases of investments                      (22,013)       (45,612)     (148,948)
  Proceeds from sale of investments              24,741         29,133        67,990
  Restricted cash                                (6,272)         6,272          --
  Cash used in acquisitions, net of
    cash received                                (1,000)       (13,247)       (5,289)
                                               --------       --------       --------
             Net cash used in
               investing activities              (5,565)       (26,047)      (87,454)
                                               --------       --------       --------
</TABLE>



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



                                      F-6
<PAGE>   41


<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                         -----------------------------------------
                                           1995           1996             1997
                                         --------       --------       -----------
<S>                                      <C>            <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from issuance of
    common stock                            9,715          8,942            99,638
  Proceeds from the issuance of
    debentures                                 --         30,000                --
  Principal payments on capital
    lease obligations                         (78)           (60)             (255)
  Loans receivable from officers               32             --                --
  Repurchase of common stock
    issued in connection with
    acquisition                                --             --            (4,230)
                                         --------       --------       -----------
             Net cash provided by
               financing activities         9,669         38,882            95,153
                                         --------       --------       -----------

EFFECT OF EXCHANGE RATE CHANGES
  ON CASH AND CASH EQUIVALENTS                 --              3              (151)

NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                     (2,094)        12,690             4,787

CASH AND CASH EQUIVALENTS,
  beginning of year                         4,045          1,951            14,641
                                         --------       --------       -----------
CASH AND CASH EQUIVALENTS,
  end of year                            $  1,951       $ 14,641       $    19,428
                                         ========       ========       ===========
</TABLE>




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



                                      F-7
<PAGE>   42
                            MRV COMMUNICATIONS, INC.


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997



1.      BACKGROUND

        MRV Communications, Inc. (the Company) designs, manufactures, markets
and sells 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, hubs and related
equipment, 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 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), and its 70
percent-owned subsidiary, EDSLAN SRL (EDS). 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 translated into U.S. dollars in accordance with Statement of
Financial Accounting Standards NO. 52, and are included in determining net
income or loss.

        The financial statements of NBase Europe, Netsoft and EDS 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.

        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 not included in determining
net income or loss but are accumulated and reported as a separate component of
stockholders' equity in the accompanying consolidated balance sheets.


                                      F-8
<PAGE>   43

        USE OF ESTIMATES

        The preparation of financial statements in conformity with generally
accepted accounting principles 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.

        STOCK-BASED COMPENSATION PLAN

        The Company accounts for its stock based compensation plan (see Note 8)
under the provisions of APB Opinion No. 25. The Company has elected to follow
the disclosure provisions of Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation", beginning January 1, 1995
for employee awards. See Note 8 for disclosure of pro forma income (loss) and
income (loss) per common share amounts for the years ended December 31, 1995,
1996 and 1997 as required by SFAS 123. The Company has adopted SFAS 123 for all
non-employee awards beginning January 1, 1996.

        REVENUE RECOGNITION

        The Company recognizes revenue and provides for returns and warranty
upon shipment of products.

        The Company has no customer that accounted for 10 percent or more of the
Company's revenues in 1995, 1996 and 1997. There were no customers with a
receivable balance greater than 10 percent of total receivables at December 31,
1996 and 1997.

        Sales to countries outside the United States approximated 45 percent, 53
percent and 60 percent of the Company's revenues in 1995, 1996 and 1997,
respectively. See Note 9 for sales by geographic areas.

        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 $6,211,000 and
$17,795,000 to technology in progress and recorded the expense during the years
ended December 31, 1995 and 1996, respectively.

        Also in connection with the Company's acquisitions, during the years
ended December 31, 1995 and 1996, the Company recorded $1,465,000 and $6,974,000
as restructuring costs, respectively, 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 1995
related to 63 employees, of which six were upper management personnel. The
reduction of the workforce in 1996 related to 95 employees, of which seven were
upper management personnel.

                                      F-9
<PAGE>   44
        CASH AND CASH EQUIVALENTS

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

        RESTRICTED CASH BALANCES

        At December 31, 1996, the Company had letters of credit secured by a
portion of the Company's short-term investments. There were no restrictions at
December 31, 1997.

        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. 

        INVESTMENTS

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

        At December 31, 1996 and 1997, short- and long-term investments
consisted of U.S. Treasury notes. As defined by the standard, 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, 1996 and 1997. All
short-term investments mature by December 1998.

                                      F-10
<PAGE>   45
        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, 1996 and 1997
(in thousands):

<TABLE>
<CAPTION>
                                                 1996              1997
                                               -------           -------
<S>                                             <C>              <C>    
        Raw materials                           $8,295           $17,568
        Work-in-process                          3,975            13,436
        Finished goods                           5,968            10,685
                                               -------           -------
                                               $18,238           $41,689
                                               =======           =======
</TABLE>

        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.

        GOODWILL

        The Goodwill resulted from the Company's acquisitions during 1995, 1996
and 1997. It is amortized on a straight-line basis over 8 years. The Company
continually evaluates the recoverability of goodwill by assessing whether the
recorded value will be recovered through future expected operating results.

        CUSTOMER DEPOSIT

        The customer deposit at December 31, 1996 represents an advance payment
from a company. The payment was deferred until the related revenue was earned in
1997.

        WARRANTY

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

        STATEMENTS OF CASH FLOWS

        Cash paid for income taxes was $932,000 in 1995, $1,620,000 in 1996 and
$5,473,000 in 1997. Cash paid for interest was $102,000 in 1995, $150,000 in
1996 and $214,000 in 1997.

        The 1995 Statement of Cash Flows includes an amount of $5,691,000 that
represents the fair value of consideration given and net liabilities assumed for
the Company's acquisitions that was allocated to purchased technology in
progress. This amount differs from the amount shown on the 1995 Statement of
Operations by $520,000, which represents legal, consulting and other costs which
were allocated to purchased technology in progress on the Statement of
Operations (see Note 3).


                                      F-11
<PAGE>   46
        During 1996, the Company acquired property and equipment with a cost of
$1,147,000 through a capital lease agreement. Also in 1996, $12,675,000
principal amount of debentures and $178,000 of accrued interest was converted
into approximately 812,000 shares of common stock. During 1995, the Company
purchased property and equipment with a cost of $100,000 through a capital lease
agreement.

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

        These non-cash transactions are excluded from the Statements of Cash
Flows.

        COMMON STOCK SPLITS

        On May 20, 1996, the Company effected a 3 for 2 stock split of its
common stock, and on July 29, 1996, the Company effected a 2 for 1 stock split
of its common stock. All share amounts set forth in these consolidated financial
statements have been retroactively restated to give effect to these stock
splits.

        NET INCOME PER COMMON SHARE

        In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share". The statement replaces primary EPS with basic EPS, which is
computed by dividing reported earnings available to common shareholders by
weighted average shares outstanding. The provision also requires the
calculation of diluted EPS. The Company adopted this statement in 1997 and all
prior year earnings per share amounts have been recalculated based on the
provisions of SFAS No. 128.

        The following schedule summarizes the information used to compute
earnings per common share (in thousands except per share data):

<TABLE>
<CAPTION>

                                                  Years Ended December 31,
                                          ---------------------------------------
                                             1995           1996           1997
                                          ---------      --------      -------- 
<S>                                        <C>           <C>           <C>

Net income (loss)                          $ (1,273)     $ (9,654)     $ 22,585
                                           ========      ========      ========
Weighted average number of common shares
  used to compute basic net income per
  common share                               18,377        19,739        23,670

Dilutive effect of common share
  equivalents                                    --            --         2,064    
                                            -------       -------       -------
Weighted average number of common shares
  used to compute diluted net income
  per common share                           18,377        19,739        25,734
                                            ========      ========      ========
Basic net income (loss) per common
  share                                         .07          (.49)          .95

Diluted net income (loss) per common 
  share                                         .07          (.49)          .88
</TABLE>

        NEW AUTHORITATIVE PRONOUNCEMENTS

        In June 1997, the Financial Accounting Standards Board (FASB) introduced
SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires certain
disclosures regarding changes in the equity of the Company that result from
transactions and other economic events other than transactions with
stockholders. SFAS No. 130 will be adopted by the Company in 1998. Management
does not expect the adoption of this standard to have a material effect on the
Company's financial position or results of operations.

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". The statement requires disclosures for
segments determined using the "management approach", which is based on the way
the chief operating decision-maker organizes segments within a company. This
statement is effective for the year ending December 31, 1998, and it must be
applied on a limited basis to interim periods thereafter. The standard will have
no effect on the Company's financial position or statement of operations, but
may change the presentation of segment information in the financial statements.


                                      F-12


<PAGE>   47
        RECLASSIFICATIONS

        Certain reclassifications have been made to prior years' amounts to
conform to the current year presentation.

3.      ACQUISITIONS AND RESTRUCTURING

        NBase Communications

        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 debts.

        On June 29, 1995, the Company acquired certain assets and the
distribution business of ACE 400 Communications, Ltd. (ACE), a network equipment
company located in Israel. The purchase price paid by the Company was $100,000
in cash, the assumption of approximately $467,000 in liabilities and debt, the
issuance of 855,000 shares of the Company's common stock (valued at $3,910,000),
and extended a right to ACE to sell to the Company up to $400,000 of ACE's
inventory.

        Subsequent to the acquisition dates, the Company consolidated operations
in Israel and formed a new subsidiary in Israel named NBase Communications, Ltd.
Each of the businesses acquired also owned a subsidiary in the United States.
These operations were also consolidated and the Company formed a new subsidiary
in the United States named NBase Communications, Inc.

        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 calls 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 $500,000, respectively. At
December 31, 1997, the Company owns 70 percent of EDSLAN SRL.

        Fibronics

        On September 26, 1996, the Company acquired certain assets and the
distribution business of Fibronics, Ltd., a computer networking and
telecommunications company located primarily in Israel and Germany. On the date
of acquisition, Fibronics, Ltd. was a wholly-owned subsidiary of Elbit, Ltd.
(Elbit). The purchase price paid by the Company was $22,770,000, of which
$12,240,000 was paid in cash and $10,530,000 was paid through the delivery of
approximately 459,000 shares of the Company's common stock.

        The Company guaranteed Elbit that it would realize at least $10,530,000
from the shares of common stock, plus interest thereon at 0.67% per month from
January 1, 1997 until such shares were resold. The Company secured the guarantee
with a letter of credit from a major bank in the amount of approximately
$4,300,000 and by issuing to a trustee an additional 137,000 shares
of common stock. After January 14, 1997, Elbit could, under certain
circumstances, elect to cause the Company to repurchase up to approximately
275,000 shares for $6,300,000, plus interest thereon at 0.67% per month from
January 1, 1997 through the date of purchase.

        In March 1997, the Company and Elbit agreed to amend their agreement
regarding the common stock portion of the purchase price paid to Elbit for the
distribution business of Fibronics, Ltd. First, the Company repurchased
approximately 184,000 shares, paying Elbit $4,230,000 (approximately $23.00 per
share) (plus accrued interest thereon at 0.67% per month from January 1, 1997
through March 13, 1997). Second, with respect to the remaining 275,000 shares
(the "Additional Shares"), the Company guaranteed that the Additional Shares
could be resold by Elbit for at least $6,300,000 (approximately $23.00 per
share),


                                      F-13
<PAGE>   48


plus interest thereon at 0.67% per month from January 1, 1997 through the date
of Elbit's resale. To secure any shortfall, the Company delivered to Elbit
pending resale of the Additional Shares a letter of credit from a major bank,
expiring on June 15, 1997, in the amount of approximately $6,536,000. Elbit is
due to pay to the Company any excess above $23.00 per share, which is an
immaterial amount. As part of the amended agreement, Elbit also returned the
137,000 shares to the Company.

        Subsequent to the acquisition date, the Company formed a new subsidiary
in Israel named NBase Fibronics, Ltd. and a new subsidiary in Germany named
NBase Europe GmbH.

        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>
                                                                  1995             1996
                                                                --------         --------
<S>                                                             <C>              <C>     
        Inventory                                               $   319          $  3,574
        Accounts receivable                                        -                2,686
        Property and equipment                                      600             1,793
        Other assets                                               -                  315
        Current liabilities and debt                             (2,267)           (3,962)
                                                                -------          --------
               Net assets acquired or
                 liabilities assumed                             (1,348)            4,406

        Cash paid for legal, consulting and
          other costs                                              (395)             (450)
        Accrued legal, consulting and others
          costs                                                    (125)             (365)
        Common stock issued to sellers                           (3,910)          (10,530)
        Cash paid to sellers                                     (1,000)          (13,287)
                                                                -------          --------
               Paid or accrued                                   (5,430)          (24,632)

        Allocated to purchased
          technology in progress                                  6,211            17,795
                                                                -------          --------
        Goodwill                                                $   567          $  2,431
                                                                =======          ========
</TABLE>

        In connection with the acquisition of certain assets from Galcom, the
Company issued warrants to Galcom to purchase 225,000 shares of common stock at
prices ranging from $4.92 to $7.38 per share. The Company also issued warrants
to purchase 75,000 common shares to former employees of Galcom at prices ranging
from $4.25 to $4.75 per share, warrants to purchase 990,000 common shares at
prices ranging from $4.25 to $4.75 per share to existing employees and
consultants, warrants to purchase 45,000 common shares at $4.25 per share to an
outside consultant, and warrants to purchase 36,000 common shares at $4.25 per
share to a company for design services performed. All of these warrants are
exercisable over a five year period.


                                      F-14
<PAGE>   49



        In connection with the acquisition of certain assets from ACE, the
Company issued warrants to the trustee of ACE to purchase 300,000 common shares
at $4.57 per share, and issued warrants to purchase 30,000 shares at $4.67 per
share to an ACE employee. All of these warrants are exercisable over a five year
period.

        The following summarized unaudited pro forma financial information for
the years ended December 31, 1996 assumes the acquisitions of NBase
Communications, Ltd., EDSLAN, Fibronics and NBase Europe GmbH occurred on 
January 1, 1995 (in thousands, except for per share data):

<TABLE>
<CAPTION>
                                              1995             1996
                                            --------         --------
<S>                                         <C>             <C>
Revenues, net                                $82,008         $111,000
Net income                                       762            1,294
Earnings per common share                    $  0.04         $   0.07
                                            ========         ========
</TABLE>

        Pro forma net income and earning per common share amounts do not include
the purchased technology in progress costs, net of their tax effects, included
in the accompanying 1995 and 1996 Statement of Operations.

        Netsoft

        In November 1997, the Company agreed to a small purchase of Netsoft
Solutions, Ltd. (Netsoft). Under the agreement, the Company acquired certain
assets and the business operations of Netsoft, a French networking company. The
purchase price paid by the Company was approximately $4,700,000, of which
approximately $2,300,000 was goodwill.

4.      CONVERTIBLE DEBENTURES

        In September 1996, the Company completed a private placement of
$30,000,000 principal amount of convertible debentures. The proceeds from the
private placement were primarily used to finance the Company's 1996 acquisition
of certain assets from Fibronics, Ltd. (see Note 3). The debentures bore
interest at 5 percent per annum, payable semi-annually, and were convertible
into common stock at any time at the option of the holders. A discount from the
market price at the time of conversion applied beginning 90 days after the first
issuance of debentures. The Company could force conversion under certain
circumstances and after certain dates, and the debentures would automatically
convert into common stock at maturity if not previously converted. The
conversion price was a specified percentage of the prevailing market price of
the Company's common stock on the conversion date, which was defined in the
debenture agreement as the average of the closing bid price of a share of the
Company's stock for the five trading days immediately preceding the conversion
date. The conversion price was 85.5 percent of the applicable market price if
the debentures were converted during the 30 days beginning December 6, 1996. The
conversion price decreased by an additional one percent each 30 days after
January 4, 1997 until it reached a floor of 77.5 percent.

        The value of the fixed discount has been reflected in the accompanying
consolidated financial statements as additional interest expense and such fixed
discount has been accreted through the first possible conversion date of the
respective issuance.

        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.

        As of December 31, 1996, $12,675,000 principal amount of debentures, and
$178,000 of accrued interest, had been converted into approximately 812,000
shares of common stock at an average conversion rate of $15.83 per share. At
December 31, 1996, there were $17,325,000 principal amount of debentures
outstanding and $297,000 of interest was owed to the holders relating to the
debentures. This accrued interest is included in "accrued liabilities" on the
accompanying December 31, 1996 consolidated balance sheet. In 1996, $4,357,000
was recorded as additional interest expense and as an increase to stockholders'
equity relating to the "beneficial conversion" feature and the fair value of the
warrants.

        During 1997, $17,325,000 principal amount of debentures, and
approximately $843,000 of accrued interest, were converted into approximately
1,013,000 shares of common stock at an average conversion rate of $17.93 per
share. At December 31, 1997, there are no debentures outstanding.


                                      F-15
<PAGE>   50
5.      WARRANTS            

        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.

        A summary of warrant activities for 1995, 1996 and 1997 is as follows
(number of shares in thousands):

<TABLE>
<CAPTION>
                                                  Number           Exercise
                                                of Shares           Prices
                                                ---------       --------------- 
<S>                                             <C>             <C>
        Balance, December 31, 1994                 268             .27 to  1.71

          Issued                                 2,100            4.25 to  7.38
          Exercised                               (236)            .27 to  1.67
          Redeemed                                -                     -
                                                 -----          ---------------
        Balance, December 31, 1995               2,132             .27 to  7.38

          Issued                                 2,106            8.42 to 26.65
          Exercised                               (776)            .27 to  8.42
          Redeemed                                -                     -
                                                 -----          ---------------
        Balance, December 31, 1996               3,462          $  .27 to 26.65

          Issued                                    10                    32.50
          Exercised                               (766)           1.67 to 14.25 
          Redeemed                                -                     -
          Canceled                                (100)                   20.00
                                                 -----          ---------------
        Balance, December 31, 1997               2,606          $  .27 to 32.50
                                                 =====          ===============
</TABLE>




                                      F-16
<PAGE>   51
6.      INCOME TAXES

        The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109 (SFAS 109).

        Under SFAS 109, 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, 1996
and 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                             1996           1997
                                                            ------         -------
<S>                                                         <C>            <C>   
        Allowance for bad debts                             $  777         $1,071
        Inventory reserve                                      280            466
        Warranty reserve                                       160            320
        Accrued restructuring costs                          1,147           -
        State income taxes                                     296            331
        Other, net                                            -                92
                                                            ------         ------
               Current portion                               2,660          2,280

        Purchased technology in progress                     6,998          6,231
        Valuation reserve                                     (962)          -
                                                            ------         ------
                                                             6,036          6,231
                                                            ------         ------
                                                            $8,696         $8,511
                                                            ======         ======
</TABLE>

        The provision (benefit) for income taxes for the years ended December
31, 1995, 1996 and 1997 is as follows (in thousands):

<TABLE>
<CAPTION>
                                              1995           1996          1997
                                             -------        --------      -------
<S>                                          <C>            <C>            <C>   
        Current  - Federal                   $ 1,112        $ 1,692        $7,635
                 - State                         247            324           828
                 - Foreign                      -               547         1,356
                                              ------        -------        ------
                                               1,359          2,563         9,819
                                              ------        -------        ------

        Deferred - Federal                      (333)        (5,694)          157
                 - State                         (99)        (1,022)           28
                 - Foreign                      (925)          (251)         (530)
                                              ------        -------        ------
                                              (1,357)        (6,967)         (345)
                                              ------        -------        ------
        Provision (benefit)for
          income taxes                       $     2        $(4,404)       $9,474
                                             =======        =======        ======
</TABLE>



                                      F-17
<PAGE>   52

        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, 1995, 1996 and 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
                                            1995                       1995                      1996
                                   ----------------------     --------------------      ---------------------
                                   Amount         Percent     Amount       Percent      Amount        Percent
                                   ------         -------     ------       -------      ------        -------
<S>                               <C>             <C>         <C>          <C>          <C>           <C>
Income tax
  provision
  (benefit)
  at statutory
  federal rate                    $    889         34.0%     $ (4,780)       (34.0)%    $ 11,222         35.0%
State and
  local income
  taxes, net
  of federal
  income tax
  effect                               160          6.1           563          4.0         1,924          6.0
Non-deductible
  interest expense                    --         --             1,542         11.0           175           .5
Research and
  development
  credit                              (173)        (6.7)         (374)        (2.7)       (1,669)        (5.2)
Effect of
  foreign net
  operating loss
  carryforwards                       (925)       (35.4)         --         --              --         --
Foreign taxes at
  rates less than
  domestic rates,
  other                                 51          2.0        (1,892)       (13.4)       (1,216)        (3.8)
Change in valuation
  reserve                             --         --               537          3.8          (962)        (3.0)
                                  --------       -----       --------        -----      --------         ----
                                  $      2          -- %     $ (4,404)       (31.3)%    $  9,474         29.5%
                                  ========       ======      ========        =====      ========         ==== 
</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. The Company estimates the benefit period will
begin in 1998.

        The Company does not provide U.S. 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.

7.            COMMITMENTS AND CONTINGENCIES

              LEASE COMMITMENTS

              The Company leases its primary facilities in Chatsworth,
California from unaffiliated third parties at an annual combined base rent of
approximately $340,000 with lease terms expiring through 2002. The Company also
leases sales office and warehouse space in Maryland, Israel, England, Germany
and Italy at a combined annual base rent of approximately $594,000, with lease
terms expiring from 1999 through 2006.

                                      F-18
<PAGE>   53
        The Company leases all of its facilities and certain equipment under
noncancelable capital and operating leases. Minimum future obligations under
such agreements at December 31, 1996 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                       Capital            Operating
                                                       Leases              Leases
<S>                                                    <C>                 <C> 
              1998                                     $   172              $   760
              1999                                         171                  602
              2000                                         171                  550
              2001                                         171                  550
              2002                                         171                  466
              Thereafter                                   279                  238
                                                       -------              -------
                                                         1,135              $ 3,166
                                                                            =======
              Less--Amount
                representing interest                     (236)
                                                       -------
                                                           899
              Less--Current portion                       (111)
                                                       -------
                                                       $   788
                                                       =======
</TABLE>

        Rent expense under noncancelable operating lease agreements for the
years ended December 31, 1995, 1996 and 1997 was $405,000,$684,000 and $706,000,
respectively.

        ROYALTY COMMITMENT

        As part of the purchase agreements of the Israeli companies referred to
in Note 3, 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. $276,000 was provided for in 1997 for royalties
to be paid under these agreements.





                                      F-19
<PAGE>   54
        ACCOUNTS RECEIVABLE

        The Company has agreements with several financial institutions to sell
its receivables with recourse; in the event of customer's default, the Company
must repurchase the receivable. At December 31, 1997 the Company is contingently
liable in the amount of $5,148,916 relating to such receivables sold 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 or products which
embody the inventions set forth in the two patents and single and treble damages
for the alleged infringement. Datatpoint'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. 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.



                                      F-20
<PAGE>   55
8.      STOCK-BASED COMPENSATION PLAN

        The Company has a stock option plan (the 1992 Plan) that provides for
the granting of options to purchase up to 1,950,000 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 and may not be
granted at an exercise price less than the fair market value of the common stock
on the date the option is granted. Non-qualified stock options may be issued to
non-employee directors, consultants and others, as well as to employees, with an
exercise price established by the Board of Directors. All incentive stock
options granted as of December 31, 1997 have been granted at prices equal to the
fair market value of the common stock on the grant date, and all options granted
expire five or ten years from the date of grant. All of the incentive stock
options granted become exercisable beginning one year from the date of grant in
equal installments over a three year period, while the non-qualified options
become fully exercisable beginning six months from the date of the grant.

        The Company has an additional stock option plan (the 1997 Plan) that
provides for the granting of options to purchase up to 500,000 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 1997 Plan must be at least equal to the fair market value of
such shares on the date of grant.

        The Company accounts for these plans under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for this
plan and the warrants been determined consistent with SFAS 123, the Company's
net (loss) income and (loss) income per diluted common share amounts would have
been reduced to the following pro forma amounts (net (loss) income amounts are
in thousands):

<TABLE>
<CAPTION>
                                             1995           1996             1997
                                           --------       --------           -----
<S>                                                      <C>                 <C>
Net Income (Loss):       As Reported       $(1,273)       $ (9,654)        $22,585
                         Pro Forma          (2,066)        (11,254)         20,943

Income (Loss) Per Common 
  Share:
  Basic:                 As Reported       $ (0.07)         $(0.49)          $0.95
                         Pro Forma           (0.11)          (0.57)           0.88 

  Diluted:               As Reported       $ (0.07)         $(0.49)          $0.88 
                         Pro Forma           (0.11)          (0.57)           0.81
</TABLE>

        Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.




                                      F-21





<PAGE>   56
        A summary of the status of the Company's outstanding stock options at
December 31, 1995, 1996 and 1997 and changes during the years then ended is
presented in the table and narrative below (shares are in thousands):


<TABLE>
<CAPTION>
                                      1995                  1996                    1997
                                -----------------     ------------------    -------------------
                                        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                         391    $2.10         1,156    $ 3.59      1,475       $ 6.02
Granted                           812     4.07           672     12.45        110        19.45 
Exercised                         (47)    2.11          (312)     3.28       (372)        4.86
Forfeited                         -        -             (41)     5.72         (5)        8.19
                                -----     ----         ------   ------      -----       ------ 

Outstanding at end of year      1,156    $3.59         1,475    $ 6.02      1,208       $ 8.77
                                -----    -----         -----    ------      -----       ------

Exercisable at end of year         84    $2.10           172      3.05        548         5.31
                                -----    -----         -----     -----      -----       ------
Weighted average fair value
  of options granted                     $1.74                  $ 4.28                  $ 5.89
                                         -----                  ------                  ------
</TABLE>

        The fair value of each option grant is estimated on the date of grant
using an option pricing model with the following weighted-average assumptions
used for grants in 1995, 1996 and 1997: risk-free interest rates of 6.5 percent;
no expected dividend yield; expected lives of 4 to 6 years; expected volatility
of 16% to 50%.

9.      FOREIGN OPERATIONS

        The Company operates principally in four geographic areas: the United
States, the European Community, the Pacific Rim and the Middle East. The
following is a summary of information by areas as of and for the year ended
December 31, 1997 (in thousands):

<TABLE>
<CAPTION>
                                    United     European    Middle     Pacific     All other
                                    States     Community    East        Rim         Areas       Total
<S>                                 <C>        <C>         <C>        <C>         <C>           <C>
        Sales to unaffiliated
          customers                $ 66,562    $68,719    $ 5,178     $21,607     $3,405        $165,471
        Income from operations       12,191     12,585        947       3,957        624          30,304
        Identifiable assets         163,462     32,584     40,190           -          -         236,236
</TABLE>

        Intercompany sales between geographic areas, which have been eliminated
from sales to unaffiliated customers and which are accounted for as arms length
transactions were as follows (in thousands):

<TABLE>
<CAPTION>
<S>                                                                             <C>
        From the Middle East to the United States                               $10,866
        From the United States to the Middle East                                 8,699 
        From the Middle East to the European Community                           13,058
        From the United States to the European Community                          4,387
</TABLE>

10.     401(K) PLAN

        In February 1997, the Company established a 401(k) savings plan (the
Plan) under which all eligible employees may participate. The Plan calls for the
Company to make matching contributions to all eligible employees. In 1997,
approximately $34,000 was charged to operations related to this plan.


11.      SUBSEQUENT EVENTS

        XYPLEX ACQUISITION

        In January 1998, the Company acquired all of the outstanding stock of
Xyplex Corporation, a subsidiary of the Whittaker Corporation engaged in the
design and manufacture of computer networking products primarily for use in
wide area networks (WAN). The purchase price was $35,000,000 in cash and 
three-year warrants to purchase up to 500,000 shares of the Company's common 
stock at $35 per share.

        The acquisition will be accounted for as a purchase. The accounting for
the acquisition and expected restructuring has not been finalized. The Company
expects the accounting to include the recording of goodwill, the write-off of
significant amounts of purchased technology in progress and the recording of a
restructuring charge related to the closing of facilities, reductions in
workforce and settlement of distribution agreements.

                                      F-22
<PAGE>   57

                                    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)                 45        President, Chief Executive Officer and Director
Shlomo Margalit(1)            56        Chairman of the Board of Directors, Chief Technical Officer and
                                        Secretary
Zeev Rav-Noy(1)               50        Chief Operating Officer, Treasurer and Director
Edmund Glazer                 37        Vice President of Finance and Administration and Chief Financial
                                        Officer
Khalid (Ken) Ahmad            44        Vice President of Marketing and Sales
Ofer Iny                      29        Vice President of Engineering
Igal Shidlovsky(2)(3)         70        Director
Guenter Jaensch(2)(3)         59        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, 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.

     Dr. Zeev Rav-Noy, a co-founder of the Company, has been its Chief Operating
Officer and a Director of the Company since inception and served as its
President until May 1990. From May 1985 to July 1988, Dr. Rav-Noy co-founded and
served as Vice President of Operations of LaserCom and, from 1982 to 1985,
served as a research fellow at Caltech. From 1979 to 1982, Dr. Rav-Noy served as
a consultant to a number of companies, including Tadiran Electronic Industries,
Inc., an Israeli telecommunication, military, and consumer electronics
conglomerate, and the Yeda Research and Development Co. Ltd., a technology
exploitation and application company affiliated with the Weizman Institute in
Israel. Dr. Rav-Noy holds a Bachelor of Science degree and a Masters degree in
physics from Tel Aviv University and a Ph.D. in Applied Physics from the Weizman
Institute in Israel.



                                      35
<PAGE>   58

     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 & 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.

     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 



                                       36
<PAGE>   59

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 ("SEC") 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, 1997.

ITEM 11. EXECUTIVE COMPENSATION

     The members of the Board of 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 sets forth a summary of all compensation paid by
the Company to its Chief Executive Officer and for each of its other executive
officers whose total annual salary and bonus exceeded $100,000 (the "Named
Executive Officers") during the fiscal year ended December 31, 1996:

<TABLE>
<CAPTION>
                                                                               LONG-TERM
                                                 ANNUAL COMPENSATION          COMPENSATION
                                           ------------------------------     ------------
                                                                               SECURITIES
                                                                               UNDERLYING
NAME AND PRINCIPAL POSITIONS               YEAR        SALARY     BONUS        OPTIONS(#)
--------------------------------------------------------------    ------      ------------
<S>                                        <C>        <C>         <C>         <C>
Noam Lotan                                 1997       $100,000    $     0             0
President and Chief Executive Officer      1996       $100,000    $     0        30,000
                                           1995       $100,000    $     0             0

Shlomo Margalit                            1997       $110,000    $     0             0
Chairman of the Board of Directors,        1996       $110,000    $     0             0
Chief Technical Officer and Secretary      1995       $110,000    $     0             0

Zeev Rav-Noy                               1997       $110,000    $60,000             0
Chief Operating Officer                    1996       $110,000    $60,000             0
                                           1995       $110,000    $60,000             0

Ken Ahmad                                  1997       $ 90,000    $45,830             0
Vice President of Marketing and Sales      1996       $ 90,000    $57,170             0
                                           1995       $ 90,000    $43,500       150,000
</TABLE>


     None of the Named Executive Officers were granted or exercised any stock
options during the year ended December 31, 1997. Neither Drs. Margalit nor
Rav-Noy hold any stock options.


                                       37
<PAGE>   60
                         FISCAL YEAR-END OPTION VALUES

     The following table provides certain information concerning stock options
held by the other Named Executive Officers at December 31, 1997:

<TABLE>
<CAPTION>
                           NUMBER OF SHARES                     
                        UNDERLYING UNEXERCISED                           VALUE OF UNEXERCISED       
                             OPTIONS AT                                IN-THE-MONEY OPTIONS AT 
                          DECEMBER 31, 1997                             DECEMBER 31, 1997 (1)
                   ----------------------------------           ------------------------------------
                   Exercisable          Unexercisable           Exercisable            Unexercisable
                   -----------          -------------           -----------            -------------
<S>                <C>                  <C>                     <C>                    <C>
Noam Lotan            10,000               20,000               $  154,550               $  309,100
Ken Ahmad            100,000               50,000               $2,024,500               $1,012,250
</TABLE>
-----------
(1)  Based on the difference between $23.88 per share (the last sale price per
     share of Common Stock on December 31, 1997 as reported on The Nasdaq
     National Market) and the per share exercise price.


EMPLOYMENT AGREEMENTS

     In March 1992, the Company entered into three-year employment agreements
with Mr. Lotan, Dr. Margalit and Dr. Rav-Noy. 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, Dr. Margalit serves as
Chairman of the Board of Directors, Chief Technical Officer and Secretary, and
Dr. Rav-Noy serves as a Chief Operating Officer, Treasurer and a Director. Mr.
Lotan, Dr. Margalit and Dr. Rav-Noy receive base annual salaries of $100,000,
$110,000 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



                                       38
<PAGE>   61

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 Rav-Noy and Mr. Lotan. All benefits under these policies will be
payable to the Company upon the death of an insured. In November 1994, each of
Mr. Lotan and Drs. Margalit and Rav-Noy agreed to extend the terms of their
respective employment agreement until March 1998.

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.

     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. Non-
qualified 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.



                                       39
<PAGE>   62

     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 July 30, 1997, options for 1,466,108 shares were outstanding under
the 1992 Plan and none were reserved thereunder for options available for future
grant.

     1997 Plan. On December 12, 1997, 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. 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
500,000 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 500,000 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 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 the full 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.

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 



                                       40
<PAGE>   63

to which such persons shall be determined to be liable for misconduct or
negligence in the 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.

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 31, 1998, 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 Named
Executive Officers, and (iv) all current directors and executive officers as a
group.

<TABLE>
<CAPTION>
                                                COMMON STOCK
                                          ------------------------
NAME AND ADDRESS(1) OF BENEFICIAL
OWNER(2) OR IDENTITY OF GROUP               NUMBER       PERCENT
----------------------------------        ----------    ---------
<S>                                      <C>           <C>

Shlomo Margalit                            1,833,930      6.9%
Zeev Rav-Noy                               1,703,915      6.4%   
Noam Lotan(3)                                878,437      3.3%
Ken Ahmad (4)                                313,464      1.2%     
All executive officers and directors
  as a group (7 persons)(5)                4,828,746     17.9% 
</TABLE>
----------
*    Less than 1%
(1)  The address of each of the person listed is c/o MRV Communications, Inc.,
     8917 Fullbright Avenue, Chatsworth, CA 91311.
(2)  Pursuant to the rules of the Securities and Exchange 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 20,000 shares issuable pursuant to stock options exercisable
     within 60 days from March 31, 1998.
(4)  Includes 150,000 shares issuable pursuant to stock options exercisable
     within 60 days from March 31, 1998.
(5)  Includes 269,000 shares issuable pursuant to stock options exercisable
     within 60 days from March 31, 1998.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.



                                       41
<PAGE>   64

<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 filed as part of Annual Report on Form 10-K for the year ended
        December 31, 1996.

 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 filed as part of Annual Report on Form 10-K for the year ended
        December 31, 1996.

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

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)).

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, 1992 (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)).
</TABLE>



                                       42
<PAGE>   65

<TABLE>
<CAPTION>
Exhibit
  No.                           Description
-------                         -----------
<S>     <C>
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   [omitted]

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   Form of Warrant issued in connection with Bridge Financing and to
        certain consultants (incorporated by reference to Exhibit 10c(2)filed as
        part of Registrant's Registration Statement on Form S-1(File No.
        33-48003)).

10.15   License Agreement between the Company and Laser Precision Corporation
        dated December 13, 1990 (incorporated by reference to Exhibit 101(1)
        filed as part of Registrant's Registration Statement on Form S-1 (File
        No. 33-48003)).

10.16   Form of Distributor Agreement (incorporated by reference to Exhibit 10m
        filed as part of Registrant's Registration Statement on Form S-1 (File
        No. 33-48003)).

10.17   Form of Sales Representative Agreement (incorporated by reference to
        Exhibit 10n filed as part of Registrant's Registration Statement on Form
        S-1 (File No. 33-48003)).

10.18   Form of Warrant issued to Managerial Resources, Inc. (incorporated by
        reference to Exhibit 10o filed as part of Registrant's Registration
        Statement on Form S-1 (File No. 33-48003))

10.19   Agreement for Sale and Purchase of Assets of ACE dated June 29,1995
        (incorporated by reference to Exhibit No. 2.1 & 2.1a of Registrant's
        Report on Form 8-K (0-23452) dated June 29, 1995,with respect to the ACE
        Acquisition).

10.20   Agreement for Purchase of Galcom Assets dated March 21, 1995
        (incorporated by reference to Exhibit No. 2.1 and 2.1a of Registrant's
        Report on Form 8-K (0-23452) dated May 1, 1995, with respect to the
        Galcom Acquisition).

10.21   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).

10.22   Asset Purchase Agreement dated September 26, 1996 between the Company,
        Elbit Ltd and certain of its Fibronics subsidiaries (incorporated by
        reference to Exhibit No. 2.1 of Registrant's Report on Form 8-K
        (0-23452), dated October 9, 1996 with respect to the Fibronics
        Acquisition).

10.22.1 First Amendment to Asset Purchase Agreement dated March 13, 1997 between
        Elbit Ltd. and Registrant (incorporated by reference to Exhibit No.
        10.22.1 of Registrant's Annual Report on Form 10-K (0-23452) for the
        year ended December 31, 1996 filed April 15, 1997).
</TABLE>



                                       43
<PAGE>   66

<TABLE>
<CAPTION>
Exhibit
  No.                           Description
-------                         -----------
<S>     <C>
10.23   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 (0-23452) for the year ended December 31, 1996 filed April 15,
        1997).

10.24   Form of Debenture (aggregating $30,000,000 principal amount)issued in
        private placement completed in September 1996 (incorporated by reference
        to Exhibit No. 10.24 of Registrant's Annual Report on Form 10-K
        (0-23452) for the year ended December 31, 1996 filed April 15, 1997).

10.25   Form of Warrants (aggregating 600,000) issued in private placement
        completed in September 1996 (incorporated by reference to Exhibit No.
        10.25 of Registrant's Annual Report on Form 10-K (0-23452) for the year
        ended December 31, 1996 filed April 15, 1997).

10.26   Form of Registration Rights Agreement entered into with investors in
        private placement completed in September 1996 (incorporated by reference
        to Exhibit No. 10.26 of Registrant's Annual Report on Form 10-K
        (0-23452) for the year ended December 31, 1996 filed April 15, 1997).

10.27   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).

10.28   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).

10.29   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).

10.30   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).

10.31   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).

10.32   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).

10.33   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).

10.34   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).

10.35   American Industrial Real Estate Association, Standard
        Industrial/Commerical 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.

10.36   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.
</TABLE>



                                       44
<PAGE>   67

<TABLE>
<CAPTION>
Exhibit
  No.                           Description
-------                         -----------
<S>     <C>
10.37   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.

21      Subsidiaries of the Registrant.

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

25      Power of Attorney (contained on Signature Page).
</TABLE>













                                       45
<PAGE>   68

                                   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 April 14, 1998.


                                        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 and appoints Noam Lotan, Zeev Rav-Noy 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 (Principal
-----------------------   Executive Officer), and a Director                    April 14, 1998
Noam Lotan                                                             

/s/ ZEEV RAV-NOY          Chief Operating Officer,                     
-----------------------   Treasurer, and a Director                             April 14, 1998
Zeev Rav-Noy                                                                                     

/s/ SHLOMO MARGALIT       Chairman of the Board, Chief Technical                                 
-----------------------   Officer, Secretary, and a Director                    April 14, 1998
Shlomo Margalit                                                                                  
                          Vice President of Finance  and                                         
/s/ EDMUND GLAZER         Administration, Chief Financial Officer                                
-----------------------   (Principal Financial and Accounting Officer)          April 14, 1998
Edmund Glazer                                                                                    
                                                                                                 
/s/ IGAL SHIDLOVSKY
-----------------------   Director                                              April 14, 1998
Igal Shidlovsky                                                                                  
                                                                                                 
/s/ GUENTER JAENSCH                                                                                                 
-----------------------   Director                                              April 14, 1998
Guenter Jaensch           
</TABLE>



                                       46