##### Table of Contents



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, 2003

OR

|     |  |                                                                                 
|---- |  | --------------------------------------------------------------------------------
|[  ] |  | Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act

For the transition period from _______________ to ______________

Commission file number 0-25678



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MRV COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)


|                                                                     |  |                                                
|-------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction
incorporation or organization) |  | 06-1340090
(I.R.S. Employer
identification No.)

20415 Nordhoff Street, Chatsworth, CA 91311
(Address of principal executive offices, Zip Code)

Registrants telephone number, including area code: (818) 773-0900

Securities registered under Section 12(b) of the Exchange Act:

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|                    |  |                                          
|None                |  | None                                     

Securities registered under Section 12(g) of the Exchange Act:

Common stock, $0.0017 par value

---

(Title of class)


Indicate by check mark, whether the issuer (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
9134 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
[   ]

Indicate by a check mark 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]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No
[   ]

Aggregate market value of the voting and non-voting common stock held by
non-affiliates computed by reference to the price at which the common stock was
last sold, or the average bid and asked price of such common stock, as of the
last business day of the Registrants most recently completed second fiscal
quarter - $199,876,210 (As of June 30, 2003).

Number of shares of common stock outstanding as of February 15, 2004 
105,471,625.

DOCUMENTS INCORPORATED BY REFERENCE

None.





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TABLE OF CONTENTS



|             |                                                                                               |  |  |  |  |  |  | 
|------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I      
|             | ITEM 1. BUSINESS                                                                             
|             | ITEM 2. PROPERTIES                                                                           
|             | ITEM 3. LEGAL PROCEEDINGS                                                                    
|             | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II     
|             | ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS            
|             | ITEM 6. SELECTED FINANCIAL DATA                                                              
|             | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|             | ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                         
|             | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|             | ITEM 9. CHANGES IN OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  
|             | ITEM 9a. CONTROLS AND PROCEDURES                                                             
|PART III    
|             | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|             | ITEM 11. EXECUTIVE COMPENSATION                                                              
|             | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|             | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV     
|             | ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                              
|             | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|SIGNATURE   
|EXHIBIT 21.1
|EXHIBIT 23.1
|EXHIBIT 23.2
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1



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##### Table of Contents



MRV Communications, Inc.

Index to Form 10-K

For the fiscal year ended December 31, 2003

|         |                                                                                               |  |             |    | 
|-------- | --------------------------------------------------------------------------------------------- |  | ----------- | -- | 
|         |                                                                                               |  | Page Number
|         |                                                                                               |  |            
|PART I   |                                                                                               |  | 3           |   
|         | Item 1. Business                                                                              |  |             | 3  | 
|         | Item 2: Properties                                                                            |  |             | 21 | 
|         | Item 3. Legal Proceedings                                                                     |  |             | 21 | 
|         | Item 4. Submission of Matters to a Vote of Security Holders                                   |  |             | 22 | 
|PART II  |                                                                                               |  | 23          |   
|         | Item 5. Market for the Registrants Common Equity and
Related Stockholder Matters             |  |             | 23 | 
|         | Item 6. Selected Financial Data                                                               |  |             | 24 | 
|         | Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations |  |             | 25 | 
|         | Item 7a. Quantitative and Qualitative Disclosures About
Market Risks                          |  |             | 41 | 
|         | Item 8. Consolidated Financial Statements and
Supplementary Data                              |  |             | 42 | 
|         | Item 9. Changes in or Disagreements with Accountants on
Accounting and Financial Disclosure   |  |             | 71 | 
|         | Item 9a. Controls and Procedures                                                              |  |             | 71 | 
|PART III |                                                                                               |  | 72          |   
|         | Item 10. Directors and Executive Officers of the
Registrant                                   |  |             | 72 | 
|         | Item 11. Executive Compensation                                                               |  |             | 75 | 
|         | Item 12. Security Ownership of Certain Beneficial Owners and Management                       |  |             | 79 | 
|         | Item 13. Certain Relationships and Related Transactions                                       |  |             | 81 | 
|PART IV  |                                                                                               |  | 81          |   
|         | Item 14. Principal Accountant Fees and Services                                               |  |             | 81 | 
|         | Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K                      |  |             | 82 | 
|         | Signatures                                                                                    |  |             | 86 | 

As used in this Report, we, us, our, MRV or the Company refer to
MRV Communications, Inc. and its consolidated subsidiaries.

2



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PART I

This Annual Report on Form 10-K for the year ended December 31, 2003, (the
Form 10-K) contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the Securities
Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act). Forward-looking statements are statements other than
historical information or statements of current condition and relate to future
events or the future financial performance of the Company. Some
forward-looking statements may be identified by use of such terms as expects,
anticipates, intends, estimates, believes and words of similar import.
These forward-looking statements relate to plans, objectives and expectations
for future operations. In light of these risks and uncertainties, there can be
no assurance that the forward-looking information contained in this Form 10-K
will in fact transpire or prove to be accurate. All subsequent written and
oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by this introduction.

In light of the risks and uncertainties inherent in all such projected
operational matters, the inclusion of forward-looking statements in this Form
10-K should not be regarded as a representation by the Company or any other
person that the objectives or plans of the Company will be achieved or that any
of the Companys operating expectations will be realized. Revenues and results
of operations are difficult to forecast and could differ materially from those
projected in the forward-looking statements contained in this Form 10-K for the
reasons detailed in the Risk Factors section of this Form 10-K, beginning on
page 9 or elsewhere in this Form 10-K. Readers should not place undue reliance
on forward-looking statements, which reflect managements view only as of the
date of this Form 10-K. 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.




ITEM 1. BUSINESS

Overview

We design, manufacture, sell, distribute, integrate and support network
infrastructure equipment and services, and optical components. We conduct our
business along three principal segments: the networking group, the optical
components group and development stage enterprise group. Our networking group
provides equipment used by commercial customers, governments and
telecommunications service providers, and include switches, routers, network
physical infrastructure equipment and remote device management equipment as
well as specialized networking products for defense and aerospace applications.
Our optical components group designs, manufactures and sell optical
communications components, primarily through our wholly owned subsidiary
Luminent, Inc. These components include fiber optic transceivers, discrete
lasers and laser emitting diodes, or LEDs, as well as components for
Fiber-to-the-Premises, or FTTP, applications. Our development stage enterprise
group seeks to develop new optical components, subsystems and networks and
other products for the infrastructure of the Internet.

We market and sell our products worldwide, through a variety of channels,
which include a dedicated direct sales force, manufacturers representatives,
value-added-resellers, distributors and systems integrators. We have
operations in Europe that provide network system design, integration and
distribution services that include products manufactured by third-party
vendors, as well as our products. We believe such specialization enhances
access to customers and allows us to penetrate targeted vertical and regional
markets.

We were organized in July 1988 as MRV Technologies, Inc., a California
corporation and reincorporated in Delaware in April 1992, at which time we
changed our name to MRV Communications, Inc.

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Industry Background

Over the past decade, businesses, governments, educational institutions
and other organizations have become increasingly reliant on communications
networks and software applications as critical strategic assets. With the
proliferation of Internet access to consumer households, communications
networks have been expanded to deliver new services providing both internal and
external connectivity. Productivity gains obtained by investments in network
infrastructure have fueled the growth of the global economy, during most of the
decade. Increased demands for capacity in network infrastructure resulted in
greater bandwidth requirements and increased deployment of optical components
and optical networks.

However, the global economic slowdown of the past several years has
negatively impacted demand for communications products and services.
Unfavorable economic conditions resulted in reduced capital spending by
telecommunications carriers and service providers, enterprise customers, and
governments. Depressed financial markets affected capital availability and
capital formation, especially in the communications equipment sector. Such
conditions have prevailed during 2001, 2002 and 2003 and may continue to
prevail during 2004 and thereafter. For information on the impact the global
economic slowdown has had on us, please see the our discussion in Item 7,
Managements Discussion and Analysis of Financial Conditions and Results of
Operations  Market Conditions and Current Outlook. See also the portion of
this Form 10-K entitled Risk Factors, including but not limited to the risk
factor entitled, Our Business has been Adversely Impacted by the Worldwide
Economic Slowdown and Related Uncertainties.

Products and Services

We provide integrated, secure network equipment and services to connect
data, voice and/or video (both analog and digital), within single buildings,
across private networks located in multiple buildings such as college or campus
environments (campus networks) and in metropolitan areas. At the access
point to the network, we provide standard-based products, including Ethernet
connectivity over telephone wires. Access speeds (data rates) vary, scaling up
to Gigabits-per-second (Gbps), and providing security features such as
intrusion control and traffic rate control. Our products aggregate network
traffic using standard protocols to interconnect high-speed networks.
Additional features enable new services such as virtual private networks
(VPN), permitting remote private network access over the Internet and quality
of service (QoS), permitting the ability to deliver time-sensitive data,
control the bandwidth, set priorities for specific network traffic and provide
an appropriate level of security. For campus networks and metropolitan
networks, where fiber optic cabling is not available, or cannot easily be
deployed, we provide point-to-point connectivity using free-space optics
(FSO) technology, a line-of-sight technology that uses lasers to provide
optical bandwidth connections that can send and receive voice, video, and data
information on invisible beams of light. These products can be deployed
quickly carrying network traffic from building to building without digging up
the street to install fiber optic cabling, or can be used in disaster recovery
and back-up applications. We also provide wave division multiplexing (WDM)
technology, to expand the capacity of existing fiber optic infrastructure by
enabling simultaneous transmission of information over multiple wavelengths on
the same fiber optic strand. In addition, we provide network management
systems that allow users and network administrators to control remote network
elements, including network equipment, temperature and alarm sensors and power
supply.

Our offerings fall into several product groups. For revenue breakdown by
product group, please see Note 16, Segment Reporting included in the Notes
to Financial Statements appearing elsewhere in this Form 10-K our product
groups include:

Network
Physical Infrastructure - Optical Connectivity. Cabling and
network transmission equipment constitute the physical infrastructure, which is
essential for computer connectivity, telephony systems and video distribution.
We provide a broad range of connectivity products for copper-to-fiber media
conversion, signal repeating, and fiber-optimization, including WDM systems and
FSO. Like fiber optic cable, FSO communications systems use laser and LED
light to transmit a digital signal between two transceivers. However, unlike
fiber, light is transmitted through the air (free-space) instead of through a
glass strand.

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We also offer both coarse wave division multiplexing (CWDM) and dense
wave division multiplexing (DWDM) system. CWDM and DWDM use a technology
that puts data from different sources together on an optical fiber, with each
signal carrier at the same time on its own separate light wavelength. CWDM
combines up to 16 wavelengths onto a single fiber. DWDM combines up to 64
wavelengths onto a single fiber. We also provide network access technology for
data and voice over standard telephone wire. This includes long range
Ethernet, and voice-over-Ethernet products for converged voice and data
networks.

Switches
and Routers - Ethernet Connectivity.Switching and routing
technologies are essential for computer networking. Switches direct the flow
of data traffic between individual computers, servers and other elements on a
network and routers direct the flow of data traffic between computer networks.
We provide a wide range of switching and routing products that scale from small
systems designed for small business applications, to very large, high capacity
systems for enterprise and telecommunications carrier applications.In some
cases, we also offer switches or routers manufactured by third-party vendors,
supplied as part of our network system integration and distribution services.

Remote Device Management.Our remote presence management products allow
network managers to manage, monitor and control, from a central point, the
real-time elements such as temperature, humidity, electrical power and the
status of other equipment that exist in the network at a remotely located
network.

We also provide a network management system (NMS) with comprehensive
management and control for our products as well as other vendors products.
Our NMS combines complete end-to-end network viewing and performance monitoring
with network configuration and fault management including automatic detection
and monitoring of devices from other vendors.

Other Networking Products. We provide networking products for defense and
aerospace applications. Applying real-time data acquisition technology allows
high-speed, packet-by-packet transaction processing for flight test validation
and simulation systems. These products provide in-flight parameter recording
systems in military and commercial aircrafts. We also provide ground test
systems as well as protocol analyzers and network performance-testing
equipment. In addition, we provide networking data test equipment and a
multi-service computing platform for wireless cellular telephony.

Services. Our products perform critical networking tasks and are often
used in conjunction with network equipment manufactured by other vendors. We
believe that pre and post-sales services ensure high-availability, reduce cost
of ownership, support business goals and promote customer loyalty.
Accordingly, we provide a broad range of service offerings including pre-sale
network design, consultation, and site-surveys. We also provide system
integration and on-site installation. Post-sales support includes in-warranty
as well as out-of-warranty repair and on-site maintenance. Our services
include a choice of technical support services including around-the-clock
response.

Optical Components. We design, manufacture and sell optical
communications components, such as fiber optic transceivers. Luminent offers a
broad line of solutions, including active and passive components, pluggable
transceivers for metropolitan and access applications, and fiber-to-the-home
(FTTH) components. Our offerings in long-wavelength transceivers include a
comprehensive set of data rates, power levels, and form factors. Product
offerings range from on-board mounted transceivers to
small-form-factor-pluggable (SFP) transceivers, in both standard and long
reach models. Standard network protocols we support include Gigabit Ethernet,
SONET/SDH (an acronym for Synchronous Optical Network/Synchronous Digital
Hierarchy) and Fibre Channel, an interconnection standard designed to connect
peripherals, mass storage systems, archiving and imaging systems, and
engineering workstations.

Our FTTH product line offers a number of products for multiplexing cable
TV video and bi-directional data over single fibers, providing high quality
video with high data throughput. These products include passive combiners,
bi-directional transceivers, and Triplexer subsystems. Offerings in CWDM
include a full 16-wavelength CWDM system implemented in a number of transceiver
and discrete laser form factors. In addition, we provide a full set of passive
multiplexers and add/drops components.

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Sales and Marketing

We employ various methods, such as public relations, advertising, and
trade shows to build awareness of our products as well as establishing our
brand name, MRV. We conduct our public relations activities both internally
and through relationships with outside agencies. We focus on major public
relations activities focused around new product introductions, corporate
partnerships and other events of interest to the market. We supplement our
public relations through media advertising programs, including electronic
media, and attendance at various trade shows throughout the year, both in the
United States and internationally.

Worldwide Sales

Our worldwide sales and marketing organization, at December 31, 2003,
consisted of approximately 350 employees, including sales representatives,
technical support and management. We have field sales offices in more than 20
countries and sell our products and services both directly and through channel
partners with support from their sales force. Our channel partners include
distributors, value-added resellers, and system integrators. We conduct
international operations in branch offices located in Argentina, Belgium,
China, Denmark, France, Finland, Germany, Israel, Italy, Japan, South Korea,
the Netherlands, Norway, Russia, Singapore, Switzerland, Sweden, Taiwan and the
United Kingdom. Our international field offices are involved in the sales and
distribution of our products and provide system installation, technical
support, and follow-up services to end users of our products.

Additionally, our offices in Denmark, Finland, France, Italy, Norway,
Sweden and Switzerland sell and market our products along with other products
manufactured by third-party vendors, supplied as part of network system
integration and distribution services. These operations provide system design,
network integration and post-sales support. These services enhance our ability
to penetrate targeted vertical and regional markets. We believe that
partnering with successful third-party vendors in certain areas helps to
provide growth opportunities beyond the limitations of our product line.

No single customer accounted for more than 10% of our revenue or accounts
receivable as of December 31, 2003 or for any of the three years in the period
ended December 31, 2003.

Markets Served

We primarily serve the following markets:

Campus Enterprise Market. We provide connectivity products for
inter-building and intra-building networking through our optical and free-space
optics connectivity equipment (inter-building) and our Ethernet aggregation
equipment (intra-building). We also provide data-center management services,
and our remote device management products manage large enterprise data centers.

Telecommunication Carrier and Service Provider Markets. We provide both
optical transport and Ethernet aggregation equipment, including switching and
routing to telecommunication carriers and service providers, such as cable-TV
multi-service operators.

Vertical and Regional Markets. For certain products, we focus on vertical
and regional markets, including health care, financial, defense, aerospace and
educational markets. We provide products and services with capabilities that
address the specific needs of these markets.

Optical Components. Our optical components are designed for use by
original equipment manufacturers (OEMs) or end-users that use our components
for optical interfaces on communications equipment. Markets served by these
systems vendors include multiple building private networks, or campus networks,
as well as metropolitan and access markets including the FTTH market. We also
sell components to other optical components vendors.

Competition

The communications equipment and optical component industries are
intensely competitive. We compete directly with a number of established and
emerging networking and optical components companies.

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Direct competitors in network physical infrastructure products, switches
and routers generally include Adva, Alcatel, Allied Telesyn, Ciena, Cisco
Systems, Dell, Enterasys, Extreme Networks, Foundry Networks, Lucent
Technologies, Nortel Networks and Riverstone. Our competitors in fiber optic
components include Agilent Technologies, Avanex, Inc., Bookham Technology,
Finisar Corporation, Fujitsu, Infineon AG, JDS Uniphase Corp., Optical
Communication Products, Inc., Sumitomo, TriQuint Semiconductor, Inc. and Tyco
International, Ltd. Many of our competitors have significantly greater
financial, technical, marketing, distribution and other resources and larger
installed customer bases than we do. Several of these competitors have recently
introduced or announced their intentions to introduce new competitive products.
Many of the larger companies with which we compete, offer customers a broader
product line, which provides a more comprehensive networking solution than we
provide. Accordingly, in certain regional markets we have partnered with other
vendors in a effort to enhance our overall capability in providing products and
services.

The principal competitive factors in the markets in which we compete include:



| | - |  | Product performance, features, quality and price;            
| | - |  | -------------------------------------------------------------
|
| | - |  | A comprehensive range of complementary products and services;
|
| | - |  | Customer service and technical support;                      
|
| | - |  | Lead and delivery times;                                     
|
| | - |  | Timeliness of new products introductions;                    
|
| | - |  | Global presence, including distribution network;             
|
| | - |  | Conformance to standards; and                                
|
| | - |  | Brand name.                                                  

Recent consolidation is likely to permit our various 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 customer bases. We expect that competition will
increase substantially as a result of these and other industry consolidations
and alliances, as well as the emergence of new competitors.

Product Development and Engineering

We believe that in order to maintain our technological competitiveness and
to better serve our customers, we must enhance our existing products and
continue to develop new products. Accordingly, we focus a significant amount
of resources on product development and engineering. During 2002, for
strategic reasons, including efficiency and increased focus on
revenue-generating products, we consolidated product development and
engineering efforts from some affiliated startup companies into our operating
product divisions. We believe these changes are an important part of the
process of responding to the current economic conditions and sharpening our
focus on providing solutions for customers.

Our product development and engineering expenses were $31.0 million, $49.4
million and $94.8 million for the years ended December 31, 2003, 2002 and 2001,
respectively. Details regarding product development and engineering expenses
by segments follow.

Networking Group. Product development and engineering expenses from our
networking group were $18.4 million, $21.0 million and $45.0 million for the
years ended December 31, 2003, 2002 and 2001, respectively. These expenses
include income from recapturing accelerated deferred stock expense due to
terminations that amounted to $488,000 for the year ended December 31, 2003,
while the two years ended December 31, 2002 includes deferred stock expense
that amounted to $2.1 million and $9.7 million, respectively.

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Optical Components Group. Product development and engineering expenses
from our optical components group were $6.9 million, $10.5 million and $18.4
million for the years ended December 31, 2003, 2002 and 2001, respectively.
These expenses include income from recapturing accelerated deferred stock
expense due to terminations that amounted to $1.6 million for the year ended
December 31, 2002, while the year ended December 31, 2001 includes deferred
stock expense that amounted to $4.3 million.

Development Stage Enterprise Group. Product development and engineering
expenses from our development stage enterprise group were $5.7 million, $17.8
million and $31.4 million for the years ended December 31, 2003, 2002 and 2001,
respectively.

Manufacturing

We outsource our board-level assembly and on some occasions, complete
turnkey production to independent contract manufacturers for our networking
products, which include our switches and routers, remote device management
products and networking physical infrastructure equipment. Outsourcing, we
believe, allows us to react more quickly to market demand, avoid the
significant capital investment required to establish automated manufacturing
and assembly facilities and concentrate resources on product design and
development. Our in-house manufacturing operations primarily perform the
functions of materials management, and, in an effort to ensure quality and
reliability, quality assurance, equipment burn-in (testing new equipment by
turning the power on), as well as inspection and final testing. Our
manufacturing processes and procedures are generally ISO 9000 certified and so
are those of our vendors.

Our optical components are designed and manufactured in our ISO 9000
certified manufacturing and production facilities in California and Taiwan. We
benefit from our in-house vertically integrated opto-electronic fabrication
capabilities, which allows us to provide low cost, highly reliable products,
and to better respond to customer requirements. Our optical transmission
production process involves:



| | - |  | Wafer processing for semiconductor laser diode and LED chip
manufacturing under stringent quality procedures using advanced
wafer fabrication technology;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | High precision electronic and mechanical assembly; and                                                                                                   
|
| | - |  | Final assembly and testing.                                                                                                                              

Typical assembly processes include die attach, wire bond, substrate
attachment and fiber coupling. We also conduct tests at various stages of the
manufacturing process using commercially available and internally built testing
systems that incorporate proprietary procedures. We perform final product tests
virtually on all of our products prior to shipment to customers. Many of the
key processes used in Luminents products are proprietary; and, therefore, many
of the key components of its products are designed and produced internally.

Components

We utilize a wide variety of components, supplies and products from a
substantial number of vendors around the world. Certain of our products rely
on a single or limited number of suppliers, although we to locate alternative
sources if the need arises. The failure of delivery by our vendors in a timely
manner of critical components could adversely affect our business. For a
discussion of the risks associated with suppliers, please see the portion of
this Form 10-K entitled Risk Factors, including but not limited to the risk
factor entitled, We May Lose Sales if Suppliers of Critical Components and
Products Fail to Meet Our Needs.

Intellectual Property

To date, we have relied principally on a combination of patents,
copyrights and trade secrets to protect proprietary technology. Generally, we
enter into confidentiality agreements with our employees and key suppliers and
otherwise seek to limit access to and distribution of the source code to
software and other proprietary information. These steps may not be adequate to
prevent misappropriation of our technologies or a third party may independently
develop technology similar or superior to any of our possesses.

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Development Stage Enterprises

We hold majority interests in Charlottes Networks, All Optical Networks,
and Optical Crossing as well as minority investments in Dune Networks,
Hyperchannel, PhoneDo Networks and RedC Optical Networks. As of December 2003,
the majority of our expenses for development stage enterprises were incurred in
Charlottes Networks.

Employees

As of December 31, 2003, we employed a total of approximately 1,250
full-time employees compared with approximately 1,400 at December 31, 2002. Of
these 1,250 employees, approximately 600 are in manufacturing, 200 in product
development and engineering and 450 in sales, marketing and general
administration. Approximately 850 employees are in locations outside the
United States. None of our employees are represented by a union or governed by
a collective bargaining agreement, and we believe our employee relationships
are satisfactory. We also believe that our long-term success depends in part
on our continued ability to recruit and retain qualified personnel. To date,
we believe that we have been successful in recruiting qualified employees, but
there is no assurance that it will continue to be successful in the future.
The risks associated with dependence on qualified personnel are more fully
discussed in the Risk Factors section contained in Item 1 of this Form 10-K.

Certain Risk Factors That Could Affect Future Results

You should carefully consider and evaluate all of the information in this Form
10-K, including the risk factors listed below. The risks described below are
not the only ones facing our company. Additional risk not now known to us or
that we currently deem immaterial may also impair our business operations.

If any of these risks actually occur, our business could be materially harmed.
If our business is harmed, the trading price of our common stock could decline.

This Form 10-K also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this Form
10-K. We undertake no duty to update any of the forward-looking statements
after the date of this Form 10-K.

Our Business Has Been Adversely Impacted By The Worldwide Economic Slowdown And
Related Uncertainties.

Weaker economic conditions worldwide, particularly in the U.S. and Europe,
have contributed to the current technology industry slowdown and impacted our
business resulting in:



| | - |  | reduced demand for our products, particularly fiber optic components;
| | - |  | ---------------------------------------------------------------------
|
| | - |  | increased risk of excess and obsolete inventories;                   
|
| | - |  | increased price competition for our products;                        
|
| | - |  | excess manufacturing capacity under current market conditions; and   
|
| | - |  | higher overhead costs, as a percentage of revenues.                  

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These unfavorable economic conditions and reduced capital spending in the
telecommunications industry detrimentally affected sales to service providers,
network equipment companies, e-commerce and Internet businesses, and the
manufacturing industry in the United States, during 2001, 2002, 2003 and may
affect them for 2004 and thereafter. Announcements by industry participants
and observers indicate there is a continuing slowdown in industry spending and
participants are seeking to reduce existing inventories and we are experiencing
these reductions in our business. As a result of these factors, our revenues
have declined and we reported net losses of $27.0 million, $479.8 million and
$326.4 million for the years ended December 31, 2003, 2002 and 2001,
respectively. Our business may continue to suffer from adverse economic
conditions worldwide and our net losses during these periods. Our operating
results for future periods are subject to numerous uncertainties, and we may
not be able to achieve and maintain profitability. Recent geopolitical and
social turmoil in many parts of the world, including actual incidents and
potential future acts of terrorism and war, may continue to put pressure on
global economic conditions. These geopolitical and social conditions,
together with the resulting economic uncertainties, make it extremely difficult
for our customers, our vendors and us to accurately forecast and plan future
business activities. In particular, it is difficult to develop and implement
strategy, sustainable business models and efficient operations, and effectively
manage manufacturing and supply chain relationships. If the economic or market
conditions continue to languish or further deteriorate, or if the economic
downturn is exacerbated as a result of political, economic or military
conditions associated with current domestic and world events, our businesses,
financial condition and results of operations could be further impaired.

Some Of Our Customers May Not Have The Resources To Pay For Our Products As A
Result Of The Current Economic Environment

With the current economic slowdown, some of our customers are forecasting
that their revenue for the foreseeable future will generally be lower than
originally anticipated. Some of these customers are experiencing, or are likely
to experience, serious cash flow problems and, as a result, find it
increasingly difficult to obtain financing, if at all. If some of these
customers are not successful in generating sufficient revenue or securing
alternate financing arrangements, they may not be able to pay, or may delay
payment for, the amounts that they owe us. Furthermore, they may not order as
many products from us as originally forecast, or cancel orders with us
entirely. The inability of some of our potential customers to pay us for our
products may adversely affect our cash flow, the timing of our revenue
recognition and the amount of revenue, which may cause our stock price to
decline.

Our Markets Are Subject To Rapid Technological Change, And To Compete
Effectively, We Must Continually Introduce New Products That Achieve Market
Acceptance.

The markets for our products are characterized by rapid technological
change, frequent new product introductions, changes in customer requirements
and evolving industry standards. We expect that new technologies will emerge
as competition and the need for higher and more cost effective transmission
capacity, or bandwidth, increases. Our future performance will depend on the
successful development, introduction and market acceptance of new and enhanced
products that address these changes as well as current and potential customer
requirements. The introduction of new and enhanced products may cause our
customers to defer or cancel orders for existing products. We have in the past
experienced delays in product development and these delays may occur in the
future. Therefore, to the extent customers defer or cancel orders in the
expectation of a new product release or there is any delay in development or
introduction of our new products or enhancements of our products, our operating
results would suffer. We also may not be able to develop the underlying core
technologies necessary to create new products and enhancements, or to license
these technologies from third parties. Product development delays may result
from numerous factors, including:



| | - |  | changing product specifications and customer requirements;                             
| | - |  | ---------------------------------------------------------------------------------------
|
| | - |  | difficulties in hiring and retaining necessary technical personnel;                    
|
| | - |  | difficulties in reallocating engineering resources and overcoming resource limitations;
|
| | - |  | difficulties with contract manufacturers;                                              
|
| | - |  | changing market or competitive product requirements; and                               

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| | - |  | unanticipated engineering complexities.
| | - |  | ---------------------------------------

The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation and highly skilled
engineering and development personnel, as well as the accurate anticipation of
technological and market trends. In order to compete, we must be able to
deliver products to customers that are highly reliable, operate with its
existing equipment, lower the customers costs of acquisition, installation and
maintenance, and provide an overall cost-effective solution. We may not be
able to identify, develop, manufacture, market or support new or enhanced
products successfully, if at all, or on a timely basis. Further, our new
products may not gain market acceptance or we may not be able to respond
effectively to product announcements by competitors, technological changes or
emerging industry standards. Our failure to respond effectively to
technological changes would significantly harm our business.

Defects In Our Products Resulting From Their Complexity Or Otherwise Could Hurt
Our Financial Performance.

Complex products, such as those we offer, may contain undetected software
or hardware errors when we first introduce them or when we release new
versions. The occurrence of these errors in the future, and our inability to
correct these errors quickly or at all, could result in the delay or loss of
market acceptance of our products. It could also result in material warranty
expense, diversion of engineering and other resources from our product
development efforts and the loss of credibility with, and legal actions by, our
customers, system integrators and end users. Any of these or other
eventualities resulting from defects in our products could cause our sales to
decline and have a material adverse effect on our business, operating results
and financial condition.

Our Operating Results Could Fluctuate Significantly From Quarter To Quarter.

Our operating results for a particular quarter are extremely difficult to
predict. Our 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 our largest customers;                                                                
|
| | - |  | our success in developing, introducing and shipping product enhancements and new products;                                             
|
| | - |  | the mix of products we sell;                                                                                                           
|
| | - |  | software, hardware or other errors in the products we sell
requiring replacements or increased warranty reserves;                      
|
| | - |  | adverse effects to our financial statements resulting from,
or necessitated by, past and future acquisitions or deferred stock
expense;
|
| | - |  | our periodic reviews of goodwill and other intangibles that lead to impairment charges;                                                
|
| | - |  | new product introductions by our competitors;                                                                                          
|
| | - |  | pricing actions by our competitors or us;                                                                                              
|
| | - |  | the timing of delivery and availability of components from suppliers;                                                                  
|
| | - |  | political stability in the areas of the world we operate in;                                                                           
|
| | - |  | changes in material costs;                                                                                                             
|
| | - |  | currency fluctuations; and                                                                                                             
|
| | - |  | general economic conditions.                                                                                                           

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

Our success is dependent, in part, on the overall growth rate of the fiber
optic components and networking industry. The Internet or the industries that
serve it may not continue to grow and even if it does, we may not achieve
increased growth. Our business, operating results or financial condition may
be adversely affected by any decreases in industry growth rates. In addition,
we can give no assurance that our results in any particular period will fall
within the ranges for growth forecast by market researchers.

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

Cost Containment And Expense Reductions Are Critical To Achieving Positive Cash
Flow From Operations And Profitability

We are continuing efforts to reduce our expense structure. We believe
strict cost containment and expense reductions are essential to achieving
positive cash flow from operations in future quarters and returning to
profitability, especially since the outlook for future quarters is subject to
numerous challenges. Additional measures to contain costs and reduce expenses
may be undertaken if revenues and market conditions do not improve. A number of
factors could preclude us from successfully bringing costs and expenses in line
with our revenues, such as our inability to accurately forecast business
activities and further deterioration of our revenues. If we are not able to
effectively reduce our costs and achieve an expense structure commensurate with
our business activities and revenues, we may have inadequate levels of cash for
operations or for capital requirements, which could significantly harm our
ability to operate the business.

The Long Sales Cycles For Our Products May Cause Revenues And Operating Results
To Vary From Quarter To Quarter, Which Could Cause Volatility In Our Stock
Price.

The timing of our revenue is difficult to predict because of the length
and variability of the sales and implementation cycles for our products. We do
not recognize revenue until a product has been shipped to a customer, all
significant vendor obligations have been performed and collection is considered
probable. Customers often view the purchase of our products as a significant
and strategic decision. As a result, customers typically expend significant
effort in evaluating, testing and qualifying our products and our manufacturing
process. This customer evaluation and qualification process frequently results
in a lengthy initial sales cycle of, depending on the products, many months or
more. In addition, some of our customers require that our products be
subjected to lifetime and reliability testing, which also can take months or
more. While our customers are evaluating our products and before they place an
order with us, we may incur substantial sales and marketing and research and
development expenses to customize our products to the customers needs. We may
also expend significant management efforts, increase manufacturing capacity and
order long lead-time components or materials prior to receiving an order. Even
after this evaluation process, a potential customer may not purchase our
products. Even after acceptance of orders, our customers often change the
scheduled delivery dates of their orders. Because of the evolving nature of
the optical networking and network infrastructure markets, we cannot predict
the length of these sales, development or delivery cycles. As a result, these
long sales cycles may cause our net sales and operating results to vary
significantly and unexpectedly from quarter-to-quarter, which could cause
volatility in our stock price.

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We Face Risks In Reselling The Products Of Other Companies.

We distribute products manufactured by other companies. To the extent we
succeed in reselling the products of these companies, or products of other
vendors with which we may enter into similar arrangements, we may be required
by customers to assume warranty and service obligations. While these suppliers
have agreed to support us with respect to those obligations, if they should be
unable, for any reason, to provide the required support, we may have to expend
our own resources on doing so. This risk is amplified by the fact that the
equipment has been designed and manufactured by others, and is thus subject to
warranty claims whose magnitude we are currently unable to fully evaluate.

The Price Of Our Shares May Continue To Be Highly Volatile.

Historically, the market price of our shares has been extremely volatile.
The market price of our common stock is likely to continue to be highly
volatile and could be significantly affected by factors such as:



| | - |  | actual or anticipated fluctuations in our operating results;                                     
| | - |  | -------------------------------------------------------------------------------------------------
|
| | - |  | announcements of technological innovations or new product introductions by us or our competitors;
|
| | - |  | changes of estimates of our future operating results by securities analysts;                     
|
| | - |  | developments with respect to patents, copyrights or proprietary rights; and                      
|
| | - |  | general market conditions and other factors.                                                     

In addition, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market prices for shares of
the common stocks of technology companies in particular, and that have been
unrelated to the operating performance of these companies. These factors, as
well as general economic and political conditions, may materially adversely
affect the market price of our common stock in the future. Similarly, the
failure by our competitors or customers to meet or exceed the results expected
by their analysts or investors could have a ripple effect on us and cause our
stock price to decline. Additionally, volatility or a lack of positive
performance in our stock price may adversely affect our ability to retain key
employees, all of whom have been granted stock options.

Our 2003 Notes Provide For Various Events Of Default That Would Entitle The
Holders To Require Us To Immediately Repay The Outstanding Principal Amount,
Plus Accrued And Unpaid Interest, In Cash.

On June 4, 2003, we completed the sale of $23 million principal amount of
2003 Notes to Deutsche Bank AG, London Branch in a private placement pursuant
to Regulation D under the Securities Act of 1933. We will be considered in
default of the 2003 Notes if any of the following events, among others, occurs:



| | - |  | our default in payment of any principal amount of, interest
on or other amount due under the 2003 Notes when and as due;                                                                                                                                                                                                                                                                                                                                  
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | the effectiveness of the registration statement, which
registered for resale the shares of our common stock issuable upon
conversion of the 2003 Notes, lapses for any reason or is
unavailable to the holder of the 2003 Notes for resale of all of the
shares issuable upon conversion, other than during allowable grace
periods, for a period of five consecutive trading days or for more
than an aggregate of 10 trading days in any 365-day period;
|
| | - |  | the suspension from trading or failure of our common stock to
be listed on the Nasdaq Stock Market for a period of five (5)
consecutive trading days or for more than an aggregate of ten (10)
trading days in any 365-day period;                                                                                                                                                                                                                        
|
| | - |  | we or our transfer agent notify any holder of our intention
not to issue shares of our common stock to the holder upon receipt
of any conversion notice delivered in respect of a Note by the
holder;                                                                                                                                                                                                                                                     

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| | - |  | we fail to deliver shares of our common stock to the holder
within 12 business days of the conversion date specified in any
conversion notice delivered in respect of a Note by the holder;                                                                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | we breach any material representation, warranty, covenant or
other term or condition of the 2003 Notes or the Securities Purchase
Agreement, or the Registration Rights Agreement relating to 2003
Notes and the breach, if curable, is not cured by us within 10 days;
|
| | - |  | failure by us for 10 days after notice to comply with any
other provision of the 2003 Notes in all material respects, which
include abiding by our covenants not to                                                                                                    
|

| | o |  | incur any form of unsecured indebtedness in
excess of $17 million, plus obligations arising from the sale
of receivables with recourse through our foreign offices, in
the ordinary course of business and consistent with past
practices;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | o |  | repurchase our common stock for an aggregate
amount in excess of $5,000,000; pursuant to a stock purchase
program that was approved by our Board of Directors and
publicly announced on June 13, 2002; or                                 
|
| | o |  | declare or pay any dividend on any of our capital
stock, other than dividends of common stock with respect to
our common stock;                                                                                                           
|

| | - |  | we breach provisions of the 2003 Notes prohibiting us from
either issuing
| | - |  | -------------------------------------------------------------------------
|

| | o |  | our common stock or securities that are
convertible into or exchangeable or exercisable for shares of
our common at a per share price less than the conversion price
per share of the 2003 Notes then in effect, except in certain
limited cases; or
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | o |  | securities that are convertible into or
exchangeable or exercisable for shares of our common stock at
a price that varies or may vary with the market price of our
common stock;                                                                    
|

| | - |  | we breach any of our obligations under any other debt or
credit agreements involving an amount exceeding $3,000,000; or
| | - |  | -----------------------------------------------------------------------------------------------------------------------
|
| | - |  | we become bankrupt or insolvent.                                                                                       

If an event of default occurs, any holder of the 2003 Notes can elect to
require us to pay the outstanding principal amount, together with all accrued
and unpaid interest.

Some of the events of default include matters over which we may have some,
little or no control. If a default occurs and we do not pay the amounts payable
under the 2003 Notes in cash (including any interest on such amounts and any
applicable default interest under the 2003 Notes), the holders of the 2003
Notes may protect and enforce their rights or remedies either by suit in equity
or by action at law, or both, whether for the specific performance of any
covenant, agreement or other provision contained in the 2003 Notes. Any default
under the 2003 Notes could have a material adverse effect on our business,
operating results and financial condition or on the market price of our common
stock.

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In The Event Of A Change Of Control, Holders Of The 2003 Notes Have The Option
To Require Immediately Repayment Of The 2003 Notes At A Premium And This Right
Could Prevent A Takeover Otherwise Favored By Stockholders.

In the event of our Change of Control, which essentially means someone
acquiring or merging with us, each holder of 2003 Notes has the right to
require us to redeem the 2003 Notes in whole or in part at a redemption price
of 105% of the principal amount of the 2003 Notes, plus accrued and unpaid
interest or if the amount is greater, an amount equal to the number of shares
issuable upon conversion of the 2003 Notes based on the conversion price at the
date the holder gives us notice of redemption, multiplied by the average of the
weighted average prices of our common stock during the five days immediately
proceeding that date. If a Change of Control were to occur, we might not have
the financial resources or be able to arrange financing on acceptable terms to
pay the redemption price for all the 2003 Notes as to which the purchase right
is exercised. Further, the existence of this right in favor of the holders may
discourage or prevent someone from acquiring or merging with us.

Sales Of Substantial Amounts Of Our Shares By Selling Stockholders Could Cause
The Market Price Of Our Shares To Decline.

Selling stockholders are offering for resale under an effective
registration statement up to 9,913,914 shares of our common stock issuable upon
conversion of the 2003 Notes. This represents approximately 9.4% of the
outstanding shares of our common stock on February 15, 2004 (or 8.6% of the
outstanding shares of our common stock on that date if pro forma effect were
given to the full conversion of the 2003 Notes). Sales of substantial amounts
of these shares at any one time or from time to time, or even the availability
of these shares for sale, could adversely affect the market price of our
shares.

Our Business Is Intensely Competitive And The Evident Trend Of Consolidations
In Our Industry Could Make It More So.

The markets for fiber optic components and networking products are
intensely competitive and subject to frequent product introductions with
improved price/performance characteristics, rapid technological change and the
continual emergence of new industry standards. We compete and will compete
with numerous types of companies including companies that 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 we do. This may give these competitors certain
advantages, including the ability to negotiate lower prices on raw materials
and components than those available to us. In addition, many of our large
competitors offer customers broader product lines, which provide more
comprehensive solutions than our current offerings. We expect that other
companies will also enter markets in which we compete. Increased competition
could result in significant price competition, reduced profit margins or loss
of market share. We can give no assurance that we will be able to compete
successfully with existing or future competitors or that the competitive
pressures we face will not materially and adversely affect our business,
operating results and financial condition. In particular, we expect that
prices on many of our products will continue to decrease in the future and that
the pace and magnitude of these price decreases may have an adverse impact on
our results of operations or financial condition.

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

Economic Conditions May Require Us To Reduce The Size Of Our Business Further.

In 2002, and to a lesser extent 2003, we undertook significant reductions
in force, some of which were accompanied by dispositions of assets, as part of
our effort to reduce the size of our operations to better match the reduced
sales of our products and services. Weakness in the global economy generally
and the fiber optics and telecommunications equipment markets in particular
continue to affect our business substantially. We may be required to undertake
further reductions in force. Any such steps would likely result in significant
charges from write-downs or write-offs of assets, costs of lease terminations,
and expenses resulting from the termination of personnel.

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We Face Risks From Our International Operations.

International sales have become an increasingly important part of our
operations. The following table sets forth the percentage of our total
revenues from sales to customers in foreign countries for the years ended
December 31, 2003, 2002 and 2001,:

|                                               |  |      |    |      |  |      |    |   |  |  |    |  
|---------------------------------------------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                                               |  | 2003 |    | 2002 |  | 2001
|                                               |  |      |    |      |  |     
|Percentage of total revenue from foreign sales |  |      | 78 | %    |  |      | 74 | % |  |  | 67 | %

We have offices in, and conduct a significant portion of our operations in
and from Israel. Similarly, some of our development stage enterprises are
located in Israel. We are, therefore, directly influenced by the political and
economic conditions affecting Israel. Any major hostilities involving Israel,
the interruption or curtailment of trade between Israel and its trading
partners or a substantial downturn in the economic or financial condition of

Israel could have a material adverse effect on our operations. Luminent has a
minority interest in a large manufacturing facility in the Peoples Republic of
China in which it manufactures passive fiber optic components and both Luminent
and we make sales of our products in the Peoples Republic of China. The
political tension between Taiwan and the Peoples Republic of China that
continues to exist, could eventually lead to hostilities. Risks we face due to
international sales and the use of overseas manufacturing include:



| | - |  | greater difficulty in accounts receivable collection and longer collection periods;                                                                                                       
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | the impact of recessions in economies outside the United States;                                                                                                                          
|
| | - |  | unexpected changes in regulatory requirements;                                                                                                                                            
|
| | - |  | seasonal reductions in business activities in some parts of
the world, such as during the summer months in Europe or in the
winter months in Asia when the Chinese New Year is celebrated;
|
| | - |  | difficulties in managing operations across disparate geographic areas;                                                                                                                    
|
| | - |  | difficulties associated with enforcing agreements through foreign legal systems;                                                                                                          
|
| | - |  | the payment of operating expenses in local currencies, which
exposes us to risks of currency fluctuations;                                                                                
|
| | - |  | higher credit risks requiring cash in advance or letters of credit;                                                                                                                       
|
| | - |  | potentially adverse tax consequences;                                                                                                                                                     
|
| | - |  | unanticipated cost increases;                                                                                                                                                             
|
| | - |  | unavailability or late delivery of equipment;                                                                                                                                             
|
| | - |  | trade restrictions;                                                                                                                                                                       
|
| | - |  | limited protection of intellectual property rights;                                                                                                                                       
|
| | - |  | unforeseen environmental or engineering problems; and                                                                                                                                     
|
| | - |  | personnel recruitment delays.                                                                                                                                                             

The majority of our sales are currently denominated in U.S. dollars and to
date our business has not been significantly affected by currency fluctuations
or inflation. However, as we conduct business in several different countries,
fluctuations in currency exchange rates could cause our products to become
relatively more expensive in particular countries, leading to a reduction in
sales in that country. In addition, inflation or fluctuations in currency
exchange rates in these countries could increase our expenses.

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To date, we have not hedged against currency exchange risks. In the
future, we may engage in foreign currency denominated sales or pay material
amounts of expenses in foreign currencies and, in that event, may experience
gains and losses due to currency fluctuations. Our operating results could be
adversely affected by currency fluctuations or as a result of inflation in
particular countries where material expenses are incurred.

We Depend On Third-Party Contract Manufacturers And Therefore Could Face Delays
Harming Our Sales.

We outsource the board-level assembly, test and quality control of
material, components, subassemblies and systems relating to our networking
products to third-party contract manufacturers. Though there are a large
number of contract manufacturers that we can use for outsourcing, we have
elected to use a limited number of vendors for a significant portion of our
board assembly requirements in order to foster consistency in quality of the
products and to achieve economies of scale. These independent third-party
manufacturers also provide the same 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 our contract manufacturers
failed to deliver needed components timely, we could face difficulty in
obtaining adequate supplies of products from other sources in the near term.
Our third party manufacturers may not provide us with adequate supplies of
quality products on a timely basis, or at all. While we could outsource with
other vendors, a change in vendors may require significant lead-time and may
result in shipment delays and expenses. Our inability to obtain these 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 our business,
operating results and financial condition.

We May Lose Sales If Suppliers Of Other Critical Components Fail To Meet Our
Needs.

Our companies currently purchase several key components used in the
manufacture of our products from single or limited sources. We depend on these
sources to meet our needs. Moreover, we depend on the quality of the products
supplied to us over which we have limited control. We have encountered
shortages and delays in obtaining components in the past and expect to
encounter shortages and delays in the future. If we cannot supply products due
to a lack of components, or are unable to redesign products with other
components in a timely manner, our business will be significantly harmed. We
have no long-term or short-term contracts for any of our components. As a
result, a supplier can discontinue supplying components to us without penalty.
If a supplier discontinued supplying a component, our business may be harmed by
the resulting product manufacturing and delivery delays.

Our Inability To Achieve Adequate Production Yields For Certain Components We
Manufacture Internally Could Result In A Loss Of Sales And Customers.

We rely heavily on our own production capability for critical
semiconductor lasers and light emitting diodes used in our products. Because
we manufacture these and other key components at our own facilities and these
components are not readily available from other sources, any interruption of
our manufacturing processes could have a material adverse effect on our
operations. Furthermore, we have a limited number of employees dedicated to
the operation and maintenance of our wafer fabrication equipment, the loss of
any of whom could result in our inability to effectively operate and service
this 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. We may not be able to maintain acceptable production yields or
avoid product shipment delays. In the event adequate production yields are not
achieved, resulting in product shipment delays, our business, operating results
and financial condition could be materially adversely affected.

The Reduced Role Of Acquisitions In Our Current Business Strategy May
Negatively Impact Our Growth.

Acquisitions were a major part of strategy in the past. However,
commensurate with the downturn in the technology sector, we have not made any
acquisitions since 2000. The networking business is highly competitive, and
while we continue to evaluate possible acquisitions, our decision not to
complete any such transactions in the recent past could hamper our ability to
enhance existing products and introduce new products on a timely basis.

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If We Fail To Adequately Protect Our Intellectual Property, We May Not Be Able
To Compete.

We rely on a combination of trade secret laws and restrictions on
disclosure and patents, copyrights and trademarks to protect our intellectual
property rights. We cannot assure you that our pending patent applications
will be approved, that any patents that may be issued will protect our
intellectual property or that third parties will not challenge any issued
patents. Other parties may independently develop similar or competing
technology or design around any patents that may be issued to us. We cannot be
certain that the steps we have taken will prevent the misappropriation of our
intellectual property, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as in the United States. Any of this
kind of litigation, regardless of outcome, could be expensive and time
consuming, and adverse determinations in any of this kind of litigation could
seriously harm our business.

We Could In The Future Become Subject To Litigation Regarding Intellectual
Property Rights, Which Could Be Costly And Subject Us To Significant Liability.

From time to time, third parties, including our competitors, may assert
patent, copyright and other intellectual property rights to technologies that
are important to us. Over the years, we have received notices from third
parties alleging possible infringement of patents with respect to certain
features of our products or our manufacturing processes and in connection with
these notices have been involved in discussions with the claimants, including
IBM, Lucent, Ortel, Nortel, Rockwell, the Lemelson Foundation and Finisar.
Aggregate revenues potentially subject to the foregoing claims amounted to
approximately 18%, 20% and 28% of our revenues for the years ended December 31,
2003, 2002 and 2001, respectively. These or other companies may pursue
litigation with respect to these or other claims. The results of any
litigation are inherently uncertain. In the event of an adverse result in any
litigation with respect to intellectual property rights relevant to our
products that could arise in the future, we could be required to obtain
licenses to the infringing technology, to pay substantial damages under
applicable law, to cease the manufacture, use and sale of infringing products
or to expend significant resources to develop non-infringing technology.
Licenses may not be available from third parties either on commercially
reasonable terms or at all. In addition, litigation frequently involves
substantial expenditures and can require significant management attention, even
if we ultimately prevail. Accordingly, any infringement claim or litigation
against us could significantly harm our business, operating results and
financial condition.

In The Future, We May Initiate Claims Or Litigation Against Third Parties For
Infringement Of Our Proprietary Rights To Protect These Rights Or To Determine
The Scope And Validity Of Our Proprietary Rights Or The Proprietary Rights Of
Competitors. These Claims Could Result In Costly Litigation And The Diversion
Of Our Technical And Management Personnel.

Necessary licenses of third-party technology may not be available to us or
may be very expensive, which could adversely affect our ability to manufacture
and sell our products. From time to time we may be required to license
technology from third parties to develop new products or product enhancements.
We cannot assure you that third-party licenses will be available to us on
commercially reasonable terms, if at all. The inability to obtain any
third-party license required to develop new products and product enhancements
could require us to obtain substitute technology of lower quality or
performance standards or at greater cost, either of which could seriously harm
our ability to manufacture and sell our products.

We Are Dependent On Certain Members Of Our Senior Management.

We are substantially dependent upon Dr. Shlomo Margalit, our Chairman of
the Board of Directors and Chief Technical Officer, and Mr. Noam Lotan, our
President and Chief Executive Officer. The loss of the services of either of
these officers could have a material adverse effect on us. We have entered
into employment agreements with Dr. Margalit and Mr. Lotan and are the
beneficiary of key man life insurance policies in the amounts of $1.0 million
each on their lives. However, we can give no assurance that the proceeds from
these policies will be sufficient to compensate us in the event of the death of
either of these individuals, and the policies are not applicable in the event
that either of them becomes disabled or is otherwise unable to render services
to us.

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Our Business Requires Us To Attract And Retain Qualified Personnel.

Our ability to develop, manufacture and market our products, run our
operations and our ability to compete with our current and future competitors
depends, and will depend, in large part, on our ability to attract and retain
qualified personnel. Competition for executives and qualified personnel in the
networking and fiber optics industries is intense, and we will be required to
compete for those personnel with companies having substantially greater
financial and other resources than we do. To attract executives, we have had
to enter into compensation arrangements, which have resulted in substantial
deferred stock expense and adversely affected our results of operations. We
may enter into similar arrangements in the future to attract qualified
executives. If we should be unable to attract and retain qualified personnel,
our business could be materially adversely affected.

Environmental Regulations Applicable To Our Manufacturing Operations Could
Limit Our Ability To Expand Or Subject Us To Substantial Costs.

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

Our Headquarters Are Located In Southern California, And Certain Of Our
Manufacturing Facilities Are Located In Southern California And Taiwan, Where
Disasters May Occur That Could Disrupt Our Operations And Harm Our Business

Our corporate headquarters are located in the San Fernando Valley of
Southern California and some of our manufacturing facilities are located in
Southern California and Taiwan. Historically, these regions has been vulnerable
to natural disasters and other risks, such as earthquakes, fires and floods,
which at times have disrupted the local economies and posed physical risks to
our property.

In addition, terrorist acts or acts of war targeted at the United States,
and specifically Southern California, could cause damage or disruption to us,
our employees, facilities, partners, suppliers, distributors and resellers, and
customers, which could have a material adverse effect on our operations and
financial results.

If We Fail To Accurately Forecast Component And Material Requirements For Our
Manufacturing Facilities, We Could Incur Additional Costs Or Experience
Manufacturing Delays.

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

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Legislative Actions, Higher Insurance Costs and Potential New Accounting
Pronouncements are Likely to Impact Our Future Financial Position and Results
of Operations.

There have been regulatory changes, including the Sarbanes-Oxley Act of
2002, new SEC regulations and Nasdaq Stock Market rules and there may be
potential new accounting pronouncements or regulatory rulings, which will have
an impact on our future financial position and results of operations. These
regulatory changes and other legislative initiatives have increased general and
administrative costs. In addition, insurers are likely to increase rates as a
result of high claims rates over the past year and our rates for our various
insurance policies are likely to increase. Further, proposed initiatives could
result in changes in accounting rules, including legislative and other
proposals to account for employee stock options as an expense. These and other
potential changes could materially increase the expenses we report under
accounting principles generally accepted in the United States, and adversely
affect our operating results.

We Are At Risk Of Securities Class Action Or Other Litigation That Could Result
In Substantial Costs And Divert Managements Attention And Resources.

In the past, securities class action litigation has been brought against a
company following periods of volatility in the market price of its securities.
Due to the volatility and potential volatility of our stock price or the
volatility of Luminents stock price following its initial public offering, we
may be the target of securities litigation in the future. Securities or other
litigation could result in substantial costs and divert managements attention
and resources.

If Our Cash Flow Significantly Deteriorates In The Future, Our Liquidity And
Ability To Operate Our Business Could Be Adversely Affected.

We incurred net losses in 2001, 2002 and 2003, and our combined cash and
short-term investments declined in each of those years as well. Although we
generated cash from operations, we could experience negative overall cash flow
in future quarters. If our cash flow significantly deteriorates in the future,
our liquidity and ability to operate our business could be adversely affected.
For example, our ability to raise financial capital may be hindered due to our
net losses and the possibility of future negative cash flow. An inability to
raise financial capital would limit our operating flexibility.

Delaware Law And Our Ability To Issue Preferred Stock May Have Anti-Takeover
Effects That Could Prevent A Change In Control, Which May Cause Our Stock Price
To Decline.

We are authorized to issue up to 1,000,000 shares of preferred stock.
This preferred stock may be issued in one or more series, the terms of which
may be determined at the time of issuance by our board of directors without
further action by stockholders. The terms of any 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 preferred stock could materially adversely
affect the rights of the holders of our common stock, and therefore, reduce the
value of our common stock. In particular, specific rights granted to future
holders of preferred stock could be used to restrict our ability to merge with,
or sell our assets to, a third party and thereby preserve control by the
present management. We are also subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which prohibit us from
engaging in a business combination with an interested stockholder for a period
of three years after the date of the transaction in which the person became an
interested stockholder unless the business combination is approved in the
manner prescribed under Section 203. These provisions of Delaware law also may
discourage, delay or prevent someone from acquiring or merging with us, which
may cause the market price of our common stock to decline.

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ITEM 2. PROPERTIES

Our principal administrative, sales and marketing, product development and
engineering and manufacturing facility is located in Chatsworth, California.
The table below lists the locations, square footage and expiration dates of our
principal owned and leased facilities used for our major operations.

|               |  |             |  |             |        |                  |  |            |  |                                                             
|-------------- |  | ----------- |  | ----------- | ------ | ---------------- |  | ---------- |  | ------------------------------------------------------------
|Location       |  |             |  | Square Feet |        | Lease Expiration |  | Purpose   
|               |  |             |  |             |        |                  |  |           
|Chatsworth, CA |  | USA         |  |             | 13,300 |                  |  | 3/31/2007  |  | Administration                                              
|Chatsworth, CA |  | USA         |  |             | 22,200 |                  |  | 12/31/2005 |  | Manufacturing and product development                       
|Chatsworth, CA |  | USA         |  |             | 49,920 |                  |  | 7/14/2004  |  | Manufacturing                                               
|Chatsworth, CA |  | USA         |  |             | 17,710 |                  |  | 2/28/2006  |  | Manufacturing and product development                       
|Littleton, MA  |  | USA         |  |             | 54,966 |                  |  | 2/28/2007  |  | Administration, product development, manufacturing and sales
|Hinchu         |  | Taiwan      |  |             | 39,590 |                  |  | 12/31/2004 |  | Product development, manufacturing and sales                
|Geneva         |  | Switzerland |  |             | 29,428 |                  |  | 12/31/2010 |  | Administration, product development, manufacturing and sales
|Zurich         |  | Switzerland |  |             | 9,343  |                  |  | 3/31/2013  |  | Administration and sales                                    
|Stockholm      |  | Sweden      |  |             | 48,825 |                  |  | 6/30/2006  |  | Administration and sales                                    
|Oslo           |  | Norway      |  |             | 7,535  |                  |  | 3/31/2004  |  | Administration and distribution                             
|Milan          |  | Italy       |  |             | 7,535  |                  |  | 3/1/2007   |  | Administration and distribution                             
|Milan          |  | Italy       |  |             | 9,688  |                  |  | 6/30/2004  |  | Administration and distribution                             
|Milan          |  | Italy       |  |             | 9,688  |                  |  | 4/28/2004  |  | Administration and distribution                             
|Milan          |  | Italy       |  |             | 8,611  |                  |  | 4/28/2004  |  | Administration and distribution                             
|Rome           |  | Italy       |  |             | 6,512  |                  |  | 1/31/2009  |  | Administration and distribution                             
|Yokneam        |  | Israel      |  |             | 26,910 |                  |  | 8/31/2005  |  | Administration, product development, manufacturing and sales
|Yokneam        |  | Israel      |  |             | 19,526 |                  |  | 12/31/2007 |  | Administration, product development, manufacturing and sales
|Yokneam        |  | Israel      |  |             | 7,202  |                  |  | 12/31/2007 |  | Administration, product development, manufacturing and sales
|Gif Sur Yvette |  | France      |  |             | 17,222 |                  |  | Owned      |  | Administration and distribution                             

We believe that our existing leased and owned space is more than adequate
for our current operations, and that suitable replacement and additional space
will be available in the future on commercially reasonable terms.




ITEM 3. LEGAL PROCEEDINGS

We have received notices from third parties alleging possible infringement
of patents with respect to product features or manufacturing processes. We
believe such notices are common in the communications industry because of the
large number of patents that have been filed on these subjects. Our policy is
to discuss these notices with the senders in an effort to demonstrate that our
products and/or processes do not violate any patents. From time to time we
have been involved in such discussions with IBM, Lucent, Ortel, Nortel,
Rockwell, the Lemelson Foundation and Finisar. We do not believe that any of
our products or processes violates any of the patents asserted by these parties
and we further believe that we have meritorious defenses if any legal action is
taken by any of these parties. However, if one or more of these parties was to
assert a claim and gain a conclusion unfavorable to us, such claims could
materially and adversely affect our business, operating results and financial
condition.

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We have been named as a defendant in lawsuits involving matters that we
consider routine to the nature of our business. We are of the opinion that the
ultimate resolution of all such matters will not have a material adverse effect
on our business, operating results and financial condition.




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

On December 12, 2003, we held our Annual Meeting of Stockholders at which,
among other things, the Companys entire board of directors was elected. The
name of each director elected at the Annual Meeting, and the number of votes
cast for and against (or withheld) were as follows:

|                |  |                 |            |          |  |            |           | 
|--------------- |  | --------------- | ---------- | -------- |  | ---------- | --------- | 
|                |  | Number of Votes
|                |  |                
|                |  |                 |            |          |  | Against or
|                |  | For             |            | Withheld
|                |  |                 |            |         
|Noam Lotan      |  |                 | 90,335,040 |          |  |            | 4,437,364 | 
|Shlomo Margalit |  |                 | 90,371,340 |          |  |            | 4,401,064 | 
|Igal Shidlovsky |  |                 | 93,065,711 |          |  |            | 1,706,693 | 
|Guenter Jaench  |  |                 | 93,065,711 |          |  |            | 1,706,693 | 
|Daniel Tsui     |  |                 | 93,914,565 |          |  |            | 857,839   | 
|Baruch Fischer  |  |                 | 93,924,565 |          |  |            | 857,839   | 

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

|                                                                                                                                  |  |                 |            |         |  |           |         |  |  |  |         | 
|--------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ---------- | ------- |  | --------- | ------- |  |  |  | ------- | 
|                                                                                                                                  |  | Number of Votes
|Proposal                                                                                                                          |  | For             |            | Against |  | Abstained
|                                                                                                                                  |  |                 |            |         |  |          
|To ratify the selection of Ernst &
Young LLP as independent auditors
for the Company for the fiscal year
ending December 31, 2003 |  |                 | 94,118,045 |         |  |           | 547,983 |  |  |  | 106,375 | 

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PART II




ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information and Holders

Our common stock is traded on the Nasdaq National Market under the symbol
MRVC. The following table sets forth, for the periods indicated, the high
and low closing prices of our common stock, as reported on the Nasdaq National
Market, giving effect to all stock splits through the date hereof.

|                                    |                |  |      |      |     |  |   |      | 
|----------------------------------- | -------------- |  | ---- | ---- | --- |  | - | ---- | 
|                                    |                |  | High |      | Low
|                                    |                |  |      |      |    
|Fiscal Year Ended December 31, 2003 |                |  |      |      |     |  |   |     
|                                    | First Quarter  |  | $    | 1.48 |     |  | $ | 1.02 | 
|                                    | Second Quarter |  | $    | 2.62 |     |  | $ | 1.11 | 
|                                    | Third Quarter  |  | $    | 3.40 |     |  | $ | 1.82 | 
|                                    | Fourth Quarter |  | $    | 4.05 |     |  | $ | 2.95 | 
|Fiscal Year Ended December 31, 2002 |                |  |      |      |     |  |   |     
|                                    | First Quarter  |  | $    | 5.08 |     |  | $ | 2.51 | 
|                                    | Second Quarter |  | $    | 2.89 |     |  | $ | 1.03 | 
|                                    | Third Quarter  |  | $    | 1.75 |     |  | $ | 0.81 | 
|                                    | Fourth Quarter |  | $    | 1.78 |     |  | $ | 0.65 | 

As of February 15, 2004, we had approximately 3,207 common stockholders of
record.

Dividends

The payment of dividends on our common stock is within the discretion of
our board of directors. Currently, we intend to retain earnings to finance the
growth of our business. We have not paid cash dividends on our common stock
and the board of directors does not expect to declare cash dividends on the
common stock in the foreseeable future.

Securities Authorized Under Equity Compensation Plans

Information regarding securities authorized for issuance under equity
compensation plans, as required pursuant to Rule 201(d) of Regulation S-K, is
included in Item 12  Equity Compensation Plan Information included elsewhere
in this Annual Report on Form 10-K.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected Statements of Operations data for each of the three
years in the period ended December 31, 2003 and the Balance Sheet data as of
December 31, 2003 and 2002 are derived from our audited Financial Statements
included elsewhere herein. The selected Statements of Operations data for each
of the two years in the period ended December 31, 2000 and the Balance Sheet
data as of December 31, 2001, 2000 and 1999 were derived from our audited
Financial Statements, which are not included in this Form 10-K. 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 Form 10-K.

|                                                                                                                               |                                              |   |                         |        |      |   |          |          |      |   |          |         |  |   |          |         |  |   |         |        | 
|------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------- | - | ----------------------- | ------ | ---- | - | -------- | -------- | ---- | - | -------- | ------- |  | - | -------- | ------- |  | - | ------- | ------ | 
|                                                                                                                               |                                              |   | Year Ended December 31,
|                                                                                                                               |                                              |   |                        
|                                                                                                                               |                                              |   | 2003                    |        | 2002 |   | 2001     |          | 2000 |   | 1999    
|                                                                                                                               |                                              |   |                         |        |      |   |          |          |      |   |         
|Statements of Operations Data:                                                                                                 |                                              |   |                         |        |      |   |          |          |      |   |          |         |  |   |          |         |  |   |         |       
|Revenue                                                                                                                        |                                              | $ | 238,983                 |        |      | $ | 252,532  |          |      | $ | 332,844  |         |  | $ | 319,394  |         |  | $ | 288,524 |       
|Cost of goods sold                                                                                                             |                                              |   | 164,893                 |        |      |   | 169,566  |          |      |   | 267,389  |         |  |   | 203,371  |         |  |   | 197,442 |       
|                                                                                                                               |                                              |   |                         |        |      |   |          |          |      |   |          |         |  |   |          |         |  |   |         |       
|Gross profit                                                                                                                   |                                              |   | 74,090                  |        |      |   | 82,966   |          |      |   | 65,455   |         |  |   | 116,023  |         |  |   | 91,082  |       
|Operating costs and expenses:                                                                                                  |                                              |   |                         |        |      |   |          |          |      |   |          |         |  |   |          |         |  |   |         |       
|                                                                                                                               | Product development and engineering          |   |                         | 30,972 |      |   |          | 49,358   |      |   |          | 94,813  |  |   |          | 74,078  |  |   |         | 35,319 | 
|                                                                                                                               | Selling, general and administrative          |   |                         | 62,868 |      |   |          | 90,047   |      |   |          | 150,674 |  |   |          | 124,700 |  |   |         | 67,859 | 
|                                                                                                                               | Amortization of intangibles                  |   |                         | 33     |      |   |          | 140      |      |   |          | 126,484 |  |   |          | 66,814  |  |   |         | 3,898  | 
|                                                                                                                               | Impairment of goodwill and other intangibles |   |                         | 356    |      |   |          | 72,697   |      |   |          |        |  |   |          |        |  |   |         |       | 
|                                                                                                                               | Impairment of long-lived assets              |   |                         |       |      |   |          | 17,038   |      |   |          |        |  |   |          |        |  |   |         |       | 
|                                                                                                                               | Restructuring costs                          |   |                         |       |      |   |          |         |      |   |          | 14,111  |  |   |          |        |  |   |         |       | 
|                                                                                                                               |                                              |   |                         |        |      |   |          |          |      |   |          |         |  |   |          |         |  |   |         |       
|Total operating costs and expenses                                                                                             |                                              |   | 94,229                  |        |      |   | 229,280  |          |      |   | 386,082  |         |  |   | 265,592  |         |  |   | 107,076 |       
|                                                                                                                               |                                              |   |                         |        |      |   |          |          |      |   |          |         |  |   |          |         |  |   |         |       
|Operating loss                                                                                                                 |                                              |   | (20,139                 | )      |      |   | (146,314 | )        |      |   | (320,627 | )       |  |   | (149,569 | )       |  |   | (15,994 | )     
|Other income (expense), net                                                                                                    |                                              |   | (6,380                  | )      |      |   | (23,465  | )        |      |   | (22,777  | )       |  |   | (9,578   | )       |  |   | 322     |       
|                                                                                                                               |                                              |   |                         |        |      |   |          |          |      |   |          |         |  |   |          |         |  |   |         |       
|Loss before minority interest, provision
(benefit) for taxes, extraordinary gain and
cumulative effect of an accounting change |                                              |   | (26,519                 | )      |      |   | (169,779 | )        |      |   | (343,404 | )       |  |   | (159,147 | )       |  |   | (15,672 | )     
|Minority interest                                                                                                              |                                              |   | 58                      |        |      |   | 230      |          |      |   | (11,577  | )       |  |   | (796     | )       |  |   | (610    | )     
|Provision (benefit) for taxes                                                                                                  |                                              |   | 2,361                   |        |      |   | 13,395   |          |      |   | 4,475    |         |  |   | (5,398   | )       |  |   | (2,153  | )     
|                                                                                                                               |                                              |   |                         |        |      |   |          |          |      |   |          |         |  |   |          |         |  |   |         |       
|Loss before extraordinary gain and cumulative
effect of an accounting change                                                   |                                              |   | (28,938                 | )      |      |   | (183,404 | )        |      |   | (336,302 | )       |  |   | (152,953 | )       |  |   | (12,909 | )     
|                                                                                                                               | Extraordinary gain, net of tax               |   |                         | 1,950  |      |   |          |         |      |   |          | 9,949   |  |   |          |        |  |   |         |       | 
|                                                                                                                               | Cumulative effect of an accounting change    |   |                         |       |      |   |          | (296,355 | )    |   |          |        |  |   |          |        |  |   |         |       | 
|                                                                                                                               |                                              |   |                         |        |      |   |          |          |      |   |          |         |  |   |          |         |  |   |         |       
|Net loss                                                                                                                       |                                              | $ | (26,988                 | )      |      | $ | (479,759 | )        |      | $ | (326,353 | )       |  | $ | (152,953 | )       |  | $ | (12,909 | )     
|                                                                                                                               |                                              |   |                         |        |      |   |          |          |      |   |          |         |  |   |          |         |  |   |         |       
|Basic and diluted loss per share                                                                                               |                                              | $ | (0.26                   | )      |      | $ | (5.25    | )        |      | $ | (4.27    | )       |  | $ | (2.33    | )       |  | $ | (0.24   | )     
|Basic and diluted weighted average shares
outstanding                                                                          |                                              |   | 102,022                 |        |      |   | 91,421   |          |      |   | 76,369   |         |  |   | 65,669   |         |  |   | 53,920  |       
|                                                                                                                               |                                              |   |                         |        |      |   |          |          |      |   |          |         |  |   |          |         |  |   |         |       

|                            |  |                    |         |      |  |      |         |      |  |      |         |  |  |   |           |  |  |   |         | 
|--------------------------- |  | ------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | --------- |  |  | - | ------- | 
|                            |  | As of December 31,
|                            |  |                   
|                            |  | 2003               |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                            |  |                    |         |      |  |      |         |      |  |     
|Balance Sheet Data:         |  |                    |         |      |  |      |         |      |  |      |         |  |  |   |           |  |  |   |         | 
|Cash and cash equivalents   |  | $                  | 88,706  |      |  | $    | 100,618 |      |  | $    | 164,676 |  |  | $ | 210,080   |  |  | $ | 34,330  | 
|Working capital             |  |                    | 108,051 |      |  |      | 91,188  |      |  |      | 175,368 |  |  |   | 366,752   |  |  |   | 106,425 | 
|Total assets                |  |                    | 254,763 |      |  |      | 284,803 |      |  |      | 864,495 |  |  |   | 1,097,621 |  |  |   | 314,533 | 
|Total long-term liabilities |  |                    | 27,415  |      |  |      | 4,056   |      |  |      | 102,254 |  |  |   | 154,504   |  |  |   | 94,409  | 
|Stockholders equity        |  |                    | 140,128 |      |  |      | 154,476 |      |  |      | 584,676 |  |  |   | 781,555   |  |  |   | 166,815 | 

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

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with Consolidated Condensed Financial
Statements and Notes thereto included elsewhere in this Form 10-K. In addition
to historical information, the discussion in this Form 10-K contains certain
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated by these forward-looking
statements due to factors, including but not limited to, those set forth in the
following and elsewhere in this Form 10-K. We assume no obligation to update
any of the forward-looking statements after the date of this Form 10-K.

Overview

We design, manufacture, sell, distribute, integrate and support network
infrastructure equipment and services, and optical components. We conduct our
business along three principal segments: the networking group, the optical
components group and development stage enterprise group. Our networking group
provides equipment used by commercial customers, governments and
telecommunications service providers, and include switches, routers, network
physical infrastructure equipment and remote device management equipment as
well as specialized networking products for defense and aerospace applications.
Our optical components group designs, manufactures and sell optical
communications components, primarily through our wholly owned subsidiary
Luminent, Inc. These components include fiber optic transceivers, discrete
lasers and laser emitting diodes, or LEDs, as well as components for
Fiber-to-the-Premises, or FTTP, applications. Our development stage enterprise
group seeks to develop new optical components, subsystems and networks and
other products for the infrastructure of the Internet.

We market and sell our products worldwide, through a variety of channels,
which include a dedicated direct sales force, manufacturers representatives,
value-added-resellers, distributors and systems integrators. We have
operations in Europe that provide network system design, integration and
distribution services that include products manufactured by third-party
vendors, as well as our products. We believe such specialization enhances
access to customers and allows us to penetrate targeted vertical and regional
markets.

We were organized in July 1988 as MRV Technologies, Inc., a California
corporation and reincorporated in Delaware in April 1992, at which time we
changed our name to MRV Communications, Inc.

We generally recognize product revenue, net of sales discounts and
allowances, when persuasive evidence of an arrangement exists, delivery has
occurred and all significant contractual obligations have been satisfied, the
fee is fixed or determinable and collection is considered probable. Products
are generally shipped FOB shipping point with no right of return. Sales of
services and system support are deferred and recognized ratably over the
contract period. Sales with contingencies, such as right of return, rotation
rights, conditional acceptance provisions and price protection are rare and
insignificant and are deferred until the contingencies have been satisfied or
the contingent period has lapsed. We generally warrant our products against
defects in materials and workmanship for one year. The estimated costs of
warranty obligations and sales returns and other allowances are recognized at
the time of revenue recognition based on contract terms and prior claims

experience. Gross profit is equal to our revenues less our cost of goods sold.
Our cost of goods sold includes materials, direct labor and overhead. Cost of
inventory is determined by the first-in, first-out method. Our operating costs
and expenses generally consist of product development and engineering costs, or
R&D, selling, general and administrative costs, or SG&A, and other operating
related costs and expenses.

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Unfavorable economic conditions and reduced capital spending in the
telecommunications industry detrimentally affected sales to service providers,
network equipment companies, e-commerce and Internet businesses, and the
manufacturing industry in the United States, during 2001, 2002 and 2003 and may
affect them for 2004 and thereafter. As a result of these factors, our
revenues have declined and we reported net losses during each these years.
Revenues for the years ended December 31, 2003, 2002 and 2001 were $239.0
million, $252.5 million and $332.8 million, respectively. We reported a net
loss of $27.0 million, $479.8 million and $326.4 million for the years ended
December 31, 2003, 2002 and 2001, respectively. A significant portion of the
loss for the years ended December 31, 2002 and 2001, was due to charges for
impairment of goodwill and other intangibles recorded in accordance with
Statement of Financial Accounting Standards, or SFAS, No. 142, Accounting for
Goodwill and Other Intangible Assets, amortization of goodwill and other
intangibles and deferred stock expense related to our acquisitions in 2000 and
the employment arrangements that we entered into with Luminents former Chief
Executive Officer and its former Chief Financial Officer in 2000. Effective
January 1, 2002, we adopted SFAS No. 142, and we no longer amortize goodwill
and intangibles with indefinite lives, but instead measure goodwill and
intangibles for impairment at least annually, or when events indicate that
impairment exists. We will continue to amortize intangible assets that we
determine have definite lives over their useful lives. As required by SFAS No.
142, we performed the transitional impairment test on goodwill and other
intangibles, which consisted of patents and assembled work forces. As a result
of the transitional impairment test, we recorded a $296.4 million cumulative
effect of an accounting change in 2002. During the fourth quarter of 2003, we
conducted our annual impairment review, which resulted in no additional
impairment. Our business may continue to suffer from adverse economic
conditions worldwide that have contributed to a technology industry slowdown
and was a principal factor for our decline in revenues and our net losses
during the last three years. Our operating results for future periods are
subject to numerous uncertainties, and we may not be able to achieve and
maintain profitability in the near future.

We divide and operate our business based on three segments: the networking
group, the optical components group and development stage enterprise group. We
evaluate segment performance based on the revenues and the operating expenses
of each segment. We do not track segment data or evaluate segment performance
on additional financial information. As such, there are no separately
identifiable segment assets nor are there any separately identifiable
Statements of Operations data below operating income (expense). The networking
and optical components groups account for virtually all of our overall revenue.
The development stage enterprise group seeks to develop new optical
components, subsystems and networks and other products for the infrastructure
of the Internet.

Our business involves reliance on foreign-based entities. Several of our
divisions, outside subcontractors and suppliers are located in foreign
countries, including Argentina, China, Denmark, Finland, France, Germany,
Israel, Italy, Japan, Korea, the Netherlands, Norway, Russia, Singapore, South
Africa, Switzerland, Sweden, Taiwan and the United Kingdom. For the years
ended December 31, 2003, 2002 and 2001, foreign revenues
constituted 78%, 74%
and 67%, respectively, of our revenues. The vast majority of our foreign sales
are to customers located in the European region. The remaining foreign sales
are primarily to customers in the Asia Pacific region.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities.

We believe that the estimates, assumptions and judgments involved in the
accounting policies described below have the greatest potential impact on our
financial statements, so we consider these to be our critical accounting
policies. Because of the uncertainty inherent in these matters, actual results
could differ from the estimates we use in applying the critical accounting
policies. Certain of these critical accounting policies affect working capital
account balances, including the policies for revenue recognition, allowance for
doubtful accounts, inventory reserves and income taxes. These policies require
that we make estimates in the preparation of our financial statements as of a
given date. However, since our business cycle is relatively short, actual
results related to these estimates are generally known within the six-month
period following the financial statement date. Thus, these policies generally
affect only the timing of reported amounts across two to three quarters.

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Within the context of these critical accounting policies, we are not
currently aware of any reasonably likely events or circumstances that would
result in materially different amounts being reported.

Revenue Recognition.We generally recognize product revenue, net of sales
discounts and allowances, when persuasive evidence of an arrangement exists,
delivery has occurred and all significant contractual obligations have been
satisfied, the fee is fixed or determinable and collection is considered
probable. Products are generally shipped FOB shipping point with no right of
return. Sales of services and system support are deferred and recognized
ratably over the contract period. Sales with contingencies, such as right of
return, rotation rights, conditional acceptance provisions and price protection
are rare and insignificant and are deferred until the contingencies have been
satisfied or the contingent period has lapsed. We generally warrant our
products against defects in materials and workmanship for one year. The
estimated costs of warranty obligations and sales returns and other allowances
are recognized at the time of revenue recognition based on contract terms and
prior claims experience. Our major revenue-generating products consist of:
passive and active optical components; switches and routers; remote device
management products; and network physical infrastructure equipment.

Allowance for Doubtful Accounts.We make ongoing estimates relating to
the collectability of our accounts receivable and maintain a reserve for
estimated losses resulting from the inability of our customers to meet their
financial obligations to us. In determining the amount of the reserve, we
consider our historical level of credit losses and make judgments about the
creditworthiness of significant customers based on ongoing credit evaluations.
Since we cannot predict future changes in the financial stability of our
customers, actual future losses from uncollectable accounts may differ from our
estimates. If the financial condition of our customers were to deteriorate,
resulting in their inability to make payments, a larger reserve may be
required. In the event we determined that a smaller or larger reserve was
appropriate, we would record a credit or a charge to selling and administrative
expense in the period in which we made such a determination.

Inventory Reserves.We also make ongoing estimates relating to the market
value of inventories, based upon our assumptions about future demand and market
conditions. If we estimate that the net realizable value of our inventory is
less than the cost of the inventory recorded on our books, we record a reserve
equal to the difference between the cost of the inventory and the estimated net
realizable market value. This reserve is recorded as a charge to cost of goods
sold. If changes in market conditions result in reductions in the estimated
market value of our inventory below our previous estimate, we would increase
our reserve in the period in which we made such a determination and record a
charge to cost of goods sold.

Goodwill and Other Intangibles.We adopted SFAS No. 142, Goodwill and
Other Intangible Assets, effective January 1, 2002. In accordance with SFAS
No. 142, we no longer amortize goodwill and intangible assets with indefinite
lives, but instead measure these assets for impairment at least annually, or
when events indicate that impairment exists. We continue to amortize
intangible assets that have definite lives over their useful lives.

Income Taxes. As part of the process of preparing our financial
statements, we are required to estimate our income taxes in each of the
jurisdictions in which we operate. This process involves us estimating our
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items, such as deferred revenue, for tax
and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in our Balance Sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the Statements of Operations.

Significant management judgment is required in determining our provision
for income taxes, deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. Management continually
evaluates our deferred tax asset as to whether it is likely that the deferred
tax assets will be realized. If management ever determined that our deferred
tax asset was not likely to be realized, a write-down of that asset would be
required and would be reflected in the provision for taxes in the accompanying
period.

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Restructuring costs

From November 9, 2000 through December 28, 2001, we owned approximately
92% of Luminent and approximately 8% of Luminents shares were publicly traded.
During the second quarter of 2001, Luminents management approved and
implemented a restructuring plan in order to adjust operations and
administration as a result of the dramatic slowdown in the communications
equipment industry generally and the optical components sector in particular.
Major actions primarily involved the reduction of workforce, the abandonment of
certain assets and the cancellation and termination of purchase commitments.
We expect these actions to realign the business based on current and near-term
growth rates. We expect that all action stemming from the restructuring plan
to be completed by the end of 2004.

Employee severance costs and related benefits of $1.3 million are related
to approximately 750 layoffs through December 31, 2003, bringing Luminents
total workforce to approximately 450 employees as of December 31, 2003.
Affected employees came from all divisions and areas of Luminent. The majority
of affected employees were in the manufacturing group.

A summary of the restructuring costs and the remaining liability through
and as of December 31, 2003 is as follows (in thousands):

|                           |             |   |             |         |            |   |             |        |           |   |       |        |          |   |       |      |   |   |        |         |  
|-------------------------- | ----------- | - | ----------- | ------- | ---------- | - | ----------- | ------ | --------- | - | ----- | ------ | -------- | - | ----- | ---- | - | - | ------ | ------- | -
|                           |             |   |             |         |            |   | Closed and  |        |           |   |       |        | Employee |   |       |      |  
|                           |             |   | Asset       |         | Abandoned  |   | Purchase    |        | Severance |   |       |        |         
|                           |             |   | Impairments |         | Facilities |   | Commitments |        | Costs     |   | Total
|                           |             |   |             |         |            |   |             |        |           |   |      
|Original provision         |             | $ | 10,441      |         |            | $ | 2,405       |        |           | $ | 6,173 |        |          | $ | 1,281 |      |   | $ | 20,300 |        
|                           | Utilized    |   |             | (10,441 | )          |   |             | (615   | )         |   |       | (1,987 | )        |   |       | (847 | ) |   |        | (13,890 | )
|                           | Adjustments |   |             |        |            |   |             |       |           |   |       | (1,474 | )        |   |       | (434 | ) |   |        | (1,908  | )
|                           |             |   |             |         |            |   |             |        |           |   |       |        |          |   |       |      |   |   |        |        
|Balance, December
31, 2002 |             |   |            |         |            |   | 1,790       |        |           |   | 2,712 |        |          |   |      |      |   |   | 4,502  |        
|                           | Utilized    |   |             |        |            |   |             | (1,854 | )         |   |       | (1,092 | )        |   |       |     |   |   |        | (2,946  | )
|                           | Adjustments |   |             |        |            |   |             | 874    |           |   |       | (1,305 | )        |   |       |     |   |   |        | (431    | )
|                           |             |   |             |         |            |   |             |        |           |   |       |        |          |   |       |      |   |   |        |        
|Balance, December
31, 2003 |             | $ |            |         |            | $ | 810         |        |           | $ | 315   |        |          | $ |      |      |   | $ | 1,125  |        
|                           |             |   |             |         |            |   |             |        |           |   |       |        |          |   |       |      |   |   |        |        

Through December 31, 2003, we reduced $5.9 million in purchase commitments
related to future liabilities based on our current negotiations with vendors,
which resulted in the reversal of $1.3 million and $1.5 million in cost of
goods sold for the years ended December 31, 2003 and 2002, respectively, and
our fulfillment of purchase commitments for inventory and equipment that we
previously reserved. The adjustments relating to closed and abandoned
facilities that amounted to $874,000 in 2003 resulting from changes in our
estimates of our continuing obligation. We did not reverse any amounts in cost
of goods sold for the year ended December 31, 2001.

Market Conditions and Current Outlook

Macroeconomic factors, such as an economic slowdown in the U.S. and
abroad, have detrimentally impacted demand for optical components and network
infrastructure products and services. The unfavorable economic conditions and
reduced capital spending has detrimentally affected sales to service providers,
network equipment companies, e-commerce and Internet businesses, and the
manufacturing industry in the United States during 2001 to date, and may
continue to affect them for the remainder of 2004 and thereafter.

Reclassifications

Our
Quarterly Financial Data is presented in Note 16, to our Notes to
Financial Statements included elsewhere in this Form 10-K. The
results of the fourth quarter of 2003 reflect certain
reclassifications affecting revenues, cost of goods sold, accounts receivable and accounts payable relating to a transaction involving
one of our European offices. These reclassifications were discovered after our press release and conference
call discussing our fourth quarter financial results that occurred on
February 5, 2004, have had no effect on the gross profit or net loss we announced for
the quarter or year ended December 31, 2003 and have been recorded in our audited financial
statements contained elsewhere in this Form 10-K.

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Results of Operations

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

|                                                                                                                     |                                              |  |                         |    |      |  |      |    |  |  |      |    | 
|-------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- |  | ----------------------- | -- | ---- |  | ---- | -- |  |  | ---- | -- | 
|                                                                                                                     |                                              |  | Year Ended December 31,
|                                                                                                                     |                                              |  |                        
|                                                                                                                     |                                              |  | 2003                    |    | 2002 |  | 2001
|                                                                                                                     |                                              |  |                         |    |      |  |     
|Revenue                                                                                                              |                                              |  | 100                     | %  |      |  | 100  | %  |  |  | 100  | % 
|Cost of goods sold                                                                                                   |                                              |  | 69                      |    |      |  | 67   |    |  |  | 80   |   
|Gross profit                                                                                                         |                                              |  | 31                      |    |      |  | 33   |    |  |  | 20   |   
|Operating costs and expenses:                                                                                        |                                              |  |                         |    |      |  |      |    |  |  |      |   
|                                                                                                                     | Product development and engineering          |  |                         | 13 |      |  |      | 20 |  |  |      | 28 | 
|                                                                                                                     | Selling, general and administrative          |  |                         | 26 |      |  |      | 36 |  |  |      | 45 | 
|                                                                                                                     | Amortization of intangibles                  |  |                         |   |      |  |      |   |  |  |      | 38 | 
|                                                                                                                     | Impairment of goodwill and other intangibles |  |                         |   |      |  |      | 29 |  |  |      |   | 
|                                                                                                                     | Impairment of long-lived assets              |  |                         |   |      |  |      | 7  |  |  |      |   | 
|                                                                                                                     | Restructuring costs                          |  |                         |   |      |  |      |   |  |  |      | 4  | 
|Total operating costs and expenses                                                                                   |                                              |  | 39                      |    |      |  | 91   |    |  |  | 116  |   
|Operating loss                                                                                                       |                                              |  | (8                      | )  |      |  | (58  | )  |  |  | (96  | ) 
|Other expense, net                                                                                                   |                                              |  | 3                       |    |      |  | 9    |    |  |  | 7    |   
|Loss before minority interest, provision for
taxes, extraordinary gain and cumulative
effect of an accounting change |                                              |  | (11                     | )  |      |  | (67  | )  |  |  | (103 | ) 
|Minority interest                                                                                                    |                                              |  |                        |    |      |  |     |    |  |  | (3   | ) 
|Provision for taxes                                                                                                  |                                              |  | 1                       |    |      |  | 5    |    |  |  | 1    |   
|Loss before extraordinary gain and cumulative
effect of an accounting change                                         |                                              |  | (12                     | )  |      |  | (73  | )  |  |  | (101 | ) 
|Extraordinary gain, net of tax                                                                                       |                                              |  | 1                       |    |      |  |     |    |  |  | 3    |   
|Cumulative effect of an accounting change                                                                            |                                              |  |                        |    |      |  | (117 | )  |  |  |     |   
|Net loss                                                                                                             |                                              |  | (11                     | )  |      |  | (190 | )  |  |  | (98  | ) 

The following management discussion and analysis refers to and analyzes
our results of operations into three segments as defined by our management.
These three segments are our networking group, optical components group and
development stage enterprise group, which includes all start-up activities.

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Year Ended December 31, 2003 (2003) Compared
To Year Ended December 31, 2002 (2002)

Revenue

Revenues for 2003 decreased $13.5 million, or 5%, to $239.0 million from
$252.5 million for 2002. The decrease was due to the worldwide economic
slowdown in general and specifically the downturn in telecommunications
spending for optical components, partially offset by the positive impact
resulting from the weakened U.S. dollar compared to our other functional
currencies. Additionally, the decrease in revenues is the result of the loss
of revenues from our divestiture of FOCI Fiber Optic Communications, Inc., or
FOCI, and Quantum Optech, Inc., or QOI, in October 2002 that amounted to $17.0
million in 2002.

For 2003, 48% of our revenues were generated from the sale of third-party
products through our system integration and distribution offices, as compared
to 39% during 2002. Our revenues by segments for 2003 and 2002 were as follows
(in thousands):

|                                   |  |      |         |      |  |   |         |  
|---------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                   |  | 2003 |         | 2002
|                                   |  |      |         |     
|Networking group                   |  | $    | 202,399 |      |  | $ | 185,662 |  
|Optical components group           |  |      | 38,790  |      |  |   | 67,284  |  
|Development stage enterprise group |  |      |        |      |  |   |        |  
|                                   |  |      |         |      |  |   |         |  
|                                   |  |      | 241,189 |      |  |   | 252,946 |  
|Adjustments
(1)                    |  |      | (2,206  | )    |  |   | (414    | )
|                                   |  |      |         |      |  |   |         |  
|                                   |  | $    | 238,983 |      |  | $ | 252,532 |  
|                                   |  |      |         |      |  |   |         |  



---

|(1) |  | Adjustments represent the elimination of inter-segment revenue in
order to reconcile to consolidated revenues.
|--- |  | --------------------------------------------------------------------------------------------------------------

Networking Group.Our networking group provides equipment used by
commercial customers, governments and telecommunications service providers,
which includes switches, routers, network physical infrastructure equipment and
remote device management equipment as well as specialized networking products
for defense, aerospace and other applications, including cellular
communications. External revenues generated from our networking group
increased $16.7 million, or 9%, to $202.4 million for 2003 as compared to
$185.7 million for 2002. The increase is due to increases in sales of switches
and routers, services and other networking products. External revenues
generated from sales of switches and routers increased $6.5 million, or 11%, to
$64.0 million for 2003 as compared to $57.6 million for 2002. The external
revenues from our networking group were also positively impacted by the effect
of the weakened U.S. dollar compared to our other functional currencies,
primarily the Euro. External revenues generated from sales of switches and
routers are heavily dependent on our international offices. External revenues
generated from sales of our remote device management products decreased
$735,000, or 4%, to $16.6 million for 2003 as compared to $17.4 million for
2002. External revenues generated from sales of our network physical
infrastructure products decreased by $5.1 million, or 9%, to $50.5 million for
2003 as compared to $55.6 million for 2002. External revenues from sales of
our other networking products, which include defense, aerospace and other
applications, including cellular communications, increased $11.8 million, or
57%, during 2003 to $32.3 million from $20.6 million for 2002. We attribute
the increase in our overall external revenues to an increased number of
governmental projects and improved penetration into the markets served by these
products.

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Optical Components Group.Our optical components group designs,
manufactures and sells optical communications components and primarily consists
of products manufactured by our wholly owned subsidiary, Luminent. These
components include fiber optic transceivers, discrete lasers and LEDs, as well
as components for Fiber-to-the-Premises applications, or FTTP. Revenues,
including inter-segment revenue, generated from our optical components group
decreased $28.5 million, or 42%, to $38.8 million for 2003 as compared to $67.3
million for 2002. We attribute the decrease in optical components revenue to
the current slowdown in telecommunications spending for optical components.
External revenues generated from optical passive components decreased $13.9
million, or 48%, to $14.9 million for 2003 as compared to $28.7 million for
2002. The decrease in revenues from sales of optical passive components is
primarily due to the loss of revenues from our divestiture of FOCI and QOI in
October 2002 that amounted to $17.0 million in 2002, in addition to decreases
in our sales of these components through our remaining offices. External
revenue generated from optical active components decreased $12.3 million, or
24%, to $39.0 million for 2003 as compared to $51.3 million for 2002. We
attribute the decrease in revenues from optical active components to a
sector-wide oversupply, which has adversely impacted the average selling prices
of these components.

Development Stage Enterprise Group. No significant revenues were
generated by these entities for 2003 and 2002.

Gross Profit

Gross profit for 2003 was $74.1 million, compared to gross profit of $83.0
million for 2002. Gross profit decreased $8.9 million, or 11%, in 2003
compared to 2002. For 2003 and 2002, gross profit includes income from
recapturing accelerated deferred stock expense due to terminations that
amounted to $1.1 million and $878,000, respectively. Gross profit for 2003 was
also positively affected by the utilization of $1.7 million of the product
credit received from the divestiture of FOCI and QOI in 2002.

Our gross margin slightly decreased to 31% for 2003, compared to gross
margin of 33% for 2002. We attribute the decrease in our gross margin to a
change in the composition of our product revenues. Our percentage of
third-party equipment revenues increased during 2003, which generated lower
gross margins. The weakened U.S. dollar compared to the Euro resulted in an
increase in our cost of goods sold, particularly in lower margin business
through our European offices.

Networking Group. Gross profit for 2003 was $70.8 million, compared to
gross profit of $67.5 million for 2002. Gross profit increased $3.4 million,
or 5%, in 2003 compared to 2002. Gross margins decreased to 35% for 2003,
compared to gross margin of 36% for 2002. For 2003, our networking groups
gross profit includes income from the recapture of accelerated deferred stock
expense due to terminations totaling $1.1 million, compared to deferred stock
expense totaling $297,000 for 2002. Changes in deferred stock expense amounted
to $1.4 million of the gross margin improvement. In addition to the decrease
in deferred stock expense, we attribute the increase in gross profit during
2003 to the effects of improved operating efficiencies and cost reduction
efforts.

Optical Components Group. Gross profit for 2003 was $3.3 million,
compared to gross profit of $16.4 million for 2002. Gross profit decreased
$13.1 million, or 80%, in 2003 compared to 2002. Gross margins decreased to 8%
for 2003, compared to gross margin of 24% for 2002. For 2003 and 2002, the
optical components groups gross profit includes income from recapturing
accelerated deferred stock expense due to terminations that amounted to $50,000
and $1.2 million, respectively. Changes in deferred stock expense accounted
for $1.1 million of the decrease in gross profit in 2003. Gross profit
decreased due to the sale of FOCI and QOI in October 2002, which contributed
gross profit that amounted to $2.0 million in 2002, along with increased
competition and continued market contraction resulting in lower average selling
prices.

Development Stage Enterprise Group. No significant gross margins were
produced by these entities for 2003 and 2002.

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Operating Costs and Expenses

Operating
costs and expenses were $94.2 million, or 39% of revenues, for
2003, compared to $229.3 million, or 91% of revenues, for 2002. Operating
costs and expenses decreased $135.1 million, or 59%, in 2003 compared to 2002.
For 2003, operating costs and expenses include income from the recapture of
accelerated deferred stock expense due to terminations that amounted to $7.0
million, while 2002 includes $7.5 million in deferred stock expense. Changes
in deferred stock expenses accounted for $14.5 million of the decrease in our
operating costs and expenses. For 2003, operating costs and expenses include
an impairment of goodwill and other intangibles that amounted to $356,000.
Operating costs and expenses for 2002, includes impairment losses on goodwill
and other intangibles and long-lived assets that amount to $72.7 million and
$17.0 million, respectively. In addition to the income from the recapture of
deferred stock expense and the substantial reduction in impairment losses on
goodwill and other tangibles and long-lived assets, we attribute the decrease
in operating costs and expenses during 2003 to our overall cost reduction
efforts to align these costs with current operations. We reduced spending in
product development and engineering and selling, general and administrative
expenses.

Networking Group. Operating costs and expenses for 2003 were $73.0
million, or 36% of revenues, for 2003, compared to $126.2 million, or 68% of
revenues, for 2002. Operating costs and expenses decreased $53.2 million, or
42%, in 2003 compared to 2002. For 2003, operating costs and expenses include
income from recapturing accelerated deferred stock expense due to terminations
that amounted to $6.7 million, while 2002 includes $6.8 million in deferred
stock expense. Changes in deferred stock expenses accounted for $13.5 million
of the decrease in our operating costs and expenses. For 2003, operating costs
and expenses include an impairment of goodwill and other intangibles that
amounted to $356,000. Operating costs and expenses for 2002, includes
impairment losses on goodwill and other intangibles and long-lived assets that
amount to $20.1 million and $17.0 million, respectively. In addition to the
impact from income from the recapture of deferred stock expense and impairment
losses, we attribute the decrease in operating costs and expenses during 2003
to our cost saving efforts, including head count reductions, to align these
costs with current operations. We reduced spending in the areas of product
development and engineering and general and administrative expense, while
slightly increasing spending for selling and marketing efforts.

Optical Components Group. Operating costs and expenses for 2003 were
$14.4 million, or 37% of revenues, for 2003, compared to $79.0 million, or 117%
of revenues, for 2002. Operating costs and expenses decreased $64.6 million,
or 82%, in 2003 compared to 2002. For 2003, operating costs and expenses
include income from recapturing accelerated deferred stock expense due to
terminations that amounted to $240,000, while 2002 includes $624,000 in
deferred stock expense. Changes in deferred stock expenses accounted for
$864,000 of the decrease in our operating costs and expenses. Operating costs
and expenses for 2002, includes an impairment loss on goodwill and other
intangibles that amounted to $51.9 million. We attributed the remaining
decrease in our operating costs and expenses to our cost saving efforts,
including head count reductions, to align these costs with current operations.
We reduced spending in the areas of product development and engineering,
selling, general and administrative expenses.

Development Stage Enterprise Group. Operating costs and expenses for 2003
were $6.8 million for 2003, compared to $24.1 million for 2002. Operating
costs and expenses decreased $17.2 million, or 72%, in 2003 compared to 2002.
We attribute the decrease in operating costs and expenses to our cost saving
efforts, including head count reductions, to align these costs with current
development activities.

Operating Loss

We reported an operating loss of $20.1 million, or 8% of revenues, for
2003 compared to $146.3 million, or 58% of revenues, for 2002. We reduced our
operating loss by $126.2 million, or 86%, in 2003 compared to 2002. For 2003,
our operating loss includes an impairment of goodwill and other intangibles
that amounted to $356,000. Our operating loss for 2002 includes impairment
losses on goodwill and other intangibles and long-lived assets that amount to
$72.7 million and $17.0 million, respectively. This improvement is the result
of our cost reduction efforts and the realignment of our costs and expenses
with current operations along with our improvement in gross profit. Our
reduction in net loss was also positively impacted by income resulting from our
reversal of deferred stock expense in 2003 compared to reporting such expenses
in 2002 and the substantial reduction in impairment losses on goodwill and
other tangibles and long-lived assets in 2003.

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Networking
Group. Our networking group reported an operating loss of $2.2
million, or 1% of revenues, for 2003, compared to an operating loss of $58.8
million, or 32% of revenues, for 2002. This improvement is the result of our
reduced spending for operating costs and expenses, along with the substantial
reduction in impairment losses in 2003. Our results in 2003 were also
positively impacted by income resulting from our reversal of deferred stock
expenses in 2003 compared to reporting such expenses in 2002.

Optical Components Group. Our optical components group reported an
operating loss of $11.1 million, or 29% of revenues, for 2003, compared to
$62.7 million, or 93% of revenues, for 2002. Our operating loss improved $51.5
million, or 82%, in 2003 compared to 2002. Our reduction in operating loss was
the result of the substantial reduction in impairment loss on goodwill and
other intangibles in 2003 along with the favorable impact from our reversal of
deferred stock expense in 2003 compared to reporting such expenses in 2002.

Development Stage Enterprise Group. Our development stage enterprise
group reported an operating loss of $6.8 million for 2003, compared to $24.1
million for 2002. Our operating loss improved $17.2 million, or 72%, in 2003
compared to 2002. The improvement is the result of a significant reduction in
spending for operating costs and expenses.

Amortization of Intangibles

During the fourth quarter of 2003, we conducted our annual review of our
goodwill and intangible assets as required by SFAS 142. The review resulted in
no further reduction in the carrying amount of goodwill. During 2003, we
impaired $356,000 in goodwill from a foreign office that ceased operations.

We recorded a $296.4 million cumulative effect of an accounting change in
2002, as the result of our adoption of SFAS No. 142 effective January 1, 2002.
As a consequence of our adoption of SFAS No. 142, we no longer amortize
goodwill and intangibles with indefinite lives, but instead measure goodwill
and other intangibles for impairment at least annually, or when events indicate
that impairment exists. We continue to amortize intangible assets that we
determine to have definite lives over their useful lives. As required by SFAS
No. 142, we performed the transitional impairment test on goodwill and other
intangibles, which consisted of patents and assembled work forces. Of the
$296.4 million cumulative effect of an accounting change, $84.6 million was
associated with our networking group and $211.8 million was associated with our
optical components group.

Beginning October 1, 2002, we also performed the annual impairment review
required by SFAS No. 142. As a result of the annual review, we further reduced
the carrying amount of goodwill and other intangibles by recording an
impairment charge of $72.7 million in the third quarter of 2002. Of the $72.7
million impairment, $20.1 million was associated with our networking group,
$51.9 million was associated with our optical components group and $641,000 was
associated with our development stage enterprise group.

Other Expense, Net

In June 2003, we completed the sale of $23.0 million principal amount of
five-year 5% convertible notes due in 2008 (the 2003 Notes), to an
institutional investor, in a private placement. The 2003 Notes bear interest
at 5% per annum and are convertible into our common stock at a conversion price
of $2.32 per share. We are using the net proceeds from the sale of the 2003
Notes for general corporate purposes and working capital. Interest expense
relating to these notes was $672,000 for 2003.

In June 1998, we issued $100.0 million principal amount of our 1998 Notes.
During 2003, we retired $5.9 million principal amount of 1998 Notes in
exchange for the issuance of 4.2 million shares of our common stock to the
holders of these notes, resulting in a remaining outstanding balance of $26.0
million at maturity. On June 15, 2003, the balance of our outstanding 1998
Notes matured and we repaid and retired them. For 2003, we recognized a loss
on the extinguishment of debt totaling $5.4 million, net of associated taxes.
This loss was recognized in accordance with Emerging Issues Task Force Issue
02-15 released in September 2002. During the year ended December 31, 2002, we
acquired $31.6 million in principal amount of these notes in exchange for our
issuance of 12.3 million shares of our common stock to the holders of these
notes. During 2002, we also purchased $21.4 million in principal amount of
these notes in exchange for $19.7 million in cash. During 2002, we recognized
a gain of $393,000 in connection with the extinguishment of debt. We incurred
$773,000 and $3.2 million in interest expense relating to the 1998 Notes for
2003 and 2002, respectively.

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During 2003, other expense, net totaling $6.4 million, represented our
loss on the extinguishment of debt and interest expense, partially offset by
interest income on cash and investments. We account for certain unconsolidated
subsidiaries using the cost and equity methods. During 2002, we impaired $11.7
million on our investments in these subsidiaries along with $4.3 million from
our share of losses from our equity method investments. For 2002, we
recognized $3.2 million in interest expense associated with the termination of
our interest rate swap.

Provision For Taxes

We record valuation allowances against our deferred tax assets, when
necessary, in accordance with SFAS No. 109, Accounting for Income Taxes.
Realization of deferred tax assets (such as net operating loss carryforwards
and income tax credits) is dependent on future taxable earnings and is
therefore uncertain. At least quarterly, we assess the likelihood that our
deferred tax asset balance will be recovered from future taxable income. Our
tax expense fluctuates primarily due to the tax jurisdictions where we
currently have operating facilities and the varying tax rates in those
jurisdictions.

The provision for income taxes for 2003,
principally foreign taxes, was $2.4 million, compared to $13.4 million for 2002.
During 2002, we recorded an additional valuation allowance, or additional tax expense,
totaling $21.2 million relating to the expected realization of our deferred income
tax assets based on likely future recovery.  For 2003 and 2002, there was no benefit provided
for net operating losses.

Year Ended December 31, 2002 (2002) Compared
To Year Ended December 31, 2001 (2001)

Revenue

Revenues for 2002 decreased $80.3 million, or 24%, to $252.5 million from
$332.8 million for 2001. The decrease was due to the worldwide economic
slowdown in general and specifically the downturn in telecommunications
spending for optical components. Our revenues by segments for 2002 and 2001
were as follows (in thousands):

|                                   |  |      |         |      |  |   |         | 
|---------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                   |  | 2002 |         | 2001
|                                   |  |      |         |     
|Networking group                   |  | $    | 185,662 |      |  | $ | 201,517 | 
|Optical components group           |  |      | 67,284  |      |  |   | 131,327 | 
|Development stage enterprise group |  |      |        |      |  |   |        | 
|                                   |  |      |         |      |  |   |         | 
|                                   |  |      | 252,946 |      |  |   | 332,844 | 
|Adjustments (1)                    |  |      | (414    | )    |  |   |        | 
|                                   |  |      |         |      |  |   |         | 
|                                   |  | $    | 252,532 |      |  | $ | 332,844 | 
|                                   |  |      |         |      |  |   |         | 



---

|(1) |  | Adjustments represent the elimination of inter-segment revenue in
order to reconcile to consolidated revenues.
|--- |  | --------------------------------------------------------------------------------------------------------------

Networking Group.External revenues generated from our networking group
decreased $15.9 million, or 8%, to $185.7 million for 2002 as compared to
$201.5 million for 2001. The decrease is due to the worldwide economic
slowdown. More specifically, the decrease is due to decreases across our
networking product lines, including switches and routers, remote device
management products, network physical infrastructure equipment and other
networking products. Revenues generated from our switches and routers
decreased $17.1 million, or 23%, to $57.6 million for 2002 as compared to $74.7
million for 2001. Revenues generated from our remote device management
products decreased $1.6 million, or 9%, to $17.4 million for 2002 as compared
to $19.0 million for 2001. Revenues generated from our network physical
infrastructure products decreased $4.3 million, or 7%, to $55.6 million for
2002 as compared to $59.9 million for 2001. Revenues generated from services
increased $2.5 million, or 13%, during 2002 to $21.4 million from $18.9 million
for 2001.

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Optical Components Group.Revenues, including inter-segment revenue,
generated from sales of our optical components group decreased $64.0 million,
or 49%, to $67.3 million for 2002 as compared to $131.3 million for 2001.
Revenues generated from optical passive and active components decreased $56.6
million, or 41%, to $80.0 million for 2002 as compared to $136.7 million for
2001. We attributed the decrease in sales of optical active components to a
sector-wide oversupply, which has significantly impacted adversely the average
selling prices of these components.

Development Stage Enterprise Group. No significant revenues were
generated by these entities for 2002 and 2001.

Gross Profit

Gross profit for 2002 was $83.0 million, compared to gross profit of $65.5
million for 2001. Gross profit improved $17.5 million, or 27%, in 2002
compared to 2001. Our gross margin improved to 33% for 2002, compared to 20%
for 2001. The increase in gross profit and gross margin is substantially due
to the write-down of inventory and other market-related one-time charges of
$35.4 million taken by Luminent during 2001.

Networking Group. Gross profit for 2002 was $67.5 million, compared to
gross profit of $54.4 million for 2001. Gross profit increased $13.1 million,
or 24%, in 2002 compared to 2001. Gross margins increased to 36% for 2002,
compared to gross margin of 27% for 2001. For 2002 and 2001, the networking
groups gross profit includes deferred stock expense that amounted to $297,000
and $2.8 million, respectively. Changes in deferred stock expenses accounted
for a $2.5 million increase in gross profit.

Optical Components Group. Gross profit for 2002 was $16.3 million,
compared to gross profit of $11.1 million for 2001. Gross profit improved $5.3
million, or 48%, in 2002 compared to 2001. Gross margins increased to 24% for
2003, compared to gross margin of 8% for 2001. For 2002, the optical
components group gross profit includes income from recapturing accelerated
deferred stock expense due to terminations totaling $1.2 million, while 2001
includes deferred stock expense totaling $5.0 million. The improvement in
gross margin was attributed to the improved operating efficiencies realized
during 2002 and the effect of the write-off of inventory and other
market-related one-time charges of $35.4 million taken by Luminent during 2001.

Development Stage Enterprise Group. No significant gross margins were
produced by these entities for 2003 and 2002.

Operating Costs and Expenses

Operating costs and expenses were $229.3 million, or 91% of revenues, for
2002, compared to $386.1 million, or 116% of revenues, for 2001. Operating
costs and expenses decreased $156.8 million, or 41%, in 2002 compared to 2001.
For 2002 and 2001, operating costs and expenses includes deferred stock expense
that amounted to $7.5 million and $61.3 million, respectively. Changes in
deferred stock expenses favorably impacted our operating costs and expenses by
$53.8 million for 2002. Operating costs and expenses for 2002, includes
impairment losses on goodwill and other intangibles and long-lived assets that
amount to $72.7 million and $17.0 million, respectively. For 2001, prior to
the adoption of SFAS No. 142, operating costs and expense included the
amortization of goodwill and other intangibles that amounted to $126.5 million.
In addition to the decrease in deferred stock expense and impairment and
amortization of goodwill and other intangibles, we attribute the decrease in
operating costs and expenses during 2002 to our overall cost reduction efforts
to align these costs with current operations. We reduced spending in product
development and engineering and selling, general and administrative expenses.

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Networking Group. Operating costs and expenses for 2002 were $126.2
million, or 68% of revenues, for 2002, compared to $171.7 million, or 85% of
revenues, for 2001. Operating costs and expenses decreased $45.4 million, or
27%, in 2002 compared to 2001. Operating costs and expenses include deferred
stock expense that amounted to $6.8 million and $15.5 million for 2002 and
2001, respectively. Changes in deferred stock expenses accounted for $8.8
million of the decrease in our operating costs and expenses. Operating costs
and expenses for 2002, includes impairment losses on goodwill and other
intangibles and long-lived assets that amount to $20.1 million and $17.0
million, respectively. For 2001, we amortized $48.5 million in goodwill and
other intangibles. We attribute the improvement in operating costs and
expenses during 2002 to our cost saving efforts, including head count
reductions, to align these costs with current operations. We reduced spending
in the areas of product development and engineering and selling, general and
administrative expense.

Optical Components Group. Operating costs and expenses for 2002 were
$79.0 million, or 117% of revenues, compared to $172.7 million, or 132% of
revenues, for 2001. Operating costs and expenses decreased $93.7 million, or
54%, in 2002 compared to 2001. Operating costs and expenses include $624,000
and $45.8 million in deferred stock expense for 2002 and 2001, respectively.
Changes in deferred stock expenses accounted for $45.1 million of the decrease
in our operating costs and expenses. Operating costs and expenses for 2002,
includes an impairment loss on goodwill and other intangibles that amounted to
$51.9 million. For 2001, operating costs and expenses includes the
amortization of goodwill and intangibles that amounted to $77.8 million. In
addition to the decrease in deferred stock expense and impairment of goodwill
and other intangibles, we attribute the decrease in operating costs and
expenses during 2002 to our cost saving efforts, including head count
reductions, to align these costs with current operations. We reduced spending
in the areas of product development and engineering, selling, general and
administrative expenses.

Development Stage Enterprise Group. Operating costs and expenses were
$24.1 million for 2002, compared to $41.8 million for 2001. Operating costs
and expenses decreased $17.7 million, or 42%, in 2002 compared to 2001. We
attribute the decrease in operating costs and expenses to our cost saving
efforts, including head count reductions, to align these costs with current
development activities.

Operating Loss

We reported an operating loss of $146.3 million, or 58% of revenues, for
2002 compared to $320.6 million, or 96% of revenues, for 2001. We reduced our
operating loss by $174.3 million, or 54%, in 2002 compared to 2001. Our
operating loss for 2002 includes impairment losses on goodwill and other
intangibles and long-lived assets that amount to $72.7 million and $17.0
million, respectively. Our operating loss for 2001 includes the amortization
of goodwill and other intangibles that amounted to $126.5 million,
restructuring charges that amounted to $14.1 million and write-offs of
inventory and other market-related one-time charges totaling $35.4 million.
The improvement in our operating loss is the result of our cost reduction
efforts and the realignment of our costs and expenses with current operations
along with our improvement in gross profit.

Networking Group. Our networking group reported an operating loss of
$58.8 million, or 32% of revenues, for 2002, compared to an operating loss of
$117.3 million, or 58% of revenues, for 2001. This improvement is the result
of our reduced spending for operating costs and expenses, along with the impact
of impairment and amortization losses incurred during 2001. Our results in
2002 were also positively impacted by income resulting from our reversal of
deferred stock expenses compared to reporting such expenses in 2001.

Optical Components Group. Our optical components group reported an
operating loss of $62.7 million, or 93% of revenues, for 2002, compared to
$161.6 million, or 123% of revenues, for 2001. Our operating loss improved
$99.0 million, or 61%, in 2002 compared to 2001. Our reduction in operating
loss was the result of the impairment and amortization losses on goodwill and
other intangibles, inventory write-downs and other market-related one-time
charges along with the favorable impact from our reversal of deferred stock
expense in 2002 compared to reporting such expenses in 2001.

Development Stage Enterprise Group. Our development stage enterprise
group reported an operating loss of $24.1 million for 2002, compared to $41.8
million for 2001. Our operating loss improved $17.7 million, or 42%, in 2002
compared to 2001. The improvement is the result of a significant reduction in
spending for operating costs and expenses.

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Amortization of Intangibles

Amortization of intangibles decreased to $140,000 for 2002, as compared to
$126.5 million for 2001. The decrease of $126.4 million was the result of our
adoption of SFAS No. 142, which we adopted effective January 1, 2002. As a
consequence, we no longer amortize goodwill and intangibles with indefinite
lives, but instead measure goodwill and other intangibles for impairment at
least annually, or when events indicate that impairment exists. We continue to
amortize intangible assets we determine to have definite lives over their
useful lives. As required by SFAS No. 142, we performed the transitional
impairment test on goodwill and other intangibles, which consisted of patents
and assembled work forces. As a result of the transitional impairment test, we
recorded a $296.4 million cumulative effect of an accounting change in 2002.
In addition to the transitional impairment test, we reviewed our remaining
goodwill and other intangibles as required annually pursuant to SFAS No. 142.
As a result of the annual review, we further reduced the carrying amount of
goodwill and other intangibles by recording an impairment charge of $72.7
million during the third quarter of 2002. We perform our annual impairment
review as of October 1st each year, commencing with this review.

Other Expense, Net

In June 1998, we issued $100.0 million principal amount of 5% convertible
subordinated notes (the Notes) due in June 2003. The Notes were offered in a
144A private placement to qualified institutional investors at the stated
amount, less a selling discount of 3%. During 2002, we retired $57.2 million
in Notes in exchange for $19.7 million in cash and 12.3 million shares of our
common stock. For 2002, we recognized a loss on the extinguishment of the
Notes of $1.4 million, net of associated taxes. This loss includes a $6.6
million loss recognized in accordance with the Emerging Issues Task Force
(EITF) Issue 02-15 released in September 2002. See Recently Issued
Accounting Standards. We incurred $3.2 million and $4.5 million in interest
expense relating to the Notes for 2002 and 2001, respectively.

We account for certain unconsolidated subsidiaries using the cost and
equity methods. The increase in other expense, net of $688,000 to $23.5
million for 2002 is primarily attributable to impairment charges of $11.7
million on our investments in these subsidiaries, $4.3 million from our share
of losses from our unconsolidated subsidiaries and interest expense of $3.2
million associated with the termination of our interest rate swap, partially
offset by interest income. Our share of losses from our unconsolidated
subsidiaries was $7.8 million for 2001. During 2001, impairment charges
related to our investments totaled $9.2 million.

Provision For Taxes

We record valuation allowances against our deferred tax assets, when
necessary, in accordance with SFAS No. 109, Accounting for Income Taxes.
Realization of deferred tax assets (such as net operating loss carryforwards
and income tax credits) is dependent on future taxable earnings and is
therefore uncertain. At least quarterly, we assess the likelihood that our
deferred tax asset balance will be recovered from future taxable income. To
the extent we believe that recovery is unlikely, we establish a valuation
allowance against our deferred tax asset, increasing our income tax expense in
the period such determination is made. The provision for taxes for 2002 was
$13.4 million, compared to a provision for taxes of $4.5 million for 2001.
During 2002, we recorded an additional valuation allowance (tax expense)
totaling $21.2 million relating to the expected realization of our deferred
income tax assets based on likely future recovery. Our tax expense fluctuates
primarily due to the tax jurisdictions where we currently have operating
facilities and the varying tax rates in those jurisdictions. For 2002, there
was no benefit provided for net operating losses.

Recently Issued Accounting Standards

In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity, effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective as of July 1, 2003.
The adoption of this pronouncement did not have a material impact on our
results of operations or our financial position.

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In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. The adoption of this pronouncement did not have a
material impact on our results of operations or our financial position.

In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities, which was originally effective
on July 1, 2003. In December 2003, the FASB deferred the effective date for
applying the provisions of FIN 46 to March 31, 2004 for interests held by
public companies in variable interest entities or potential variable interest
entities created before February 1, 2003. We have completed our evaluation of
the provisions of FIN 46 and do not have any significant interests in variable
interest entities. Accordingly, the adoption of FIN 46 did not have a material
impact on our results of operations or our financial position.

Liquidity and Capital Resources

We had cash and cash equivalents of $88.7 million as of December 31, 2003,
a decrease of $11.9 million from the cash and cash equivalents of $100.6
million as of December 31, 2002. The decrease in cash and cash equivalent is
primarily the result of our cash used in our operations; cash used to satisfy
our term loan in January 2003 and repay our 1998 Notes, which matured in June
2003; and our purchase of short-term and long-term marketable securities.
These decreases were partially offset by the proceeds from maturities of our
investments, the net proceeds from our sale in June 2003 of our 2003 Notes and
the net proceeds from our sale of approximately 1.7 million shares of common
stock in October 2003. The following table illustrates as of December 31, 2003
and December 31, 2002 our cash position, which we define as cash, cash
equivalents, time deposits and short-term and long-term marketable securities,
as it relates to our current debt position, which we define as all short-term
and long-term obligations including our 2003 Notes (in thousands):

|                             |                                            |          |        |          |      |   |         |         | 
|---------------------------- | ------------------------------------------ | -------- | ------ | -------- | ---- | - | ------- | ------- | 
|                             |                                            |          | 2003   |          | 2002
|                             |                                            |          |        |          |     
|Cash                         |                                            |          |        |          |      |   |         |        
|                             | Cash and cash equivalents                  |          | $      | 88,706   |      |   | $       | 100,618 | 
|                             | Short-term marketable securities           |          |        | 5,221    |      |   |         | 11,738  | 
|                             | Time deposits                              |          |        | 1,411    |      |   |         | 2,789   | 
|                             | Long-term marketable securities            |          |        | 1,705    |      |   |         | 1,447   | 
|                             |                                            |          |        |          |      |   |         |         | 
|                             |                                            |          | 97,043 |          |      |   | 116,592 |        
|Debt                         |                                            |          |        |          |      |   |         |        
|                             | Current portion of long-term debt          |          |        | 204      |      |   |         | 393     | 
|                             | 5% convertible subordinated notes due 2003 |          |        |         |      |   |         | 32,418  | 
|                             | 5% convertible notes due 2008              |          |        | 23,000   |      |   |         |        | 
|                             | Short-term obligations                     |          |        | 2,701    |      |   |         | 7,000   | 
|                             | Long-term debt                             |          |        | 200      |      |   |         | 390     | 
|                             |                                            |          |        |          |      |   |         |         | 
|                             |                                            |          | 26,105 |          |      |   | 40,201  |        
|                             |                                            |          |        |          |      |   |         |         | 
|Excess cash versus debt      |                                            | $        | 70,938 |          |      | $ | 76,391  |        
|                             |                                            |          |        |          |      |   |         |         | 
|Ratio of cash versus debt(1) |                                            | 3.7 to 1 |        | 2.9 to 1
|                             |                                            |          |        |          |      |   |         |         | 



---

|(1) |  | Determined by dividing total cash by total debt, in each case as
reflected in the table.
|--- |  | --------------------------------------------------------------------------------------------

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Our working capital as of December 31, 2003 was $108.1 million compared to
$91.2 million as of December 31, 2002. Our ratio of current assets to current
liabilities as of September 30, 2003 was 2.3 to 1.0 compared to 1.8 to 1.0 as
of December 31, 2002. The increase in working capital is primarily the result
of our repayment of our 1998 Notes, which matured in June 2003 and were
classified on our balance sheet at December 31, 2002 as a current liability,
and the issuance of our 2003 Notes, which is classified on our balance sheet at
December 31, 2003 as a long-term liability. Working capital was also
positively impacted by our receipt of approximately $5.0 million in cash from
the sale of approximately 1.7 million shares of our common stock in October
2003.

Cash used in operating activities was $17.3 million for the year ended
December 31, 2003, as compared to $1.4 million for the year ended December 31,
2002. Cash used in operating activities is a result of our net operating loss
of $27.0 million, adjusted for non-cash items such as the depreciation and
amortization, deferred stock expense, our extraordinary gain, gains and losses
on debt extinguishments and deferred income taxes. Decreased time deposits and
other assets and increases in accounts payable and other current liabilities
positively affected cash used in operating activities. Cash used in operating
activities was negatively affected by increases in accounts receivable and
inventories and decreases in accrued liabilities, deferred revenue and other
current liabilities. The increase in accounts receivable is due to business in
Europe, in which, customers have a traditionally had a longer pay cycle than in
other regions. Decreases in accrued liabilities are the result of the
continuing slowdown in the communications equipment industry and reductions in
overall expenses.

Cash flows generated from investing activities were $3.7 million for the
year ended December 31, 2003, compared to $21.4 million for the year ended
December 31, 2002. Cash flows generated from investing activities for the year
ended December 31, 2003 were the result of the maturity of short-term and
long-term marketable securities of $6.3 million and proceeds from the sale of
property and equipment of $449,000, offset by capital expenditures of $2.4
million. As of December 31, 2003, we had no plans for major capital
expenditures. Cash flows provided by investing activities for the prior period
resulted from the maturities of short-term and long-term marketable securities
and proceeds from the sale of FOCI and QOI, partially offset by the net cash
used for capital expenditures and investments in equity method subsidiaries.

Cash flows used in financing activities were $990,000 for the year ended
December 31, 2003, as compared to $79.5 million for the year ended December 31,
2002. Cash used in financing activities was primarily the result of our
repayment of the remaining $26.0 million balance of our 1998 Notes, which
matured on June 15, 2003, the net proceeds from our issuance of our 2003 Notes,
the net proceeds from the issuance of common stock, and net payments of $4.5
million on our short-term and long-term obligations. Cash flows used in
financing activities in 2002 represent the cash paid on borrowings, payments to
terminate an interest rate swap arrangement, offset by short-term borrowings
and proceeds from the issuance of our common stock.

In June 1998, we issued $100.0 million principal amount of our 1998 Notes
in a private placement raising net proceeds of $96.4 million. During 2003,
prior to their maturity on June 15, 2003, we acquired



| |  |  | $5.9 million in principal amount of these notes in exchange for our
issuance of 4.2 million shares of our common stock to the holders of
the 1998 Notes; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | $500,000 in principal amount of these notes in exchange for
$502,000 in cash.                                                                               

During the year ended December 31, 2002, we acquired $31.6 million in
principal amount of these notes in exchange for our issuance of 12.3 million
shares of our common stock to the holders of these notes. During 2002, we also
purchased $21.4 million in principal amount of these notes in exchange for
$19.7 million in cash. At maturity on June 15, 2003, we repaid in full the
$26.0 million outstanding balance of our outstanding 1998 Notes using cash
on-hand.

In June 2003, we completed the sale of $23.0 million principal amount of
our 2003 Notes to an institutional investor in a private placement under the
Securities Act of 1933. These notes have an annual interest rate of 5% and are
convertible into our common stock at a conversion price of $2.32 per share. We
are using the net proceeds from the sale of these notes for general corporate
purposes and working capital.

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During October 2003, we issued and sold 1,667,000 shares of our common
stock to several institutional investors that are managed client accounts of a
large investment management firm, raising net proceeds of approximately $5.0
million. These shares were taken from our shelf registration statement that
was declared effective by the SEC in June 2003, which registered $20.0 million
of our common stock that we may issue and sell from time to time.

Off-Balance Sheet Arrangements

We do not have transactions, arrangements and other relationships with
unconsolidated entities that are reasonably likely to affect our liquidity or
capital resources. We have no special purpose or limited purpose entities that
provided off-balance sheet financing, liquidity or market or credit risk
support, engage in leasing, hedging, research and development services, or
other relationships that expose us to liability that is not reflected on the
face of the financials.

Contractual Cash Obligations

The following table illustrates our total contractual cash obligations as
of December 31, 2003 (in thousands):

|                                   |  |       |        |      |  |             |        |             |  |               |       |  |  |   |        |  |  |   |       | 
|---------------------------------- |  | ----- | ------ | ---- |  | ----------- | ------ | ----------- |  | ------------- | ----- |  |  | - | ------ |  |  | - | ----- | 
|                                   |  |       |        |      |  | Less than 1 |        |             |  |               |       |  |  |   |        |  |  |  
|Cash Obligations                   |  | Total |        | Year |  | 1  3 Years |        | 4  5 Years |  | After 5 Years
|                                   |  |       |        |      |  |             |        |             |  |              
|Short-term obligations             |  | $     | 2,701  |      |  | $           | 2,701  |             |  | $             |      |  |  | $ |       |  |  | $ |      | 
|Long-term debt                     |  |       | 404    |      |  |             | 204    |             |  |               | 200   |  |  |   |       |  |  |   |      | 
|5% convertible notes
due June 2008 |  |       | 23,000 |      |  |             |       |             |  |               |      |  |  |   | 23,000 |  |  |   |      | 
|Unconditional
purchase obligations |  |       | 6,961  |      |  |             | 6,957  |             |  |               | 4     |  |  |   |       |  |  |   |      | 
|Operating leases                   |  |       | 22,705 |      |  |             | 5,192  |             |  |               | 8,073 |  |  |   | 5,443  |  |  |   | 3,997 | 
|                                   |  |       |        |      |  |             |        |             |  |               |       |  |  |   |        |  |  |   |       | 
|Total contractual
cash obligations |  | $     | 55,771 |      |  | $           | 15,054 |             |  | $             | 8,277 |  |  | $ | 28,443 |  |  | $ | 3,997 | 
|                                   |  |       |        |      |  |             |        |             |  |               |       |  |  |   |        |  |  |   |       | 

Our total contractual cash obligations as of December 31, 2003, were $55.8
million, of which, $15.1 million were due by December 31, 2004. These total
contractual cash obligations primarily consist of short-term and long-term
obligations, including our 5% convertible notes due June 2008, operating leases
for our equipment and facilities and unconditional purchase obligations for
necessary raw materials. Historically, these obligations have been satisfied
through cash generated from our operations or other avenues, which is further
discussed below, and we expect that this will continue to be the case.

Our unconditional purchase obligations are to secure the necessary raw
materials and components required for production of our products. As part of
Luminents restructure plan (see our discussion above and the Notes to our
Financial Statements), there is a remaining obligation totaling $315,000 for
unconditional purchase obligations and Luminent continues in negotiations
seeking to cancel or renegotiate contracts that it no longer requires as a
consequence of the significantly reduced orders for its optical components and
its sales projections. The remaining purchase commitments are part of our
ordinary course of business.

We believe that our cash on hand and cash flows from operations will be
sufficient to satisfy our working capital, capital expenditures and product
development and engineering requirements for at least the next 12 months.
However, we may choose to obtain additional debt or equity financing if we
believe it appropriate. Our future capital requirements will depend on many
factors, including our rate of revenue growth, the timing and extent of
spending to support development of new products and expansion of sales and
marketing, the timing of new product introductions and enhancements to existing
products and market acceptance of our products.

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Internet Access to Our Financial Documents

We maintain a website at www.mrv.com. We make available free of charge,
either by direct access or a link to the SEC website, our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably
practicable after such reports are electronically filed with, or furnished to,
the SEC. Our reports filed with, or furnished to, the SEC are also available
directly at the SECs website at www.sec.gov.




ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Market Risks

Market risk represents the risk of loss that may impact our Consolidated
Financial Statements through adverse changes in financial market prices and
rates and inflation. Our market risk exposure results primarily from
fluctuations in interest rates and foreign exchange rates. We manage our
exposure to these market risks through our regular operating and financing
activities and have not historically hedged these risks through the use of
derivative financial instruments. The term hedge is used to mean a strategy
designed to manage risks of volatility in prices or interest and foreign
exchange rate movements on certain assets, liabilities or anticipated
transactions and creates a relationship in which gains or losses on derivative
instruments are expected to counter-balance the losses or gains on the assets,
liabilities or anticipated transactions exposed to such market risks.

Interest Rates. We are exposed to interest rate fluctuations on our
investments, short-term borrowings and long-term obligations. Our cash and
short-term investments are subject to limited interest rate risk, and are
primarily maintained in money market funds and bank deposits. Our
variable-rate short-term borrowings are also subject to limited interest rate
risk due to their short-term maturities. Our long-term obligations were
entered into with fixed and variable interest rates. In connection with our
$50.0 million variable-rate term loan due in 2003, we entered into a specific
hedge, an interest rate swap, to modify the interest characteristics of this
instrument. The interest rate swap was used to reduce our cost of financing
and the fluctuations in the aggregate interest expense. The notional amount,
interest payment and maturity dates of the swap match the principal, interest
payment and maturity dates of the related debt. Accordingly, any market risk
or opportunity associated with this swap is offset by the opposite market
impact on the related debt. In February 2002, we paid off our $50.0 million
term loan and terminated our interest rate swap for $3.2 million. To date, we
have not entered into any other derivative instruments, however, as we continue
to monitor our risk profile, we may enter into additional hedging instruments
in the future.

Foreign Exchange Rates. We operate on an international basis with a
portion of our revenues and expenses being incurred in currencies other than
the U.S. dollar. Fluctuation in the value of these foreign currencies in which
we conduct our business relative to the U.S. dollar will cause U.S. dollar
translation of such currencies to vary from one period to another. We cannot
predict the effect of exchange rate fluctuations upon future operating results.
However, because we have expenses and revenues in each of the principal
functional currencies, the exposure to our financial results to currency
fluctuations is reduced. We do not regularly attempted to reduce our currency
risks through hedging instruments, however, we may do so in the future.

Inflation. We believe that the relatively moderate rate of inflation in
the United States over the past few years has not had a significant impact on
our sales or operating results or on the prices of raw materials. However, in
view of our recent expansion of operations in Taiwan, Israel and other
countries, which have experienced greater inflation than the United States,
there can be no assurance that inflation will not have a material adverse
effect on our operating results in the future.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Stockholders of MRV Communications, Inc.

We have audited the accompanying consolidated balance sheets of MRV
Communications, Inc. (a Delaware corporation) and subsidiaries as of December
31, 2003 and 2002 and the related consolidated statements of operations,
stockholders equity and comprehensive income (loss) and cash flows for the
years ended December 31, 2003 and 2002. 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. The consolidated
financial statements of MRV Communications, Inc., for the fiscal year ended
December 31, 2001, was audited by other auditors who have ceased operations.
Those auditors expressed an unqualified opinion on those statements in their
report dated February 12, 2002.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audits 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 consolidated financial position of MRV
Communications, Inc. and subsidiaries as of December 31, 2002 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2003 and 2002 in conformity with accounting principles
generally accepted in the United States.

As discussed in Note 3 to the consolidated financial statements, MRV
Communications, Inc. changed its method of accounting for purchased goodwill
and other intangible assets in accordance with Statement of Financial
Accounting Standards (SFAS) No. 142 during the first quarter of fiscal 2002.
As discussed above, the financial statements of MRV Communications, Inc. as of
December 31, 2001, and for the year then ended were audited by other auditors
who have ceased operations. As described in Note 3, these financial statements
have been updated to include the transitional disclosures required by SFAS No.
142, Goodwill and Other Intangible Assets, which was adopted by the Company
as of January 1, 2002. Our audit procedures with respect to the disclosures in
Note 3 for fiscal 2001 included (i) agreeing the previously reported net loss
to the previously issued financial statements and the adjustments to reported
net loss representing amortization expense (including any related tax effects)
recognized in those periods related to goodwill that are no longer being
amortized to the Companys underlying records obtained from management, and
(ii) testing the mathematical accuracy of the reconciliation of adjusted net
loss to reported net loss, and the related net loss-per-share amounts. Our
audit procedures with respect to the disclosures in Note 3 for fiscal 2001
included (i) agreeing the goodwill and amortization amounts and the gross
intangible assets and accumulated amortization amounts to the Companys
underlying records obtained from management, and (ii) testing the mathematical
accuracy of the tables. In our opinion, the disclosures for fiscal 2001 in Note
3 related to the transitional disclosures of SFAS No. 142 are appropriate.
However, we were not engaged to audit, review, or apply any procedures to the
Companys financial statements for fiscal 2001 other than with respect to such
disclosures and, accordingly, we do not express an opinion or any other form of
assurance on the Companys fiscal 2001 financial statements taken as a whole.

/s/ ERNST & YOUNG LLP

Los Angeles, California
February 4, 2004

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This is a copy of the audit report previously issued by Arthur Andersen
LLP in connection with MRV Communications, Inc. filing on Form 10-K for the
year ended December 31, 2001. This audit report has not been reissued by
Arthur Andersen LLP in connection with this filing on Form 10-K. See Exhibit
23.2 for further discussion.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of MRV Communications, Inc.:

We have audited the accompanying consolidated balance sheets of MRV
Communications, Inc. (a Delaware corporation) and subsidiaries as of December
31, 2001 and 2000 and the related consolidated statements of operations,
stockholders equity and comprehensive income (loss) and cash flows for each of
the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MRV
Communications, Inc. and subsidiaries as of December 31, 2001 and 2000 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.

/s/ ARTHUR ANDERSEN LLP

Los Angeles, California
February 12, 2002

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MRV Communications, Inc.

Statements of Operations

(In thousands, except per share data)

|                                                                                                                     |                                                                              |   |                         |        |      |   |          |        |   |   |          |         |  
|-------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | - | ----------------------- | ------ | ---- | - | -------- | ------ | - | - | -------- | ------- | -
|                                                                                                                     |                                                                              |   | Year Ended December 31,
|                                                                                                                     |                                                                              |   |                        
|                                                                                                                     |                                                                              |   | 2003                    |        | 2002 |   | 2001    
|                                                                                                                     |                                                                              |   |                         |        |      |   |         
|Revenue                                                                                                              |                                                                              | $ | 238,983                 |        |      | $ | 252,532  |        |   | $ | 332,844  |        
|Cost of goods sold                                                                                                   |                                                                              |   | 164,893                 |        |      |   | 169,566  |        |   |   | 267,389  |        
|                                                                                                                     |                                                                              |   |                         |        |      |   |          |        |   |   |          |        
|Gross profit                                                                                                         |                                                                              |   | 74,090                  |        |      |   | 82,966   |        |   |   | 65,455   |        
|Operating costs and expenses:                                                                                        |                                                                              |   |                         |        |      |   |          |        |   |   |          |        
|                                                                                                                     | Product development and engineering                                          |   |                         | 30,972 |      |   |          | 49,358 |   |   |          | 94,813  |  
|                                                                                                                     | Selling, general and administrative                                          |   |                         | 62,868 |      |   |          | 90,047 |   |   |          | 150,674 |  
|                                                                                                                     | Amortization of intangibles                                                  |   |                         | 33     |      |   |          | 140    |   |   |          | 126,484 |  
|                                                                                                                     | Impairment of goodwill and other intangibles                                 |   |                         | 356    |      |   |          | 72,697 |   |   |          |        |  
|                                                                                                                     | Impairment of long-lived assets                                              |   |                         |       |      |   |          | 17,038 |   |   |          |        |  
|                                                                                                                     | Restructuring costs                                                          |   |                         |       |      |   |          |       |   |   |          | 14,111  |  
|                                                                                                                     |                                                                              |   |                         |        |      |   |          |        |   |   |          |        
|Total operating costs and expenses                                                                                   |                                                                              |   | 94,229                  |        |      |   | 229,280  |        |   |   | 386,082  |        
|                                                                                                                     |                                                                              |   |                         |        |      |   |          |        |   |   |          |        
|Operating loss                                                                                                       |                                                                              |   | (20,139                 | )      |      |   | (146,314 | )      |   |   | (320,627 | )      
|Other expense, net                                                                                                   |                                                                              |   | 6,380                   |        |      |   | 23,465   |        |   |   | 22,777   |        
|                                                                                                                     |                                                                              |   |                         |        |      |   |          |        |   |   |          |        
|Loss before minority interest, provision for
taxes, extraordinary gain and cumulative
effect of an accounting change |                                                                              |   | (26,519                 | )      |      |   | (169,779 | )      |   |   | (343,404 | )      
|Minority interest                                                                                                    |                                                                              |   | 58                      |        |      |   | 230      |        |   |   | (11,577  | )      
|Provision for taxes                                                                                                  |                                                                              |   | 2,361                   |        |      |   | 13,395   |        |   |   | 4,475    |        
|                                                                                                                     |                                                                              |   |                         |        |      |   |          |        |   |   |          |        
|Loss before extraordinary gain and cumulative
effect of an accounting change                                         |                                                                              |   | (28,938                 | )      |      |   | (183,404 | )      |   |   | (336,302 | )      
|Extraordinary gain, net of tax                                                                                       |                                                                              |   | 1,950                   |        |      |   |         |        |   |   | 9,949    |        
|Cumulative effect of an accounting change                                                                            |                                                                              |   |                        |        |      |   | (296,355 | )      |   |   |         |        
|                                                                                                                     |                                                                              |   |                         |        |      |   |          |        |   |   |          |        
|Net loss                                                                                                             |                                                                              | $ | (26,988                 | )      |      | $ | (479,759 | )      |   | $ | (326,353 | )      
|                                                                                                                     |                                                                              |   |                         |        |      |   |          |        |   |   |          |        
|Earnings per share:                                                                                                  |                                                                              |   |                         |        |      |   |          |        |   |   |          |        
|Basic and diluted loss per share:                                                                                    |                                                                              |   |                         |        |      |   |          |        |   |   |          |        
|                                                                                                                     | Loss before extraordinary gain and
cumulative effect of an accounting change |   | $                       | (0.28  | )    |   | $        | (2.01  | ) |   | $        | (4.40   | )
|                                                                                                                     | Extraordinary gain                                                           |   | $                       | 0.02   |      |   | $        |       |   |   | $        | 0.13    |  
|                                                                                                                     | Cumulative effect of an accounting change                                    |   | $                       |       |      |   | $        | (3.24  | ) |   | $        |        |  
|Net loss                                                                                                             |                                                                              | $ | (0.26                   | )      |      | $ | (5.25    | )      |   | $ | (4.27    | )      
|Weighted average number of shares:                                                                                   |                                                                              |   |                         |        |      |   |          |        |   |   |          |        
|Basic and diluted                                                                                                    |                                                                              |   | 102,022                 |        |      |   | 91,421   |        |   |   | 76,369   |        
|                                                                                                                     |                                                                              |   |                         |        |      |   |          |        |   |   |          |        

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

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MRV Communications, Inc.

Balance Sheets

(In thousands, except par values)

|                                     |                                      |   |                    |        |      |   |         |         | 
|------------------------------------ | ------------------------------------ | - | ------------------ | ------ | ---- | - | ------- | ------- | 
|                                     |                                      |   | As of December 31,
|                                     |                                      |   |                   
|                                     |                                      |   | 2003               |        | 2002
|                                     |                                      |   |                    |        |     
|Assets                               |                                      |   |                    |        |      |   |         |        
|Current assets:                      |                                      |   |                    |        |      |   |         |        
|                                     | Cash and cash equivalents            |   | $                  | 88,706 |      |   | $       | 100,618 | 
|                                     | Short-term marketable securities     |   |                    | 5,221  |      |   |         | 11,738  | 
|                                     | Time deposits                        |   |                    | 1,411  |      |   |         | 2,789   | 
|                                     | Accounts receivable, net             |   |                    | 53,464 |      |   |         | 50,965  | 
|                                     | Inventories                          |   |                    | 35,799 |      |   |         | 32,695  | 
|                                     | Other current assets                 |   |                    | 5,379  |      |   |         | 11,283  | 
|                                     |                                      |   |                    |        |      |   |         |         | 
|Total current assets                 |                                      |   | 189,980            |        |      |   | 210,088 |        
|Property and equipment, net          |                                      |   | 25,416             |        |      |   | 35,169  |        
|Goodwill                             |                                      |   | 29,965             |        |      |   | 29,740  |        
|Intangibles                          |                                      |   | 102                |        |      |   | 135     |        
|Long-term marketable securities      |                                      |   | 1,705              |        |      |   | 1,447   |        
|Deferred income taxes                |                                      |   | 2,594              |        |      |   | 2,637   |        
|Investments                          |                                      |   | 3,063              |        |      |   | 3,063   |        
|Other assets                         |                                      |   | 1,938              |        |      |   | 2,524   |        
|                                     |                                      |   |                    |        |      |   |         |         | 
|                                     |                                      | $ | 254,763            |        |      | $ | 284,803 |        
|                                     |                                      |   |                    |        |      |   |         |         | 
|Liabilities and stockholders equity
|Current liabilities:                 |                                      |   |                    |        |      |   |         |        
|                                     | Current maturities of long-term debt |   | $                  | 204    |      |   | $       | 393     | 
|                                     | Convertible subordinated notes       |   |                    |       |      |   |         | 32,418  | 
|                                     | Short-term obligations               |   |                    | 2,701  |      |   |         | 7,000   | 
|                                     | Accounts payable                     |   |                    | 46,811 |      |   |         | 41,308  | 
|                                     | Accrued liabilities                  |   |                    | 25,523 |      |   |         | 31,542  | 
|                                     | Deferred revenue                     |   |                    | 3,754  |      |   |         | 3,950   | 
|                                     | Other current liabilities            |   |                    | 2,936  |      |   |         | 2,289   | 
|                                     |                                      |   |                    |        |      |   |         |         | 
|Total current liabilities            |                                      |   | 81,929             |        |      |   | 118,900 |        
|Long-term debt                       |                                      |   | 200                |        |      |   | 390     |        
|Convertible notes                    |                                      |   | 23,000             |        |      |   |        |        
|Other long-term liabilities          |                                      |   | 4,215              |        |      |   | 3,666   |        
|Minority interest                    |                                      |   | 5,291              |        |      |   | 7,371   |        
|Commitments and contingencies        |                                      |   |                    |        |      |   |         |        

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MRV Communications, Inc.

Balance Sheets

(In thousands, except par values)

|                           |                                                               |                                                                |         |                    |     |      |         |           |     | 
|-------------------------- | ------------------------------------------------------------- | -------------------------------------------------------------- | ------- | ------------------ | --- | ---- | ------- | --------- | --- | 
|                           |                                                               |                                                                |         | As of December 31,
|                           |                                                               |                                                                |         |                   
|                           |                                                               |                                                                |         | 2003               |     | 2002
|                           |                                                               |                                                                |         |                    |     |     
|Stockholders equity:      |                                                               |                                                                |         |                    |     |      |         |          
|                           | Preferred stock, $0.01 par value:                             |                                                                |         |                    |     |      |         |           |    
|                           |                                                               | Authorized  1,000 shares; no shares issued or outstanding     |         |                    |    |      |         |           |    | 
|                           | Common stock, $0.0017 par value:                              |                                                                |         |                    |     |      |         |           |    
|                           |                                                               | Authorized  160,000 shares                                    |         |                    |     |      |         |           |     | 
|                           |                                                               | Issued  106,794 shares in 2003 and 100,132 shares in 2002     |         |                    |     |      |         |           |     | 
|                           |                                                               | Outstanding  105,441 shares in 2003 and 98,917 shares in 2002 |         |                    | 179 |      |         |           | 168 | 
|                           | Additional paid-in capital                                    |                                                                |         | 1,154,869          |     |      |         | 1,149,635 |    
|                           | Accumulated deficit                                           |                                                                |         | (1,004,430         | )   |      |         | (977,442  | )  
|                           | Deferred stock expense, net                                   |                                                                |         | (200               | )   |      |         | (5,047    | )  
|                           | Treasury stock, 1,353 shares in 2003 and 1,215 shares in 2002 |                                                                |         | (1,352             | )   |      |         | (1,207    | )  
|                           | Accumulated other comprehensive loss                          |                                                                |         | (8,938             | )   |      |         | (11,631   | )  
|                           |                                                               |                                                                |         |                    |     |      |         |           |     | 
|Total stockholders equity |                                                               |                                                                | 140,128 |                    |     |      | 154,476 |          
|                           |                                                               |                                                                |         |                    |     |      |         |           |     | 
|                           |                                                               | $                                                              | 254,763 |                    |     | $    | 284,803 |          
|                           |                                                               |                                                                |         |                    |     |      |         |           |     | 

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

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MRV Communications, Inc.

Statements of Stockholders Equity and Comprehensive Income (Loss)

(In thousands)

|                                                                            |                                       |  |              |   |            |   |          |   |             |   |           |   |               |   |               |   |       |   |          |          |   |   |        |   |  |   |         |        |   |   |          |          |  
|--------------------------------------------------------------------------- | ------------------------------------- |  | ------------ | - | ---------- | - | -------- | - | ----------- | - | --------- | - | ------------- | - | ------------- | - | ----- | - | -------- | -------- | - | - | ------ | - |  | - | ------- | ------ | - | - | -------- | -------- | -
|                                                                            |                                       |  | Common Stock |   | Additional |   | Deferred |   |             |   |           |   |               |   |               |   |       |   |          |          |   |   |       
|                                                                            |                                       |  |              |   | Paid-In    |   | Stock    |   | Accumulated |   | Treasury  |   | Comprehensive |   |               |   |      
|                                                                            |                                       |  | Shares       |   | Amount     |   | Capital  |   | Expense     |   | Deficit   |   | Stock         |   | Income (Loss) |   | Total
|                                                                            |                                       |  |              |   |            |   |          |   |             |   |           |   |               |   |               |   |      
|Balance, December 31, 2000                                                  |                                       |  | 73,231       |   |            | $ | 126      |   |             | $ | 1,060,650 |   |               | $ | (100,862      | ) |       | $ | (171,330 | )        |   | $ | (133   | ) |  | $ | (6,896  | )      |   | $ | 781,555  |         
|Exercise of stock options
and warrants                                      |                                       |  | 561          |   |            |   |         |   |             |   | 6,406     |   |               |   |              |   |       |   |         |          |   |   |       |   |  |   |        |        |   |   | 6,406    |         
|Issuance of common stock
for purchase of Luminent,
Inc.s minority interest |                                       |  | 5,160        |   |            |   | 9        |   |             |   | 16,845    |   |               |   |              |   |       |   |         |          |   |   |       |   |  |   |        |        |   |   | 16,854   |         
|Issuance of common stock in
connection with
acquisitions                    |                                       |  | 1,247        |   |            |   | 2        |   |             |   | 19,719    |   |               |   |              |   |       |   |         |          |   |   |       |   |  |   |        |        |   |   | 19,721   |         
|Issuance of common stock in
a private placement                             |                                       |  | 2,529        |   |            |   | 4        |   |             |   | 19,501    |   |               |   |              |   |       |   |         |          |   |   |       |   |  |   |        |        |   |   | 19,505   |         
|Fair value of stock options
issued for an investment                        |                                       |  |             |   |            |   |         |   |             |   | 508       |   |               |   |              |   |       |   |         |          |   |   |       |   |  |   |        |        |   |   | 508      |         
|Fair value of stock options
issued to a non-employee                        |                                       |  |             |   |            |   |         |   |             |   | 535       |   |               |   |              |   |       |   |         |          |   |   |       |   |  |   |        |        |   |   | 535      |         
|Forfeited stock options                                                     |                                       |  |             |   |            |   |         |   |             |   | (13,038   | ) |               |   | 6,733         |   |       |   |         |          |   |   |       |   |  |   |        |        |   |   | (6,305   | )       
|Deferred stock expense                                                      |                                       |  |             |   |            |   |         |   |             |   | 7,816     |   |               |   | (7,816        | ) |       |   |         |          |   |   |       |   |  |   |        |        |   |   |         |         
|Amortization of deferred
stock expense                                      |                                       |  |             |   |            |   |         |   |             |   |          |   |               |   | 75,601        |   |       |   |         |          |   |   |       |   |  |   |        |        |   |   | 75,601   |         
|Comprehensive loss:                                                         |                                       |  |              |   |            |   |          |   |             |   |           |   |               |   |               |   |       |   |          |          |   |   |        |   |  |   |         |        |   |   |          |         
|                                                                            | Net loss                              |  |              |  |            |   |          |  |             |   |           |  |               |   |               |  |       |   |          | (326,353 | ) |   |        |  |  |   |         |       |   |   |          | (326,353 | )
|                                                                            | Unrealized loss on
interest rate swap |  |              |  |            |   |          |  |             |   |           |  |               |   |               |  |       |   |          |         |   |   |        |  |  |   |         | (3,198 | ) |   |          | (3,198   | )
|                                                                            | Translation adjustment                |  |              |  |            |   |          |  |             |   |           |  |               |   |               |  |       |   |          |         |   |   |        |  |  |   |         | (153   | ) |   |          | (153     | )
|                                                                            |                                       |  |              |   |            |   |          |   |             |   |           |   |               |   |               |   |       |   |          |          |   |   |        |   |  |   |         |        |   |   |          |         
|Comprehensive loss                                                          |                                       |  |              |   |            |   |          |   |             |   |           |   |               |   |               |   |       |   |          |          |   |   |        |   |  |   |         |        |   |   | (329,704 | )       
|                                                                            |                                       |  |              |   |            |   |          |   |             |   |           |   |               |   |               |   |       |   |          |          |   |   |        |   |  |   |         |        |   |   |          |         
|Balance, December 31, 2001                                                  |                                       |  | 82,728       |   |            |   | 141      |   |             |   | 1,118,942 |   |               |   | (26,344       | ) |       |   | (497,683 | )        |   |   | (133   | ) |  |   | (10,247 | )      |   |   | 584,676  |         
|Exercise of stock options
and warrants                                      |                                       |  | 50           |   |            |   |         |   |             |   | 131       |   |               |   |              |   |       |   |         |          |   |   |       |   |  |   |        |        |   |   | 131      |         
|Issuance of common stock in
connection with
acquisitions                    |                                       |  | 4,996        |   |            |   | 8        |   |             |   | 7,044     |   |               |   |              |   |       |   |         |          |   |   |       |   |  |   |        |        |   |   | 7,052    |         
|Issuance of common stock in
exchange for convertible
subordinated notes     |                                       |  | 12,310       |   |            |   | 21       |   |             |   | 38,211    |   |               |   |              |   |       |   |         |          |   |   |       |   |  |   |        |        |   |   | 38,232   |         
|Purchase of treasury stock                                                  |                                       |  | (1,167       | ) |            |   | (2       | ) |             |   |          |   |               |   |              |   |       |   |         |          |   |   | (1,074 | ) |  |   |        |        |   |   | (1,076   | )       
|Forfeited stock options                                                     |                                       |  |             |   |            |   |         |   |             |   | (14,693   | ) |               |   | 2,990         |   |       |   |         |          |   |   |       |   |  |   |        |        |   |   | (11,703  | )       
|Amortization of deferred
stock expense                                      |                                       |  |             |   |            |   |         |   |             |   |          |   |               |   | 18,307        |   |       |   |         |          |   |   |       |   |  |   |        |        |   |   | 18,307   |         
|Comprehensive income (loss):                                                |                                       |  |              |   |            |   |          |   |             |   |           |   |               |   |               |   |       |   |          |          |   |   |        |   |  |   |         |        |   |   |          |         
|                                                                            | Net loss                              |  |              |  |            |   |          |  |             |   |           |  |               |   |               |  |       |   |          | (479,759 | ) |   |        |  |  |   |         |       |   |   |          | (479,759 | )
|                                                                            | Realized loss on interest
rate swap   |  |              |  |            |   |          |  |             |   |           |  |               |   |               |  |       |   |          |         |   |   |        |  |  |   |         | 3,198  |   |   |          | 3,198    |  
|                                                                            | Translation adjustment                |  |              |  |            |   |          |  |             |   |           |  |               |   |               |  |       |   |          |         |   |   |        |  |  |   |         | (4,582 | ) |   |          | (4,582   | )
|                                                                            |                                       |  |              |   |            |   |          |   |             |   |           |   |               |   |               |   |       |   |          |          |   |   |        |   |  |   |         |        |   |   |          |         
|Comprehensive loss                                                          |                                       |  |              |   |            |   |          |   |             |   |           |   |               |   |               |   |       |   |          |          |   |   |        |   |  |   |         |        |   |   | (481,143 | )       
|                                                                            |                                       |  |              |   |            |   |          |   |             |   |           |   |               |   |               |   |       |   |          |          |   |   |        |   |  |   |         |        |   |   |          |         
|Balance, December 31, 2002                                                  |                                       |  | 98,917       |   |            |   | 168      |   |             |   | 1,149,635 |   |               |   | (5,047        | ) |       |   | (977,442 | )        |   |   | (1,207 | ) |  |   | (11,631 | )      |   |   | 154,476  |         

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MRV Communications, Inc.

Statements of Stockholders Equity and Comprehensive Income (Loss)

(In thousands)

|                                                                        |                        |  |              |   |            |   |          |   |             |   |           |   |               |   |               |   |       |   |            |         |   |   |        |   |  |   |         |       |  |   |         |         |  
|----------------------------------------------------------------------- | ---------------------- |  | ------------ | - | ---------- | - | -------- | - | ----------- | - | --------- | - | ------------- | - | ------------- | - | ----- | - | ---------- | ------- | - | - | ------ | - |  | - | ------- | ----- |  | - | ------- | ------- | -
|                                                                        |                        |  | Common Stock |   | Additional |   | Deferred |   |             |   |           |   |               |   |               |   |       |   |            |         |   |   |       
|                                                                        |                        |  |              |   | Paid-In    |   | Stock    |   | Accumulated |   | Treasury  |   | Comprehensive |   |               |   |      
|                                                                        |                        |  | Shares       |   | Amount     |   | Capital  |   | Expense     |   | Deficit   |   | Stock         |   | Income (Loss) |   | Total
|                                                                        |                        |  |              |   |            |   |          |   |             |   |           |   |               |   |               |   |      
|Balance, December 31, 2002                                              |                        |  | 98,917       |   |            |   | 168      |   |             |   | 1,149,635 |   |               |   | (5,047        | ) |       |   | (977,442   | )       |   |   | (1,207 | ) |  |   | (11,631 | )     |  |   | 154,476 |        
|Exercise of stock options
and warrants                                  |                        |  | 758          |   |            |   | 1        |   |             |   | 1,752     |   |               |   |              |   |       |   |           |         |   |   |       |   |  |   |        |       |  |   | 1,753   |        
|Issuance of common stock in
connection with private
placement           |                        |  | 1,667        |   |            |   | 3        |   |             |   | 4,982     |   |               |   |              |   |       |   |           |         |   |   |       |   |  |   |        |       |  |   | 4,985   |        
|Issuance of common stock in
exchange for convertible
subordinated notes |                        |  | 4,237        |   |            |   | 7        |   |             |   | 11,445    |   |               |   |              |   |       |   |           |         |   |   |       |   |  |   |        |       |  |   | 11,452  |        
|Purchase of treasury stock                                              |                        |  | (138         | ) |            |   |         |   |             |   |          |   |               |   |              |   |       |   |           |         |   |   | (145   | ) |  |   |        |       |  |   | (145    | )      
|Forfeited stock options                                                 |                        |  |             |   |            |   |         |   |             |   | (12,945   | ) |               |   | 1,369         |   |       |   |           |         |   |   |       |   |  |   |        |       |  |   | (11,576 | )      
|Amortization of deferred
stock expense                                  |                        |  |             |   |            |   |         |   |             |   |          |   |               |   | 3,478         |   |       |   |           |         |   |   |       |   |  |   |        |       |  |   | 3,478   |        
|Comprehensive income (loss):                                            |                        |  |              |   |            |   |          |   |             |   |           |   |               |   |               |   |       |   |            |         |   |   |        |   |  |   |         |       |  |   |         |        
|                                                                        | Net loss               |  |              |  |            |   |          |  |             |   |           |  |               |   |               |  |       |   |            | (26,988 | ) |   |        |  |  |   |         |      |  |   |         | (26,988 | )
|                                                                        | Translation adjustment |  |              |  |            |   |          |  |             |   |           |  |               |   |               |  |       |   |            |        |   |   |        |  |  |   |         | 2,693 |  |   |         | 2,693   |  
|                                                                        |                        |  |              |   |            |   |          |   |             |   |           |   |               |   |               |   |       |   |            |         |   |   |        |   |  |   |         |       |  |   |         |        
|Comprehensive loss                                                      |                        |  |              |   |            |   |          |   |             |   |           |   |               |   |               |   |       |   |            |         |   |   |        |   |  |   |         |       |  |   | (24,295 | )      
|                                                                        |                        |  |              |   |            |   |          |   |             |   |           |   |               |   |               |   |       |   |            |         |   |   |        |   |  |   |         |       |  |   |         |        
|Balance, December 31, 2003                                              |                        |  | 105,441      |   |            | $ | 179      |   |             | $ | 1,154,869 |   |               | $ | (200          | ) |       | $ | (1,004,430 | )       |   | $ | (1,352 | ) |  | $ | (8,938  | )     |  | $ | 140,128 |        
|                                                                        |                        |  |              |   |            |   |          |   |             |   |           |   |               |   |               |   |       |   |            |         |   |   |        |   |  |   |         |       |  |   |         |        

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

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MRV Communications, Inc.

Statements of Cash Flows

(In thousands)

|                                      |                                                                                |                                                                  |                                                     |         |                         |         |      |          |         |        |   |          |         |         |  
|------------------------------------- | ------------------------------------------------------------------------------ | ---------------------------------------------------------------- | --------------------------------------------------- | ------- | ----------------------- | ------- | ---- | -------- | ------- | ------ | - | -------- | ------- | ------- | -
|                                      |                                                                                |                                                                  |                                                     |         | Year Ended December 31,
|                                      |                                                                                |                                                                  |                                                     |         |                        
|                                      |                                                                                |                                                                  |                                                     |         | 2003                    |         | 2002 |          | 2001   
|                                      |                                                                                |                                                                  |                                                     |         |                         |         |      |          |        
|Cash flows from operating activities: |                                                                                |                                                                  |                                                     |         |                         |         |      |          |         |        |   |         
|                                      | Net loss                                                                       |                                                                  | $                                                   | (26,988 | )                       |         | $    | (479,759 | )       |        | $ | (326,353 | )      
|                                      | Adjustments to reconcile net loss to net cash used in
operating activities:    |                                                                  |                                                     |         |                         |         |      |          |         |        |   |          |        
|                                      |                                                                                | Depreciation and amortization                                    |                                                     |         | 11,411                  |         |      |          | 16,169  |        |   |          | 140,554 |        
|                                      |                                                                                | Amortization of deferred stock expense, net of forfeited options |                                                     |         | (8,098                  | )       |      |          | 6,604   |        |   |          | 69,831  |        
|                                      |                                                                                | Provision for doubtful accounts                                  |                                                     |         | 1,829                   |         |      |          | 2,188   |        |   |          | 5,654   |        
|                                      |                                                                                | Deferred income taxes                                            |                                                     |         | 43                      |         |      |          | 20,592  |        |   |          | 15,134  |        
|                                      |                                                                                | Loss on extinguishment of debt                                   |                                                     |         | 5,438                   |         |      |          | 1,363   |        |   |          |        |        
|                                      |                                                                                | Impairment of goodwill and other intangibles                     |                                                     |         | 356                     |         |      |          | 72,697  |        |   |          |        |        
|                                      |                                                                                | Cumulative effect of an accounting change                        |                                                     |         |                        |         |      |          | 296,355 |        |   |          |        |        
|                                      |                                                                                | Loss on termination of interest rate swap                        |                                                     |         |                        |         |      |          | 3,198   |        |   |          |        |        
|                                      |                                                                                | Extraordinary gain                                               |                                                     |         | (1,950                  | )       |      |          |        |        |   |          | (9,949  | )      
|                                      |                                                                                | (Gain) loss on disposition of property and equipment             |                                                     |         | 306                     |         |      |          | 243     |        |   |          | (178    | )      
|                                      |                                                                                | Impairment of long-lived assets                                  |                                                     |         |                        |         |      |          | 17,038  |        |   |          | 7,787   |        
|                                      |                                                                                | Impairment of cost and equity method investments                 |                                                     |         |                        |         |      |          | 11,741  |        |   |          | 9,166   |        
|                                      |                                                                                | Loss on equity method subsidiaries                               |                                                     |         |                        |         |      |          | 4,283   |        |   |          | 10,790  |        
|                                      |                                                                                | Minority interests share of income                              |                                                     |         | (80                     | )       |      |          | 230     |        |   |          | (11,557 | )      
|                                      | Changes in operating assets and liabilities, net of effects from
acquisitions: |                                                                  |                                                     |         |                         |         |      |          |         |        |   |          |        
|                                      |                                                                                | Time deposits                                                    |                                                     |         | 1,378                   |         |      |          | 1,843   |        |   |          | 46,840  |        
|                                      |                                                                                | Accounts receivable                                              |                                                     |         | (4,328                  | )       |      |          | 1,946   |        |   |          | 1,953   |        
|                                      |                                                                                | Inventories                                                      |                                                     |         | (3,104                  | )       |      |          | 24,613  |        |   |          | 19,697  |        
|                                      |                                                                                | Other assets                                                     |                                                     |         | 6,540                   |         |      |          | 11,404  |        |   |          | 4,532   |        
|                                      |                                                                                | Accounts payable                                                 |                                                     |         | 5,503                   |         |      |          | (6,996  | )      |   |          | (7,502  | )      
|                                      |                                                                                | Accrued liabilities                                              |                                                     |         | (4,136                  | )       |      |          | (7,280  | )      |   |          | 1,321   |        
|                                      |                                                                                | Deferred revenue                                                 |                                                     |         | (196                    | )       |      |          | (215    | )      |   |          | 2,695   |        
|                                      |                                                                                | Other current liabilities                                        |                                                     |         | (1,236                  | )       |      |          | 375     |        |   |          | (4,563  | )      
|                                      |                                                                                |                                                                  |                                                     |         |                         |         |      |          |         |        |   |          |        
|                                      |                                                                                |                                                                  | Net cash used in operating activities               |         |                         | (17,312 | )    |          |         | (1,368 | ) |          |         | (24,148 | )
|Cash flows from investing activities: |                                                                                |                                                                  |                                                     |         |                         |         |      |          |         |        |   |         
|                                      | Purchases of property and equipment                                            |                                                                  |                                                     | (2,380  | )                       |         |      | (13,947  | )       |        |   | (19,923  | )      
|                                      | Proceeds from sale of property and equipment                                   |                                                                  |                                                     | 449     |                         |         |      | 323      |         |        |   | 453      |        
|                                      | Purchases of investments                                                       |                                                                  |                                                     |        |                         |         |      | (4,150   | )       |        |   | (33,581  | )      
|                                      | Proceeds from sale of FOCI and QOI                                             |                                                                  |                                                     |        |                         |         |      | 5,735    |         |        |   |         |        
|                                      | Proceeds from maturity of investments                                          |                                                                  |                                                     | 6,259   |                         |         |      | 33,426   |         |        |   |         |        
|                                      | Investment in subsidiaries                                                     |                                                                  |                                                     | (631    | )                       |         |      |         |         |        |   |         |        
|                                      |                                                                                |                                                                  |                                                     |         |                         |         |      |          |         |        |   |          |        
|                                      |                                                                                |                                                                  | Net cash provided by (used in) investing activities |         |                         | 3,697   |      |          |         | 21,387 |   |          |         | (53,051 | )

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MRV Communications, Inc.

Statements of Cash Flows

(In thousands)

|                                                             |                                                 |                                                     |         |                         |      |      |         |         |         |   |         |         |        | 
|------------------------------------------------------------ | ----------------------------------------------- | --------------------------------------------------- | ------- | ----------------------- | ---- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------ | 
|                                                             |                                                 |                                                     |         | Year Ended December 31,
|                                                             |                                                 |                                                     |         |                        
|                                                             |                                                 |                                                     |         | 2003                    |      | 2002 |         | 2001   
|                                                             |                                                 |                                                     |         |                         |      |      |         |        
|Cash flows from financing activities:                        |                                                 |                                                     |         |                         |      |      |         |         |         |   |         |        
|                                                             | Net proceeds from issuance of convertible notes |                                                     |         | 22,950                  |      |      |         |        |         |   |         |        |       
|                                                             | Net proceeds from issuance of common stock      |                                                     |         | 6,738                   |      |      |         | 131     |         |   |         | 25,911  |       
|                                                             | Payment for termination of interest rate swap   |                                                     |         |                        |      |      |         | (3,198  | )       |   |         |        |       
|                                                             | Borrowings on short-term obligations            |                                                     |         | 49,902                  |      |      |         | 63,303  |         |   |         | 39,034  |       
|                                                             | Payments on short-term obligations              |                                                     |         | (53,879                 | )    |      |         | (66,368 | )       |   |         | (29,459 | )     
|                                                             | Payments on long-term obligations               |                                                     |         | (583                    | )    |      |         | (52,495 | )       |   |         | (2,718  | )     
|                                                             | Repurchase of convertible subordinated notes    |                                                     |         | (26,522                 | )    |      |         | (19,721 | )       |   |         |        |       
|                                                             | Purchase of treasury stock                      |                                                     |         | (145                    | )    |      |         | (1,076  | )       |   |         |        |       
|                                                             | Other long-term liabilities                     |                                                     |         | 549                     |      |      |         | (71     | )       |   |         | (820    | )     
|                                                             |                                                 |                                                     |         |                         |      |      |         |         |         |   |         |         |       
|                                                             |                                                 | Net cash provided by (used in) financing activities |         |                         | (990 | )    |         |         | (79,495 | ) |         |         | 31,948 | 
|Effect of exchange rate changes on cash and cash equivalents |                                                 |                                                     | 2,693   |                         |      |      | (4,582  | )       |         |   | (153    | )      
|                                                             |                                                 |                                                     |         |                         |      |      |         |         |         |   |         |         |       
|Net decrease in cash and cash equivalents                    |                                                 |                                                     | (11,912 | )                       |      |      | (64,058 | )       |         |   | (45,404 | )      
|Cash and cash equivalents, beginning of year                 |                                                 |                                                     | 100,618 |                         |      |      | 164,676 |         |         |   | 210,080 |        
|                                                             |                                                 |                                                     |         |                         |      |      |         |         |         |   |         |         |       
|Cash and cash equivalents, end of year                       |                                                 | $                                                   | 88,706  |                         |      | $    | 100,618 |         |         | $ | 164,676 |        
|                                                             |                                                 |                                                     |         |                         |      |      |         |         |         |   |         |         |       

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

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MRV Communications, Inc.

Notes To Financial Statements

December 31, 2002

1. Description of Business

MRV Communications, Inc, (a Delaware corporation, MRV or the Company)
designs, manufactures, sells, distributes, integrates and supports network
infrastructure equipment and services, and optical components. MRV conducts
its business along three principal reportable segments: the networking group,
the optical components groups and the development stage enterprise group.
MRVs networking group provides equipment used by commercial customers,
governments and telecommunications service providers, and include switches,
routers, network physical infrastructure equipment and remote device management
equipment as well as specialized networking products for defense and aerospace
applications. MRVs optical components group designs, manufactures and sell
optical communications components, primarily through its wholly owned
subsidiary Luminent, Inc. These components include fiber optic transceivers,
discrete lasers and laser emitting diodes, or LEDs, as well as components for
Fiber-to-the-Premises, or FTTP, applications.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying financial statements include the accounts of MRV and its
wholly owned and majority owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated. MRV consolidates the financial
results of related development stage enterprises when it has effective control,
voting control or has provided the entitys working capital. When others
invest in these enterprises reducing its voting control below 50%, MRV
discontinues consolidation and uses the cost or equity method of accounting for
these investments unless otherwise required.

Foreign Currency

Transactions originally denominated in other currencies are converted into
U.S. dollars in accordance with Statement of Financial Accounting Standards
(SFAS) No. 52, Foreign Currency Translation. Increases or decreases in the
resulting assets or liabilities, which are denominated in a foreign currency,
are recorded as foreign currency gains and losses and are included in other
income (expense) in determining net income (loss).

For foreign operations with the local currency as the functional 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 rate prevailing at the
dates those elements are recognized in the financial statements. Translation
adjustments resulting from the process of translating the local currency
financial statements into U.S. dollars are included in determining
comprehensive income (loss).

Revenue Recognition

MRV generally recognizes product revenue, net of sales discounts, returns
and allowances, when persuasive evidence of an arrangement exits, delivery has
occurred and all significant contractual obligations have been satisfied, the
fee is fixed or determinable and collection in considered probable. Products
are generally shipped FOB shipping point with no right of return. Sales of
services and system support are deferred and recognized ratably over the
contract period. Sales with contingencies, such as rights of return, rotation
rights, conditional acceptance provisions and price protection, are rare and
insignificant and are deferred until the contingencies have been satisfied or
the contingent period has lapsed. MRVs major revenue-generating products
consist of: passive and active optical components; switches and routers; remote
device management; and network physical infrastructure equipment.

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MRV generally warrants its products against defects in materials and
workmanship for one year. The estimated cost of warranty obligations and sales
returns and other allowances are recognized at the time of revenue recognition
based on contract terms and prior claims experience.

Cash, Cash Equivalents and Time Deposits

MRV considers all highly liquid investments with an original maturity of
90 days or less to be cash equivalents. MRV maintains cash balances and
investments in highly qualified financial institutions. At various times such
amounts are in excess of insured limits. Time deposits of $1.4 million and
$2.8 million as of December 31, 2003 and 2002, respectively, are restricted by
short-term obligations.

Marketable Securities

MRV accounts for its marketable securities, which are available for sale,
under the provisions of SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. During 2003, MRV changed its investment
classification from held-to-maturity to available for sale. The original
cost of MRVs marketable securities approximated fair market value as of
December 31, 2003 and 2002. As of December 31, 2003 and 2002, short-term and
long-term marketable securities consisted principally of U.S. Treasury Bonds,
Municipal Bonds and Corporate Bonds. Marketable securities mature at various
dates through 2004. Purchase, sales and maturities of securities are presented
in the accompanying Statements of Cash Flows.

Accounts Receivable

As of December 31, 2003, 2002 and 2001, the allowance for doubtful
accounts totaled $10.7 million, $15.0 million and $14.8 million, respectively.
Increases in the allowance for doubtful accounts totaled $1.8 million, $2.2
million and $5.7 million for the years ended December 31, 2003, 2002 and 2001,
respectively. Write-offs against the allowance for doubtful accounts totaled
$6.1 million, $1.9 million and $335,000 for the years ended December 31, 2003,
2002 and 2001, respectively. If the financial condition of MRVs customers
were to deteriorate, resulting in their inability to make payments, additional
provisions are recorded in that period.

MRV, through foreign subsidiaries, has agreements with financial
institutions to sell its receivables. At December 31, 2003, MRV is
contingently liable for approximately $21.1 million relating to such
receivables sold with recourse. There were no gain or loss on the sale of
these receivables.

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Inventories

Inventories are stated at the lower of cost or market and consist of
material, labor and overhead. Cost is determined by the first in, first out
method. Inventories consisted of the following as of December 31, 2003 and
2002 (in thousands):

|                |  |      |        |      |  |   |        | 
|--------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                |  | 2003 |        | 2002
|                |  |      |        |     
|Raw materials   |  | $    | 5,886  |      |  | $ | 8,058  | 
|Work-in process |  |      | 7,274  |      |  |   | 5,867  | 
|Finished goods  |  |      | 22,639 |      |  |   | 18,770 | 
|                |  |      |        |      |  |   |        | 
|                |  | $    | 35,799 |      |  | $ | 32,695 | 
|                |  |      |        |      |  |   |        | 

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets,
ranging from three to thirty-three years. Maintenance and repairs are charged
to expense as incurred and the costs of additions and betterments that increase
the useful lives of the assets are capitalized. Property and equipment
consisted of the following as of December 31, 2003 and 2002 (in thousands):

|                                |                                                  |   |        |         |      |   |        |         |  
|------------------------------- | ------------------------------------------------ | - | ------ | ------- | ---- | - | ------ | ------- | -
|                                |                                                  |   | 2003   |         | 2002
|                                |                                                  |   |        |         |     
|Property and equipment, at cost |                                                  |   |        |         |      |   |        |        
|                                | Land                                             |   | $      | 57      |      |   | $      | 48      |  
|                                | Building                                         |   |        | 3,674   |      |   |        | 3,070   |  
|                                | Machinery and equipment                          |   |        | 43,611  |      |   |        | 52,844  |  
|                                | Furniture and fixtures                           |   |        | 5,709   |      |   |        | 10,478  |  
|                                | Computer hardware and software                   |   |        | 18,021  |      |   |        | 14,022  |  
|                                | Leasehold improvements                           |   |        | 5,848   |      |   |        | 7,581   |  
|                                | Construction in progress                         |   |        | 653     |      |   |        | 1,384   |  
|                                |                                                  |   |        |         |      |   |        |        
|                                |                                                  |   | 77,573 |         |      |   | 89,427 |        
|                                | Less  accumulated depreciation and amortization |   |        | (52,157 | )    |   |        | (54,258 | )
|                                |                                                  |   |        |         |      |   |        |        
|                                |                                                  | $ | 25,416 |         |      | $ | 35,169 |        
|                                |                                                  |   |        |         |      |   |        |        

Goodwill and Other Intangibles

MRV adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, effective January 1, 2002. In
accordance with SFAS No. 142, goodwill and intangible assets with indefinite
lives will no longer be amortized, but instead will be measured for impairment
at least annually, or when events indicate that impairment exists. Intangible
assets that are determined to have definite lives will continue to be amortized
over their useful lives (See Note 3, Goodwill and Other Intangible Assets).

Investments

MRV accounts for its investments in unconsolidated entities (see Note 2,
Principles of Consolidation) under the provisions of Accounting Principles
Board Opinions (APB) No. 18, The Equity Method of Accounting for Investments
in common stock, and related interpretations. Unconsolidated investments, for
which MRV does not have the ability to exercise significant influence over
operating and financial polices, are accounted for under the cost method.
Those investments, for which MRV does have the ability to exercise significant
influence over operating and financial policies, are accounted for under the
equity method. In general, all investments in which MRV owns greater than 20%
of the voting stock, are accounted for under the equity method. Cost and
equity method investments totaled $3.1 million as of December 31, 2003 and
2002.

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Under the cost and equity method, a loss in value of an investment, which
is deemed to be other than a temporary decline, is recognized. Evidence of a
loss in value might include, but would not necessarily be limited to, absence
of an ability to recover the carrying amount of the investment or inability of
the investee to sustain an earnings capacity, which would justify the carrying
amount of the investment. During the year ended December 31, 2002, MRV
recognized impairment on investments totaling $11.7 million, which has been
included in Other Expense, net.

Impairment of Long-Lived Assets

MRV evaluates its long-term assets, such as property and equipment and
other long-term assets, for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may be impaired.
MRV considers events or changes such as product discontinuance, plant closures,
product dispositions and history of operating losses or other changes in
circumstances to indicate that the carrying amount may not be recoverable. The
carrying value of an asset is considered impaired when the anticipated
undiscounted cash flow from such assets is less than its carrying value. In
that event, a loss is recognized based on the amount by which the carrying
value exceeds the fair market value. Fair market value is determined using the
anticipated cash flows discounted at a rate based on MRVs weighted average
costs of capital, which represents the blended after-tax costs of debt and
equity.

For the year ended December 31, 2002, MRV determined that $17.0 million in
long-lived assets, primarily property and equipment, were impaired. This
amount was determined to be impaired using the method discussed above. The
remaining carrying values of the long-lived assets were determined to be
realizable. This process and analysis requires management to use significant
judgment and apply assumptions regarding the future cash flows expected to
result from the use of the assets and the eventual disposition of such assets.
While management believes the carrying value of its assets are realizable based
on its analysis, changes in the assumptions used in its models could produce
significantly different results. The impairment of long-lived assets of $17.0
million for the year ended December 31, 2002 has been included in the
determination of operating loss in the accompanying Statements of Operations.
The vast majority of these impairments were from our operating divisions
segment. There were no significant impairment losses recorded for the years
ended December 31, 2003 and 2001.

Fair Value of Financial Instruments

MRVs financial instruments, including cash and cash equivalents, time
deposits, short-term and long-term marketable securities, accounts receivable,
accounts payable, accrued liabilities and short-term debt obligations are
carried at cost, which approximates their fair market value due to the
short-term nature of those instruments. The fair value of long-term debt
obligations is estimated based on current interest rates available to MRV for
debt instruments with similar terms, degrees of risk and remaining maturities.
The carrying values of these obligations approximate their fair values.

Product Development and Engineering

Product development and engineering costs are charged to expense as
incurred.

Software Development Costs

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

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

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Advertising Costs

Advertising costs are charged to expense as incurred.

Income Taxes

Deferred income tax assets and liabilities are computed based on the
temporary differences between the financial statement and income tax bases of
assets and liabilities using the statutory marginal income tax rate in effect
for the years 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.

Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted earnings (loss) per share is calculated by dividing net income
(loss) by the sum of the weighted average number of common shares outstanding,
plus all additional common shares that would have been outstanding if
potentially dilutive securities or common stock equivalents had been issued.
Stock options and warrants to purchase 10.0 million, 12.6 million and 12.5
million shares were not included in the computation of years 2003, 2002 and
2001 diluted loss per share because such stock options and warrants were
considered anti-dilutive. Shares associated with MRVs outstanding 5%
Convertible Notes issued in June 2003 (2003 Notes) and 5% Convertible
Subordinated Notes issued in June 1998 and paid in June 2003 (1998 Notes)
were not included in the computation of loss per share as they are
anti-dilutive.

Stock-Based Compensation

MRV accounts for its employee stock plan under the intrinsic value method
prescribed by APB No. 25, Accounting for Stock Issued to Employees, and
related interpretations, and has adopted the disclosure-only provisions of SFAS
No. 123, Accounting for Stock-Based Compensation and as amended by SFAS No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure, an
amendment of FASB Statement No. 123.

SFAS No. 123, as amended by SFAS No. 148, permits companies to recognize,
as expense over the vesting period, the fair value of all stock-based awards on
the date of grant. The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. Because MRVs stock-based
compensation plans have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, management believes that the
existing option valuation models do not necessarily provide a reliable single
measure of the fair value of awards from the plan. Therefore, as permitted,
MRV applies the existing accounting rules under APB No. 25 and provides pro
forma net loss and pro forma loss per share disclosures for stock-based awards
made during the year as if the fair value method defined in SFAS No. 123, as
amended, had been applied. Net loss and net loss per share for each of the
three years in the period ended December 31, 2003 would have increased to the
following pro forma amounts (in thousands, except per share data):

|                                                                             |                                                    |   |         |       |      |   |          |       |   |   |          |       |  
|---------------------------------------------------------------------------- | -------------------------------------------------- | - | ------- | ----- | ---- | - | -------- | ----- | - | - | -------- | ----- | -
|                                                                             |                                                    |   | 2003    |       | 2002 |   | 2001    
|                                                                             |                                                    |   |         |       |      |   |         
|Net loss, as reported                                                        |                                                    | $ | (26,988 | )     |      | $ | (479,759 | )     |   | $ | (326,353 | )    
|Additional compensation expense determined under the
fair value based method |                                                    |   | (23,520 | )     |      |   | (24,775  | )     |   |   | (24,874  | )    
|                                                                             |                                                    |   |         |       |      |   |          |       |   |   |          |      
|Pro forma net loss                                                           |                                                    | $ | (50,508 | )     |      | $ | (504,534 | )     |   | $ | (351,227 | )    
|                                                                             |                                                    |   |         |       |      |   |          |       |   |   |          |      
|Earnings per share:                                                          |                                                    |   |         |       |      |   |          |       |   |   |          |      
|                                                                             | Basic and diluted net loss per share  as reported |   | $       | (0.26 | )    |   | $        | (5.25 | ) |   | $        | (4.27 | )
|                                                                             | Basic and diluted net loss per share  pro forma   |   | $       | (0.50 | )    |   | $        | (5.52 | ) |   | $        | (4.60 | )

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The following assumptions were applied: (i) no expected dividend yield for
all periods, (ii) expected volatility of 84% for 2003, 104% for 2002 and 191%
for 2001, (iii) expected lives of 4 to 6 years for all years, (iv) and
risk-free interest rates ranging from 2.69% to 6.73% for all years.

MRV accounts for option and warrant grants to non-employees using the
guidance prescribed by SFAS No. 123, FASB Interpretation No. (FIN) 44,
Accounting for Certain Transactions Involving Stock Compensation (an
interpretation of APB Opinion No. 25), and Emerging Issue Task Force (EITF)
No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or In Conjunction with Selling, Goods, or Services,
whereby the fair value of such option and warrant grants are measured using the
fair value at the earlier of the date at which the non-employees performance
is completed or a performance commitment is reached.

Deferred stock expense is being amortized using the graded vesting method
over four years. Using this method, approximately 57%, 26%, 13% and 4%,
respectively, of each options compensation expense is amortized in each of the
four years following the date of grant. Deferred stock expense generated
during 2001 was $7.1 million generated through acquisitions. Deferred stock
expense generated during 2000 was $160.8 million of which $106.6 million was
generated through acquisitions and $54.2 million was generated through stock
options granted to Luminents former President and its former Chief Financial
Officer (see Note 12, Stockholders Equity). There was no deferred stock
expense generated for the years ended December 31, 2003 and 2002, respectively.
For the year ended December 31, 2003, MRV recognized income from recapturing
accelerated deferred stock expense due to terminations, net of the amortization
of deferred stock expense of $3.5 million, totaling $8.1 million. Total
amortization of deferred stock expense for the years ended December 31, 2002
and 2001 was $6.6 million and $69.8 million, respectively.

During the three years in the period ended December 31, 2003, certain
stock option holders ceased to be employees of MRV, either through termination
or sale. Since MRV used the graded vesting method of accounting to recognize
the compensation over the related employment period, MRV recognized deferred
stock expense related to options that were unvested. For the years ended
December 31, 2003, 2002 and 2001, MRV reversed $11.6 million, $11.7 million and
$6.3 million, respectively, related to unvested, forfeited stock options for
which compensation expense was previously recognized. Unamortized deferred
stock expense totaling $1.4 million, $3.0 million and $6.7 million for the
years ended December 31, 2003, 2002 and 2001, respectively, has been reversed
to additional paid-in capital relating to these employees.

Transactions with Stock of a Subsidiary

In September 2003, MRV acquired 666,666 shares of Series A Preferred
Stock, or 1.9% additional ownership interest, in Charlottes Networks from a
minority interest in exchange for $50,000 in cash. This acquisition of a
minority interest resulted in an extraordinary gain of $2.0 million for the
year ended December 31, 2003. MRVs ownership interest following this
acquisition is approximately 60%. Charlottes Networks is included in MRVs
development stage enterprise group.

On November 9, 2000, Luminent, a wholly-owned subsidiary of MRV, issued
12.0 million shares of its common stock for $12.0 per share, or $144.0 million,
to complete its Initial Public Offering (IPO). As part of MRVs plan to
spin-off Luminent to MRV stockholders, the purchase price in excess of its book
value, or $49.7 million has been included in Effect of Subsidiary Equity
Transactions in MRVs Statements of Stockholders Equity for the year ended
December 31, 2000. In September 2001, MRV and Luminent jointly announced that
MRV intended to acquire Luminents 8% minority interest (established through
Luminents November 2000 IPO), and merge Luminent back into MRV through a
short-form merger. It was determined that each Luminent stockholder would
receive 0.43 shares of MRV common stock in exchange for their Luminent common
stock. Additionally, all stock options to purchase Luminent common stock would
be converted into stock options to purchase MRVs common stock based on the
same exchange ratio. The merger was completed in December 2001. MRV exchanged
5.2 million shares of common stock for 12.0 million shares of Luminent common
stock. MRVs shares had a fair value of $16.9 million, based on the average
market price five days before and after the terms were determined. MRV
recorded an extraordinary gain from the merger of $9.9 million, net of tax,
which equals to the excess minority interest reduced by the fair value paid,
net of the costs incurred to effect the merger.

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Recently Issued Accounting Standards

In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity, effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective as of July 1, 2003.
The adoption of this pronouncement did not have a material impact on the
results of operations or the financial position of MRV.

In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. The adoption of this pronouncement did not have a
material impact on the results of operations or the financial position of MRV.

In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities, which was originally effective
on July 1, 2003. In December 2003, the FASB deferred the effective date for
applying the provisions of FIN 46 to March 31, 2004 for interests held by
public companies in variable interest entities or potential variable interest
entities created before February 1, 2003. MRV has completed our evaluation of
the provisions of FIN 46 and does not have any significant interests in
variable interest entities. Accordingly, the adoption of FIN 46 did not have a
material impact on the results of operations or the financial position of MRV.

Use of Estimates

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

Reclassifications

Certain prior year amounts have been reclassified to conform to the
current year presentation.

3. Goodwill and Other Intangible Assets

As required by SFAS No. 142, MRV performed transitional impairment tests
on goodwill and other intangibles assets with indefinite lives, which consisted
of patents and assembled work forces, as of January 1, 2002. As a result of
the impairment tests, MRV recorded a $296.4 million cumulative effect of an
accounting change. Under SFAS No. 142, goodwill impairment exists if the net
book value of a reporting unit exceeds its fair value. MRV, with the
assistance of valuation experts, estimated the fair value of its reporting
units using a combination of discounted cash flow analyses and comparisons with
the market values of similar publicly traded companies.

Included in MRVs $296.4 million impairment was a $247.3 million charge
related to the impairment of the goodwill associated with the Foreign Optical
Components and Free-Space Optics reporting units. The Foreign Optical
Components reporting unit included the goodwill generated from the FOCI Fiber
Optic Communications, Inc. (FOCI) and Quantum Optech, Inc. (QOI)
acquisitions (see Note 5, Disposition of Assets). The optical components,
active and passive, markets continued to deteriorate and have contracted
significantly. As a result, MRV determined that a significant portion of the
goodwill acquired had been impaired. The goodwill impairment in the Free-Space
Optics reporting unit reflected the significantly lower fair value calculated
on the basis of reduced operating revenues and income as a result of a
depressed market for those products.

The remaining $49.1 million of impairment charge related to patents and
assembled work forces associated with the Free-Space Optics reporting unit.
The impairment of these patents and assembled work forces reflected the same
circumstances as described above.

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During the third quarter of 2002 and in addition to the transitional
impairment testing, MRV reviewed its remaining goodwill and other intangible
assets as required annually pursuant to SFAS No. 142. This impairment reduced
the carrying value of goodwill and other intangible assets by recording an
impairment charge of $72.7 million, which consisted of $70.4 million relating
to goodwill and $2.3 million relating to patents. MRV has determined that the
annual impairment test will be performed on October 1st of each year. MRV,
with the assistance of valuation experts, estimated the fair value of its
reporting units using a combination of discounted cash flow analyses and
comparisons with the market values of similar publicly traded companies.
During 2003, MRV impaired $356,000 in goodwill from a foreign office that
ceased operations. During the fourth quarter of 2003, MRV completed the annual
review of its remaining goodwill and other intangible assets. With the
assistance of valuation experts, MRV determined that no further reduction in
the carrying value of its goodwill and intangible assets was necessary.

The following table summarizes MRVs identifiable intangible assets and
goodwill balances as of December 31, 2003 and 2002 (in thousands):

|                                               |                       |   |                   |         |                   |   |          |          |          |   |        |        |          |   |         |         |     |   |          |          |   |   |        |        | 
|---------------------------------------------- | --------------------- | - | ----------------- | ------- | ----------------- | - | -------- | -------- | -------- | - | ------ | ------ | -------- | - | ------- | ------- | --- | - | -------- | -------- | - | - | ------ | ------ | 
|                                               |                       |   | December 31, 2003 |         | December 31, 2002
|                                               |                       |   |                   |         |                  
|                                               |                       |   | Gross             |         |                   |   |          |          | Net      |   | Gross  |        |          |   |         |         | Net
|                                               |                       |   | Carrying          |         | Accum.            |   | Carrying |          | Carrying |   | Accum. |        | Carrying
|                                               |                       |   | Amount            |         | Amort.            |   | Amount   |          | Amount   |   | Amort. |        | Amount  
|                                               |                       |   |                   |         |                   |   |          |          |          |   |        |        |         
|Intangible assets
subject to
amortization:     |                       |   |                   |         |                   |   |          |          |          |   |        |        |          |   |         |         |     |   |          |          |   |   |        |       
|                                               | Patents               |   | $                 | 14,751  |                   |   | $        | (14,751  | )        |   | $      |       |          |   | $       | 14,751  |     |   | $        | (14,751  | ) |   | $      |       | 
|                                               | Assembled work
forces |   |                   | 537     |                   |   |          | (537     | )        |   |        |       |          |   |         | 537     |     |   |          | (537     | ) |   |        |       | 
|                                               | Customer contracts    |   |                   | 720     |                   |   |          | (720     | )        |   |        |       |          |   |         | 720     |     |   |          | (720     | ) |   |        |       | 
|                                               | Other                 |   |                   | 230     |                   |   |          | (128     | )        |   |        | 102    |          |   |         | 230     |     |   |          | (95      | ) |   |        | 135    | 
|                                               |                       |   |                   |         |                   |   |          |          |          |   |        |        |          |   |         |         |     |   |          |          |   |   |        |        | 
|                                               |                       |   | 16,238            |         |                   |   | (16,136  | )        |          |   | 102    |        |          |   | 16,238  |         |     |   | (16,103  | )        |   |   | 135    |       
|Intangible assets not
subject to
amortization: |                       |   |                   |         |                   |   |          |          |          |   |        |        |          |   |         |         |     |   |          |          |   |   |        |       
|                                               | Goodwill              |   |                   | 195,869 |                   |   |          | (165,904 | )        |   |        | 29,965 |          |   |         | 195,644 |     |   |          | (165,904 | ) |   |        | 29,740 | 
|                                               |                       |   |                   |         |                   |   |          |          |          |   |        |        |          |   |         |         |     |   |          |          |   |   |        |        | 
|Goodwill and Other
Intangibles                 |                       | $ | 212,107           |         |                   | $ | (182,040 | )        |          | $ | 30,067 |        |          | $ | 211,882 |         |     | $ | (182,007 | )        |   | $ | 29,875 |       
|                                               |                       |   |                   |         |                   |   |          |          |          |   |        |        |          |   |         |         |     |   |          |          |   |   |        |        | 

The changes in the carrying amount of goodwill for the year ended December
31, 2003, are as follows: (in thousands):

|                           |                               |   |            |      |            |   |             |   |             |   |   |   |  |   |        |      |  
|-------------------------- | ----------------------------- | - | ---------- | ---- | ---------- | - | ----------- | - | ----------- | - | - | - |  | - | ------ | ---- | -
|                           |                               |   |            |      |            |   | Optical     |   | Development |   |   |   | 
|                           |                               |   | Networking |      | Components |   | stage       |   |             |   |  
|                           |                               |   | Group      |      | Group      |   | enterprises |   | Total      
|                           |                               |   |            |      |            |   |             |   |            
|Balance, December 31, 2002 |                               | $ | 29,740     |      |            | $ |            |   |             | $ |  |   |  | $ | 29,740 |     
|                           | Goodwill acquired during year |   |            | 581  |            |   |             |  |             |   |   |  |  |   |        | 581  |  
|                           | Impairment losses             |   |            | (356 | )          |   |             |  |             |   |   |  |  |   |        | (356 | )
|                           |                               |   |            |      |            |   |             |   |             |   |   |   |  |   |        |     
|Balance, December 31, 2003 |                               | $ | 29,965     |      |            | $ |            |   |             | $ |  |   |  | $ | 29,965 |     
|                           |                               |   |            |      |            |   |             |   |             |   |   |   |  |   |        |     

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The results for the year ended December 31, 2001 do not reflect the
provisions of SFAS No. 142. Had MRV adopted SFAS 142 on January 1, 2001, the
reported loss before cumulative effect of an accounting change and net loss and
the related per-share amounts would have been presented as follows (in
thousands, except per share amounts):

|                                                                                          |                                                    |                                   |         |       |   |      |          |       |   |   |          |         |      | 
|----------------------------------------------------------------------------------------- | -------------------------------------------------- | --------------------------------- | ------- | ----- | - | ---- | -------- | ----- | - | - | -------- | ------- | ---- | 
|                                                                                          |                                                    |                                   |         | 2003  |   | 2002 |          | 2001 
|                                                                                          |                                                    |                                   |         |       |   |      |          |      
|Loss before extraordinary gain and cumulative effect
of an accounting change, as reported |                                                    | $                                 | (28,938 | )     |   | $    | (183,404 | )     |   | $ | (336,302 | )      
|                                                                                          | Goodwill amortization, net of tax                  |                                   |         |      |   |      |          |      |   |   |          | 102,324 |     
|                                                                                          |                                                    |                                   |         |       |   |      |          |       |   |   |          |        
|Pro forma loss before extraordinary gain and
cumulative effect of an accounting change    |                                                    | $                                 | (28,938 | )     |   | $    | (183,404 | )     |   | $ | (233,978 | )      
|                                                                                          |                                                    |                                   |         |       |   |      |          |       |   |   |          |        
|Earnings per share:                                                                       |                                                    |                                   |         |       |   |      |          |       |   |   |          |        
|                                                                                          | Basic and diluted loss per share  as reported     |                                   | $       | (0.28 | ) |      | $        | (2.01 | ) |   | $        | (4.40   | )   
|                                                                                          |                                                    | Goodwill amortization, net of tax |         | $     |  |      |          | $     |  |   |          | $       | 1.34 | 
|                                                                                          | Basic and diluted loss per share  pro forma       |                                   | $       | (0.28 | ) |      | $        | (2.01 | ) |   | $        | (3.06   | )   
|Net loss, as reported                                                                     |                                                    | $                                 | (26,988 | )     |   | $    | (479,759 | )     |   | $ | (326,353 | )      
|                                                                                          | Goodwill amortization, net of tax                  |                                   |         |      |   |      |          |      |   |   |          | 102,324 |     
|                                                                                          |                                                    |                                   |         |       |   |      |          |       |   |   |          |        
|Pro forma net loss                                                                        |                                                    | $                                 | (26,988 | )     |   | $    | (479,759 | )     |   | $ | (224,029 | )      
|                                                                                          |                                                    |                                   |         |       |   |      |          |       |   |   |          |        
|Earnings per share:                                                                       |                                                    |                                   |         |       |   |      |          |       |   |   |          |        
|                                                                                          | Basic and diluted net loss per share  as reported |                                   | $       | (0.26 | ) |      | $        | (5.25 | ) |   | $        | (4.27   | )   
|                                                                                          |                                                    | Goodwill amortization, net of tax |         | $     |  |      |          | $     |  |   |          | $       | 1.34 | 
|                                                                                          | Basic and diluted net loss per share  pro forma   |                                   | $       | (0.26 | ) |      | $        | (5.25 | ) |   | $        | (2.93   | )   

4.     Restructuring costs

From November 9, 2000 through December 28, 2001, MRV owned approximately
92% of Luminent and approximately 8% of Luminents shares were publicly traded.
During the second quarter of 2001, Luminents management approved and
implemented a restructuring plan in order to adjust operations and
administration as a result of the dramatic slowdown in the communications
equipment industry generally and the optical components sector in particular.
Major actions primarily involved the reduction of workforce, the abandonment of
certain assets and the cancellation and termination of purchase commitments.
MRV expects these actions to realign the business based on current and
near-term growth rates. MRV expects that all actions stemming from the
restructuring plan to be completed by the end of year 2004.

Employee severance costs and related benefits of $1.3 million are related
to approximately 750 layoffs through December 31, 2003, bringing Luminents
total workforce to approximately 450 employees as of December 31, 2003.
Affected employees came from all divisions and areas of Luminent. The majority
of affected employees were in the manufacturing group.

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A summary of the restructuring costs and the remaining liability through
and as of December 31, 2003 is as follows (in thousands):

|                           |             |   |             |         |            |   |             |        |           |   |       |        |          |   |       |      |   |   |        |         |  
|-------------------------- | ----------- | - | ----------- | ------- | ---------- | - | ----------- | ------ | --------- | - | ----- | ------ | -------- | - | ----- | ---- | - | - | ------ | ------- | -
|                           |             |   |             |         |            |   | Closed and  |        |           |   |       |        | Employee |   |       |      |  
|                           |             |   | Asset       |         | Abandoned  |   | Purchase    |        | Severance |   |       |        |         
|                           |             |   | Impairments |         | Facilities |   | Commitments |        | Costs     |   | Total
|                           |             |   |             |         |            |   |             |        |           |   |      
|Original provision         |             | $ | 10,441      |         |            | $ | 2,405       |        |           | $ | 6,173 |        |          | $ | 1,281 |      |   | $ | 20,300 |        
|                           | Utilized    |   |             | (10,441 | )          |   |             | (615   | )         |   |       | (1,987 | )        |   |       | (847 | ) |   |        | (13,890 | )
|                           | Adjustments |   |             |        |            |   |             |       |           |   |       | (1,474 | )        |   |       | (434 | ) |   |        | (1,908  | )
|                           |             |   |             |         |            |   |             |        |           |   |       |        |          |   |       |      |   |   |        |        
|Balance, December
31, 2002 |             |   |            |         |            |   | 1,790       |        |           |   | 2,712 |        |          |   |      |      |   |   | 4,502  |        
|                           | Utilized    |   |             |        |            |   |             | (1,854 | )         |   |       | (1,092 | )        |   |       |     |   |   |        | (2,946  | )
|                           | Adjustments |   |             |        |            |   |             | 874    |           |   |       | (1,305 | )        |   |       |     |   |   |        | (431    | )
|                           |             |   |             |         |            |   |             |        |           |   |       |        |          |   |       |      |   |   |        |        
|Balance, December
31, 2003 |             | $ |            |         |            | $ | 810         |        |           | $ | 315   |        |          | $ |      |      |   | $ | 1,125  |        
|                           |             |   |             |         |            |   |             |        |           |   |       |        |          |   |       |      |   |   |        |        

Through December 31, 2003, MRV reduced $5.9 million in purchase
commitments related to future liabilities based on its current negotiations
with vendors, which resulted in the reversal of $1.3 million and $1.5 million
in cost of goods sold for the years ended December 31, 2003 and 2002,
respectively, and its fulfillment of purchase commitments for inventory and
equipment that it previously reserved. The adjustments relating to closed and
abandoned facilities that amounted to $874,000 in 2003 resulting from changes
in MRVs estimates of its continuing obligation. MRV did not reverse any
amounts in cost of goods sold for the year ended December 31, 2001.

5. Disposition of Assets

On October 15, 2002, MRVs wholly owned subsidiary Luminent, in a single
transaction, sold (i) 53.4 million shares of the capital stock of FOCI
amounting to approximately 78% of the total issued and outstanding share
capital of FOCI and (ii) 19.0 million shares of the capital stock of QOI,
representing approximately 100% of the total issued and outstanding share
capital of QOI. The purchasers consisted of employees of FOCI, including its
President. Luminent continues to hold approximately 19.5% of the outstanding
share capital of FOCI and no remaining ownership in QOI. The remaining
ownership in FOCI has been recorded as a cost method investment in the
accompanying Balance Sheet.

The consideration received by Luminent for the sale of the FOCI and QOI
shares, which was determined through arms length negotiations between Luminent
and MRV on the one hand, and the purchasers on the other, consisted of $8.0
million in cash and $2.0 million in credit against future purchases of
components. These net assets have been included in MRVs optical components
group segment.

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Prior to the sale of FOCI and QOI, MRV recorded an impairment loss on
long-lived assets totaling $15.9 million, which was measured, based on the
lower of its carrying amount or fair value less cost to sell. The fair value
less cost to sell was based on the sale price described above. The adjusted
carrying amounts of the major classes of assets and liabilities sold along with
the consideration received as of October 15, 2002 were as follows (in
thousands):

|                                    |                                                              |   |        |         |  
|----------------------------------- | ------------------------------------------------------------ | - | ------ | ------- | -
|Consideration received:             |                                                              |   |        |        
|                                    | Cash                                                         |   | $      | 8,000   |  
|                                    | Future product credit                                        |   |        | 2,000   |  
|                                    |                                                              |   |        |         |  
|                                    |                                                              |   | 10,000 |        
|Assets and liabilities disposed of: |                                                              |   |        |        
|                                    | Assets (primarily receivables, inventory and fixed assets)   |   |        | 36,322  |  
|                                    | Liabilities (primarily short-term and long-term obligations) |   |        | (23,614 | )
|                                    |                                                              |   |        |         |  
|                                    |                                                              | $ | 12,708 |        
|                                    |                                                              |   |        |         |  

The loss on disposition of FOCI and QOI has been included in Other
Expense, net in the accompanying Statement of Operations for the year ended
December 31, 2002. Through December 31, 2003, MRV utilized $1.9 million of the
future product credit, resulting in $86,000 remaining product credit available
through October 2004.

6. Accrued Liabilities

Accrued liabilities as of December 31, 2003 and 2002, consisted of the
following (in thousands):

|                    |  |      |        |      |  |   |        | 
|------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                    |  | 2003 |        | 2002
|                    |  |      |        |     
|Payroll and related |  | $    | 8,850  |      |  | $ | 8,824  | 
|Product warranty    |  |      | 5,337  |      |  |   | 5,678  | 
|Restructuring       |  |      | 1,125  |      |  |   | 4,502  | 
|Other               |  |      | 10,211 |      |  |   | 12,538 | 
|                    |  |      |        |      |  |   |        | 
|                    |  | $    | 25,523 |      |  | $ | 31,542 | 
|                    |  |      |        |      |  |   |        | 

7. Income Taxes

The provision for income taxes for each of the years ended December 31,
2003, 2002 and 2001, is as follows (in thousands):

|          |         |   |       |       |      |   |        |        |   |   |        |         |  
|--------- | ------- | - | ----- | ----- | ---- | - | ------ | ------ | - | - | ------ | ------- | -
|          |         |   | 2003  |       | 2002 |   | 2001  
|          |         |   |       |       |      |   |       
|Current:  |         |   |       |       |      |   |        |        |   |   |        |        
|          | Federal |   | $     |      |      |   | $      | (329   | ) |   | $      | (12,454 | )
|          | State   |   |       | (10   | )    |   |        | (3     | ) |   |        | (2,196  | )
|          | Foreign |   |       | 2,414 |      |   |        | 2,802  |   |   |        | 4,918   |  
|          |         |   |       |       |      |   |        |        |   |   |        |         |  
|          |         |   | 2,404 |       |      |   | 2,470  |        |   |   | (9,732 | )      
|Deferred: |         |   |       |       |      |   |        |        |   |   |        |        
|          | Federal |   |       |      |      |   |        | 11,870 |   |   |        | 11,278  |  
|          | State   |   |       |      |      |   |        |       |   |   |        | 3,942   |  
|          | Foreign |   |       | (43   | )    |   |        | (945   | ) |   |        | (1,013  | )
|          |         |   |       |       |      |   |        |        |   |   |        |         |  
|          |         |   | (43   | )     |      |   | 10,925 |        |   |   | 14,207 |        
|          |         |   |       |       |      |   |        |        |   |   |        |         |  
|          |         | $ | 2,361 |       |      | $ | 13,395 |        |   | $ | 4,475  |        
|          |         |   |       |       |      |   |        |        |   |   |        |         |  

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The income tax provision (benefit) differs from the amount computed by
applying the federal statutory income tax rate to income before taxes for each
of the years ended December 31, 2003, 2002 and 2001, are as follows:

|                                                                 |  |      |     |      |  |      |     |    |  |  |     |   
|---------------------------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- | -- |  |  | --- | --
|                                                                 |  | 2003 |     | 2002 |  | 2001
|                                                                 |  |      |     |      |  |     
|Income tax provision
(benefit, at statutory
federal rate)        |  |      | (34 | %)   |  |      | (34 | %) |  |  | (34 | %)
|State and local income
taxes, net of federal income
taxes effect |  |      | (6  | %)   |  |      | (1  | %) |  |  | (6  | %)
|Permanent differences                                            |  |      | 24  | %    |  |      | 31  | %  |  |  | 28  | % 
|Foreign taxes at rates
different than domestic
rates             |  |      | 25  | %    |  |      | 1   | %  |  |  | (2  | %)
|Change in valuation allowance                                    |  |      |    | %    |  |      | 6   | %  |  |  | 15  | % 
|                                                                 |  |      |     |      |  |      |     |    |  |  |     |   
|                                                                 |  |      | 9   | %    |  |      | 3   | %  |  |  | 1   | % 
|                                                                 |  |      |     |      |  |      |     |    |  |  |     |   

The components of deferred income taxes as of December 31, 2003 and 2002
are as follows (in thousands):

|                                |                                           |   |         |          |      |   |         |          |  
|------------------------------- | ----------------------------------------- | - | ------- | -------- | ---- | - | ------- | -------- | -
|                                |                                           |   | 2003    |          | 2002
|                                |                                           |   |         |          |     
|Allowance for doubtful accounts |                                           | $ | 994     |          |      | $ | 3,015   |         
|Inventory reserve               |                                           |   | 10,425  |          |      |   | 13,474  |         
|Warranty reserve                |                                           |   | 771     |          |      |   | 1,244   |         
|Deferred stock expense          |                                           |   |        |          |      |   | 2,529   |         
|Accrued liabilities             |                                           |   | 2,610   |          |      |   | 9,069   |         
|Other                           |                                           |   | 3,479   |          |      |   | 2,169   |         
|                                |                                           |   |         |          |      |   |         |         
|                                |                                           |   | 18,279  |          |      |   | 31,500  |         
|                                | Valuation allowance                       |   |         | (18,279  | )    |   |         | (31,500  | )
|                                |                                           |   |         |          |      |   |         |         
|                                | Net short-term deferred income tax assets |   |         |         |      |   |         |         |  
|Net operating losses            |                                           |   | 40,587  |          |      |   | 28,376  |         
|Tax credits                     |                                           |   | 3,153   |          |      |   | 2,553   |         
|Depreciation and amortization   |                                           |   | 7,466   |          |      |   | 10,831  |         
|Investments                     |                                           |   | 16,926  |          |      |   | 17,180  |         
|Capital loss carryforwards      |                                           |   | 88,717  |          |      |   | 88,501  |         
|Other                           |                                           |   | (136    | )        |      |   | 5       |         
|                                |                                           |   |         |          |      |   |         |         
|                                |                                           |   | 156,713 |          |      |   | 147,446 |         
|                                | Valuation allowance                       |   |         | (154,119 | )    |   |         | (144,809 | )
|                                |                                           |   |         |          |      |   |         |         
|                                | Net long-term deferred income tax assets  |   |         | 2,594    |      |   |         | 2,637    |  
|                                |                                           |   |         |          |      |   |         |         
|                                |                                           | $ | 2,594   |          |      | $ | 2,637   |         
|                                |                                           |   |         |          |      |   |         |         

MRV records valuation allowances against its deferred tax assets, when
necessary, in accordance with SFAS No. 109, Accounting for Income Taxes.
Realization of deferred tax assets (such as net operating loss carryforwards
and income tax credits) is dependent on future taxable earnings and is
therefore uncertain. At least quarterly, MRV assesses the likelihood that its
deferred tax asset balance will be recovered from future taxable income. To
the extent management believes that recovery is unlikely, MRV establishes a
valuation allowance against its deferred tax asset, increasing its income tax
expense in the period such determination is made. During 2002, MRV recorded an
additional valuation allowance (tax expense) totaling $21.2 million relating to
the expected realization of its deferred income tax assets based on likely
future recovery. Although realization is not assured, management believes it
is more likely than not that the net deferred tax assets will be realized.

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As of December 31, 2003, MRV had federal and state net operating loss
carryforwards available of $96.0 million and $136.0 million, respectively. For
the year ended December 31, 2003, MRV generated additional federal and state
net operating losses of $9.9 million and $6.0 million, respectively. For
federal and state income tax purposes, the net operating losses are available
to offset future taxable income through 2023 and 2023, respectively. Tax
credits of $3.1 million and $2.5 million as of December 31, 2003 and 2002,
respectively, expire in 2013. Capital loss carryforwards totaling $221.8
million as of December 31, 2003 and 2002, respectively, expire in 2007.

In 1995, MRV, through a subsidiary in Israel, qualified for a program
under which it is eligible for a tax exemption on its income for a period of
ten years from the beginning of the benefits period. This benefit is due to
expire in 2006. Due to operating losses at this subsidiary, no tax benefit was
received for any of the years ended December 31, 2003, 2002 and 2001.

MRV does not provide United States federal income taxes on the
undistributed earnings of its foreign operations. MRV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.

8. Short-Term and Long-Term Obligations

Short-term obligations consist of secured and unsecured lines of credit,
short-term loans and notes entered into with certain financial institutions.
As of December 31, 2003 and 2002, these short-term obligations totaled $2.7
million and $7.0 million, respectively. Certain assets of MRVs subsidiaries
have been pledged as collateral on these borrowings. The weighted average
interest rate on these obligations was approximately 5% as of December 31, 2003
and 2002. These obligations are incurred and settled in the local currencies
of the respective subsidiaries.

Long-term debt consisted of secured notes payable to financial
institutions bearing interest at rates ranging from 4.7% to 9.4%. Principal
and interest is payable in monthly and quarterly installments through December
2005. As of December 31, 2003 and 2002, long-term debt totaled $404,000 and
$783,000, respectively. As of December 31, 2003, $204,000 of long-term debt is
due during 2004 with the remaining balance of $200,000 due in 2005.

9. Interest Rate Swap

MRV entered into an interest rate swap (the Swap) in the second quarter
of 2000 to effectively change the interest rate characteristics of its $50.0
million variable-rate term loan presented in Long-Term Debt, with the objective
of fixing its overall borrowing costs. The Swap was considered to be 100%
effective and was therefore recorded using the short-cut method. The Swap was
designated as a cash flow hedge and changes in fair value of the debt were
generally offset by changes in fair value of the related security, resulting in
negligible net impact. The gain or loss from the change in fair value of the
Swap as well as the offsetting change in the hedged fair value of the long-term
debt were recognized in other comprehensive loss. In February 2002, MRV paid
off the Long-Term Debt of $50.0 million and terminated the Swap. The realized
loss on the Swap of $3.2 million has been recorded as interest expense and is
included in other expense, net in the accompanying Statements of Operations for
2002.

10. Convertible Debt

In June 2003, MRV completed the sale of $23.0 million principal amount of
five-year 5% convertible notes due in 2008, to an institutional investor, in a
private placement. The 2003 Notes bear interest at 5% per annum and are
convertible into shares of MRVs common stock at a conversion price of $2.32
per share. MRV is using the net proceeds from the sale of the 2003 Notes for
general corporate purposes and working capital. Included in Other Expense, net
in the accompanying Statements of Operations is interest expense related to
these 2003 Notes that amounted to $672,000 for the year ended December 31,
2003.

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In June 1998, MRV issued $100.0 million principal amount of its 1998
Notes. During 2003, MRV retired $5.9 million principal amount of 1998 Notes in
exchange for the issuance of 4.2 million shares of its common stock to the
holders of these notes, resulting in a remaining outstanding balance of $26.0
million at maturity. On June 15, 2003, the balance of MRVs outstanding 1998
Notes matured and MRV repaid and retired them. For 2003, MRV recorded a loss
on the extinguishment of debt totaling $5.4 million, net of associated taxes,
in other expense, net in the accompanying Statements of Operations. This loss
was recognized in accordance with Emerging Issues Task Force Issue 02-15
released in September 2002. During the year ended December 31, 2002, MRV
acquired $53.0 million in principal amount of these notes in exchange for its
issuance of 12.3 million shares of its common stock and $19.7 million in cash
to the holders of these notes. During 2002, MRV recognized a gain of $393,000
in connection with the extinguishment of debt. MRV incurred $809,000 and $3.2
million in interest expense relating to the 1998 Notes for 2003 and 2002,
respectively.

11. Commitments and Contingencies

Lease Commitments

The Company leases all of its facilities and certain equipment under
non-cancelable operating lease agreements expiring in various years through
2013. The aggregate minimum annual lease payments under leases in effect as of
December 31, 2003 were as follows (in thousands):

|                         |  |   |        | 
|------------------------ |  | - | ------ | 
|Year Ending December 31, |  |   |        | 
|2004                     |  |   | 5,192  | 
|2005                     |  |   | 4,332  | 
|2006                     |  |   | 3,741  | 
|2007                     |  |   | 3,012  | 
|2008                     |  |   | 2,431  | 
|Thereafter               |  |   | 3,997  | 
|                         |  |   |        | 
|                         |  | $ | 22,705 | 
|                         |  |   |        | 

Annual rental expense under non-cancelable operating lease agreements for
the years ended December 31, 2003, 2002 and 2001, was $6.0 million, $9.6
million and $8.8 million, respectively.

Royalty Commitment

Through subsidiaries in Israel, MRV is obligated to the Office of the
Chief Scientist of the Government of Israel (Chief Scientist) with respect to
the governments participation in research and development expenses for certain
products. Amounts received by MRV from the participation of the Chief
Scientist were offset against the related research and development expenses
incurred. Accordingly, MRVs royalty to the Chief Scientist is calculated at a
rate of 2% to 5% of sales of such products developed with the participation up
to the dollar amount of such participation. MRV received
participation from the Chief Scientist that amounted to $287,000 and
$746,000 for the years ended December 31, 2003 and 2002, respectively. No participation was received for
the year ended December 31, 2001. The remaining future
obligation as of December 31, 2003 is approximately $1.4 million which is
contingent on generating sufficient sales of selected product lines.

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Litigation

MRV has received notices from third parties alleging possible infringement
of patents with respect to product features or manufacturing processes.
Management believes such notices are common in the communications industry
because of the large number of patents that have been filed on these subjects.
MRVs policy is to discuss these notices with the senders in an effort to
demonstrate that MRVs products and/or processes do not violate any patents.
From time to time, MRV has been involved in such discussions with IBM, Lucent,
Ortel, Nortel, Rockwell, the Lemelson Foundation and Finisar. MRV does not
believe that any of its products or processes violates any of the patents
asserted by these parties and MRV further believes that it has meritorious
defenses if any legal action is taken by any of these parties. However, if one
or more of these parties was to assert a claim and gain a conclusion
unfavorable to MRV such claims could materially and adversely affect the
business, operating results and financial condition of MRV.

MRV has been named as a defendant in lawsuits involving matters that MRV
considers routine to the nature of its business. Management is of the opinion
that the ultimate resolution of all such matters will not have a material
adverse effect on the accompanying financial statements.

12. Stockholders Equity

Authorized Shares

On May 10, 2000, the Board of Directors and stockholders of MRV approved
an increase in the authorized number of shares of its $0.0017 par value common
stock from 80.0 million to 160.0 million shares relating to the two-for-one
stock split distributed on May 26, 2000. MRV is authorized to issue up to 1.0
million shares of its $0.01 par value preferred stock, of which none is issued
or outstanding as of December 31, 2003 and 2002.

In October 2003, MRV issued and sold 1,667,000 shares of its common stock
to several institutional investors, raising net proceeds of approximately $5.0
million. These shares were taken from its shelf registration statement that
was declared effective by the SEC in June 2003, which registered $20.0 million
of its common stock that MRV may issue and sell from time to time.

Stock Repurchase Program

On June 13, 2002, MRV announced that its Board of Directors had approved a
program to repurchase up to 7.0 million shares of its common stock. As of
December 31, 2003, MRV had repurchased 1.3 million shares of its common stock
at a cost of $1.3 million through December 31, 2003. MRV can repurchase up to
5.7 million additional shares of its common stock under this program.

Stock Options

MRV has various stock option and warrant plans that provide for granting
options and warrants to purchase shares of MRVs common stock to employees,
directors and non-employees performing consulting or advisory services for MRV.
The plans provide for the granting of options, which meet the Internal Revenue
Code requirements for qualification as incentive stock options, as well as
nonstatutory options and are at the discretion of the board of directors.
Under these plans, stocks option and warrant exercise prices generally equal
the fair market value of MRVs common stock at the date of grant. The options
and warrants generally vest over three to five years with expiration dates
ranging from six and ten years from the date of grant depending on the plan.
The plans provide for the issuance of 6.2 million shares of common stock over
the remaining life of the plans.

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In July 2000, Luminent and MRV entered into four-year employment contracts
with the former President and former Chief Financial Officer (CFO) of
Luminent. The agreements provide for annual salaries, performance bonuses and
a combination of stock options to purchase common stock of MRV and Luminent.
The former President received approximately 316,000 options to purchase shares
of MRV common stock at $32.56 per share (a substantial discount) expiring in
five years. The former CFO received approximately 22,000 options to purchase
shares of MRV common stock at $33.44 per share (a substantial discount)
expiring in five years. These options are immediately exercisable, however
they provide for the repurchase in the event of voluntary termination. These
grants have been accounted for under APB No. 25 and the intrinsic value (fair
market value less exercise price) results in additional deferred stock
compensation of approximately $10.8 million that is being amortized over the
four-year vesting period. Furthermore, Luminent granted 4.8 million and
800,000 of its stock options to the former President and former CFO,
respectively. The options are exercisable at $6.25 per share and vest over
four years. These grants have been accounted for in accordance with APB No. 25
and the intrinsic value (original mid point of filing range, $14, less $6.25)
resulted in aggregate deferred stock expense of approximately $43.4 million.
The deferred stock expense is being amortized using the graded vesting method
over four years. The deferred stock compensation incurred from the granting of
MRV and Luminent options for a total of $54.2 million has been included in the
consolidated financial statements of MRV.

In June 2002 and September 2001, Luminents former CFO and former
President, respectively, resigned. In connection with their resignations, they
received severance packages, as defined in each of their employment agreements
dated July 2000, providing for severance payments of approximately $335,000 and
$1.0 million, respectively, and the immediate vesting of all outstanding MRV
and Luminent stock options held on the date of resignation. The MRV and
Luminent stock options are exercisable through July 12, 2004 and September 11,
2003, respectively. Additionally, an immediate recognition of deferred stock
expense of $1.7 million and $18.9 million was recorded during the years ended
December 31, 2002 and 2001, respectively, as a result of their resignations.

Information with respect to MRVs stock option and warrant plans is as
follows (in thousands):

|                                                           |                         |  |        |        |           |   |           |       |           |  |        |        |           |   |       |       |  |  |           |        |   |   |       |       | 
|---------------------------------------------------------- | ----------------------- |  | ------ | ------ | --------- | - | --------- | ----- | --------- |  | ------ | ------ | --------- | - | ----- | ----- |  |  | --------- | ------ | - | - | ----- | ----- | 
|                                                           |                         |  | 2003   |        | 2002      |   | 2001     
|                                                           |                         |  |        |        |           |   |          
|                                                           |                         |  |        |        |           |   | Wtd. Avg. |       |           |  |        |        | Wtd. Avg. |   |       |       |  |  | Wtd. Avg.
|                                                           |                         |  | Shares |        | Ex. Price |   | Shares    |       | Ex. Price |  | Shares |        | Ex. Price
|                                                           |                         |  |        |        |           |   |           |       |           |  |        |        |          
|Outstanding, beginning of
year                             |                         |  | 12,626 |        |           | $ | 6.90      |       |           |  | 12,549 |        |           | $ | 9.93  |       |  |  | 12,110    |        |   | $ | 11.28 |      
|                                                           | Granted                 |  |        | 2,543  |           |   | $         | 2.00  |           |  |        | 3,116  |           |   | $     | 0.90  |  |  |           | 3,045  |   |   | $     | 5.63  | 
|                                                           | Exercised               |  |        | (758   | )         |   | $         | 2.31  |           |  |        | (50    | )         |   | $     | 2.60  |  |  |           | (561   | ) |   | $     | 11.42 | 
|                                                           | Cancelled and forfeited |  |        | (4,382 | )         |   | $         | 12.44 |           |  |        | (2,989 | )         |   | $     | 13.47 |  |  |           | (2,045 | ) |   | $     | 11.07 | 
|                                                           |                         |  |        |        |           |   |           |       |           |  |        |        |           |   |       |       |  |  |           |        |   |   |       |      
|Outstanding, end of year                                   |                         |  | 10,029 |        |           | $ | 3.58      |       |           |  | 12,626 |        |           | $ | 6.90  |       |  |  | 12,549    |        |   | $ | 9.93  |      
|                                                           |                         |  |        |        |           |   |           |       |           |  |        |        |           |   |       |       |  |  |           |        |   |   |       |      
|Exercisable, end of year                                   |                         |  | 4,483  |        |           | $ | 6.00      |       |           |  | 6,811  |        |           | $ | 10.76 |       |  |  | 6,211     |        |   | $ | 11.20 |      
|                                                           |                         |  |        |        |           |   |           |       |           |  |        |        |           |   |       |       |  |  |           |        |   |   |       |      
|Weighted average fair
value of options granted
during year |                         |  |        |        |           | $ | 1.58      |       |           |  |        |        |           | $ | 0.83  |       |  |  |           |        |   | $ | 9.79  |      
|                                                           |                         |  |        |        |           |   |           |       |           |  |        |        |           |   |       |       |  |  |           |        |   |   |       |      

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Information about MRV stock options outstanding at December 31, 2003 is
summarized as follows (in thousands):

|                |  |             |        |           |  |               |       |             |  |            |  |  |       |  |  |   |       |  |  | 
|--------------- |  | ----------- | ------ | --------- |  | ------------- | ----- | ----------- |  | ---------- |  |  | ----- |  |  | - | ----- |  |  | 
|                |  | Number      |        |           |  |               |       | Wtd. Avg.   |  | Number     |  |  |       | 
|                |  | Outstanding |        | Wtd. Avg. |  | Remaining     |       | Exercisable |  | Wtd. Avg. 
|Exercise Prices |  | as of 2003  |        | Ex. Price |  | Contract Life |       | as of 2003  |  | Ex. Price 
|                |  |             |        |           |  |               |       |             |  |           
|$0.67 - $1.95   |  |             | 4,095  |           |  | $             | 1.08  |             |  | 8.89 Years |  |  | 759   |  |  | $ | 0.94  | 
|$2.15 - $3.95   |  |             | 4,089  |           |  | $             | 2.84  |             |  | 4.86 Years |  |  | 2,331 |  |  | $ | 2.79  | 
|$5.38 - $9.50   |  |             | 821    |           |  | $             | 6.43  |             |  | 5.27 Years |  |  | 625   |  |  | $ | 6.55  | 
|$10.06 - $17.63 |  |             | 490    |           |  | $             | 13.95 |             |  | 3.78 Years |  |  | 334   |  |  | $ | 14.44 | 
|$23.00 - $50.38 |  |             | 534    |           |  | $             | 25.05 |             |  | 4.24 Years |  |  | 434   |  |  | $ | 24.88 | 
|                |  |             |        |           |  |               |       |             |  |            |  |  |       |  |  |   |       | 
|                |  |             | 10,029 |           |  | $             | 3.58  |             |  | 6.45 Years |  |  | 4,483 |  |  | $ | 6.00  | 
|                |  |             |        |           |  |               |       |             |  |            |  |  |       |  |  |   |       |  |  | 

13. Segment Reporting and Geographical Information

MRV divides and operates its business based on three segments: the
networking group, the optical components group and development stage enterprise
group. The networking group designs, manufactures and distributes optical
networking solutions and Internet infrastructure products. The optical
components group designs, manufactures and distributes optical components and
optical subsystems. The development stage enterprise group that MRV has
created or invested in is developing optical components, subsystems and
networks and products for the infrastructure of the Internet. Segment
information is therefore being provided on this basis, which differs from prior
period presentations.

The accounting policies of the segments are the same as those described in
the summary of significant accounting polices previously described. MRV
evaluates segment performance based on revenues and operating expenses of each
segment. As such, there are no separately identifiable segment assets nor are
there any separately identifiable statements of operations data below operating
income.

Business segment revenues for the years ended December 31, 2003, 2002 and
2001, are as follows (in thousands):

|                                   |  |      |         |      |  |      |         |   |  |   |         | 
|---------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | 
|                                   |  | 2003 |         | 2002 |  | 2001
|                                   |  |      |         |      |  |     
|Networking group                   |  | $    | 202,399 |      |  | $    | 185,662 |   |  | $ | 201,517 | 
|Optical components group           |  |      | 38,790  |      |  |      | 67,284  |   |  |   | 131,327 | 
|Development stage enterprise group |  |      |        |      |  |      |        |   |  |   |        | 
|                                   |  |      |         |      |  |      |         |   |  |   |         | 
|                                   |  |      | 241,189 |      |  |      | 252,946 |   |  |   | 332,844 | 
|Inter-segment adjustment           |  |      | (2,206  | )    |  |      | (414    | ) |  |   |        | 
|                                   |  |      |         |      |  |      |         |   |  |   |         | 
|                                   |  | $    | 238,983 |      |  | $    | 252,532 |   |  | $ | 332,844 | 
|                                   |  |      |         |      |  |      |         |   |  |   |         | 

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Revenues by product line for the years ended December 31, 2003, 2002 and
2001, are as follows (in thousands):

|                                          |  |      |         |      |  |      |         |  |  |   |         | 
|----------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                          |  | 2003 |         | 2002 |  | 2001
|                                          |  |      |         |      |  |     
|Optical passive components                |  | $    | 14,838  |      |  | $    | 28,693  |  |  | $ | 39,010  | 
|Optical active components                 |  |      | 39,037  |      |  |      | 51,343  |  |  |   | 97,653  | 
|Switches and routers                      |  |      | 64,028  |      |  |      | 57,571  |  |  |   | 74,675  | 
|Remote device management products         |  |      | 16,626  |      |  |      | 17,361  |  |  |   | 18,987  | 
|Network physical infrastructure equipment |  |      | 50,511  |      |  |      | 55,570  |  |  |   | 59,902  | 
|Services                                  |  |      | 21,612  |      |  |      | 21,444  |  |  |   | 18,934  | 
|Other networking products                 |  |      | 32,331  |      |  |      | 20,550  |  |  |   | 23,683  | 
|                                          |  |      |         |      |  |      |         |  |  |   |         | 
|                                          |  | $    | 238,983 |      |  | $    | 252,532 |  |  | $ | 332,844 | 
|                                          |  |      |         |      |  |      |         |  |  |   |         | 

For the years ended December 31, 2003, 2002 and 2001, MRV had no single
customer that accounted for 10% or more of revenues. As of December 31, 2003
and 2002, MRV had no single customer that accounted for 10% or more of accounts
receivable. MRV does not track customer revenue by region for each individual
reporting segment.

A summary of external revenue by geographical region for the years ended
December 31, 2003, 2002 and 2001, is as follows (in thousands):

|              |  |      |         |      |  |      |         |  |  |   |         | 
|------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|              |  | 2003 |         | 2002 |  | 2001
|              |  |      |         |      |  |     
|Americas      |  | $    | 51,505  |      |  | $    | 64,675  |  |  | $ | 108,550 | 
|Europe        |  |      | 171,957 |      |  |      | 157,998 |  |  |   | 176,745 | 
|Asia Pacific  |  |      | 14,277  |      |  |      | 28,560  |  |  |   | 42,925  | 
|Other regions |  |      | 1,244   |      |  |      | 1,299   |  |  |   | 4,624   | 
|              |  |      |         |      |  |      |         |  |  |   |         | 
|              |  | $    | 238,983 |      |  | $    | 252,532 |  |  | $ | 332,844 | 
|              |  |      |         |      |  |      |         |  |  |   |         | 

Business segment operating loss for the years ended December 31, 2003,
2002 and 2001, are as follows (in thousands):

|                                   |  |      |         |      |  |      |          |   |  |   |          |  
|---------------------------------- |  | ---- | ------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                   |  | 2003 |         | 2002 |  | 2001
|                                   |  |      |         |      |  |     
|Networking group                   |  | $    | (2,207  | )    |  | $    | (58,764  | ) |  | $ | (117,257 | )
|Optical components group           |  |      | (11,110 | )    |  |      | (62,655  | ) |  |   | (161,613 | )
|Development stage enterprise group |  |      | (6,830  | )    |  |      | (24,067  | ) |  |   | (41,757  | )
|                                   |  |      |         |      |  |      |          |   |  |   |          |  
|                                   |  |      | (20,147 | )    |  |      | (145,486 | ) |  |   | (320,627 | )
|Inter-segment adjustment           |  |      | 8       |      |  |      | (828     | ) |  |   |         |  
|                                   |  |      |         |      |  |      |          |   |  |   |          |  
|                                   |  | $    | (20,139 | )    |  | $    | (146,314 | ) |  | $ | (320,627 | )
|                                   |  |      |         |      |  |      |          |   |  |   |          |  

Net loss before provision for income taxes for each of the three years
ended December 31, 2003 is as follows (in thousands):

|         |  |      |         |      |  |      |          |   |  |   |          |  
|-------- |  | ---- | ------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|         |  | 2003 |         | 2002 |  | 2001
|         |  |      |         |      |  |     
|Domestic |  | $    | (12,917 | )    |  | $    | (143,119 | ) |  | $ | (207,753 | )
|Foreign  |  |      | (11,710 | )    |  |      | (323,245 | ) |  |   | (114,125 | )
|         |  |      |         |      |  |      |          |   |  |   |          |  
|         |  | $    | (24,627 | )    |  | $    | (466,364 | ) |  | $ | (321,878 | )
|         |  |      |         |      |  |      |          |   |  |   |          |  

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14. 401(K) Plans

MRV has 401(K) savings plans (the Plans) at certain subsidiaries under
which all eligible employees may participate. The Plans provide for MRV to
make matching contributions to all eligible employees. For the years ended
December 31, 2003, 2002 and 2001, approximately $627,000, $568,000 and
$838,000, respectively, was charged as expense related to these plans.

15. Supplemental Statements of Cash Flow Information

Supplemental Statements of Cash Flow information for each of the years
ended December 31, 2003, 2002 and 2001 is as follows (in thousands):

|                                                                      |                                                                    |  |                                  |       |      |  |      |        |  |  |   |        | 
|--------------------------------------------------------------------- | ------------------------------------------------------------------ |  | -------------------------------- | ----- | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                                                      |                                                                    |  | For the Years Ended December 31,
|                                                                      |                                                                    |  |                                 
|                                                                      |                                                                    |  | 2003                             |       | 2002 |  | 2001
|                                                                      |                                                                    |  |                                  |       |      |  |     
|Supplemental disclosure of cash flow information:                     |                                                                    |  |                                  |       |      |  |      |        |  |  |   |       
|                                                                      | Cash paid during year for interest                                 |  | $                                | 2,464 |      |  | $    | 2,168  |  |  | $ | 10,549 | 
|                                                                      | Cash paid during year for income taxes                             |  | $                                | 3,098 |      |  | $    | 2,724  |  |  | $ | 5,323  | 
|Supplemental schedule of non-cash investing and
financing activities: |                                                                    |  |                                  |       |      |  |      |        |  |  |   |       
|                                                                      | Common stock issued in connection with
investments in subsidiaries |  | $                                |      |      |  | $    | 7,052  |  |  | $ | 36,575 | 
|                                                                      |                                                                    |  |                                  |       |      |  |      |        |  |  |   |        | 
|                                                                      | Common stock issued in connection with
exchange of 1998 Notes      |  | $                                | 6,014 |      |  | $    | 31,647 |  |  | $ |       | 
|                                                                      |                                                                    |  |                                  |       |      |  |      |        |  |  |   |        | 
|                                                                      | Decrease in fair value of interest rate swap                       |  | $                                |      |      |  | $    |       |  |  | $ | 3,198  | 
|                                                                      |                                                                    |  |                                  |       |      |  |      |        |  |  |   |        | 
|                                                                      | Non-cash deferred stock expense                                    |  | $                                | 1,369 |      |  | $    | 2,990  |  |  | $ | 7,816  | 
|                                                                      |                                                                    |  |                                  |       |      |  |      |        |  |  |   |        | 
|                                                                      | Non-cash consideration received in sale of
FOCI and QOI            |  | $                                |      |      |  | $    | 2,000  |  |  | $ |       | 
|                                                                      |                                                                    |  |                                  |       |      |  |      |        |  |  |   |        | 
|                                                                      | Fair value of stock options issued in
connection with investment   |  | $                                |      |      |  | $    |       |  |  | $ | 503    | 
|                                                                      |                                                                    |  |                                  |       |      |  |      |        |  |  |   |        | 

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16. Quarterly Financial Data (Unaudited)

|                                                                          |                                |                                              |        |                    |        |          |         |           |        |          |         |       |        |   |         |   |        | 
|------------------------------------------------------------------------- | ------------------------------ | -------------------------------------------- | ------ | ------------------ | ------ | -------- | ------- | --------- | ------ | -------- | ------- | ----- | ------ | - | ------- | - | ------ | 
|                                                                          |                                |                                              |        | Three Months Ended
|                                                                          |                                |                                              |        |                   
|                                                                          |                                |                                              |        | Mar. 31,           |        | June 30, |         | Sept. 30, |        | Dec. 31,
|                                                                          |                                |                                              |        | 2003               |        | 2003     |         | 2003      |        | 2003    
|                                                                          |                                |                                              |        |                    |        |          |         |           |        |         
|Revenue                                                                   |                                | $                                            | 51,117 |                    |        | $        | 61,958  |           |        | $        | 56,817  |       |        | $ | 69,091  |  
|Cost of goods sold                                                        |                                |                                              | 36,514 |                    |        |          | 42,133  |           |        |          | 38,397  |       |        |   | 47,849  |  
|                                                                          |                                |                                              |        |                    |        |          |         |           |        |          |         |       |        |   |         |  
|Gross profit                                                              |                                |                                              | 14,603 |                    |        |          | 19,825  |           |        |          | 18,420  |       |        |   | 21,242  |  
|Operating costs and expenses:                                             |                                |                                              |        |                    |        |          |         |           |        |          |         |       |        |   |         |  
|                                                                          |                                | Product development and engineering          |        |                    | 8,736  |          |         |           | 6,890  |          |         |       | 8,088  |   |         |   | 7,258  | 
|                                                                          |                                | Selling, general and administrative          |        |                    | 11,905 |          |         |           | 16,695 |          |         |       | 16,832 |   |         |   | 17,436 | 
|                                                                          |                                | Amortization of intangibles                  |        |                    | 13     |          |         |           | 3      |          |         |       | 9      |   |         |   | 8      | 
|                                                                          |                                | Impairment of goodwill and other intangibles |        |                    |       |          |         |           |       |          |         |       | 356    |   |         |   |       | 
|                                                                          |                                |                                              |        |                    |        |          |         |           |        |          |         |       |        |   |         |  
|Total operating costs and expenses                                        |                                |                                              | 20,654 |                    |        |          | 23,588  |           |        |          | 25,285  |       |        |   | 24,702  |  
|                                                                          |                                |                                              |        |                    |        |          |         |           |        |          |         |       |        |   |         |  
|Operating loss                                                            |                                |                                              | (6,051 | )                  |        |          | (3,763  | )         |        |          | (6,865  | )     |        |   | (3,460  | )
|Other income (expense), net                                               |                                |                                              | 41     |                    |        |          | (5,445  | )         |        |          | (526    | )     |        |   | (450    | )
|                                                                          |                                |                                              |        |                    |        |          |         |           |        |          |         |       |        |   |         |  
|Loss before minority interest, provision for taxes
and extraordinary gain |                                |                                              | (6,010 | )                  |        |          | (9,208  | )         |        |          | (7,391  | )     |        |   | (3,910  | )
|Minority interest                                                         |                                |                                              | (38    | )                  |        |          | 66      |           |        |          | 51      |       |        |   | (21     | )
|Provision for taxes                                                       |                                |                                              | 428    |                    |        |          | 493     |           |        |          | 412     |       |        |   | 1,028   |  
|                                                                          |                                |                                              |        |                    |        |          |         |           |        |          |         |       |        |   |         |  
|Loss before extraordinary gain                                            |                                |                                              | (6,400 | )                  |        |          | (9,767  | )         |        |          | (7,854  | )     |        |   | (4,917  | )
|                                                                          | Extraordinary gain, net of tax |                                              |        |                   |        |          |         |          |        |          |         | 1,950 |        |   |         |  |       
|                                                                          |                                |                                              |        |                    |        |          |         |           |        |          |         |       |        |   |         |  
|Net loss                                                                  |                                | $                                            | (6,400 | )                  |        | $        | (9,767  | )         |        | $        | (5,904  | )     |        | $ | (4,917  | )
|                                                                          |                                |                                              |        |                    |        |          |         |           |        |          |         |       |        |   |         |  
|Loss before extraordinary gain                                            |                                | $                                            | (0.06  | )                  |        | $        | (0.10   | )         |        | $        | (0.08   | )     |        | $ | (0.05   | )
|Extraordinary gain, net of tax                                            |                                | $                                            |       |                    |        | $        |        |           |        | $        | 0.02    |       |        | $ |        |  
|Basic and diluted net loss per share                                      |                                | $                                            | (0.06  | )                  |        | $        | (0.10   | )         |        | $        | (0.06   | )     |        | $ | (0.05   | )
|Basic and diluted weighted average shares outstanding                     |                                |                                              | 98,930 |                    |        |          | 101,383 |           |        |          | 103,097 |       |        |   | 104,747 |  
|                                                                          |                                |                                              |        |                    |        |          |         |           |        |          |         |       |        |   |         |  

|                                                                                                 |                                           |                                              |          |                    |        |          |         |           |        |          |          |   |        |   |         |   |        | 
|------------------------------------------------------------------------------------------------ | ----------------------------------------- | -------------------------------------------- | -------- | ------------------ | ------ | -------- | ------- | --------- | ------ | -------- | -------- | - | ------ | - | ------- | - | ------ | 
|                                                                                                 |                                           |                                              |          | Three Months Ended
|                                                                                                 |                                           |                                              |          |                   
|                                                                                                 |                                           |                                              |          | Mar. 31,           |        | June 30, |         | Sept. 30, |        | Dec. 31,
|                                                                                                 |                                           |                                              |          | 2002               |        | 2002     |         | 2002      |        | 2002    
|                                                                                                 |                                           |                                              |          |                    |        |          |         |           |        |         
|Revenue                                                                                          |                                           | $                                            | 62,418   |                    |        | $        | 61,627  |           |        | $        | 60,833   |   |        | $ | 67,654  |  
|Cost of goods sold                                                                               |                                           |                                              | 43,105   |                    |        |          | 40,723  |           |        |          | 43,377   |   |        |   | 42,361  |  
|                                                                                                 |                                           |                                              |          |                    |        |          |         |           |        |          |          |   |        |   |         |  
|Gross profit                                                                                     |                                           |                                              | 19,313   |                    |        |          | 20,904  |           |        |          | 17,456   |   |        |   | 25,293  |  
|Operating costs and expenses:                                                                    |                                           |                                              |          |                    |        |          |         |           |        |          |          |   |        |   |         |  
|                                                                                                 |                                           | Product development and engineering          |          |                    | 15,620 |          |         |           | 14,425 |          |          |   | 11,681 |   |         |   | 7,632  | 
|                                                                                                 |                                           | Selling, general and administrative          |          |                    | 23,539 |          |         |           | 24,320 |          |          |   | 21,365 |   |         |   | 20,823 | 
|                                                                                                 |                                           | Amortization of intangibles                  |          |                    | 28     |          |         |           | 29     |          |          |   | 29     |   |         |   | 54     | 
|                                                                                                 |                                           | Impairment of goodwill and other intangibles |          |                    |       |          |         |           |       |          |          |   | 72,697 |   |         |   |       | 
|                                                                                                 |                                           | Impairment of long-lived assets              |          |                    |       |          |         |           |       |          |          |   | 16,516 |   |         |   | 522    | 
|                                                                                                 |                                           |                                              |          |                    |        |          |         |           |        |          |          |   |        |   |         |  
|Total operating costs and expenses                                                               |                                           |                                              | 39,187   |                    |        |          | 38,774  |           |        |          | 122,288  |   |        |   | 29,031  |  
|                                                                                                 |                                           |                                              |          |                    |        |          |         |           |        |          |          |   |        |   |         |  
|Operating loss                                                                                   |                                           |                                              | (19,874  | )                  |        |          | (17,870 | )         |        |          | (104,832 | ) |        |   | (3,738  | )
|Other expense, net                                                                               |                                           |                                              | 9,878    |                    |        |          | 76      |           |        |          | 374      |   |        |   | 13,137  |  
|                                                                                                 |                                           |                                              |          |                    |        |          |         |           |        |          |          |   |        |   |         |  
|Loss before minority interest, provision for taxes
and cumulative effect of an accounting change |                                           |                                              | (29,752  | )                  |        |          | (17,946 | )         |        |          | (105,206 | ) |        |   | (16,875 | )
|Minority interest                                                                                |                                           |                                              | 105      |                    |        |          | (3      | )         |        |          | 43       |   |        |   | 85      |  
|Provision for taxes                                                                              |                                           |                                              | 186      |                    |        |          | 856     |           |        |          | 11,869   |   |        |   | 484     |  
|                                                                                                 |                                           |                                              |          |                    |        |          |         |           |        |          |          |   |        |   |         |  
|Loss before cumulative effect of an accounting change                                            |                                           |                                              | (30,043  | )                  |        |          | (18,799 | )         |        |          | (117,118 | ) |        |   | (17,444 | )
|                                                                                                 | Cumulative effect of an accounting change |                                              |          | (296,355           | )      |          |         |          |        |          |          |  |        |   |         |  |       
|                                                                                                 |                                           |                                              |          |                    |        |          |         |           |        |          |          |   |        |   |         |  
|Net loss                                                                                         |                                           | $                                            | (326,398 | )                  |        | $        | (18,799 | )         |        | $        | (117,118 | ) |        | $ | (17,444 | )
|                                                                                                 |                                           |                                              |          |                    |        |          |         |           |        |          |          |   |        |   |         |  
|Loss before cumulative effect of an accounting change                                            |                                           | $                                            | (0.35    | )                  |        | $        | (0.21   | )         |        | $        | (1.24    | ) |        | $ | (0.18   | )
|Cumulative effect of an accounting change                                                        |                                           | $                                            | (3.50    | )                  |        | $        |        |           |        | $        |         |   |        | $ |        |  
|Basic and diluted net loss per share                                                             |                                           | $                                            | (3.85    | )                  |        | $        | (0.21   | )         |        | $        | (1.24    | ) |        | $ | (0.18   | )
|Basic and diluted weighted average shares outstanding                                            |                                           |                                              | 84,789   |                    |        |          | 90,319  |           |        |          | 94,351   |   |        |   | 95,811  |  
|                                                                                                 |                                           |                                              |          |                    |        |          |         |           |        |          |          |   |        |   |         |  

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

On June 17, 2002, the Board of Directors of the MRV Communications, Inc.
(MRV) determined, upon the recommendation of its audit committee, to appoint
Ernst & Young LLP as MRVs independent public accountants, replacing Arthur
Andersen LLP. MRV dismissed Arthur Andersen LLP on the same date. This
determination followed MRVs decision to seek proposals from independent public
accountants to audit the financial statements of MRV.

The audit reports of Arthur Andersen LLP on the consolidated financial
statements of MRV as of and for the fiscal years ended December 31, 2001 and
2000 did not contain any adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles.

During the two most recent fiscal years of MRV ended December 31, 2001 and
the subsequent interim period to June 17, 2002, there were no disagreements
between MRV and Arthur Andersen LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to Arthur Andersen LLPs satisfaction,
would have caused Arthur Andersen LLP to make reference to the subject matter
of the disagreement in connection with its reports.

None of the reportable events described under Item 304(a)(1)(v) of
Regulation S-K occurred within the two most recent fiscal years of MRV ended
December 31, 2001 and the subsequent interim period to June 17, 2002.

During the two most recent fiscal years of MRV ended December 31, 2001 and
the subsequent interim period to June 17, 2002, MRV did not consult with Ernst
& Young LLP regarding any of the matters or events set forth in Item
304(a)(2)(i) and (ii) of Regulation S-K.

MRV provided Arthur Andersen a copy of the foregoing disclosures. Exhibit
16.1 to this Form 10-K is a copy of Arthur Andersens letter dated June 17,
2002 stating that it has found no basis for disagreement with such statements.




ITEM 9a. CONTROLS AND PROCEDURES

Evaluation Of Disclosure Controls And Procedures

As of the end of the period covered by this report on Form 10-K, we
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the Exchange
Act)) pursuant to Rule 13a-15 of the Exchange Act. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that as of the end of the period covered by the report on Form 10-K, our
disclosure controls and procedures are effective in timely alerting them to
material information relating to MRV (including its consolidated subsidiaries)
required to be included in MRVs Exchange Act filings.

Changes In Internal Controls

There have been no changes in our internal control over financial
reporting identified in connection with the evaluation required by paragraph
(d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

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PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers and directors of the Registrant at February 15,
2004 are as follows:

|                         |  |     |    |          |  |                                                
|------------------------ |  | --- | -- | -------- |  | -----------------------------------------------
|Name                     |  | Age |    | Position
|                         |  |     |    |         
|Noam Lotan               |  |     | 52 |          |  | President, Chief Executive Officer and Director
|Shlomo Margalit          |  |     | 62 |          |  | Chairman, Chief Technical Officer and Secretary
|Shay Gonen               |  |     | 38 |          |  | Chief Financial Officer                        
|Near Margalit            |  |     | 31 |          |  | Chief Executive Officer, Luminent, Inc.        
|Igal Shidlovsky          |  |     | 67 |          |  | Director                                       
|Guenter Jaensch          |  |     | 65 |          |  | Director                                       
|Professor Daniel Tsui    |  |     | 65 |          |  | Director                                       
|Professor Baruch
Fischer |  |     | 53 |          |  | Director                                       

Noam Lotanhas 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 Margalita 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.

Shay Gonenbecame Chief Financial Officer in September 2001. Since
September 1996, Mr. Gonen has served in various executive capacities for
certain MRV subsidiaries, including as the Vice President of Finance, Chief
Financial Officer and Secretary of Optical Access, Inc. from September 2000; as
General Manager of European Activity for Fiber Driver from January 1999 to
September 2000; as Chief Operating Officer of Fiber Driver Communications from
September 1996 to December 1998. Mr. Gonen served as Vice President of
Operations and Finance for Silver Arrow, L.P. from April 1994 to September
1996. Mr. Gonen holds a B.S. degree in industrial engineering from the
Technion, and an M.B.A. degree from Bar-Ilan University in Tel Aviv.

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Near Margalit, Ph.D. re-joined MRV in May 2002 as Vice President of
Marketing and Business Development. From 1998 until re-joining MRV, Dr.
Margalit was founder, Chairman and Chief Technology Officer for Zaffire, Inc.,
a DWDM Metro Platform company, which was acquired by Centerpoint in October
2001. At Zaffire, Dr. Margalit was responsible for product vision and
architecture of integrating DWDM and SONET technology. Prior to founding
Zaffire, Dr. Margalit was employed by MRV, both in the optical component and
networking divisions. Dr. Margalit holds a B.S. in applied physics from
Caltech and a Ph.D. in optoelectronics from the University of California, Santa
Barbara. In February 2003, Dr. Margalit was appointed Chief Executive Officer
of Luminent, Inc.

Dr. Igal Shidlovskybecame 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. 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 Jaenschbecame a Director of the Company in December 1997.
Dr. Jaensch serves as President of Jaensch Enterprises, a firm engaged in
management and project consulting, and serves as Chairman of the Board for
Biophan Technologies, Inc. For over 20 years, he held executive positions with
Siemens or its subsidiaries in Europe and the United States. Among his
assignments were service as President of Siemens Communications Systems, Inc.;
President and Chairman of Siemens Corporate Research and Support, Inc.;
Chairman and Chief Executive Officer at Siemens Pacesetter, Inc.; and head of
the Cardiac Arrhythmia Division of Siemens AG Medical Group. Dr. Jaensch also
served as Director of Siemens Accounting and Budgeting operations and as
controller of Siemens Data Processing Group. Dr. Jaensch holds a Masters
degree in Business Administration and Ph.D. degree in Business and Finance from
the University of Frankfurt; he also taught business at the University of
Frankfurt.

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

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

Each director is elected for a period of one year at MRVs annual meeting
of stockholders and serves until the next annual meeting and until his
successor is duly elected and qualified. Officers are elected by, and serve at
the discretion of, the board of directors, subject to relevant employment
agreements. Except for Dr. Near Margalit, who is the son of Dr. Shlomo
Margalit, none of the Directors of MRV are related by blood, marriage or
adoption to any of MRVs Directors or executive officers.

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

Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers and persons who own more than 10% of a
registered class of our equity securities, to file with the 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 stockholders are required by the SEC regulations to furnish us with
copies of all Section 16(a) forms they file.

We believe, 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 stockholders was duly and timely filed
during the year ended December 31, 2003.

Code of Business Conduct and Corporate Governance

We have adopted a Code of Business Conduct and Corporate Governance that
applies to all of our directors, officers and employees. In compliance with
the applicable rules of the SEC, special ethics obligations of our Chief
Executive Officer, Chief Financial Officer, Controller and other employees who
perform financial or accounting functions are set forth in the section of our
Code of Business Conduct and Corporate Governance, entitled Special Ethics
Obligations of Employees with Financial Reporting Responsibilities. The Code
is available through our web site at www.mrv.com. Printed copies are available
free of charge and may be requested by contacting our Investor Relations
Department either by mail at our corporate headquarters, by telephone at (818)
886-6782 or by e-mail at if@mrv.com.

We intend to satisfy the disclosure requirements under the Securities
Exchange Act of 1934, as amended, regarding an amendment to, or a waiver from,
our Code of Business Conduct and Corporate Governance by posting such
information on our web site at www.mrv.com.

Audit Committee Financial Expert

Our Board of Directors has determined that at least one person serving on
the Audit Committee is an audit committee financial expert as defined under
Item 401(h) of Regulation S-K and Rule 4200(a)(15) of the Nasdaq Marketplace
Rules. Dr. Guenter Jaensch, the Chairman of the Audit Committee, is an audit
committee financial expert and is independent as defined under Item
7(d)(3)(iv) of Schedule 14A of the Exchange Act.

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ITEM 11. EXECUTIVE COMPENSATION

The following table shows information regarding the total compensation
paid to the Chief Executive Officer and each of its other executive officers
whose total annual compensation exceeds $100,000 (collectively, the Named
Executive Officer) for services rendered to MRV in all capacities during each
of the past three fiscal years.

|                                      |                |  |      |      |        |   |         |         |             |   |              |     |  |  |              |     |           |   |   |     | 
|------------------------------------- | -------------- |  | ---- | ---- | ------ | - | ------- | ------- | ----------- | - | ------------ | --- |  |  | ------------ | --- | --------- | - | - | --- | 
|                                      |                |  |      |      |        |   |         |         |             |   |              |     |  |  | Long-term    |     |           |   |  
|                                      |                |  |      |      |        |   |         |         |             |   |              |     |  |  | Compensation |     |           |   |  
|                                      |                |  |      |      |        |   |         |         |             |   |              |     |  |  | Securities   |     |           |   |  
|                                      |                |  |      |      |        |   |         |         |             |   |              |     |  |  | Underlying  |     | All Other
|                                      |                |  | Year |      | Salary |   | Bonus   |         | Options (#) |   | Compensation
|                                      |                |  |      |      |        |   |         |         |             |   |             
|Noam Lotan                            |                |  | 2003 |      |        | $ | 150,000 |         |             | $ |             |     |  |  | 20,000       |     |           | $ |  |    
|President and Chief Executive
Officer |                |  | 2002 |      |        | $ | 150,000 |         |             | $ |             |     |  |  | 112,000      |     |           | $ |  |    
|                                      |                |  | 2001 |      |        | $ | 100,000 |         |             | $ |             |     |  |  | 98,000       |     |           | $ |  |    
|Shlomo Margalit                       |                |  | 2003 |      |        | $ | 110,000 |         |             | $ |             |     |  |  |             |     |           | $ |  |    
|Chairman, Chief Technical Officer     |                |  | 2002 |      |        | $ | 110,000 |         |             | $ |             |     |  |  |             |     |           | $ |  |    
|                                      | and Secretary  |  |      | 2001 |        |   | $       | 110,000 |             |   | $            |    |  |  |              |    |           |   | $ |    | 
|Shay Gonen                            |                |  | 2003 |      |        | $ | 155,000 |         |             | $ | 25,000       |     |  |  | 50,000       |     |           | $ |  |    
|Chief Financial Officer               |                |  | 2002 |      |        | $ | 146,346 |         |             | $ | 18,000       |     |  |  | 64,500       |     |           | $ |  |    
|                                      |                |  | 2001 |      |        | $ | 128,955 |         |             | $ |             |     |  |  | 100,000      |     |           | $ |  |    
|Near Margalit                         |                |  | 2003 |      |        | $ | 160,000 |         |             | $ |             |     |  |  | 20,000       |     |           | $ |  |    
|Chief Executive Officer,              |                |  | 2002 |      |        | $ | 113,847 |         |             | $ | 15,000       |     |  |  | 190,000      |     |           | $ |  |    
|                                      | Luminent, Inc. |  |      | 2001 |        |   |         | N/A     |             |   |              | N/A |  |  |              | N/A |           |   |   | N/A | 

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Option Grants in Last Fiscal Year

This table gives information about stock options granted during 2003 to
the Named Executive Officers, including potential realizable values. The
actual amount realized upon exercise of stock options will depend upon the
amount by which the market price of common stock on the date of exercise is
greater than the exercise price. If the market price of common stock does not
increase above the exercise price at the time of exercise, realized value to
the named executives from these options will be zero.

|                |  |            |        |                   |  |              |     |                 |  |        |      |         |  |  |            |  |  |                         |        |  |  |   |        | 
|--------------- |  | ---------- | ------ | ----------------- |  | ------------ | --- | --------------- |  | ------ | ---- | ------- |  |  | ---------- |  |  | ----------------------- | ------ |  |  | - | ------ | 
|                |  |            |        |                   |  |              |     |                 |  |        |      |         |  |  |            |  |  | Potential Realizable   
|                |  |            |        |                   |  |              |     |                 |  |        |      |         |  |  |            |  |  | Value at Assumed Annual
|                |  |            |        |                   |  |              |     |                 |  |        |      |         |  |  |            |  |  | Rate of Stock          
|                |  |            |        |                   |  |              |     |                 |  |        |      |         |  |  |            |  |  | Appreciation for Option
|                |  |            |        |                   |  |              |     |                 |  |        |      |         |  |  |            |  |  | Term                   
|                |  | Number of  |        | Percentage        |  |              |     |                 |  |        |      |         |  | 
|                |  | Securities |        | of Total          |  |              |     |                 |  |        |      |         |  |  |            |  |  |                         |        | 
|                |  | Underlying |        | Options           |  |              |     |                 |  |        |      |         |  |  |            |  |  |                         |        | 
|                |  | Options    |        | Granted to        |  | Exercise     |     |                 |  |        |      |         |  |  |            |  |  |                        
|                |  | Granted    |        | Employees in 2003 |  | Price ($/sh) |     | Expiration Date |  | 5%
(1) |      | 10%
(1)
|                |  |            |        |                   |  |              |     |                 |  |        |      |        
|Noam Lotan      |  |            | 20,000 |                   |  |              | 0.8 | %               |  | $      | 3.35 |         |  |  | 12/29/2013 |  |  | $                       | 36,939 |  |  | $ | 90,982 | 
|Shlomo Margalit |  |            |       |                   |  |              |    |                 |  | $      |     |         |  |  | N/A        |  |  | $                       |       |  |  | $ |       | 
|Shay Gonen      |  |            | 30,000 |                   |  |              | 1.2 | %               |  | $      | 1.38 |         |  |  | 5/5/2013   |  |  | $                       | 22,825 |  |  | $ | 56,219 | 
|                |  |            | 20,000 |                   |  |              | 0.8 | %               |  | $      | 3.35 |         |  |  | 12/29/2013 |  |  | $                       | 36,939 |  |  | $ | 90,982 | 
|Near Margalit   |  |            | 20,000 |                   |  |              | 0.8 | %               |  | $      | 3.35 |         |  |  | 12/29/2013 |  |  | $                       | 36,939 |  |  | $ | 90,982 | 



---

|(1) |  | The dollar amounts under these columns are the result of
calculations assuming the price of MRVs common stock on the date of
the grant of the option increases at the hypothetical 5% and 10%
rates set by the SEC for the term of the option. Neither the
amounts reflected nor the rates applied are intended to forecast
possible future appreciation, if any, of the Companys stock price.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Fiscal Year End Option Values

No options were exercised by any of the Named Executive Officers during
2003. The following table provides certain information concerning MRV stock
options held by the Named Executive Officers at December 31, 2003:

|                |  |                             |        |                         |  |             |         |               |  |   |         |  |  |   |         | 
|--------------- |  | --------------------------- | ------ | ----------------------- |  | ----------- | ------- | ------------- |  | - | ------- |  |  | - | ------- | 
|                |  | Number of Shares Underlying |        | Value of Unexercised   
|                |  | Unexercised Options at      |        | In-The-Money Options at
|                |  | December 31, 2003           |        | December 31, 2003
(1)  
|                |  |                             |        |                        
|                |  | Exercisable                 |        | Unexercisable           |  | Exercisable |         | Unexercisable
|                |  |                             |        |                         |  |             |         |              
|Noam Lotan      |  |                             | 42,200 |                         |  |             | 187,800 |               |  | $ | 42,230  |  |  | $ | 361,010 | 
|Shlomo Margalit |  |                             |       |                         |  |             |        |               |  |   |        |  |  |   |        | 
|Shay Gonen      |  |                             | 86,625 |                         |  |             | 158,375 |               |  |   | 119,946 |  |  |   | 271,986 | 
|Near Margalit   |  |                             | 47,500 |                         |  |             | 162,500 |               |  |   | 126,350 |  |  |   | 387,250 | 



---

|(1) |  | Based on the difference between the closing price of MRV
common stock on December 31, 2003 and the exercise price.
|--- |  | ------------------------------------------------------------------------------------------------------------------

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Employment Agreements

In March 1992, MRV entered into three-year employment agreements with Mr.
Lotan and Dr. Margalit. Upon expiration, these agreements automatically renew
for one-year terms unless either party terminates them by giving the other
three months notice of non-renewal prior to the expiration of the current
term. Pursuant to the agreements, Mr. Lotan serves as President, Chief
Executive Officer and a Director of MRV and Dr. Margalit serves as Chairman of
the Board of Directors, Chief Technical Officer and Secretary. Mr. Lotan and
Dr. Margalit receive base annual salaries of $100,000 and $150,000,
respectively and each is entitled to receive a bonus determined and payable at
the discretion of the board of directors upon the recommendation of the
Compensation Committee of the Board. Recommendations with respect to bonus
levels are based on achievement of specified goals, such as new product
introductions, profitability levels, revenue goals, market expansion and other
criteria as established by the Compensation Committee.

Each officer also receives employee benefits, such as vacation, sick pay
and insurance, in accordance with MRVs policies, which are applicable to all
employees. MRV 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 Dr. Margalit and
Mr. Lotan. All benefits under these policies will be payable to MRV upon the
death of an insured.

Compensation of Outside Directors

Outside directors, i.e., directors who are not employees of MRV, receive
cash compensation of $800 per month and $500 for each board of directors
meeting attended, while serving as Directors. In June 2003, MRV granted to
each outside director options to purchase 24,000 shares of its common stock at
exercise prices ranging from $1.94 per share to $2.18 per share. In September
2003, MRV granted to each outside director options to purchase 9,000 shares of
its common stock at $2.75 per share. In June and December 2003, MRV granted to
Dr. Shidlovsky additional options to purchase 12,000 shares of its common stock
at $1.94 per share and 10,000 shares of its common stock at $3.35 per share,
respectively. In December 2003, MRV granted to Dr. Jaensch additional options
to purchase 10,000 shares of its common stock at $3.35 per share.

Board Committees

MRVs board of directors has established the Compensation Committee, the
Audit Committee and the Executive Committee. Below is a description of each
committee of the Board of Directors. MRV does not have a standing nominating
committee of the Board of Directors or a committee performing similar
functions. Each of the committees has authority to engage legal counsel or
other experts or consultants as it deems appropriate to carry out its
responsibilities. The Board of Directors has determined that each member of
each committee meets the applicable laws and regulations regarding
independence and that each member is free of any relationship that would
interfere with his individual exercise of independent judgment.

Audit Committee: The Audit Committee consists of Dr. Shidlovsky, Dr.
Jaensch and Professor Tsui. The Audit Committee met four times during 2003.
The Audit Committee assists the Board of Directors in its oversight of the
quality and integrity of the accounting, auditing and reporting practices of
MRV. The Audit Committees role includes discussing with management MRVs
processes to manage business and financial risk and for compliance with
significant applicable legal, ethical and regulatory requirements. The Audit
Committee is responsible for the appointment, replacement, compensation and
oversight of the independent auditor engaged to prepare or issue audit reports
on the financial statements of MRV. The Audit Committee relies on the
expertise and knowledge of management and the independent auditor in carrying
out its oversight responsibilities. The Board of Directors has determined that
each Audit Committee member has sufficient knowledge in financial and auditing
matters to serve on the Committee.

77



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Compensation Committee: The Compensation Committee consists of Dr.
Shidlovsky and Dr. Jaensch. The Compensation Committee met four times during
2003. The primary responsibilities of the Compensation Committee are to (a)
review and recommend to the Board the compensation of the Chief Executive
Officer and other officers of MRV, (b) oversee and advise the Board on the
adoption of policies that govern MRVs compensation programs, (c) oversee MRVs
administration of its equity-based compensation and other benefit plans and (d)
recommends to the Board the grants of stock options and stock awards to
officers and employees of MRV under its stock plans. The Compensation
Committees role includes producing the report on executive compensation
required by SEC rules and regulations.

Executive Committee: The Executive Committee consists of Mr. Lotan and
Dr. Margalit. The Executive Committee met four times during 2003. The primary
responsibility of the Executive Committee is to take any action that the Board
is authorized to act upon, with the exception of the issuance of stock, the
sale of all or substantially all of MRVs assets and other significant
corporate transactions.

Compensation Committee Interlocks And Insider Participation

No member of the Compensation Committee was, during 2003, an officer or
employee of MRV or any of its subsidiaries; or was formerly an officer of MRV
or any of its subsidiaries. During 2003, no executive officer of MRV served as
an executive officer, director or member of the compensation committee (or
other board committee performing equivalent functions, or in the absence of
such committee, the entire board of directors) of another entity, one of whose
executive officers served as a member of the Compensation Committee or as a
director of MRV.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information known to MRV with respect to
beneficial ownership of MRV common stock as of February 15, 2004 for (i) each
current director, (ii) MRVs Chief Executive Officer and each of the Named
Executive Officers and (iii) all executive officers and directors as a group.
The table below indicates the number of shares owned by each person known to
MRV to be the beneficial owner of 5% or more of the outstanding shares of MRVs
common stock.

Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Except as indicated in the footnotes to this table and
pursuant to applicable community property laws, the persons named in the table
below have sole voting and investment power with respect to all shares of
common stock beneficially owned. The number of shares beneficially owned by
each person or group as of February 15, 2004 includes shares of common stock
that such person or group had the right to acquire on or within 60 days after
February 15, 2004, including, but not limited to, upon the exercise of options.
References to options in the footnotes of the table below include only options
to purchase shares that were exercisable on or within 60 days after February
15, 2004. For each individual and group included in the table below,
percentage ownership is calculated by dividing the number of shares
beneficially owned by such person or group by the sum of the 105,471,625 shares
of common stock outstanding on February 15, 2004 plus the number of shares of
common stock that such person or group had the right to acquire on or within 60
days after February 15, 2004.

|                                                                        |  |              |           |  |  |  |    |            |  |  |     |  
|----------------------------------------------------------------------- |  | ------------ | --------- |  |  |  | -- | ---------- |  |  | --- | -
|                                                                        |  | Common Stock
|                                                                        |  |             
|Name and Address
(1) of Beneficial Owner or                             |  | Number of    |           |  |  |  |    | Percentage
|Identity of Group                                                       |  | Shares       |           |  |  |  |    | Ownership 
|                                                                        |  |              |           |  |  |  |    |           
|Deutsche Bank, AG London Branch
31 West 52nd Street, New York, NY 10019 |  |              | 9,913,794 |  |  |  | (2 | )          |  |  | 8.6 | %
|Wellington Management Company, LLP
75 State Street, Boston, MA 02109    |  |              | 7,566,086 |  |  |  | (3 | )          |  |  | 6.7 | %
|Shlomo Margalit                                                         |  |              | 3,245,660 |  |  |  |    |            |  |  | 3.0 | %
|Noam Lotan                                                              |  |              | 1,512,624 |  |  |  | (4 | )          |  |  | 1.4 |  
|Shay Gonen                                                              |  |              | 88,775    |  |  |  | (5 | )          |  |  | *   |  
|Near Margalit                                                           |  |              | 47,500    |  |  |  | (6 | )          |  |  | *   |  
|Igal Shidlovsky                                                         |  |              | 208,550   |  |  |  | (7 | )          |  |  | *   |  
|Guenter Jaensch                                                         |  |              | 162,000   |  |  |  | (6 | )          |  |  | *   |  
|Professor Daniel Tsui                                                   |  |              | 84,000    |  |  |  | (6 | )          |  |  | *   |  
|Professor Baruch Fischer                                                |  |              | 84,000    |  |  |  | (6 | )          |  |  | *   |  
|All executive officers and directors as a group                         |  |              | 5,433,109 |  |  |  | (8 | )          |  |  | 4.9 |  



---

|* |  | Less than 1%
|- |  | ------------



|(1) |  | Except as noted below, the address of each of the person
listed is c/o MRV Communications, Inc., 20415 Nordhoff Street,
Chatsworth, California 91311.                                                                                                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Consists of shares issuable pursuant to $23.0 million
principle amount of five-year 5% convertible notes sold in June
2003. The notes are convertible into MRVs common stock at a
conversion price of $2.32 per share.                                                                                                     
|   
|(3) |  | As reported in Schedule 13G/A filed on February 12, 2004 by
Wellington Management Company, LLO (WMC), WMC reported that these
securities are owned by various individual and institutional
investors for which WMC serves as investment advisor with power to
direct investments and/or sole power to vote the securities.
|   
|(4) |  | Includes 45,800 shares issuable pursuant to stock options
exercisable within 60 days of February 15, 2004.                                                                                                                                                                                                                  
|   
|(5) |  | Includes 86,625 shares issuable pursuant to stock options
exercisable within 60 days of February 15, 2004.                                                                                                                                                                                                                  
|   
|(6) |  | Consists of shares issuable upon exercise of stock options
within 60 days of February 15, 2004.                                                                                                                                                                                                                             

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|(7) |  | Includes 204,250 shares issuable pursuant to stock options
exercisable within 60 days of February 15, 2004.
|--- |  | -----------------------------------------------------------------------------------------------------------
|   
|(8) |  | Includes 714,175 shares issuable pursuant to stock options
exercisable within 60 days of February 15, 2004.

Equity Compensation Plan Information

The table below set forth information with respect to shares of common
stock that may be issued under our stock option and warrant plans as of
December 31, 2003.

|                                                                        |  |                      |            |                     |  |                              |      |                         |  |  |           | 
|----------------------------------------------------------------------- |  | -------------------- | ---------- | ------------------- |  | ---------------------------- | ---- | ----------------------- |  |  | --------- | 
|                                                                        |  |                      |            |                     |  |                              |      | Number of Securities   
|                                                                        |  | Number of Securities |            |                     |  |                              |      | Remaining Available for
|                                                                        |  | to be Issued Upon    |            | Weighted Average    |  | Future Issuance Under Equity
|                                                                        |  | Exercise of          |            | Exercise Price of   |  | Compensation Plans          
|                                                                        |  | Outstanding Options  |            | Outstanding Options |  | (excluding securities       
|                                                                        |  | and Warrants         |            | and Warrants        |  | reflected in column (a))    
|                                                                        |  |                      |            |                     |  |                             
|Plan Category                                                           |  | (a)                  |            | (b)                 |  | (c)                         
|                                                                        |  |                      |            |                     |  |                             
|Stock option and
warrant plans
approved by
security holders
(1)         |  |                      | 3,027,575  |                     |  | $                            | 4.11 |                         |  |  | 963,533   | 
|Stock option and
warrant plans not
approved by
security holders
(2),(3) |  |                      | 7,000,996  |                     |  | $                            | 3.97 |                         |  |  | 5,277,235 | 
|                                                                        |  |                      |            |                     |  |                              |      |                         |  |  |           | 
|                                                                        |  |                      | 10,028,571 |                     |  | $                            | 4.02 |                         |  |  | 6,240,768 | 
|                                                                        |  |                      |            |                     |  |                              |      |                         |  |  |           | 





|(1) |  | Includes the:
|--- |  | -------------



| | § |  | 1992 Stock Option Plan (no securities available
for future issuance); and
| | - |  | -------------------------------------------------------------------------
|
| | § |  | 1997 Incentive and Nonstatutory Stock Option
Plan.                       



|(2) |  | Includes the:
|--- |  | -------------



| | § |  | Non-Director and Non-Executive Officer Consolidated Long-Term Stock Incentive Plan                                                                                                                                                                                                  
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | § |  | 1998 Nonstatutory Stock Option Plan (no securities available for future issuance);                                                                                                                                                                                                  
|
| | § |  | 2001 MRV Communications, Inc. Stock Option Plan
for Employees of Appointech, Inc. (no securities available for
future issuance);                                                                                                                                                    
|
| | § |  | 2000 MRV Communications, Inc. Stock Option Plan
for Employees of AstroTerra Corporation (no securities
available for future issuance);                                                                                                                                              
|
| | § |  | Stock option agreement effective July 12, 2000
between the Company and Eric I. Blancho (no securities
available for future issuance);                                                                                                                                               
|
| | § |  | German Employee Warrant Program (no securities
available for future issuance);                                                                                                                                                                                                      
|
| | § |  | Stock option agreement dated March 1, 2002
between the Company and Candy Glazer (no securities available
for future issuance);                                                                                                                                                      
|
| | § |  | MRV Communications, Inc. 2002 International Stock
Option Plan (no securities available for future issuance);                                                                                                                                                                        
|
| | § |  | Warrants provided to Nathan Shilo as trustee for
employees and designated consultants of NBase Communications,
Ltd. exercisable on July 19, 1996, July 13, 1997, July 13,
1998, February 1, 1998, January 2, 1998 and January 4, 1999
(no securities available for future issuance);
|
| | § |  | Italian Employees Warrant Program (no securities
available for future issuance);                                                                                                                                                                                                    

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| | § |  | Stock option issued and outstanding on the
effective date of the merger of Luminent under the Luminent
Amended and Restated 2000 Stock Option Plan that were assumed
by MRV and are exercisable for 0.43 shares of Common Stock for
each share of Luminent held under the relevant option (no
securities available for future issuance);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | § |  | MRV Communications, Inc. 2002 Nonstatutory Stock
Option Plan for Employees of Luminent, Inc. (no securities
available for future issuance);                                                                                                                                                                                             
|
| | § |  | 2000 MRV Communications, Inc. Stock Option Plan
for Employees of Optonics International Corp. (no securities
available for future issuance); and                                                                                                                                                                                        
|
| | § |  | Swedish Employees Warrant Program (no securities
available for future issuance).                                                                                                                                                                                                                                                        



|(3) |  | See Note 15, Stockholders Equity  Stock Options to the
Financial Statements included in Item 8  Financial Statements and
Supplementary Data.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.




PART IV




ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Ernst & Young LLP has audited MRVs consolidated financial statements
annually since 2002. The following is a summary of the fees billed to MRV by
Ernst & Young LLP and Arthur Andersen LLP for professional services rendered
for the years ended December 31, 2003 and 2002:

|                   |  |               |         |               |  |  |         | 
|------------------ |  | ------------- | ------- | ------------- |  |  | ------- | 
|Fee Category       |  | 2003 Fees ($) |         | 2002 Fees ($)
|                   |  |               |         |              
|Audit Fees         |  |               | 628,000 |               |  |  | 643,000 | 
|Audit-Related Fees |  |               | 24,000  |               |  |  | 5,000   | 
|Tax Fees           |  |               | 218,000 |               |  |  | 252,000 | 
|All Other Fees     |  |               |        |               |  |  |        | 
|                   |  |               |         |               |  |  |         | 
|Total Fees         |  |               | 870,000 |               |  |  | 900,000 | 
|                   |  |               |         |               |  |  |         | 

Audit Fees. Consists of fees billed for professional services rendered
for the audit of MRVs consolidated financial statements and review of the
interim consolidated financial statements included in quarterly reports and
services that are normally provided by Ernst & Young LLP in connection with
statutory and regulatory filings or engagements.

Audit-Related Fees. Consists of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of MRVs consolidated financial statements and are not reported under Audit
Fees. These services include employee benefit plan audits, consultations in
connection with acquisitions, attest services that are not required by statute
or regulation and consultation concerning financial accounting and reporting
standards.

Tax Fees. Consists of fees billed for professional services for tax
compliance, tax advice and tax planning. These services include assistance
regarding federal, state and international tax compliance, tax audit defense
and international tax planning.

All Other Fees. Consists of fees for products and services other than the
services reported above.

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Policy On Audit Committee Pre-Approval Of Audit And Permissible Non-Audit
Services Of Independent Auditors

The Audit Committees policy is to pre-approve all audit and permissible
non-audit related services provided by the independent audits. These services
may include audit services, audit-related services, tax services and other
services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category of services
and generally subject to a specific budget. The independent auditors and
management are required to periodically report to the Audit Committee regarding
the extent of services provided by the independent auditors in accordance with
this pre-approval, and the fees for the services performed to date. The Audit
Committee may also pre-approve particular services on a case-by-case basis.




ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  (1) The financial statements and the Report of Ernst & Young LLP are
included in Part II of this Form 10-K on the pages indicated:

|                                                                                                                         |  |                   |    | 
|------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | -- | 
|                                                                                                                         |  | Form 10-KPage
No.
|                                                                                                                         |  |                  
|Consolidated Financial Statements:                                                                                       |  |                   |    | 
|Report of Ernst & Young LLP, Independent Auditors                                                                        |  |                   | 42 | 
|Statements of Operations for the years ended December 31, 2003,
2002 and 2001,                                           |  |                   | 44 | 
|Balance Sheets as of December 31, 2003 and 2002                                                                          |  |                   | 45 | 
|Statements of Stockholders Equity and Comprehensive Income
(Loss) for the years ended December 31, 2003, 2002 and 2001, |  |                   | 47 | 
|Statements of Cash Flows for the years ended December 31, 2003,
2002 and 2001,                                           |  |                   | 47 | 
|Notes to Financial Statements                                                                                            |  |                   | 51 | 

(2) All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.

(3) Exhibits

|            |  |                                                                                                                                                                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                              
|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)).                   
|            |  |                                                                                                                                                                                                                                                                                              
|2.3         |  | Certificate of Merger Merging Luminent, Inc. into MRV Sub
Corp. (incorporated by reference to Exhibit 4.1 of MRVs 8-K
filed with the SEC on January 8, 2002).                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                              
|3.1         |  | Certificate of Incorporation, as amended (incorporated by
referenced to Exhibit 3a filed as part of Registrants
Registration Statement on Form S-1 (File No. 33-48003)).                                                                                                                    

82



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|            |  |                                                                                                                                                                                                                                                                                                                                                       
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                       
|3.2         |  | Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on March 20, 1996
(incorporated by reference to Exhibit 3.2 of MRVs Form 10-Q
for the quarter ended June 30, 1998 filed August 14, 1998).                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                       
|3.3         |  | Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on July 29, 1996
(incorporated by reference to Exhibit 3.3 of MRVs Form 10-Q
for the quarter ended June 30, 1998 filed August 14, 1998).                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                       
|3.4         |  | Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on November 19, 1998
(incorporated by reference to Exhibit 3.4 of MRVs Form 10-K
for the year ended December 31, 1998 filed March 31, 1999).                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                                                       
|3.5         |  | Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on May 11, 2000
(incorporated by reference to Exhibit 3.5 of MRVs Form 10-K
for the year ended December 31, 2000 filed April 17, 2001).                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                       
|3.6         |  | Bylaws (incorporated by reference to Exhibit 3b filed as part
of Registrants Registration Statement on Form S-1 (File No.
33-48003)).                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                       
|4.1         |  | Specimen certificate of common stock (incorporated by
reference to Exhibit 4.5 filed as part of Registrants
Registration Statement on Form S-3 (File No. 333-64017).                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                       
|10.1        |  | Key Employee Agreement between MRV and Noam Lotan dated March
23, 1993 (incorporated by reference to Exhibit 10b(1) filed as
part of Registrants Registration Statement on Form S-1 (File
No. 33-48003)).                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                                       
|10.2        |  | Letter amending Key Employee Agreement between MRV 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)).                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                       
|10.3        |  | Letter amending Key Employee Agreement between MRV 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)).                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                       
|10.4        |  | Key Employee Agreement between MRV 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)).                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                                       
|10.5        |  | Letter amending Key Employee Agreement between MRV 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)).                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                       
|10.6        |  | Form of Letter amending Key Employee Agreement between MRV and
Shlomo Margalit (incorporated by reference to Exhibit 10b(3)2
filed as part of Registrants Registration Statement on Form
S-1 (File No. 33-48003)).                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                       
|10.7        |  | Standard Industrial/Commercial Single-Tenant Lease dated
October 8, 1996 between MRV and Nordhoff Development relating
to the premises located at 20415 Nordhoff Street, Chatsworth,
California (incorporated by reference to Exhibit No. 10.23 of
Registrants Annual Report on Form 10-K for the year ended
December 31, 1996 filed April 15, 1997).
|            |  |                                                                                                                                                                                                                                                                                                                                                       
|10.8        |  | New Lease dated February 22, 1993 by and between 495 Littleton
Associates and Xyplex, Inc. relating to the premises located
at 295 Foster Street, Littleton, Mass, Amendments Nos. 1
through 4 thereto (incorporated by reference to Exhibit No.
10.36 of Registrants Report on Form 10-K for the year ended
December 31, 1997 filed April 15, 1998).
|            |  |                                                                                                                                                                                                                                                                                                                                                       
|10.9        |  | Fifth Amendment to Lease relating to the premises located at
295 Foster Street, Littleton, Mass. with attached Lease
Guaranty of Registrant (incorporated by reference to Exhibit
10.31 of MRVs Form 10-K for the year ended December 31, 1998
filed March 31, 1999).                                                                                

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|            |  |                                                                                                                                                                                                                                                                                                                                                    
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                    
|10.10       |  | Under lease dated September 16, 1998 between Lowe Azure
Limited, NBase Europe Gmbh and MRV relating to property at
Unit 16, Campbell Court, Campbell Road, Bramley Basingstoke
Hampshire, England (incorporated by reference to Exhibit 10.37
of MRVs Form 10-K for the year ended December 31, 1998 filed
March 31, 1999).                       
|            |  |                                                                                                                                                                                                                                                                                                                                                    
|10.11       |  | Standard Industrial/Commercial Single-Tenant Lease  Net dated
December 1, 1998 by and between Radar Investments, Inc. and
Registrant relating to the premises located at 8943 Fullbright
Avenue, Chatsworth, California (incorporated by reference to
Exhibit 10.38 of MRVs Form 10-K for the year ended December
31, 1998 filed March 31, 1999).
|            |  |                                                                                                                                                                                                                                                                                                                                                    
|10.12       |  | Stock Option Agreement dated July 12, 2000 between Eric
Blachno and the Registrant (incorporated by reference to
Exhibit 10.7 filed with the Luminent, Inc. Registration
Statement (file no. 333-42238) on Form S-1 on July 26, 2000).                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                    
|10.13       |  | 2000 MRV Communications, Inc. Stock Option plan for Employees
of Optronics International Corp. (incorporated by reference to
Exhibit 4.1 of the Registrants Registration Statement on Form
S-8 filed with the SEC on October 13, 2000 (file no.
333-47898)).                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                    
|10.14       |  | Form of Stock Option Agreement for the 2000 MRV
Communications, Inc. Stock Option Plan for Employees of
Optronics International Corp. (incorporated by reference to
Exhibit 4.2 of the Registrants Registration Statement on Form
S-8 filed with the SEC on October 13, 2000 (file no.
333-47898)).                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                    
|10.15       |  | 2000 MRV Communications, Inc. Stock Option Plan for Employees
of AstroTerra Corporation (incorporated by reference to
Exhibit 4.1 of the Registrants Registration Statement on Form
S-8 filed with the SEC on October 13, 2000 (file no.
333-47900)).                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                    
|10.16       |  | Form of Stock Option Agreement for the 2000 MRV
Communications, Inc. Stock Option Plan for Employees of
AstroTerra Corporation (incorporated by reference to Exhibit
4.2 of the Registrants Registration Statement on Form S-8
filed with the SEC on October 13, 2000 (file no. 333-47900)).                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                    
|10.17       |  | 1997 Incentive and Nonstatutory Stock Option Plan, as amended
(incorporated by reference to Appendix A to the Registrants
Definitive Proxy Statement filed with the SEC on November 14,
2001).                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                    
|10.18       |  | Form of Stock Option Agreement under the 1997 Incentive and
Nonstatutory Stock Option Plan (incorporated by reference to
Exhibit 4.2 to the Registrants Registration Statement on Form
S-8 filed with the SEC on September 24, 1999 (file no.
333-87735)).                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                    
|10.19       |  | 2001 MRV Communications, Inc. Stock Option Plan for Employees
of Appointech, Inc. dated January 19, 2001 (incorporated by
reference to Exhibit 4.1 of the Registration Statement on Form
S-8 filed with the SEC on October 9, 2001).                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                    
|10.20       |  | Form of Stock Option Agreement for the 2001 MRV
Communications, Inc. Stock Option Plan for Employees of
Appointech, Inc. (incorporated by reference to Exhibit 4.2 of
the Registration Statement on Form S-8 filed with the SEC on
October 9, 2001).                                                                                               

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|            |  |                                                                                                                                                                                                                                                                                                                 
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                 
|10.21       |  | Lease Agreement dated January 30, 2001 between Abronson, Cole
& Eisele, a California General Partnership and Luminent, Inc.,
relating to premises located at 850 Lawrence Drive
(incorporated by reference to Exhibit 10.42 of Luminent,
Inc.s Form 10-Q filed with the SEC on May 15, 2001).                  
|            |  |                                                                                                                                                                                                                                                                                                                 
|10.22       |  | Lease Agreement dated July 13, 1999 between Nordhoff
Industrial Complex and the Registrant, relating to premises
located at 20550 Nordhoff Street (incorporated by reference to
Exhibit 10.8 of Luminent, Inc.s Registration Statement on
Form S-1 filed with the SEC on July 26, 2000).                       
|            |  |                                                                                                                                                                                                                                                                                                                 
|10.23       |  | Lease Agreement dated November 11, 1997 by and among Kenneth
R. Smith, Alice J. Smith and MRV Communications, Inc.,
relating to premises located at 8917 Fullbright Ave.
(incorporated by reference to Exhibit 10.9 of Luminent, Inc.s
Registration Statement on Form S-1 filed with the SEC on July
26, 2000).
|            |  |                                                                                                                                                                                                                                                                                                                 
|10.24       |  | Extension to Lease Agreement referred to in Exhibit 10.32.                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                 
|10.25       |  | Amendment to Lease between Nordhoff Industrial and the
Registrant dated December 14, 2001 relating to premises
located at 20415 Nordhoff Street (incorporated by reference to
Exhibit 10.65 of MRVs Form 10-K filed with the SEC on March
21, 2002).                                                           
|            |  |                                                                                                                                                                                                                                                                                                                 
|10.26       |  | Non-statutory Stock Option Plan for Employees of Luminent,
Inc. (incorporated by reference to Exhibit 4.1 of the
Registration Statement on Form S-8 filed with the SEC on
February 1, 2002).                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                 
|10.27       |  | Form of Stock Option Agreement for Non-statutory Stock Option
Plan for Employees of Luminent, Inc. (incorporated by
reference to Exhibit 4.2 of the Registration Statement on Form
S-8 filed with the SEC on February 1, 2002).                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                 
|10.28       |  | Lease Agreement dated August 14, 2000 between George DeRado
and Luminent, Inc. relating to the premises located at 20520
Nordhoff Street (incorporated by reference to Exhibit 10.69 of
MRVs Form 10-K filed with the SEC on March 21, 2002).                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                 
|10.29       |  | Candy Glazer Stock Option Agreement (incorporated by reference
to Exhibit 4 of the Registration Statement on Form S-8 filed
with the SEC on March 22, 2002).                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                 
|10.30       |  | Share Purchase Agreement dated September 30, 2002, by and
among Luminent and Lin, Son-Fure (Steve), Chen, Chao Hsien
(Goodman), Hou, Janpu Hsu and Jen Hsu (Rio) (incorporated by
reference to Exhibit 2.1 of MRVs Form 8-K filed with the SEC
on October 23, 2002).                                           
|            |  |                                                                                                                                                                                                                                                                                                                 
|10.31       |  | MRV Communications, Inc. 2002 International Stock Option Plan
(incorporated by reference to Exhibit 4.1 of the Registration
Statement on Form S-8 filed with the SEC on February 1, 2002).                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                 
|10.32       |  | Form of Stock Option Agreement for MRV Communications, Inc.
2002 International Stock Option Plan (incorporated by
reference to Exhibit 4.2 of the Registration Statement on Form
S-8 filed with the SEC on February 1, 2002).                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                 
|10.33       |  | Luminent, Inc. Amended and Restated 2000 Stock Option Plan
(incorporated by reference to Exhibit 4.1 of the Registration
Statement on Form S-8 filed with the SEC on February 1, 2002).                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                 
|10.34       |  | Stock Option Agreement for Luminent, Inc. Amended and Restated
2000 Stock Option Plan (incorporated by reference to Exhibit
4.2 of the Registration Statement on Form S-8 filed with the
SEC on February 1, 2002).                                                                                              

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|            |  |                                                                                                                                                                                                                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                   
|10.35       |  | Securities Purchase Agreement dated as of June 1, 2003 between MRV Communications, Inc. and
Deutsche Bank AG, London Branch, with form of Convertible Note attached as Exhibit A
thereto (incorporated by reference to Exhibit 4.1 of registrants Current Report on Form
8-K filed June 3, 2003).
|            |  |                                                                                                                                                                                                                                                                                                   
|10.36       |  | Amendment -1 to Convertible Note dated as of June 13, 2003 (incorporated by reference to
Exhibit 4.3 of the Registration Statement on Form S-3 filed with the SEC on June 16, 2003
(file no. 333-106169)).                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                   
|10.37       |  | Registration Rights Agreement dated as of June 1, 2003 (incorporated by reference to
Exhibit 4.1 of registrants Current Report on Form 8-K filed June 3, 2003).                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                   
|10.38       |  | Non-Director and Non-Executive Officer Consolidated Long-Term Stock Incentive Plan
(incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-8 filed
with the SEC on July 17, 2003 (file no. 333-107109)).                                                                
|            |  |                                                                                                                                                                                                                                                                                                   
|10.39       |  | Form of Non-Director and Non-Executive Officer Consolidated Long-Term Stock Incentive Plan
Stock Option Agreement (incorporated by reference to Exhibit 4.2 of the Registration
Statement on Form S-8 filed with the SEC on July 17, 2003 (file no. 333-107109)).                                 
|            |  |                                                                                                                                                                                                                                                                                                   
|16.1        |  | Letter regarding Change in Certified Accountant (incorporated by reference to Exhibit 16 of Registrants Form 8-K filed with the SEC on June 18, 2002).                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                   
|21.1        |  | Subsidiaries of Registrant.                                                                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                   
|23.1        |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                   
|23.2        |  | Notice Regarding Consent of Arthur Andersen LLP.                                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                   
|25.1        |  | Power of Attorney (included on signature page).                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                   
|31.1        |  | Certification of the Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act.                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                   
|31.2        |  | Certification of the Chief Financial Officer required by Rule 13a-14(a) of the Exchange Act.                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                   
|32.1        |  | Certification pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.                                                                                                                                                                                                                              

(b) One report on Form 8-K was filed during the period covered by this
Report. That Form 8-K Report, dated October 22, 2003 and filed on October 24,
2003, reported matters under Item 5 and Item 12.

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SIGNATURE

Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant certifies that it has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized
on March 3, 2004.

| |  |                                      
| |  | -------------------------------------
| |  | MRV COMMUNICATIONS, INC              
| |  |                                      
| |  | By: /s/ Noam Lotan
Noam Lotan        
| |  | President and Chief Executive Officer
| |  |                                      
| |  | By: /s/ Shay Gonen
Shay Gonen        
| |  | Chief Financial Officer              

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POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Noam Lotan, his true and lawful
attorney-in-fact and agent with full power of power substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign this Registration Statement, and to file any and all
amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and all documents
in connection therewith, with Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent thereof. Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities and on the date indicated.

|                                     |  |                                                                     |  |              
|------------------------------------ |  | ------------------------------------------------------------------- |  | -------------
|Signature                            |  | Title                                                               |  | Date         
|                                     |  |                                                                     |  |              
|/s/ Noam Lotan(Noam Lotan)           |  | President and Chief Executive Officer
(Principal Executive Officer) |  | March 3, 2004
|                                    
|/s/ Shlomo Margalit(Shlomo Margalit) |  | Chairman of the Board, Chief
Technology Officer, and Secretary      |  | March 3, 2004
|                                    
|/s/ Shay Gonen(Shay Gonen)           |  | Chief Financial Officer
(Principal Finance and Accounting
Officer)  |  | March 3, 2004
|                                    
|/s/ Igal Shidlovsky(Igal Shidlovsky) |  | Director                                                            |  | March 3, 2004
|                                    
|/s/ Guenter Jaensch(Guenter Jaensch) |  | Director                                                            |  | March 3, 2004
|                                    
|/s/ Daniel Tsui(Daniel Tsui)         |  | Director                                                            |  | March 3, 2004
|                                    
|/s/ Baruch Fischer(Baruch Fischer)   |  | Director                                                            |  | March 3, 2004

88