<PAGE>

                                 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, 2001

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

For the transition period from _____________ to ____________

Commission file number 0-25678

                            MRV COMMUNICATIONS, INC.
                (Name of registrant as specified in its charter)

                   Delaware
       (State or other jurisdiction of                    06-1340090
        incorporation or organization)                 (I.R.S. employer
                                                    identification number)
            20415 Nordhoff Street
            Chatsworth, California
   (Address of principal executive offices)                 91311
                                                          (Zip Code)

                    Issuer's telephone number: (818) 773-0900

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$0.0017 par value

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

Check if disclosure of delinquent filers in response 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. [ ]

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: $253,901,477 based on the closing sale price of $3.01 per share on March
19, 2002 as reported by The Nasdaq National Market.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 89,122,734 shares at March 18, 2002.

                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      None


<PAGE>

        This Annual Report on Form 10-K contains forward-looking statements
including statements regarding, among other items, our business strategy, growth
strategy and anticipated trends in our business. We may make additional written
or oral forward-looking statements from time to time in filings with the
Securities and Exchange Commission or otherwise. When we use the words believe,
expect, anticipate, project and similar expressions, this should alert you that
this is a forward-looking statement. These forward-looking statements are
largely based on our expectations. They are subject to a number of risks and
uncertainties, some of which cannot be predicted or quantified and are beyond
our control. Future events and actual results could differ materially from those
set forth in, contemplated by, or underlying the forward-looking statements.
Statements in this Report, including those set forth below in Item 1 "Business
-- Risk Factors," describe factors, among others, that could contribute to or
cause these differences. In light of these risks and uncertainties, there can be
no assurance that the forward-looking information contained in this Report 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.

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


                                Table of Contents
<TABLE>
<S>                                                                                         <C>
PART I.......................................................................................3
        ITEM 1.  BUSINESS....................................................................3
        ITEM 2.  PROPERTIES.................................................................31
        ITEM 3.  LEGAL PROCEEDINGS..........................................................33
        ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................34

PART II.....................................................................................35
        ITEM 5.  MARKET FOR COMMON EQUITY AND
                 RELATED STOCKHOLDER MATTERS................................................35
        ITEM 6.  SELECTED FINANCIAL DATA....................................................36
        ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................38
        ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................54
        ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                 ON ACCOUNTING AND FINANCIAL DISCLOSURE.....................................54

PART III....................................................................................55
        ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........................55
        ITEM 11. EXECUTIVE COMPENSATION.....................................................58
        ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNER
                 AND MANAGEMENT.............................................................62
        ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................63

PART IV.....................................................................................65
        ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,...................................65
                 AND REPORTS ON FORM 8-K....................................................65
</TABLE>




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<PAGE>

                                     PART I


ITEM 1. BUSINESS

OVERVIEW

        MRV Communications, Inc. creates, acquires, finances and operates
companies, and through them, designs, develops, manufactures and markets
products, which enable high-speed broadband communications. MRV concentrates on
companies and products devoted to optical components and Internet infrastructure
systems. MRV has leveraged its early experience in fiber optic technology into a
number of focused operating units specializing in advanced fiber optic
components, switching, routing, transaction management and wireless optical
transmission systems which it has created, financed or acquired.

        MRV's principal operating units that constituted wholly or majority
owned subsidiaries or divisions at December 31, 2001 were:

    -   LUMINENT, INC. Luminent designs, manufactures and sells a comprehensive
        line of singlemode active and passive fiber optic components for
        high-capacity data transmission in the metropolitan and access markets.
        Leading network equipment manufacturers rely on Luminent to provide
        technical depth, responsive customer service and volume manufacturing to
        meet the increasing requirements for transmission capacity and speed
        between nationwide telecommunications networks and end users.

        In November 2000, Luminent completed an initial public offering of its
        common stock. While we originally planned to spin-off to our
        stockholders the remaining Luminent common stock that we owned, in
        September 2001 we decided not to make that distribution and instead to
        merge Luminent into one of our wholly-owned subsidiaries, thereby
        eliminating public ownership of Luminent's common stock. In that merger,
        which was completed on December 28, 2001, we issued 0.43 shares of our
        common stock in exchange for each outstanding share of Luminent common
        stock that we did not own prior to the merger, or an aggregate of
        approximately 5,160,000 of our shares, and assumed Luminent's
        outstanding stock options adjusted for the exchange ratio.

    -   OPTICAL ACCESS, INC. Optical Access designs, manufactures and markets
        optical wireless products that enable the delivery of high-speed
        communications traffic to the portion of the communications network
        commonly known as the last mile, which extends from the end user to the
        service provider's central office. Optical Access' solutions to the
        last-mile bottleneck bypass the incumbent carrier's copper access
        network with a comprehensive, integrated access solution, using optical
        wireless technology. The building blocks of Optical Access' solution
        include the TereScope(TM), for optical wireless links, and the
        OptiSwitch(TM), for switching, provisioning and mesh enabling. At
        December 31, 2001, MRV owned all of the outstanding capital stock of
        Optical Access. On October 6, 2000, Optical Access filed a registration
        statement with the Securities and Exchange Commission for the initial
        public offering of its common stock. Market conditions prevented this
        offering from being completed and it was withdrawn in November 2001.

    -   CESCOMM, INC. CEScomm (formerly Creative Electronic Systems SA or CES)
        is developing and providing equipment to manufacturers of cellular
        network infrastructure equipment and mobile operators and service
        providers for the third generation of wireless solutions commonly known
        as 3G. 3G is the generic term used for the next generation of mobile
        communications systems. These new systems provide enhanced services to
        those available today i.e., voice, text and data. CEScomm specializes in
        products that provide the real-time conversion of radio signals
        generated




                                       3
<PAGE>

        by Internet ready mobile devices into asynchronous transfer mode, or
        ATM, traffic streams. At December 31, 2001, MRV owned all of the
        outstanding capital stock of CEScomm.

    O   ITOUCH COMMUNICATIONS, INC. iTouch Communications, Inc. provides
        next-generation Internet infrastructure solutions that enable service
        providers and carriers to deliver and monitor, on a real-time basis,
        high-speed Internet services. iTouch's products combine transaction
        management with Internet protocol, or IP, routing and wide-area network,
        or WAN, technologies, which allow for faster development of feature rich
        high-speed data acquisition and management systems. At December 31,
        2001, MRV owned all of the outstanding capital stock of iTouch.

    O   NBASE-XYPLEX. NBase-Xyplex, a division of MRV, provides products and
        services, such as the Fiber Driver, to enhance network infrastructures
        for city carriers, service providers, cable operators and campus and
        enterprise networks. Its products and technologies have been utilized in
        metropolitan area fiber-based networks, enabling smart access to the
        WAN, as well as in local area network, or LAN, switching, building
        enterprise/corporate data networks.

        MRV's principal development stage companies, which MRV founded or has
invested in as of December 31, 2001 were:

    -   CHARLOTTE'S NETWORKS, INC. Charlotte's Networks is a start-up company
        that is developing a core router for large service providers and
        carriers. The Aranea core router is Charlotte's first product. The
        Aranea router is capable of carrying both IP packets and time-division
        multiplexing, or TDM, voice traffic and enables the current WAN to grow
        in high orders of magnitude both in processing power and rate of
        transmission. In addition, the router provides multi-services required
        by telecommunication companies for efficient and flexible transmission
        of voice over data networks. At December 31, 2001, MRV owned
        approximately 54% of the outstanding capital stock of Charlotte's
        Networks on a fully diluted basis.

    -   ZUMA NETWORKS, INC. Zuma Networks is a startup company that is
        developing a next generation Gigabit Ethernet switch router platform. At
        December 31, 2001, MRV owned all of the outstanding capital stock of
        Zuma Networks.

    -   OPTICAL CROSSING INC. Optical Crossing designs, develops and
        manufactures advanced fiber optic communication components and systems
        for the telecommunications industry. At December 31, 2001, MRV owned
        approximately 60% of the outstanding capital stock of Optical Crossing
        on a fully diluted basis.

    -   REDC OPTICAL NETWORKS, INC. RedC has developed a complete line of
        optical modules used for operating, monitoring and protecting optical
        networks including: optical amplifiers, add/drop modules, protection and
        restoration modules and dense wave division multiplexing, or DWDM,
        monitoring. At December 31, 2001, MRV owned approximately 35% of the
        outstanding capital stock of RedC on a fully diluted basis.

    -   HYPERCHANNEL LTD. Hyperchannel, which does business under its trademark
        Hyporium is an independent Internet market maker for the information
        technology, or IT, industry, enabling IT vendors, distributors and
        resellers to trade online. Hyporium offers an alternative route to
        market through an online trading hub and reseller web storefronts. At
        December 31, 2001, MRV owned approximately 40% of the outstanding
        capital stock of Hyperchannel on a fully diluted basis.




                                       4
<PAGE>

BACKGROUND

        MRV was organized in July 1988 as MRV Technologies, Inc., a California
corporation and reincorporated in Delaware in April 1992, at which time it
changed its name to MRV Communications, Inc. MRV's initial focus was in the
design, manufacture and marketing of semiconductor laser diodes, light emitting
diodes, or LEDs, and fiber optic transmitting and receiving modules for the
transmission of large amounts of information at high speeds over long distances
and LAN switching products for the computer networking industry. From 1995 to
1998, MRV made several acquisitions involving companies making networking
equipment, including:

    -   in 1995, certain of the assets and the distribution businesses of Galcom
        Networking, Ltd. and Ace 400 Communications Ltd, both network equipment
        companies located in Israel, which provided MRV with experienced
        personnel and technology for the networking markets;

    -   in 1996, certain of the liabilities and assets of Fibronics Ltd. and its
        subsidiaries, including its technology in progress and existing
        technology, its marketing channels, its GigaHub family of computer
        networking products and other rights, relating to Fibronics' computer
        networking and telecommunications businesses in Germany, the United
        States, the United Kingdom, the Netherlands and Israel, enabling MRV to
        enhance the development of Fast Ethernet and Gigabit Ethernet functions,
        to offer a broader range of networking products and to benefit from
        combined distribution channels and sales in both the United States and
        Europe and greater product development capability; and

    -   in 1998 of the outstanding capital stock of the entity owning the
        outstanding capital stock of Xyplex, Inc., a leading provider of access
        solutions between enterprise networks and wide area network and/or
        Internet service providers, or ISPs. This acquisition enabled MRV to
        expand its product lines with products that had WAN and remote access
        capabilities, permitting MRV to offer these solutions not only to MRV's
        own existing base of customers, but also to the customer base added by
        Xyplex. The acquisition of Xyplex (now known as iTouch Communications)
        also increased MRV's sales force, distribution channels and customer
        support and service capabilities.

        During 2000, MRV completed several strategic acquisitions. These
acquisitions were made to expand MRV's product offerings, enhance its
technological experience and expand MRV's manufacturing capabilities. The table
below summarizes MRV's more notable acquisitions in that year.

<TABLE>
<CAPTION>
                                                                            Form of Consideration and
         Acquired Company         Date of Acquisition  Total Consideration  Other Notes to Acquisition
         ----------------         -------------------  -------------------  --------------------------
<S>                               <C>                  <C>                  <C>
Fiber Optic Communications, Inc.  April 24, 2000       $309.7 million       $48.6 million in cash and 5.4 million
                                                                            shares of common stock and options
                                                                            issued; approximately 97% of capital
                                                                            stock assumed; goodwill and other
                                                                            intangibles recorded of $261.5 million;
                                                                            deferred stock compensation recorded of
                                                                            $14.1 million

 Jolt Limited                      May 1, 2000         $57.7 million        1.9 million shares of common stock and
                                                                            options issued; 100% of capital stock
                                                                            assumed; goodwill and other intangibles
                                                                            recorded of $33.7 million; deferred
                                                                            stock compensation recorded of $25.0
                                                                            million
</TABLE>




                                       5
<PAGE>

<TABLE>
<CAPTION>
                                                                            Form of Consideration and
         Acquired Company         Date of Acquisition  Total Consideration  Other Notes to Acquisition
         ----------------         -------------------  -------------------  --------------------------
<S>                               <C>                  <C>                  <C>
                                  July 12, 2000        $36.1 million        1.2 million shares of common stock and
Quantum Optech Inc.                                                         options issued; 100% of capital stock
                                                                            assumed; goodwill and other intangibles
                                                                            recorded of $27.8 million; deferred
                                                                            stock compensation recorded of $2.7
                                                                            million

AstroTerra Corporation            July 12, 2000        $160.3 million       2.4 million shares of common stock and
                                                                            options issued; 100% of capital stock
                                                                            assumed; goodwill and other intangibles
                                                                            recorded of $108.4 million; deferred
                                                                            stock compensation recorded of $50.0
                                                                            million

Optronics International Corp.     July 21, 2000        $123.9 million       4.2 million shares of common stock and
                                                                            options issued; approximately 99% of
                                                                            capital stock assumed; goodwill and
                                                                            other intangibles recorded of $99.4
                                                                            million; deferred stock compensation
                                                                            recorded of $13.4 million
</TABLE>

        Each of these acquisitions was accounted for using the purchase method
and therefore, the results of operations of the acquired businesses have been
included in MRV's consolidated financial statements from the respective dates of
acquisition.

        Fiber Optic Communications is a Taiwanese manufacturer of passive fiber
optic components for wavelength division multiplexing and has facilities in both
Taiwan and the People's Republic of China. Quantum Optech is a Taiwanese
manufacturer of passive fiber optic components specializing in developing and
manufacturing optical thin film coating and filters for dense wavelength
division multiplexing. Optronics International is a Taiwanese manufacturer of
active fiber optic components focused on developing and manufacturing high
temperature semiconductor lasers, transceivers and detectors for optical
networks. Fiber Optic Communications, Quantum Optech and Optronics International
were acquired and contributed to Luminent in September 2000, prior to Luminent's
initial public offering of its common stock.

        AstroTerra develops and manufactures free-space optical wireless
communication systems to connect data and telecommunications networks. Jolt
develops and manufactures multi-port wireless optics communications equipment.
These acquisitions provided strategic components and technology for Optical
Access' wireless optical solution. AstroTerra and Jolt were acquired and
contributed to MRV's subsidiary, Optical Access, which focuses on optical
wireless products that deliver high-speed communications traffic to the
so-called last mile portion of the communications network.

RISK FACTORS

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




                                       6
<PAGE>

WE INCURRED A NET LOSS IN THE YEARS ENDED DECEMBER 31, 2000 AND 2001, PRIMARILY
AS A RESULT OF THE AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES AND DEFERRED
COMPENSATION CHARGES FROM RECENT ACQUISITIONS. WE EXPECT TO CONTINUE TO INCUR
NET LOSSES FOR THE FORESEEABLE FUTURE.

        We reported a net loss of $153.0 million for the year ended December 31,
2000 and $326.4 million for the year ended December 31, 2001. A major
contributing factor to the net losses was the amortization of goodwill and
intangibles and deferred stock compensation related to our acquisitions of Fiber
Optic Communications, Jolt, Quantum Optech, AstroTerra and Optronics and our
employment arrangements with Luminent's former President and Luminent's Chief
Financial Officer. We will continue to record deferred stock compensation
relating to these acquisitions and the employment arrangements with these
executives going forward. Effective January 1, 2002, with the adoption of SFAS
142 we will stop amortization of goodwill however we may be required to record
goodwill impairment charges if the fair value of the assets acquired is less
than their carrying value (see Recently Issued Accounting Standards). As a
consequence of deferred stock compensation charges and potential impairment
charges, we do not expect to report net income in the foreseeable future.

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

        Weaker economic conditions worldwide, 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 Luminent's 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.

        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, appear to continue
to affect these industries in the first quarter of 2002 and may affect them for
the balance of 2002 and thereafter. Announcements by industry participants and
observers indicate there is a slowdown in industry spending and participants are
seeking to reduce existing inventories and we are experiencing these reductions
in our business. As a result of these factors, we recorded during the year ended
December 31, 2001 consolidated charges from our subsidiary, Luminent, which
include the write-off of inventory, purchase commitments, asset impairment,
workforce reduction, restructuring costs and other unusual items. The aggregate
charges recorded during the year ended December 31, 2001 were $49.5 million.
These charges are the result of the lower demand for Luminent's products and
pricing pressures stemming from the continuing downturn in the communications
equipment industry generally and the optical components sector in particular.

        Additionally, these economic conditions are making it very difficult for
MRV and our other companies, our customers and our vendors to forecast and plan
future business activities. This level of uncertainty severely challenges our
ability to operate profitably or to grow our businesses. In particular, it is
difficult to develop and implement strategy, sustainable business models and
efficient operations, and effectively manage manufacturing and supply chain
relationships. We lost a key member of our management team in the terrorists
attacks on the World Trade Center of September 11, 2001 and thus the




                                       7
<PAGE>
 attacks have already had adverse consequences on our business. However, we do
not know how the consequences of these attacks will additionally affect our
business. It is possible that a decrease in business and consumer confidence in
the economy and the stability of financial markets may lead to delays or
reductions in capital expenditures by our customers and potential customers.
Concerns over accounting practices of service providers and faltering growth
prospects among equipment manufactures could delay the economic recovery in the
telecommunications industry beyond 2002. In addition, further disruptions of the
air transport system in the United States and abroad may negatively impact our
ability to deliver products to customers, visit potential customers, to provide
support and service to our existing customers and to obtain components in a
timely fashion. If the economic or market conditions continue or further
deteriorate, or if the economic downturn is exacerbated as a result of
political, economic or military conditions associated with current domestic and
world events, our businesses, financial condition and results of operations
could be further impaired.

OUR 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

    -   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 cannot assure
you that we will be able to identify, develop, manufacture, market or support
new or enhanced products successfully, if at all, or on a timely basis. Further,
we cannot assure you that our new products will gain market acceptance or that
we will be able to respond effectively to product announcements by competitors,
technological changes or emerging industry standards. Any failure to respond to
technological changes would significantly harm our business.




                                       8
<PAGE>

DEFECTS IN OUR PRODUCTS RESULTING FROM THEIR COMPLEXITY OR OTHERWISE COULD HURT
OUR FINANCIAL PERFORMANCE.

        Complex products, such as those our companies and 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. For instance, during late 2000, we
were informed that certain Luminent transceivers sold to Cisco were experiencing
field failures. Through discussions with Cisco through September 2001,
Luminent's management agreed to replace the failed units, which we believe
resolves this issue. We expect the ultimate replacement of these failed
transceivers will cost approximately $3.6 million which we fully reserved in
2001. 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 compensation
        charges,

    -   new product introductions by our competitors,

    -   pricing actions by our competitors or us,

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

    -   changes in material costs, and

    -   general economic conditions.

        Moreover, the volume and timing of orders we receive during a quarter
are difficult to forecast. From time to time, our customers encounter uncertain
and changing demand for their products. Customers generally order based on their
forecasts. If demand falls below these forecasts or if customers do not control
inventories effectively, they may cancel or reschedule shipments previously
ordered from us. Our




                                       9
<PAGE>

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. We can give no assurance that
the Internet or the industries that serve it will continue to grow or that we
will achieve higher growth rates. 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.

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.

THE PRICES 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




                                       10
<PAGE>

    -   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 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 STOCK PRICE MIGHT SUFFER AS A CONSEQUENCE OF OUR INVESTMENTS IN AFFILIATES.

        We have created several start-up companies and formed independent
business units in the optical technology and Internet infrastructure areas. We
account for these investments in affiliates according to the equity or cost
methods as required by accounting principles generally accepted in the United
States. The market value of these investments may vary materially from the
amounts shown as a result of business events specific to these entities or their
competitors or market conditions. Actual or perceived changes in the market
value of these investments could have a material impact on our share price and
in addition could contribute significantly to volatility of our share price.

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.

WE MAY HAVE DIFFICULTY MANAGING OUR BUSINESSES.

        Our growth in recent years, both internally and through the acquisitions
we have made has placed a significant strain on our financial and management
personnel and information systems and controls. As




                                       11
<PAGE>

a consequence, we must continually implement new and enhance existing financial
and management information systems and controls and must add and train personnel
to operate these systems effectively. Our delay or failure to implement new and
enhance existing systems and controls as needed could have a material adverse
effect on our results of operations and financial condition in the future. Our
intention to continue to pursue a growth strategy can be expected to place even
greater pressure on our existing personnel and to compound the need for
increased personnel, expanded information systems, and additional financial and
administrative control procedures. We can give no assurance that we will be able
to successfully manage operations if they continue to expand.

        WE FACE RISKS FROM OUR INTERNATIONAL OPERATIONS.

        International sales have become an increasingly important segment of our
operations. The following table sets forth the percentage of our total net
revenues from sales to customers in foreign countries for the periods indicated
below:

<TABLE>
<CAPTION>
                                                  Year ended December 31,
                                               ----------------------------
                                                1999       2000       2001
                                               ------     ------     ------
<S>                                            <C>        <C>        <C>
Percent of total revenue from foreign sales      58%        63%        67%
</TABLE>

        We have companies and offices in, and conduct a significant portion of
our operations in and from, 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. In
addition, the recent acquisition of operations in Taiwan and People's Republic
of China has increased both the administrative complications we must manage and
our exposure to political, economic and other conditions affecting Taiwan and
People's Republic of China. Luminent has 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. Our total sales in the People's Republic of China amounted to
approximately $2.7 million during the year ended December 31, 2000 and $10.4
million during the year ended December 31, 2001. Currently there is significant
political tension between Taiwan and People's Republic of China, which could
lead to hostilities. Risks we face due to international sales and the use of
overseas manufacturing include:

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

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

    -   unexpected changes in regulatory requirements;

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

    -   certification requirements;

    -   potentially adverse tax consequences;

    -   unanticipated cost increases;

    -   unavailability or late delivery of equipment;




                                       12
<PAGE>

    -   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. The Single
European Currency (Euro) was introduced on January 1, 1999 with complete
transition to this new currency required by January 2002. We have made and
expect to continue to make changes to our internal systems in order to
accommodate doing business in the Euro. Any delays in our ability to be
Euro-compliant could have an adverse impact on our results of operations or
financial condition. Due to numerous uncertainties, we cannot reasonably
estimate at this time the effects a common currency will have on pricing within
the European Union and the resulting impact, if any, on our financial condition
or results of operations.

        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 FOR NEEDED COMPONENTS 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. We can give no assurance that our
third party manufacturers will 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




                                       13
<PAGE>

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 can
give no assurance that we will be able to maintain acceptable production yields
and avoid product shipment delays. In the event adequate production yields are
not achieved, resulting in product shipment delays, our business, operating
results and financial condition could be materially adversely affected.

FUTURE HARM COULD RESULT FROM ADDITIONAL ACQUISITIONS.

        An important element of our strategy is to review acquisition prospects
that would complement our existing companies and products, augment our market
coverage and distribution ability or enhance our technological capabilities.
Future acquisitions could have a material adverse effect on our business,
financial condition and results of operations because of the following:

    -   possible charges to operations for purchased technology and
        restructuring similar to those incurred in connection with our
        acquisition of Xyplex in 1998;

    -   potentially dilutive issuances of equity securities;

    -   incurrence of debt and contingent liabilities;

    -   incurrence of amortization expenses and impairment charges related to
        goodwill and other intangible assets and deferred compensation charges
        similar to those arising with the acquisitions of Fiber Optic
        Communications, Optronics, Quantum Optech, Jolt and AstroTerra in 2000
        (see Recently Issued Accounting Standards);

    -   difficulties assimilating the acquired operations, technologies and
        products;

    -   diversion of management's attention to other business concerns;

    -   risks of entering markets in which we have no or limited prior
        experience;

    -   potential loss of key employees of acquired organizations; and

    -   difficulties in honoring commitments made to customers by management of
        the acquired entity prior to the acquisition.




                                       14
<PAGE>

    -   We can give no assurance as to whether we can successfully integrate the
        companies, products, technologies or personnel of any business that we
        might acquire in the future.

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 ARE CURRENTLY, AND 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. We expect we will increasingly be subject to license offers
and infringement claims as the number of products and competitors in our market
grows and the functioning of products overlaps. In this regard:

    -   In March 1999, we received a written notice from Lemelson Foundation
        Partnership in which Lemelson claimed to have patent rights in our
        vision and automatic identification operations, which are widely used in
        the manufacture of electronic assemblies.

    -   In April 1999, we received a written notice from Rockwell Automation
        Technologies Corporation in which Rockwell claimed to have patent rights
        in certain technology related to our metal organic chemical vapor
        deposition, or MOCVD, processes and this claim has resulted in
        litigation, which Rockwell brought against us in March 2002 (see Item 3.
        Legal Proceedings").

    -   In October 1999, we received written notice from Lucent Technologies,
        Inc. in which Lucent claimed we have violated certain of Lucent's
        patents falling into the general category of communications technology,
        with a focus on networking functionality.

    -   In October 1999, we received a written notice from Ortel Corporation,
        which has since been acquired by Lucent, in which Ortel claimed to have
        patent rights in certain technology related to our photodiode module
        products. In January 2001, we were advised that Lucent had assigned
        certain of its rights and claims to Agere Systems, Inc., including the
        claim made on the Ortel patent. To date, we have not been contacted by
        Agere regarding this patent claim. In July 2000, we received written
        notice from Nortel Networks, which claimed we violated Nortel's patent
        relating to technology associated with local area networks.

    -   In May 2001, we received written notice from IBM, which claims that
        several of our optical components and Internet infrastructure products
        make use of inventions covered by certain patents claimed by IBM. We are
        evaluating the patents noted in the letters.

    Aggregate net sales potentially subject to the foregoing claims amounted to
    approximately 30% of our total sales during the year ended December 31, 2000
    and 28% of our total sales during the year ended December 31, 2001. Others'
    patents, including Lemelson's, Rockwell's, Lucent's, Agere's, Nortel's and
    IBM's, may be determined to be valid, or some of our products may ultimately
    be determined to infringe the Lemelson, Rockwell, Lucent, Agere, Nortel or
    IBM patents, or those of other companies.




                                       15
<PAGE>
        As was the case with Rockwell, Lemelson, Lucent, Agere, Nortel or IBM,
or other companies may pursue litigation with respect to these or other claims.
The results of any litigation are inherently uncertain. In the event of an
adverse result in any litigation with respect to intellectual property rights
relevant to our products that could arise in the future, 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, including Lemelson, Rockwell, Lucent,
Ortel, Nortel or IBM, 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.

OUR BUSINESS REQUIRES US TO ATTRACT AND RETAIN QUALIFIED PERSONNEL.

        Our ability to develop, manufacture and market our products, run our
companies 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 that personnel with companies having substantially greater financial
and other resources than we do. To attract executives, we have had to enter into
compensation arrangements, which have resulted in substantial deferred
compensation charges and adversely affected our results of operations. We may
enter into similar arrangements in the future to attract qualified executives If
we should be unable to attract and retain qualified personnel, our business
could be materially adversely affected. We can give no assurance that we will be
able to attract and retain qualified personnel.




                                       16
<PAGE>

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.

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

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

        Current softness in demand and pricing in the communications market have
necessitated a review of our inventory, facilities and headcount. As a result,
we and Luminent recorded in the year ended December 31, 2001 one-time charges to
write down inventory to realizable value and inventory purchase commitments of
approximately $35.4 million.

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. Additionally, while
Luminent and we informed investors that we were under no obligation to, and
might not, make the distribution to our stockholders of our Luminent common
stock and that we could and might eliminate public ownership of Luminent through
a short-form merger with us, our decisions to abandon our distribution of
Luminent's common stock to our stockholders or to eliminate public ownership of
Luminent's common stock through the merger of Luminent into one of our
wholly-owned subsidiaries may result in securities or other litigation.
Securities or other litigation could result in substantial costs and divert
management's attention and resources.

DEPENDING ON OUR FUTURE ACTIVITIES OR AS A RESULT OF THE POSSIBLE SALE OF ONE OR
MORE OF OUR PORTFOLIO COMPANIES, WE COULD BE FORCED TO INCUR SIGNIFICANT COSTS
TO AVOID INVESTMENT COMPANY STATUS AND MAY SUFFER ADVERSE CONSEQUENCES IF DEEMED
TO BE AN INVESTMENT COMPANY.

        In the past through 2000, we embarked upon a business strategy of
creating, acquiring and managing companies in the optical technology and
Internet infrastructure areas, with a view toward




                                       17
<PAGE>

creating equity growth by operating or investing in these companies and then
potentially spinning them off, taking them public or selling them or our
interest in them. If this strategy proved successful, we were concerned that we
might incur significant costs to avoid investment company status and would
suffer other adverse consequences if deemed to be an investment company under
the Investment Company Act of 1940. The Investment Company Act of 1940 requires
registration for companies that are engaged primarily in the business of
investing, reinvesting, owning, holding or trading in securities. A company may
be deemed to be an investment company if it owns investment securities with a
value exceeding 40% of the value of its total assets (excluding government
securities and cash items) on an unconsolidated basis, unless an exemption or
safe harbor applies. Securities issued by companies other than majority-owned
subsidiaries are generally counted as investment securities for purposes of the
Investment Company Act. Investment companies are subject to registration under,
and compliance with, the Investment Company Act unless a particular exclusion or
safe harbor provision applies. If we were to be deemed an investment company, we
would become subject to the requirements of the Investment Company Act. As a
consequence, we would be prohibited from engaging in business or issuing our
securities as we have in the past and might be subject to civil and criminal
penalties for noncompliance. In addition, certain of our contracts might be
voidable.

        As a result of the current economic slowdown in the communications
industry generally and the fiber optic components industry particularly, we have
abandoned plans to spin-off Luminent, one of our subsidiaries, and withdrawn the
initial public offering of Optical Access, another of our subsidiaries. The
economic slowdown and its consequences have caused us to reevaluate our strategy
and to focus currently on holding and operating our existing businesses. This
current focus makes it less likely that we would attain investment company
status. However, if economic and market conditions recover to the point at which
they existed prior to the fourth quarter of 2000, we may return to our prior
strategy which, depending on future events, might again subject us to the
potential risks associated with investment company status, including
registration as an investment company.

        Moreover, although our portfolio of investment securities currently
comprises substantially less than 40% of our total assets, fluctuations in the
value of these securities or of our other assets as a result of future economic
conditions or events, or, more likely, the sale of one or more of companies in
exchange for the securities of the purchaser, may cause this limit to be
exceeded. For example, while we have no plans to sell all or any portion of
Luminent to a third party after the merger, we are periodically contacted by
third parties regarding potential transactions and, depending on the proposal,
could complete a sale if we determine that it would be in our best interest and
those of our stockholders. In any case, where our investment securities
resulting from a sale of Luminent or another of our companies or otherwise were
in excess of the 40% limit unless an exclusion or safe harbor was available to
us, in that case, we would have to attempt to reduce our investment securities
as a percentage of our total assets. This reduction could be attempted in a
number of ways, including the disposition of investment securities and the
acquisition of non-investment security assets. If we were required to sell
investment securities, we may sell them sooner than we otherwise would. These
sales may be at depressed prices and we may never realize anticipated benefits
from, or may incur losses on, these investments. We may be unable to sell some
investments due to contractual or legal restrictions or the inability to locate
a suitable buyer. Moreover, we may incur tax liabilities when we sell assets. We
may also be unable to purchase additional investment securities that may be
important to our operating strategy. If we decide to acquire non-investment
security assets, we may not be able to identify and acquire suitable assets and
businesses or the terms on which we are able to acquire these assets may be
unfavorable. The mere existence of these issues could cause us to forego a
transaction, which might otherwise have been beneficial to us.

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 the board of




                                       18
<PAGE>

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.

INDUSTRY BACKGROUND

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

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

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




                                       19
<PAGE>

        OPTICAL NETWORKING AND INTERNET INFRASTRUCTURE ENVIRONMENT

        The Internet has evolved into a network of hundreds of public and
private networks interconnected using Internet Protocol, or IP. Industry
analysts expect continued dramatic growth worldwide in Internet use and Internet
traffic. As the Internet continues to grow, business enterprises are
increasingly reliant on communications networks and software applications as
strategic assets that are critical to business success. Communications networks
are being expanded to deliver new services and distribute computing applications
such as customer network management, e-mail, video, conferencing, and Voice Over
Internet Protocol to suppliers, customers and employees.

        While consumers use the Internet for education and communication,
business and service providers are realizing the critical nature of network and
application performance. To meet the growth in the demand for high-speed data
services, service providers are invested heavily to construct and upgrade the
transmission foundation of the public network infrastructure worldwide. The
public network infrastructure, which was originally built for voice traffic, is
inadequate to handle data and must be upgraded. Expenditures are spread across
fiber deployment, dense wavelength division multiplexing, or DWDM, products,
Synchronous Optical Network, or SONET, transmission equipment, and more
recently, and intelligent optical networking solutions.

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

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

        FIBER OPTIC ENVIRONMENT

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

        Demand for fiber optic transmission components is driven by four
factors:

    -   fiber applications have expanded beyond traditional telephony
        applications and are being deployed in enterprise network backbones to
        support high-speed data communications;

    -   within access networks, fiber is rapidly expanding downstream toward
        end-users as access networks deploy Fiber-in-the-Loop and fiber to the
        curb, or FTTC architectures to support services such as fast Internet
        access and interactive video;

    -   the growth of cellular communications and PCs requires fiber to be
        deployed both within and between cells; and

    -   the usage of fiber in short distances increases the demand for
        components as more are used per mile of fiber. As the size, number and
        complexity of these fiber networks increases, management expects that
        the demand for fiber optic components will grow significantly.




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<PAGE>

        Fiber Optic Transmission in Data Communications. As higher speed
connections are implemented in LAN/WAN systems, fiber optic transmission becomes
an essential element in computer networks. For transmission speeds of 100 Mbps
and higher, and transmission distances of 100 meters and longer, fiber optic
transmission must be deployed. Virtually all high-speed transmission standards,
such as Fiber Distributed Data Interface, Asynchronous Transfer Mode, or ATM,
Fast Ethernet and Gigabit Ethernet, specify fiber optic media as the most
practical technology for transmission. The steady rise in high-speed connections
and the growth in the span of networks, including the need to connect remote
workgroups, have been driving the deployment of fiber optic cable throughout
enterprise networks.

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

RECENT ECONOMIC SLOWDOWN

        Macroeconomic factors, such as an economic slowdown in the U.S. and
abroad, have detrimentally impacted demand for communications products, thereby
resulting in reduced demand for optical components and equipment. 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 2002 and
thereafter. Announcements by industry participants and observers indicate there
is a slowdown in industry spending and participants are seeking to reduce
existing inventories. For information on charges MRV has taken to its financial
results as a result of these conditions, please see the discussion in Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Market Conditions and Current Outlook."

MRV'S CONCENTRATION

        MRV creates, acquires, finances and operates companies, and through
them, designs, develops, manufactures and markets products, which enable
high-speed broadband communications. MRV concentrates on companies and products
devoted to optical components and network infrastructure systems. MRV has
leveraged its early experience in fiber optic technology into a number of
focused operating units specializing in advanced fiber optic components,
switching, routing, transaction management and wireless optical transmission
systems which it has created, financed or acquired. Products and product
developments of MRV's wholly or majority owned subsidiaries or operating units
include the following:

        Luminent, Inc.

        Luminent provides an extensive offering of active and passive
singlemode fiber optic components that support a wide range of requirements for
the metropolitan and access networks. It is currently shipping a variety of
active and passive fiber optic components. Active components are the core




                                       21
<PAGE>

technology for optical networks and require electrical power to generate, boost
or transform optical signals. Luminent's passive fiber optic components are used
to direct, split and merge optical signals without the use of electricity. These
components have become critical due to the use of fiber amplifiers, passive
networks and WDM technology. Luminent provides an extensive offering of active
and passive singlemode fiber optic components that support a wide range of
requirements for the metropolitan and access networks. It is currently shipping
a variety of active and passive fiber optic components. Active components are
the core technology for optical networks and require electrical power to
generate, boost or transform optical signals. Luminent's active components
include:

    -   Mixed signal, single fiber components, called duplexers and triplexers,
        which are capable of transmitting bi-directional digital and analog
        information over a single fiber;

    -   A wide variety of transceivers, the most common fiber-optic data link.
        Transceivers have both a transmitter and receiver built into one unit. A
        transmitter converts electrical signals into optical signals and
        launches them into the fiber. A receiver receives the optical signal,
        converts it back to an electrical signal and amplifies it;

    -   Coarse WDM subsystems, which enable communications equipment
        manufacturers to implement wavelength division multiplexing inside their
        equipment at a fraction of the cost of dense WDM;

    -   Light emitting diodes, or LEDs, used as a light source for fiber optic
        transmission;

    -   Laser diodes, which convert electrical signals to optical signals and
        are the most widely used light sources for optical communications
        systems;

    -   Analog fiber optic links, which are used in cable television, cellular,
        satellite and wireless local area networks transmissions;

    -   Photo detectors, which convert optical signals into electrical signals
        and receivers that include photo detectors with electrical amplifiers
        for greater functionality; and

    -   Electro-optic modulators, which are used to transfer information onto a
        light signal without the modifying wavelength of the light and enable
        data to travel extended transmission distances compared to a directly
        modulated laser.

        Luminent's passive fiber optic components are used to direct, split and
merge optical signals without the use of electricity. These components have
become critical due to the use of fiber amplifiers, passive networks and WDM
technology. Luminent's passive components include:

    -   A wide variety of couplers, one of the most common components of any
        optical network, used to combine and/or split optical signals;

    -   Isolators, which allow transmission of optical signals in one direction
        but block transmission in the other direction;

    -   WDM thin film add/drop components, which enable the transmission of
        specific optical wavelengths and the reflection of others and allow for
        the removal and insertion of wavelengths in WDM systems with minimal
        power losses;

    -   Optical circulators, which are used in wavelength management
        applications to direct optical signals to the appropriate sections of
        the system;




                                       22
<PAGE>

    -   Variable fiber optic attenuators, which reduce the amplitude of a signal
        without distorting the waveform and are used to equalize the power
        between different WDM channels before being amplified by a fiber
        amplifier;

    -   Optical connectors, which are used to couple light either directly from
        a component or from another fiber; and

    -   Adapters, which facilitate the connection of any two connectors.

        Optical Access, Inc.

        Optical Access is an optical networking and Internet infrastructure
company that designs, manufactures and markets optical wireless products
enabling service providers to offer high-speed broadband access within the last
mile of the communications network in a cost effective and timely manner.
Optical Access' products are designed to be deployed in a switched mesh
architecture, which means that its products allow transmission of data between
any two points on the network and enable full re-routing of traffic around a
transmission link or equipment failure. In addition, its products feature a
backup wireless radio frequency option, which reduces problems associated with
adverse weather conditions. Optical Access offers the TereScope family of
products, which provide optical wireless links, and OptiSwitch(TM) products,
which enable switching, provisioning and aggregation. All of these products can
be remotely managed through Optical Access' MegaVision network management
system. Because each of its products can perform independently, Optical Access's
customers can also purchase products separately with no performance degradation.

        TereScope. TereScope products are optical wireless links that utilize
high-powered optics, which allow for high-speed, long distance optical wireless
transmission of data. By installing its TereScope products in a mesh
configuration with a minimum of two connections into each building and utilizing
Optical Access' OptiSwitch(TM) switching technology, Optical Access' products
enable full re-routing of traffic around a link or equipment failure. Optical
Access believes that its TereScope products offer one of the first commercially
available wireless optic systems with built-in auto fallback to radio frequency
links.

        TereScope devices can be installed on a building's rooftop or side or in
an office behind a window rather than a radio tower. They are constructed with a
transmitter, which emits light that does not damage the human eye, and a
receiver that detects light. Optical Access offers a range of TereScope
products, the smallest of which looks like a security camera and the largest of
which is the size of a computer monitor. The products feature a number of
recently developed technologies to account for issues that have historically
limited the use of optical wireless systems, including a system that enables
them to compensate for misalignment due to building movements or interference
caused by flying objects such as birds. In addition, TereScope products feature
high power laser transmitters and large optical receivers to permit connectivity
over longer distances. The TereScope ranges in list price from approximately
$4,000 to $120,000, depending on data rate and maximum range, with an additional
$5,000 to $10,000 for a 10 megabit per second radio frequency backup.

        OptiSwitch(TM). Optical Access' family of OptiSwitch(TM) products
enables a mesh architecture, bandwidth distribution, provisioning and
termination for all-IP networks. The OptiSwitch is designed to provide customer
premise connectivity to business users, smart aggregation and to enable
execution of any service level agreement by advanced features and capabilities
of traffic classification and quality of service. Direct connection of the
OptiSwitch(TM) ports to TereScope products allow service providers to offer a
complete cost-effective metropolitan solution. The system is designed to manage
optical wireless mesh topology management and subscriber management in Ethernet
broadband networks. The OptiSwitch(TM) products range in price from $1,400 to
$190,000, depending upon data rate and number of ports.




                                       23
<PAGE>

        MegaVision. Optical Access' MegaVision management system provides
software based graphical network management and monitoring that is fully
integrated with its optical transmission and switching products. The MegaVision
network management system allows service providers to provision their networks
from a centralized location. With the graphical interface offered by Optical
Access, the provider receives a comprehensive view of the network as well as
fault isolation, configuration, performance and security management of the
network.

        CEScomm, Inc.

        CEScomm is developing and providing products for manufacturers of
cellular network infrastructure equipment and mobile operators and service
providers for the third generation of wireless solutions commonly known as 3G.
3G is the generic term used for the next generation of mobile communications
systems. These new systems provide enhanced wireless services to those available
today, i.e., voice, text and data. CEScomm specializes in products that provide
the real-time conversion of radio signals generated by Internet ready mobile
devices into asynchronous transfer mode, or ATM, traffic streams. Its products
are based on distributed architectures that cluster super computer
multi-processing capabilities between the radio access network and the Internet
protocol, or IP, core network.

        CEScomm's products make it possible for 3G mobile network operators and
equipment vendors to deliver more efficient service with enhanced options. End
users of CEScomm's products include leading 3G wireless network operators such
as NTT DoCoMo, the cellular telephone arm of Nippon Telegraph and Telephone
Corporation in Japan, and European operators using the Universal Mobile
Telecommunications System, or UMTS. CEScomm sells its products to leading
cellular equipment vendors, including Lucent Technologies, Nortel Networks and
Ericsson.

        iTouch Communications, Inc.

        iTouch provides next-generation Internet infrastructure solutions that
enable service providers and carriers to deliver and monitor, on a real-time
basis, high-speed Internet services. iTouch's products utilize internet
protocol, or IP, routing and wide area network, or WAN, technologies, which
allow for faster development of feature rich high-speed data acquisition and
management systems.

        iTouch's In-Reach product suite supports network element management and
out-of-band management applications for large, heterogeneous communication
networks. In-Reach products offer console, alarm, sensor and power management
solutions and possess features ranging from simple network management protocol,
or SNMP, -based discrete alarm signal collection and distribution to remote
console management of routers, switches, and equipment from Sun Microsystems and
other providers. Standalone and chassis-based In-Reach products enable upgrades
at central sites and downloads of software to thousands of remote network
elements.

        NBase-Xyplex.

        NBase-Xyplex, a division of MRV, provides products and services, such as
the Fiber Driver family of products, to enhance network infrastructures for city
carriers, service providers, cable operators and campus and enterprise networks.
The Fiber Driver family of products focuses on providing more effective usage of
fiber-optic cables for carriers, service providers, cable operators and campus
and enterprise networks. The Fiber Driver product line is designed to address
the growing need for connecting networks of different media and speed into
today's expanding fiber optic infrastructure.

        The Fiber Driver family consists of over 150 different converters,
repeaters, switches, distance extenders and coarse wave division multiplexer
modules, all of which operate on the same modular, and scalable platform. Each
module provides a different solution and together the family covers almost every




                                       24
<PAGE>

communication protocol. The family includes a base chassis in one, two, four and
16 slot varieties and is fully managed through any network management system
based on simple network management protocol, or SNMP, including the MegaVision
network management system discussed above under Optical Access.

        Charlotte's Networks, Inc.

        Charlotte's Networks is developing a core router for large service
providers and carriers. The Aranea core router is Charlotte's Networks' first
product. The Aranea router is capable of carrying both IP packets and
time-division multiplexing, or TDM, voice traffic and enables the current WAN to
grow in high orders of magnitude both in processing power and rate of
transmission. The router has the ability to emulate a class 4 or 5 switch,
enabling its voice traffic capability. It offers various interfaces and allows
multiple Aranea machines to be clustered into a single virtual router for
ultra-high speed. This feature allows construction of a machine with an
aggregate bandwidth of multiple terabits per second. The Aranea can be
configured to combine up to 16 port interfaces of any kind into a single dense
wavelength division multiplexing link of up to 40 Gbps. The clustered machines
may be managed as a single virtual router through the operating system called
AROS. The Aranea is designed to meet the exact requirements of new generation
telecommunication service providers in terms of bandwidth, differentiated
services, scalability and reliability and is positioned to take advantage of the
explosive growth predicted for the WAN or terabit router segment of the router
market.

        Zuma Networks, Inc.

        Zuma is developing a next generation gigabit Ethernet switch router
platform. The platform is distinguished by very high gigabit Ethernet port
density in a single chassis, outstanding packet forwarding performance; a
multi-processor, multi-component hardware architecture supporting carrier class
survivability; and a multi-processor software architecture supporting the
coupling of wire speed switch routing functions with wire speed network services
in a single platform. This router, named Zuma LightReef(TM) entered beta trials
in December 2000 and shipments began in April 2001.

        European Subsidiaries

        MRV maintains European subsidiaries and branch offices in France,
Germany, the United Kingdom, Italy, Switzerland, Sweden, Norway and Finland,
which are involved in sales, services and distribution of data networking
products. The activities of these companies include system design, integration
and support as well as product sales to enterprise customers and carriers,
including service providers. Products sold include products manufactured by
other MRV companies or divisions, as well as products manufactured by third
party vendors supplied as part of network system integration and distribution
services. Such specialization allows MRV to penetrate targeted vertical and
regional markets. As of December 31, 2001, MRV owned approximately 80% of its
European subsidiaries.

OTHER KEY TECHNOLOGY INTERESTS

        In addition to its wholly owned and majority owned companies, MRV has
significant interests in other key technology companies, including RedC Optical
Networks and Hyperchannel Ltd.

        Optical Crossing's core experience is in free-space laser communications
and semiconductor optoelectronic components. Optical Crossing has three internal
product groups -- Optoelectronics Products, Optical Wireless Products and
Networking Products and Services -- that address multiple aspects of optical
wireless technology, from components to architectural implementation of
all-optical networks. Products are currently in the prototyping and development
stage.




                                       25
<PAGE>

        RedC Optical Networks has developed a complete line of optical modules
used for operating, monitoring and protecting optical networks including:
optical amplifiers, add/drop modules, protection and restoration modules and
DWDM monitoring.

        Hyperchannel, which does business under its trademark Hyporium, is an
independent net market maker for the information technology, or IT, industry,
enabling IT vendors, distributors and resellers to trade online. Hyporium offers
an alternative route to market through an online trading hub and reseller web
storefronts.

SALES AND MARKETING

        Through the end of 2001, each of MRV and its operating company
maintained its own separate sales and marketing staffs. In early 2002, with the
goals of cutting costs and increasing revenue while better serving its
customers, MRV centralized sales and marketing and established product-solution
groups, which it formed to replace the sales and marketing organizations of its
independent business units and which were folded into MRV. These
product-solution groups include: Active and Passive Optical Components, Network
Physical Infrastructure, Switches and Routers, Remote Device Management, and
Services and Other. The sales forces of the formerly independent business units
were unified, and cover two sales regions - MRV Americas and MRV International.
MRV retained only the independent sales organization of Luminent.

        MRV and its companies have sold their products worldwide to over 500
diverse customers in a wide range of industries; primarily, data communications,
telecommunications and cable. No customer accounted for more than 10% of MRV's
consolidated revenues in 1999, 2000 or 2001.

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

SALES, SUPPORT AND DISTRIBUTION

        MRV continually seeks to augment and increase its distribution channels
and sales forces to accelerate growth. Products are sold through MRV and its
operating companies' direct sales forces, VARs, systems integrators,
distributors, manufacturer's representatives and OEM customers. Sales and
distribution divisions are organized along the following primary lines: direct
sales, including OEM; domestic and international distributors; value-added
resellers, or VARs, and systems integrators; and manufacturer's representatives.

        Direct Sales. MRV and its companies employ worldwide direct sales forces
primarily to sell their products to large OEM accounts and in some cases to end
users. MRV believes that a direct sales force can best serve large customers by
allowing salespeople to develop strong, lasting relationships, which can meet
the customers' needs effectively. Direct sales staffs are located across the
United States, Europe and Israel.

        Domestic and International Distributors. MRV and its companies work with
both domestic and international distributors. Geographic exclusivity is normally
not awarded unless the distributor has demonstrated acceptable performance.
Distributors must successfully complete MRV's training programs and provide
system installation, technical support, sales support and follow-on service to
local customers. Generally, distributors have agreements with a one-year term
subject to automatic renewal unless otherwise canceled by either party. In
certain cases with major distributors, the agreements are terminable




                                       26
<PAGE>

on 30 days' notice. MRV uses stocking distributors, which purchase its product
and stock it in their warehouse for immediate delivery, and non-stocking
distributors, which purchase its products after the receipt of an order.
Internationally, MRV sells through numerous distributors in Asia, Africa,
Europe, Australia, the Middle East, Canada and Latin America.

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

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

        Customer Support and Service. MRV and its companies are committed to
providing strong technical support to their customers. MRV operates customer
service groups, and provides support through engineering groups, sales staff,
distributors, OEMs and VARs. Customer support personnel are currently located at
offices in California, Massachusetts, Maryland, Germany, England, Italy and
Israel.

        International Sales. International sales accounted for approximately
58%, 63% and 67% of MRV's consolidated net revenues in 1999, 2000 and 2001,
respectively.

MANUFACTURING

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

        MRV relies extensively on MRV's and its companies own production
capabilities for critical semiconductor lasers and LEDs used in MRV's products.
MRV's optical transmission production process involves:

    -   a wafer processing facility for semiconductor laser diode and LED chip
        manufacturing under stringent and accurate procedures using
        state-of-the-art wafer fabrication technology;

    -   high precision electronic and mechanical assembly; and




                                       27
<PAGE>

    -   final assembly and testing.

        Relevant assembly processes include die attach, wire bond, substrate
attachment and fiber coupling. MRV also conducts tests throughout MRV's
manufacturing processes using commercially available and internally built
testing systems that incorporate proprietary procedures. MRV and its companies
perform final product tests on all of their products prior to shipment to
customers. Many of the key processes used in MRV's products are proprietary;
and, therefore, many of the key components of its products are designed and
produced internally. Because MRV and its companies manufacture these and other
key components of their products at their own facilities and they are not
readily available from other sources, any interruption of the manufacturing
process could have a material adverse effect on MRV's operations. Furthermore,
MRV and its companies have a limited number of employees dedicated to the
operation and maintenance of wafer fabrication equipment, the loss of any of
whom could result in their inability to effectively operate and service that
equipment. Wafer fabrication is sensitive to a wide variety of factors,
including variations and impurities in the raw materials, difficulties in the
fabrication process and performance of the manufacturing equipment. There can be
no assurance that MRV and its companies will be able to maintain acceptable
production yields and avoid product shipment delays. In the event adequate
production yields are not achieved resulting in product shipment delays, MRV's
business, operating results and financial condition could be materially
adversely affected. While MRV believes its companies have sufficient
manufacturing capacity for growth in the coming years, at various times there
have been shortages of parts in the electronics industry, and certain critical
components have been subject to limited allocations. Although shortages of parts
and allocations have not had a material adverse effect on MRV's results of
operations, there can be no assurance that any future shortages or allocations
would not have that effect.

        MRV and its companies are subject to a variety of federal, state, and
local governmental laws and regulations related to the storage, use, emission,
discharge, and disposal of toxic, volatile or otherwise hazardous chemicals used
in the manufacturing process. Although MRV believes that it is in material
compliance and has complied with all applicable legal requirements, any failure
by MRV to comply with present and future regulations could subject MRV to future
liabilities or the suspension of production. There can be no assurance that
environmental laws and regulations will not result in the need for additional
capital equipment or other requirements. Further, these laws and regulations
could restrict MRV's ability to expand operations. Any failure by MRV or its
companies to obtain required permits for, control of use of, or adequately
restrict the discharge, emission or release of, hazardous substances under
present or future laws and regulations could subject MRV to substantial
liability or could cause MRV's manufacturing operations to be suspended. That
liability or suspension of manufacturing operations could have a material
adverse effect on MRV's operating results. To date, these environmental laws and
regulations have not had a material adverse effect on MRV's operating results.

COMPETITION

        The communications equipment and component industry is intensely
competitive. MRV and its companies compete directly with a number of established
and emerging computer, communications and networking device companies. Direct
competitors in optical networking and Internet infrastructure, generally include
Cisco Systems, Lucent Technologies, Nortel Networks and 3Com Corporation. Direct
competitors for MRV's optical wireless technology include AirFiber, Inc., fSona
Communications Corporation, Canon and TeraBeam Corporation. Direct competitors
in fiber optic components include Agilent Technologies, Corning Incorporated,
Finisar Corporation, Fujitsu, Infineon AG, International Business Machines
Corporation, JDS Uniphase Corp., Lucent Technologies, Inc., Sumitomo and Tyco
International, Ltd. Many of MRV's competitors have significantly greater
financial, technical, marketing, distribution and other resources and larger
installed customer bases than MRV. Several of these competitors have recently
introduced or announced their intentions to introduce new competitive products.
Many of the larger companies with which MRV competes offer customers a broader
product




                                       28
<PAGE>

line, which provides a more comprehensive networking solution than the products
of MRV and its companies.

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

        The communications industry has become increasingly concentrated in
recent years as a result of consolidation. This consolidation is likely to
permit MRV's 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 bases. MRV expects that
competition will increase substantially as a result of these and other industry
consolidations and alliances, as well as the emergence of new competitors.

PROPRIETARY RIGHTS

        To date, MRV and its companies have relied principally upon copyrights
and trade secrets to protect its proprietary technology. Generally, MRV enters
into confidentiality agreements with its employees and key suppliers and
otherwise seek to limit access to and distribution of the source code to
software and other proprietary information. There can be no assurance that these
steps will be adequate to prevent misappropriation of MRV's technologies or that
a third party will not independently develop technology similar or superior to
any MRV possesses.

        MRV has received notices from third parties claiming possible
infringement of patents with respect to product features or manufacturing
processes and one of these claims, of Rockwell Automation Technologies, has
resulted in litigation that Rockwell commenced in March 2002. See Item 3. Legal
Proceeds. MRV believes these kind of claims 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 claims with the claimants in an
effort to demonstrate that its products and/or processes do not violate any
patents. MRV is currently involved in discussions with Lucent Technologies,
Nortel Networks, Ortel, Rockwell and the Lemelson Medical, Education & Research
Foundation. MRV does not believe that any of MRV's or its companies' products or
processes violates any of the patents asserted by these parties and further
believes that it has meritorious defenses if any legal action is taken by any of
these parties and plans to vigorously defend the litigation brought by Rockwell
if it is unable to settle it through negotiations. However, the prosecution by
one or more of these parties of litigation of a claim that results in a
conclusion unfavorable to MRV could materially and adversely affect MRV's
business, operating results and financial condition.

In the future, litigation may be necessary to protect trade secrets and other
intellectual property rights owned by MRV, to enforce any patents issued to MRV
or its companies, to defend against claimed infringement of the rights of others
and to determine the scope and validity of the proprietary rights of others. Any
litigation of this kind could be costly and a diversion of the attention of the
management involved, which could have a material adverse effect on MRV's
business, operating results and financial condition. An adverse determination in
that litigation could further result in the loss of MRV's proprietary rights,
subject it to significant liabilities, require MRV to seek licenses from third
parties or prevent MRV and its companies from manufacturing or selling their
products, any of which could have a material adverse effect on MRV's business,
operating results and financial condition. MRV typically has agreed to




                                       29
<PAGE>

indemnify its customers and key suppliers for liability incurred in connection
with the infringement of a third party's intellectual property rights.

EMPLOYEES

        As of December 31, 2001, MRV and its consolidated companies employed a
total of approximately 2,227 full-time employees compared with approximately
2,600 at December 31, 2000. None of MRV's employees is represented by a union or
governed by a collective bargaining agreement, and MRV believes its employee
relationships are satisfactory.





                                       30
<PAGE>

ITEM 2. PROPERTIES

        MRV's principal administrative, sales and marketing, research and
development and manufacturing facility is located in Chatsworth, California. The
table below lists the locations, square footage and expiration dates of MRV's
owned and leased facilities for MRV's major operations.

<TABLE>
<CAPTION>
       LOCATION                                    SQUARE FEET      DATE LEASE EXPIRES
       --------                                    -----------      ------------------
       <S>                <C>                      <C>              <C>
       Chatsworth, CA     USA                          5,000            12/31/2002
       Chatsworth, CA     USA                         17,700             2/28/2004
       Chatsworth, CA     USA                         22,200            12/31/2005
       Chatsworth, CA     USA                         50,000              7/1/2004
       Chatsworth, CA     USA                         13,300             3/31/2007
       Chatsworth, CA     USA                         20,950              1/1/2003
       Chu-Pei            Taiwan                      15,989                 Owned
       Copenhagen         Denmark                      4,112             6/30/2005
       Denver, CO         USA                          6,770             5/31/2004
       Frankfurt          Germany                      6,398             7/31/2011
       Geneva             Switzerland                 29,428            12/31/2010
       Gif Sur Yvette     France                      17,222                 Owned
       Gothenborg         Sweden                       3,100            10/31/2002
       Helsinki           Finland                      6,458             6/30/2002
       Hinchu             Taiwan                         431            12/19/2002
       Hinchu             Taiwan                       1,066            12/31/2002
       Hinchu             Taiwan                       2,626             8/31/2002
       Hinchu             Taiwan                       3,907            12/31/2002
       Hinchu             Taiwan                       9,440            12/31/2002
       Hinchu             Taiwan                       9,440            12/31/2002
       Hinchu             Taiwan                       9,461            12/31/2002
       Hinchu             Taiwan                      12,712                 Owned
       Hinchu             Taiwan                      39,590            12/31/2002
       Hinchu             Taiwan                     165,910             3/31/2016
       Hinchu             Taiwan                       5,665            12/19/2002
       Jerusalem          Israel                       2,433             8/28/2003
       Jerusalem          Israel                       4,962             7/30/2003
       Jerusalem          Israel                       6,609             8/16/2003
       Littleton, MA      USA                        101,031             9/30/2003
       London             United Kingdom               5,000              1/1/2004
       Malmoe             Sweden                       4,413             8/31/2002
       Miao-Li County     Taiwan                      24,398                 Owned
       Milano             Italy                        3,229              3/1/2007
       Milano             Italy                        4,306              3/1/2007
       Milano             Italy                        9,687              4/1/2004
       Milano             Italy                        8,611              4/1/2004
       Milano             Italy                        7,750             11/1/2006
       Milano             Italy                        9,687              7/1/2004
</TABLE>




                                       31
<PAGE>

<TABLE>
<CAPTION>
       LOCATION                                      SQUARE FEET      DATE LEASE EXPIRES
       --------                                      -----------      ------------------
       <S>                  <C>                      <C>              <C>
       Milano               Italy                        3,014              2/1/2003
       Norrkoping           Sweden                       3,175            12/31/2004
       Oslo                 Norway                       7,535            12/31/2006
       Paris                France                       4,414              2/2/2004
       Pasadina, CA         USA                         13,663             1/14/2007
       Rome                 Italy                        1,615              1/1/2007
       Rome                 Italy                        8,181              1/1/2003
       Rome                 Italy                        2,368             12/1/2006
       Rothenburg           Switzerland                  4,510             3/31/2003
       San-Diego, CA        USA                         23,354            12/31/2004
       Santa Barbara, CA    USA                          2,700              7/1/2003
       Shanghai             China                       48,495            10/31/2047
       Shanghai             China                      139,008             1/31/2049
       Stockholm            Sweden                      52,205             6/30/2003
       Tewksbury, MA        USA                          3,800             5/31/2002
       Venice               Italy                        2,799              7/1/2004
       Ventura, CA          USA                         46,200             8/31/2008
       West Hills, CA       USA                         38,795             3/30/2005
       Woodland Hills, CA   USA                          2,310            12/31/2005
       Woodland Hills, CA   USA                          3,448              1/1/2004
       Yokneam              Israel                      24,757              6/1/2004
       Yokneam              Israel                      12,917             9/30/2003
       Yokneam              Israel                      17,350            12/31/2007
       Yokneam              Israel                      19,526             1/25/2003
       Zurich               Switzerland                 17,147             9/30/2009
</TABLE>

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




                                       32
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

        MRV is involved in lawsuits, claims, investigations and proceedings,
including patent, commercial and environmental matters, which arise in the
ordinary course of business. There are no matters pending that MRV currently
expects to be material in relation to MRV's business, consolidated financial
condition, results of operations or cash flows.

        On March 1, 2002, Rockwell Automation Technologies, Inc. filed a patent
infringement lawsuit against MRV and two of its affiliated companies, Optronics
International Corp. and Luminent, Inc. in U.S. District Court in Delaware.
Several other companies that are not related to MRV were also named as
defendants in the lawsuit. The lawsuit alleges that in January, 1983, a Rockwell
affiliate obtained United States Letters Patent No. 4,368,098 entitled
"Epitaxial Composite and Method of Making" from the U.S. Patent and Trademark
Office. The patent is directed to an organo-metallic process for producing
epitaxial films of Group III-V semiconductor on a single crystal substrate. This
process generally is referred to as Metal Organic Chemical Vapor Deposition, or
MOCVD. The rights to the patent were ultimately assigned to Rockwell. In the
lawsuit, Rockwell alleges that

    -   it gave a company it calls IQE a nonexclusive, nontransferable license
        to import and sell in the United States MOCVD wafers;

    -   the license prohibited IQE from passing onto others any rights under the
        patent, including the right to make, use, sell or import into the United
        States MOCVD devices made from MOCVD wafers; and

    -   the license required IQE to provide its customers of MOCVD wafers with
        written notice that the customers must obtain a license from Rockwell to
        use the MOCVD wafers to make, use, sell or import MOCVD devices into the
        United States.

IQE has sued Rockwell in another action seeking declaratory relief that, among
other things, IQE has not infringed the patent and that the patent is invalid
and unenforceable. That action is pending. Nevertheless, Rockwell has claimed in
its patent infringement lawsuit against MRV that the defendants infringed its
patent by using at least some of the MOCVD wafers purchased from IQE or others
and/or fabricated wafers themselves that were manufactured by a process that
infringes one or more claims of Rockwell's patent to make, sell and/or import
into the United States MOCVD devices such as laser diodes. Rockwell claims it
has been damaged by the defendants in an unspecified amount, and seeks to
recover those damages, and also seeks an increase in damages and attorneys' fees
for alleged willful infringement. Rockwell has agreed to grant MRV an extension
of time to file a response to the lawsuit, in order to give the parties an
opportunity to try and resolve the matter. MRV is investigating the claims, and
intends to vigorously defend itself if the matter cannot be resolved out of
court.

        MRV has received notices from third parties alleging possible
infringement of other patents with respect to product features or manufacturing
processes. For a discussion of these notices and the claims, see Item 1.
Description of Business -- Proprietary Rights earlier in this Report.




                                       33
<PAGE>

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

        On December 14, 2001, 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:

<TABLE>
<CAPTION>
                                                        Number of Votes
                                                 -----------------------------
                                                                    Against or
       Name                                          For             Withheld
       ----                                      ----------         ----------
<S>                                              <C>                <C>
Noam Lotan                                       61,481,631          2,191,010

Shlomo Margalit                                  61,810,130          1,862,511

Igal Shidlovsky                                  62,705,257            967,384

Guenter Jaensch                                  62,696,708            957,933

Baruch Fischer                                   62,705,199            967,442

Daniel Tsui                                      62,701,597            971,044
</TABLE>

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

<TABLE>
<CAPTION>
                    PROPOSAL                                  FOR           AGAINST      ABSTAIN
                    --------                              ----------       ---------     -------
<S>                                                       <C>              <C>           <C>
To approve amendments to the Company's 1997               57,026,521       6,346,225     299,895
Incentive and Nonstatutory Stock Option Plan to
increase by 1,200,000 shares the number of shares
of Common Stock that can be optioned and sold
under the Stock Option Plan

To ratify the selection of Arthur Andersen LLP            63,065,522         374,256     232,863
as independent auditors for the Company for the
fiscal year ending December 31, 2001.
</TABLE>




                                       34
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND
        RELATED STOCKHOLDER MATTERS

        MRV's common stock is traded in the over-the-counter market and has been
included in the Nasdaq National Market since February 28, 1994 under the symbol
"MRVC." The following table sets forth the high and low closing sale prices of
it common stock for the periods indicated as reported by the Nasdaq National
Market. The prices have been adjusted to give retroactive effect to the
two-for-one stock split of MRV's common stock effected on May 11, 2000.

<TABLE>
<CAPTION>
                                                     High          Low
                                                    ------        ------
<S>                                                 <C>           <C>
2000

First Quarter                                       $95.25        $25.88
Second Quarter                                       67.25         23.44
Third Quarter                                        80.38         45.31
Fourth Quarter                                       49.25         11.06

2001

First Quarter                                       $21.38         $6.22
Second Quarter                                       12.90          5.38
Third Quarter                                         8.79          2.43
Fourth Quarter                                        5.75          2.76
</TABLE>

        According to the records of MRV's transfer agent, at March 12, 2002, MRV
had 3,380 stockholders of record, which, management believes, held from
approximately 55,000 beneficial holders.




                                       35
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The following selected statement of operations data for the three years in the
period ended December 31, 2001 and the balance sheet data as of December 31,
2000 and 2001 are derived from our consolidated financial statements and notes
thereto, included elsewhere herein, and are audited by Arthur Andersen LLP,
independent public accountants, as set forth in their report included later in
this Report. The selected statement of operations data for the two years in the
period ended December 31, 1997 and the balance sheet data as of December 31,
1997, 1998 and 1999 were derived from our audited financial statements, which
are not included in this Report. The following data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of the
Company, including the notes thereto, included elsewhere in this Report.

<TABLE>
<CAPTION>

Statements of Operations Data:                                       Year ended December 31,
                                                  -------------------------------------------------------------
                                                     1997         1998         1999         2000         2001
                                                  ---------    ---------    ---------    ---------    ---------
                                                              (in thousands, except per share data)
<S>                                               <C>          <C>          <C>          <C>          <C>
Revenues, net                                     $ 165,471    $ 264,075    $ 288,524    $ 319,394    $ 332,844
Cost of goods sold(1)(2)(4)                          94,709      165,385      197,442      203,371      267,389
Research and development(1)(2)                       13,093       25,817       35,319       74,078       94,813
Selling, general and administrative(1)(2)            26,993       53,852       67,859      124,700      150,674
Purchased technology in progress(3)                      --       20,633           --           --           --
Restructuring costs(2)                                   --       15,671           --           --       14,111
Amortization of goodwill
  and other intangibles                                 372        2,901        3,898       66,814      126,484
                                                  ---------    ---------    ---------    ---------    ---------
Operating income (loss)                              30,304      (20,184)     (15,994)    (149,569)    (320,627)
Other income (expense), net(2)(5)                     1,901        4,339          322       (9,578)     (22,777)
                                                  ---------    ---------    ---------    ---------    ---------
Income (loss) before provision for income taxes
  minority interests and extraordinary item          32,205      (15,845)     (15,672)    (159,147)    (343,404)
Provision (benefit for) income taxes                  9,474        5,707       (2,153)      (5,398)       4,475
Minority interests                                     (146)      (1,345)         610          796       11,577
Gain on purchase of minority interest,
  net of tax                                             --           --           --           --        9,949
Gain on repurchase of convertible notes,
  net of tax                                             --        2,791           --           --           --
                                                  ---------    ---------    ---------    ---------    ---------
Net income (loss)                                 $  22,585    $ (20,106)   $ (12,909)   $(152,953)   $(326,353)

Net income (loss) per
  share -- Basic                                  $    0.48    $   (0.38)   $   (0.24)   $   (2.33)   $   (4.27)
                                                  =========    =========    =========    =========    =========
Net income (loss) per
  share -- Diluted                                $    0.44    $   (0.38)   $   (0.24)   $   (2.33)   $   (4.27)
                                                  =========    =========    =========    =========    =========
Shares used in per share
  calculation --
  Basic                                              47,340       53,064       53,920       65,669       76,369
  Diluted                                            51,468       53,064       53,920       65,669       76,369
</TABLE>




                                       36
<PAGE>

<TABLE>
<CAPTION>
                                                     At December 31
CONSOLIDATED BALANCE          --------------------------------------------------------------
  SHEET DATA:                    1997         1998         1999         2000         2001
                              ----------   ----------   ----------   ----------   ----------
<S>                           <C>          <C>          <C>          <C>          <C>
Cash and cash equivalents     $   19,428   $   20,692   $   34,330   $  210,080   $  164,676
Working capital                  111,559      115,318      106,425      366,752      175,966
Total assets                     236,236      320,192      314,533    1,097,621      864,495
Total long-term liabilities        2,853       94,317       94,409      154,504      102,254
Stockholders' equity             189,969      174,429      166,815      781,555      584,676
</TABLE>


(1) Includes amounts related to deferred stock compensation of: $8.3 million and
$7.8 million in cost of goods sold; $13.3 million and $14.0 million in research
and development expenses; and $38.4 million and $48.0 million in selling,
general and administrative expenses for the years ended December 31, 2000 and
2001, respectively.

(2) Includes charges of $35.4 million, $14.1 million, and $16,000 presented in
cost of sales, selling, general and administrative, and other income (expense),
respectively, for the year ended December 31, 2001, to write-down inventory,
purchase commitments, asset impairment, workforce reduction, restructuring costs
and other non-recurring items. These charges resulted from the lower demand for
our products and pricing pressures stemming from the continuing downturn in the
communications equipment industry generally and the optical components sector in
particular.

(3) Purchased technology in progress and restructuring charges were incurred as
a result of acquisitions. Purchased technology in progress for the year ended
December 31, 1998, was in conjunction with the Xyplex acquisition. Restructuring
costs during the year ended December 31, 1998, were associated with a plan
adopted by MRV in March 1998, calling for the reduction of workforce, closing of
certain facilities, elimination of particular product lines, settlement of
distribution agreements and other costs.

(4) For the years ended December 31, 1998 and 1999, includes amounts relating to
the write-down of discontinued products of $3.1 million and $13.8 million,
respectively.

(5) Interest expenses for the year ended December 31, 1997 was in connection
with the private placement of $30.0 million principal amount of notes, the
proceeds from which MRV used to finance the cash portion of the Fibronics
acquisition in 1996. Interest expenses for the year ended December 31, 1998 and
1999, were connected with the private placement of $100.0 million principal
amount of 5% Convertible Subordinated Notes. See Note 10 of notes to the
consolidated financial statements of MRV included later in this Report.




                                       37
<PAGE>

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

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

OVERVIEW

        We create, acquire, finance and operate companies, and through them,
design, develop, manufacture and market products, which enable high-speed
broadband communications. We concentrate on companies and products devoted to
optical components and network infrastructure systems. We have leveraged our
early experience in fiber optic technology into a number of well-focused
operating units specializing in advanced fiber optic components, switching,
routing, and wireless optical transmission systems which we have created,
financed or acquired.

        Revenues for the year ended December 31, 2001 were $332.8 million,
compared to $319.4 million for the year ended December 31, 2000, an increase of
4%. However we reported a net loss of $326.4 million and $153.0 million for the
years ended December 31, 2001 and 2000, respectively. A significant portion of
these losses were due to the amortization of goodwill and other intangibles and
deferred stock compensation related to our acquisitions in 2000 and our
employment arrangements with Luminent's former President and its Chief Financial
Officer. We will continue to record deferred stock compensation through 2004,
relating to these acquisitions and Luminent's employment arrangements with its
executives. Effective January 1, 2002, the adoption of SFAS No. 142 will stop
amortization of goodwill, however, it may require us to record impairment
charges (see Recently Issued Accounting Standards, below). For the year ended
December 31, 2001, we recorded goodwill and other intangible impairment charges
of $14.2 million as the fair value of these assets was less than their carrying
value (see Amortization of Goodwill and Other Intangibles, below). As a
consequence of these charges, we do not expect to report net income in the
foreseeable future. See discussion of the impact on the amortization of goodwill
and other intangibles due to the adoption of SFAS No. 142 on January 1, 2002
(see Recently Issued Accounting Standards, below).

RECENT ACQUISITIONS

During 2000, we completed several strategic acquisitions. These acquisitions
were made to expand our product offerings, enhance our technological expertise
and expand our manufacturing capabilities. During 2001 and 1999, we did not
complete any material acquisitions. The table below summarizes the more notable
acquisitions.

<TABLE>
<CAPTION>
                                                                            Form of Consideration and
Acquired Company                  Date of Acquisition  Total Consideration  Other Notes to Acquisition
----------------                  -------------------  -------------------  --------------------------
<S>                               <C>                  <C>                  <C>
Fiber Optic Communications, Inc.  April 24, 2000       $309.7 million       $48.6 million in cash and 5.4
                                                                            million shares of common stock and
                                                                            options issued; approximately 97% of
                                                                            capital stock assumed; goodwill and
                                                                            other intangibles recorded of $261.5
                                                                            million; deferred stock compensation
                                                                            recorded of $14.1 million
</TABLE>




                                       38
<PAGE>

<TABLE>
<CAPTION>
                                                                            Form of Consideration and
Acquired Company                  Date of Acquisition  Total Consideration  Other Notes to Acquisition
----------------                  -------------------  -------------------  --------------------------
<S>                               <C>                  <C>                  <C>
Jolt Limited                      May 1, 2000          $57.7 million        1.9 million shares of common stock
                                                                            and options issued; 100% of capital
                                                                            stock assumed; goodwill and other
                                                                            intangibles recorded of $33.7 million;
                                                                            deferred stock compensation recorded of
                                                                            $25.0 million

Quantum Optech Inc.               July 12, 2000        $36.1 million        1.2 million shares of common stock
                                                                            and options issued; 100% of capital
                                                                            stock assumed; goodwill and other
                                                                            intangibles recorded of $27.8 million;
                                                                            deferred stock compensation recorded of
                                                                            $2.7 million

AstroTerra Corporation            July 12, 2000        $160.3 million       2.4 million shares of common stock and
                                                                            options issued; 100% of capital stock
                                                                            assumed; goodwill and other intangibles
                                                                            recorded of $108.4 million; deferred
                                                                            stock compensation recorded of $50.0
                                                                            million

Optronics International Corp.     July 21, 2000        $123.9 million       4.2 million shares of common stock and
                                                                            options issued; approximately 99% of
                                                                            capital stock assumed; goodwill and other
                                                                            intangibles recorded of $99.4 million;
                                                                            deferred stock compensation recorded of
                                                                            $13.4 million
</TABLE>

        Each of these acquisitions was accounted for using the purchase method
and therefore, the results of operations of the acquired businesses have been
included in our Consolidated Financial Statements from the respective dates of
acquisition. Goodwill and other intangibles initially recorded from these
acquisitions totaled $530.8 million. Net goodwill and other intangibles from
these acquisitions totaled $367.4 million as of December 31, 2001. For the years
ended December 31, 2001 and 2000, we recorded amortization of goodwill and other
intangibles from these acquisitions of $102.8 million and $60.6 million,
respectively. Effective January 1, 2002, we plan to implement Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets" (see Recently Issued Accounting Standards, below).

        A portion of the purchase prices paid in connection with these
acquisitions represented deferred stock compensation relating to options to
purchase our common stock. The fair values of these options were $105.2 million
and have been recorded as deferred stock compensation. Deferred stock
compensation amortization expense for the year ended December 31, 2001, relating
to these stock options was $27.9 million, compared with $42.7 million for the
year ended December 31, 2000. We expect to incur additional deferred stock
compensation relating to these acquisitions of approximately $34.6 million,
which will be fully amortized by 2004. Deferred stock compensation is being
amortized using the graded method using an estimated employment period of four
years.

Fiber Optic Communications, Quantum Optech and Optronics International were
acquired and contributed to Luminent as part of our original plan to complete an
initial public offering of our fiber




                                       39
<PAGE>
optics components business and eventually spin-off this business to our
stockholders. This plan was terminated in September 2001 when we decided not to
complete the spin-off of Luminent and to effect a short form merger of Luminent
with one of our wholly-owned subsidiaries and thereby eliminate public ownership
of Luminent. Fiber Optic Communications develops and manufactures passive fiber
optic components for wavelength division multiplexing. Quantum Optech
specializes in developing and manufacturing optical thin film coating and
filters for dense wavelength division multiplexing. Optronics focuses on
developing and manufacturing high temperature semiconductor lasers, transceivers
and detectors for optical networks. These acquisitions also provided additional
manufacturing capabilities for future growth.

        AstroTerra and Jolt were acquired and contributed to our subsidiary,
Optical Access, which focuses on optical wireless products that deliver
high-speed communications traffic to the so-called last mile portion of the
communications network. AstroTerra develops and manufactures free-space optical
wireless communication systems to connect data and telecommunications networks.
Jolt develops and manufactures multi-port wireless optics communications
equipment. These acquisitions provide strategic components and technology for
Optical Access' wireless optical solution.

TRANSACTION WITH STOCK OF SUBSIDIARIES

        In November 2000, Luminent completed the initial public offering of its
common stock, selling 12 million shares at $12.00 per share for net proceeds of
approximately $132.3 million. Luminent designs, manufactures and sells a
comprehensive line of fiber optic components that enable communications
equipment manufacturers to provide optical networking equipment for the rapidly
growing metropolitan and access segments of the communications networks. While
we had planned to distribute all of our shares of Luminent common stock to our
stockholders, unfavorable business and economic conditions in the fiber optic,
data networking and telecommunications industries and the resulting adverse
effects on the market prices of our common stock and Luminent common stock,
caused us to determine to abandon the distribution and effect a short-form
merger of Luminent into one of our wholly-owned subsidiaries, thereby
eliminating public ownership of Luminent. This merger was completed on December
28, 2001.

        In July 2000, we and Luminent, entered into employment agreements with
Luminent's former President and Chief Executive Officer and its Vice President
of Finance and Chief Financial Officer. The agreements provide for annual
salaries, performance bonuses and combinations of stock options to purchase
shares of our common stock and Luminent's common stock. The stock options were
granted to Luminent's executives at exercise prices below market value,
resulting in deferred stock compensation. Deferred stock compensation expense
from these stock option grants reported for the years ended December 31, 2001
and 2000, were $35.8 million and $54.2 million, respectively. We will incur
additional deferred stock compensation expense of approximately $2.1 million
through 2004. Luminent's President and Chief Executive Officer resigned in
September 2001. Dr. Spivey's resignation was considered by the parties to be a
termination other than for cause under his employment agreement entitling him to
the severance benefits of his employment agreement, including payment over a one
year period of an amount equal to two times the sum of his annual salary plus
bonus and the vesting of all of his unvested Luminent options. Dr. Spivey's MRV
and Luminent stock options are now exercisable through September 11, 2003.
During the year ended December 31, 2001, we recorded a charge of $1.0 million to
reflect severance and other expenses and an immediate recognition of deferred
stock compensation expense of $18.9 million.

        In October 2000, our wholly-owned subsidiary, Optical Access, filed a
registration statement with the Securities and Exchange Commission for the
initial public offering of its common stock. This offering was not completed
because of market conditions and in November 2001, Optical Access withdrew its
registration statement. Due to the postponement of the offering prior to its
withdrawal, we expensed all costs, approximately $1.1 million, of this offering
in the second quarter of 2001. Optical




                                       40
<PAGE>

Access designs, manufactures and markets an optical wireless solution that
delivers high-speed communications traffic to the portion of the communications
network commonly known as the last mile, which extends from the end user to the
service provider's central office.

RESTRUCTURING AND ONE-TIME CHARGES

        In the second quarter of 2001 when Luminent's common stock was still
publicly traded, Luminent's management approved and implemented a restructuring
plan and other actions in order to adjust operations and administration as a
result of the dramatic slowdown in the communications equipment industry
generally and the optical components sector in particular. Major actions
primarily involved the reduction of facilities in the U.S. and in Taiwan, the
reduction of workforce, the abandonment of certain assets, the cancellation and
termination of purchase commitments and the write-down of certain inventory.
These actions are expected to realign Luminent's business based on current and
near term growth rates. All of these actions are expected to be completed in
2002.

        Restructuring Charges. During the year ended December 31, 2001, Luminent
recorded restructuring charges totaling $20.3 million. Costs for restructuring
activities are limited to either incremental costs that directly result from the
restructuring activities and provide no future revenue generating benefit, or
costs incurred under contractual obligations that existed before the
restructuring plan and will continue with either no future revenue generating
benefit or become a penalty incurred for termination of the obligation.

        Luminent identified a number of assets, including leased facilities and
equipment that are no longer required due to current market conditions,
operations and expected growth rates. The net facility costs related to closed
and abandoned facilities of approximately $2.4 million for the year ended
December 31, 2001, are primarily related to future obligations under operating
leases. The total lease charge is net of approximately $3.7 million in expected
sublease revenue on leases that Luminent cannot terminate. In connection with
these closed and abandoned facilities, Luminent recorded asset impairment
charges of $10.4 million for the year ended December 31, 2001 to write-down the
value of equipment, consisting of leasehold improvements and certain
manufacturing equipment. Due to the specialized nature of these assets, Luminent
determined that they have minimal or no future benefit and recorded a provision
reflecting the net book value relating to these assets. Purchase commitments of
$6.2 million, recorded in cost of sales, for the year ended December 31, 2001
are to cancel or renegotiate outstanding contracts for materials and capital
assets that are no longer required due to Luminent's significantly reduced
orders for optical components and sales projections over the next twelve months.

        Employee severance costs and related benefits of $1.3 million are
associated with approximately 600 layoffs during the year ended December 31,
2001, bringing Luminent's total workforce to approximately 1,100 employees as of
December 31, 2001. Affected employees came from all divisions and areas of
Luminent. The majority of affected employees were in the manufacturing group.

        As of December 31, 2001, the restructuring provision has been reduced by
cash payments of $1.2 million for the year ended December 31, 2001 and non-cash
related charges of $10.4 million for the year ended December 31, 2001, resulting
in an ending liability balance of $8.7 million. Luminent expects to utilize most
of the remaining balance in the year ending December 31, 2002. Luminent expects
that it will spend approximately $8.7 million through the next two quarters to
carry out the plan, which will be paid through cash and cash equivalents and
through operating cash flows. Luminent began to realize savings related to the
workforce reductions in late 2001 with estimated ongoing quarterly net savings
of $2.4 million. In addition, Luminent anticipates that it will realize reduced
depreciation charges of approximately $384,000 per quarter through December 2004
and $163,000 per quarter through December 2005 for facility costs. These savings
are expected to be realized as reductions in cost of sales, research and
development and selling, general and administrative expenses.




                                       41
<PAGE>

A summary of the restructuring costs for the year ended December 31, 2001
consist of the following (in thousands):

<TABLE>
<CAPTION>
                                              Original  Additional               Remaining
                                             Provision  Provision     Utilized    Balance
                                             ---------  ----------    --------   ---------
        <S>                                  <C>        <C>           <C>        <C>
        Exit costs
             Asset impairment                 $ 9,544     $   897     $10,441     $    --
             Closed and abandoned facilities    1,125       1,280          88       2,317
             Purchase commitments               2,386       3,787         468       5,705
                                              -------     -------     -------     -------
                                               13,055       5,964      10,997       8,022
        Employee severance costs                1,281          --         626         655
                                               ------     -------     -------     -------
                                              $14,336     $ 5,964     $11,623     $ 8,677
                                              =======     =======     =======     =======
</TABLE>

        A summary of the restructuring costs by line item for the year ended
December 31, 2001 consist of the following (in thousands):

<TABLE>
<CAPTION>
                                               2001
                                            ---------
        <S>                                 <C>
        Cost of sales                       $   6,173
        Restructuring costs                    14,111
        Other income (expense)                     16
                                            ---------
                                            $  20,300
                                            =========
</TABLE>

        One-Time Charges. As a result of the significant negative economic and
industry trends impacting Luminent's expected sales over the twelve months
ending June 30, 2002, Luminent also recorded a one-time $29.2 million charge to
write-down the remaining book value of certain inventory related to certain
transceivers, duplexors, and triplexors that are previous generation products to
its realizable value during the year ended December 31, 2001. The one-time
charges to write-down inventory were subsequently reduced by $8.1 million for
the year ended December 31, 2001 to reflect the sale of previously written-off
items.

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. 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 2002 and
thereafter. Announcements by industry participants and observers indicate there
is a slowdown in industry spending and participants are seeking to reduce
existing inventories.

        As a result of the slowdown in the communications industry, we recorded
in our consolidated results for the year ended December 31, 2001, charges
relating to Luminent's write-down of inventory, purchase commitments, asset
impairment, workforce reduction, restructuring costs and other items. These
charges, totaling $49.5 million, resulted from the lower demand for Luminent's
products and pricing pressures stemming from the continuing downturn in the
communications equipment industry generally and the optical components sector in
particular.




                                       42
<PAGE>

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                 2001        2000        1999
                                                 ----        ----        ----
        <S>                                     <C>          <C>         <C>
        Revenues, net                            100%        100%        100%
        Cost of goods sold                        80          64          68
        Research and development                  28          23          12
        Selling, general and administrative       45          39          24
        Amortization of goodwill and              38          21           1
          other intangible
        Restructuring costs                        4          --          --
                                                -----------------------------
        Operating income (loss)                  (96)        (47)         (6)
        Other income (expense), net               (7)         (3)         --
                                                -----------------------------
        Income (loss) before provision          (103)        (50)         (5)
          for income taxes minority
          interests and extraordinary item
        Provision (benefit) for income taxes       1          (2)         (1)
        Minority interests                         3          --          --
        Gain on purchase of minority               3          --          --
          interest, net of tax
                                                 ----        ----        ----
        Net income (loss)                        (98)%       (48)%        (4)%
                                                 ====        ====        ====
</TABLE>

        The following management discussion and analysis refers to and analyzes
our results of operations into two segments as defined by our management. These
two segments are Operating Entities and Development Stage Enterprises including
all startups activities.

YEARS ENDED DECEMBER 31, 2001 AND 2000

Revenues, Net

        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 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: optical passive and active components; switches and
routers; remote device management; and network physical infrastructure
equipment. Revenue generated through the sales of services and systems support
has been insignificant.

        Operating Entities. Revenue for the year ended December 31, 2001
increased $13.5 million, or 4%, to $332.8 million from $319.4 million for the
year ended December 31, 2000. Revenue generated through our recent acquisitions
for the year ended December 31, 2001 increased $21.7 million, or 56%, to $60.3
million from $38.6 million for the prior year. Revenue from our existing
business generated $272.5 million and $280.8 million for the years ended
December 31, 2001 and 2000, respectively. This change represents a decrease of
$8.3 million, or 3%, for the year ended December 31, 2001. Revenue generated




                                       43
<PAGE>

from our optical passive components increased $9.9 million, or 34%, over the
prior year. This increase offsets decreases in revenue from our switch and
routers, which decreased $6.1 million, or 8%. Revenue to the European Community
and the Pacific Rim together increased $24.9 million, or 13%, for the current
year.

        Development Stage Enterprises. No significant revenues were generated by
these entities for the years ended December 31, 2001 and 2000.

Gross Profit

        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.

        Operating Entities. Gross profit for the year ended December 31, 2001
was $65.5 million, compared to gross profit of $116.0 million for the year ended
December 31, 2000. Gross profit decreased $50.6 million, or 44%, for the year
ended December 31, 2001 over the year ended December 31, 2000.

        Our gross margins (defined as gross profit as a percentage of revenues)
are generally affected by price changes over the life of the products and the
overall mix of products sold. Higher gross margins are generally expected from
new products and improved production efficiencies as a result of increased
utilization. Conversely, prices for existing products generally will continue to
decrease over their respective life cycles.

        Our gross margin decreased to 20% for the year ended December 31, 2001,
compared to gross margin of 36% for the year ended December 31, 2000. The
decrease in gross margin was partially attributed to a write-off of inventory
and other charges of $35.4 million taken by Luminent during the year ended
December 31, 2001. The gross margin decreases in the current year were also
affected by reductions in inventory value to record inventory at the lower of
cost or market at MRV's networking and other operating subsidiaries. In
addition, certain profitable, but low margin projects in Europe, contributed to
the reduction in gross margin for the year ended December 31, 2001. Furthermore,
our gross margin was affected by deferred compensation amortization charges of
$7.8 million for the current year. Prior to Luminent's restructuring and other
one-time charges of $35.4 million additional reductions in inventory at other
subsidiaries of $8.3 million and deferred stock compensation amortization of
$7.8 million, gross margin would have been $117.0 million, or 35%. Prior to
deferred stock compensation amortization of $8.3 million for the year ended
December 31, 2000, gross margin would have been $124.3 million, or 39%.

        Development Stage Enterprises. No significant gross margins were
produced by these entities for the years ended December 31, 2000 and 2001.

Research and Development Expenses (R&D)

        R&D expenses increased 28%, to $94.8 million for the year ended December
31, 2001 from $74.1 million in the year ended December 31, 2000.

        Operating Entities. R&D expenses from our operating entities were $49.1
million, or 15% of revenues, for the year ended December 31, 2001, as compared
to $32.6 million, or 10% of revenues, for the year ended December 31, 2000. This
represents an increase of $16.5 million, or 51%, for the year ended December 31,
2001. Excluding deferred stock compensation amortization charges of $14.0
million and $13.3 million for the years ended December 31, 2001 and 2000,
respectively, R&D expenses would have increased by 82% to $35.1 million, or
11% of revenues, from $19.3 million, or 6% of revenues, for the years ended
December 31, 2001 and 2000, respectively.




                                       44
<PAGE>

        Development Stage Enterprises. R&D expenses of the development stage
enterprises were $45.7 million, or 14% of revenues, for the year ended December
31, 2001, as compared to $41.5 million, or 13% of revenues, for the year ended
December 31, 2000. This represents a decrease of $4.2 million, or 10% of
revenues, for the year ended December 31, 2001.

Selling, General and Administrative (SG&A)

        SG&A expenses increased 21% to $150.7 million for the year ended
December 31, 2001, compared to $124.7 million for the year ended December 31,
2000. SG&A expenses were 45% of revenues for the year ended December 31, 2001
compared to 39% of revenues for the year ended December 31, 2000. Prior to
Luminent's restructuring and other one-time charges of $14.1 million and
deferred stock compensation amortization charges of $48.1 million for the year
ended December 31, 2001 and deferred stock compensation amortization charges of
$38.4 million for the year ended December 31, 2000, SG&A would have decreased 6%
to $88.5 million from $86.3 million for the years ended December 31, 2001 and
2000, respectively. As a percentage of revenue, SG&A prior to Luminent's
restructuring and other one-time charges and deferred stock compensation
amortization expenses would have been 27% for the year ended December 31, 2001
and prior to deferred compensation amortization expenses would have been 30% for
the year ended December 31, 2000.

        Operating Entities. SG&A expenses increased 9% over prior year to $135.7
million for the year ended December 31, 2001. SG&A expenses were 41% and 39% of
our revenue for the years ended December 31, 2001 and 2000, respectively. Prior
to Luminent's restructuring and other one-time charges of $14.1 million and
deferred stock compensation amortization charges of $48.1 million for the year
ended December 31, 2001 and deferred stock compensation amortization charges of
$38.4 million for the year ended December 31, 2000, SG&A would have decreased
15% to $73.5 million for the year ended December 31, 2001, respectively,
compared to $86.3 million for the year ended December 31, 2000. As a percentage
of revenues, SG&A prior to Luminent's restructuring and other one-time and
deferred stock compensation charges would have been 22% for the year ended
December 31, 2001 compared to 27% for the year ended December 31, 2000. These
decreases are mainly due to the reduction of overhead expenses.

        Development Stage Enterprises. The Development Stage Enterprises did not
report SG&A expenses during the year ended December 31, 2000. During 2001 these
companies began to develop their administrative capabilities and reported $15.0
million for the year ended December 31, 2001.

Amortization Of Goodwill and Other Intangibles

        Operating Entities. Amortization of goodwill and other intangibles
increased to $126.5 million for the year ended December 31, 2001, from $66.8
million for the year ended December 31, 2000. The increase of approximately
$45.5 million was the result of the timing of our recent acquisitions, which
occurred principally from April 24 to July 21, 2000, and an additional $14.2
million of impairment charges. The goodwill and other intangibles was considered
impaired as the anticipated undiscounted cash flows from these assets was less
than their carrying values. The remaining carrying value of goodwill and other
intangibles was not impaired based on this analysis. This analysis requires us
to use significant judgment and make assumptions regarding the future cash flows
expected to result from the use of the assets and their eventual disposition.
While we believe the carrying values are realizable based on our analysis,
changes in the assumptions used in our cash flows models could have resulted in
significantly different results (See Recently Issued Accounting Pronouncements,
below.).

        Development Stage Enterprises. No amortization of goodwill and other
intangibles was recorded for these entities for the years ended December 31,
2001 and 2000.




                                       45
<PAGE>

Other Expense, Net

        In June 1998, we issued $100 million principal amount of 5% convertible
subordinated 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%. In late 1998, we repurchased $10.0 million principal
amount of these notes at a discount from the stated amount. We incurred $4.5
million in interest expense relating to the Notes during the year ended December
31, 2001 and 2000.

        The increase in other expense from $8.8 million to $11.2 million for the
year ended December 31, 2001 is primarily attributed to interest expense from
our financing obligations, our share of losses from our unconsolidated
subsidiaries of $7.8 millions and impairment charges of $9.2 million on our
investments for the year ended December 31, 2001, partially offset by interest
income and minority interest. As part of our asset realization evaluation, we
determined that the carrying value of certain wireless BLECs (Building Local
Exchange Carriers) and other investments, where we have less than a 20%
ownership stake, were impaired. Our share of losses from our unconsolidated
subsidiaries was $7.3 for the year ended December 31, 2000.

Gain on Purchase of Minority Interest, Net of Tax

        In September 2001, we announced our intention to reacquire Luminent's 8%
minority interest, established through Luminent's November 2000 initial public
offering, and merge Luminent back into MRV. The merger was completed in December
2001. We exchanged 0.43 shares of MRV common stock, or 5.2 million shares, for
12.0 million shares of Luminent common stock. Our common stock had a fair value
of $16.9 million, based on the average market price of our common stock five
days before and after the terms were determined. Consequently, we recorded an
extraordinary gain from this merger of $9.9 million, net of tax, equal to the
excess minority interest reduced over the fair value paid, net of our costs
incurred to effect this merger.

YEARS ENDED DECEMBER 31, 2000 AND 1999

Revenues, Net

        Operating Entities. Revenue for the year ended December 31, 2000
increased $30.9 million or 11% to $319.4 million from $288.5 million for the
year ended December 31, 1999. Revenue generated through our recent acquisitions
for the year ended December 31, 2000 was $38.6 million. No acquisitions were
made during the year of 1999. Revenue from our existing business was $280.8
million and $288.5 million for the years ended December 31, 2000 and 1999,
respectively. This change represents a decrease of $7.7 million or 3% for the
year ended December 31, 2000 due to a decrease of approximately $37.0 million or
27% due to MRV's decision to discontinue the production and sale of LAN switches
and remote device management products. MRV made this decision in order to focus
on the emerging carrier and service providers' market segment where the sales
cycle is significantly greater than the enterprise networks market. This
decrease was offset by the growth in the fiber optic components business of
approximately $22.0 million due to the increase in market demand created by
carrier equipment manufacturers. Our various other products substantially
accounted for the remaining increase of approximately $7.0 million or 9% for the
year ended December 31, 2000.

        Development Stage Enterprises. No significant revenues were generated by
these entities for the years ended 2000 and 1999.

Gross Profit

        Operating Entities. Gross profit for the year ended December 31, 2000
increased $24.9 million, or 27% to $116.0 million from $91.1 million for the
year ended December 31, 1999. MRV's gross




                                       46
<PAGE>

margin (defined as gross profit as a percentage of revenues) increased to 36%
for the year ended December 31, 2000 from 32% for the year ended December 31,
1999. Prior to deferred stock compensation amortization expense, MRV's gross
margin would have increased to $124.3 million or 39% for the year ended December
31, 2000 compared to $91.1 million or 32% for the year ended December 31, 1999.
MRV's margins increased due to a favorable shift in product mix towards higher
margin product lines, such as those for third generation wireless networks and
other Internet infrastructure products.

        Development Stage Enterprises. No significant gross profits were
generated by these entities for the years ended 2000 and 1999.

Research and Development (R&D)

        R&D expenses increased $38.8 million or 110% to $74.1 million for the
year ended December 31, 2000 from $35.3 million for the year ended December 31,
1999.

        Operating Entities. R&D expenses of the operating entities were $32.6
million or 10% of revenues for the year ended December 31, 2000 as compared to
$15.3 million or 5% of revenues for the year ended December 31, 1999. This
represents an increase of $17.3 million or 113% for the year ended December 31,
2000. Prior to deferred stock compensation amortization expense of $21.6 million
for the year ended December 31, 2000, R&D expenses would have been $11.0 million
or 3% of revenues compared to $15.3 million or 5% of revenue. This represents a
decrease of $4.3 million or 28% for the year ended December 31, 2000.

        Development Stage Enterprises. R&D expenses of the development stage
enterprises increased by $21.5 million of 108% to $41.5 million or 13% of
revenues for the year ended December 31, 2000 compared to $20.0 million or 7% of
revenues for the year ended December 31, 1999. MRV's increased spending in R&D
illustrates its commitment to continued product development and technological
expansion. Additionally, R&D from MRV's consolidated development stage
enterprises continued to increase as those enterprises strive towards bringing
new products to market.

Selling, General and Administrative (SG&A)

        Operating Entities. SG&A expenses increased $56.8 million, or 84%, to
$124.7 million from $67.9 for the year ended December 31, 1999. SG&A expenses
were 39% of revenue for the year ended December 31, 2000 compared to 24% of
revenue for the year ended December 31, 1999. Prior to the amortization of
deferred stock compensation of $30.0 million for the year ended December 31,
2000, SG&A expenses would have been $94.7 million or 30% of revenues. This
represents an increase of $26.8 million or 39% for the year ended December 31,
2000 primarily as a result of MRV's recent acquisitions. MRV also increased
personnel and related costs in its operating entities during the year ended
December 31, 2000.

        Development Stage Enterprises. The development stage enterprises did not
report SG&A expenses during the years of 2000 and 1999 as their activities
primarily involved the research development of products and they had yet to
develop administrative and selling functions.




                                       47
<PAGE>

Amortization of Goodwill and Other Intangibles

        Amortization of goodwill and other intangibles increased $62.9 million
to $66.8 million from $3.9 million for the year ended December 31, 2000 and
1999, respectively. Furthermore, as MRV continues to engage in strategic
acquisitions, additional goodwill and other intangibles may be recorded.

Other Expenses, Net

        MRV incurred $4.5 million in interest expense relating to the Notes for
each year ended December 31, 2000 and 1999, respectively. The increase in other
expense is primarily attributed to MRV's share of losses from its unconsolidated
development stage enterprises of $7.3 million for the year ended December 31,
2000. For the year ended December 31, 1999, these entities were included in
MRV's consolidated statements of operations based on its ownership in those
enterprises. The remaining components of other expense, principally represent
interest income recognized from short-term and long-term investments.

Provision (Benefit) for Income Taxes

        The benefit for income taxes for the year ended December 31, 2000 was
$5.4 million, compared to $2.2 million for the year ended December 31, 1999.
MRV's income tax expense fluctuates primarily due to the tax jurisdictions where
MRV currently has operating facilities and the varying tax rates in those
jurisdictions.

QUARTERLY RESULTS OF OPERATIONS

        The following tables set forth MRV's unaudited condensed consolidated
statements of operations data for each of the eight quarters ended December 31,
2001. These statements should be read in conjunction with MRV's consolidated
financial statements and related notes appearing elsewhere in this prospectus.
MRV has prepared this unaudited consolidated information on a basis consistent
with its audited consolidated financial statements, and in the opinion of its
management, it reflects all normal recurring adjustments that MRV considers
necessary for a fair presentation of its financial position and operating
results for the quarters presented. You should not draw any conclusions about
MRV's future results from the operating results for any quarter.




                                       48
<PAGE>

<TABLE>
<CAPTION>
                                                               For the three months ended
                           ----------------------------------------------------------------------------------------------------
                           March 31,    June 30,     Sept. 30,    Dec. 31,     March 31,     June 30,    Sept. 30,    Dec. 31,
                             2000         2000         2000         2000         2001          2001         2001        2001
                           ---------    ---------    ---------    ---------    ---------    ---------    ---------    ---------
                                                             (in thousands, except per share amounts)
                                                                          (unaudited)
<S>                        <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Revenues, net              $  65,072    $  73,935    $  82,720    $  97,667    $ 100,104    $  89,530    $  69,730    $  73,480
Cost and expenses:
  Cost of goods sold          42,736       45,793       47,910       66,932       66,391       88,765       57,621       54,612
  Research and
  development                 11,891       14,758       21,803       25,626       25,005       25,782       18,806       24,719
  Selling, general and
    administrative            16,028       26,467       52,699       29,506       38,412       31,777       49,528       30,959
  Restructuring expenses          --           --           --           --           --       11,934        1,724          453
    Amortization of
      goodwill and other
      intangibles                 --       12,055       27,348       27,411       28,139       29,028       27,218       42,099
                           ---------    ---------    ---------    ---------    ---------    ---------    ---------    ---------
                              70,655       99,073      149,760      149,475      157,947      187,286      155,398      152,840
    Operating loss            (5,583)     (25,138)     (67,040)     (51,808)     (57,843)     (97,756)     (85,668)     (79,360)
Other expense, net              (488)      (1,190)      (5,764)      (2,136)        (520)      (2,373)      (1,410)     (18,474)
                           ---------    ---------    ---------    ---------    ---------    ---------    ---------    ---------
    Loss before
      benefit (provision)
      for income taxes,
      minority interest
      and extraordinary       (6,071)     (26,328)     (72,804)     (53,944)     (58,363)    (100,129)     (87,078)     (97,834)
(Provision) benefit for
  income taxes                   494       (1,377)      (1,005)       7,286        2,683          939       (6,215)      (1,882)
Minority interest               (287)         (45)        (570)       1,698        1,388        5,051        3,646        1,492
Gain on purchase or
  minority interest, net          --           --           --           --           --           --           --        9,949
  of tax
                           ---------    ---------    ---------    ---------    ---------    ---------    ---------    ---------
    Net loss               $  (5,864)   $ (27,750)   $ (74,379)   $ (44,960)   $ (54,292)   $ (94,139)   $ (89,647)   $ (88,275)
                           =========    =========    =========    =========    =========    =========    =========    =========
Basic and diluted income
  (loss) per share         $   (0.10)   $   (0.44)   $   (1.06)   $   (0.62)   $   (0.73)   $   (1.24)   $   (1.16)   $   (1.14)
                           =========    =========    =========    =========    =========    =========    =========    =========
Shares used in per share
  calculation -- Basic
  and diluted                 56,850       62,764       70,122       72,768       74,370       76,111       77,404       77,545
                           =========    =========    =========    =========    =========    =========    =========    =========
</TABLE>

CRITICAL ACCOUNTING POLICIES

        In response to the SEC's Release No. 33-8040, "Cautionary Advice
Regarding Disclosure About Critical Accounting Policy," we identified the most
critical accounting principles upon which our financial status depends. We
determined the critical principles considering accounting principles to be
related to revenue recognition, inventory valuation and impairment of
intangibles and other long-lived assets. We state these accounting policies in
the Footnotes to our Consolidated Financial Statements and in relevant sections
in this management's discussion and analysis, including the Recently Issued
Accounting Standards discussed below.

RECENTLY ISSUED ACCOUNTING STANDARDS

        The FASB recently approved two pronouncements: SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets, which
provide guidance on the accounting for business combinations to be accounted for
using the purchase method. Under the new rules, goodwill will no longer be
subject to amortization over its useful life. Rather, goodwill will be subject
to at least an




                                       49
<PAGE>
 annual impairment assessment. This assessment is a fundamentally different
two-step approach and is based on a comparison between a reporting unit's fair
value and its carrying value. Intangible assets have newly defined criteria and
will be accounted for separately from goodwill and will continue to be amortized
over their useful lives. We plan to adopt these pronouncements as of January 1,
2002. Upon the adoption of SFAS No. 142, we will no longer amortize goodwill and
certain intangible assets. Under this new pronouncement, we will evaluate the
carrying value of these assets and if necessary, we will record additional
impairment charges. SFAS No. 142 represents a change in the methodology used to
determine impairment in that it is more market focused. As of December 31, 2001,
our common stock was trading at amounts significantly lower than our book value.
As such, we anticipate recording, in the first quarter of 2002, impairment
charges as a result of our depressed market valuations. Should market values
dramatically improve during the first half of 2002, impairment losses, if any,
could be reduced or eliminated. Furthermore, as we continue to engage in
strategic acquisitions, we may record additional goodwill and other intangibles.

        In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which the
obligation is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. This statement is effective on January 1, 2003 with earlier application
encouraged. We are currently reviewing this statement and have not yet
determined its impact, if any on our financial position, results of operations
or cash flows.

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. We will adopt this statement as of January 1, 2002 and are currently
reviewing the statement to determine its impact, if any, on our financial
position, results of operations or cash flows.

LIQUIDITY AND CAPITAL RESOURCES

        Cash, cash equivalents and restricted cash were $220.7 million at
December 31, 2001, a decrease of $63.3 million from cash, cash equivalents and
restricted cash of $284.0 million at December 31, 2000. Working capital at
December 31, 2001 was $176.0 million compared to $366.8 million at December 31,
2000. Our ratio of current assets to current liabilities at December 31, 2001
was 2.0 to 1.0 compared to 4.3 to 1.0 at December 31, 2000. The decrease in
working capital is substantially attributed to the cash requirements of our
development stage enterprises and our consolidated net operating losses. As of
December 31, 2001 and 2000, we did not have any "off-balance sheet" financing
arrangements.

        Cash used in operating activities was $24.1 million for the year ended
December 31, 2001, compared to cash used in operating activities of $29.8
million for the year ended December 31, 2000. Cash used in operating activities
is a result of our net operating loss of $326.4 million, adjusted for non-cash
items such as depreciation and amortization and deferred stock compensation
charges, and offset by cash generated from operating assets and liabilities.
Cash used in operating activities were positively affected by decreased
restricted cash and cash equivalents, accounts receivables, inventories and
other assets and increases in accrued liabilities and deferred revenue,
partially offset by decreases in accounts payable and income taxes payable,
during the period. The decrease in inventory is primarily the result of
inventory write-downs taken and lower of cost or market inventory adjustments.
Decreases in accounts payable are the result of dramatic slowdown in the
communications equipment industry, while increases accrued liabilities are the
result of growth in our non-Luminent businesses.

        Cash flows used in investing activities were $53.1 million for the year
ended December 31, 2001, compared to cash provided by investing activities of
$9.2 million for the year ended December 31, 2000.




                                       50
<PAGE>

        Cash flows used in investing activities were the result of capital
expenditures of $19.9 million and investments in unconsolidated subsidiaries of
$33.6 million. Cash flows provided by investing activities for the prior period
resulted from the net cash provided by the maturity of investments, offset by
net cash used in for capital expenditures, purchases of investments in
unconsolidated subsidiaries, and cash used for our recent acquisitions.

        Cash flows from financing activities were $31.9 million for the year
ended December 31, 2001, compared to cash provided in financing activities of
$198.5 million for the year ended December 31, 2000. Cash generated from
financing activities was the result of proceeds received from the issuance of
our common stock of $25.9 million and short-term borrowing of $39.0 million,
offset by payments on short-term borrowings of $29.5 million, during the period.
Cash flows provided by financing activities in the prior period represent the
cash received through Luminent's initial public offering, borrowings on our
short-term and long-term obligations, the issuance of common stock, offset by
payments on our short-term and long-term obligations.

        On November 10, 2000, Luminent completed the initial public offering of
its common stock, selling 12.0 million shares at $12 per share. Their initial
public offering raised net proceeds of approximately $132.3 million. In December
2001, we reacquired the minority interest of Luminent representing approximately
8% of Luminent's outstanding common stock (See the discussion above and the
Footnotes to our Consolidated Financial Statements for additional discussion).

        In June 1998, we issued $100 million principal amount of 5% notes due in
June 2003 in a private placement raising net proceeds of $96.4 million. The
notes are convertible into our common stock at a conversion price of $13.52 per
share (equivalent to a conversion rate of approximately 73.94 shares per $1,000
principal amount of notes), representing an initial conversion premium of 24%,
for a total of approximately 7.4 million shares of our common stock. The notes
bear interest at 5% per annum, which is payable semi-annually on June 15 and
December 15 of each year. The notes have a five-year term and have been callable
by us since June 15, 2001. The premiums payable to call these notes are 102% of
the outstanding principal amount during the 12 months ending June 14, 2002 and
101% during the 12 months ending June 14, 2003, plus accrued interest through
the date of redemption. During February and March 2002, we exchanged
approximately 6.5 million shares of our common stock for approximately $24.6
million of our notes.

        The following table illustrates our total contractual cash obligations
as of December 31, 2001:

<TABLE>
<CAPTION>
                                                  Payments due by Period
---------------------------------------------------------------- Contractual
Cash                           Less than                                 After 5
Obligations                  TOTAL         1 Year        1 - 3 Years   4 - 5
Years   Years ------------------------     --------      ---------
-----------   -----------   -------- <S>                          <C>
<C>           <C>           <C>           <C> Long-term obligations(1)
$ 61,097      $ 52,226      $  4,421      $  3,088      $  1,362 Convertible
subordinated notes(1)        89,646            --        89,646            --
-- Unconditional purchase obligations                   9,921         8,508
1,042           304            67 Operating leases               30,236
7,791        11,614         5,240         5,591 Investments
10,560         4,130         4,320         2,110            -- --------
--------      --------      --------      -------- Total contractual cash
obligations                $201,460      $ 72,655      $111,043      $ 10,742
$  7,020 ========      ========      ========      ========      ========
</TABLE>
--------------
(1) Subsequent to December 31, 2001, MRV paid $53.2 million of
current maturities of long term debt and its interest rate swap and retired
approximately $24.6 million of its convertible subordinated notes through the
exchange of approximately 6.5 million shares of its common stock therefor.




                                       51
<PAGE>
        Our total contractual cash obligations as of December 31, 2001 were
$201.5 million, of which, $72.7 million are due during the year ending December
31, 2002. These total contractual cash obligations primarily consist of
long-term financing obligations including our convertible subordinated notes,
operating leases for our equipment and facilities, unconditional purchase
obligations for necessary raw materials and funding commitments for certain
development stage enterprises. Historically, these obligations have been
satisfied through cash generated from our operations or other avenues (see
discussion below) and we expect that this will continue to be the case. During
February 2002, we paid $50.0 million in current maturities of long-term
obligations and terminated our interest rate swap for $3.2 million. During
February and March 2002, we exchanged approximately 6.5 million shares of our
common stock for approximately $24.6 million. Giving pro forma effect to these
payments and the shares-for-notes exchanges as if they had occurred on December
31, 2001, we reduced our total contractual cash obligations as of December 31,
2001 to $123.7 million and our short-term obligations to $20.4 million. Although
these obligations were scheduled to become due in 2003, we determined that there
were substantial liquidity savings realizable by satisfying these obligations
during the three months ending March 31, 2002.

        Our remaining short-term obligations of $20.4 million consist of $7.8
million for operating leases, $8.5 million for unconditional purchase
obligations and $4.1 million for funding commitments for our development stage
enterprises. Our operating entities are responsible for approximately $5.9
million, or 76% of the operating leases, while our development stage enterprises
are responsible for $1.9 million, or 24% of the operating leases. Our
unconditional purchase obligations are to secure the necessary raw goods for
production of our products. Our operating and development stage enterprises are
responsible for 91% and 9% of total unconditional purchase obligations,
respectively. As part of Luminent's restructure plan (see our discussion above
and the Footnotes to our Consolidated Financial Statements), $6.2 million in
unconditional purchase obligations have been recorded as a liability and
Luminent is in negotiations to cancel or renegotiate contracts that are no
longer required due to its significantly reduced orders for optical components
and sale projections. The remaining purchase commitments are part of our
ordinary course of business. Finally, we will continue to fund our start-up
activities that are complementary to our business strategy.

        Our remaining long-term obligations as of March 2002 of $103.3 million
consist of $73.1 million of long-term financing obligations including our $65.0
million in remaining convertible subordinated notes, $22.4 million in operating
leases for our equipment and facilities, $1.4 million of unconditional purchase
obligations and $6.4 million for funding commitments for certain development
stage enterprises. As discussed above, subsequent December 31, 2001, we
exchanged approximately approximately 6.5 million shares of our common stock for
approximately $24.6 million of our notes . Our notes are due in June 2003.
Should the price of our common stock exceed the conversion price of the notes,
or $13.52 per share, we would not be obligated to satisfy these amounts in cash,
but rather with our common stock. Our remaining long-term financing obligations
consist of financing obtained for capital expenditures and product expansion.
Our operating leases expire at various dates through 2049. Our operating and
development stage enterprises are responsible for 78% and 22% of the long-term
operating lease commitments, respectively.

        We believe that our cash on-hand and cash flows from operations will be
sufficient to satisfy our working capital, capital expenditures and research and
development requirements for at least the next 12 months. However, we may
require or choose to obtain additional debt or equity financing in order to
finance acquisitions or other investments in our business. We will continue to
devote resources for expansion and other business requirements. Our future
capital requirements will depend on many factors, including acquisitions, 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. Additionally, following the merger with Luminent (see Overview), we
increased our liquidity based on




                                       52
<PAGE>

Luminent's cash, cash equivalents, restricted cash and cash equivalents and
short-term investments on hand as of the consummation of the merger, or $107.7
million at December 31, 2001.

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. Fluctuations 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 have not historically 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 substantial inflation, there can be no
assurance that inflation will not have a material adverse effect on our
operating results in the future.




                                       53
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

Consolidated Balance Sheets as of December 31, 2001 and 2000......................... F-2

Consolidated Statements of Operations for each of the three years in the period
    ended December 31, 2001, 2000 and 1999........................................... F-4

Consolidated Statements of Stockholders' Equity and Comprehensive Loss for each
    of the three years in the period ended December 31, 2001......................... F-5

Consolidated Statements of Cash Flows for each of the three years in the period
    ended December 31, 2001, 2000 and 1999........................................... F-6

Notes to Consolidated Financial Statements........................................... F-7
</TABLE>

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

None.





                                       54
<PAGE>

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 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
Arthur Andersen LLP


Los Angeles, California
February 12, 2002




                                      F-1
<PAGE>

MRV COMMUNICATIONS, INC.

Consolidated Balance Sheets - December 31, 2001 and 2000


<TABLE>
<CAPTION>
                                     Assets

                                                       2001              2000
                                                    ----------        ----------
                                                           (in thousands)
<S>                                                 <C>               <C>
Current assets:
  Cash and cash equivalents                         $  164,676        $  210,080
  Short-term investments                                46,696            17,766
  Restricted cash and cash equivalents                   9,341            56,181
  Accounts receivable, net of
    allowance of $14,799 in 2001 and
    $9,480 in 2000                                      55,106            62,713
  Inventories                                           57,308            77,005
  Deferred income taxes                                    598            31,227
  Other current assets                                  10,044            22,750
                                                    ----------        ----------
        Total current assets                           343,769           477,722

Property and equipment, net                             72,012            72,269

Other assets:
  Investments                                           16,937            31,734
  Deferred income taxes                                 22,631             6,209
  Goodwill and other intangibles, net                  395,312           504,027
  Other long-term assets                                13,834             5,660
                                                    ----------        ----------
                                                       448,714           547,630
                                                    ----------        ----------
                                                    $  864,495        $1,097,621
                                                    ==========        ==========
</TABLE>


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




                                      F-2
<PAGE>

MRV COMMUNICATIONS, INC.

Consolidated Balance Sheets - December 31, 2001 and 2000


<TABLE>
<CAPTION>
                      Liabilities and Stockholders' Equity

                                                                       2001              2000
                                                                    -----------       -----------
                                                                   (in thousands, except par value)
<S>                                                                 <C>               <C>
Current liabilities:
  Current portion of long-term debt                                 $    52,226       $     2,937
  Short-term obligations                                                 18,679             9,104
  Accounts payable                                                       48,586            56,088
  Accrued liabilities                                                    39,035            34,894
  Income taxes payable                                                    1,914             6,477
  Deferred revenue                                                        4,165             1,470
  Other current liabilities                                               3,198                --
                                                                    -----------       -----------
        Total current liabilities                                       167,803           110,970

Long-term liabilities:
  Convertible subordinated notes                                         89,646            89,646
  Long-term debt, net of current portion                                  8,871            60,878
  Other long-term liabilities                                             3,737             3,980
                                                                    -----------       -----------
        Total long-term liabilities                                     102,254           154,504

Commitments and contingencies

Minority interest                                                         9,762            50,592

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 - 82,824 shares in 2001 and 73,327 in 2000
    Outstanding - 82,776 shares in 2001 and 73,279 in 2000                  141               126
  Additional paid-in capital                                          1,125,675         1,060,650
  Deferred stock compensation, net                                      (33,077)         (100,862)
  Accumulated deficit                                                  (497,683)         (171,330)
  Treasury stock, 48 shares at cost in 2001 and 2000                       (133)             (133)
  Accumulated other comprehensive loss                                  (10,247)           (6,896)
                                                                    -----------       -----------
        Total stockholders' equity                                      584,676           781,555
                                                                    -----------       -----------
                                                                    $   864,495       $ 1,097,621
                                                                    ===========       ===========
</TABLE>


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




                                      F-3
<PAGE>
MRV COMMUNICATIONS, INC.

Consolidated Statements of Operations
For the years ended December 31, 2001, 2000 and 1999


<TABLE>
<CAPTION>
                                                                 2001            2000           1999
                                                              ---------       ---------       ---------
                                                               (in thousands, except per share amounts)
<S>                                                           <C>             <C>             <C>
Revenues, net                                                 $ 332,844       $ 319,394       $ 288,524
Costs and expenses:
  Cost of goods sold(1)                                         267,389         203,371         197,442
  Research and development(1)                                    94,813          74,078          35,319
  Selling, general and administrative(1)                        150,674         124,700          67,859
  Amortization of goodwill and other intangibles                126,484          66,814           3,898
  Restructuring costs                                            14,111              --              --
                                                              ---------       ---------       ---------
                                                                653,471         468,963         304,518
        Operating loss                                         (320,627)       (149,569)        (15,994)

Other income (expense):
  Interest expense and other                                     (9,586)         (2,829)         (4,500)
  Interest income                                                 6,765             551           4,822
  Loss on equity method investments                             (19,956)         (7,300)             --
  Minority interest                                              11,577             796             610
                                                              ---------       ---------       ---------
                                                                (11,200)         (8,782)            932

        Loss before provision (benefit) for income taxes
         and extraordinary gain                                (331,827)       (158,351)        (15,062)

Provision (benefit) for income taxes                              4,475          (5,398)         (2,153)
                                                              ---------       ---------       ---------
        Loss before extraordinary gain                         (336,302)       (152,953)        (12,909)

Extraordinary gain on purchase of minority
  interest in Luminent, Inc., net of tax                          9,949              --              --
                                                              ---------       ---------       ---------
        Net loss                                              $(326,353)      $(152,953)      $ (12,909)
                                                              =========       =========       =========

Loss per share information:
  Basic and diluted loss before
    extraordinary gain per share                              $   (4.40)      $   (2.33)      $   (0.24)
                                                              =========       =========       =========
  Basic and diluted net loss per share                        $   (4.27)      $   (2.33)      $   (0.24)
                                                              =========       =========       =========
  Basic and diluted weighted average shares outstanding          76,369          65,669          53,920
                                                              =========       =========       =========
</TABLE>

----------
(1)  Includes amounts relating to deferred stock compensation expense of $7.8
     million and $8.3 million, $14.0 million and $13.3 million and $48.0 million
     and $38.4 million presented in cost of goods sold, research and development
     and selling, general and administrative, respectively, for the years ended
     December 31, 2001 and 2000.


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




                                      F-4
<PAGE>

MRV COMMUNICATIONS, INC.

Consolidated Statements of Stockholders' Equity and Comprehensive Loss
For the years ended December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>
                                                                                                       Accumulated
                                           Common       Additional   Deferred                             Other
                                        --------------   Paid-in       Stock    Accumulated  Treasury  Comprehensive
                                        Shares  Amount   Capital   Compensation   Deficit     Stock         Loss       Total
                                        ------  ------ ----------- ------------ -----------  --------- ------------- ---------
                                                                           (in thousands)
<S>                                     <C>      <C>   <C>           <C>         <C>         <C>         <C>        <C>
Balance at December 31, 1998            53,278   $ 91  $   180,653   $      --   $  (5,471)  $    (133)  $   (711)  $ 174,429
  Exercise of stock options
    and warrants                         2,156      4        2,816          --          --          --         --       2,820
  Exercise of stock warrants by
    Intel Corporation                      800      1        7,999          --          --          --         --       8,000
  Other                                     --     --           --          --           3          --         --           3
  Comprehensive loss:
    Translation adjustments                 --     --           --          --          --          --     (5,528)     (5,528)
    Net loss                                --     --           --          --     (12,909)         --         --     (12,909)
                                                                                                                     ---------
  Comprehensive loss                        --     --           --          --          --          --         --     (18,437)
                                        ------  ------ ----------- ------------ -----------  --------- ------------- ---------
Balance at December 31, 1999            56,234     96      191,468          --     (18,377)       (133)    (6,239)    166,815
  Exercise of stock options
    and warrants                         2,896      5        7,757          --          --          --         --       7,762
  Tax benefit from exercise of
    stock options                           --     --       11,417          --          --          --         --      11,417
  Issuance of common stock in
    connection with acquisitions        14,123     25      639,172          --          --          --         --     639,197
  Issuance of common stock in
    connection with conversion of
    convertible subordinated notes          26     --          354          --          --          --         --         354
  Effect of subsidiary equity
    transactions                            --     --       49,679          --          --          --         --      49,679
  Deferred stock compensation               --     --      160,803    (160,803)         --          --         --          --
  Amortization of deferred stock
    compensation                            --     --           --      59,941          --          --         --      59,941
  Comprehensive loss:
    Net loss                                --     --           --          --    (152,953)         --         --    (152,953)
    Translation adjustments                 --     --           --          --          --          --       (657)       (657)
                                                                                                                     ---------
  Comprehensive loss                                                                                                  (153,610)
                                        ------  ------ ----------- ------------ -----------  --------- ------------- ---------
Balance at December 31, 2000            73,279    126    1,060,650    (100,862)   (171,330)       (133)    (6,896)    781,555
  Issuance of common stock
    in connection with acquisition       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
    in exchange for investment              --     --          508          --          --          --         --         508
  Issuance of common stock for
    purchase of Luminent, Inc.'s
    minority interest                    5,160      9       16,845          --          --          --         --      16,854
  Exercise of stock options
    and warrants                           561     --        6,406          --          --          --         --       6,406
  Deferred stock compensation               --     --        7,816      (7,816)         --          --         --          --
  Fair value of stock options issued
    to a non-employee                       --     --          535          --          --          --         --         535
  Forfeited stock options                   --     --       (6,305)         --          --          --         --      (6,305)
  Amortization of deferred stock
    compensation                            --     --           --      75,601          --          --         --      75,601
  Comprehensive loss:
    Net loss                                --     --           --          --    (326,353)         --               (326,353)
    Unrealized loss on interest
      rate swap                             --     --           --          --          --          --     (3,198)     (3,198)
    Foreign currency translation
      adjustment                            --     --           --          --          --          --       (153)       (153)
                                                                                                                     ---------
  Comprehensive loss                                                                                                 (329,704)
                                        ------  ------ ----------- ------------ -----------  --------- ------------- ---------
Balance at December 31, 2001            82,776   $141  $ 1,125,675   $ (33,077)  $(497,683)  $    (133)  $(10,247)  $ 584,676
                                        ======   ====  ===========   =========   =========   =========   ========   =========
</TABLE>


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




                                      F-5

<PAGE>

MRV COMMUNICATIONS, INC.

Consolidated Statements of Cash Flows
For the years ended December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>
                                                                  2001         2000        1999
                                                               ---------    ---------    --------
                                                                         (in thousands)
<S>                                                            <C>          <C>          <C>
Cash flows from operating activities:
  Net loss                                                     $(326,353)   $(152,953)   $(12,909)
  Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
      Depreciation and amortization                              140,554       77,871      12,501
      Amortization of deferred stock compensation expense         69,831       59,941          --
      Allowance for doubtful accounts                              5,654        3,833       1,416
      Deferred income taxes                                       15,134      (25,205)     (1,302)
      Realized gain on investment                                     --          (50)         --
      Extraordinary gain on purchase of minority interest
        of Luminent, Inc.                                         (9,949)          --          --
      (Gain) loss on disposition of property and equipment          (178)          16          --
      Tax benefit from stock option exercises                         --       11,417          --
      Impairment loss on property and equipment                    7,787           --          --
      Loss on equity method investments                           19,956           --          --
      Minority interests' share of income                        (11,557)        (796)       (610)
  Changes in operating assets and liabilities, net
    of effects from acquisitions:
      Restricted cash and cash equivalents                        46,840           --          --
      Accounts receivable                                          1,953        4,949      (7,457)
      Inventories                                                 19,697      (28,869)     12,075
      Refundable income taxes                                         --        3,216          --
      Other assets                                                 4,532      (12,020)       (519)
      Accounts payable                                            (7,502)      28,939       3,698
      Accrued liabilities                                          1,321        4,890       1,715
      Income taxes payable                                        (4,563)      (5,154)     (3,661)
      Deferred revenue                                             2,695          175      (2,920)
                                                               ---------    ---------    --------
        Net cash provided by (used in) operating activities      (24,148)     (29,800)      2,027
Cash flows from investing activities:
  Purchases of property and equipment                            (19,923)     (23,977)     (8,053)
  Proceeds from sale of property and equipment                       453        1,520          --
  Purchases of investments                                       (33,581)     (21,566)    (19,242)
  Proceeds from maturity of investments                               --       97,704      38,293
  Cash used in acquisitions, net of cash received                     --      (44,517)     (4,773)
                                                               ---------    ---------    --------
        Net cash provided by (used in) investing activities      (53,051)       9,164       6,225
Cash flows from financing activities:
  Net proceeds from equity transaction of Luminent, Inc.              --      132,290          --
  Net proceeds from issuance of common stock                      25,911        7,762      10,820
  Borrowings on short-term obligations                            39,034       35,887          --
  Payments on short-term obligations                             (29,459)     (35,949)         --
  Principal payments on capital lease obligations                   (148)        (163)         94
  Borrowings on long-term debt                                        --       62,696          --
  Payments on long-term debt                                      (2,570)      (4,002)         --
  Other long-term liabilities                                       (820)          --          --
                                                               ---------    ---------    --------
        Net cash provided by financing activities                 31,948      198,521      10,914
Effect of exchange rate changes on cash and cash equivalents        (153)      (2,135)     (5,528)
Net (decrease) increase  in cash and cash equivalents            (45,404)     175,750      13,638
Cash and cash equivalents, beginning of year                     210,080       34,330      20,692
                                                               ---------    ---------    --------
Cash and cash equivalents, end of year                         $ 164,676    $ 210,080    $ 34,330
                                                               =========    =========    ========
</TABLE>


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




                                      F-6
<PAGE>

MRV COMMUNICATIONS, INC.

Notes to Consolidated Financial Statements
December 31, 2001


1.      Description of Business

MRV Communications, Inc. (a Delaware corporation, MRV or the Company) creates,
acquires, finances and operates companies, and through them, designs, develops,
manufactures and markets products, which enable high-speed broadband
communications. MRV concentrates on companies and products devoted to optical
active and passive components, switches and routers, remote device management
and network physical infrastructure equipment. MRV's strategy involves creating
value for its stockholders and the other minority shareholders of its
subsidiaries by helping the companies grow and access the public and private
capital markets.

In November 2000, Luminent, a publicly owned subsidiary, completed an initial
public offering of its common stock, selling 12.0 million shares at $12.0 per
share, raising net proceeds of approximately $132.3 million. As of December 31,
2000, MRV owned 92 percent of the outstanding capital stock of Luminent. In
December 2001, MRV completed its acquisition of Luminent's eight percent
minority interest and merged Luminent back into MRV (see Note 2, Transactions
with Stock of a Subsidiary).

2.      Summary of Significant Accounting Policies

        Principles of Consolidation

        The accompanying consolidated 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 percent, MRV
        discontinues consolidation and uses the equity method of accounting for
        these investments.

        Foreign Currency Translation

        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". Increased 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 loss.

        Transaction Gains or Losses

        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 rates prevailing at the dates those elements
        are recognized in the financial statements. Translation adjustments
        resulting from the process of translating the local currency financial
        statements into U.S. dollars are included in determining comprehensive
        loss.

        Revenue Recognition

        MRV generally recognizes product revenue, net of sales discounts,
        returns 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 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. Revenue
        generated through the sales of services and systems support has been
        insignificant.

        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.




                                      F-7
<PAGE>

        Cash, Cash Equivalents and Restricted Cash

        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. In connection with MRV's
        its long-term debt and interest rate swap agreement (see Notes 9 and 10)
        as of December 31, 2000, $56.2 million in cash was restricted as the
        term loan and the swap expire in 2003. In February 2002, MRV repaid the
        long-term debt and terminated the swap, and as such, the restricted cash
        balance of $53.4 million has been presented in Cash and Cash Equivalents
        and the related long term debt has been reflected as a current liability
        as of December 31, 2001. Restricted cash of $9.3 million as of December
        31, 2001 represents cash restricted against short-term and long-term
        obligations.

        Investments

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

        As of December 31, 2001 and 2000, short-term investments consisted
        principally of U.S. Treasury Bonds, Municipal Bonds and Corporate Bonds.
        As defined by SFAS No. 115, MRV has classified these investments in debt
        securities as "held-for-maturity" investments and all investments are
        recorded at their amortized cost basis, which approximated their fair
        value at December 31, 2001 and 2000. As of December 31, 2001 and 2000,
        all held-for-maturity investments were short-term expiring at various
        dates through the following year.

        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, 2001 and 2000
        (in thousands):

<TABLE>
<CAPTION>
                                                  2001             2000
                                                -------          -------
        <S>                                     <C>              <C>
        Raw materials                           $15,444          $36,278
        Work-in-progress                         19,230           17,721
        Finished goods                           22,634           23,006
                                                -------          -------
                                                $57,308          $77,005
                                                =======          =======
</TABLE>

        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,
        2001 and 2000 (in thousands):

<TABLE>
<CAPTION>
                                                                   2001           2000
                                                                ---------       ---------
        <S>                                                     <C>             <C>
        Property and equipment, at cost:
          Land                                                  $   3,521       $   3,559
          Building                                                 19,448          19,563
          Machinery and equipment                                  67,713          57,369
          Furniture and fixtures                                   12,347          12,824
          Computer hardware and software                           12,084          10,823
          Leasehold improvements                                    7,870           7,221
          Construction in progress                                  1,065           3,815
                                                                ---------       ---------
                                                                  124,048         115,174
          Less - accumulated depreciation and amortization        (52,036)        (42,905)
                                                                ---------       ---------
                                                                $  72,012       $  72,269
                                                                =========       =========
</TABLE>




                                      F-8
<PAGE>

        Goodwill and Other Intangibles

        Intangible assets represent intellectual property acquired, purchased
        intangible assets and the excess acquisition cost over the fair value of
        tangible and identified intangible net assets of the businesses acquired
        (goodwill). Purchased intangible assets include patents, assembled work
        forces, customer contracts and goodwill. Goodwill is amortized using the
        straight-line method over five years. Other intangible assets are
        amortized using the straight-line method over estimated useful lives
        ranging from one to 12 years.

        The components of intangible assets as of December 31, 2001 and 2000 are
        as follows (in thousands):

<TABLE>
<CAPTION>
                                                 2001            2000
                                              ---------       ---------
        <S>                                   <C>             <C>
        Patents                               $  64,600       $  64,600
        Assembled work forces                     1,790           1,790
        Customer contracts                          720             720
        Goodwill                                510,426         510,426
                                              ---------       ---------
                                                577,536         577,536
        Less - accumulated amortization        (182,224)        (73,509)
                                              ---------       ---------
                                              $ 395,312       $ 504,027
                                              =========       =========
</TABLE>

        Impairment of Intangibles and Other Long-Lived Assets

        MRV evaluates its long-term assets, such as goodwill and other
        intangibles and property and equipment, for impairment at the acquired
        business unit level 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, a 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, 2001, MRV determined that $14.2 million
        of goodwill and intangibles and $9.2 million of equity method
        investments were impaired. These amounts were determined to be impaired
        using the method discussed above. The remaining carrying values of
        intangibles and investments 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. This analysis has
        been performed using the guidance prescribed in SFAS No, 121,
        "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
        Assets to be Disposed of", see Note 2, Recently Issued Accounting
        Standards, for the anticipated impact of the adoption of SFAS No. 142.
        The impairment of intangibles of $14.2 million has been recorded as
        amortization of goodwill and other intangibles and the $9.2 million has
        been recorded as other income (expense) in the accompanying consolidated
        statements of operations for the year ended December 31, 2001. There
        were no impairment losses recorded for the years ended December 31, 2000
        and 1999, respectively.

        Fair Value of Financial Instruments

        MRV's financial instruments, including cash and cash equivalents,
        restricted cash and cash equivalents, investments, 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.

        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.




                                      F-9
<PAGE>

        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.

        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.

        Loss Per Share

        Basic loss per share is calculated by dividing net loss by the weighted
        average number of common shares outstanding during the period. Diluted
        loss per share is calculated by dividing net 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. Options
        to purchase 12.4 million, 7.1 million and 5.5 million shares were not
        included in the computation of years 2001, 2000 and 1999 diluted loss
        per share because such options were considered anti-dilutive. Warrants
        to purchase 1.5 million, 2.4 million and 3.3 million shares were not
        included in the computation of years 2001, 2000 and 1999 diluted loss
        per share because such warrants were considered anti-dilutive. Shares
        associated with MRV's $89.6 million outstanding convertible subordinated
        notes were not included in the computation of loss per share as they are
        anti-dilutive.

        The following schedule summarizes the information used to compute
        earnings per share (in thousands, except per share data) for each of the
        three years in the period ended December 31, 2001:

<TABLE>
<CAPTION>
                                                             2001          2000         1999
                                                          ---------     ---------     --------
        <S>                                               <C>           <C>           <C>
        Loss before extraordinary item                    $(336,302)    $(152,953)    $(12,909)
        Extraordinary item - gain on purchase of
          minority interest, net of tax                       9,949            --           --
                                                          ---------     ---------     --------
              Net loss                                    $(326,353)    $(152,953)    $(12,909)
                                                          =========     =========     ========
        Weighted average number of shares used to
          compute basic and diluted loss per share           76,369        65,669       53,920
                                                          =========     =========     ========
        Basic and diluted loss per share before
          extraordinary item                              $   (4.40)    $   (2.33)    $  (0.24)
        Extraordinary gain per basic and diluted share         0.13            --           --
                                                          ---------     ---------     --------
        Basic and diluted loss per share                  $   (4.27)    $   (2.33)    $  (0.24)
                                                          =========     =========     ========
</TABLE>

        Stock-Based Compensation

        MRV accounts for its employee stock plan under the intrinsic value
        method prescribed by Accounting Principles Board Opinion (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."

        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 compensation expense is being amortized using the graded
        vesting method over four years. Using this method, approximately 57
        percent, 26 percent, 13 percent and 4 percent, respectively, of each
        option's compensation expense is amortized in each of the four years
        following the date of grant. Deferred stock compensation generated
        during 2001 was $7.0 million generated through acquisitions. Deferred
        stock




                                      F-10
<PAGE>

        compensation generated during 2000 was $148.3 million of which $94.1
        million was generated through acquisitions (see Note 4) and $54.2
        million was generated through stock options granted to Luminent's Chief
        Executive Officer and its Chief Financial Officer (see Note 13). Total
        deferred stock compensation expense for the years ended December 31,
        2001 and 2000 was $69.8 million and $60.0 million, respectively. There
        was no deferred stock compensation expense incurred for the year ended
        December 31, 1999.

        Transactions with Stock of a Subsidiary

        At the time a subsidiary sells its stock to unrelated parties at a price
        in excess of its book value, the book value of MRV's investment in that
        subsidiary increases. If at that time, the subsidiary is not a
        newly-formed, non-operating entity, nor a research and development,
        start-up or development stage company, nor does MRV contemplate
        subsequent capital transactions or intend to spin-off the subsidiary to
        stockholders, MRV records the increase in its investment as a gain in
        Other Income, net in its Consolidated Statements of Operations.
        Otherwise, the increase in its investment is considered as additional
        paid-in capital, which is included in Effect of Subsidiary Equity
        Transactions in MRV's Consolidated Statements of Stockholders' Equity.

        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 Consolidated 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 eight percent 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
        common stock 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.

        Recently Issued Accounting Standards

        In June 2001, the FASB approved two pronouncements: SFAS No. 141,
        "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
        Assets", which provide guidance on the accounting for business
        combinations to be accounted for using the purchase method. Under the
        new rules, goodwill will no longer be subject to amortization over its
        useful life. Rather, goodwill will be subject to at least an annual
        impairment assessment. This assessment is a fundamentally different
        two-step approach and is based on a comparison between a reporting
        unit's fair value and its carrying value. Certain intangible assets have
        newly defined criteria and will be accounted for separately from
        goodwill and will continue to be amortized over their useful lives.
        Under the new impairment assessment, fair value is more focused on
        market value or market capitalization. That is, fair value is
        determined, based on, among other factors, the current market value of
        MRV and its reporting units. As of December 31, 2001, MRV's common stock
        was trading at amounts significantly lower than its book value per
        share. Based on this current environment, management would anticipate
        recording, upon adoption of this standard during the first quarter of
        2002, significant impairment losses, although, such amounts have not be
        determined. Should market values dramatically improve during the first
        half of 2002, impairment losses, if any, could be reduced or eliminated.

        In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
        Retirement Obligations". SFAS No. 143 requires entities to record the
        fair value of a liability for an asset retirement obligation in the
        period in which the obligation is incurred. When the liability is
        initially recorded, the entity capitalizes the cost by increasing the
        carrying amount of the related long-lived asset. Over time, the
        liability is accreted to its present value each period, and the
        capitalized cost is depreciated over the useful life of the related
        asset. This statement is effective on January 1, 2003 with earlier
        application encouraged. The Company is currently reviewing this
        statement and has not yet determined its impact, if any, on our
        financial position, results of operations or cash flows.

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the
        Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that
        long-lived assets be measured at the lower of carrying amount or fair
        value less cost to sell, whether reported in continuing operations or in
        discontinued operations. The




                                      F-11
<PAGE>

        Company will adopt this statement on January 1, 2002 and is currently
        reviewing the statement to determine its impact, if any, on the
        Company's financial position, results of operations or cash flows.

        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 with the
        current year presentation.

3.      Restructuring and One-Time Charges

        During the year ended December 31, 2001, the management of Luminent, a
        subsidiary of MRV, approved and implemented a restructuring plan and
        other actions in order to adjust operations and administration as a
        result of the dramatic slowdown in the communications equipment industry
        generally and the optical components sector in particular. Major actions
        primarily involved the reduction of facilities in the U.S. and in
        Taiwan, the reduction of workforce, the abandonment of certain assets,
        the cancellation and termination of purchase commitments and the
        write-down of certain inventory. These actions are expected to realign
        the business based on current and near-term growth rates. All of these
        actions are expected to be completed by the second quarter of 2002.

        Restructuring Charges

        During the year ended December 31, 2001, Luminent recorded restructuring
        charges totaling $20.3 million. Costs for restructuring activities are
        limited to either incremental costs that directly result from the
        restructuring activities and provide no future revenue generating
        benefit, or costs incurred under contractual obligations that existed
        before the restructuring plan and will continue with either no future
        revenue generating benefit or become a penalty incurred for termination
        of the obligation.

        Employee severance costs and related benefits of $1.3 million are
        related to approximately 600 layoffs during the year ended December 31,
        2001, bringing the Luminent's total workforce to approximately 1,100
        employees as of December 31, 2001. Affected employees came from all
        divisions and areas of Luminent. The majority of affected employees were
        in the manufacturing group.

        In addition to the costs associated with employee severance, Luminent
        identified a number of assets, including leased facilities and equipment
        that are no longer required due to current market conditions, operations
        and expected growth rates. The net facilities costs related to closed
        and abandoned facilities costs of approximately $2.4 million for the
        year ended December 31, 2001, are primarily related to future
        obligations under operating leases. The total lease charge is net of
        approximately $3.7 million in expected sublease revenue on leases that
        Luminent cannot terminate. In connection with these closed and abandoned
        facilities, Luminent has recorded asset impairment charges of $10.4
        million for the year ended December 31, 2001, consisting of leasehold
        improvements and certain manufacturing equipment to write-down the value
        of this equipment. Due to its specialized nature, Luminent has
        determined that these assets have minimal or no future benefit and has
        recorded a provision reflecting the net book value relating to these
        assets. Purchase commitments of $6.2 million recorded in cost of sales,
        for the year ended December 31, 2001, are to cancel or renegotiate
        outstanding contracts for materials and capital assets that are no
        longer required due to Luminent's significantly reduced orders for
        optical components and sales projections over the next twelve months.

        As of December 31, 2001, the restructuring liability has been reduced by
        cash payments of $1.2 million for the year ended December 31, 2001, and
        non-cash related charges of $10.4 million for the year ended December
        31, 2001, resulting in an ending liability balance of $8.7 million.
        Luminent expects to utilize the remaining balance by the end of the
        second quarter of 2002. Luminent expects that it will spend
        approximately $8.7 million through the next two quarters to carry out
        the plan, which will be paid through cash and cash equivalents and
        through operating cash flows. Luminent began to realize savings related
        to the workforce reductions in late 2001 with estimated ongoing
        quarterly net savings of $2.4 million. In addition, Luminent will
        realize reduced depreciation charges of approximately $384,000 per
        quarter through December 2004 and $163,000 per quarter through December
        2005 for facility costs. These savings are




                                      F-12
<PAGE>

        expected to be realized as reductions in cost of sales, research and
        development and selling, general and administrative expenses.

        A summary of the restructuring costs for the year ended December 31,
        2001 consist of the following (in thousands):

<TABLE>
<CAPTION>
                                       Original       Additional                   Remaining
                                       Provision       Provision    Utilized        Balance
                                       ---------      ----------    --------       ---------
        <S>                             <C>             <C>          <C>            <C>
        Exit costs
          Asset impairment              $ 9,544         $  897       $10,441        $   --
          Closed and abandoned
            facilities                    1,125          1,280            88         2,317
          Purchase commitments            2,386          3,787           468         5,705
                                        -------         ------       -------        ------
                                         13,055          5,964        10,997         8,022
          Employee severance costs        1,281             --           626           655
                                        -------         ------       -------        ------
                                        $14,336         $5,964       $11,623        $8,677
                                        =======         ======       =======        ======
</TABLE>

        A summary of the restructuring costs by line item for the year ended
        December 31, 2001 consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                   2001
                                                                 --------
        <S>                                                      <C>
        Cost of sales                                            $  6,173
        Restructuring costs                                        14,111
        Other income (expense)                                         16
                                                                 --------
                                                                 $ 20,300
                                                                 ========
</TABLE>

        One-Time Charges

        As a result of the significant negative economic and industry trends
        impacting Luminent's expected sales over the next twelve months,
        Luminent also recorded one-time charges of $29.2 million to write-down
        the remaining book value of certain inventory related to certain
        transceivers, duplexors, and triplexors that are previous generation
        products to its realizable value during the year ended December 31,
        2001. The one-time charges to write-down inventory were subsequently
        reduced by $8.1 million during the year ended December 31, 2001 to
        reflect the sale of previously written-off items.




                                      F-13
<PAGE>

4.      Business Acquisitions

The following table presents information regarding acquisitions by MRV in each
of the three years in the period ended December 31, 2001. MRV completed no
material acquisitions for the years ended December 31, 2001 and 1999, excluding
the acquisition of the Luminent minority interest discussed in Note 2. All of
these acquisitions were accounted for under the purchase method of accounting,
and the results of operations of each business have been included in the
accompanying consolidated statements of operations from the date of acquisition.

<TABLE>
<CAPTION>
                                      Date of           Total          Form of Consideration and
Acquired Company                    Acquisition     Consideration      Other Notes to Acquisition
----------------                    -----------     -------------      --------------------------
<S>                                <C>              <C>              <C>

Year Ended December 31, 2000
----------------------------

Fiber Optic Communications, Inc.   April 24, 2000   $309.7 million   $48.6 million in cash and 5.4 million
                                                                     shares of common stock and options
                                                                     issued; approximately 97 percent of
                                                                     capital stock assumed; goodwill recorded
                                                                     of $261.5 million; deferred stock
                                                                     compensation recorded of $14.1 million.

Jolt Limited                        May 1, 2000     $57.7 million    1.9 million shares of common stock and
                                                                     options issued; 100 percent of capital
                                                                     stock assumed; goodwill and intangibles
                                                                     recorded of $33.7 million; deferred stock
                                                                     compensation recorded of $25.0 million.

Quantum Optech Inc.                July 12, 2000    $36.1 million    1.2 million shares of common stock and
                                                                     options issued; 100 percent of capital
                                                                     stock assumed; goodwill recorded of $27.8
                                                                     million; deferred stock compensation
                                                                     recorded of $2.7 million.

AstroTerra Corporation             July 12, 2000    $160.3 million   2.4 million shares of common stock and
                                                                     options issued; 100 percent of capital
                                                                     stock assumed; goodwill and intangibles
                                                                     recorded of $108.4 million; deferred
                                                                     stock compensation recorded of $50.0
                                                                     million.

Optronics International Corp.      July 21, 2000    $123.9 million   4.2 million shares of common stock and
                                                                     options issued; approximately 99 percent
                                                                     of capital stock assumed; goodwill
                                                                     recorded of $99.4 million; deferred stock
                                                                     compensation recorded of $13.4 million.


Others                                Various       $16.5 million    507,000 shares of common stock issued;
                                                                     100 percent of capital stock assumed;
                                                                     goodwill recorded of $14.9 million;
                                                                     deferred stock compensation recorded of
                                                                     $1.4 million.
</TABLE>

On April 24, 2000, MRV completed the acquisition of approximately 97 percent of
the outstanding capital stock of Fiber Optic Communications, Inc., a Republic of
China corporation. Fiber Optic Communications is a manufacturer of passive fiber
optic components for Wavelength Division Multiplexing. Under the terms of the
purchase agreement, Fiber Optic Communications shareholders received
approximately $48.6 million in cash and approximately 4.7 million shares of MRV
common stock and options to purchase 680,000 shares of MRV common stock for a
total purchase price of approximately $309.7 million. The issuance price of the
MRV common stock was approximately $53 per share, which was determined based on
the average market price five days before and after the terms were agreed upon.
The options to purchase MRV common stock are exercisable at $3.00 per share,
have an aggregate intrinsic value of $14.1 million, and vest over a four-year
period. The acquisition is being accounted for using the purchase method of
accounting. The excess purchase price paid over the fair value of the net
identifiable assets acquired of $261.5 million has been recorded as goodwill and
is being amortized on a straight-line basis over 5 years. The deferred
compensation is being amortized using the graded vesting method over 4 years.




                                      F-14
<PAGE>

On May 1, 2000, MRV completed the acquisition of all of the outstanding capital
stock of Jolt Limited, an Israeli corporation. Jolt designs, manufactures and
sells multi-port wireless optics communications equipment. Under the terms of
the purchase agreement, shareholders received approximately 1.1 million shares
of MRV common stock. In addition, the employees of Jolt received options to
purchase approximately 849,000 shares of common stock of MRV. The purchase price
aggregated approximately $57.7 million. The issuance price of the common stock
was approximately $31 per share, which was determined based on the average
market price five days before and after the terms of the acquisition were agreed
upon. The options to purchase common stock are exercisable at $6 per share, have
an aggregate intrinsic value of $25.0 million, and vest over an employment
period of four years. The acquisition is being accounted for using the purchase
method of accounting. The excess purchase price paid over the fair value of the
net identifiable assets acquired of $33.7 million has been recorded as goodwill
and is being amortized on a straight-line basis over 5 years. The deferred
compensation of approximately $25.0 million is being amortized using the graded
vesting method over four years.

On July 12, 2000, MRV completed the acquisition of all of the outstanding
capital stock of Quantum Optech Inc., a Republic of China corporation. Quantum
Optech is a manufacturer of optical thin film coating and filters for Dense
Wavelength Division Multiplexing. Under the terms of the purchase agreement,
Quantum Optech shareholders received approximately 1.0 million shares of MRV
common stock and options to purchase approximately 160,000 shares of MRV common
stock for a total purchase price of approximately $36.1 million. The issuance
price of the MRV common stock was approximately $30 per share, which was
determined based on the average market price five days before and after the
terms were agreed upon. The options to purchase MRV common stock are exercisable
at $3.00 per share, have a fair value of $4.0 million, of which unvested options
have an intrinsic value of $2.7 million and vested options have a fair value of
$1.3 million, and the remaining vest over a four-year period. The excess
purchase price paid over the fair value of the net identifiable assets acquired
of $27.8 million has been recorded as goodwill and is being amortized on a
straight-line basis over 5 years. The deferred compensation is being amortized
using the graded vesting method over 4 years.

On July 12, 2000, MRV completed the acquisition of AstroTerra, a California
corporation that develops and manufactures free-space optical wireless
communication systems to connect data and telecommunications networks. MRV
exchanged approximately 1.6 million shares of its common stock for all of the
outstanding capital stock of AstroTerra. In addition, the employees of
AstroTerra received options to purchase approximately 809,000 shares of common
stock of MRV. The purchase price aggregated approximately $160.3 million. The
issuance price of the common stock was approximately $65 per share, which was
determined based on the average market price five days before and after the
terms of the agreement were agreed upon. The options to purchase common stock
are exercisable at approximately $3 per share, have a fair value of
approximately $50.0 million and vest over an employment period of four years.
The deferred compensation is being amortized using the graded vesting method
over four years. The excess purchase price paid over the fair value of the net
identifiable assets acquired of $108.4 million has been recorded as goodwill and
is being amortized on a straight-line basis over 5 years.

On July 21, 2000, MRV completed the acquisition of approximately 99 percent of
the outstanding capital stock of Optronics International Corp., a Republic of
China corporation. Optronics International is a manufacturer of high temperature
semiconductor lasers, transceivers and detectors for optical networks. Under the
terms of the purchase agreement, Optronics International shareholders received
approximately 3.4 million shares of MRV common stock and options to purchase
approximately 800,000 shares of MRV common stock for a total purchase price of
approximately $123.9 million. The issuance price of the MRV common stock was
approximately $30 per share, which was determined based on the average market
price five days before and after the terms were agreed upon. The options to
purchase MRV common stock are exercisable at $3.00 per share, have a fair value
of $20.0 million, of which unvested options have an intrinsic value of $13.4
million and vested options have a fair value of $6.6 million, and the remaining
vest over a four-year period. The acquisition is being accounted for using the
purchase method of accounting. The excess purchase price paid over the fair
value of the net identifiable assets acquired of $99.4 million has been recorded
as goodwill and is being amortized on a straight-line basis over 5 years. The
deferred compensation is being amortized using the graded vesting method over 4
years.

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

<TABLE>
        <S>                                                     <C>
        Purchase price                                          $704,241
        Allocation of purchase price:
           Net tangible assets                                    51,902
           Deferred stock compensation                           106,602
           Goodwill and other intangibles                        545,737
</TABLE>

The results of operations of these acquisitions have been included in MRV's
consolidated financial statements from the date of acquisition. The following
unaudited pro forma financial information presents the combined results of
operations of these acquisitions as if the acquisitions had occurred as of
January 1, 1999, giving effect to certain




                                      F-15
<PAGE>

adjustments, including amortization of goodwill and other intangibles and
deferred stock compensation charges. The unaudited pro forma share data assumes
the shares issued in connection with these acquisitions were outstanding as of
January 1, 1999 (in thousands, except per share amounts, unaudited).

<TABLE>
<CAPTION>
                                                                    December 31,
                                                            -------------------------
                                                              2000            1999
                                                            ---------       ---------
        <S>                                                 <C>             <C>
        Pro forma revenue                                   $ 335,486       $ 322,645
        Pro forma net loss                                  $(143,044)      $(115,775)
        Pro forma basic and diluted net loss per share      $   (1.83)      $   (1.75)
        Pro forma basic and diluted weighted average
          shares outstanding                                   77,996          66,247
</TABLE>

Acquisition-Related Unearned Stock Compensation

During 2001 and 2000, MRV recorded acquisition-related purchase consideration of
$7.1 million and $94.1 million, respectively, as unearned stock-based
compensation, in accordance with FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation." This amount represents the
portion of the purchase consideration related to shares issued contingent on
continued employment of certain employee stockholders and the intrinsic value of
stock options assumed that are earned as future services are provided by
employees. The compensation is being recognized over the related employment
period using the graded vesting method. A total of $33.2 million and $43.7
million of expense was recognized for 2001 and 2000, respectively, relating to
these acquisitions.

5.      Investments in Subsidiaries

The following table presents information regarding investments made by MRV in
subsidiaries accounted for under the equity method of accounting or
consolidated. Subsidiaries in which MRV owns greater than 50 percent ownership
or exercises control have been consolidated in the accompanying consolidated
financial statements.

<TABLE>
<CAPTION>

Subsidiary                            Ownership %               Form of Consideration(5)
----------                          -------------               ------------------------
<S>                                 <C>             <C>

Consolidated Subsidiaries
-------------------------

EDSLan SRL                          87%(1)          Purchased an additional 7 percent ownership
                                                    in 2001 for approximately $1.7 million;
                                                    purchased an additional 10 percent ownership
                                                    in 2000 for approximately $1.5 million;
                                                    purchased an additional 10 percent ownership
                                                    in 1999 for approximately $1.5 million;
                                                    purchased an additional 10 percent ownership
                                                    in 1997 for approximately $500,000; purchased
                                                    50 percent ownership in 1996 for approximately
                                                    $1.1 million.

Tecnonet SRL                        60%(2)          Purchased an additional 10 percent ownership in
                                                    1999 for approximately $600,000; purchased 50
                                                    percent ownership in 1998 for approximately
                                                    $3.1 million.

RDS                                 75%             Purchased an additional 12.5 percent in 2001 for
                                                    approximately $2.0 million. Purchased an additional
                                                    12.5 percent ownership in 1999 for approximately
                                                    $2.4 million; purchased 50 percent ownership in 1998
                                                    for approximately $8.0 million.

Charlotte's Networks                92%(3)          Issued 1.0 million shares of MRV common stock valued
                                                    at approximately $61.5 million for approximately 10
                                                    percent in 2000.

Equity Method Subsidiaries
--------------------------

RedC Optical                        35%             $5.0 million in cash and issued 150,000 shares of MRV
                                                    common stock valued at approximately $11.5 million for
                                                    approximately 35 percent in 2000.

Others                              Various(4)      Issued 646,000 shares of MRV common stock
                                                    valued at approximately $16.7 million for ownership
                                                    interest in various non-consolidated equity investments.
</TABLE>




                                      F-16
<PAGE>

-----------------
(1)  MRV receives 97 percent of EDSLan's profits or losses from the date of each
     investment.

(2)  MRV receives 90 percent of Tecnonet's profits or losses from the date of
     each investment.

(3)  MRV's ownership on a fully diluted basis (assuming exercise of all stock
     options) is approximately 53 percent.

(4)  Represents various investments, all of which are less than 50 percent
     ownership and not consolidated. During 2001, MRV recorded $9.2 million in
     impairment losses relating to these investments (see Note 2).

(5)  The purchase price for each of these acquisitions is based on the common
     stock and cash consideration provided. The issuance prices of MRV common
     stock used in the calculation of the purchase price is based on the average
     market price five days before and after the terms were agreed upon.

Income and losses from non-consolidated equity method subsidiaries are included
in "Other income (expense)" in the accompanying consolidated statements of
operations.

MRV is obligated to provide funding to certain of these investments. As of
December 31, 2001 the remaining contractual obligation is $10.6 million.

6.      Accrued Liabilities

Accrued liabilities as of December 31, 2001 and 2000, consisted of the following
(in thousands):

<TABLE>
<CAPTION>
                                                  2001             2000
                                                -------          -------
        <S>                                     <C>              <C>
        Payroll and related                     $10,428          $16,851
        Restructuring                             8,677               --
        Other                                    19,930           18,043
                                                -------          -------
                                                $39,035          $34,894
                                                =======          =======
</TABLE>

7.      Income Taxes

The provision (benefit) for income taxes for the three years in the period ended
December 31, 2001 is as follows (in thousands):

<TABLE>
<CAPTION>
                                  2001            2000           1999
                                --------        --------        -------
        <S>                     <C>             <C>             <C>
        Current
          Federal               $(12,454)       $  7,344        $(2,139)
          State                   (2,196)          5,622           (413)
          Foreign                  4,918           6,841          1,701
                                --------        --------        -------
                                  (9,732)         19,807           (851)
        Deferred
          Federal                 11,278         (17,354)        (1,487)
          State                    3,942          (7,137)            45
          Foreign                 (1,013)           (714)           140
                                --------        --------        -------
                                  14,207         (25,205)        (1,302)
                                --------        --------        -------
                                $  4,475        $ (5,398)       $(2,153)
                                ========        ========        =======
</TABLE>

The income tax provision (benefit) differs from the amount computed by applying
the federal statutory income tax rate to income before taxes as of December 31,
2001, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                    2001       2000       1999
                                                   -----      -----      -----
        <S>                                        <C>        <C>        <C>
        Income tax provision (benefit, at
          statutory federal rate                   (34%)      (34%)      (34%)
        State and local income taxes, net of
          federal income tax effect                 (6)        (6)        (6)
        Permanent differences                       28         30         15
        Research and development credit             --         --         (6)
        Foreign taxes at rates different than
          domestic rates                            (2)         3         17
        Change in valuation allowance               15         10         --
                                                   -----      -----      -----
                                                     1%         3%       (14%)
                                                   =====      =====      =====
</TABLE>




                                      F-17
<PAGE>

The components of deferred income taxes as of December 31, 2001 and 2000 are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                             2001           2000
                                                           --------       --------
        <S>                                                <C>            <C>
        Allowance for doubtful accounts                    $  2,239       $  2,083
        Inventory reserve                                    11,153          6,133
        Warranty reserve                                      1,241            647
        Deferred stock compensation                              --          6,630
        Net operating losses                                     --         29,014
        Accrued liabilities                                   6,108          2,158
        Other                                                   549          1,463
                                                           --------       --------
                                                             21,290         48,128
            Valuation allowance                             (20,692)       (16,901)
                                                           --------       --------
            Net short-term deferred income tax assets           598         31,227

        Net operating losses                                 34,903             --
        Depreciation and amortization                         7,695          6,209
        Investments                                           3,674             --
        Other                                                 6,527             --
                                                           --------       --------
                                                             52,799          6,209
            Valuation allowance                             (30,168)            --
                                                           --------       --------
            Net long-term deferred income tax assets         22,631          6,209
                                                           --------       --------
                                                           $ 23,229       $ 37,436
                                                           ========       ========
</TABLE>

Realization of the net deferred tax assets is dependent on MRV's ability to
carry losses back to prior periods or on generating sufficient taxable income
during the future periods in which temporary differences will reverse.
Management reviews its deferred tax assets and has provided a valuation
allowance based on its assessment of the expected future benefit to be
ultimately received from each asset identified. Although realization is not
assured, management believes it is more likely than not that the net deferred
tax assets will be realized.

As of December 31, 2001, MRV had federal and state net operating loss
carryforwards available of $106.4 million and $156.5 million, respectively. For
the year ended December 31, 2001, MRV generated additional federal and state net
operating losses of $46.4 million and $48.3 million, respectively. For federal
and state income tax purposes, the net operating losses are available to offset
future taxable income through 2021 and 2011, respectively.

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 in
2001 or 2000. MRV received a tax benefit of approximately $300,000 in 1999.

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 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, 2001 and 2000, these short-term obligations totaled $18.7
million and $9.1 million, respectively. Certain assets of MRV's subsidiaries
have been pledged as collateral on these borrowings. The weighted average
interest rate on these obligations at December 31, 2001 and 2000 was 2.4 percent
and 6.1 percent, respectively. These obligations are incurred and settled in the
local currencies of the respective subsidiaries. As of December 31, 2001, MRV
had approximately $9.3 million of available short-terms borrowings.




                                      F-18
<PAGE>

9.      Long-Term Debt

Long-term debt consisted of the following as of December 31, 2001 and 2000 (in
thousands):

<TABLE>
<CAPTION>
                                                                                2001           2000
                                                                              --------       --------
        <S>                                                                   <C>            <C>
        Secured notes payable to financial institutions bearing interest
          ranging from 6.5 percent to 18.0 percent, payable in monthly
          and quarterly installments of principal and interest through
          October 2012                                                        $ 11,097       $ 13,815
        Term loan with a financial institution bearing interest at
          7.0 percent as of December 31, 2001, paid in full in
          February 2002                                                         50,000         50,000
                                                                              --------       --------
                                                                                61,097         63,031
          Less - current portion                                               (52,226)        (2,937)
                                                                              --------       --------
                                                                              $  8,871       $ 60,878
                                                                              ========       ========
</TABLE>

The following summarizes the required principal payments on long-term debt as of
December 31, 2001 (in thousands):

<TABLE>
      Year Ending December 31,
      <S>                                                            <C>
        2002                                                         $52,226
        2003                                                           2,433
        2004                                                           1,986
        2005                                                           1,653
        2006                                                           1,443
        Thereafter                                                     1,356
                                                                     -------
                                                                     $61,097
                                                                     =======
</TABLE>

Certain assets of MRV totaling $38,000, primarily through its foreign
subsidiaries, have been pledged as collateral under these obligations.

10.    Interest Rate Swap

MRV entered into an interest rate 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 entered into concurrently with
the issuance of the related debt. 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. The interest rate swap is considered to be 100 percent effective and is
therefore recorded using the short-cut method. The swap is designated as a cash
flow hedge and changes in fair value of the debt are 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 interest rate swap as well as
the offsetting change in the hedged fair value of the long-term debt are
recognized in Other Comprehensive Loss. Prior to the adoption of SFAS 133, the
interest rate swap related to this long-term debt was not recognized in the
balance sheet, nor were the changes in the market value of the debt. The net
settlements of the swap are included in Interest expense and other. For the year
ended December 31, 2001, the Company recorded an unrealized loss on its interest
rate swap of $3.2 million included in Other Comprehensive Loss. At December 31,
2001, the interest rate swap had a fair value of $3.2 million included in Other
Current Liabilities. In February 2002, MRV paid off the Long-Term Debt of $50.0
million and terminated the swap.

11.     Convertible Subordinated Notes

In June 1998, MRV completed a private placement of $100.0 million principal
amount five-year, convertible subordinated notes (the Notes) of which $10.0
million were redeemed in February 2002. The Notes bear interest at five percent
per year, payable semi- annually, and are convertible into common stock at the
option of the holders. The conversion rate is 73.94 shares of common stock per
$1,000 principal amount of the Notes, equivalent to a conversion price of $13.52
per share, an initial premium above market price. The conversion rate is subject
to adjustment in certain circumstances, including dividends payable in common
stock, issuance of stock rights to all holders of common stock or stock splits
or distributions to common stockholders in connection with a tender offer. If a
change in control, as defined, occurs, the holders of the Notes have the right
to require MRV to repurchase the Notes at face value along with any interest
accrued. MRV has the right, after June 2001, to redeem the Notes at 102 percent
of face value, and after June 2002 for 101 percent of face value. The Notes are
not entitled to the benefits of any sinking fund.




                                      F-19
<PAGE>

In connection with the private placement, MRV incurred costs of $4.0 million.
These costs are being amortized using the effective interest method over five
years, the life of the Notes. Amortization expense for the years ended December
31, 2001, 2000 and 1999 was $767,000, $723,000 and $681,000, respectively.

12.     Commitments and Contingencies

        Lease Commitments

        The Company leases all of its facilities and certain equipment under
        noncancellable capital and operating lease agreements expiring in
        various years through 2049. The aggregate minimum annual lease payments
        under leases in effect on December 31, 2001 were as follows (in
        thousands):

<TABLE>
<CAPTION>
                                                                    Operating
                                                                     Leases
                                                                    ---------
      <S>                                                           <C>
      2002                                                           $ 8,253
      2003                                                             6,995
      2004                                                             4,619
      2005                                                             3,007
      2006                                                             2,233
      Thereafter                                                       5,675
                                                                     -------
                                                                     $30,782
                                                                     =======
</TABLE>

        Annual rental expense under noncancellable operating lease agreements
        for the years ended December 31, 2001, 2000 and 1999 was $8.8 million,
        $4.9 million and $4.7 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 three percent to five
        percent of sales of such products developed with the participation up to
        the dollar amount of such participation. MRV received participation of
        $500,000 for the year ended December 31, 1999. No participation was
        received for the year ended December 31, 2001 and 2000. The remaining
        future obligation as of December 31, 2001 is approximately $913,000
        million which is contingent on generating sufficient sales of this
        selected product line.

        Accounts Receivable

        MRV, through foreign subsidiaries, has agreements with several financial
        institutions to sell its receivables with recourse; in the event of
        customer's default, MRV must repurchase the receivables. At December 31,
        2001 and 2000 the Company is contingently liable for approximately $14.8
        million and $23.4 million, respectively, relating to such receivables
        sold with recourse. No gain or loss on the sale of these receivables has
        been included in the accompanying consolidated statements of operations.

        Litigation

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

        From time to time, MRV is a defendant in lawsuits involving matters
        which are 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 consolidated financial
        statements.




                                      F-20
<PAGE>

13.     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, 2001
        and 2000.

        Stock Split

        The Board of Directors authorized the splitting of MRV's common stock on
        a two-for-one basis for stockholders of record on May 11, 2000 and the
        resulting shares from the split were distributed on May 26, 2000. All
        references to share and per-share data for all periods presented have
        been adjusted to give effect to this two-for-one stock split.

        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. 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 13.4
        million shares of common stock over the remaining life of the plans.

        In July 2000, Luminent and MRV entered into four-year employment
        contracts with the Chief Executive Officer (CEO) and 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 CEO 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 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 CEO and 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 compensation of
        approximately $43.4 million. The deferred stock compensation 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 September 2001, Luminent's President and Chief Executive Officer
        resigned. In connection with the resignation, Luminent's President and
        Chief Executive Officer received a severance package, as defined in the
        employment agreement dated July 2000, providing severance payments of
        approximately $1.0 million and the immediate vesting of all outstanding
        MRV and Luminent stock options held as of the date of resignation. The
        MRV and Luminent stock options are exercisable through September 11,
        2003. Additionally, an immediate recognition of deferred compensation
        expenses of $18.9 million was recorded during year ended December 31,
        2001 as a result of the acceleration of these stock options.




                                      F-21
<PAGE>

        Stock option information with respect to MRV's stock option and warrant
        plans is as follows (in thousands):

<TABLE>
<CAPTION>
                                                        2001                   2000                  1999
                                               ---------------------   --------------------   -------------------
                                                            Wtd Avg.               Wtd Avg.              Wtd Avg.
                                               Shares      Ex. Price   Shares     Ex. Price   Shares    Ex. Price
                                               ------      ---------   -----      ---------   -----     ---------
        <S>                                    <C>         <C>         <C>        <C>          <C>      <C>
        Outstanding, beginning of
          year                                  7,081       $  7.43    5,497       $  4.37    5,323       $ 2.40
        Granted                                 1,360          4.74    4,375          8.14    1,581         9.21
        Exercised                                (487)         2.98   (2,791)         2.52   (1,208)        2.31
        Forfeited                                (887)         5.65       --            --     (199)        2.63
        Luminent options converted
          to MRV options                        5,341         15.87       --            --       --           --
                                               ------       -------    -----       -------    -----       ------
        Outstanding, end of year               12,408       $ 11.07    7,081       $  7.43    5,497       $ 4.37
                                               ======       =======    =====       =======    =====       ======
        Weighted average fair value
          of options granted during year                    $  9.79                $ 20.79                $ 7.33
                                                            =======                =======                ======
</TABLE>

        During 2001 and 2000, MRV granted 444,000 and 3.8 million options to
        purchase MRV common stock with exercises that differed from the market
        price of the stock on the grant date. As of December 31, 2001, the
        weighted average exercise price and weighted average fair value of these
        options were $3.00 and $3.00 per share, respectively. As of December 31,
        2000, the weighted average exercise price and weighted average fair
        value of these options were $5.67 and $21.99 per share, respectively.

        Information about MRV stock options outstanding at December 31, 2001 is
        summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                  Weighted Average
                           Number Outstanding    Remaining Contract   Number Exercisable
        Exercise Price         as of 2001                Life              as of 2001
        ---------------    ------------------    ------------------   ------------------
        <S>                <C>                   <C>                  <C>
        $ 2.59 - $ 3.95           5,407                  7.93                2,212
        $ 4.21 - $ 6.98           1,474                  9.05                  385
        $ 9.50 - $11.06             391                  8.52                   93
        $12.00 - $16.00           2,681                  8.57                2,208
        $17.63 - $33.44           2,455                  7.94                  712
                                 ------                                      -----
                                 12,408                                      5,610
                                 ======                                      =====
</TABLE>

        Accounting for Stock-Based Compensation

        SFAS No. 123 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 had been applied. Net loss and
        net loss per share for each of the three years in the period ended
        December 31, 2001 would have increased to the following pro forma
        amounts (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                             2001            2000           1999
                                                          ---------       ---------       --------
        <S>                                               <C>             <C>             <C>
        Additional compensation expense                   $  24,874       $  24,998       $  2,888
        Pro forma net loss                                 (350,968)       (177,951)       (15,797)
        Pro forma basic and diluted net loss per sha          (4.60)          (2.71)         (0.29)
</TABLE>

        The following assumptions were applied: (i) no expected dividend yield
        for all periods, (ii) expected volatility of 191 percent for 2001, 162
        percent for 2000 and 64 percent for 1999, (iii) expected lives of 4 to 6
        years for all years, (iv) and risk-free interest rates ranging from 3.93
        percent to 6.73 percent for all years.




                                      F-22
<PAGE>

        Common Stock Purchase Warrants

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

        A summary of warrant activities for the three years ended December 31,
        2001 is as follows (in thousands, except exercise prices):

<TABLE>
<CAPTION>
                                            Number of
                                             Shares       Exercise Prices
                                             ------       ---------------
        <S>                                  <C>          <C>
        Balance, December 31, 1998            5,770       $0.14 to $17.50
          Issued                                 --             --
          Exercised                            (874)        2.40 to 10.00
          Canceled                           (1,556)        0.14 to 13.38
                                             ------        --------------
        Balance, December 31, 1999            3,340      $2.13 to $17.50
          Issued                                 --             --
          Exercised                            (895)        2.29 to 16.25
          Canceled                               (5)                 2.13
                                             ------        --------------
        Balance, December 31, 2000            2,440       $2.13 to $17.50
          Issued                                 --             --
          Exercised                             (74)         2.38 to 2.63
          Canceled                             (874)        2.63 to 17.50
                                             ------        --------------
        Balance, December 31, 2001            1,492        $2.13 to $2.80
                                             ======        ==============
</TABLE>

        In November 1996, MRV completed a private placement of 400,000 stock and
        1.0 million three-year warrants to purchase common stock for a total
        price of $4.0 million. During 1999, prior to the expiration of the
        three-year warrants, 800,000 warrants were exercised at $10.00 per
        share, for total proceeds of $8.0 million. The remaining 200,000
        warrants expired.

14.     Segment Reporting and Geographical Information

MRV operates under a business model that creates and manages start-up companies
and independent business units. These companies fall into two segments:
operating entities and development stage enterprises. Segment information is
therefore being provided on this basis which differs from prior period
presentations.

Development stage enterprises that MRV has created or invested in are developing
optical components, subsystems and networks and products for the infrastructure
of the Internet. Operating entities of MRV design, manufacture and distribute
optical components, optical subsystems, optical networking solutions, and
Internet infrastructure products.

The accounting policies of the segments are the same as those described in the
summary of significant accounting polices. MRV evaluates segment performance
based on revenues and operating income (loss) 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 net revenues for each of the three years in the period ended
December 31, 2001 are as follows (in thousands):

<TABLE>
<CAPTION>
                                             2001          2000          1999
                                           --------      --------      --------
        <S>                                <C>           <C>           <C>
        Operating entities                 $332,844      $319,394      $288,524
        Development stage enterprises            --            --            --
                                           --------      --------      --------
                                           $332,844      $319,394      $288,524
                                           ========      ========      ========
</TABLE>

There were no inter-segment sales for the years ended December 31, 2001, 2000
and 1999.




                                      F-23
<PAGE>

Net revenues by groups of products for each of the years in the period ended
December 31, 2001 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                2001            2000            1999
                                             ---------       ---------       ---------
        <S>                                  <C>             <C>             <C>
        Optical passive components           $  39,010       $  29,148       $   3,687
        Optical active components               97,653          97,335          67,722
        Switches and routers                    74,675          80,784         108,000
        Remote device management                18,987          19,167          28,698
        Network physical infrastructure
          equipment                             59,902          56,747          50,521
        Services                                18,934          20,892          23,461
        Other                                   23,683          15,321           6,435
                                             ---------       ---------       ---------
                                             $ 332,844       $ 319,394       $ 288,524
                                             =========       =========       =========
</TABLE>

For each of the three years in the period ended and as of December 31, 2001, MRV
had no single customer that accounted for more than 10 percent of revenues or
accounts receivable. MRV does not track customer revenue by region for each
individual reporting segment. A summary of external revenue by region for each
of the three years in the periods ended December 31, 2001 are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                2001            2000            1999
                                             ---------       ---------       ---------
        <S>                                  <C>             <C>             <C>
        United States                        $ 108,550       $ 119,190       $ 122,054
        European Community                     176,745         162,881         134,160
        Pacific Rim                             42,925          31,891          28,921
        Other                                    4,624           5,432           3,389
                                             ---------       ---------       ---------
                                             $ 332,844       $ 319,394       $ 288,524
                                             =========       =========       =========
</TABLE>

Business segment operating loss before other income (expense), provision
(benefit) for income taxes and extraordinary item for each of the three years in
the period ended December 31, 2001 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                2001            2000            1999
                                             ---------       ---------       ---------
        <S>                                  <C>             <C>             <C>
        Operating entities                   $(274,831)      $(100,759)      $   4,017
        Development stage enterprises          (45,796)        (48,810)        (20,011)
                                             ---------       ---------       ---------
                                             $(320,627)      $(149,569)      $ (15,994)
                                             =========       =========       =========
</TABLE>

Operating loss before other income (expense), provision (benefit) for income
taxes and extraordinary item for each of the three years in the periods ended
December 31, 2001 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                2001            2000            1999
                                             ---------       ---------       ---------
        <S>                                  <C>             <C>             <C>
        United States                        $(240,467)      $ (69,671)      $  (5,781)
        Foreign                                (80,160)        (79,898)        (10,213)
                                             ---------       ---------       ---------
                                             $(320,627)      $(149,569)      $ (15,994)
                                             =========       =========       =========
</TABLE>

15.     LAN Business

In 1999, MRV recorded one-time charges of approximately $13.8 million primarily
related to the write-down of inventories related to its LAN product lines. These
charges have been included in cost of goods sold for the year ended December 31,
1999 in the accompanying consolidated statement of operations. In February 2000,
MRV discontinued manufacturing and supporting its LAN product lines.

16.     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. In 2001 and 2000, approximately
$838,000 and $731,000 respectively, was charged as expense related to these
plans.




                                      F-24
<PAGE>

17.     Supplemental Statements of Cash Flow Information (in thousands)

<TABLE>
<CAPTION>
                                                                  For the Years Ended December 31
                                                               ------------------------------------
                                                                 2001           2000          1999
                                                               --------       --------       ------
        <S>                                                    <C>            <C>            <C>
        Supplemental disclosure of cash flow information:
          Cash paid during period for interest                 $ 10,549       $  3,635       $1,652
          Cash paid during period for income taxes                5,323            130        4,887
        Supplemental schedule of noncash
          investing and financing activities:
          Fair value of asset acquired, net of
            cash received                                      $  2,153       $ 48,611       $   --
          Less: Liabilities assumed                              (2,153)       (44,190)          --
                                                               --------       --------       ------
          Cash received in acquisitions                        $     --       $  4,421       $   --
                                                               --------       --------       ------
          Cash used in acquisitions                                  --         48,938           --
                                                               --------       --------       ------
          Cash used in acquisitions, less
            cash received in acquisitions                      $     --       $ 44,517       $   --
        Common stock issued in connection with
          investments in subsidiaries                          $ 36,575       $ 90,126       $   --
                                                               ========       ========       ======
        Decrease in fair value of interest rate swap           $  3,198       $     --       $   --
                                                               ========       ========       ======
        Non-cash deferred stock compensation                   $  7,816       $     --       $   --
                                                               ========       ========       ======
        Fair value of stock options issued in
          connection with investments                          $    503       $     --       $   --
                                                               ========       ========       ======
</TABLE>





                                      F-25
<PAGE>

18.     Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>
                                              First          Second            Third         Fourth
                                             Quarter         Quarter          Quarter        Quarter
                                            ---------       ---------       ---------       ---------
                                                    (in thousands, except per share amounts)
<S>                                         <C>             <C>             <C>             <C>
Year Ended December 31, 2001

Revenues, net                               $ 100,104       $  89,530       $  69,730       $  73,480
Costs and expenses:
  Costs of goods sold                          66,391          88,765          57,621          54,612
  Research and development                     25,005          25,782          19,307          24,719
  Selling, general and administrative          38,412          31,777          49,528          30,959
  Restructuring charges                            --          11,934           1,724             453
  Amortization of goodwill and other
    intangibles                                28,139          29,028          27,218          42,099
                                            ---------       ---------       ---------       ---------
                                              157,947         187,286         155,398         152,840
    Operating loss                            (57,843)        (97,756)        (85,668)        (79,360)
Other expense, net                               (520)         (2,373)         (1,410)        (18,474)
  Loss before benefit (provision) for
    income taxes, minority interest
    and extraordinary gain                    (58,363)       (100,129)        (87,078)        (97,834)
(Provision) benefit for income taxes            2,683             939          (6,215)         (1,882)
Minority interest                               1,388           5,051           3,646           1,492
Extraordinary gain                                 --              --              --           9,949
                                            ---------       ---------       ---------       ---------
  Net loss                                  $ (54,292)      $ (94,139)      $ (89,647)      $ (88,275)
                                            =========       =========       =========       =========
Basic and diluted earnings per share        $   (0.73)      $   (1.24)      $   (1.16)      $   (1.14)
                                            =========       =========       =========       =========
Basic and diluted weighted averages
  shares                                       74,370          76,111          77,404          77,545
                                            =========       =========       =========       =========

Year Ended December 31, 2000

Revenues, net                               $  65,072       $  73,935       $  82,720       $  97,667
Costs and expenses:
  Cost of goods sold                           42,736          45,793          47,910          66,932
  Research and development                     11,891          14,758          21,803          25,626
  Selling, general and administrative          16,028          26,467          52,699          29,506
  Amortization of goodwill and other
    intangibles                                    --          12,055          27,348          27,411
                                            ---------       ---------       ---------       ---------
                                               70,655          99,073         149,760         149,475
    Operating loss                             (5,583)        (25,138)        (67,040)        (51,808)
Other expense, net                               (488)         (1,190)         (5,764)         (2,136)
                                            ---------       ---------       ---------       ---------
  Loss before benefit (provision) for
    income taxes and minority interest         (6,071)        (26,328)        (72,804)        (53,944)
Benefit (provision) for income taxes              494          (1,377)         (1,005)          7,286
Minority interest                                (287)            (45)           (570)          1,698
                                            ---------       ---------       ---------       ---------
  Net loss                                  $  (5,864)      $ (27,750)      $ (74,379)      $ (44,960)
                                            =========       =========       =========       =========
Basic and diluted loss per share            $   (0.10)      $   (0.44)      $   (1.06)      $   (0.62)
                                            =========       =========       =========       =========
Basic and diluted weighted averages
  shares                                       56,850          62,754          70,122          72,768
                                            =========       =========       =========       =========
</TABLE>




                                      F-26
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The executive officers and directors of the Company at March 19,2002 are
as follows:

<TABLE>
<CAPTION>
          Name                  Age                         Position
          ----                  ---                         --------
<S>                             <C>   <C>
Noam Lotan(1)                   50    President, Chief Executive Officer and Director
Shlomo Margalit(1)              60    Chairman of the Board of Directors, Chief Technical
                                      Officer and Secretary
Guy Avidan                      39    President and Chief Executive Officer of Optical Access, Inc.
Shay Gonen                      36    Interim Chief Financial Officer
Igal Shidlovsky(2)(3)           65    Director
Guenter Jaensch(2)(3)           63    Director
Professor Daniel Tsui(3)        63    Director
Professor Baruch Fischer        51    Director
</TABLE>

----------
(1)  Member of the Executive Committee.
(2)  Member of the Compensation Committee.
(3)  Member of the Audit Committee.

        NOAM LOTAN has been the President, Chief Executive Officer and a
Director of MRV since May 1990 and became Chief Financial Officer of MRV 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. MRV 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 that time, Mr. Lotan
held a variety of sales and marketing positions with Fibronics and
Hewlett-Packard. Mr. Lotan holds a Bachelor of Science degree in Electrical
Engineering from the Technion, the Israel Institute of Technology, and a Masters
degree in Business Administration from INSEAD (the European Institute of
Business Administration, Fontainebleau, France).

        DR. SHLOMO MARGALIT, a founder of MRV, has been Chairman of the board of
directors and Chief Technical Officer since MRV'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.

        GUY AVIDAN has served as the Chief Executive Officer and President of
Optical Access, Inc. MRV's optical wireless products subsidiary since September
2000. From 1995 to September 2000, Mr. Avidan served in various executive
capacities for other subsidiaries of MRV, including as President of NBase-
Xyplex International from January 1999 until joining Optical Access and as
Managing Director of NBase-Communications, from 1995 until January 1999. Mr.
Avidan holds a B.A. degree in business management, economics and accounting from
Haifa University and also is licensed as a Certified Public Accountant.




                                       55
<PAGE>
 SHAY GONEN became Interim Chief Financial Officer in September 2001 following
the death of Edmund Glazer in the World Trade Center terrorist attack. Since
September 1996, Mr. Gonen has served in various executive capacities for certain
of MRV's 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 NBase-Xyplex from January 1999 to
September 2000; and as Chief Operating Officer of NBase 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.

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

        DR. GUENTER JAENSCH became a Director of MRV in December 1997. Dr.
Jaensch serves as Managing Director of The McKenzie Companies, Inc. and McKenzie
Ventures LTD. and as President of Jaensch Enterprises. Each firm is engaged in
management consulting, mergers and acquisitions and investments. For over 20
years, Dr. Jaensch held several executive positions with Siemens or its
subsidiaries. Among his executive positions in the United States were as
President of Siemens Communications Systems, Inc.; Chairman of Siemens Corporate
Research and Support, Inc.; Chairman and Chief Executive Officer of Pacesetter;
and head of the cardiac management division of Siemens AG Medical Group. Dr.
Jaensch also served as controller of Siemens Data Processing Group and Director
of Siemens Internal Accounting and Budgeting operations. Dr. Jaensch holds a
Masters degree in Business Administration and Ph.D. degree in Finance from the
University of Frankfurt. He also served as an Associate Professor at the
University of Frankfurt prior to joining Siemens.

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

        PROFESSOR BARUCH FISCHER became a Director of MRV in December 1999.
Professor Fischer currently 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.




                                       56
<PAGE>

        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. None of the Directors of MRV are related by blood, marriage or
adoption to any of MRV's Directors or executive officers.

        Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires 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, 2001, except for a Form 3 of Shay Gonen and
one Form 4 by each of Noam Lotan and Shlomo Margalit. The Form 3 filed late by
Mr. Gonen reported as his beneficial ownership of our shares grants to him of
stock options exempt from Section 16(b) of the Exchange Act pursuant to Rule
16b-3 under the Exchange Act that occurred prior to his appointment as an
executive officer of MRV. The Form 4 filed late by Mr. Lotan reported four
separate sales transactions involving the sale of an aggregate of 3,150 shares
during August 2001 and one transaction involving the grant to him of stock
options in January 2001 that was exempt from Section 16(b) of the Exchange Act
pursuant to Rule 16b-3 under the Exchange Act and, but for such sales, would
have been reportable under Form 5. The Form 4 filed late by Dr. Margalit
reported four separate transactions involving the sale of an aggregate of 6,400
shares during August 2001.




                                       57
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

        The members of the Board of Directors who are not employees of the
Company receive cash compensation of $800 per month and $500 for each Board of
Directors' meeting attended, while serving as Directors.

        The following table sets forth a summary of all compensation paid by the
Company to its Chief Executive Officer and for each of its other executive
officers whose total annual salary and bonus exceeded $100,000 (the "Named
Executive Officers") during the fiscal year ended December 31, 2001:

<TABLE>
<CAPTION>
                                                                                          Long-term
                                                                                        Compensation
                                                                                         Securities
                                                                                         Underlying -        All other
                                                Year       Salary             Bonus       Options(#)        Compensation
                                                ----      ---------         --------    -------------       ------------
<S>                                             <C>       <C>               <C>         <C>                 <C>
Noam Lotan                                      2001      $ 100,000         $     --         98,000         $      --
President and Chief Executive Officer           2000      $ 100,000         $     --             --                --
                                                1999      $ 100,000         $     --             --                --

Shlomo Margalit                                 2001      $ 110,000         $     --             --                --
Chairman of the Board of Directors,             2000      $ 110,000         $     --             --                --
  Chief Technical Officer and Secretary         1999      $ 110,000         $     --             --                --

Edmund Glazer(1)                                2001      $ 153,462         $     --        130,000         $      --
Vice President of Finance and                   2000      $ 140,000         $     --         40,000                --
Administration and Chief Financial Officer      1999      $ 140,000         $     --         60,000                --

William R Spivey(2)                             2001      $ 199,574(3)      $ 90,000      2,064,000(4)      $ 400,000(5)
President and Chief Executive Officer           2000      $ 138,000         $ 90,000        316,315         $  48,682(6)
  of Luminent, Inc                              1999            N/A              N/A            N/A               N/A

Shay Gonen                                      2001      $ 128,955         $     --        100,000         $      --
Interim Chief Financial Officer                 2000      $ 104,836         $     --             --                --
                                                1999      $ 102,000                          26,000                --
</TABLE>

----------
(1)  Mr. Glazer was killed in the air crash of American Airlines Flight 11 into
     North Tower of the World Trade Center on September 11, 2001. The table
     includes salary paid and options granted to Mr. Glazer's wife following his
     death.

(2)  Dr. Spivey joined Luminent in July 2000 and resigned in September 2001.

(3)  Consists of regular salary of $177,115, vacation pay of $19,924 and payment
     for personal time of $2,535.

(4)  In connection with the short-form merger of Luminent, which was completed
     on December 28, 2001, MRV agreed to assume the outstanding options to
     purchase shares of Luminent, adjusted for the exchange ration of 0.43 of a
     share of MRV common stock for each outstanding share of Luminent common
     stock MRV did not own prior to the merger. The options reflected in the
     table for Dr. Spivey for 2001 are the number of MRV shares issuable to Dr.
     Spivey as the result of MRV assumption of Dr. Spivey's outstanding Luminent
     options on December 28, 2001.

(5)  Consists of severance compensation paid in 2001.

(6)  Consists of a reimbursement of legal fees Dr. Spivey incurred in 2000 in
     connection with the negotiation of his employment contract.




                                       58
<PAGE>

OPTION GRANTS IN LAST FISCAL YEAR

The following table provides certain information regarding stock option grants
made to the Named Executive Officers in the year ended December 31, 2001.

<TABLE>
<CAPTION>
                                          Percent                               Potential realizable value
                          Number of       of total                                at assumed annual rate
                         securities       options                                  of stock appreciation
                         underlying      granted to                                   for option term
                           options       employees  Exercise    Expiration      ---------------------------
Name                       granted        in 2001  price($/sh)     Date           5%(1)            10%(1)
-----------------        ----------      --------- -----------   ---------      ----------       ----------
<S>                     <C>              <C>       <C>           <C>            <C>              <C>
Noam Lotan                 18,000           1.3    $    12.00     1/8/2007      $   73,461       $  166,657
                           80,000           5.9    $     2.70    9/20/2007      $   73,461       $  166,657
Shlomo Margalit                --            --            --           --              --               --

Edmund Glazer(2)           20,000           1.5    $    12.00    9/12/2004      $   47,231       $  101,057
                           30,000           2.2    $     5.38    9/12/2004      $   29,561       $   62,899
                           80,000           (2)    $     2.70    9/12/2004      $   27,392       $   56,888

William R. Spivey       2,064,000           (3)    $14.534883    9/11/2003              (4)              (4)

Shay Gonen                100,000           7.4    $     2.70    9/26/2007      $   91,826       $  208,321
</TABLE>


----------

(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 (or, in the case of Dr. Spivey, on December 28, 2001, when MRV
     agreed to assume outstanding Luminent options by converting them into in
     options to purchase MRV common stock adjusted for the 0.43 exchange ratio)
     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.

(2)  Mr. Glazer was killed on September 11, 2001. The table includes options
     granted to Mr. Glazer's wife following his death. Options reflected for Mr.
     Glazer at December 31, 2001 are beneficially owned by his estate or wife.
     Options granted to Mrs. Glazer after Mr. Glazer's death are not included in
     the calculation of total options granted to MRV employees during 2001.

(3)  In connection with the short-form merger of Luminent, which was completed
     on December 28, 2001, MRV agreed to assume the outstanding options to
     purchase shares of Luminent, adjusted for the exchange ration of 0.43 of a
     share of MRV common stock for each outstanding share of Luminent common
     stock MRV did not own prior to the merger. Accordingly, these options were
     not part of the total options granted to MRV employees during 2001.

(4)  The potential realizable value of these options, calculated by assuming
     that the market price of MRV's common stock on December 28, 2001 (the date
     MRV assumed Dr. Spivey's Luminent options) appreciates at the 5% and 10%
     rates set by the SEC for the term of the options, minus the exercise price
     of these options, is less than zero.




                                       59
<PAGE>

FISCAL YEAR END OPTION VALUES

        No options were exercised by any of the Named Executive Officers during
the year ended December 31, 2001. The following table provides certain
information concerning MRV stock options and held by the named the Named
Executive Officers at December 31, 2001.

<TABLE>
<CAPTION>
                           Number of shares
                        underlying unexercised         Value of unexercised
                              options at              in-the money options at
                           December 31, 2001            December 31, 2001(1)
                      --------------------------    ---------------------------
                      Exercisable  Unexercisable    Exercisable   Unexercisable
                      -----------  -------------    -----------   -------------
<S>                   <C>          <C>              <C>           <C>
Noam Lotan                12,000      98,000         $  21,540      $ 137,600
Shlomo Margalit               --          --                --             --
Edmund Glazer(2)         268,000          --         $ 313,510      $      --
William R. Spivey      2,380,315          --                --             --
Shay Gonen                33,500     111,500         $  60,133      $ 194,438
</TABLE>

----------

(1)  Based on difference between the closing price of MRV common stock on
     December 31, 2001 and the exercise price.

(2)  Mr. Glazer was killed on September 11, 2001. The table includes options
     granted to Mr. Glazer's wife following his death. Options reflected for Mr.
     Glazer at December 31, 2001 are beneficially owned by his estate or wife.

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 $110,000, respectively, and each is
entitled to receive a bonus determined and payable at the discretion of the
board of directors upon the recommendation of the Compensation Committee of the
Board. Recommendations with respect to bonus levels are based on achievement of
specified goals, such as new product introductions, profitability levels,
revenue goals, market expansion and other criteria as established by the
Compensation Committee. Effective January 1, 2002, Mr. Lotan's salary was
increased to $150,000 per year.

        In July 2000, MRV and its subsidiary, Luminent, entered into a four-year
employment agreement with Dr. William R. Spivey, Luminent's former President and
Chief Executive Officer. Under the agreement, Luminent agreed to pay to Dr.
Spivey an annual salary of $300,000 with a bonus targeted at $75,000 for 2000
and at $150,000 for the following years as determined at the discretion of our
board of directors. MRV granted Dr. Spivey an option to purchase 316,315 shares
of MRV common stock exercisable at $32.56 per share for five years. Luminent
granted to Dr. Spivey an option to purchase 4,800,000 shares of Luminent common
stock at an exercise price of $6.25 per share. Dr. Spivey's option to purchase
MRV common stock was fully exercisable as of the date of grant, and his option
to purchase Luminent common stock vested in annual installments of 25%,
beginning on July 11, 2000, provided, however, that in the event his employment
was terminated other than for cause he was entitled to receive from the date of
termination over a one year period an amount equal to two times the sum of his
annual salary plus bonus and all of his unvested Luminent options will
automatically vest and become exercisable. Dr. Spivey's resignation on September
12, 2001 was considered by the parties to be a




                                       60
<PAGE>

termination other than for cause under his employment agreement entitling him to
the severance benefits of his employment agreement therefor. The salary and
bonus portion of Dr. Spivey's severance compensation totals $900,000, and is
payable in 24 equal installments of $37,500 each beginning on or about October
1, 2001, in accordance with the payroll cycles of Luminent and MRV and
continuing through September, 2002. As a consequence of Dr. Spivey's
resignation, his MRV and Luminent options are now exercisable through September
11, 2003. On December 28, 2001, MRV completed the short-form merger of Luminent.
Former Luminent stockholders whose shares were converted in the merger are
entitled to receive 0.43 of share of MRV common stock for each share of Luminent
common stock owned at the time of the merger. In addition, MRV assumed in the
merger options to purchase Luminent common stock that were outstanding and
accordingly, Dr. Spivey's Luminent stock options were converted into options to
purchase 2,064,000 shares of MRV common stock, exercisable at $14.534883 per
share until September 11, 2003.

        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 January 2002, MRV granted to
each outside director options to purchase 30,000 shares of its common stock at
$12.00 per share and in September 2001, MRV granted to each outside director
(other than Dr. Shidlovsky who was granted options to purchase 33,000 shares)
options to purchase 30,000 shares of its common stock at $2.70 per share.

BOARD COMMITTEES

        MRV's board of directors has established the Compensation Committee, the
Audit Committee and the Executive Committee. The Compensation Committee reviews
and recommends to the board of directors the compensation and benefits of all
MRV's officers and establishes and reviews general policies relating to
compensation and benefits of our employees. The Compensation Committee consists
of Igal Shidlovsky and Guenter Jaensch. The Audit Committee reviews MRV internal
accounting procedures and consults with and reviews the services provided by its
independent accountants. The Audit Committee consists of Igal Shidlovsky,
Guenter Jaensch and Daniel Tsui. The Executive Committee is empowered to take
any action that the board of directors 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. The Executive
Committee consists of Noam Lotan and Shlomo Margalit.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

        None of the members of the Compensation Committee has ever been an
officer or employee of MRV. None of MRV's executive officers has served or
currently serves on a board of directors or on a compensation committee of any
other entity that had officers who served on MRV's board of directors.




                                       61
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNER
         AND MANAGEMENT.

        The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of March 18, 2002, of (i) each
person known by the Company to own beneficially 5% or more of the Common Stock,
(ii) each current director of the Company owning Common Stock, (iii) each of the
Named Executive Officers, and (iv) all current directors and executive officers
as a group.

<TABLE>
<CAPTION>
                                                         COMMON STOCK
                                                  --------------------------
    NAME AND ADDRESS(1) OF BENEFICIAL             NUMBER OF       PERCENTAGE
      OWNER(2) OR IDENTITY OF GROUP                 SHARES         OWNERSHIP
-----------------------------------------------   ---------       ----------
<S>                                               <C>             <C>
Shlomo Margalit                                   3,305,660          3.7%
Noam Lotan                                        1,473,824(3)       1.7%
Edmund Glazer                                       298,000(4)         *
William R. Spivey                                 2,380,315(5)       2.6%
Shay Gonen                                           33,500(5)         *
Igal Shidlovsky                                      82,600(6)         *
Guenter Jaensch (8)                                  44,000(5)         *
Professor Daniel Tsui (9)                            18,000(5)         *
Professor Baruch Fischer (10)                        18,000(5)         *
All executive officers and directors as a group   4,993,584(7)       5.6%
</TABLE>

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

(3)  Includes 18,000 shares issuable pursuant to stock options exercisable
     within 60 days of March 18, 2002.

(4)  Mr. Glazer, MRV's Vice President of Finance and Administration and Chief
     Financial Officer, was killed on September 11, 2001 in the World Trade
     Center terrorist attacks. The number of shares reflected in the table
     consist of 30,000 shares held in his estate and options exercisable by his
     estate within 60 days of March 18, 2002.

(5)  Consists of shares issuable upon exercise of stock options within 60 days
     of March 18, 2002.

(6)  Includes 74,000 shares issuable upon exercise of stock options within 60
     days of March 18, 2002.

(7)  Includes 208,000 shares issuable upon exercise of stock options within 60
     days of March 18, 2002.




                                       62
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        In July 1998, MRV and Zaffire, Inc. (formerly New Access Communications,
Inc.) entered into a Securities Purchase Agreement, under which MRV purchased
for $950,000 shares of the capital stock of Zaffire equal to approximately 19%
of the capital stock of Zaffire then outstanding and warrants to purchase
additional capital stock of Zaffire, which, if fully exercised for an aggregate
of $2,050,000, MRV would own an aggregate of approximately 60% of Zaffire's
capital stock (when the shares purchased upon exercise of the warrants were
added to MRV's existing stake in Zaffire). The warrants were exercisable in two
installments (provided the first installment was exercised) by July 1, 1999 and
January 4, 1999, respectively. These warrants were fully exercised in 1999. In
May 2000, MRV, along with 36 other accredited investors, and Zaffire entered
into a Series C Preferred Stock Purchase Agreement under which MRV purchased for
$5,000,000 shares of Series C Preferred Stock of Zaffire. At September 30, 2001,
MRV had an approximate 22% ownership interest in Zaffire.

        Zaffire was engaged in the development of new products based on wave
division multiplexing technology. In July 2001, Zaffire reached an agreement
with Centerpoint Broadband Technologies, Inc., under which Centerpoint agreed to
acquire Zaffire in an all stock transaction. Centerpoint develops high capacity
transport systems that maximize network performance for both optical and
wireless networks. These highly scalable, dynamically flexible systems allow
service providers advanced levels of bandwidth efficiency, capacity and high
service velocity. The Centerpoint -- Zaffire acquisition was completed in
October 2001. Dr. Near Margalit was the Chairman of the Board and Chief
Technical Officer of Zaffire and a principal stockholder of it and became Chief
Technical Officer of Centerpoint following its acquisition of Zaffire. Dr. Near
Margalit is the son of Dr. Shlomo Margalit, a principal stockholder of MRV and
MRV's Chairman of the Board of Directors and Chief Technical Officer. At
December 31, 2001, MRV owned less than 10% of Centerpoint.

        From November 9, 2001, when it completed its initial public offering,
through December 28, 2001, when MRV completed a short form merger, approximately
7.7% of the outstanding capital stock of Luminent was publicly held. During this
period and prior to it, divisions and subsidiaries of MRV were customers of
Luminent and purchased, substantial quantities of Luminent's fiber optic
components. These customers accounted for Luminent sales of $2.5 million during
1999, $4.9 million during the year ended December 31, 2000 and $5.7 million
during the year ended December 31, 2001. At December 31, 2000, using cash
generated from operations Luminent had repaid approximately $6.5 million to MRV
for interest-free advances Luminent made to MRV to cover payroll and other
operating expenses. At September 30, 2001, Luminent had incurred $6.2 million in
estimated income tax liability and $1.1 million in transitional services due
MRV. The transitional services related substantially to Luminent's portion of
group insurance coverages. In December 2001, Luminent repaid these amounts
totaling $7.3 million in full. Further, MRV repaid $4.4 million in December 2001
for product sales by Luminent to divisions and subsidiaries of MRV. Like other
customers, sales by Luminent to MRV-related customers are based on purchase
orders and none of MRV or its companies has any long long-term arrangements with
Luminent regarding purchases.

For the three years in the period ended December 31, 2000, intercompany
transactions between Luminent and divisions and subsidiaries of MRV consisted of
the following (in thousands):

<TABLE>
<CAPTION>
                                                 Year ended December 31,
                                         -------------------------------------
                                           1998           1999          2000
                                         --------       --------      --------
<S>                                      <C>            <C>           <C>
Sales to MRV and its affiliates          $  2,104       $  2,503      $  4,878
Operating expenses                          7,218          9,512        14,213
Fair value of acquisitions                     --            250       440,628
Deferred stock compensation                    --             --        40,950
Net cash advances (distributions)          (1,232)         1,709         1,568
                                         --------       --------      --------
  Equity of MRV Communications, Inc      $  8,090       $ 13,974      $502,237
                                         ========       ========      ========
</TABLE>




                                       63
<PAGE>

        In preparation for Luminent's separation from MRV prior to its initial
public offering, Luminent entered into various agreements related to interim and
ongoing relationships with MRV. These agreements provided for transitional
services and support in the areas of data processing and telecommunications
services (such as voice telecommunications and data transmission and information
technology support services) for functions including accounting, financial
management, tax, payroll, stockholder and public relations, legal, procurement
and other administrative functions. Services were generally cost plus 5%, but
could have increased to cost plus 10% if the services extended beyond a one-year
period. Subsequent to the separation date, certain of these services were
discontinued, including accounting, financial management, payroll, legal,
procurement and other administrative functions. The transition period varied
depending on the agreement but was generally one year. All amounts paid under
these agreements have been discussed above.

        Although the fees provided for in the agreements were intended to
represent the fair market value of these services, MRV and Luminent cannot
assure that these fees necessarily reflected the costs of providing these
services from unrelated third parties or of Luminent providing these services
internally. However, Luminent and MRV believed that purchasing these services
from MRV, and providing these services to Luminent, provided an efficient means
of obtaining them during the transition period. With the merger, these
agreements have been terminated.

..
        Through the completion of the short form merger of Luminent, Luminent
became a wholly-owned subsidiary of MRV on December 28, 2001 and these
agreements were effectively terminated on that date. Further, beginning in 2002,
MRV no longer plans to report transactions between itself and its divisions and
Luminent.




                                       64
<PAGE>

                                     PART IV

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

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

         (2) The financial statements schedules filed as part of this report
             consist of the following:

               Schedule II --Valuation and Qualifying Accounts

               Report of Independent Public Accountants on Financial Statement
               Schedule

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

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

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

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

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

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

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

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




                                       65
<PAGE>

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

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

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

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

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

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

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

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

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

10.11          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).

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

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

10.14          Purchase Agreement, dated June 23, 1998, between the Company and
               Prudential Securities Incorporated and Bear, Stearns & Co. Inc.
               relating to the Notes (incorporated by reference to Exhibit 4.1
               of the Company's Form 10-Q for the quarter ended June 30, 1998
               filed August 14, 1998).
</TABLE>




                                       66
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO                              DESCRIPTION
----------                              -----------
<S>            <C>

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

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

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

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

10.19          Stock Purchase Agreement Dated February 21, 2000 relating to the
               sale and purchase of up to one hundred percent (100%) of the
               ordinary shares in the capital of Fiber Optic Communications,
               Inc. ("FOCI") and the sale and purchase of two million four
               hundred thousand of ordinary shares in the capital of MRV
               Communications, Inc. (incorporated by reference to Exhibit 10.33
               of the Company's Form 10-K filed with the SEC on March 30, 2000).

10.20          Stock Option Agreement dated July 11, 2000 between William R.
               Spivey and the Registrant (incorporated by reference to Exhibit
               10.4 filed with the Luminent, Inc. Registrant Statement (file no.
               333-42238) on Form S-1 on July 26, 2000).

10.21          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 October 5, 2000).

10.22          Escrow Agreement dated as of 21st day of February, 2000, by and
               among the Registrant, the Selling Shareholders of FOCI and the
               law firm of Baker & McKenzie, Taipei Office (incorporated by
               reference to Exhibit 2.1(b) of the Form 8-K of the Registrant
               filed with the SEC on May 9, 2000).

10.23          Addendum to Stock Purchase Agreement dated as of April 14, 2000
               by and among FOCI, the Registrant and the selling shareholders of
               FOCI (incorporated by reference to Exhibit 2.1(c) of the Form 8-K
               of the Registrant filed with the SEC on May 9, 2000).

10.24          Addendum to Escrow Agreement dated as of April 14, 2000 by and
               among FOCI, Registrant and the selling shareholders of FOCI
               (incorporated by reference to Exhibit 2.1(d) of the Form 8-K of
               the Registrant filed with the SEC on May 9, 2000).

10.25          Addendum No. 2 to Escrow Agreement dated as of June 26, 2000 by
               and among FOCI, the Registrant and the selling shareholders of
               FOCI (incorporated by reference to Exhibit 2.1(e) of the Form
               8-K/A of the Registrant filed with the SEC on July 7, 2000).

10.26          Addendum No. 2 to Stock Purchase Agreement dated as of June 26,
               2000 by and among FOCI, the Registrant and the selling
               shareholders of FOCI (incorporated by reference to Exhibit 2.1(e)
               of the Form 8-K/A of the Registrant filed with the SEC on July 7,
               2000).
</TABLE>




                                       67
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO                              DESCRIPTION
----------                              -----------
<S>            <C>
10.27          Memorandum of Understanding dated as of June 26, 2000 between the
               Registrant and the remaining shareholders of FOCI (incorporated
               by reference to Exhibit 2.1(g) of the Form 8-K/A of the
               Registrant filed with the SEC on July 7, 2000).

10.28          Stock Purchase Agreement by and between the Registrant and the
               shareholders of Optronics International Corp. ("OIC") dated April
               23, 2000 (incorporated by reference to Exhibit 10.19 filed with
               the Luminent, Inc. Registration Statement (file no. 333-42238) on
               Form S-1 on July 26, 2000).

10.29          Escrow Agreement, dated as of the 23rd day of April 2000, by and
               among the Registrant, the selling shareholders of OIC and the law
               firm of Baker & McKenzie, Taipei Office (incorporated by
               reference to Exhibit 10.20 filed with the Luminent, Inc.
               Registration Statement (file no. 333-42238) on Form S-1 on July
               26, 2000).

10.30          Stock Purchase Agreement by and between the Registrant and the
               shareholders of Quantum Optech Inc. ("QOI") dated April 26, 2000
               (incorporated by reference to Exhibit 10.21 filed with the
               Luminent, Inc. Registration Statement (file no. 333-42238) on
               Form S-1 on July 26, 2000).

10.31          Escrow and Stock Pledge Agreement dated as of April 26, 2000 by
               and between the Registrant and certain shareholders of QOI
               (incorporated by reference to Exhibit 10.22 filed with the
               Luminent, Inc. Registration Statement (file no. 333-42238) on
               Form S-1 on July 26, 2000).

10.32          Addendum to Stock Purchase Agreement made as of June 16th, 2000
               by and among the Registrant, QOI and shareholders of QOI
               (incorporated by reference to Exhibit 10.23 filed with the
               Luminent, Inc. Registration Statement (file no. 333-42238) on
               Form S-1 on July 26, 2000).

10.33          Addendum to Escrow and Stock Pledge Agreement dated as of June
               16, 2000 by and between the Registrant and certain shareholders
               of QOI (incorporated by reference to Exhibit 10.24 filed with the
               Luminent, Inc. Registration Statement (file no. 333-42238) on
               Form S-1 on July 26, 2000).

10.34          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)).

10.35          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)).

10.36          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)).

10.37          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)).

10.38          1997 Incentive and Nonstatutory Stock Option Plan, as amended
               (incorporated by reference to Exhibit A to the Registrant's
               Definitive Proxy Statement filed with the SEC on November 14,
               2001)
</TABLE>




                                       68
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO                              DESCRIPTION
----------                              -----------
<S>            <C>
10.39          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)).

10.40          Underwriting Agreement dated as of November 9, 2000 by and
               between the Registrant, the Registrant and Credit Suisse First
               Boston Corporation, acting on behalf of themselves and as the
               Representatives of the several Underwriters (incorporated by
               reference to Exhibit 10.25 of the Form 10-K for the year ended
               December 31, 2000 of Luminent, Inc. filed with the SEC on April
               2, 2001).

10.41          Master Separation and Distribution Agreement dated as of July 25,
               2000 between the Registrant and Luminent, Inc. (incorporated by
               reference to Exhibit 2.1 filed with the Luminent, Inc.
               Registration Statement (file no. 333-42238) on Form S-1 on July
               26, 2000).

10.42          Amendment to Master Separation and Distribution Agreement dated
               as of September 8, 2000, between the Registrant, and Luminent,
               Inc. (incorporated by reference to Exhibit 10.27 of the Form 10-K
               for the year ended December 31, 2000 of Luminent, Inc. filed with
               the SEC on April 2, 2001).

10.43          General Assignment and Assumption Agreement dated as of September
               8, 2000 between the Registrant and Luminent, Inc. (incorporated
               by reference to Exhibit 10.28 of the Form 10-K for the year ended
               December 31, 2000 of Luminent, Inc. filed with the SEC on April
               2, 2001).

10.44          Master Technology Ownership and License Agreement dated as of
               September 8, 2000 between the Registrant, and Luminent, Inc.
               (incorporated by reference to Exhibit 10.29 of the Form 10-K for
               the year ended December 31, 2000 of Luminent, Inc. filed with the
               SEC on April 2, 2001).

10.45          Employee Matters Agreement dated as of September 8, 2000 between
               the Registrant, and Luminent, Inc. (incorporated by reference to
               Exhibit 10.30 of the Form 10-K for the year ended December 31,
               2000 of Luminent, Inc. filed with the SEC on April 2, 2001).

10.46          Real Estate Matters Agreement dated as of September 8, 2000
               between the Registrant, and Luminent, Inc. (incorporated by
               reference to Exhibit 10.31 of the Form 10-K for the year ended
               December 31, 2000 of Luminent, Inc. filed with the SEC on April
               2, 2001).

10.47          Master Transitional Services Agreement dated as of September 8,
               2000 between the Registrant, and Luminent, Inc. (incorporated by
               reference to Exhibit 10.32 of the Form 10-K for the year ended
               December 31, 2000 of Luminent, Inc. filed with the SEC on April
               2, 2001).

10.48          Master Trademark Ownership and License Agreement dated as of
               September 8, 2000 between the Registrant, and Luminent, Inc.
               (incorporated by reference to Exhibit 10.33 of the Form 10-K for
               the year ended December 31, 2000 of Luminent, Inc. filed with the
               SEC on April 2, 2001).

10.49          Master Patent Ownership and License Agreement dated as of
               September 8, 2000 between the Registrant, and Luminent, Inc.
               (incorporated by reference to Exhibit 10.34 of the Form 10-K for
               the year ended December 31, 2000 of Luminent, Inc. filed with the
               SEC on April 2, 2001).

10.50          Indemnification and Insurance Matters Agreement dated as of
               September 8, 2000 between the Registrant, and Luminent, Inc.
               (incorporated by reference to Exhibit 10.35 of the Form 10-K for
               the year ended December 31, 2000 of Luminent, Inc. filed with the
               SEC on April 2, 2001).

10.51          Master Confidential Disclosure Agreement dated as of September 8,
               2000 between the Registrant, and Luminent, Inc. (incorporated by
               reference to Exhibit 10.36 of the Form 10-K for the year ended
               December 31, 2000 of Luminent, Inc. filed with the SEC on April
               2, 2001).
</TABLE>




                                       69
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO                              DESCRIPTION
----------                              -----------
<S>            <C>
10.52          Tax Sharing Agreement dated as of September 8, 2000 between the
               Registrant, and Luminent, Inc. (incorporated by reference to
               Exhibit 10.37 of the Form 10-K for the year ended December 31,
               2000 of Luminent, Inc. filed with the SEC on April 2, 2001).

10.53          Resignation Agreement and General Release between Registrant and
               Luminent and William R. Spivey dated September 12, 2001
               (incorporated by reference to Exhibit 10.62 of registrant's
               Post-Effective Amendment No. 4 to Registration Statement on Form
               S-4 filed with the SEC on December 28, 2001).

10.54          Stock Purchase Agreement dated July 7, 2000, by and among
               Astroterra Corporation, certain shareholders of AstroTerra
               Corporation and the Registrant (incorporated by reference to
               Exhibit 2.1(a) of the Form 8-K filed with the SEC on July 27,
               2000).

10.55          Registration Rights Agreement dated July 7, 2000 by and among the
               Registrant and employees of Astroterra Corporation (incorporated
               by reference to Exhibit 2.1(b) of the Form 8-K filed with the SEC
               on July 27, 2000).

10.56          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).

10.57          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).

10.58          Stock Option Plan for Employees of Fiber Optic Communications,
               Inc. dated April 25, 2000 (incorporated by reference to Exhibit
               4.1 of the Registration Statement on Form S-8 filed with the SEC
               on February 9, 2001).

10.59          From of Stock Option Agreement under the Stock Option Plan for
               Employees of Fiber Optic Communications, Inc. (incorporated by
               reference to Exhibit 4.2 of the Registration Statement on Form
               S-8 filed with the SEC on February 9, 2001).

10.60          Stock Option Plan for Employees of Quantum Optic, Inc. dated
               April 26, 2000 (incorporated by reference to Exhibit 4.1 of the
               Registration Statement on Form S-8 filed with the SEC on February
               9, 2001).

10.61          Form of Stock Option Agreement under the Stock Option Plan for
               Employees of Quantum Optic, Inc. (incorporated by reference to
               Exhibit 4.2 of the Registration Statement on Form S-8 filed with
               the SEC on February 9, 2001).

10.62          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).

10.63          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 25, 2000).

10.64          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).
</TABLE>




                                       70
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO                              DESCRIPTION
----------                              -----------
<S>            <C>
10.65          Amendment to Lease between Nordhoff Industrial and the Registrant
               dated December 14, 2001 relating to premises located at 20415
               Nordhoff Street.

10.66          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).

10.67          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).

10.68          Lease Agreement dated March 30, 2000 between the Registrant and
               MEPT West Hills, LLC, relating to the premises located at 8433
               Fallbrook Ave.

10.69          Lease Agreement dated August 14, 2000 between George DeRado and
               Luminent, Inc. relating to the premises located at 20520 Nordhoff
               Street.

21             Subsidiaries of Registrant

23.1           Consent of Arthur Andersen LLP to incorporation of Report on
               Financial Statements into registrant's Registration Statements

25             Power of Attorney (included on signature page)
</TABLE>


(b)     Reports on Form 8-K.

        Two reports on Form 8-K were filed during the last quarter of the period
covered by this Report, as follows:

        (i) A report on Form 8-K dated October 1, 2001 was filed on October 1,
2001 reporting matters under Item 5.

        (ii). A report on Form 8-K dated October 9, 2001 was filed on October 9,
2001 reporting matters under Item 5.




                                       71
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To MRV Communications, Inc.:

We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of MRV Communications, Inc.
and subsidiaries included in this Form 10-K, and have issued our report thereon
dated February 12, 2002. Our audits were made for the purpose of forming an
opinion on the basic consolidated financial statements taken as a whole. The
schedule of valuation and qualifying accounts is the responsibility of the
Company's management and is presented for the purpose of complying with the
Securities and Exchange Commission's rules and it is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements, and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.




/s/ Arthur Andersen LLP
Arthur Andersen LLP




Los Angeles, California
February 12, 2002



                                       72

<PAGE>

                            MRV COMMUNICATIONS, INC.

                 Schedule II-- Valuation and Qualifying Accounts
                                 (in thousands)


<TABLE>
<CAPTION>
                                   Balance at     Charge to                   Balance at
                                  Beginning of    Costs and                     End of
                                     Period       Expenses       Write-off      Period
                                  ------------    ---------      ---------    ----------
<S>                               <C>             <C>            <C>          <C>
Allowance of doubtful accounts:
Year ended December 31, 1999         $ 8,487      $  1,416       $ (1,452)      $ 8,451
Year ended December 31, 2000         $ 8,451      $  3,833       $ (2,804)      $ 9,480
Year ended December 31, 2001         $ 9,480      $  5,654       $   (335)      $14,799
</TABLE>



<TABLE>
<CAPTION>
                                   Balance at     Charge to                   Balance at
                                  Beginning of    Costs and                     End of
                                     Period       Expenses       Write-off      Period
                                  ------------    ---------      ---------    ----------
<S>                               <C>             <C>            <C>          <C>
Restructuring accrual accounts:
Year ended December 31, 1999         $    --      $     --       $     --       $    --
Year ended December 31, 2000              --            --             --            --
Year ended December 31, 2001              --        20,300        (11,623)        8,677
                                     -------      --------       --------       -------
                                     $    --      $ 20,300       $(11,623)      $ 8,677
                                     =======      ========       ========       =======
</TABLE>





                                       73

<PAGE>

                                   SIGNATURES


        In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"), the Registrant caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chatsworth,
State of California, on March 20, 2002.



                                        MRV COMMUNICATIONS, INC.


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


                                POWER OF ATTORNEY

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

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

<TABLE>
<CAPTION>
             Names                                    Title                               Date
             -----                                    -----                               ----
<S>                                <C>                                              <C>
       /s/ NOAM LOTAN              President, Chief Executive Officer (Principal
-------------------------------    Executive Officer), and a Director               March 20, 2002
         Noam Lotan


       /s/ SHLOMO MARGALIT         Chairman of the Board, Chief Technical Officer,
-------------------------------    Secretary, and a Director                        March 20, 2002
         Shlomo Margalit


      /s/ SHAY GONEN               Interim Chief Financial Officer
-------------------------------    (Principal Financial and Accounting Officer)     March 20, 2002
         Shay Gonen

      /s/ IGAL SHIDLOVSKY
-------------------------------    Director                                         March 20, 2002
       Igal Shidlovsky

     /s/ GUENTER JAENSCH
------------------------------    Director                                          March 20, 2002
        Guenter Jaensch

     /s/ DANIEL TSUI
-------------------------------    Director                                         March 20, 2002
         Daniel Tsui

     /s/ BARUCH FISCHER
-------------------------------    Director                                         March 20, 2002
        Baruch Fischer

</TABLE>




                                       74