##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K

|(Mark One)
|----------
|[X]       

For the fiscal year ended December 31, 2002

OR

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

For the transition period from        to

Commission file number 0-25678_________

MRV COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)


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

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

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

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

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

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

Common stock, $0.0017 par value

---

(Title of class)


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

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

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

Aggregate market value of the voting and non-voting common stock held by
non-affiliates computed by reference to the price at which the common stock was
last sold, or the average bid and asked price of such common stock, as of the
last business day of the Registrants most recently completed second fiscal
quarter - $138,572,756 (As of June 28, 2002).

Number of shares of common stock outstanding as of February 28, 2003 -
98,932,954.

DOCUMENTS INCORPORATED BY REFERENCE

None.





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TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | ITEM 1. BUSINESS                                                                             
|              | ITEM 2. PROPERTIES                                                                           
|              | ITEM 3. LEGAL PROCEEDINGS                                                                    
|              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II      
|              | ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS            
|              | ITEM 6. SELECTED FINANCIAL DATA                                                              
|              | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|              | ITEM 7a. QUANITITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                        
|              | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|              | ITEM 9. CHANGES IN OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  
|PART III     
|              | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|              | ITEM 11. EXECUTIVE COMPENSATION                                                              
|              | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|              | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV      
|              | ITEM 14. CONTROLS AND PROCEDURES                                                             
|              | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|SIGNATURE    
|CERTIFICATION
|Exhibit 10.33
|Exhibit 21.1 
|Exhibit 23.1 
|Exhibit 23.2 



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MRV Communications, Inc.

Index to Form 10-K

For the fiscal year ended December 31, 2002

|         |  |                                                                                                                       |  |                                                                                       |    |             |    | 
|-------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- | -- | ----------- | -- | 
|         |  |                                                                                                                       |  |                                                                                       |    | Page Number
|         |  |                                                                                                                       |  |                                                                                       |    |            
|PART I   |  |                                                                                                                       |  |                                                                                       |    |             | 3  | 
|         |  | Item 1.                                                                                                               |  | Business                                                                              |    |             | 3  | 
|         |  | Item 2:                                                                                                               |  | Properties                                                                            |    |             | 21 | 
|         |  | Item 3.                                                                                                               |  | Legal Proceedings                                                                     |    |             | 23 | 
|         |  | Item 4.                                                                                                               |  | Submission of Matters to a Vote of Security
Holders                                   |    |             | 23 | 
|PART II  |  |                                                                                                                       |  |                                                                                       |    |             | 24 | 
|         |  | Item 5.                                                                                                               |  | Market for the Registrants Common Equity and
Related Stockholder Matters             |    |             | 24 | 
|         |  | Item 6.                                                                                                               |  | Selected Financial Data                                                               |    |             | 25 | 
|         |  | Item 7.                                                                                                               |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations |    |             | 26 | 
|         |  | Item 7a.                                                                                                              |  | Quantitative and Qualitative Disclosures About
Market Risks                           |    |             | 40 | 
|         |  | Item 8.                                                                                                               |  | Consolidated Financial Statements and
Supplementary Data                              |    |             | 41 | 
|         |  | Item 9.                                                                                                               |  | Changes in or Disagreements with Accountants on
Accounting and Financial Disclosure   |    |             | 76 | 
|PART III |  |                                                                                                                       |  |                                                                                       |    |             | 76 | 
|         |  | Item 10.                                                                                                              |  | Directors and Executive Officers of the
Registrant                                    |    |             | 76 | 
|         |  | Item 11.                                                                                                              |  | Executive Compensation                                                                |    |             | 79 | 
|         |  | Item 12.                                                                                                              |  | Security Ownership of Certain Beneficial Owners
and Management                        |    |             | 82 | 
|         |  | Item 13.                                                                                                              |  | Certain Relationships and Related Transactions                                        |    |             | 84 | 
|PART IV  |  |                                                                                                                       |  |                                                                                       |    |             | 85 | 
|         |  | Item 14.                                                                                                              |  | Controls and Procedures                                                               |    |             | 85 | 
|         |  | Item 15.                                                                                                              |  | Exhibits, Financial Statement Schedules and
Reports on Form 8-K                       |    |             | 85 | 
|         |  | Signatures                                                                                                            |  |                                                                                       |    |             | 91 | 
|         |  | Certifications Pursuant to Rule 13a-14:                                                                               |  |                                                                                       |    |            
|         |  | Certification of the Chief Executive Officer                                                                          |  |                                                                                       | 93 |            
|         |  | Certification of the Chief Financial Officer                                                                          |  |                                                                                       | 94 |            
|         |  | Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |  |                                                                                       | 95 |            

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

2



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PART I

This Annual Report on Form 10-K for the year ended December 31, 2002, (the
Form 10-K) contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the Securities
Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act). Forward-looking statements are statements other than
historical information or statements of current condition and relate to future
events or the future financial performance of the Company. Some
forward-looking statements may be identified by use of such terms as expects,
anticipates, intends, estimates, believes and words of similar import.
These forward-looking statements relate to plans, objectives and expectations
for future operations. In light of these risks and uncertainties, there can be
no assurance that the forward-looking information contained in this Form 10-K
will in fact transpire or prove to be accurate. All subsequent written and
oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by this introduction.

In light of the risks and uncertainties inherent in all such projected
operational matters, the inclusion of forward-looking statements in this Form
10-K should not be regarded as a representation by the Company or any other
person that the objectives or plans of the Company will be achieved or that any
of the Companys operating expectations will be realized. Revenues and results
of operations are difficult to forecast and could differ materially from those
projected in the forward-looking statements contained in this Form 10-K for the
reasons detailed in the Risk Factors section of this Form 10-K, beginning on
page 8 or elsewhere in this Form 10-K. Readers should not place undue reliance
on forward-looking statements, which reflect managements view only as of the
date of this Form 10-K. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect subsequent events or
circumstances. Readers should also carefully review the risk factors described
in other documents the Company files from time to time with the Securities and
Exchange Commission.




ITEM 1. BUSINESS

Overview

We design, manufacture, sell, distribute, integrate and support network
infrastructure equipment, services and optical components. We conduct our
business along two principal segments: operating divisions and development
stage enterprises. Our principal operating divisions provide equipment used by
commercial customers, governments and telecommunications service providers, and
include network physical infrastructure products, switches, routers and remote
device management products as well as specialized networking products for
defense and aerospace applications. We have sales offices in over 20
countries, and our products are sold worldwide, through direct and indirect
sales channels. In Europe, we have operations that provide network system
design, integration and distribution services that include our products, as
well as products manufactured by third-party vendors. We conduct our optical
components business through Luminent, Inc. our wholly owned subsidiary.
Luminent designs, manufactures and sells optical communications components.
These components include fiber optic transceivers, discrete lasers and laser
emitting diodes (LEDs), as well as components for fiber-to-the-home (FTTH)
applications.

Our development stage enterprises develop and manufacture routers for
telecommunication carriers, service providers and business enterprise
customers.

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

Industry Background

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

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

Products and Services

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

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

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

We also offer both Dense and Coarse WDM systems (DWDM and CWDM,
respectively). We also provide network access technology for data and voice
over standard telephone wire. This includes long range Ethernet, and
voice-over-Ethernet products for converged voice and data networks.

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

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

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

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

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

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

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

Sales and Marketing

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

Worldwide Sales

In early 2002, we centralized our sales and marketing functions. The vast
majority of the sales forces of formerly independent business units have been
unified, and now support our worldwide sales efforts.

Our worldwide sales and marketing organization, at December 31, 2002,
consisted of approximately 350 employees, including sales representatives,
technical support and management. We have field sales offices in more than 20
countries and sell our products and services both directly and through channel
partners with support from their sales force. Our channel partners include
distributors, value-added resellers, and system integrators. We conduct
international operations in branch offices located in Argentina, China,
Denmark, France, Finland, Germany, Israel, Italy, Japan, Korea, the
Netherlands, Norway, Russia, Singapore, South Africa, Switzerland, Sweden,
Taiwan and the United Kingdom. Our international field offices are involved in
the sales and distribution of our products and provide system installation,
technical support, and follow-up services to end users of our products.

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

No single customer accounted for more than 10% of our revenue or accounts
receivable in 2002, 2001, or 2000.

Markets Served

We primarily serve the following markets:

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

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

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

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

Competition

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

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



| | - |  | The principal competitive factors in the markets in which we compete include:
| | - |  | -----------------------------------------------------------------------------
|
| | - |  | Product performance, features and price;                                     
|
| | - |  | A comprehensive range of complementary products and services;                
|
| | - |  | Customer service and technical support;                                      
|
| | - |  | Timeliness of new products introductions;                                    

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| | - |  | Global presence, including distribution network;
| | - |  | ------------------------------------------------
|
| | - |  | Conformance to standards; and                   
|
| | - |  | Brand name.                                     

Recent consolidation is likely to permit our various competitors to devote
significantly greater resources to the development and marketing of new
competitive products and the marketing of existing competitive products to
their larger installed customer bases. We expect that competition will
increase substantially as a result of these and other industry consolidations
and alliances, as well as the emergence of new competitors.

Product Development and Engineering

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

We are working on new developments covering the following product areas:
active optical components, fiber-optic transport and free-space optics,
switching, routing, Ethernet aggregation, remote device management and network
management systems.

Our product development and engineering expenses were $49.4 million, $94.8
million and $74.1 million for the years ended December 31, 2002, 2001 and 2000,
respectively.

Operating divisions. Product development and engineering expenses from
our operating divisions were $31.5 million, $49.1 million and $32.6 million for
the years ended December 31, 2002, 2001 and 2000, respectively. These expenses
include $551,000, $14.0 million and $13.3 million for the years ended December
31, 2002, 2001 and 2000, respectively, of non-cash deferred stock expenses.

Development stage enterprises. Product development and engineering
expenses of the development stage enterprises were $17.8 million, $45.7 million
and $41.5 million for the years ended December 31, 2002, 2001 and 2000,
respectively.

Manufacturing

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

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



| | - |  | Wafer processing for semiconductor laser diode and LED chip
manufacturing under stringent quality procedures using advanced
wafer fabrication technology;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

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| | - |  | High precision electronic and mechanical assembly; and
| | - |  | ------------------------------------------------------
|
| | - |  | Final assembly and testing.                           

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

Components

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

Intellectual Property

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

Development Stage Enterprises

We hold majority interests in Charlottes Networks, Zuma Networks, All
Optical Networks, and Optical Crossing as well as minority investments in Dune
Networks, Hyperchannel, PhoneDo Networks and RedC Optical Networks. As of
December 2002, the majority of our expenses for development stage enterprises
were incurred in Charlottes Networks. The risks associated with investments
in private companies are more fully discussed in the Risk Factors section
contained in Item 1 of this Form 10-K.

Employees

As of December 31, 2002, we employed a total of approximately 1,400
full-time employees compared with approximately 2,200 at December 31, 2001. Of
these 1,400 employees, approximately 600 are in manufacturing, 280 in product
development and engineering and 520 in sales, marketing and general
administration. Approximately 950 employees are in locations outside the
United States. None of our employees are represented by a union or governed by
a collective bargaining agreement, and we believe our employee relationships
are satisfactory. We also believe that our long-term success depends in part
on our continued ability to recruit and retain qualified personnel. To date,
we believe that we have been successful in recruiting qualified employees, but
there is no assurance that it will continue to be successful in the future.
The risks associated with dependence on qualified personnel are more fully
discussed in the Risk Factors section contained in Item 1 of this Form 10-K.

Certain Risk Factors That Could Affect Future Results

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:

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We Incurred Net Losses For The Years Ended December 31, 2002, 2001 And 2000,
Primarily As A Result Of The Impairment And Amortization Of Goodwill And Other
Intangibles And Deferred Stock Expense From Recent Acquisitions. We Expect To
Continue To Incur Net Losses For The Foreseeable Future.

We reported net losses of $479.8 million, $326.4 million and $153.0
million for the years ended December 31, 2002, 2001 and 2000, respectively. A
major contributing factor to the net losses was the cumulative effect of an
accounting change and the impairment of goodwill and other intangibles in
accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
the amortization of goodwill and intangibles and deferred stock expense related
to our acquisitions during 2000 of Fiber Optic Communications, Jolt, Quantum
Optech, AstroTerra and Optronics International during 2000 and the employment
arrangements we made in 2000 with Luminents former President and Luminents
Chief Financial Officer. We will continue to record deferred stock expense
relating to these acquisitions through 2004. Effective January 1, 2002, we
adopted SFAS No. 142, and we no longer amortize goodwill and intangibles with
indefinite lives, but instead we measure goodwill and intangibles for
impairment at least annually, or when events indicate that impairment exists.
We will continue to amortize intangible assets that we determine to have
definite lives over their useful lives. As required by SFAS No. 142, we
performed the transitional impairment test on goodwill and other intangibles,
which consisted of patents and assembled work forces. As a result of the
transitional impairment test, we recorded a $296.4 million cumulative effect of
an accounting change during 2002. In addition to the transitional impairment
test, we reviewed our remaining goodwill and other intangibles as required
annually pursuant to SFAS No. 142. As a result of the annual review, we
further reduced the carrying amount of goodwill and other intangibles by
recording an impairment charge of $72.7 million during 2002. We will perform
our annual impairment review as of October 1st each year, commencing with this
review. We expect to record impairment charges in the future from time to time
as a result of this standard. As a consequence of the current economic
environment 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 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 and 2002 and may
affect them for 2003 and thereafter. Announcements by industry participants
and observers indicate there is a continuing slowdown in industry spending and
participants are seeking to reduce existing inventories and we are experiencing
these reductions in our business. As a result of these factors, we recorded,
during the year ended December 31, 2001, consolidated charges from our
subsidiary, Luminent, which included 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. We did not record similar charges during
the year ended December 31, 2002. These charges were 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.

9



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Additionally, these economic conditions are making it very difficult for
us, our customers and our vendors to forecast and plan future business
activities. This level of uncertainty severely challenges our ability to
operate profitably or to grow our businesses. In particular, it is difficult
to develop and implement strategy, sustainable business models and efficient
operations, and effectively manage manufacturing and supply chain
relationships. We believe that a decrease in business and consumer confidence
in the economy and the financial markets will result from current political
tensions or the outbreak of war with Iraq. Concerns over accounting practices
of service providers and faltering growth prospects among equipment
manufactures could delay the economic recovery in the telecommunications
industry beyond 2003. In addition, further disruptions of the air transport
system such as those resulting from the terrorist attacks of September 11, 2001
in the United States and abroad may negatively impact our ability to deliver
products to customers, to 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 to languish or further
deteriorate, or if the economic downturn is exacerbated as a result of
political, economic or military conditions associated with current domestic and
world events, our businesses, financial condition and results of operations
could be further impaired.

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

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

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

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



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

10



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

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

Complex products, such as those we offer, may contain undetected software
or hardware errors when we first introduce them or when we release new
versions. The occurrence of these errors in the future, and our inability to
correct these errors quickly or at all, could result in the delay or loss of
market acceptance of our products. It could also result in material warranty
expense, diversion of engineering and other resources from our product
development efforts and the loss of credibility with, and legal actions by, our
customers, system integrators and end users. 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 has been fully
reserved. As of December 31, 2002, we had a remaining obligation to replace
approximately $2.9 million additional transceivers. 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.

We Face Risks In Reselling The Products Of Other Companies.

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

Our Operating Results Could Fluctuate Significantly From Quarter To Quarter.

Our operating results for a particular quarter are extremely difficult to
predict. Our revenue and operating results could fluctuate substantially from
quarter to quarter and from year to year. This could result from any one or a
combination of factors such as:



| | - |  | the cancellation or postponement of orders;                                                                                            
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | the timing and amount of significant orders from our largest customers;                                                                
|
| | - |  | our success in developing, introducing and shipping product
enhancements and new products;                                             
|
| | - |  | the mix of products we sell;                                                                                                           
|
| | - |  | software, hardware or other errors in the products we sell
requiring replacements or increased warranty reserves;                      
|
| | - |  | adverse effects to our financial statements resulting from,
or necessitated by, past and future acquisitions or deferred stock
expense;
|
| | - |  | our periodic reviews of goodwill and other intangibles that lead to impairment charges;                                                

11



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| | - |  | new product introductions by our competitors;                        
| | - |  | ---------------------------------------------------------------------
|
| | - |  | pricing actions by our competitors or us;                            
|
| | - |  | the timing of delivery and availability of components from suppliers;
|
| | - |  | political stability in the areas of the world we operate in;         
|
| | - |  | changes in material costs; and                                       
|
| | - |  | general economic conditions.                                         

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

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

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

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

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

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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                      
|
| | - |  | general market conditions and other factors.                                                     

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

Our 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.

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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.

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.
Should we continue to pursue a growth strategy, such a strategy can be expected
to place even greater pressure on our existing personnel and 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.

Adjustments To The Size Of Our Operations May Require Us To Incur Unanticipated
Costs

Prior to 2001, we experienced growth and expansion that placed, and may in
the future place, a significant strain on our resources. Subsequent to the
quarter ended March 31, 2001, we have incurred unanticipated costs to downsize
our operations to a level consistent with downward forecasts in sales. Even if
we manage the current period of instability effectively, as well as possible
expansion in the future, we may make mistakes in restructuring or operating our
business such as inaccurate sales forecasting or incorrect material planning.
Any of these mistakes may lead to unanticipated fluctuations in our operating
results. We may not be able to size our operations in accordance with growth or
decline of our business in the future.

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

In 2002, we undertook significant reductions in force, some of which were
accompanied by dispositions of assets, as part of our effort to reduce the size
of our operations to better match the reduced sales of our products and
services. Weakness in the global economy generally and the fiber optics and
telecommunications equipment markets in particular continue to affect our
business substantially. We may be required to undertake further reductions in
force. Any such steps would likely result in significant charges from
write-downs or write-offs of assets, costs of lease terminations, and expenses
resulting from the termination of personnel.
14Table of ContentsWe Face Risks From Our International Operations.International sales have become an increasingly important part of our
operations. The following table sets forth the percentage of our total
revenues from sales to customers in foreign countries for the three years ended
December 31, 2002:

|                                               |  |      |    |      |  |      |    |   |  |  |    |  
|---------------------------------------------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                                               |  | 2002 |    | 2001 |  | 2000
|                                               |  |      |    |      |  |     
|Percentage of total revenue from foreign sales |  |      | 74 | %    |  |      | 67 | % |  |  | 63 | %

We have offices in, and conduct a significant portion of our operations in
and from Israel. Similarly, some of our development stage enterprises are
located in Israel. We are, therefore, directly influenced by the political and
economic conditions affecting Israel. Any major hostilities involving Israel,
the interruption or curtailment of trade between Israel and its trading
partners or a substantial downturn in the economic or financial condition of
Israel could have a material adverse effect on our operations. Luminent has a
minority interest in a large manufacturing facility in the Peoples Republic of
China in which it manufactures passive fiber optic components and both Luminent
and we make sales of our products in the Peoples Republic of China. Our total
sales in the Peoples Republic of China amounted to approximately $18.2
million, $10.4 million and $2.7 million for the three years ended December 31,
2002, respectively. The political tension between Taiwan and the Peoples
Republic of China that continues to exist, could eventually lead to
hostilities. Risks we face due to international sales and the use of overseas
manufacturing include:



| | - |  | greater difficulty in accounts receivable collection and longer collection periods;                                                                                                       
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | the impact of recessions in economies outside the United States;                                                                                                                          
|
| | - |  | unexpected changes in regulatory requirements;                                                                                                                                            
|
| | - |  | seasonal reductions in business activities in some parts of
the world, such as during the summer months in Europe or in the
winter months in Asia when the Chinese New Year is celebrated;
|
| | - |  | certification requirements;                                                                                                                                                               
|
| | - |  | potentially adverse tax consequences;                                                                                                                                                     
|
| | - |  | unanticipated cost increases;                                                                                                                                                             
|
| | - |  | unavailability or late delivery of equipment;                                                                                                                                             
|
| | - |  | trade restrictions;                                                                                                                                                                       
|
| | - |  | limited protection of intellectual property rights;                                                                                                                                       
|
| | - |  | unforeseen environmental or engineering problems; and                                                                                                                                     
|
| | - |  | personnel recruitment delays.                                                                                                                                                             

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.

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.

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

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

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

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

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

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

We May Be Harmed By Our Failure To Pursue Acquisitions And If We Do Pursue
Acquisitions Harm Could Result.

An important element of our strategy has been to review acquisition
prospects that would complement our existing operations and products, augment
our market coverage and distribution ability or enhance our technological
capabilities. Sine the end of 2000, we have not made any acquisitions of
businesses or product lines and we have no plans to do so in the foreseeable
future. The networking business is highly competitive and our failure to
pursue future acquisitions could hamper our ability to enhance existing
products and introduce new products on a timely basis. If we do choose to
pursue acquisitions, they 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

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| | - |  | 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 stock
expense similar to those arising with the acquisitions of Fiber
Optic Communications, Optronics, Quantum Optech, Jolt and AstroTerra
in 2000;
|
| | - |  | 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.                                                                                                                                                      

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 initially resulted in litigation, which has since been
dismissed pending the results of litigation not directly involving
us.
|
| | - |  | 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.                                                                                                                                   

17



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| | - |  | 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 revenues potentially subject to the foregoing claims amounted to
approximately 20%, 28% and 30% of our revenues for the years ended December 31,
2002, 2001 and 2000, respectively. 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.

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.

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Our Business Requires Us To Attract And Retain Qualified Personnel.

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

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

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

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

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

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

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

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

Softness in demand and pricing in the communications market have
necessitated a review of our inventory, facilities and headcount. As a result,
we recorded in the 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 did not recognize similar charges for the year
ended December 31, 2002.
19Table of Contents

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

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

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

In the past, securities class action litigation has been brought against a
company following periods of volatility in the market price of its securities.
Due to the volatility and potential volatility of our stock price or the
volatility of Luminents stock price following its initial public offering, we
may be the target of securities litigation in the future. 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 in 2001 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.

If The Price Of Our Common Stock Again Trades Below $1.00 Per Share For A
Prolonged Period, Our Common Stock May Be Delisted From Nasdaq

Nasdaq has established certain standards for the continued listing of a
security on its National Market and its SmallCap Market. The standards for
continued listing on either market require, among other things, that the
minimum bid price for the listed common stock be at least $1.00 per share. A
deficiency in the bid price maintenance standard will be deemed to exist if the
issuer fails the minimum bid-price requirement for 30 consecutive trading days,
within a 90-day cure period, with respect to the Nasdaq National Market, and a
180-day cure period with respect to the Nasdaq SmallCap Market (which may be
extended by an additional 180 days if the issuer meets certain specified
criteria at the end of the initial 180-day period).

From September 19, 2002 to October 25, 2002, a period of 27 consecutive
trading days, our common stock traded at less than $1.00 per share and thus we
just avoided receiving notice from the Nasdaq Stock Market, Inc. of a failure
to comply with the $1.00 minimum bid price per share requirement. While the
price per share of our common stock has recently exceeded the $1.00 per share
minimum bid requirement, because of current economic or market conditions or
other factors the price of our common stock may again fall below $1.00 per
share. If that deficiency were sustained for a prolonged period, it could
result in our common stock being delisted from the Nasdaq Stock Market. In
that event, public trading, if any, in our common stock would be limited to the
over-the-counter markets in the so-called pink sheets or the NASDs OTC
Electronic Bulletin Board. Consequently, the liquidity of our common stock
could be impaired and the ability of holders to sell our stock could be
adversely affected as would our ability to raise additional capital.

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If The Nasdaq Stock Market Delisted Our common stock We Could Become Subject To
The SECs Penny Stock Rules. In That Event, Because Of The Burden Placed On
Broker-Dealers To Comply With The Rules Applicable To Penny Stocks, Investors
May Have Difficulty Selling Our common stock In The Open Market.

If the Nasdaq Stock Market delisted our common stock, our common stock
could become subject to Rule 15g-9 under the Securities Exchange Act of 1934.
This rule imposes additional sales practice requirements on broker-dealers who
sell so-called penny stocks to persons other than established customers and
accredited investors. Subject to some exceptions, the SECs regulations
define a penny stock to be any non-Nasdaq or non-exchange listed equity
security that has a market price of less than $5.00 per share. Generally,
accredited investors are individuals with a net worth more than $1,000,000 or
annual incomes exceeding $200,000 (or $300,000 together with their spouses).
For transactions covered by this rule, a broker-dealer must, among other
requirements, make a special suitability determination for the purchaser and
have received the purchasers written consent to the transaction before sale.
Consequently, the rule may adversely affect the interest or ability of
broker-dealers in selling our shares in the secondary market and this in turn
could adversely affect both the market liquidity for our common stock and the
ability of holders to sell our stock.

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

We are authorized to issue up to 1,000,000 shares of preferred stock.
This preferred stock may be issued in one or more series, the terms of which
may be determined at the time of issuance by our board of directors without
further action by stockholders. The terms of any series of preferred stock may
include voting rights (including the right to vote as a series on particular
matters), preferences as to dividend, liquidation, conversion and redemption
rights and sinking fund provisions. No preferred stock is currently
outstanding. The issuance of any preferred stock could materially adversely
affect the rights of the holders of our common stock, and therefore, reduce the
value of our common stock. In particular, specific rights granted to future
holders of preferred stock could be used to restrict our ability to merge with,
or sell our assets to, a third party and thereby preserve control by the
present management. We are also subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which prohibit us from
engaging in a business combination with an interested stockholder for a period
of three years after the date of the transaction in which the person became an
interested stockholder unless the business combination is approved in the
manner prescribed under Section 203. These provisions of Delaware law also may
discourage, delay or prevent someone from acquiring or merging with us, which
may cause the market price of our common stock to decline.




ITEM 2. PROPERTIES

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

|                 |  |     |  |             |        |                  |  |            |  |                                                             
|---------------- |  | --- |  | ----------- | ------ | ---------------- |  | ---------- |  | ------------------------------------------------------------
|Location         |  |     |  | Square Feet |        | Lease Expiration |  | Purpose   
|                 |  |     |  |             |        |                  |  |           
|Andover, MA      |  | USA |  |             | 10,995 |                  |  | 9/30/2005  |  | Product development                                         
|Chatsworth, CA   |  | USA |  |             | 13,300 |                  |  | 3/31/2007  |  | Administration                                              
|Chatsworth, CA   |  | USA |  |             | 22,200 |                  |  | 12/31/2005 |  | Manufacturing                                               
|Chatsworth, CA   |  | USA |  |             | 49,920 |                  |  | 7/14/2004  |  | Manufacturing                                               
|Chatsworth, CA   |  | USA |  |             | 5,000  |                  |  | 12/31/2008 |  | Manufacturing and
product development                       
|Chatsworth, CA   |  | USA |  |             | 17,710 |                  |  | 2/28/2004  |  | Manufacturing and
product development                       
|Littleton, MA    |  | USA |  |             | 54,966 |                  |  | 1/14/2007  |  | Administration,
product
development,
manufacturing and
sales
|Newbury Park, CA |  | USA |  |             | 49,920 |                  |  | 8/13/2007  |  | Manufacturing                                               
|Pasadena, CA     |  | USA |  |             | 13,663 |                  |  | 1/14/2004  |  | Product development                                         

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|               |  |             |  |             |        |                  |  |            |  |                                                             
|-------------- |  | ----------- |  | ----------- | ------ | ---------------- |  | ---------- |  | ------------------------------------------------------------
|Location       |  |             |  | Square Feet |        | Lease Expiration |  | Purpose   
|               |  |             |  |             |        |                  |  |           
|San Diego, CA  |  | USA         |  |             | 23,354 |                  |  | 12/31/2004 |  | Product development and
manufacturing                       
|West Hills, CA |  | USA         |  |             | 38,795 |                  |  | 7/14/2005  |  | Product development                                         
|Hinchu         |  | Taiwan      |  |             | 18,587 |                  |  | 9/20/2003  |  | Product development,
manufacturing and sales                
|Hinchu         |  | Taiwan      |  |             | 39,590 |                  |  | 12/31/2003 |  | Product development,
manufacturing and sales                
|Hinchu         |  | Taiwan      |  |             | 12,712 |                  |  | Owned      |  | Product development,
manufacturing and sales                
|Geneva         |  | Switzerland |  |             | 29,428 |                  |  | 12/31/2010 |  | Administration, product
development, manufacturing and
sales
|Zurich         |  | Switzerland |  |             | 9,343  |                  |  | 3/31/2013  |  | Administration, product
development, manufacturing and
sales
|Stockholm      |  | Sweden      |  |             | 52,205 |                  |  | 6/30/2003  |  | Administration, product
development, manufacturing and
sales
|Oslo           |  | Norway      |  |             | 7,535  |                  |  | 3/31/2004  |  | Administration and distribution                             
|Milan          |  | Italy       |  |             | 7,535  |                  |  | 3/1/2007   |  | Administration and distribution                             
|Milan          |  | Italy       |  |             | 9,688  |                  |  | 6/30/2004  |  | Administration and distribution                             
|Milan          |  | Italy       |  |             | 5,382  |                  |  | 11/28/2006 |  | Administration and distribution                             
|Milan          |  | Italy       |  |             | 9,688  |                  |  | 4/28/2004  |  | Administration and distribution                             
|Milan          |  | Italy       |  |             | 8,611  |                  |  | 4/28/2004  |  | Administration and distribution                             
|Rome           |  | Italy       |  |             | 6,512  |                  |  | 1/31/2009  |  | Administration and distribution                             
|Rome           |  | Italy       |  |             | 5,382  |                  |  | 10/31/2007 |  | Administration and distribution                             
|Jerusalem      |  | Israel      |  |             | 6,609  |                  |  | 8/16/2003  |  | Administration and distribution                             
|Yokneam        |  | Israel      |  |             | 26,910 |                  |  | 4/30/2004  |  | Administration, product
development, manufacturing and
sales
|Yokneam        |  | Israel      |  |             | 19,526 |                  |  | 12/31/2007 |  | Administration, product
development, manufacturing and
sales
|Yokneam        |  | Israel      |  |             | 5,845  |                  |  | 1/31/2006  |  | Administration, product
development, manufacturing and
sales
|Yokneam        |  | Israel      |  |             | 7,202  |                  |  | 12/31/2007 |  | Administration, product
development, manufacturing and
sales
|Gif Sur Yvette |  | France      |  |             | 17,222 |                  |  | Owned      |  | Administration and distribution                             
|Helsinki       |  | Finland     |  |             | 7,750  |                  |  | 3/31/2003  |  | Administration and distribution                             

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

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ITEM 3. LEGAL PROCEEDINGS

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

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




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

On December 12, 2002, we held our Annual Meeting of Stockholders at which,
among other things, the Companys entire board of directors was elected. The
name of each director elected at the Annual Meeting, and the number of votes
cast for and against (or withheld) were as follows:

|                |  |                 |            |          |  |            |           | 
|--------------- |  | --------------- | ---------- | -------- |  | ---------- | --------- | 
|                |  | Number of Votes
|                |  |                
|                |  |                 |            |          |  | Against or
|                |  | For             |            | Withheld
|                |  |                 |            |         
|Noam Lotan      |  |                 | 76,261,462 |          |  |            | 1,467,072 | 
|Shlomo Margalit |  |                 | 76,261,277 |          |  |            | 1,467,257 | 
|Igal Shidlovsky |  |                 | 75,954,614 |          |  |            | 1,773,920 | 
|Guenter Jaench  |  |                 | 75,954,614 |          |  |            | 1,773,920 | 
|Daniel Tsui     |  |                 | 75,954,614 |          |  |            | 1,773,920 | 
|Baruch Fischer  |  |                 | 77,165,187 |          |  |            | 563,347   | 

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

|                                                                                                                                                  |  |     |            |         |  |                 |           |  |  |  |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | --- | ---------- | ------- |  | --------------- | --------- |  |  |  | ------ | 
|                                                                                                                                                  |  |     |            |         |  | Number of Votes |           |  |  | 
|Proposal                                                                                                                                          |  | For |            | Against |  | Abstained      
|                                                                                                                                                  |  |     |            |         |  |                
|To ratify the selection of Ernst
& Young      LLP as independent
auditors for the      Company for the
fiscal year ending      December 31, 2002. |  |     | 75,353,063 |         |  |                 | 2,309,118 |  |  |  | 66,353 | 

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PART II




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

Market Information and Holders

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

|                                    |                |  |      |       |     |  |   |      | 
|----------------------------------- | -------------- |  | ---- | ----- | --- |  | - | ---- | 
|                                    |                |  | High |       | Low
|                                    |                |  |      |       |    
|Fiscal Year Ended December 31, 2002 |                |  |      |       |     |  |   |     
|                                    | First Quarter  |  | $    | 5.08  |     |  | $ | 2.51 | 
|                                    | Second Quarter |  | $    | 2.89  |     |  | $ | 1.03 | 
|                                    | Third Quarter  |  | $    | 1.75  |     |  | $ | 0.81 | 
|                                    | Fourth Quarter |  | $    | 1.78  |     |  | $ | 0.65 | 
|Fiscal Year Ended December 31, 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 | 

As of February 28, 2003, we
had approximately 3,348 common stockholders of record.

Dividends

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

Changes In Securities

During the three months ended December 31, 2002, we issued 4,545,452
shares of our common stock to a holder of our 5% Convertible Subordinated Notes
due 2003 (the Notes) in exchange for $7.5 million principal amount of the
Notes.

Exemption from the registration requirements is claimed under the
Securities Act of 1933 (the Securities Act) in reliance on Section 3(a)(9) of
the Securities Act in that the shares were exchanged by us with an existing
security holder exclusively where no commission or other remuneration was paid
or given directly or indirectly for soliciting such exchange.

Securities Authorized Under Equity Compensation Plans

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

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ITEM 6. SELECTED FINANCIAL DATA

The following selected Statements of Operations data for each of the three
years in the period ended December 31, 2002 and the Balance Sheet data as of
December 31, 2002 and 2001 are derived from our audited Financial Statements
included elsewhere herein. The selected Statements of Operations data for the
two years in the period ended December 31, 1999 and the Balance Sheet data as
of December 31, 2000, 1999 and 1998 were derived from our audited Financial
Statements, which are not included in this Form 10-K. The following data
should be read in conjunction with Managements Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated financial
statements of the Company, including the notes thereto, included elsewhere in
this Form 10-K.

|                                                                                                                               |                                                                                   |   |          |                         |   |      |          |         |  |      |          |         |  |   |         |        |  |   |         |        |  | 
|------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------- | - | -------- | ----------------------- | - | ---- | -------- | ------- |  | ---- | -------- | ------- |  | - | ------- | ------ |  | - | ------- | ------ |  | 
|                                                                                                                               |                                                                                   |   |          | Year Ended December 31,
|                                                                                                                               |                                                                                   |   |          |                        
|                                                                                                                               |                                                                                   |   |          | 2002                    |   | 2001 |          | 2000    |  | 1999 |          | 1998   
|                                                                                                                               |                                                                                   |   |          |                         |   |      |          |         |  |      |          |        
|Statements of Operations Data:                                                                                                 |                                                                                   |   |          |                         |   |      |          |         |  |      |          |         |  |   |         |        |  |   |         |       
|Revenue                                                                                                                        |                                                                                   | $ | 252,532  |                         |   | $    | 332,844  |         |  | $    | 319,394  |         |  | $ | 288,524 |        |  | $ | 264,075 |       
|Cost of goods sold                                                                                                             |                                                                                   |   | 169,566  |                         |   |      | 267,389  |         |  |      | 203,371  |         |  |   | 197,442 |        |  |   | 165,385 |       
|                                                                                                                               |                                                                                   |   |          |                         |   |      |          |         |  |      |          |         |  |   |         |        |  |   |         |       
|Gross profit                                                                                                                   |                                                                                   |   | 82,966   |                         |   |      | 65,455   |         |  |      | 116,023  |         |  |   | 91,082  |        |  |   | 98,690  |       
|Operating costs and expenses:                                                                                                  |                                                                                   |   |          |                         |   |      |          |         |  |      |          |         |  |   |         |        |  |   |         |       
|                                                                                                                               | Product development and engineering                                               |   |          | 49,358                  |   |      |          | 94,813  |  |      |          | 74,078  |  |   |         | 35,319 |  |   |         | 25,817 | 
|                                                                                                                               | Selling, general and administrative                                               |   |          | 90,047                  |   |      |          | 150,674 |  |      |          | 124,700 |  |   |         | 67,859 |  |   |         | 53,852 | 
|                                                                                                                               | Amortization of intangibles                                                       |   |          | 140                     |   |      |          | 126,484 |  |      |          | 66,814  |  |   |         | 3,898  |  |   |         | 2,901  | 
|                                                                                                                               | Impairment of goodwill and other intangibles                                      |   |          | 72,697                  |   |      |          |        |  |      |          |        |  |   |         |       |  |   |         |       | 
|                                                                                                                               | Impairment of long-lived assets                                                   |   |          | 17,038                  |   |      |          |        |  |      |          |        |  |   |         |       |  |   |         |       | 
|                                                                                                                               | Restructuring costs                                                               |   |          |                        |   |      |          | 14,111  |  |      |          |        |  |   |         |       |  |   |         | 15,671 | 
|                                                                                                                               | Purchased technology in progress                                                  |   |          |                        |   |      |          |        |  |      |          |        |  |   |         |       |  |   |         | 20,633 | 
|                                                                                                                               |                                                                                   |   |          |                         |   |      |          |         |  |      |          |         |  |   |         |        |  |   |         |       
|Total operating costs and expenses                                                                                             |                                                                                   |   | 229,280  |                         |   |      | 386,082  |         |  |      | 265,592  |         |  |   | 107,076 |        |  |   | 118,874 |       
|                                                                                                                               |                                                                                   |   |          |                         |   |      |          |         |  |      |          |         |  |   |         |        |  |   |         |       
|Operating loss                                                                                                                 |                                                                                   |   | (146,314 | )                       |   |      | (320,627 | )       |  |      | (149,569 | )       |  |   | (15,994 | )      |  |   | (20,184 | )     
|Other income (expense), net                                                                                                    |                                                                                   |   | (23,465  | )                       |   |      | (22,777  | )       |  |      | (9,578   | )       |  |   | 322     |        |  |   | 7,130   |       
|                                                                                                                               |                                                                                   |   |          |                         |   |      |          |         |  |      |          |         |  |   |         |        |  |   |         |       
|Loss before minority interest, provision
(benefit) for taxes, extraordinary gain and
cumulative effect of an accounting change |                                                                                   |   | (169,779 | )                       |   |      | (343,404 | )       |  |      | (159,147 | )       |  |   | (15,672 | )      |  |   | (13,054 | )     
|Minority interest                                                                                                              |                                                                                   |   | 230      |                         |   |      | (11,577  | )       |  |      | (796     | )       |  |   | (610    | )      |  |   | 1,345   |       
|Provision (benefit) for taxes                                                                                                  |                                                                                   |   | 13,395   |                         |   |      | 4,475    |         |  |      | (5,398   | )       |  |   | (2,153  | )      |  |   | 5,707   |       
|                                                                                                                               |                                                                                   |   |          |                         |   |      |          |         |  |      |          |         |  |   |         |        |  |   |         |       
|Loss before extraordinary gain and cumulative
effect of an accounting change                                                   |                                                                                   |   | (183,404 | )                       |   |      | (336,302 | )       |  |      | (152,953 | )       |  |   | (12,909 | )      |  |   | (20,106 | )     
|                                                                                                                               | Extraordinary gain on purchase of minority
interest in Luminent, Inc., net of tax |   |          |                        |   |      |          | 9,949   |  |      |          |        |  |   |         |       |  |   |         |       | 
|                                                                                                                               | Cumulative effect of an accounting change                                         |   |          | (296,355                | ) |      |          |        |  |      |          |        |  |   |         |       |  |   |         |       | 
|                                                                                                                               |                                                                                   |   |          |                         |   |      |          |         |  |      |          |         |  |   |         |        |  |   |         |       
|Net loss                                                                                                                       |                                                                                   | $ | (479,759 | )                       |   | $    | (326,353 | )       |  | $    | (152,953 | )       |  | $ | (12,909 | )      |  | $ | (20,106 | )     
|                                                                                                                               |                                                                                   |   |          |                         |   |      |          |         |  |      |          |         |  |   |         |        |  |   |         |       
|Basic and diluted loss per share                                                                                               |                                                                                   | $ | (5.25    | )                       |   | $    | (4.27    | )       |  | $    | (2.33    | )       |  | $ | (0.24   | )      |  | $ | (0.38   | )     
|Basic and diluted weighted average shares
outstanding                                                                          |                                                                                   |   | 91,421   |                         |   |      | 76,369   |         |  |      | 65,669   |         |  |   | 53,920  |        |  |   | 53,064  |       
|                                                                                                                               |                                                                                   |   |          |                         |   |      |          |         |  |      |          |         |  |   |         |        |  |   |         |       

|                            |  |                    |         |      |  |      |         |      |  |      |           |  |  |   |         |  |  |   |         | 
|--------------------------- |  | ------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | --------- |  |  | - | ------- |  |  | - | ------- | 
|                            |  | As of December 31,
|                            |  |                   
|                            |  | 2002               |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                            |  |                    |         |      |  |      |         |      |  |     
|Balance Sheet Data:         |  |                    |         |      |  |      |         |      |  |      |           |  |  |   |         |  |  |   |         | 
|Cash and cash equivalents   |  | $                  | 100,618 |      |  | $    | 164,676 |      |  | $    | 210,080   |  |  | $ | 34,330  |  |  | $ | 20,692  | 
|Working capital             |  |                    | 91,188  |      |  |      | 175,368 |      |  |      | 366,752   |  |  |   | 106,425 |  |  |   | 115,318 | 
|Total assets                |  |                    | 284,803 |      |  |      | 864,495 |      |  |      | 1,097,621 |  |  |   | 314,533 |  |  |   | 320,192 | 
|Total long-term liabilities |  |                    | 4,056   |      |  |      | 102,254 |      |  |      | 154,504   |  |  |   | 94,409  |  |  |   | 94,317  | 
|Stockholders equity        |  |                    | 154,476 |      |  |      | 584,676 |      |  |      | 781,555   |  |  |   | 166,815 |  |  |   | 174,429 | 

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

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

Overview

We design, manufacture, sell, distribute, integrate and support network
infrastructure equipment and services, and optical components. We conduct our
business along two principal segments: operating divisions and development
stage enterprises. Our principal operating divisions provide equipment used by
commercial customers, governments and telecommunications service providers, and
include switches, routers, network physical infrastructure equipment and remote
device management equipment as well as specialized networking products for
defense and aerospace applications. We conduct our optical components business
through our subsidiary: Luminent, Inc. Luminent designs, manufactures and
sells optical communications components. These components include fiber optic
transceivers, discrete lasers and LEDs, as well as components for
Fiber-to-the-Home applications.

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

Revenues for the year ended December 31, 2002 were $252.5 million,
compared to $332.8 million for the year ended December 31, 2001, a decrease of
24%. We reported a net loss of $479.8 million and $326.4 million for the years
ended December 31, 2002 and 2001, respectively. A significant portion of these
losses were due to charges for impairment of goodwill and other intangibles
recorded in accordance with Statement of Financial Accounting Standards
(SFAS) No. 142, Accounting for Goodwill and Other Intangible Assets,
amortization of goodwill and other intangibles and deferred stock expense
related to our acquisitions in 2000 and the employment arrangements that we
entered into with Luminents former President and its former Chief Financial
Officer in 2000. We expect to continue to amortize deferred stock expense
through 2004. Effective January 1, 2002, we adopted SFAS No. 142, and we no
longer amortize goodwill and intangibles with indefinite lives, but instead
measure goodwill and intangibles for impairment at least annually, or when
events indicate that impairment exists. We will continue to amortize
intangible assets that we determine have definite lives over their useful
lives. As required by SFAS No. 142, we performed the transitional impairment
test on goodwill and other intangibles, which consisted of patents and
assembled work forces. As a result of the transitional impairment test, we
recorded a $296.4 million cumulative effect of an accounting change in 2002.
In addition to the transitional impairment test, we reviewed our remaining
goodwill and other intangibles as required annually pursuant to SFAS No. 142.
As a result of the annual review, we further reduced the carrying amount of
goodwill and other intangibles by recording an impairment charge of $72.7
million in 2002. We will perform our annual impairment review as of October
1st each year, commencing with this review. For the year ended December 31,
2002, we also recorded impairment charges of $11.7 million in connection with
certain equity method investments, as the fair value of these assets was less
than their carrying value. As a consequence of the current economic
environment and potential impairment charges, we do not
expect to report net income in the foreseeable future.

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We divide and operate our business based on two reportable segments:
operating divisions and development stage enterprises. We evaluate segment
performance based on the revenues and the operating expenses of each segment.
We do not track segment data or evaluate segment performance on additional
financial information. As such, there are no separately identifiable segment
assets nor are there any separately identifiable Statements of Operations data
below operating income (expense). The operating divisions segment consists of
substantially all of our overall revenue and includes our optical components,
optical subsystems, optical networking solutions and network physical
infrastructure products. The development stage enterprises segment develops
optical components, subsystems and networks and products for the infrastructure
of the Internet.

Our business involves reliance on foreign-based entities. Several of our
divisions, outside subcontractors and suppliers are located in foreign
countries, including Argentina, China, Denmark, France, Finland, Germany,
Israel, Italy, Japan, Korea, the Netherlands, Norway, Russia, Singapore, South
Africa, Switzerland, Sweden, Taiwan and the United Kingdom. During 2002, 2001
and 2000, foreign sales constituted 74%, 67%, and 63%, respectively, of our
revenue. The vast majority of our foreign sales are to customers located in
the European region. The remaining foreign sales are primarily to customers in
the Asia Pacific region.

Critical Accounting Policies

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

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

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

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

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

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

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

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

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

Transactions With Stock of Luminent

In November 2000, our subsidiary, Luminent, completed the initial public
offering of its common stock, selling 12.0 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 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.

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In July 2000, we entered into employment agreements with Luminents former
President and its former 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. As part the
merger of Luminent discussed above, all stock options to purchase Luminent
common stock were converted into stock options to purchase our common stock
based on the exchange ratio established for the merger. The stock options were
granted to Luminents executives at exercise prices below market value,
resulting in deferred stock expense. Luminents President resigned in
September 2001 and its Chief Financial Officer resigned in June 2002. The
resignations were considered by the parties to be terminations other than for
cause under the employment agreements, providing severance benefits based on
the employment agreements, and the vesting of all of the unvested Luminent
options. The stock options are now exercisable at various dates through June
2004.

Restructuring costs

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 and the cancellation
and termination of purchase commitments. 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 by the end of 2003.

Employee severance costs and related benefits of $1.3 million are related
to approximately 750 layoffs through December 31, 2002, bringing Luminents
total workforce to approximately 472 employees as of December 31, 2002.
Affected employees came from all divisions and areas of Luminent. The majority
of affected employees were in the manufacturing group.

A summary of the restructuring costs and the remaining liability through
and as of December 31, 2002 is as follows (in thousands):

|            |                                 |   |               |       |          |   |               |       |                    |   |        |        |   |   |       |       | 
|----------- | ------------------------------- | - | ------------- | ----- | -------- | - | ------------- | ----- | ------------------ | - | ------ | ------ | - | - | ----- | ----- | 
|            |                                 |   |               |       |          |   |               |       |                    |   |        |        |   |   |      
|            |                                 |   | 2001Provision |       | Utilized |   | Adjustment(1) |       | RemainingProvision
|            |                                 |   |               |       |          |   |               |       |                   
|Exit costs: |                                 |   |               |       |          |   |               |       |                    |   |        |        |   |   |       |      
|            | Closed and abandoned facilities |   | $             | 2,317 |          |   | $             | 527   |                    |   | $      |       |   |   | $     | 1,790 | 
|            | Purchase commitments            |   |               | 5,705 |          |   |               | 1,519 |                    |   |        | (1,474 | ) |   |       | 2,712 | 
|            |                                 |   |               |       |          |   |               |       |                    |   |        |        |   |   |       |       | 
|            |                                 |   | 8,022         |       |          |   | 2,046         |       |                    |   | (1,474 | )      |   |   | 4,502 |      
|            | Employee severance costs        |   |               | 655   |          |   |               | 221   |                    |   |        | (434   | ) |   |       |      | 
|            |                                 |   |               |       |          |   |               |       |                    |   |        |        |   |   |       |       | 
|            |                                 | $ | 8,677         |       |          | $ | 2,267         |       |                    | $ | (1,908 | )      |   | $ | 4,502 |      
|            |                                 |   |               |       |          |   |               |       |                    |   |        |        |   |   |       |       | 

|            |                                 |   |           |        |          |   |           |        |      |   |       |       | 
|----------- | ------------------------------- | - | --------- | ------ | -------- | - | --------- | ------ | ---- | - | ----- | ----- | 
|            |                                 |   | Original  |        |          |   |           |        | 2001
|            |                                 |   | Provision |        | Utilized |   | Provision
|            |                                 |   |           |        |          |   |          
|Exit costs: |                                 |   |           |        |          |   |           |        |      |   |       |      
|            | Asset impairment                |   | $         | 10,441 |          |   | $         | 10,441 |      |   | $     |      | 
|            | Closed and abandoned facilities |   |           | 2,405  |          |   |           | 88     |      |   |       | 2,317 | 
|            | Purchase commitments            |   |           | 6,173  |          |   |           | 468    |      |   |       | 5,705 | 
|            |                                 |   |           |        |          |   |           |        |      |   |       |       | 
|            |                                 |   | 19,019    |        |          |   | 10,997    |        |      |   | 8,022 |      
|            | Employee severance costs        |   |           | 1,281  |          |   |           | 626    |      |   |       | 655   | 
|            |                                 |   |           |        |          |   |           |        |      |   |       |       | 
|            |                                 | $ | 20,300    |        |          | $ | 11,623    |        |      | $ | 8,677 |      
|            |                                 |   |           |        |          |   |           |        |      |   |       |       | 



| | (1) | Includes $837,000 in reduction of future liabilities based on
negotiations with vendors and in usage of previously reserved
purchase commitments for inventory and equipment. The provisions
previously recognized for these items have been reversed during the
year ended December 31, 2002. In connection
with the sale of FOCI and QOI, $1.1 million in restructuring charges
are no longer included in the remaining obligation as they were assumed
by the buyers.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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A summary of the restructuring costs by line item for the years ended
December 31, 2002 and 2001 is as follows (in thousands):

|            |                             |   |      |      |      |   |        |        | 
|----------- | --------------------------- | - | ---- | ---- | ---- | - | ------ | ------ | 
|            |                             |   | 2002 |      | 2001
|            |                             |   |      |      |     
|Exit Costs: |                             |   |      |      |      |   |        |       
|            | Cost of goods sold          |   | $    | (837 | )    |   | $      | 6,173  | 
|            | Restructuring costs         |   |      |     |      |   |        | 14,111 | 
|            | Other income (expense), net |   |      |     |      |   |        | 16     | 
|            |                             |   |      |      |      |   |        |        | 
|            |                             | $ | (837 | )    |      | $ | 20,300 |       
|            |                             |   |      |      |      |   |        |        | 

Market Conditions and Current Outlook

Macroeconomic factors, such as an economic slowdown in the U.S. and
abroad, have detrimentally impacted demand for optical components and network
infrastructure products and services. The unfavorable economic conditions and
reduced capital spending has detrimentally affected sales to service providers,
network equipment companies, e-commerce and Internet businesses, and the
manufacturing industry in the United States during 2001 to date, and may
continue to affect them for the remainder of 2003 and thereafter.

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Results of Operations

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

|                                                                                                                     |                                              |  |                         |    |      |  |      |    |  |  |     |    | 
|-------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- |  | ----------------------- | -- | ---- |  | ---- | -- |  |  | --- | -- | 
|                                                                                                                     |                                              |  | Year Ended December 31,
|                                                                                                                     |                                              |  |                        
|                                                                                                                     |                                              |  | 2002                    |    | 2001 |  | 2000
|                                                                                                                     |                                              |  |                         |    |      |  |     
|Revenue                                                                                                              |                                              |  | 100                     | %  |      |  | 100  | %  |  |  | 100 | % 
|Cost of goods sold                                                                                                   |                                              |  | 67                      |    |      |  | 80   |    |  |  | 64  |   
|Gross profit                                                                                                         |                                              |  | 33                      |    |      |  | 20   |    |  |  | 36  |   
|Operating costs and expenses:                                                                                        |                                              |  |                         |    |      |  |      |    |  |  |     |   
|                                                                                                                     | Product development and engineering          |  |                         | 20 |      |  |      | 28 |  |  |     | 23 | 
|                                                                                                                     | Selling, general and administrative          |  |                         | 36 |      |  |      | 45 |  |  |     | 39 | 
|                                                                                                                     | Amortization of intangibles                  |  |                         |   |      |  |      | 38 |  |  |     | 21 | 
|                                                                                                                     | Impairment of goodwill and other intangibles |  |                         | 29 |      |  |      |   |  |  |     |   | 
|                                                                                                                     | Impairment of long-lived assets              |  |                         | 7  |      |  |      |   |  |  |     |   | 
|                                                                                                                     | Restructuring costs                          |  |                         |   |      |  |      | 4  |  |  |     |   | 
|Total operating costs and expenses                                                                                   |                                              |  | 91                      |    |      |  | 116  |    |  |  | 83  |   
|Operating loss                                                                                                       |                                              |  | (58                     | )  |      |  | (96  | )  |  |  | (47 | ) 
|Other expense, net                                                                                                   |                                              |  | 9                       |    |      |  | 7    |    |  |  | 3   |   
|Loss before minority interest, provision for
taxes, extraordinary gain and cumulative
effect of an accounting change |                                              |  | (67                     | )  |      |  | (103 | )  |  |  | (50 | ) 
|Minority interest                                                                                                    |                                              |  |                        |    |      |  | (3   | )  |  |  |    |   
|Provision (benefit) for taxes                                                                                        |                                              |  | 5                       |    |      |  | 1    |    |  |  | (2  | ) 
|Loss before extraordinary gain and cumulative
effect of an accounting change                                         |                                              |  | (73                     | )  |      |  | (101 | )  |  |  | (48 | ) 
|Extraordinary gain on purchase of minority
interest in Luminent, Inc., net of tax                                    |                                              |  |                        |    |      |  | 3    |    |  |  |    |   
|Cumulative effect of an accounting change                                                                            |                                              |  | (117                    | )  |      |  |     |    |  |  |    |   
|Net loss                                                                                                             |                                              |  | (190                    | )  |      |  | (98  | )  |  |  | (48 | ) 

The following management discussion and analysis refers to and analyzes
our results of operations into two segments as defined by our management.
These two reportable segments are operating divisions and development stage
enterprises, which includes all start-up activities.
31Table of Contents

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

Revenue

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

|                                          |  |      |         |      |  |   |         | 
|----------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                          |  | 2002 |         | 2001
|                                          |  |      |         |     
|Optical passive component                 |  | $    | 28,693  |      |  | $ | 39,010  | 
|Optical active component                  |  |      | 51,343  |      |  |   | 97,653  | 
|Switches and routers                      |  |      | 57,571  |      |  |   | 74,675  | 
|Remote device management products         |  |      | 17,361  |      |  |   | 18,987  | 
|Network physical infrastructure equipment |  |      | 55,570  |      |  |   | 59,902  | 
|Services                                  |  |      | 21,444  |      |  |   | 18,934  | 
|Other network products                    |  |      | 20,550  |      |  |   | 23,683  | 
|                                          |  |      |         |      |  |   |         | 
|                                          |  | $    | 252,532 |      |  | $ | 332,844 | 
|                                          |  |      |         |      |  |   |         | 

Revenues generated from optical passive and active components decreased
$56.6 million, or 41%, to $80.0 million for 2002 as compared to $136.7 million
for 2001. The decrease in optical components revenues was a result of the
downturn in the communications equipment industry and specifically the optical
components sector. Revenues generated from our switches and routers decreased
$17.1 million, or 23%, to $57.6 million for 2002 as compared to $74.7 million
for 2001. Revenues generated from our remote device management products
decreased $1.6 million, or 9%, to $17.4 million for 2002 as compared to $19.0
million for 2001. Revenues generated from our network physical infrastructure
products decreased $4.3 million, or 7%, to $55.6 million for 2002 as compared
to $59.9 million for 2001. Revenues generated from services increased $2.5
million, or 13%, during 2002 to $21.4 million from $18.9 million for 2001.

Our revenues by geographical region for 2002 and 2001 were as follows (in
thousands):

|              |  |      |         |      |  |   |         | 
|------------- |  | ---- | ------- | ---- |  | - | ------- | 
|              |  | 2002 |         | 2001
|              |  |      |         |     
|United States |  | $    | 64,675  |      |  | $ | 108,550 | 
|Europe        |  |      | 157,998 |      |  |   | 176,745 | 
|Asia Pacific  |  |      | 28,560  |      |  |   | 42,925  | 
|Other         |  |      | 1,299   |      |  |   | 4,624   | 
|              |  |      |         |      |  |   |         | 
|              |  | $    | 252,532 |      |  | $ | 332,844 | 
|              |  |      |         |      |  |   |         | 

Revenues to the United States decreased $43.9 million, or 40%, for 2002,
to $64.7 million as compared to $108.6 million for 2001. Revenues to Asia
Pacific decreased $14.4 million, or 34%, for 2002 to $28.6 million as compared
to $42.9 million for 2001. Revenue to Europe decreased $18.7 million, or 11%,
for 2002 to $158.0 million as compared to $176.7 million for 2001.

Development stage enterprises. No significant revenues were generated by
these entities for 2002 and 2001.

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##### Table of Contents



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 divisions. Gross profit for 2002 was $83.0 million, compared to
gross profit of $65.5 million for 2001. Gross profit improved by $17.5
million, or 27%, for 2002 as compared to 2001.

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 increased to 33% for 2002, compared to gross margin of
20% for 2001. The improvement in gross margin was attributed to improved
operating efficiencies realized during 2002 and the effect of write-off of
inventory and other market-related one-time charges of $35.4 million taken by
Luminent during 2001. During 2002, our gross profit was favorably impacted by
recapturing accelerated deferred stock expense due to terminations primarily
through the sale of FOCI and QOI totaling $879,000. Deferred stock expense for
2001 totaled $7.8 million.

Development stage enterprises. No significant gross margins were produced
by these entities for 2002 and 2001.

Product Development and Engineering

Product development and engineering expenses decreased 48%, to $49.4
million for 2002 as compared to $94.8 million for 2001.

Operating divisions. Product development and engineering expenses from
our operating divisions were $31.5 million, or 13% of revenues, for 2002, as
compared to $49.1 million, or 15% of revenues, for 2001. This represents a
decrease of $17.6 million, or 36%, for 2002. These expenses include $551,000
and $14.0 million for 2002 and 2001, respectively, of non-cash deferred stock
expense. We continued to consolidate our operations and product development
and engineering and as a result, we have realized substantial costs savings.

Development stage enterprises. Product development and engineering
expenses of the development stage enterprises were $17.8 million, or 7% of
revenues, for 2002, as compared to $45.7 million, or 14% of revenues, for 2001.
This represents a decrease of $27.9 million, or 61%, for 2002. The decrease
is due to cost reduction efforts, which improved efficiency.

Selling, General and Administrative (SG&A)

SG&A expenses decreased $60.6 million to $90.0 million for 2002, compared
to $150.7 million for 2001. SG&A expenses were 36% and 45% of revenues for
2002 and 2001, respectively. These expenses include $6.9 million and $47.3
million for 2002 and 2001, respectively, of non-cash deferred stock expense.

Operating divisions. SG&A expenses decreased 38% over the prior period to
$84.6 million for 2002. SG&A expenses were 34% and 41% of our revenue for 2002
and 2001, respectively. These expenses include $6.9 million and $47.3 million
for 2002 and 2001, respectively, of non-cash deferred stock expense. These
absolute dollar decreases are mainly due to the reduction of overhead expenses
to align operations with current revenue levels.

Development stage enterprises. SG&A expenses decreased 64% over the prior
period to $5.5 million for 2002, as compared to $15.0 million for 2001. SG&A
expenses for these entities decreased due to reductions in overhead expenses.

33



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Amortization Of Intangibles

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

Development stage enterprises. No significant amortization of intangibles
was recorded for these entities for 2002 and 2001.

Other Expense, Net

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

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

Provision For Taxes

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

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Year ended December 31, 2001 (2001) Compared
To Year ended December 31, 2000 (2000)

Revenue

Operating divisions. Revenue for 2001 increased $13.5 million, or 4%, to
$332.8 million from $319.4 million for 2000. Revenue generated through our
acquisitions for 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 2001 and 2000, respectively. This change
represents a decrease of $8.3 million, or 3%, for 2001. Revenue generated 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 2001.

Development stage enterprises. No significant revenues were generated by
these entities for 2001 and 2000.

Gross Profit

Operating divisions. Gross profit for 2001 was $65.5 million, compared to
gross profit of $116.0 million for 2000. Gross profit decreased $50.6 million,
or 44%, for 2001 over 2000.

Our gross margin decreased to 20% for 2001, compared to gross margin of
36% for 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 2001. The decrease in gross margin in 2001 was 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 totaling $8.3
million. In addition, certain profitable, but low-margin projects in Europe
contributed to the reduction in gross margin for 2001. Furthermore, our gross
margin was affected by deferred stock expense of $7.8 million for the current
year.

Development stage enterprises. No significant gross margins were produced
by these entities for 2000 and 2001.

Product Development and Engineering

Product development and engineering expenses increased 28%, to $94.8
million for 2001 from $74.1 million for 2000.

Operating divisions. Product development and engineering expenses from
our operating divisions were $49.1 million, or 15% of revenues, for 2001, as
compared to $32.6 million, or 10% of revenues, for 2000. This represents an
increase of $16.5 million, or 51%, for 2001. These expenses include deferred
stock expense of $14.0 million and $13.3 million for 2001 and 2000,
respectively.

Development stage enterprises. Product development and engineering
expenses of the development stage enterprises were $45.7 million, or 14% of
revenues, for 2001, as compared to $41.5 million, or 13% of revenues, for 2000.
This represents a decrease of $4.2 million, or 10% of revenues, for 2001.

Selling, General and Administrative (SG&A)

SG&A expenses increased 21% to $150.7 million for 2001, compared to $124.7
million for 2000. SG&A expenses were 45% of revenues for 2001 compared to 39%
of revenues for 2000. These expenses include Luminents restructuring and
other one-time charges of $14.1 million and deferred stock expense of $47.3
million for 2001 and deferred stock expense of $38.4 million for 2000.

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Operating divisions. SG&A expenses increased 9% over prior year to $135.7
million for 2001. SG&A expenses were 41% and 39% of our revenue for 2001 and
2000, respectively. These expenses include Luminents restructuring and other
one-time charges of $14.1 million and deferred stock expense of $47.3 million
for 2001 and deferred stock expense of $38.4 million for 2000. These decreases
are mainly due to the reduction of overhead expenses.

Development stage enterprises. During 2001, the development stage
enterprises began to develop their administrative capabilities and reported
$15.0 million. These companies did not report SG&A expenses during 2000.

Amortization Of Goodwill and Other Intangibles

Operating divisions. Amortization of goodwill and other intangibles
increased to $126.5 million for 2001, from $66.8 million for 2000. The
increase of approximately $45.5 million was the result of the timing of our
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.

Other Expense, Net

In June 1998, we issued $100 million principal amount of 5% 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 2001 and 2000.

The increase in other expense from $8.8 million to $11.2 million for 2001
is primarily attributed to interest expense from our financing obligations, our
share of losses from our unconsolidated subsidiaries of $7.8 million and
impairment charges of $9.2 million on our investments for 2001, partially
offset by interest income and minority interest. Our share of losses from our
unconsolidated subsidiaries was $7.3 for 2000.

Gain on Purchase of Minority Interest, Net of Tax

In December 2001, we reacquired 8% minority interest of Luminent that we
did not own that was created through Luminents November 2000 initial public
offering by merging Luminent into one of our wholly owned subsidiaries. In the
merger, we merger 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.

Recently Issued Accounting Standards

In October 2001, the Financial Accounting Standards Board (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 adopted this statement effective
January 1, 2002, and the immediate impact of the adoption of this statement was
the recognition of an impairment on long-lived assets totaling $17.0 million,
which has been included in the determination of operating loss in the
accompanying Statements of Operations.
36Table of Contents

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement, among other amendments and corrections, rescinds
Statement 4, Reporting Gains and Losses from Extinguishment of Debt  an
amendment of APB Opinion 30, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the
criteria set forth by APB Opinion 30 will now be used to classify those gains
and losses. SFAS No. 145 is effective for fiscal years beginning after May 15,
2002, with early application encouraged. We have adopted this statement for
the year ended December 31, 2002, and the immediate impact of its application
was the inclusion of the gains and losses on the extinguishment of debt in
other expense, net in the accompanying Statements of Operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement supercedes EITF
Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability
is incurred. Under EITF 94-3, a liability is recognized at the date an entity
commits to an exit plan. SFAS No. 146 also establishes that the liability
should initially be measured and recorded at fair value. The provisions of
SFAS No. 146 will be effective for any exit and disposal activities initiated
after December 31, 2002. We have reviewed this statement and do not expect a
material impact on our financial position, results of operations or cash flows.

In September 2002, the EITF released Issue 02-15, Determining Whether
Certain Conversions of Convertible Debt to Equity Securities Are within the
Scope of FASB Statement No. 84. The EITF reached a consensus that SFAS No.
84, Induced Conversions of Convertible Debt applies to all conversions of
convertible debt that (a) occur pursuant to changed conversion privileges that
are exercisable only for a limited period of time and (b) include the issuance
of all of the equity securities issuable pursuant to conversion privileges
included in the terms of the debt at issuance for each debt instrument that is
converted, regardless of the party that initiates the offer or whether the
offer relates to all debt holders. EITF Issue 02-15 applies prospectively to
conversion transactions completed after September 12, 2002. As a result of
this Issue, we recorded a loss of $6.6 million in December 2002 for the
exchange of 4.5 million shares of common stock for $7.5 million principal
amount of Notes.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, an Amendment of FASB
Statement No. 123. This statement amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirement of SFAS No. 123 to require prominent disclosure in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
We adopted this statement and its adoption did not have a material impact on
our financial position, results of operations or cash flows.

Liquidity and Capital Resources

Cash and cash equivalents were $100.6 million as of December 31, 2002, a
decrease of $64.1 million from cash and cash equivalents of $164.7 million as
of December 31, 2001. The decrease in cash and cash equivalent is
substantially the result of paying off $50.0 million of long-term debt, $19.7
million of convertible subordinated notes, terminating our interest rate swap
for $3.2 million, net payments on short-term obligations of $3.1 million and
the repurchase of our common stock of $1.1 million, partially offset by cash
received from the disposition of FOCI and QOI totaling $5.7 million and $7.1
million in income tax refunds received in 2002. The following table
illustrates our current cash position, which we define as cash, cash
equivalents, time deposits and short-term and long-term marketable securities,
as it relates to our current debt position, which we define as all short-term
and long-term obligations including our convertible subordinated notes, as of
December 31, 2002 and 2001 (in thousands):

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|                          |                                   |          |         |          |      |   |         |         | 
|------------------------- | --------------------------------- | -------- | ------- | -------- | ---- | - | ------- | ------- | 
|                          |                                   |          | 2002    |          | 2001
|                          |                                   |          |         |          |     
|Cash                      |                                   |          |         |          |      |   |         |        
|                          | Cash and cash equivalents         |          | $       | 100,618  |      |   | $       | 164,676 | 
|                          | Short-term marketable securities  |          |         | 11,738   |      |   |         | 46,696  | 
|                          | Time deposits                     |          |         | 2,789    |      |   |         | 9,341   | 
|                          | Long-term marketable securities   |          |         | 1,447    |      |   |         |        | 
|                          |                                   |          |         |          |      |   |         |         | 
|                          |                                   |          | 116,592 |          |      |   | 220,713 |        
|Debt                      |                                   |          |         |          |      |   |         |        
|                          | Current portion of long-term debt |          |         | 393      |      |   |         | 52,226  | 
|                          | Convertible subordinated notes    |          |         | 32,418   |      |   |         | 89,646  | 
|                          | Short-term obligations            |          |         | 7,000    |      |   |         | 18,679  | 
|                          | Long-term debt                    |          |         | 390      |      |   |         | 8,871   | 
|                          |                                   |          |         |          |      |   |         |         | 
|                          |                                   |          | 40,201  |          |      |   | 169,422 |        
|                          |                                   |          |         |          |      |   |         |         | 
|Excess cash versus debt   |                                   | $        | 76,391  |          |      | $ | 51,291  |        
|                          |                                   |          |         |          |      |   |         |         | 
|Ratio of cash versus debt |                                   | 2.9 to 1 |         | 1.3 to 1
|                          |                                   |          |         |          |      |   |         |         | 

Our working capital as of December 31, 2002 was $91.2 million compared to
$175.4 million as of December 31, 2001. Our ratio of current assets to current
liabilities as of December 31, 2002 was 1.8 to 1.0 compared to 2.0 to 1.0 as of
December 31, 2001. The decrease in working capital is substantially attributed
to our consolidated net operating losses and the classification, beginning at
June 30, 2002, of our convertible subordinated notes, which are due in June
2003, as a current liability. As of December 31, 2002 and December 31, 2001,
we did not have any off-balance sheet financing arrangements.

Cash used in operating activities was $1.4 million for the year ended
December 31, 2002, as compared to cash used in operating activities of $24.1
million for the year ended December 31, 2001. Cash used in operating
activities is a result of our net operating loss of $479.8 million, adjusted
for non-cash items such as the cumulative effect of an accounting change,
impairment losses on goodwill and other intangibles, cost and equity method
investments, and long-lived assets, depreciation and amortization, deferred
stock expense, deferred income taxes, and offset by cash generated from
operating assets and liabilities. Cash used in operating activities were
positively affected by decreased time deposits, accounts receivables,
inventories and other assets partially offset by decreases in accounts payable
and accrued liabilities, during the period. The decrease in accounts
receivable is due to lower revenue volumes coupled with increased collection
efforts, while the decrease in inventory is primarily the result of the
utilization of inventories on hand. Decreases in accounts payable and accrued
liabilities are the result of the dramatic slowdown in the communications
equipment industry and reductions in overhead expenses.

Cash flows generated from investing activities were $21.4 million for the
year ended December 31, 2002, compared to cash used in investing activities of
$53.1 million for the year ended December 31, 2001. Cash flows generated from
investing activities for the year ended December 31, 2002 were the result of
the maturity of short and long-term investments of $33.4 million and cash
received from the sale of FOCI and QOI of $5.7 million, offset by capital
expenditures of $13.9 million. As of December 31, 2002, we had no plans for
major capital expenditures. Cash flows used in investing activities for the
prior period resulted from the net cash used for capital expenditures and
investments in equity method subsidiaries, offset by the net cash provided by
the maturity of investments.

Cash flows used in financing activities were $79.5 million for the year
ended December 31, 2002, as compared to cash provided in financing activities
of $31.9 million for the year ended December 31, 2001. Cash used in financing
activities was primarily the result of paying off $52.5 million of long-term
debt, paying off $19.7 million of convertible subordinated notes, terminating
our interest rate swap for $3.2 million, net payments on short-term obligations
of $3.1 million and the repurchase of our common stock of $1.1 million. Cash
flows provided by financing activities in 2001 represent the cash received
through borrowings on our short-term obligations and the exercise of stock
options, offset by payments on our short-term and long-term obligations.
38Table of ContentsOn November 10, 2000, Luminent completed the initial public offering of
its common stock, selling 12.0 million shares at $12 per share. This initial
public offering raised net proceeds of approximately $132.3 million. In
December 2001, we reacquired, through a short-form merger, the minority
interest of Luminent, representing approximately 8% of Luminents outstanding
common stock. Following this merger, we increased our liquidity based on
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.In June 1998, we issued $100.0 million principal amount of 5% convertible
subordinated notes (the Notes) due in June 2003, in a private placement
raising net proceeds of $96.4 million. The share (equivalent to a conversion
rate of approximately 73.94 share 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 2002, we retired 57.2 million in Notes in exchange for
$19.7 million in cash and 12.3 million shares of our common stock. For 2002,
we recognized a loss on the extinguishment of the Notes of $1.4 million, net of
associated taxes. This loss includes a $6.6 million loss recognized in
accordance with EITF Issue 02-15 released in September 2002. See Recently
Issued Accounting Standards.The following table illustrates our total contractual cash obligations as
of December 31, 2002 (in thousands):

|                                   |  |       |        |      |  |             |        |             |  |               |        |  |  |   |       |  |  |   |       | 
|---------------------------------- |  | ----- | ------ | ---- |  | ----------- | ------ | ----------- |  | ------------- | ------ |  |  | - | ----- |  |  | - | ----- | 
|                                   |  |       |        |      |  | Less than
1 |        |             |  |               |        |  |  |   |       |  |  |  
|Cash Obligations                   |  | Total |        | Year |  | 1  3 Years |        | 4  5 Years |  | After 5 Years
|                                   |  |       |        |      |  |             |        |             |  |              
|Short-term obligations             |  | $     | 7,000  |      |  | $           | 7,000  |             |  | $             |       |  |  | $ |      |  |  | $ |      | 
|Long-term debt                     |  |       | 783    |      |  |             | 393    |             |  |               | 323    |  |  |   | 67    |  |  |   |      | 
|Convertible
subordinated notes     |  |       | 32,418 |      |  |             | 32,418 |             |  |               |       |  |  |   |      |  |  |   |      | 
|Unconditional
purchase obligations |  |       | 9,165  |      |  |             | 9,165  |             |  |               |       |  |  |   |      |  |  |   |      | 
|Operating leases                   |  |       | 30,690 |      |  |             | 8,907  |             |  |               | 10,937 |  |  |   | 5,659 |  |  |   | 5,187 | 
|                                   |  |       |        |      |  |             |        |             |  |               |        |  |  |   |       |  |  |   |       | 
|Total contractual
cash obligations |  | $     | 80,056 |      |  | $           | 57,883 |             |  | $             | 11,260 |  |  | $ | 5,726 |  |  | $ | 5,187 | 
|                                   |  |       |        |      |  |             |        |             |  |               |        |  |  |   |       |  |  |   |       | 

Our total contractual cash obligations as of December 31, 2002, were $80.1
million, of which, $57.9 million are due within the next 12 months. These
total contractual cash obligations primarily consist of short-term obligations
including our convertible subordinated notes, long-term financing obligations,
operating leases for our equipment and facilities and unconditional purchase
obligations for necessary raw materials. Historically, these obligations have
been satisfied through cash generated from our operations or other avenues (see
discussion below), and we expect that this will continue to be the case.

Our unconditional purchase obligations are to secure the necessary raw
materials and components required for production of our products. As part of
Luminents restructure plan (see our discussion above and the
Notes to our
Financial Statements), $2.7 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 sales
projections. The remaining purchase commitments are part of our ordinary
course of business.

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




ITEM 7a. QUANITITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Market Risks

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

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

Foreign Exchange Rates. We operate on an international basis with a
portion of our revenues and expenses being incurred in currencies other than
the U.S. dollar. Fluctuation in the value of these foreign currencies in which
we conduct our business relative to the U.S. dollar will cause U.S. dollar
translation of such currencies to vary from one period to another. We cannot
predict the effect of exchange rate fluctuations upon future operating results.
However, because we have expenses and revenues in each of the principal
functional currencies, the exposure to our financial results to currency
fluctuations is reduced. We 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 greater inflation than the United States,
there can be no assurance that inflation will not have a material adverse
effect on our operating results in the future.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Stockholders of MRV Communications, Inc.

We have audited the accompanying consolidated balance sheet of MRV
Communications, Inc. (a Delaware corporation) and subsidiaries as of December
31, 2002 and the related consolidated statements of operations, stockholders
equity and comprehensive income (loss) and cash flows for the year ended
December 31, 2002. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of MRV Communications, Inc., for the fiscal years ended December 31, 2001 and
2000, were audited by other auditors who have ceased operations. Those
auditors expressed an unqualified opinion on those statements in their report
dated February 12, 2002.

We conducted our audit 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 audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MRV
Communications, Inc. and subsidiaries as of December 31, 2002 and the
consolidated results of their operations and their cash flows for the year
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States.

As discussed in Note 3 to the consolidated financial statements, MRV
Communications, Inc. changed its method of accounting for purchased goodwill
and other intangible assets in accordance with Statement of Financial
Accounting Standards (SFAS) No. 142 during the first quarter of fiscal 2002.
As discussed above, the financial statements of MRV Communications, Inc. as of
December 31, 2001 and 2000, and for the years then ended were audited by other
auditors who have ceased operations. As described in Note 3, these financial
statements have been updated to include the transitional disclosures required
by SFAS No. 142, Goodwill and Other Intangible Assets, which was adopted by
the Company as of January 1, 2002. Our audit procedures with respect to the
disclosures in Note 3 for fiscal 2001 and 2000 included (i) agreeing the
previously reported net loss to the previously issued financial statements and
the adjustments to reported net loss representing amortization expense
(including any related tax effects) recognized in those periods related to
goodwill that are no longer being amortized to the Companys underlying records
obtained from management, and (ii) testing the mathematical accuracy of the
reconciliation of adjusted net loss to reported net loss, and the related net
loss-per-share amounts. Our audit procedures with respect to the disclosures in
Note 3 for fiscal 2001 and 2000 included (i) agreeing the goodwill and
amortization amounts and the gross intangible assets and accumulated
amortization amounts to the Companys underlying records obtained from
management, and (ii) testing the mathematical accuracy of the tables. In our
opinion, the disclosures for fiscal 2001 and 2000 in Note 3 related to the
transitional disclosures of SFAS No. 142 are appropriate. However, we were not
engaged to audit, review, or apply any procedures to the Companys financial
statements for fiscal 2001 and 2000 other than with respect to such disclosures
and, accordingly, we do not express an opinion or any other form of assurance
on the Companys fiscal 2001 and 2000 financial statements taken as a whole.

/s/ ERNST & YOUNG LLP

Los Angeles, California
February 5, 2003

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This is a copy of the audit report previously issued by Arthur Andersen
LLP in connection with MRV Communications, Inc. filing on Form 10-K for the
year ended December 31, 2001. This audit report has not been reissued by
Arthur Andersen LLP in connection with this filing on Form 10-K. See Exhibit
23.2 for further discussion. The balance sheet as of December 31, 2000,
referred to in this report has not been included in the accompanying financial
statements.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of MRV Communications, Inc.:

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

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

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

/s/ ARTHUR ANDERSEN LLP

Los Angeles, California
February 12, 2002

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MRV Communications, Inc.Statements of Operations

(In thousands, except per share data)

|                                                                                                                               |                                              |                                                                               |          |                         |       |      |          |         |       |   |          |         |       |  
|------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------- | ----------------------------------------------------------------------------- | -------- | ----------------------- | ----- | ---- | -------- | ------- | ----- | - | -------- | ------- | ----- | -
|                                                                                                                               |                                              |                                                                               |          | Year Ended December 31,
|                                                                                                                               |                                              |                                                                               |          |                        
|                                                                                                                               |                                              |                                                                               |          | 2002                    |       | 2001 |          | 2000   
|                                                                                                                               |                                              |                                                                               |          |                         |       |      |          |        
|Revenue                                                                                                                        |                                              | $                                                                             | 252,532  |                         |       | $    | 332,844  |         |       | $ | 319,394  |        
|Cost of goods sold                                                                                                             |                                              |                                                                               | 169,566  |                         |       |      | 267,389  |         |       |   | 203,371  |        
|                                                                                                                               |                                              |                                                                               |          |                         |       |      |          |         |       |   |          |        
|Gross profit                                                                                                                   |                                              |                                                                               | 82,966   |                         |       |      | 65,455   |         |       |   | 116,023  |        
|Operating costs and expenses:                                                                                                  |                                              |                                                                               |          |                         |       |      |          |         |       |   |          |        
|                                                                                                                               | Product development and engineering          |                                                                               |          | 49,358                  |       |      |          | 94,813  |       |   |          | 74,078  |      
|                                                                                                                               | Selling, general and administrative          |                                                                               |          | 90,047                  |       |      |          | 150,674 |       |   |          | 124,700 |      
|                                                                                                                               | Amortization of intangibles                  |                                                                               |          | 140                     |       |      |          | 126,484 |       |   |          | 66,814  |      
|                                                                                                                               | Impairment of goodwill and other intangibles |                                                                               |          | 72,697                  |       |      |          |        |       |   |          |        |      
|                                                                                                                               | Impairment of long-lived assets              |                                                                               |          | 17,038                  |       |      |          |        |       |   |          |        |      
|                                                                                                                               | Restructuring costs                          |                                                                               |          |                        |       |      |          | 14,111  |       |   |          |        |      
|                                                                                                                               |                                              |                                                                               |          |                         |       |      |          |         |       |   |          |        
|Total operating costs and expenses                                                                                             |                                              |                                                                               | 229,280  |                         |       |      | 386,082  |         |       |   | 265,592  |        
|                                                                                                                               |                                              |                                                                               |          |                         |       |      |          |         |       |   |          |        
|Operating loss                                                                                                                 |                                              |                                                                               | (146,314 | )                       |       |      | (320,627 | )       |       |   | (149,569 | )      
|Other expense, net                                                                                                             |                                              |                                                                               | 23,465   |                         |       |      | 22,777   |         |       |   | 9,578    |        
|                                                                                                                               |                                              |                                                                               |          |                         |       |      |          |         |       |   |          |        
|Loss before minority interest, provision
(benefit) for taxes, extraordinary gain and
cumulative effect of an accounting change |                                              |                                                                               | (169,779 | )                       |       |      | (343,404 | )       |       |   | (159,147 | )      
|Minority interest                                                                                                              |                                              |                                                                               | 230      |                         |       |      | (11,577  | )       |       |   | (796     | )      
|Provision (benefit) for taxes                                                                                                  |                                              |                                                                               | 13,395   |                         |       |      | 4,475    |         |       |   | (5,398   | )      
|                                                                                                                               |                                              |                                                                               |          |                         |       |      |          |         |       |   |          |        
|Loss before extraordinary gain and cumulative
effect of an accounting change                                                   |                                              |                                                                               | (183,404 | )                       |       |      | (336,302 | )       |       |   | (152,953 | )      
|Extraordinary gain on purchase of minority
interest in Luminent, Inc., net of tax                                              |                                              |                                                                               |         |                         |       |      | 9,949    |         |       |   |         |        
|Cumulative effect of an accounting change                                                                                      |                                              |                                                                               | (296,355 | )                       |       |      |         |         |       |   |         |        
|                                                                                                                               |                                              |                                                                               |          |                         |       |      |          |         |       |   |          |        
|Net loss                                                                                                                       |                                              | $                                                                             | (479,759 | )                       |       | $    | (326,353 | )       |       | $ | (152,953 | )      
|                                                                                                                               |                                              |                                                                               |          |                         |       |      |          |         |       |   |          |        
|Earnings per share:                                                                                                            |                                              |                                                                               |          |                         |       |      |          |         |       |   |          |        
|Basic and diluted loss per share:                                                                                              |                                              |                                                                               |          |                         |       |      |          |         |       |   |          |        
|                                                                                                                               |                                              | Loss before extraordinary gain, and
cumulative effect of an accounting change |          | $                       | (2.01 | )    |          | $       | (4.40 | ) |          | $       | (2.33 | )
|                                                                                                                               |                                              | Extraordinary gain                                                            |          | $                       |      |      |          | $       | 0.13  |   |          | $       |      |  
|                                                                                                                               |                                              | Cumulative effect of an accounting change                                     |          | $                       | (3.24 | )    |          | $       |      |   |          | $       |      |  
|Net loss                                                                                                                       |                                              | $                                                                             | (5.25    | )                       |       | $    | (4.27    | )       |       | $ | (2.33    | )      
|Weighted average number of shares:                                                                                             |                                              |                                                                               |          |                         |       |      |          |         |       |   |          |        
|Basic and diluted                                                                                                              |                                              |                                                                               | 91,421   |                         |       |      | 76,369   |         |       |   | 65,669   |        
|                                                                                                                               |                                              |                                                                               |          |                         |       |      |          |         |       |   |          |        

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

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MRV Communications, Inc.

Balance Sheets

(In thousands, except par values)

|                                     |                                      |   |                    |         |      |   |         |         | 
|------------------------------------ | ------------------------------------ | - | ------------------ | ------- | ---- | - | ------- | ------- | 
|                                     |                                      |   | As of December 31,
|                                     |                                      |   |                   
|                                     |                                      |   | 2002               |         | 2001
|                                     |                                      |   |                    |         |     
|Assets                               |                                      |   |                    |         |      |   |         |        
|Current assets:                      |                                      |   |                    |         |      |   |         |        
|                                     | Cash and cash equivalents            |   | $                  | 100,618 |      |   | $       | 164,676 | 
|                                     | Short-term marketable securities     |   |                    | 11,738  |      |   |         | 46,696  | 
|                                     | Time deposits                        |   |                    | 2,789   |      |   |         | 9,341   | 
|                                     | Accounts receivable, net             |   |                    | 50,965  |      |   |         | 55,106  | 
|                                     | Inventories                          |   |                    | 32,695  |      |   |         | 57,308  | 
|                                     | Other current assets                 |   |                    | 11,283  |      |   |         | 10,044  | 
|                                     |                                      |   |                    |         |      |   |         |         | 
|Total current assets                 |                                      |   | 210,088            |         |      |   | 343,171 |        
|Property and equipment, net          |                                      |   | 35,169             |         |      |   | 72,012  |        
|Goodwill                             |                                      |   | 29,740             |         |      |   | 343,904 |        
|Intangibles                          |                                      |   | 135                |         |      |   | 51,408  |        
|Long-term marketable securities      |                                      |   | 1,447              |         |      |   |        |        
|Deferred income taxes                |                                      |   | 2,637              |         |      |   | 23,229  |        
|Investments                          |                                      |   | 3,063              |         |      |   | 16,937  |        
|Other assets                         |                                      |   | 2,524              |         |      |   | 13,834  |        
|                                     |                                      |   |                    |         |      |   |         |         | 
|                                     |                                      | $ | 284,803            |         |      | $ | 864,495 |        
|                                     |                                      |   |                    |         |      |   |         |         | 
|Liabilities and stockholders equity |                                      |   |                    |         |      |   |         |        
|Current liabilities:                 |                                      |   |                    |         |      |   |         |        
|                                     | Current maturities of long-term debt |   | $                  | 393     |      |   | $       | 52,226  | 
|                                     | Convertible subordinated notes       |   |                    | 32,418  |      |   |         |        | 
|                                     | Short-term obligations               |   |                    | 7,000   |      |   |         | 18,679  | 
|                                     | Accounts payable                     |   |                    | 41,308  |      |   |         | 48,586  | 
|                                     | Accrued liabilities                  |   |                    | 31,542  |      |   |         | 39,035  | 
|                                     | Deferred revenue                     |   |                    | 3,950   |      |   |         | 4,165   | 
|                                     | Other current liabilities            |   |                    | 2,289   |      |   |         | 5,112   | 
|                                     |                                      |   |                    |         |      |   |         |         | 
|Total current liabilities            |                                      |   | 118,900            |         |      |   | 167,803 |        
|Long-term debt                       |                                      |   | 390                |         |      |   | 8,871   |        
|Convertible subordinated notes       |                                      |   |                   |         |      |   | 89,646  |        
|Other long-term liabilities          |                                      |   | 3,666              |         |      |   | 3,737   |        
|Minority interest                    |                                      |   | 7,371              |         |      |   | 9,762   |        
|Commitments and contingencies        |                                      |   |                    |         |      |   |         |        

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MRV Communications, Inc.

Balance Sheets

(In thousands, except par values)

|                           |                                                            |                                                            |         |                    |     |      |         |           |     | 
|-------------------------- | ---------------------------------------------------------- | ---------------------------------------------------------- | ------- | ------------------ | --- | ---- | ------- | --------- | --- | 
|                           |                                                            |                                                            |         | As of December 31,
|                           |                                                            |                                                            |         |                   
|                           |                                                            |                                                            |         | 2002               |     | 2001
|                           |                                                            |                                                            |         |                    |     |     
|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  100,132 shares in 2002 and 82,824 in 2001         |         |                    |     |      |         |           |     | 
|                           |                                                            | Outstanding  98,965 shares in 2002 and 82,776 in 2001     |         |                    | 168 |      |         |           | 141 | 
|                           | Additional paid-in capital                                 |                                                            |         | 1,149,635          |     |      |         | 1,118,942 |    
|                           | Accumulated deficit                                        |                                                            |         | (977,442           | )   |      |         | (497,683  | )  
|                           | Deferred stock expense, net                                |                                                            |         | (5,047             | )   |      |         | (26,344   | )  
|                           | Treasury stock, 1,215 shares in 2002 and 48 shares in 2001 |                                                            |         | (1,207             | )   |      |         | (133      | )  
|                           | Accumulated other comprehensive loss                       |                                                            |         | (11,631            | )   |      |         | (10,247   | )  
|                           |                                                            |                                                            |         |                    |     |      |         |           |     | 
|Total stockholders equity |                                                            |                                                            | 154,476 |                    |     |      | 584,676 |          
|                           |                                                            |                                                            |         |                    |     |      |         |           |     | 
|                           |                                                            | $                                                          | 284,803 |                    |     | $    | 864,495 |          
|                           |                                                            |                                                            |         |                    |     |      |         |           |     | 

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

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MRV Communications, Inc.Statements of Stockholders Equity and Comprehensive Income (Loss)

(In thousands)

|                                                                            |                                       |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |      |   |  |   |        |        |   |   |          |          |  
|--------------------------------------------------------------------------- | ------------------------------------- |  | ------------ | - | ------ | - | ------- | - | ------- | - | ---------- | - | -------- | - | ------------- | - | -------- | - | ------------- | -------- | - | - | ---- | - |  | - | ------ | ------ | - | - | -------- | -------- | -
|                                                                            |                                       |  | Common Stock |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |      |   |  |   |       
|                                                                            |                                       |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |      |   |  |   |       
|                                                                            |                                       |  |              |   |        |   |         |   |         |   | Additional |   | Deferred |   |               |   |          |   |               |          |   |   |      |   |  |   |        |        |  
|                                                                            |                                       |  |              |   |        |   |         |   |         |   | Paid-In    |   | Stock    |   | Accumulated   |   | Treasury |   | Comprehensive |          |   |   |     
|                                                                            |                                       |  | Shares       |   | Amount |   | Capital |   | Expense |   | Deficit    |   | Stock    |   | Income (Loss) |   | Total   
|                                                                            |                                       |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |         
|Balance, December 31, 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  |         
|Conversion of convertible
subordinated notes                                |                                       |  | 26           |   |        |   |        |   |         |   | 354        |   |          |   |              |   |          |   |              |          |   |   |     |   |  |   |       |        |   |   | 354      |         
|Effect of subsidiary
equity transactions                                    |                                       |  |             |   |        |   |        |   |         |   | 49,679     |   |          |   |              |   |          |   |              |          |   |   |     |   |  |   |       |        |   |   | 49,679   |         
|Deferred stock expense                                                      |                                       |  |             |   |        |   |        |   |         |   | 160,803    |   |          |   | (160,803      | ) |          |   |              |          |   |   |     |   |  |   |       |        |   |   |         |         
|Amortization of deferred
stock expense                                      |                                       |  |             |   |        |   |        |   |         |   |           |   |          |   | 59,941        |   |          |   |              |          |   |   |     |   |  |   |       |        |   |   | 59,941   |         
|Comprehensive loss:                                                         |                                       |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |      |   |  |   |        |        |   |   |          |         
|                                                                            | Net loss                              |  |              |  |        |   |         |  |         |   |            |  |          |   |               |  |          |   |               | (152,953 | ) |   |      |  |  |   |        |       |   |   |          | (152,953 | )
|                                                                            | Translation adjustment                |  |              |  |        |   |         |  |         |   |            |  |          |   |               |  |          |   |               |         |   |   |      |  |  |   |        | (657   | ) |   |          | (657     | )
|                                                                            |                                       |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |      |   |  |   |        |        |   |   |          |         
|Comprehensive loss                                                          |                                       |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |      |   |  |   |        |        |   |   | (153,610 | )       
|                                                                            |                                       |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |      |   |  |   |        |        |   |   |          |         
|Balance, December 31, 2000                                                  |                                       |  | 73,279       |   |        | $ | 126     |   |         | $ | 1,060,650  |   |          | $ | (100,862      | ) |          | $ | (171,330      | )        |   | $ | (133 | ) |  | $ | (6,896 | )      |   | $ | 781,555  |         
|Exercise of stock options
and warrants                                      |                                       |  | 561          |   |        |   |        |   |         |   | 6,406      |   |          |   |              |   |          |   |              |          |   |   |     |   |  |   |       |        |   |   | 6,406    |         
|Issuance of common stock
for purchase of Luminent,
Inc.s minority interest |                                       |  | 5,160        |   |        |   | 9       |   |         |   | 16,845     |   |          |   |              |   |          |   |              |          |   |   |     |   |  |   |       |        |   |   | 16,854   |         
|Issuance of common stock
in connection with
acquisitions                    |                                       |  | 1,247        |   |        |   | 2       |   |         |   | 19,719     |   |          |   |              |   |          |   |              |          |   |   |     |   |  |   |       |        |   |   | 19,721   |         
|Issuance of common stock
in a private placement                             |                                       |  | 2,529        |   |        |   | 4       |   |         |   | 19,501     |   |          |   |              |   |          |   |              |          |   |   |     |   |  |   |       |        |   |   | 19,505   |         
|Fair value of stock
options issued for an
investment                        |                                       |  |             |   |        |   |        |   |         |   | 508        |   |          |   |              |   |          |   |              |          |   |   |     |   |  |   |       |        |   |   | 508      |         
|Fair value of stock
options issued to a
non-employee                        |                                       |  |             |   |        |   |        |   |         |   | 535        |   |          |   |              |   |          |   |              |          |   |   |     |   |  |   |       |        |   |   | 535      |         
|Forfeited stock options                                                     |                                       |  |             |   |        |   |        |   |         |   | (13,038    | ) |          |   | 6,733         |   |          |   |              |          |   |   |     |   |  |   |       |        |   |   | (6,305   | )       
|Deferred stock expense                                                      |                                       |  |             |   |        |   |        |   |         |   | 7,816      |   |          |   | (7,816        | ) |          |   |              |          |   |   |     |   |  |   |       |        |   |   |         |         
|Amortization of deferred
stock expense                                      |                                       |  |             |   |        |   |        |   |         |   |           |   |          |   | 75,601        |   |          |   |              |          |   |   |     |   |  |   |       |        |   |   | 75,601   |         
|Comprehensive loss:                                                         |                                       |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |      |   |  |   |        |        |   |   |          |         
|                                                                            | Net loss                              |  |              |  |        |   |         |  |         |   |            |  |          |   |               |  |          |   |               | (326,353 | ) |   |      |  |  |   |        |       |   |   |          | (326,353 | )
|                                                                            | Unrealized loss on
interest rate swap |  |              |  |        |   |         |  |         |   |            |  |          |   |               |  |          |   |               |         |   |   |      |  |  |   |        | (3,198 | ) |   |          | (3,198   | )
|                                                                            | Translation adjustment                |  |              |  |        |   |         |  |         |   |            |  |          |   |               |  |          |   |               |         |   |   |      |  |  |   |        | (153   | ) |   |          | (153     | )
|                                                                            |                                       |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |      |   |  |   |        |        |   |   |          |         
|Comprehensive loss                                                          |                                       |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |      |   |  |   |        |        |   |   | (329,704 | )       
|                                                                            |                                       |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |      |   |  |   |        |        |   |   |          |         

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MRV Communications, Inc.

Statements of Stockholders Equity and Comprehensive Income (Loss)

(In thousands)

|                                                                        |                                     |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |        |   |  |   |         |        |   |   |          |          |  
|----------------------------------------------------------------------- | ----------------------------------- |  | ------------ | - | ------ | - | ------- | - | ------- | - | ---------- | - | -------- | - | ------------- | - | -------- | - | ------------- | -------- | - | - | ------ | - |  | - | ------- | ------ | - | - | -------- | -------- | -
|                                                                        |                                     |  | Common Stock |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |        |   |  |   |        
|                                                                        |                                     |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |        |   |  |   |        
|                                                                        |                                     |  |              |   |        |   |         |   |         |   | Additional |   | Deferred |   |               |   |          |   |               |          |   |   |        |   |  |   |         |        |  
|                                                                        |                                     |  |              |   |        |   |         |   |         |   | Paid-In    |   | Stock    |   | Accumulated   |   | Treasury |   | Comprehensive |          |   |   |       
|                                                                        |                                     |  | Shares       |   | Amount |   | Capital |   | Expense |   | Deficit    |   | Stock    |   | Income (Loss) |   | Total   
|                                                                        |                                     |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |         
|Balance, December 31, 2001                                              |                                     |  | 82,776       |   |        | $ | 141     |   |         | $ | 1,118,942  |   |          | $ | (26,344       | ) |          | $ | (497,683      | )        |   | $ | (133   | ) |  | $ | (10,247 | )      |   | $ | 584,676  |         
|Exercise of stock options
and warrants                                  |                                     |  | 50           |   |        |   |        |   |         |   | 131        |   |          |   |              |   |          |   |              |          |   |   |       |   |  |   |        |        |   |   | 131      |         
|Issuance of common stock in
connection with
acquisitions                |                                     |  | 4,996        |   |        |   | 8       |   |         |   | 7,044      |   |          |   |              |   |          |   |              |          |   |   |       |   |  |   |        |        |   |   | 7,052    |         
|Issuance of common stock in
exchange for convertible
subordinated notes |                                     |  | 12,310       |   |        |   | 21      |   |         |   | 38,211     |   |          |   |              |   |          |   |              |          |   |   |       |   |  |   |        |        |   |   | 38,232   |         
|Purchase of treasury stock                                              |                                     |  | (1,167       | ) |        |   | (2      | ) |         |   |           |   |          |   |              |   |          |   |              |          |   |   | (1,074 | ) |  |   |        |        |   |   | (1,076   | )       
|Forfeited stock options                                                 |                                     |  |             |   |        |   |        |   |         |   | (14,693    | ) |          |   | 2,990         |   |          |   |              |          |   |   |       |   |  |   |        |        |   |   | (11,703  | )       
|Amortization of deferred
stock expense                                  |                                     |  |             |   |        |   |        |   |         |   |           |   |          |   | 18,307        |   |          |   |              |          |   |   |       |   |  |   |        |        |   |   | 18,307   |         
|Comprehensive income (loss):                                            |                                     |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |        |   |  |   |         |        |   |   |          |         
|                                                                        | Net loss                            |  |              |  |        |   |         |  |         |   |            |  |          |   |               |  |          |   |               | (479,759 | ) |   |        |  |  |   |         |       |   |   |          | (479,759 | )
|                                                                        | Realized loss on interest
rate swap |  |              |  |        |   |         |  |         |   |            |  |          |   |               |  |          |   |               |         |   |   |        |  |  |   |         | 3,198  |   |   |          | 3,198    |  
|                                                                        | Translation adjustment              |  |              |  |        |   |         |  |         |   |            |  |          |   |               |  |          |   |               |         |   |   |        |  |  |   |         | (4,582 | ) |   |          | (4,582   | )
|                                                                        |                                     |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |        |   |  |   |         |        |   |   |          |         
|Comprehensive loss                                                      |                                     |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |        |   |  |   |         |        |   |   | (481,143 | )       
|                                                                        |                                     |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |        |   |  |   |         |        |   |   |          |         
|Balance, December 31, 2002                                              |                                     |  | 98,965       |   |        | $ | 168     |   |         | $ | 1,149,635  |   |          | $ | (5,047        | ) |          | $ | (977,442      | )        |   | $ | (1,207 | ) |  | $ | (11,631 | )      |   | $ | 154,476  |         
|                                                                        |                                     |  |              |   |        |   |         |   |         |   |            |   |          |   |               |   |          |   |               |          |   |   |        |   |  |   |         |        |   |   |          |         

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

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MRV Communications, Inc.

Statements of Cash Flows

(In thousands)

|                                      |                                                                                |                                                                       |                                                     |          |                         |        |      |          |         |         |   |          |         |         |  
|------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------------------------------------------- | --------------------------------------------------- | -------- | ----------------------- | ------ | ---- | -------- | ------- | ------- | - | -------- | ------- | ------- | -
|                                      |                                                                                |                                                                       |                                                     |          | Year Ended December 31,
|                                      |                                                                                |                                                                       |                                                     |          |                        
|                                      |                                                                                |                                                                       |                                                     |          | 2002                    |        | 2001 |          | 2000   
|                                      |                                                                                |                                                                       |                                                     |          |                         |        |      |          |        
|Cash flows from operating activities: |                                                                                |                                                                       |                                                     |          |                         |        |      |          |         |         |   |         
|                                      | Net loss                                                                       |                                                                       | $                                                   | (479,759 | )                       |        | $    | (326,353 | )       |         | $ | (152,953 | )      
|                                      | Adjustments to reconcile net loss to net cash used in
operating activities:    |                                                                       |                                                     |          |                         |        |      |          |         |         |   |          |        
|                                      |                                                                                | Depreciation and amortization                                         |                                                     |          | 16,169                  |        |      |          | 140,554 |         |   |          | 77,871  |        
|                                      |                                                                                | Amortization of deferred stock expense, net of forfeited options      |                                                     |          | 6,604                   |        |      |          | 69,831  |         |   |          | 59,941  |        
|                                      |                                                                                | Provision for doubtful accounts                                       |                                                     |          | 2,188                   |        |      |          | 5,654   |         |   |          | 3,833   |        
|                                      |                                                                                | Deferred income taxes                                                 |                                                     |          | 20,592                  |        |      |          | 15,134  |         |   |          | (25,205 | )      
|                                      |                                                                                | Loss on extinguishment of debt                                        |                                                     |          | 1,363                   |        |      |          |        |         |   |          |        |        
|                                      |                                                                                | Impairment of goodwill and other intangibles                          |                                                     |          | 72,697                  |        |      |          |        |         |   |          |        |        
|                                      |                                                                                | Cumulative effect of an accounting change                             |                                                     |          | 296,355                 |        |      |          |        |         |   |          |        |        
|                                      |                                                                                | Loss on termination of interest rate swap                             |                                                     |          | 3,198                   |        |      |          |        |         |   |          |        |        
|                                      |                                                                                | Realized gain on investment                                           |                                                     |          |                        |        |      |          |        |         |   |          | (50     | )      
|                                      |                                                                                | Extraordinary gain on purchase of minority interest in
Luminent, Inc. |                                                     |          |                        |        |      |          | (9,949  | )       |   |          |        |        
|                                      |                                                                                | (Gain) loss on disposition of property and equipment                  |                                                     |          | 243                     |        |      |          | (178    | )       |   |          | 16      |        
|                                      |                                                                                | Tax benefit from stock option exercises                               |                                                     |          |                        |        |      |          |        |         |   |          | 11,417  |        
|                                      |                                                                                | Impairment of long-lived assets                                       |                                                     |          | 17,038                  |        |      |          | 7,787   |         |   |          |        |        
|                                      |                                                                                | Impairment of cost and equity method investments                      |                                                     |          | 11,741                  |        |      |          | 9,166   |         |   |          |        |        
|                                      |                                                                                | Loss on equity method subsidiaries                                    |                                                     |          | 4,283                   |        |      |          | 10,790  |         |   |          |        |        
|                                      |                                                                                | Minority interests share of income                                   |                                                     |          | 230                     |        |      |          | (11,557 | )       |   |          | (796    | )      
|                                      | Changes in operating assets and liabilities, net of effects from
acquisitions: |                                                                       |                                                     |          |                         |        |      |          |         |         |   |          |        
|                                      |                                                                                | Time deposits                                                         |                                                     |          | 1,843                   |        |      |          | 46,840  |         |   |          |        |        
|                                      |                                                                                | Accounts receivable                                                   |                                                     |          | 1,946                   |        |      |          | 1,953   |         |   |          | 4,949   |        
|                                      |                                                                                | Inventories                                                           |                                                     |          | 24,613                  |        |      |          | 19,697  |         |   |          | (28,869 | )      
|                                      |                                                                                | Refundable income taxes                                               |                                                     |          |                        |        |      |          |        |         |   |          | 3,216   |        
|                                      |                                                                                | Other assets                                                          |                                                     |          | 11,404                  |        |      |          | 4,532   |         |   |          | (12,020 | )      
|                                      |                                                                                | Accounts payable                                                      |                                                     |          | (6,996                  | )      |      |          | (7,502  | )       |   |          | 28,939  |        
|                                      |                                                                                | Accrued liabilities                                                   |                                                     |          | (7,280                  | )      |      |          | 1,321   |         |   |          | 4,890   |        
|                                      |                                                                                | Deferred revenue                                                      |                                                     |          | (215                    | )      |      |          | 2,695   |         |   |          | 175     |        
|                                      |                                                                                | Other current liabilities                                             |                                                     |          | 375                     |        |      |          | (4,563  | )       |   |          | (5,154  | )      
|                                      |                                                                                |                                                                       |                                                     |          |                         |        |      |          |         |         |   |          |        
|                                      |                                                                                |                                                                       | Net cash used in operating activities               |          |                         | (1,368 | )    |          |         | (24,148 | ) |          |         | (29,800 | )
|Cash flows from investing activities: |                                                                                |                                                                       |                                                     |          |                         |        |      |          |         |         |   |         
|                                      | Purchases of property and equipment                                            |                                                                       |                                                     | (13,947  | )                       |        |      | (19,923  | )       |         |   | (23,977  | )      
|                                      | Proceeds from sale of property and equipment                                   |                                                                       |                                                     | 323      |                         |        |      | 453      |         |         |   | 1,520    |        
|                                      | Purchases of investments                                                       |                                                                       |                                                     | (4,150   | )                       |        |      | (33,581  | )       |         |   | (21,566  | )      
|                                      | Proceeds from sale of FOCI and QOI                                             |                                                                       |                                                     | 5,735    |                         |        |      |         |         |         |   |         |        
|                                      | Proceeds from maturity of investments                                          |                                                                       |                                                     | 33,426   |                         |        |      |         |         |         |   | 97,704   |        
|                                      | Cash used in acquisitions, net or cash received                                |                                                                       |                                                     |         |                         |        |      |         |         |         |   | (44,517  | )      
|                                      |                                                                                |                                                                       |                                                     |          |                         |        |      |          |         |         |   |          |        
|                                      |                                                                                |                                                                       | Net cash provided by (used in) investing activities |          |                         | 21,387 |      |          |         | (53,051 | ) |          |         | 9,164   |  

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MRV Communications, Inc.Statements of Cash Flows

(In thousands)

|                                                             |                                                        |                                                     |         |                         |         |      |         |         |        |   |         |         |         | 
|------------------------------------------------------------ | ------------------------------------------------------ | --------------------------------------------------- | ------- | ----------------------- | ------- | ---- | ------- | ------- | ------ | - | ------- | ------- | ------- | 
|                                                             |                                                        |                                                     |         | Year Ended December 31,
|                                                             |                                                        |                                                     |         |                        
|                                                             |                                                        |                                                     |         | 2002                    |         | 2001 |         | 2000   
|                                                             |                                                        |                                                     |         |                         |         |      |         |        
|Cash flows from financing activities:                        |                                                        |                                                     |         |                         |         |      |         |         |        |   |         |        
|                                                             | Net proceeds from equity transaction of Luminent, Inc. |                                                     |         |                        |         |      |         |        |        |   |         | 132,290 |        
|                                                             | Net proceeds from issuance of common stock             |                                                     |         | 131                     |         |      |         | 25,911  |        |   |         | 7,762   |        
|                                                             | Payment for termination of interest rate swap          |                                                     |         | (3,198                  | )       |      |         |        |        |   |         |        |        
|                                                             | Borrowings on short-term obligations                   |                                                     |         | 63,303                  |         |      |         | 39,034  |        |   |         | 35,887  |        
|                                                             | Payments on short-term obligations                     |                                                     |         | (66,368                 | )       |      |         | (29,459 | )      |   |         | (35,949 | )      
|                                                             | Borrowings on long-term obligations                    |                                                     |         |                        |         |      |         |        |        |   |         | 62,696  |        
|                                                             | Payments on long-term obligations                      |                                                     |         | (52,495                 | )       |      |         | (2,718  | )      |   |         | (4,165  | )      
|                                                             | Repurchase of convertible subordinated notes           |                                                     |         | (19,721                 | )       |      |         |        |        |   |         |        |        
|                                                             | Purchase of treasury stock                             |                                                     |         | (1,076                  | )       |      |         |        |        |   |         |        |        
|                                                             | Other long-term liabilities                            |                                                     |         | (71                     | )       |      |         | (820    | )      |   |         |        |        
|                                                             |                                                        |                                                     |         |                         |         |      |         |         |        |   |         |         |        
|                                                             |                                                        | Net cash provided by (used in) financing activities |         |                         | (79,495 | )    |         |         | 31,948 |   |         |         | 198,521 | 
|Effect of exchange rate changes on cash and cash equivalents |                                                        |                                                     | (4,582  | )                       |         |      | (153    | )       |        |   | (2,135  | )      
|                                                             |                                                        |                                                     |         |                         |         |      |         |         |        |   |         |         |        
|Net increase (decrease) in cash and cash equivalents         |                                                        |                                                     | (64,058 | )                       |         |      | (45,404 | )       |        |   | 175,750 |        
|Cash and cash equivalents, beginning of year                 |                                                        |                                                     | 164,676 |                         |         |      | 210,080 |         |        |   | 34,330  |        
|                                                             |                                                        |                                                     |         |                         |         |      |         |         |        |   |         |         |        
|Cash and cash equivalents, end of year                       |                                                        | $                                                   | 100,618 |                         |         | $    | 164,676 |         |        | $ | 210,080 |        
|                                                             |                                                        |                                                     |         |                         |         |      |         |         |        |   |         |         |        

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

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MRV Communications, Inc.

Notes To Financial Statements

December 31, 2002

1. Description of Business

MRV Communications, Inc, (a Delaware corporation, MRV or the Company)
designs, manufactures, sells, distributes, integrates and supports network
infrastructure equipment and services, and optical components. MRV conducts
its business along two principal reportable segments: operating divisions and
development stage enterprises. MRVs principal operating units provide
products used by commercial customers, governments and telecommunications
service providers, and include switches, routers, optical transport systems,
and remote presence equipment as well as specialized networking products for
defense and aerospace applications. MRV conducts its optical components
business through its subsidiary Luminent, Inc. Luminent designs, manufactures
and sells optical communications components. These components include fiber
optic transceivers, discrete lasers and LEDs, as well as components for
Fiber-to-the-Home applications.

2. Summary of Significant Accounting Policies

Principles of Consolidation

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

Foreign Currency

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

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

Revenue Recognition

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

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

Cash, Cash Equivalents and Time Deposits

MRV considers all highly liquid investments with an original maturity of
90 days or less to be cash equivalents. MRV maintains cash balances and
investments in highly qualified financial institutions. At various times such
amounts are in excess of insured limits. In February 2002, MRV repaid the
long-term debt and terminated its interest rate swap totaling $53.2 million
(see Note 11, Long-Term Debtand Note 12, Interest Rate Swap). Time deposits
of $2.8 million and $9.3 million as of December 31, 2002 and 2001,
respectively, are restricted by short-term obligations.

Marketable Securities

MRV accounts for its marketable securities under the provisions of SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities.

As of December 31, 2002 and 2001, short-term and long-term marketable
securities consisted principally of U.S. Treasury Bonds, Municipal Bonds and
Corporate Bonds. As defined by SFAS No. 115, MRV has classified investments in
debt securities as held-for-maturity investments and all marketable
securities are recorded at their amortized cost basis, which approximated fair
value at December 31, 2002 and 2001. Marketable securities mature at various
dates through 2004. Sales and maturities of securities are presented in the
accompanying Statements of Cash Flows.

Accounts Receivable

As of December 31, 2002, 2001 and 2000, the allowance for doubtful
accounts totaled $15.0 million, $14.8 million and $9.5 million, respectively.
Increases in the allowance for doubtful accounts totaled $2.2 million, $5.7
million and $3.8 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Write-offs against the allowance for doubtful accounts totaled
$1.9 million, $335,000 and $2.8 million for the years ended December 31, 2002,
2001 and 2000, respectively. If the financial condition of MRVs customers
were to deteriorate, resulting in their inability to make payments, additional
provisions are recorded in that period.

MRV, through foreign subsidiaries, has agreements with financial
institutions to sell its receivables. At December 31, 2002, MRV is
contingently liable for approximately $16.1 million relating to such
receivables sold with recourse. No gain or loss on the sale of these
receivables has been included in the accompanying Statements of Operations.

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Inventories

Inventories are stated at the lower of cost or market and consist of
material, labor and overhead. Cost is determined by the first in, first out
method. Inventories consisted of the following as of December 31, 2002 and
2001 (in thousands):

|                |  |      |        |      |  |   |        | 
|--------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                |  | 2002 |        | 2001
|                |  |      |        |     
|Raw materials   |  | $    | 8,058  |      |  | $ | 15,444 | 
|Work-in process |  |      | 5,867  |      |  |   | 19,230 | 
|Finished goods  |  |      | 18,770 |      |  |   | 22,634 | 
|                |  |      |        |      |  |   |        | 
|                |  | $    | 32,695 |      |  | $ | 57,308 | 
|                |  |      |        |      |  |   |        | 

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, 2002 and 2001 (in thousands):

|                                |                                                  |   |        |         |      |   |         |         |  
|------------------------------- | ------------------------------------------------ | - | ------ | ------- | ---- | - | ------- | ------- | -
|                                |                                                  |   | 2002   |         | 2001
|                                |                                                  |   |        |         |     
|Property and equipment, at cost |                                                  |   |        |         |      |   |         |        
|                                | Land                                             |   | $      | 48      |      |   | $       | 3,521   |  
|                                | Building                                         |   |        | 3,070   |      |   |         | 19,448  |  
|                                | Machinery and equipment                          |   |        | 52,844  |      |   |         | 67,713  |  
|                                | Furniture and fixtures                           |   |        | 10,478  |      |   |         | 12,347  |  
|                                | Computer hardware and software                   |   |        | 14,022  |      |   |         | 12,084  |  
|                                | Leasehold improvements                           |   |        | 7,581   |      |   |         | 7,870   |  
|                                | Construction in progress                         |   |        | 1,384   |      |   |         | 1,065   |  
|                                |                                                  |   |        |         |      |   |         |         |  
|                                |                                                  |   | 89,427 |         |      |   | 124,048 |        
|                                | Less  accumulated depreciation and amortization |   |        | (54,258 | )    |   |         | (52,036 | )
|                                |                                                  |   |        |         |      |   |         |         |  
|                                |                                                  | $ | 35,169 |         |      | $ | 72,012  |        
|                                |                                                  |   |        |         |      |   |         |         |  

Goodwill and Other Intangibles

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

Investments

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

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Under the cost and equity method, a loss in value of an investment, which
is deemed to be other than a temporary decline, is recognized. Evidence of a
loss in value might include, but would not necessarily be limited to, absence
of an ability to recover the carrying amount of the investment or inability of
the investee to sustain an earnings capacity, which would justify the carrying
amount of the investment. During the year ended December 31, 2002 and 2001,
MRV recognized impairment on investments of $11.7 million and $9.2 million,
respectively, which has been included in Other Expense, net.

Impairment of Long-Lived Assets

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

For the year ended December 31, 2002, MRV determined that $17.0 million in
long-lived assets (primarily property and equipment) were impaired. This
amount was determined to be impaired using the method discussed above. The
remaining carrying values of the long-lived assets were determined to be
realizable. This process and analysis requires management to use significant
judgment and apply assumptions regarding the future cash flows expected to
result from the use of the assets and the eventual disposition of such assets.
While management believes the carrying value of its assets are realizable based
on its analysis, changes in the assumptions used in its models could produce
significantly different results. The impairment of long-lived assets of $17.0
million for the year ended December 31, 2002 has been included in the
determination of operating loss in the accompanying Statements of Operations.
The vast majority of these impairments were from our operating divisions
segment. There were no impairment losses recorded for the years ended December
31, 2001 and 2000.

Fair Value of Financial Instruments

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

Product Development and Engineering

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

Software Development Costs

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

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

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Advertising Costs

Advertising costs are charged to expense as incurred.

Income Taxes

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

Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted earnings (loss) per share is calculated by dividing net income
(loss) by the sum of the weighted average number of common shares outstanding,
plus all additional common shares that would have been outstanding if
potentially dilutive securities or common stock equivalents had been issued.
Stock options and warrants to purchase 13.0 million, 12.9 million and 12.1
million shares were not included in the computation of years 2002, 2001 and
2000 diluted loss per share because such stock options and warrants were
considered anti-dilutive. Shares associated with MRVs outstanding Convertible
Subordinated Notes (Notes) were not included in the computation of loss per
share as they are anti-dilutive.

Stock-Based Compensation

MRV accounts for its employee stock plan under the intrinsic value method
prescribed by 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 and as amended by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment of FASB Statement No.
123.

SFAS No. 123, and as amended by SFAS No. 148, permits companies to
recognize, as expense over the vesting period, the fair value of all
stock-based awards on the date of grant. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options,
which have no vesting restrictions and are fully transferable. Because MRVs
stock-based compensation plans have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, management believes
that the existing option valuation models do not necessarily provide a reliable
single measure of the fair value of awards from the plan. Therefore, as
permitted, MRV applies the existing accounting rules under APB No. 25 and
provides pro forma net loss and pro forma loss per share disclosures for
stock-based awards made during the year as if the fair value method defined in
SFAS No. 123, as amended, had been applied. Net loss and net loss per share
for each of the three years ended December 31, 2002 would have increased to the
following pro forma amounts (in thousands, except per share data):

|                                                                             |                                                    |   |          |       |      |   |          |       |   |   |          |       |  
|---------------------------------------------------------------------------- | -------------------------------------------------- | - | -------- | ----- | ---- | - | -------- | ----- | - | - | -------- | ----- | -
|                                                                             |                                                    |   | 2002     |       | 2001 |   | 2000    
|                                                                             |                                                    |   |          |       |      |   |         
|Net loss, as reported                                                        |                                                    | $ | (479,759 | )     |      | $ | (326,353 | )     |   | $ | (152,953 | )    
|Additional compensation expense determined under the
fair value based method |                                                    |   | (24,775  | )     |      |   | (24,874  | )     |   |   | (24,998  | )    
|                                                                             |                                                    |   |          |       |      |   |          |       |   |   |          |      
|Pro forma net loss                                                           |                                                    | $ | (504,534 | )     |      | $ | (351,227 | )     |   | $ | (177,951 | )    
|                                                                             |                                                    |   |          |       |      |   |          |       |   |   |          |      
|Earnings per share:                                                          |                                                    |   |          |       |      |   |          |       |   |   |          |      
|                                                                             | Basic and diluted net loss per share  as reported |   | $        | (5.25 | )    |   | $        | (4.27 | ) |   | $        | (2.33 | )
|                                                                             | Basic and diluted net loss per share  pro forma   |   | $        | (5.52 | )    |   | $        | (4.60 | ) |   | $        | (2.71 | )

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The following assumptions were applied: (i) no expected dividend yield for
all periods, (ii) expected volatility of 104% for 2002, 191% for 2001 and 162%
for 2000, (iii) expected lives of 4 to 6 years for all years, (iv) and
risk-free interest rates ranging from 3.65% to 6.73% for all years.

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

Deferred stock expense is being amortized using the graded vesting method
over four years. Using this method, approximately 57%, 26%, 13% and 4%,
respectively, of each options compensation expense is amortized in each of the
four years following the date of grant. Deferred stock expense generated
during 2001 was $7.1 million generated through acquisitions. Deferred stock
expense generated during 2000 was $160.8 million of which $106.6 million was
generated through acquisitions (see Note 6, Business Acquisitionsfor
additional information on MRVs material acquisitions) and $54.2 million was
generated through stock options granted to Luminents former President and its
former Chief Financial Officer (see Note 15, Stockholders Equity). There was
no deferred stock expense generated for the year ended December 31, 2002.
Total amortization of deferred stock expense for the three years ended December
31, 2002, 2001 and 2000 was $6.6 million, $69.8 million and $59.9 million,
respectively.

Transactions with Stock of a Subsidiary

On November 9, 2000, Luminent, a wholly-owned subsidiary of MRV, issued
12.0 million shares of its common stock for $12.0 per share, or $144.0 million,
to complete its Initial Public Offering (IPO). As part of MRVs plan to
spin-off Luminent to MRV stockholders, the purchase price in excess of its book
value, or $49.7 million has been included in Effect of Subsidiary Equity
Transactions in MRVs Statements of Stockholders Equity for the year ended
December 31, 2000. In September 2001, MRV and Luminent jointly announced that
MRV intended to acquire Luminents 8% minority interest (established through
Luminents November 2000 IPO), and merge Luminent back into MRV through a
short-form merger. It was determined that each Luminent stockholder would
receive 0.43 shares of MRV common stock in exchange for their Luminent common
stock. Additionally, all stock options to purchase Luminent common stock would
be converted into stock options to purchase MRVs common stock based on the
same exchange ratio. The merger was completed in December 2001. MRV exchanged
5.2 million shares of common stock for 12.0 million shares of Luminent common
stock. MRVs 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 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. MRV adopted this statement effective January 1, 2002 and the
immediate impact of the adoption of this statement was the recognition of an
impairment on long-lived assets totaling $17.0 million, which has been included
in the determination of operating loss in the accompanying Statements of
Operations.

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In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement, among other amendments and corrections, rescinds
Statement 4, Reporting Gains and Losses from Extinguishment of Debt  an
amendment of APB Opinion 30, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the
criteria set forth by APB Opinion 30 will now be used to classify those gains
and losses. SFAS No. 145 is effective for fiscal years beginning after May 15,
2002, with early application encouraged. MRV has adopted this statement for
the year ended December 31, 2002, and the immediate impact of its application
was the inclusion of the gains and losses on the extinguishment of debt (see
Note 11, Long-Term Debt) in Other expense, net in the accompanying Statements
of Operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement supercedes EITF
Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability
is incurred. Under EITF 94-3, a liability is recognized at the date an entity
commits to an exit plan. SFAS No. 146 also establishes that the liability
should initially be measured and recorded at fair value. The provisions of
SFAS No. 146 will be effective for any exit and disposal activities initiated
after December 31, 2002. MRV has reviewed this statement and does not expect a
material impact on its financial position, results of operations or cash flows.

In September 2002, the EITF released Issue 02-15, Determining Whether
Certain Conversions of Convertible Debt to Equity Securities Are within the
Scope of FASB Statement No. 84. The EITF reached a consensus that SFAS No.
84, Induced Conversions of Convertible Debt applies to all conversions of
convertible debt that (a) occur pursuant to changed conversion privileges that
are exercisable only for a limited period of time and (b) include the issuance
of all of the equity securities issuable pursuant to conversion privileges
included in the terms of the debt at issuance for each debt instrument that is
converted, regardless of the party that initiates the offer or whether the
offer relates to all debt holders. EITF 02-15 applies prospectively to
conversion transactions completed after September 12, 2002 (see Note 12,
Convertible Subordinated Notes). As a result of this Issue, MRV recorded a
loss of $6.6 million in December 2002 for the exchange of 4.5 million shares of
common stock for $7.5 million principal amount of Notes.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, an amendment of FASB
Statement No. 123. This statement amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirement of SFAS No. 123 to require prominent disclosure in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
MRV adopted this statement and its adoption did not have a material impact on
its financial position, results of operations or cash flows (see Note 2,
Summary of Significant Accounting Policies  Stock-Based Compensation).

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.

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3. Goodwill and Other Intangible Assets

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

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

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

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

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The following table summarizes MRVs identifiable intangible assets and
goodwill balances as of December 31, 2002 and 2001 (in thousands):

|                                               |                       |   |                   |         |                   |   |          |          |          |   |        |        |          |   |         |         |     |   |          |          |   |   |         |         | 
|---------------------------------------------- | --------------------- | - | ----------------- | ------- | ----------------- | - | -------- | -------- | -------- | - | ------ | ------ | -------- | - | ------- | ------- | --- | - | -------- | -------- | - | - | ------- | ------- | 
|                                               |                       |   | December 31, 2002 |         | December 31, 2001
|                                               |                       |   |                   |         |                  
|                                               |                       |   | Gross             |         |                   |   |          |          | Net      |   | Gross  |        |          |   |         |         | Net
|                                               |                       |   | Carrying          |         | Accum.            |   | Carrying |          | Carrying |   | Accum. |        | Carrying
|                                               |                       |   | Amount            |         | Amort.            |   | Amount   |          | Amount   |   | Amort. |        | Amount  
|                                               |                       |   |                   |         |                   |   |          |          |          |   |        |        |         
|Intangible assets
subject to
amortization:     |                       |   |                   |         |                   |   |          |          |          |   |        |        |          |   |         |         |     |   |          |          |   |   |         |        
|                                               | Patents               |   | $                 | 14,751  |                   |   | $        | (14,751  | )        |   | $      |       |          |   | $       | 64,600  |     |   | $        | (14,445  | ) |   | $       | 50,155  | 
|                                               | Assembled work
forces |   |                   | 537     |                   |   |          | (537     | )        |   |        |       |          |   |         | 1,790   |     |   |          | (537     | ) |   |         | 1,253   | 
|                                               | Customer contracts    |   |                   | 720     |                   |   |          | (720     | )        |   |        |       |          |   |         | 720     |     |   |          | (720     | ) |   |         |        | 
|                                               | Other                 |   |                   | 230     |                   |   |          | (95      | )        |   |        | 135    |          |   |         |        |     |   |          |         |   |   |         |        | 
|                                               |                       |   |                   |         |                   |   |          |          |          |   |        |        |          |   |         |         |     |   |          |          |   |   |         |         | 
|                                               |                       |   | 16,238            |         |                   |   | (16,103  | )        |          |   | 135    |        |          |   | 67,110  |         |     |   | (15,702  | )        |   |   | 51,408  |        
|Intangible assets not
subject to
amortization: |                       |   |                   |         |                   |   |          |          |          |   |        |        |          |   |         |         |     |   |          |          |   |   |         |        
|                                               | Goodwill              |   |                   | 195,644 |                   |   |          | (165,904 | )        |   |        | 29,740 |          |   |         | 510,426 |     |   |          | (166,522 | ) |   |         | 343,904 | 
|                                               |                       |   |                   |         |                   |   |          |          |          |   |        |        |          |   |         |         |     |   |          |          |   |   |         |         | 
|Goodwill and Other
Intangibles                 |                       | $ | 211,882           |         |                   | $ | (182,007 | )        |          | $ | 29,875 |        |          | $ | 577,536 |         |     | $ | (182,224 | )        |   | $ | 395,312 |        
|                                               |                       |   |                   |         |                   |   |          |          |          |   |        |        |          |   |         |         |     |   |          |          |   |   |         |         | 

The changes in the carrying amount of goodwill for the year ended December
31, 2002, are as follows: (in thousands):

|                           |                               |   |           |          |             |   |             |      |   |   |         |          |  
|-------------------------- | ----------------------------- | - | --------- | -------- | ----------- | - | ----------- | ---- | - | - | ------- | -------- | -
|                           |                               |   |           |          |             |   | Development |      |   |   |        
|                           |                               |   | Operating |          | stage       |   |             |      |  
|                           |                               |   | divisions |          | enterprises |   | Total      
|                           |                               |   |           |          |             |   |            
|Balance, December 31, 2001 |                               | $ | 343,263   |          |             | $ | 641         |      |   | $ | 343,904 |         
|                           | Goodwill acquired during year |   |           | 3,548    |             |   |             |     |   |   |         | 3,548    |  
|                           | Impairment losses             |   |           | (317,071 | )           |   |             | (641 | ) |   |         | (317,712 | )
|                           |                               |   |           |          |             |   |             |      |   |   |         |         
|Balance, December 31, 2002 |                               | $ | 29,740    |          |             | $ |            |      |   | $ | 29,740  |         
|                           |                               |   |           |          |             |   |             |      |   |   |         |         

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The results for the years ended December 31, 2001 and 2000 do not reflect
the provisions of SFAS No. 142. Had MRV adopted SFAS 142 on January 1, 2000,
the reported loss before cumulative effect of an accounting change and net loss
and the related per-share amounts would have been presented as follows (in
thousands, except per share amounts):

|                                                                                          |                                                    |                                   |          |       |   |      |          |         |      |   |          |        |      | 
|----------------------------------------------------------------------------------------- | -------------------------------------------------- | --------------------------------- | -------- | ----- | - | ---- | -------- | ------- | ---- | - | -------- | ------ | ---- | 
|                                                                                          |                                                    |                                   |          | 2002  |   | 2001 |          | 2000   
|                                                                                          |                                                    |                                   |          |       |   |      |          |        
|Loss before extraordinary gain and cumulative effect
of an accounting change, as reported |                                                    | $                                 | (183,404 | )     |   | $    | (336,302 | )       |      | $ | (152,953 | )     
|                                                                                          | Goodwill amortization, net of tax                  |                                   |          |      |   |      |          | 102,324 |      |   |          | 61,106 |     
|                                                                                          |                                                    |                                   |          |       |   |      |          |         |      |   |          |       
|Pro forma loss before extraordinary gain and
cumulative effect of an accounting change    |                                                    | $                                 | (183,404 | )     |   | $    | (233,978 | )       |      | $ | (91,847  | )     
|                                                                                          |                                                    |                                   |          |       |   |      |          |         |      |   |          |       
|Earnings per share:                                                                       |                                                    |                                   |          |       |   |      |          |         |      |   |          |       
|                                                                                          | Basic and diluted loss per share  as reported     |                                   | $        | (2.01 | ) |      | $        | (4.40   | )    |   | $        | (2.33  | )   
|                                                                                          |                                                    | Goodwill amortization, net of tax |          | $     |  |      |          | $       | 1.34 |   |          | $      | 0.93 | 
|                                                                                          | Basic and diluted loss per share  pro forma       |                                   | $        | (2.01 | ) |      | $        | (3.06   | )    |   | $        | (1.40  | )   
|Net loss, as reported                                                                     |                                                    | $                                 | (479,759 | )     |   | $    | (326,353 | )       |      | $ | (152,953 | )     
|                                                                                          | Goodwill amortization, net of tax                  |                                   |          |      |   |      |          | 102,324 |      |   |          | 61,106 |     
|                                                                                          |                                                    |                                   |          |       |   |      |          |         |      |   |          |       
|Pro forma net loss                                                                        |                                                    | $                                 | (479,759 | )     |   | $    | (224,029 | )       |      | $ | (91,847  | )     
|                                                                                          |                                                    |                                   |          |       |   |      |          |         |      |   |          |       
|Earnings per share:                                                                       |                                                    |                                   |          |       |   |      |          |         |      |   |          |       
|                                                                                          | Basic and diluted net loss per share  as reported |                                   | $        | (5.25 | ) |      | $        | (4.27   | )    |   | $        | (2.33  | )   
|                                                                                          |                                                    | Goodwill amortization, net of tax |          | $     |  |      |          | $       | 1.34 |   |          | $      | 0.93 | 
|                                                                                          | Basic and diluted net loss per share  pro forma   |                                   | $        | (5.25 | ) |      | $        | (2.93   | )    |   | $        | (1.40  | )   

4. Restructuring costs

From November 9, 2000 through December 28, 2001, MRV owned approximately
92% of Luminent, Inc. and approximately 8% of Luminents shares were publicly
traded. During the second quarter of 2001, Luminents management approved and
implemented a restructuring plan in order to adjust operations and
administration as a result of the dramatic slowdown in the communications
equipment industry generally and the optical components sector in particular.
Major actions primarily involved the reduction of workforce, the abandonment of
certain assets and the cancellation and termination of purchase commitments.
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 end of fiscal year 2003.

Employee severance costs and related benefits of $1.3 million are related
to approximately 750 layoffs through December 31, 2002, bringing Luminents
total workforce to approximately 472 employees as of December 31, 2002.
Affected employees came from all divisions and areas of Luminent. The majority
of affected employees were in the manufacturing group.

A summary of the restructuring costs and the remaining liability through
and as of December 31, 2002 is as follows (in thousands):

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|            |                                 |   |           |       |          |   |               |       |           |   |        |        |           |   |       |       | 
|----------- | ------------------------------- | - | --------- | ----- | -------- | - | ------------- | ----- | --------- | - | ------ | ------ | --------- | - | ----- | ----- | 
|            |                                 |   | 2001      |       |          |   |               |       |           |   |        |        | Remaining
|            |                                 |   | Provision |       | Utilized |   | Adjustment(1) |       | Provision
|            |                                 |   |           |       |          |   |               |       |          
|Exit costs: |                                 |   |           |       |          |   |               |       |           |   |        |        |           |   |       |      
|            | Closed and abandoned facilities |   | $         | 2,317 |          |   | $             | 527   |           |   | $      |       |           |   | $     | 1,790 | 
|            | Purchase commitments            |   |           | 5,705 |          |   |               | 1,519 |           |   |        | (1,474 | )         |   |       | 2,712 | 
|            |                                 |   |           |       |          |   |               |       |           |   |        |        |           |   |       |       | 
|            |                                 |   | 8,022     |       |          |   | 2,046         |       |           |   | (1,474 | )      |           |   | 4,502 |      
|            | Employee severance costs        |   |           | 655   |          |   |               | 221   |           |   |        | (434   | )         |   |       | -     | 
|            |                                 |   |           |       |          |   |               |       |           |   |        |        |           |   |       |       | 
|            |                                 | $ | 8,677     |       |          | $ | 2,267         |       |           | $ | (1,908 | )      |           | $ | 4,502 |      
|            |                                 |   |           |       |          |   |               |       |           |   |        |        |           |   |       |       | 

|            |                                 |   |           |        |          |   |           |        |      |   |       |       | 
|----------- | ------------------------------- | - | --------- | ------ | -------- | - | --------- | ------ | ---- | - | ----- | ----- | 
|            |                                 |   | Original  |        |          |   |           |        | 2001
|            |                                 |   | Provision |        | Utilized |   | Provision
|            |                                 |   |           |        |          |   |          
|Exit costs: |                                 |   |           |        |          |   |           |        |      |   |       |      
|            | Asset impairment                |   | $         | 10,441 |          |   | $         | 10,441 |      |   | $     |      | 
|            | Closed and abandoned facilities |   |           | 2,405  |          |   |           | 88     |      |   |       | 2,317 | 
|            | Purchase commitments            |   |           | 6,173  |          |   |           | 468    |      |   |       | 5,705 | 
|            |                                 |   |           |        |          |   |           |        |      |   |       |       | 
|            |                                 |   | 19,019    |        |          |   | 10,997    |        |      |   | 8,022 |      
|            | Employee severance costs        |   |           | 1,281  |          |   |           | 626    |      |   |       | 655   | 
|            |                                 |   |           |        |          |   |           |        |      |   |       |       | 
|            |                                 | $ | 20,300    |        |          | $ | 11,623    |        |      | $ | 8,677 |      
|            |                                 |   |           |        |          |   |           |        |      |   |       |       | 



|(1) |  | Includes $837,000 in reduction of future liabilities based on
current negotiations with vendors and in usage of previously
reserved purchase commitments for inventory and equipment. The
provisions previously recognized for these items have been reversed
for the year ended December 31, 2002. In connection with the sale
of FOCI and QOI, $1.1 million in restructuring charges are no longer
included in the remaining obligation as they were assumed by the
buyer.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A summary of the restructuring costs by line item for the years ended
December 31, 2002 and 2001 is as follows (in thousands):

|            |                             |   |      |      |      |   |        |        | 
|----------- | --------------------------- | - | ---- | ---- | ---- | - | ------ | ------ | 
|            |                             |   | 2002 |      | 2001
|            |                             |   |      |      |     
|Exit Costs: |                             |   |      |      |      |   |        |       
|            | Cost of goods sold          |   | $    | (837 | )    |   | $      | 6,173  | 
|            | Restructuring costs         |   |      |     |      |   |        | 14,111 | 
|            | Other income (expense), net |   |      |     |      |   |        | 16     | 
|            |                             |   |      |      |      |   |        |        | 
|            |                             | $ | (837 | )    |      | $ | 20,300 |       
|            |                             |   |      |      |      |   |        |        | 

5. Disposition of Assets

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

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

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

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

The loss on disposition of FOCI and QOI has been included in Other
Expense, net in the accompanying Statement of Operations for the year ended
December 31, 2002.

6. Business Acquisitions

MRV completed no material acquisitions for the years ended December 31,
2002 and 2001, excluding the acquisition of the Luminent minority interest
discussed in Note 2, Summary of Significant Accounting Policies  Transaction
with Stock of a Subsidiary. 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 Statements of Operations from
the date of acquisition.

On April 24, 2000, MRV completed the acquisition of approximately 97% of
the outstanding capital stock of FOCI Fiber Optic Communications, Inc., a
Republic of China corporation (FOCI). FOCI is a manufacturer of passive
fiber optic components for Wavelength Division Multiplexing. Under the terms
of the purchase agreement, FOCI shareholders received approximately $48.6
million in cash and approximately 4.7 million shares of MRV common stock and
options to purchase 681,000 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 were exercisable at $3.00 per share,
had an aggregate intrinsic value of $14.1 million, and vest over a four-year
period. The acquisition was 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 was recorded as goodwill and was
being amortized on a straight-line basis over 5 years through December 31, 2001
(see Note 3, Goodwill and Other Intangible Assets). The deferred stock expense
was being amortized using the graded vesting method over 4 years. As a result
of the sale of FOCI (see Note 5, Disposition of Assets), the employees ceased
to be employees of MRV, and consequently, 641,000 remaining outstanding stock
options were forfeited.

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On May 1, 2000, MRV completed the acquisition of all of the outstanding
capital stock of Jolt Limited, an Israeli corporation (Jolt). 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 was
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 was recorded as goodwill and was amortized on a straight-line basis
over 5 years through December 31, 2001 (see Note 3, Goodwill and Other
Intangible Assets). The deferred stock expense 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 Optec Inc., a Republic of China corporation (QOI).
QOI is a manufacturer of optical thin film coating and filters for Dense
Wavelength Division Multiplexing. Under the terms of the purchase agreement,
QOI 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 were exercisable at $3.00 per share,
have a fair value of $4.0 million, of which unvested options had an intrinsic
value of $2.7 million and vested options had 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
was recorded as goodwill and was amortized on a straight-line basis over 5
years through December 31, 2001 (see Note 3, Goodwill and Other Intangible
Assets). The deferred stock expense was amortized using the graded vesting
method over 4 years. As a result of the sale of QOI (see Note 5, Disposition
of Assets), the employees ceased to be employees of MRV, and consequently,
152,000 remaining outstanding stock options were forfeited.

On July 12, 2000, MRV completed the acquisition of AstroTerra Corporation,
a California corporation (AstroTerra) 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 stock expense
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 through December 31, 2001 (see Note 3,
Goodwill and Other Intangible Assets).

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On July 21, 2000, MRV completed the acquisition of approximately 99% of
the outstanding capital stock of Optronics International Corp., a Republic of
China corporation (OIC). OIC International is a manufacturer of high
temperature semiconductor lasers, transceivers and detectors for optical
networks. Under the terms of the purchase agreement, OIC 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
was 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 was recorded as goodwill and was amortized on a straight-line basis
over 5 years through December 31, 2001 (see Note 3, Goodwill and Other
Intangible Assets). The deferred stock expense is being amortized using the
graded vesting method over 4 years.

The purchase price of FOCI, Jolt, QOI, AstroTerra, OIC International and
Others were allocated as follows (in thousands, unaudited):

|                              |                                |   |         |         | 
|----------------------------- | ------------------------------ | - | ------- | ------- | 
|Purchase price                |                                | $ | 704,241 |        
|Allocation of purchase price: |                                |   |         |        
|                              | Net tangible assets            |   |         | 51,902  | 
|                              | Deferred stock expense         |   |         | 106,602 | 
|                              | Goodwill and other intangibles |   |         | 545,737 | 

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 for the year ended December
31, 2000, presents the combined results of operations of these acquisitions as
if the acquisitions had occurred as of January 1, 2000, giving effect to
certain adjustments, including amortization of goodwill and other intangibles
and deferred stock expense. The unaudited pro forma share data assumes the
shares issued in connection with these acquisitions were outstanding as of
January 1, 2000 (in thousands, except per share amounts, unaudited).

|                                                                |  |   |          |  
|--------------------------------------------------------------- |  | - | -------- | -
|Pro forma revenue                                               |  | $ | 322,645  |  
|Pro forma net loss                                              |  | $ | (115,775 | )
|Pro forma basic and diluted net loss per share                  |  | $ | (1.75    | )
|Pro forma basic and diluted weighted average
shares outstanding |  |   | 66,247   |  

Acquisition-Related Unearned Stock Compensation

During 2001 and 2000, MRV recorded acquisition-related purchase
consideration of $7.1 million and $106.6 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.

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

7. Investments

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

|                           |  |            |  |                                                                                                                                                       
|-------------------------- |  | ---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|Subsidiary                 |  | Ownership  |  | Form of Consideration(1)                                                                                                                              
|                           |  |            |  |                                                                                                                                                       
|Consolidated Subsidiaries  |  |            |  |                                                                                                                                                       
|                           |  |            |  |                                                                                                                                                       
|RDS Communications AB      |  | 100%       |  | Purchased remaining 25% ownership in 2002 for approximately $6.3 million;                                                                             
|                           |  |            |  | purchased an additional 12.5% ownership in 2001 for approximately $2.0
million;                                                                       
|                           |  |            |  | purchased an additional 12.5% ownership in 1999 for approximately $2.4
million;                                                                       
|                           |  |            |  | purchased 50% ownership in 1998 for approximately $8.0 million.                                                                                       
|                          
|TurnKey Communications AG  |  | 100%       |  | Purchased remaining 29.5% ownership in 2002 for approximately $1.8 million;                                                                           
|                           |  |            |  | initial investment to establish subsidiary in 1998 for approximately $389,000.                                                                        
|                          
|EDSLan SPA                 |  | 90%        |  | Purchased an additional 3% ownership in 2002 for approximately $918,000;                                                                              
|                           |  |            |  | purchased an additional 7% ownership in 2001 for approximately $1.7 million;                                                                          
|                           |  |            |  | purchased an additional 10% ownership in 2000 for approximately $1.5 million;                                                                         
|                           |  |            |  | purchased an additional 10% ownership in 1999 for approximately $1.5 million;                                                                         
|                           |  |            |  | purchased an additional 10% ownership in 1997 for approximately $500,000;                                                                             
|                           |  |            |  | purchased 50% ownership in 1996 for approximately $1.1 million.                                                                                       
|                           |  |            |  |                                                                                                                                                       
|Tecnonet SPA               |  | 60%        |  | Purchased an additional 10% ownership in 1999 for approximately $600,000;                                                                             
|                           |  |            |  | purchased 50% ownership in 1998 for approximately $3.1 million.                                                                                       
|                           |  |            |  |                                                                                                                                                       
|Charlottes Networks       |  | 92%        |  | Issued 1.0 million shares of MRV common stock valued at approximately $61.5
million for approximately 10% ownership in 2000                           
|Equity Method Subsidiaries |  |            |  |                                                                                                                                                       
|                           |  |            |  |                                                                                                                                                       
|RedC Optical Networks      |  | 35%        |  | $5.0 million in cash and issued 150,000 shares of MRV common stock valued at
approximately $11.5 million for approximately 35% ownership in 2000.     
|                           |  |            |  |                                                                                                                                                       
|Others                     |  | Various(2) |  | Issued 646,000 shares of MRV common stock valued at approximately $16.7
million for ownership interest in various non-consolidated equity
investments.



---

|(1) |  | 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 purchase price is based on the average market price five days before and after the terms were agreed upon.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Represents various investments, all of which are less than 50% ownership and not consolidated.                                                                                                                                                                                               

Income and losses from non-consolidated equity method subsidiaries are
included in Other income (expense), net in the accompanying Statements of
Operations.

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8. Accrued Liabilities

Accrued liabilities as of December 31, 2002 and 2001, consisted of the
following (in thousands):

|                    |  |      |        |      |  |   |        | 
|------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                    |  | 2002 |        | 2001
|                    |  |      |        |     
|Payroll and related |  | $    | 8,824  |      |  | $ | 10,428 | 
|Restructuring       |  |      | 4,502  |      |  |   | 8,677  | 
|Other               |  |      | 18,216 |      |  |   | 19,930 | 
|                    |  |      |        |      |  |   |        | 
|                    |  | $    | 31,542 |      |  | $ | 39,035 | 
|                    |  |      |        |      |  |   |        | 

9. Income Taxes

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

|          |         |   |        |        |      |   |        |         |   |   |         |         |  
|--------- | ------- | - | ------ | ------ | ---- | - | ------ | ------- | - | - | ------- | ------- | -
|          |         |   | 2002   |        | 2001 |   | 2000  
|          |         |   |        |        |      |   |       
|Current:  |         |   |        |        |      |   |        |         |   |   |         |        
|          | Federal |   | $      | (329   | )    |   | $      | (12,454 | ) |   | $       | 7,344   |  
|          | State   |   |        | (3     | )    |   |        | (2,196  | ) |   |         | 5,622   |  
|          | Foreign |   |        | 2,802  |      |   |        | 4,918   |   |   |         | 6,841   |  
|          |         |   |        |        |      |   |        |         |   |   |         |         |  
|          |         |   | 2,470  |        |      |   | (9,732 | )       |   |   | 19,807  |        
|Deferred: |         |   |        |        |      |   |        |         |   |   |         |        
|          | Federal |   |        | 11,870 |      |   |        | 11,278  |   |   |         | (17,354 | )
|          | State   |   |        |       |      |   |        | 3,942   |   |   |         | (7,137  | )
|          | Foreign |   |        | (945   | )    |   |        | (1,013  | ) |   |         | (714    | )
|          |         |   |        |        |      |   |        |         |   |   |         |         |  
|          |         |   | 10,925 |        |      |   | 14,207 |         |   |   | (25,205 | )      
|          |         |   |        |        |      |   |        |         |   |   |         |         |  
|          |         | $ | 13,395 |        |      | $ | 4,475  |         |   | $ | (5,398  | )      
|          |         |   |        |        |      |   |        |         |   |   |         |         |  

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

|                                                                 |  |      |     |      |  |      |     |    |  |  |     |   
|---------------------------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- | -- |  |  | --- | --
|                                                                 |  | 2002 |     | 2001 |  | 2000
|                                                                 |  |      |     |      |  |     
|Income tax provision
(benefit, at statutory
federal rate)        |  |      | (34 | %)   |  |      | (34 | %) |  |  | (34 | %)
|State and local income
taxes, net of federal income
taxes effect |  |      | (1  | %)   |  |      | (6  | %) |  |  | (6  | %)
|Permanent differences                                            |  |      | 31  | %    |  |      | 28  | %  |  |  | 30  | % 
|Foreign taxes at rates
different than domestic
rates             |  |      | 1   | %    |  |      | (2  | %) |  |  | 3   | % 
|Change in valuation allowance                                    |  |      | 6   | %    |  |      | 15  | %  |  |  | 10  | % 
|                                                                 |  |      |     |      |  |      |     |    |  |  |     |   
|                                                                 |  |      | 3   | %    |  |      | 1   | %  |  |  | 3   | % 
|                                                                 |  |      |     |      |  |      |     |    |  |  |     |   

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The components of deferred income taxes as of December 31, 2002 and 2001
are as follows (in thousands):

|                                |                                           |   |        |         |      |   |        |         |  
|------------------------------- | ----------------------------------------- | - | ------ | ------- | ---- | - | ------ | ------- | -
|                                |                                           |   | 2002   |         | 2001
|                                |                                           |   |        |         |     
|Allowance for doubtful accounts |                                           | $ | 3,015  |         |      | $ | 2,239  |        
|Inventory reserve               |                                           |   | 13,474 |         |      |   | 11,153 |        
|Warranty reserve                |                                           |   | 1,244  |         |      |   | 1,241  |        
|Deferred stock expense          |                                           |   | 2,529  |         |      |   |       |        
|Accrued liabilities             |                                           |   | 9,069  |         |      |   | 6,108  |        
|Other                           |                                           |   | 2,169  |         |      |   | 549    |        
|                                |                                           |   |        |         |      |   |        |        
|                                |                                           |   | 31,500 |         |      |   | 21,290 |        
|                                | Valuation allowance                       |   |        | (31,500 | )    |   |        | (21,290 | )
|                                |                                           |   |        |         |      |   |        |        
|                                | Net short-term deferred income tax assets |   |        |        |      |   |        |        |  
|Net operating losses            |                                           |   | 28,376 |         |      |   | 34,903 |        
|Depreciation and amortization   |                                           |   | 10,831 |         |      |   | 7,695  |        
|Investments                     |                                           |   | 3,960  |         |      |   | 3,674  |        
|Other                           |                                           |   | 5      |         |      |   | 6,527  |        
|                                |                                           |   |        |         |      |   |        |        
|                                |                                           |   | 43,172 |         |      |   | 52,799 |        
|                                | Valuation allowance                       |   |        | (40,535 | )    |   |        | (29,570 | )
|                                |                                           |   |        |         |      |   |        |        
|                                | Net long-term deferred income tax assets  |   |        | 2,637   |      |   |        | 23,229  |  
|                                |                                           |   |        |         |      |   |        |        
|                                |                                           | $ | 2,637  |         |      | $ | 23,229 |        
|                                |                                           |   |        |         |      |   |        |        

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

As of December 31, 2002, MRV had federal and state net operating loss
carryforwards available of $84.7 million and $122.0 million, respectively. For
the year ended December 31, 2002, MRV generated additional federal and state
net operating losses of $27.0 million and $27.0 million, respectively. For
federal and state income tax purposes, the net operating losses are available
to offset future taxable income through 2020 and 2019, 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 for each of the three years ended December 31, 2002.

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.

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10. 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, 2002 and 2001, these short-term obligations totaled $7.0
million and $18.7 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, 2002 and 2001 was 4.2% and
2.4%, respectively. These obligations are incurred and settled in the local
currencies of the respective subsidiaries.

11. Long-Term Debt

Long-term debt consisted of the following as of December 31, 2002 and 2001
(in thousands):

|                                                                                                                                                                                          |  |      |      |      |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | ---- |  | - | ------- | -
|                                                                                                                                                                                          |  | 2002 |      | 2001
|                                                                                                                                                                                          |  |      |      |     
|Secured notes payable to
financial institutions bearing
interest ranging from 4.7% to
9.4%, payable in monthly and
quarterly installments of
principal and interest through
December 2006 |  | $    | 783  |      |  | $ | 11,097  |  
|Term loan with a financial
institution paid in full in
February 2002                                                                                                                      |  |      |     |      |  |   | 50,000  |  
|                                                                                                                                                                                          |  |      |      |      |  |   |         |  
|                                                                                                                                                                                          |  |      | 783  |      |  |   | 61,097  |  
|Less  current portion                                                                                                                                                                    |  |      | (393 | )    |  |   | (52,226 | )
|                                                                                                                                                                                          |  |      |      |      |  |   |         |  
|                                                                                                                                                                                          |  | $    | 390  |      |  | $ | 8,871   |  
|                                                                                                                                                                                          |  |      |      |      |  |   |         |  

The following summarizes the required principal payments on long-term debt
as of December 31, 2002 (in thousands):

|                         |      |   |      |     | 
|------------------------ | ---- | - | ---- | --- | 
|                         |      |   | 2002
|                         |      |   |     
|Year Ending December 31, |      |   |      |    
|                         | 2003 |   |      | 393 | 
|                         | 2004 |   |      | 250 | 
|                         | 2005 |   |      | 73  | 
|                         | 2006 |   |      | 67  | 
|                         |      |   |      |     | 
|                         |      | $ | 783  |    
|                         |      |   |      |     | 

12. Interest Rate Swap

MRV entered into an interest rate swap (the Swap) in the second quarter
of 2000 to effectively change the interest rate characteristics of its $50.0
million variable-rate term loan presented in Long-Term Debt, with the objective
of fixing its overall borrowing costs. The Swap was considered to be 100%
effective and was therefore recorded using the short-cut method. The Swap was
designated as a cash flow hedge and changes in fair value of the debt were
generally offset by changes in fair value of the related security, resulting in
negligible net impact. The gain or loss from the change in fair value of the
Swap as well as the offsetting change in the hedged fair value of the long-term
debt were recognized in other comprehensive loss. In February 2002, MRV paid
off the Long-Term Debt of $50.0 million (see Note 11, Long-term Debt) and
terminated the Swap. The realized loss on the Swap of $3.2 million has been
recorded as interest expense and is included in other expense, net in the
accompanying Statements of Operations.

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13. Convertible Subordinated Notes

In June 1998, MRV completed a private placement of $100.0 million
principal amount five-year, Notes of which $10.0 million were redeemed in
February 2000. The Notes bear interest at 5% 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% of face value, and
after June 2002 for 101% of face value. The Notes are not entitled to the
benefits of any sinking fund.

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, 2002, 2001 and 2000 was $485,000, $767,000 and $723,000,
respectively, and included in other expense, net in the accompanying Statements
of Operations.

During the year ended December 31, 2002, MRV retired $57.2 million in
Notes in exchange for $19.7 million in cash and 12.3 million shares of its
common stock. For the year ended December 31, 2002, MRV recognized a loss on
the extinguishment of the Notes of $1.4 million, net of associated taxes. This
loss includes $6.6 million loss recognized in accordance with EITF Issue 02-15.
The loss on the extinguishment of the Notes has been presented in Other
Expense, net in the accompanying Statements of Operations. MRV retired all
Notes acquired.

14. Commitments and Contingencies

Lease Commitments

The Company leases all of its facilities and certain equipment under
non-cancelable operating lease agreements expiring in various years through
2013. The aggregate minimum annual lease payments under leases in effect as of
December 31, 2002 were as follows (in thousands):

|                         |            |   |        |       | 
|------------------------ | ---------- | - | ------ | ----- | 
|Year Ending December 31, |            |   |        |      
|                         | 2003       |   |        | 8,907 | 
|                         | 2004       |   |        | 6,570 | 
|                         | 2005       |   |        | 4,367 | 
|                         | 2006       |   |        | 3,194 | 
|                         | 2007       |   |        | 2,465 | 
|                         | Thereafter |   |        | 5,187 | 
|                         |            |   |        |       | 
|                         |            | $ | 30,690 |      
|                         |            |   |        |       | 

Annual rental expense under non-cancelable operating lease agreements for
the years ended December 31, 2002, 2001 and 2000 was $9.6 million, $8.8 million
and $4.9 million, respectively.

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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 3% to 5% of sales of such products developed with the participation up
to the dollar amount of such participation. No participation was received for
the years ended December 31, 2002, 2001 and 2000. The remaining future
obligation as of December 31, 2002 is approximately $482,000 which is
contingent on generating sufficient sales of this selected product line.

Litigation

MRV 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.
MRVs policy is to discuss these notices with the senders in an effort to
demonstrate that MRVs products and/or processes do not violate any patents.
MRV is currently involved in such discussions with IBM, Lucent, Ortel, Rockwell
and the Lemelson Foundation. MRV does not believe that any of its products or
processes violate any of the patents asserted by these parties and MRV further
believes that it has meritorious defenses if any legal action is taken by any
of these parties. However, if one or more of these parties was to assert a
claim and gain a conclusion unfavorable to MRV such claims could materially and
adversely affect the business, operating results and financial condition of
MRV.

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 financial statements.

15. 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, 2002 and 2001.

Stock Repurchase Program

On June 13, 2002, MRV announced that its Board of Directors had approved a
program to repurchase up to 7.0 million shares of its common stock. As of
December 31, 2002, MRV had repurchased 1.2 million shares of its common stock
at a cost of $1.1 million through December 31, 2002. MRV can repurchase up to
5.8 million additional shares of its common stock under this program.

Stock Options

MRV has various stock option and warrant plans that provide for granting
options and warrants to purchase shares of MRVs common stock to employees,
directors and non-employees performing consulting or advisory services for MRV.
The plans provide for the granting of options, which meet the Internal Revenue
Code requirements for qualification as incentive stock options, as well as
nonstatutory options and are at the discretion of the board of directors.
Under these plans, stocks option and warrant exercise prices generally equal
the fair market value of MRVs common stock at the date of grant. The options
and warrants generally vest over three to five years with expiration dates
ranging from six and ten years from the date of grant depending on the plan.
The plans provide for the issuance of 16.8 million shares of common stock over
the remaining life of the plans.

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

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

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

|                                                           |                         |  |        |        |           |   |           |       |           |  |        |        |           |   |       |       |  |  |           |        |   |   |       |       | 
|---------------------------------------------------------- | ----------------------- |  | ------ | ------ | --------- | - | --------- | ----- | --------- |  | ------ | ------ | --------- | - | ----- | ----- |  |  | --------- | ------ | - | - | ----- | ----- | 
|                                                           |                         |  | 2002   |        | 2001      |   | 2000     
|                                                           |                         |  |        |        |           |   |          
|                                                           |                         |  |        |        |           |   | Wtd. Avg. |       |           |  |        |        | Wtd. Avg. |   |       |       |  |  | Wtd. Avg.
|                                                           |                         |  | Shares |        | Ex. Price |   | Shares    |       | Ex. Price |  | Shares |        | Ex. Price
|                                                           |                         |  |        |        |           |   |           |       |           |  |        |        |          
|Outstanding, beginning of
year                             |                         |  | 12,936 |        |           | $ | 10.15     |       |           |  | 12,137 |        |           | $ | 11.28 |       |  |  | 8,230     |        |   | $ | 2.81  |      
|                                                           | Granted                 |  |        | 3,116  |           |   | $         | 0.90  |           |  |        | 3,045  |           |   | $     | 7.49  |  |  |           | 7,986  |   |   | $     | 50.60 | 
|                                                           | Exercised               |  |        | (50    | )         |   | $         | 2.64  |           |  |        | (561   | )         |   | $     | 3.08  |  |  |           | (2,896 | ) |   | $     | 2.97  | 
|                                                           | Cancelled and forfeited |  |        | (3,021 | )         |   | $         | 13.13 |           |  |        | (1,685 | )         |   | $     | 12.31 |  |  |           | (1,183 | ) |   | $     | 3.21  | 
|                                                           |                         |  |        |        |           |   |           |       |           |  |        |        |           |   |       |       |  |  |           |        |   |   |       |      
|Outstanding, end of year                                   |                         |  | 12,981 |        |           | $ | 7.26      |       |           |  | 12,936 |        |           | $ | 10.15 |       |  |  | 12,137    |        |   | $ | 11.28 |      
|                                                           |                         |  |        |        |           |   |           |       |           |  |        |        |           |   |       |       |  |  |           |        |   |   |       |      
|Weighted average fair
value of options granted
during year |                         |  |        |        |           | $ | 0.83      |       |           |  |        |        |           | $ | 9.79  |       |  |  |           |        |   | $ | 20.79 |      
|                                                           |                         |  |        |        |           |   |           |       |           |  |        |        |           |   |       |       |  |  |           |        |   |   |       |      

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 per
share. 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, 2002 is
summarized as follows (in thousands):

|                |  |             |        |               |  |             |      |  |  |  |       | 
|--------------- |  | ----------- | ------ | ------------- |  | ----------- | ---- |  |  |  | ----- | 
|                |  | Number      |        | Wtd. Avg.     |  | Number     
|                |  | Outstanding |        | Remaining     |  | Exercisable
|Exercise Prices |  | as of 2002  |        | Contract Life |  | as of 2002 
|                |  |             |        |               |  |            
|$0.67 - $1.10   |  |             | 3,065  |               |  |             | 9.61 |  |  |  | 37    | 
|$1.81 - $2.75   |  |             | 3,113  |               |  |             | 2.46 |  |  |  | 2,085 | 
|$2.88 - $3.95   |  |             | 1,818  |               |  |             | 5.29 |  |  |  | 942   | 
|$5.00 - $7.74   |  |             | 1,063  |               |  |             | 7.08 |  |  |  | 571   | 
|$9.50 - $13.95  |  |             | 423    |               |  |             | 5.40 |  |  |  | 227   | 
|$14.53 - $21.75 |  |             | 2,549  |               |  |             | 6.76 |  |  |  | 2,447 | 
|$23.00 - $50.38 |  |             | 950    |               |  |             | 5.68 |  |  |  | 770   | 
|                |  |             |        |               |  |             |      |  |  |  |       | 
|                |  |             | 12,981 |               |  |             |      |  |  |  | 7,079 | 
|                |  |             |        |               |  |             |      |  |  |  |       | 

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Warrants to Purchase common stock

In connection with various public and private offerings of common stock
and acquisitions MRV has issued warrants to purchase additional shares of
common stock, however as of December 31, 2002 and 2001, there were no
outstanding warrants to purchase shares of common stock.

16. Segment Reporting and Geographical Information

MRV divides and operates its business based on two reportable segments:
operating divisions and development stage enterprises. 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 divisions 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 expenses of each segment. As such,
there are no separately identifiable segment assets or are there any separately
identifiable statements of operations data below operating income.

Business segment Revenues for each of the three years ended December 31,
2002 were generated from operating divisions. There were no inter-segment
sales for each of the three years ended December 31, 2002, 2001 and 2000.
Revenues by groups of products for each of the years ended December 31, 2002
are as follows (in thousands):

|                                          |  |      |         |      |  |      |         |  |  |   |         | 
|----------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                          |  | 2002 |         | 2001 |  | 2000
|                                          |  |      |         |      |  |     
|Optical passive component                 |  | $    | 28,693  |      |  | $    | 39,010  |  |  | $ | 29,148  | 
|Optical active component                  |  |      | 51,343  |      |  |      | 97,653  |  |  |   | 97,335  | 
|Switches and routers                      |  |      | 57,571  |      |  |      | 74,675  |  |  |   | 80,784  | 
|Remote device management                  |  |      | 17,361  |      |  |      | 18,987  |  |  |   | 19,167  | 
|Network physical infrastructure equipment |  |      | 55,570  |      |  |      | 59,902  |  |  |   | 56,747  | 
|Services                                  |  |      | 21,444  |      |  |      | 18,934  |  |  |   | 20,892  | 
|Other network products                    |  |      | 20,550  |      |  |      | 23,683  |  |  |   | 15,321  | 
|                                          |  |      |         |      |  |      |         |  |  |   |         | 
|                                          |  | $    | 252,532 |      |  | $    | 332,844 |  |  | $ | 319,394 | 
|                                          |  |      |         |      |  |      |         |  |  |   |         | 

For each of the three years ended and as of December 31, 2002, MRV had no
single customer that accounted for more than 10% 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 is as follows (in
thousands):

|              |  |      |         |      |  |      |         |  |  |   |         | 
|------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|              |  | 2002 |         | 2001 |  | 2000
|              |  |      |         |      |  |     
|United States |  | $    | 64,675  |      |  | $    | 108,550 |  |  | $ | 119,190 | 
|Europe        |  |      | 157,998 |      |  |      | 176,745 |  |  |   | 162,881 | 
|Asia Pacific  |  |      | 28,560  |      |  |      | 42,925  |  |  |   | 31,891  | 
|Other         |  |      | 1,299   |      |  |      | 4,624   |  |  |   | 5,432   | 
|              |  |      |         |      |  |      |         |  |  |   |         | 
|              |  | $    | 252,532 |      |  | $    | 332,844 |  |  | $ | 319,394 | 
|              |  |      |         |      |  |      |         |  |  |   |         | 

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Business segment operating loss for each of the three years ended December
31, 2002 is as follows (in thousands):

|                              |  |      |          |      |  |      |          |   |  |   |          |  
|----------------------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                              |  | 2002 |          | 2001 |  | 2000
|                              |  |      |          |      |  |     
|Operating divisions           |  | $    | (122,053 | )    |  | $    | (274,831 | ) |  | $ | (100,759 | )
|Development stage enterprises |  |      | (24,261  | )    |  |      | (45,796  | ) |  |   | (48,810  | )
|                              |  |      |          |      |  |      |          |   |  |   |          |  
|                              |  | $    | (146,314 | )    |  | $    | (320,627 | ) |  | $ | (149,569 | )
|                              |  |      |          |      |  |      |          |   |  |   |          |  

Operating loss for each of the three years ended December 31, 2002 is as
follows (in thousands):

|              |  |      |          |      |  |      |          |   |  |   |          |  
|------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|              |  | 2002 |          | 2001 |  | 2000
|              |  |      |          |      |  |     
|United States |  | $    | (112,536 | )    |  | $    | (240,467 | ) |  | $ | (69,671  | )
|Foreign       |  |      | (33,778  | )    |  |      | (80,160  | ) |  |   | (79,898  | )
|              |  |      |          |      |  |      |          |   |  |   |          |  
|              |  | $    | (146,314 | )    |  | $    | (320,627 | ) |  | $ | (149,569 | )
|              |  |      |          |      |  |      |          |   |  |   |          |  

17. 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 2002, 2001 and 2000,
approximately $568,000, $838,000 and $731,000, respectively, was charged as
expense related to these plans.

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18. Supplemental Statements of Cash Flow Information

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

|                                                                      |                                                                    |  |                                  |        |      |  |      |        |   |  |   |         |  
|--------------------------------------------------------------------- | ------------------------------------------------------------------ |  | -------------------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                                                      |                                                                    |  | For the Years Ended December 31,
|                                                                      |                                                                    |  |                                 
|                                                                      |                                                                    |  | 2002                             |        | 2001 |  | 2000
|                                                                      |                                                                    |  |                                  |        |      |  |     
|Supplemental disclosure of cash flow information:                     |                                                                    |  |                                  |        |      |  |      |        |   |  |   |        
|                                                                      | Cash paid during year for interest                                 |  | $                                | 2,168  |      |  | $    | 10,549 |   |  | $ | 3,635   |  
|                                                                      | Cash paid during year for income taxes                             |  | $                                | 2,724  |      |  | $    | 5,323  |   |  | $ | 130     |  
|Supplemental schedule of non-cash investing and
financing activities: |                                                                    |  |                                  |        |      |  |      |        |   |  |   |        
|                                                                      | Fair value of assets acquired, net of cash
received                |  | $                                |       |      |  | $    | 2,153  |   |  | $ | 48,611  |  
|                                                                      | Less: Liabilities assumed                                          |  |                                  |       |      |  |      | (2,153 | ) |  |   | (44,190 | )
|                                                                      |                                                                    |  |                                  |        |      |  |      |        |   |  |   |         |  
|                                                                      | Cash received in acquisition                                       |  |                                  |       |      |  |      |       |   |  |   | 4,421   |  
|                                                                      | Cash used in acquisition                                           |  |                                  |       |      |  |      |       |   |  |   | 48,938  |  
|                                                                      |                                                                    |  |                                  |        |      |  |      |        |   |  |   |         |  
|                                                                      | Cash used in acquisition, net of cash received                     |  | $                                |       |      |  | $    |       |   |  | $ | 44,517  |  
|                                                                      |                                                                    |  |                                  |        |      |  |      |        |   |  |   |         |  
|                                                                      | Common stock issued in connection with
investments in subsidiaries |  | $                                | 7,052  |      |  | $    | 36,575 |   |  | $ | 90,126  |  
|                                                                      |                                                                    |  |                                  |        |      |  |      |        |   |  |   |         |  
|                                                                      | Common stock issued in connection with
exchange of Notes           |  | $                                | 31,647 |      |  | $    |       |   |  | $ |        |  
|                                                                      |                                                                    |  |                                  |        |      |  |      |        |   |  |   |         |  
|                                                                      | Decrease in fair value of interest rate swap                       |  | $                                |       |      |  | $    | 3,198  |   |  | $ |        |  
|                                                                      |                                                                    |  |                                  |        |      |  |      |        |   |  |   |         |  
|                                                                      | Non-cash deferred stock expense                                    |  | $                                | 2,990  |      |  | $    | 7,816  |   |  | $ |        |  
|                                                                      |                                                                    |  |                                  |        |      |  |      |        |   |  |   |         |  
|                                                                      | Non-cash consideration received in sale of
FOCI and QOI            |  | $                                | 2,000  |      |  | $    |       |   |  | $ |        |  
|                                                                      |                                                                    |  |                                  |        |      |  |      |        |   |  |   |         |  
|                                                                      | Fair value of stock options issued in
connection with investment   |  | $                                |       |      |  | $    | 503    |   |  | $ |        |  
|                                                                      |                                                                    |  |                                  |        |      |  |      |        |   |  |   |         |  

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19. Quarterly Financial Data (Unaudited)

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

|                                                                                    |                    |                                     |         |                    |        |          |          |           |        |          |         |   |        |   |         |       |        | 
|----------------------------------------------------------------------------------- | ------------------ | ----------------------------------- | ------- | ------------------ | ------ | -------- | -------- | --------- | ------ | -------- | ------- | - | ------ | - | ------- | ----- | ------ | 
|                                                                                    |                    |                                     |         | Three Months Ended
|                                                                                    |                    |                                     |         |                   
|                                                                                    |                    |                                     |         | Mar. 31,           |        | June 30, |          | Sept. 30, |        | Dec. 31,
|                                                                                    |                    |                                     |         | 2001               |        | 2001     |          | 2001      |        | 2001    
|                                                                                    |                    |                                     |         |                    |        |          |          |           |        |         
|Revenue                                                                             |                    | $                                   | 100,104 |                    |        | $        | 89,530   |           |        | $        | 69,730  |   |        | $ | 73,480  |      
|Cost of goods sold                                                                  |                    |                                     | 66,391  |                    |        |          | 88,765   |           |        |          | 57,621  |   |        |   | 54,612  |      
|                                                                                    |                    |                                     |         |                    |        |          |          |           |        |          |         |   |        |   |         |      
|Gross profit                                                                        |                    |                                     | 33,713  |                    |        |          | 765      |           |        |          | 12,109  |   |        |   | 18,868  |      
|Operating costs and expenses:                                                       |                    |                                     |         |                    |        |          |          |           |        |          |         |   |        |   |         |      
|                                                                                    |                    | Product development and engineering |         |                    | 25,005 |          |          |           | 25,782 |          |         |   | 19,307 |   |         |       | 24,719 | 
|                                                                                    |                    | Selling, general and administrative |         |                    | 38,412 |          |          |           | 31,777 |          |         |   | 49,528 |   |         |       | 30,957 | 
|                                                                                    |                    | Amortization of intangibles         |         |                    | 28,139 |          |          |           | 29,028 |          |         |   | 27,218 |   |         |       | 42,099 | 
|                                                                                    |                    | Restructuring costs                 |         |                    |       |          |          |           | 11,934 |          |         |   | 1,724  |   |         |       | 453    | 
|                                                                                    |                    |                                     |         |                    |        |          |          |           |        |          |         |   |        |   |         |      
|Total operating costs and expenses                                                  |                    |                                     | 91,556  |                    |        |          | 98,521   |           |        |          | 97,777  |   |        |   | 98,228  |      
|                                                                                    |                    |                                     |         |                    |        |          |          |           |        |          |         |   |        |   |         |      
|Operating loss                                                                      |                    |                                     | (57,843 | )                  |        |          | (97,756  | )         |        |          | (85,668 | ) |        |   | (79,360 | )    
|Other expense, net                                                                  |                    |                                     | 520     |                    |        |          | 2,373    |           |        |          | 1,410   |   |        |   | 18,474  |      
|                                                                                    |                    |                                     |         |                    |        |          |          |           |        |          |         |   |        |   |         |      
|Loss before minority interest, provision (benefit)
for taxes and extraordinary gain |                    |                                     | (58,363 | )                  |        |          | (100,129 | )         |        |          | (87,078 | ) |        |   | (97,834 | )    
|Minority interest                                                                   |                    |                                     | (1,388  | )                  |        |          | (5,051   | )         |        |          | (3,646  | ) |        |   | (1,492  | )    
|Provision (benefit) for taxes                                                       |                    |                                     | (2,683  | )                  |        |          | (939     | )         |        |          | 6,215   |   |        |   | 1,882   |      
|                                                                                    |                    |                                     |         |                    |        |          |          |           |        |          |         |   |        |   |         |      
|Loss before extraordinary gain                                                      |                    |                                     | (54,292 | )                  |        |          | (94,139  | )         |        |          | (89,647 | ) |        |   | (98,224 | )    
|                                                                                    | Extraordinary gain |                                     |         |                   |        |          |          |          |        |          |         |  |        |   |         | 9,949 |       
|                                                                                    |                    |                                     |         |                    |        |          |          |           |        |          |         |   |        |   |         |      
|Net loss                                                                            |                    | $                                   | (54,292 | )                  |        | $        | (94,139  | )         |        | $        | (89,647 | ) |        | $ | (88,275 | )    
|                                                                                    |                    |                                     |         |                    |        |          |          |           |        |          |         |   |        |   |         |      
|Loss before extraordinary gain                                                      |                    | $                                   | (0.73   | )                  |        | $        | (1.24    | )         |        | $        | (1.16   | ) |        | $ | (1.27   | )    
|Extraordinary gain                                                                  |                    | $                                   |        |                    |        | $        |         |           |        | $        |        |   |        | $ | 1.13    |      
|Basic and diluted net loss per share                                                |                    | $                                   | (0.73   | )                  |        | $        | (1.24    | )         |        | $        | (1.16   | ) |        | $ | (1.14   | )    
|Basic and diluted weighted average shares outstanding                               |                    |                                     | 74,370  |                    |        |          | 76,111   |           |        |          | 77,404  |   |        |   | 77,545  |      
|                                                                                    |                    |                                     |         |                    |        |          |          |           |        |          |         |   |        |   |         |      

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

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

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

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

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

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

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




PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers and directors of the Registrant at February 28,
2003 are as follows:

|                         |  |     |    |          |  |                                                
|------------------------ |  | --- | -- | -------- |  | -----------------------------------------------
|Name                     |  | Age |    | Position
|                         |  |     |    |         
|                         |  |     |    |         
|Noam Lotan               |  |     | 51 |          |  | President, Chief Executive Officer and Director
|Shlomo Margalit          |  |     | 61 |          |  | Chairman, Chief Technical Officer and Secretary
|Shay Gonen               |  |     | 37 |          |  | Chief Financial Officer                        
|Near Margalit            |  |     | 30 |          |  | Chief Executive Officer, Luminent, Inc.        
|Igal Shidlovsky          |  |     | 66 |          |  | Director                                       
|Guenter Jaensch          |  |     | 64 |          |  | Director                                       
|Professor Daniel Tsui    |  |     | 64 |          |  | Director                                       
|Professor Baruch Fischer |  |     | 52 |          |  | Director                                       

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

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

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

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

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

Science degree in Chemistry from the Technion and Master and Ph.D. degrees from
the Hebrew University in Israel. Dr. Shidlovsky became a director of Luminent,
Inc., MRVs 92.3% publicly traded subsidiary in September 2001.

77



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

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

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

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

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, 2002.

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ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth a summary of all compensation paid by the
Company to its Chief Executive Officer and for 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, 2002:

|                                                     |               |  |      |      |        |   |         |         |             |   |              |   |  |  |              |   |           |   |     |   | 
|---------------------------------------------------- | ------------- |  | ---- | ---- | ------ | - | ------- | ------- | ----------- | - | ------------ | - |  |  | ------------ | - | --------- | - | --- | - | 
|                                                     |               |  |      |      |        |   |         |         |             |   |              |   |  |  | Long-term    |   |           |   |    
|                                                     |               |  |      |      |        |   |         |         |             |   |              |   |  |  | Compensation |   |           |   |    
|                                                     |               |  |      |      |        |   |         |         |             |   |              |   |  |  | Securities   |   |           |   |    
|                                                     |               |  |      |      |        |   |         |         |             |   |              |   |  |  | Underlying  |   | All Other
|                                                     |               |  | Year |      | Salary |   | Bonus   |         | Options (#) |   | Compensation
|                                                     |               |  |      |      |        |   |         |         |             |   |             
|Noam Lotan                                           |               |  | 2002 |      |        | $ | 150,000 |         |             | $ |             |   |  |  | 112,000      |   |           | $ |    |  
|President and Chief Executive
Officer                |               |  | 2001 |      |        | $ | 100,000 |         |             | $ |             |   |  |  | 98,000       |   |           | $ |    |  
|                                                     |               |  | 2000 |      |        | $ | 100,000 |         |             | $ |             |   |  |  |             |   |           | $ |    |  
|Shlomo Margalit                                      |               |  | 2002 |      |        | $ | 110,000 |         |             | $ |             |   |  |  |             |   |           | $ |    |  
|Chairman, Chief Technical Officer                    |               |  | 2001 |      |        | $ | 110,000 |         |             | $ |             |   |  |  |             |   |           | $ |    |  
|                                                     | and Secretary |  |      | 2000 |        |   | $       | 110,000 |             |   | $            |  |  |  |              |  |           |   | $   |  | 
|Shay Gonen                                           |               |  | 2002 |      |        | $ | 146,346 |         |             | $ | 18,000       |   |  |  | 64,500       |   |           | $ |    |  
|Chief Financial Officer                              |               |  | 2001 |      |        | $ | 128,955 |         |             | $ |             |   |  |  | 100,000      |   |           | $ |    |  
|                                                     |               |  | 2000 |      |        | $ | 104,836 |         |             | $ |             |   |  |  |             |   |           | $ |    |  
|Near Margalit (1)                                    |               |  | 2002 |      |        | $ | 113,847 |         |             | $ | 15,000       |   |  |  | 190,000      |   |           | $ |    |  
|Vice
President of Marketing and Business Development |               |  | 2001 |      |        |   | N/A     |         |             |   | N/A          |   |  |  | N/A          |   |           |   | N/A |  
|                                                     |               |  | 2000 |      |        |   | N/A     |         |             |   | N/A          |   |  |  | N/A          |   |           |   | N/A |  



---

|(1) |  | Near Margalit joined MRV as Vice President of Marketing and
Business Development in May 2002 and became Luminents Chief
Executive Officer in February 2003.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

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Option Grants in Last Fiscal Year

The following table provides certain information regarding stock option
grants made to the Named Executive Officers during the year ended December 31,
2002:

|                |  |  |  |  |  |            |         |            |  |              |     |                 |  |        |      |         |  |  |            |  |  |                               |         |  |  |   |         | 
|--------------- |  |  |  |  |  | ---------- | ------- | ---------- |  | ------------ | --- | --------------- |  | ------ | ---- | ------- |  |  | ---------- |  |  | ----------------------------- | ------- |  |  | - | ------- | 
|                |  |  |  |  |  |            |         |            |  |              |     |                 |  |        |      |         |  |  |            |  |  | Potential Realizable Value at
|                |  |  |  |  |  |            |         |            |  |              |     |                 |  |        |      |         |  |  |            |  |  | Assumed Annual Rate of Stock 
|                |  |  |  |  |  |            |         |            |  |              |     |                 |  |        |      |         |  |  |            |  |  | Appreciation for Option Term 
|                |  |  |  |  |  |            |         |            |  |              |     |                 |  |        |      |         |  |  |            |  |  |                              
|                |  |  |  |  |  |            |         |            |  | Percentage   |     |                 |  |        |      |         |  |  |            |  |  |                               |         |  |  |  
|                |  |  |  |  |  | Number of  |         | of Total   |  |              |     |                 |  |        |      |         |  |  |            |  |  |                               |         | 
|                |  |  |  |  |  | Securities |         | Options    |  |              |     |                 |  |        |      |         |  |  |            |  |  |                               |         | 
|                |  |  |  |  |  | Underlying |         | Granted to |  |              |     |                 |  |        |      |         |  |  |            |  |  |                               |         | 
|                |  |  |  |  |  | Options    |         | Employees  |  | Exercise     |     |                 |  |        |      |         |  |  |            |  |  |                              
|                |  |  |  |  |  | Granted    |         | in 2002    |  | Price ($/sh) |     | Expiration Date |  | 5% (1) |      | 10% (1)
|                |  |  |  |  |  |            |         |            |  |              |     |                 |  |        |      |        
|Noam Lotan      |  |  |  |  |  |            | 100,000 |            |  |              | 3.2 | %               |  | $      | 0.99 |         |  |  | 10/29/2012 |  |  | $                             | 54,581  |  |  | $ | 134,437 | 
|                |  |  |  |  |  |            | 12,000  |            |  |              | 0.4 | %               |  | $      | 0.99 |         |  |  | 10/29/2012 |  |  | $                             | 6,550   |  |  | $ | 16,132  | 
|Shlomo Margalit |  |  |  |  |  |            |        |            |  |              |    |                 |  | $      |     |         |  |  | N/A        |  |  | $                             |        |  |  | $ |        | 
|Shay Gonen      |  |  |  |  |  |            | 50,000  |            |  |              | 1.6 | %               |  | $      | 1.10 |         |  |  | 6/11/2012  |  |  | $                             | 30,323  |  |  | $ | 74,687  | 
|                |  |  |  |  |  |            | 14,500  |            |  |              | 0.5 | %               |  | $      | 1.09 |         |  |  | 12/24/2012 |  |  | $                             | 8,714   |  |  | $ | 21,462  | 
|Near Margalit   |  |  |  |  |  |            | 190,000 |            |  |              | 6.1 | %               |  | $      | 1.10 |         |  |  | 6/11/2012  |  |  | $                             | 115,228 |  |  | $ | 283,811 | 



---

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

Fiscal Year End Option Values

No options were exercised by any of the Named Executive Officers during
the year ended December 31, 2002. The following table provides certain
information concerning MRV stock options held by the Named Executive Officers
at December 31, 2002:

|                |  |                             |  |                              |  |             |        |               |  |  |         |  |  |   |    |   |  |   |       |  
|--------------- |  | --------------------------- |  | ---------------------------- |  | ----------- | ------ | ------------- |  |  | ------- |  |  | - | -- | - |  | - | ----- | -
|                |  | Number of Shares Underlying |  | Value of Unexercised In-The-
|                |  | Unexercised Options at      |  | Money Options at            
|                |  | December 31, 2002           |  | December 31, 2002 (1)       
|                |  |                             |  |                             
|                |  | Exercisable                 |  | Unexercisable                |  | Exercisable |        | Unexercisable
|                |  |                             |  |                              |  |             |        |              
|Noam Lotan      |  |                             |  |                              |  |             | 19,600 |               |  |  | 190,400 |  |  | $ | (2 | ) |  | $ | 8,960 |  
|Shlomo Margalit |  |                             |  |                              |  |             |       |               |  |  |        |  |  |   |   |   |  |   |      |  
|Shay Gonen      |  |                             |  |                              |  |             | 43,925 |               |  |  | 151,075 |  |  |   | (2 | ) |  |   | (2    | )
|Near Margalit   |  |                             |  |                              |  |             |       |               |  |  | 190,000 |  |  |   |   |   |  |   | (2    | )



---

|(1) |  | Based on the difference between the closing price of MRV
common stock on December 31, 2002 and the exercise price.
|--- |  | ------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | None of these options, calculated as stated above, are
in-the-money as of December 31, 2002.                      

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Employment Agreements

In March 1992, MRV entered into three-year employment agreements with Mr.
Lotan and Dr. Margalit. Upon expiration, these agreements automatically renew
for one-year terms unless either party terminates them by giving the other
three months notice of non-renewal prior to the expiration of the current
term. Pursuant to the agreements, Mr. Lotan serves as President, Chief
Executive Officer and a Director of MRV and Dr. Margalit serves as Chairman of
the Board of Directors, Chief Technical Officer and Secretary. Mr. Lotan and
Dr. Margalit receive base annual salaries of $100,000 and $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.

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 Drs. 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 October 2002, MRV granted to
each outside director options to purchase 60,000 shares of its common stock at
$0.99 per share. In June 2002, MRV granted to Dr. Shidlovsky options to
purchase 3,000 of its common stock at $1.10 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.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of February 28, 2003, 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.

|                                                |  |              |  |  |  |  |           |            |  |  |    |   |  |  |     |  
|----------------------------------------------- |  | ------------ |  |  |  |  | --------- | ---------- |  |  | -- | - |  |  | --- | -
|                                                |  | Common Stock
|                                                |  |             
|Name and Address (1) of Beneficial Owner (2) or |  | Number of    |  |  |  |  |           | Percentage
|Identity of Group                               |  | Shares       |  |  |  |  |           | Ownership 
|                                                |  |              |  |  |  |  |           |           
|Shlomo Margalit                                 |  |              |  |  |  |  | 3,245,660 |            |  |  |    |   |  |  | 3.2 | %
|Noam Lotan                                      |  |              |  |  |  |  | 1,499,024 |            |  |  | (3 | ) |  |  | 1.5 |  
|Shay Gonen                                      |  |              |  |  |  |  | 52,650    |            |  |  | (4 | ) |  |  | *   |  
|Near Margalit                                   |  |              |  |  |  |  |          |            |  |  |    |   |  |  | *   |  
|Igal Shidlovsky                                 |  |              |  |  |  |  | 148,200   |            |  |  | (5 | ) |  |  | *   |  
|Guenter Jaensch                                 |  |              |  |  |  |  | 103,000   |            |  |  | (6 | ) |  |  | *   |  
|Professor Daniel Tsui                           |  |              |  |  |  |  | 51,000    |            |  |  | (6 | ) |  |  | *   |  
|Professor Baruch Fischer                        |  |              |  |  |  |  | 51,000    |            |  |  | (6 | ) |  |  | *   |  
|All executive officers and directors as a group |  |              |  |  |  |  | 5,150,534 |            |  |  | (7 | ) |  |  | 4.9 |  



---

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

|
|
|
|
|
|
|
|
|
|
|
|
|
|
|

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Equity Compensation Plan Information

The table below set forth information with respect to shares of common
stock that may be issued under our stock option and warrant plans as of
December 31, 2002.

|                                                                        |  |                      |            |                     |  |                           |      |                         |  |                      |           | 
|----------------------------------------------------------------------- |  | -------------------- | ---------- | ------------------- |  | ------------------------- | ---- | ----------------------- |  | -------------------- | --------- | 
|                                                                        |  |                      |            |                     |  |                           |      |                         |  | Number of Securities
|                                                                        |  | Number of Securities |            |                     |  |                           |      | Remaining Available for
|                                                                        |  | to be Issued Upon    |            | Weighted Average    |  | Future Issuance Under    
|                                                                        |  | Exercise of          |            | Exercise Price of   |  | Equity Compensation Plans
|                                                                        |  | Outstanding Options  |            | Outstanding Options |  | (excluding securities    
|Plan Category                                                           |  | and Warrants         |            | and Warrants        |  | reflected in column (a)) 
|                                                                        |  |                      |            |                     |  |                          
|                                                                        |  | (a)                  |            | (b)                 |  | (c)                      
|Stock
option and warrant plans approved by security holders (1)         |  |                      | 3,262,390  |                     |  | $                         | 4.40 |                         |  |                      | 930,590   | 
|Stock
option and warrant plans not approved by security holders (2),(3) |  |                      | 9,718,871  |                     |  | $                         | 8.19 |                         |  |                      | 2,849,586 | 
|                                                                        |  |                      |            |                     |  |                           |      |                         |  |                      |           | 
|                                                                        |  |                      | 12,981,261 |                     |  | $                         | 7.26 |                         |  |                      | 3,780,176 | 
|                                                                        |  |                      |            |                     |  |                           |      |                         |  |                      |           | 



---

(1)  Includes the:



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

(2)  Includes the:



| |  |  | 1998 Nonstatutory Stock Option Plan;                                                                                                                                                                                                                                                      
| |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 2001 MRV Communications, Inc. Stock Option Plan for Employees of Appointech, Inc.;                                                                                                                                                                                                        
|
| |  |  | 2000 MRV Communications, Inc. Stock Option Plan for Employees of AstroTerra Corporation;                                                                                                                                                                                                  
|
| |  |  | Stock option agreement effective July 12, 2000 between the Company and Eric I. Blancho;                                                                                                                                                                                                   
|
| |  |  | German Employee Warrant Program;                                                                                                                                                                                                                                                          
|
| |  |  | Stock option agreement dated March 1, 2002 between the Company and Candy Glazer;                                                                                                                                                                                                          
|
| |  |  | MRV Communications, Inc. 2002 International Stock Option Plan;                                                                                                                                                                                                                            
|
| |  |  | Warrants provided to Nathan Shilo as trustee for
employees and designated consultants of NBase Communications,
Ltd. exercisable on July 19, 1996, July 13, 1997, July 13,
1998, February 1, 1998, January 2, 1998 and January 4, 1999.                                                    
|
| |  |  | Italian Employees Warrant Program;                                                                                                                                                                                                                                                        
|
| |  |  | Stock
option issued and outstanding on the effective date of the merger of
Luminent under the Luminent Amended and
Restated 2000 Stock Option Plan that were assumed by MRV and
are exercisable for 0.43 shares of
Common Stock for each share of Luminent held under the relevant option;
|
| |  |  | MRV Communications, Inc. 2002 Nonstatutory Stock Option Plan for Employees of Luminent, Inc.;                                                                                                                                                                                             
|
| |  |  | 2000 MRV Communications, Inc. Stock Option Plan for Employees of Optonics International Corp.;                                                                                                                                                                                            
|
| |  |  | 2000 MRV Communications, Inc. Stock Option Plan for Employees of Quantum Optech, Inc.;                                                                                                                                                                                                    

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| |  |  | Swedish Employees Warrant Program; and                                                   
| |  | - | -----------------------------------------------------------------------------------------
|
| |  |  | Stock option agreement effective July 11, 2000 between the Company and William R. Spivey.

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




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.

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PART IV




ITEM 14. CONTROLS AND PROCEDURES

Evaluation Of Disclosure Controls And Procedures

Within the 90-day period prior to the date of this report, we carried out
an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of MRVs disclosure controls
and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934
(the Exchange Act). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
relating to MRV (including its consolidated subsidiaries) required to be
included in MRVs Exchange Act filings.

Changes In Internal Controls

There have been no significant changes in our internal controls or in
other factors, which could significantly affect internal controls subsequent to
the date we carried out its evaluation.




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

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

|                                                                                                               |  |           |    | 
|-------------------------------------------------------------------------------------------------------------- |  | --------- | -- | 
|                                                                                                               |  | Form 10-K
|                                                                                                               |  | Page No. 
|                                                                                                               |  |          
|Consolidated Financial Statements:                                                                             |  |           |    | 
|Report of Ernst & Young LLP, Independent Auditors                                                              |  |           | 41 | 
|Statements of Operations for the three years ended December 31, 2002                                           |  |           | 43 | 
|Balance Sheets as of December 31, 2002 and 2001                                                                |  |           | 44 | 
|Statements of Stockholders Equity and Comprehensive Income (Loss)
for the three years ended December 31, 2002 |  |           | 46 | 
|Statements of Cash Flows for the three years ended December 31, 2002                                           |  |           | 46 | 
|Notes to Financial Statements                                                                                  |  |           | 50 | 

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

(3)  Exhibits

|        |  |                                                                                                                                                                                                                                                                                              
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                              
|No.     |  | Description                                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                              
|2.1     |  | Agreement and Plan of Merger by and between MRV Technologies,
Inc. (a California corporation) and MRV Technologies, Inc. (a
Delaware corporation), as amended (incorporated by reference
to Exhibit 2a filed as part of Registrants Registration
Statement on Form S-1 (File No. 33-48003)).
|        |  |                                                                                                                                                                                                                                                                                              
|2.2     |  | Certificate of Merger by and between MRV Technologies, Inc. (a
California corporation) and MRV Technologies, Inc. (a Delaware
corporation) (incorporated by reference to Exhibit 2b filed as
part of Registrants Registration Statement on Form S-1 (File
No. 33-48003)).                   

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|        |  |                                                                                                                                                                                                                                                        
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                        
|No.     |  | Description                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                        
|2.3     |  | Certificate of Merger Merging Luminent, Inc. into MRV Sub
Corp. (incorporated by reference to Exhibit 4.1 of MRVs 8-K
filed with the SEC on January 8, 2002).                                                                                         
|        |  |                                                                                                                                                                                                                                                        
|3.1     |  | Certificate of Incorporation, as amended (incorporated by
referenced to Exhibit 3a filed as part of Registrants
Registration Statement on Form S-1 (File No. 33-48003)).                                                                              
|        |  |                                                                                                                                                                                                                                                        
|3.2     |  | Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on March 20, 1996
(incorporated by reference to Exhibit 3.2 of MRVs Form 10-Q
for the quarter ended June 30, 1998 filed August 14, 1998).         
|        |  |                                                                                                                                                                                                                                                        
|3.3     |  | Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on July 29, 1996
(incorporated by reference to Exhibit 3.3 of MRVs Form 10-Q
for the quarter ended June 30, 1998 filed August 14, 1998).          
|        |  |                                                                                                                                                                                                                                                        
|3.4     |  | Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on November 19, 1998
(incorporated by reference to Exhibit 3.4 of MRVs Form 10-K
for the year ended December 31, 1998 filed March 31, 1999).      
|        |  |                                                                                                                                                                                                                                                        
|3.5     |  | Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on May 11, 2000
(incorporated by reference to Exhibit 3.5 of MRVs Form 10-K
for the year ended December 31, 2000 filed April 17, 2001).           
|        |  |                                                                                                                                                                                                                                                        
|3.6     |  | Bylaws (incorporated by reference to Exhibit 3b filed as part
of Registrants Registration Statement on Form S-1 (File No.
33-48003)).                                                                                                                 
|        |  |                                                                                                                                                                                                                                                        
|4.1     |  | Specimen certificate of common stock (incorporated by
reference to Exhibit 4.5 filed as part of Registrants
Registration Statement on Form S-3 (File No. 333-64017).                                                                                  
|        |  |                                                                                                                                                                                                                                                        
|10.1    |  | Key Employee Agreement between MRV and Noam Lotan dated March
23, 1993 (incorporated by reference to Exhibit 10b(1) filed as
part of Registrants Registration Statement on Form S-1 (File
No. 33-48003)).                                             
|        |  |                                                                                                                                                                                                                                                        
|10.2    |  | Letter amending Key Employee Agreement between MRV and Noam
Lotan (incorporated by reference to Exhibit 10b(1)1 filed as
part of Registrants Registration Statement on Form S-1 (File
No. 33-48003)).                                                 
|        |  |                                                                                                                                                                                                                                                        
|10.3    |  | Letter amending Key Employee Agreement between MRV and Noam
Lotan (incorporated by reference to Exhibit 10b(1)2 filed as
part of Registrants Registration Statement on Form S-1 (File
No. 33-48003)).                                                 
|        |  |                                                                                                                                                                                                                                                        
|10.4    |  | Key Employee Agreement between MRV and Shlomo Margalit
(incorporated by reference to Exhibit 10b(3) filed as part of
Registrants Registration Statement on Form S-1 (File No.
33-48003)).                                                             
|        |  |                                                                                                                                                                                                                                                        
|10.5    |  | Letter amending Key Employee Agreement between MRV and Shlomo
Margalit (incorporated by reference to Exhibit 10b(3)1 filed
as part of Registrants Registration Statement on Form S-1
(File No. 33-48003)).                                            
|        |  |                                                                                                                                                                                                                                                        
|10.6    |  | Form of Letter amending Key Employee Agreement between MRV and
Shlomo Margalit (incorporated by reference to Exhibit 10b(3)2
filed as part of Registrants Registration Statement on Form
S-1 (File No. 33-48003)).                                    
|        |  |                                                                                                                                                                                                                                                        
|10.7    |  | 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).

86



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|        |  |                                                                                                                                                                                                                                                                                                                                                       
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                       
|No.     |  | Description                                                                                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|10.8    |  | Standard Industrial/Commercial Single-Tenant Lease dated
October 8, 1996 between MRV and Nordhoff Development relating
to the premises located at 20415 Nordhoff Street, Chatsworth,
California (incorporated by reference to Exhibit No. 10.23 of
Registrants Annual Report on Form 10-K for the year ended
December 31, 1996 filed April 15, 1997).
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|10.9    |  | 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).
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|10.10   |  | Fifth Amendment to Lease relating to the premises located at
295 Foster Street, Littleton, Mass. with attached Lease
Guaranty of Registrant (incorporated by reference to Exhibit
10.31 of MRVs Form 10-K for the year ended December 31, 1998
filed March 31, 1999).                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|10.11   |  | Indenture, dated as of June 26, 1998, between MRV and American
Stock Transfer & Trust Company, as Trustee, relating to MRVs
5% Convertible Subordinated Notes Due 2003 (the Notes)
(incorporated by reference to Exhibit 4.2 of MRVs Form 10-Q
for the quarter ended June 30, 1998, filed August 14, 1998).                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|10.12   |  | Purchase Agreement, dated June 23, 1998, between MRV and
Prudential Securities Incorporated and Bear, Stearns & Co.
Inc. relating to the Notes (incorporated by reference to
Exhibit 4.1 of MRVs Form 10-Q for the quarter ended June 30,
1998 filed August 14, 1998).                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|10.13   |  | Indenture, dated as of June 26, 1998, between MRV and American
Stock Transfer & Trust Company, as Trustee, relating to the
Notes (incorporated by reference to Exhibit 4.2 of MRVs Form
10-Q for the quarter ended June 30, 1998, filed August 14,
1998).                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|10.14   |  | Registration Rights Agreement dated June 26, 1998 between MRV
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 MRVs Form 10-Q for the quarter ended June 30, 1998
filed August 14, 1998).               
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|10.15   |  | Under lease dated September 16, 1998 between Lowe Azure
Limited, NBase Europe Gmbh and MRV relating to property at
Unit 16, Campbell Court, Campbell Road, Bramley Basingstoke
Hampshire, England (incorporated by reference to Exhibit 10.37
of MRVs Form 10-K for the year ended December 31, 1998 filed
March 31, 1999).                          
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|10.16   |  | Standard Industrial/Commercial Single-Tenant Lease - Net dated
December 1, 1998 by and between Radar Investments, Inc. and
Registrant relating to the premises located at 8943 Fullbright
Avenue, Chatsworth, California (incorporated by reference to
Exhibit 10.38 of MRVs Form 10-K for the year ended December
31, 1998 filed March 31, 1999).   
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|10.17   |  | 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).                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|10.18   |  | 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).                                                                                                              

87



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|        |  |                                                                                                                                                                                                                                                                                                     
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                     
|No.     |  | Description                                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                     
|10.19   |  | 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)).                                       
|        |  |                                                                                                                                                                                                                                                                                                     
|10.20   |  | 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)).
|        |  |                                                                                                                                                                                                                                                                                                     
|10.21   |  | 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)).                                              
|        |  |                                                                                                                                                                                                                                                                                                     
|10.22   |  | 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)).       
|        |  |                                                                                                                                                                                                                                                                                                     
|10.23   |  | 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).                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                     
|10.24   |  | 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)).                                         
|        |  |                                                                                                                                                                                                                                                                                                     
|10.25   |  | 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). 
|        |  |                                                                                                                                                                                                                                                                                                     
|10.26   |  | 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).                                              
|        |  |                                                                                                                                                                                                                                                                                                     
|10.27   |  | 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).                                                                             
|        |  |                                                                                                                                                                                                                                                                                                     
|10.28   |  | 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).                                                                
|        |  |                                                                                                                                                                                                                                                                                                     
|10.29   |  | 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).                                                

88



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|        |  |                                                                                                                                                                                                                                                                                                                 
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                 
|No.     |  | Description                                                                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                 
|10.30   |  | 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).                  
|        |  |                                                                                                                                                                                                                                                                                                                 
|10.31   |  | 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).                       
|        |  |                                                                                                                                                                                                                                                                                                                 
|10.32   |  | Lease Agreement dated November 11, 1997 by and among Kenneth
R. Smith, Alice J. Smith and MRV Communications, Inc.,
relating to premises located at 8917 Fullbright Ave.
(incorporated by reference to Exhibit 10.9 of Luminent, Inc.s
Registration Statement on Form S-1 filed with the SEC on July
26, 2000).
|        |  |                                                                                                                                                                                                                                                                                                                 
|10.33   |  | Extension to Lease Agreement referred to in Exhibit 10.32                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                 
|10.34   |  | Amendment to Lease between Nordhoff Industrial and the
Registrant dated December 14, 2001 relating to premises
located at 20415 Nordhoff Street (incorporated by reference to
Exhibit 10.65 of MRVs Form 10-K filed with the SEC on March
21, 2002).                                                           
|        |  |                                                                                                                                                                                                                                                                                                                 
|10.35   |  | 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).                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                 
|10.36   |  | 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).                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                 
|10.37   |  | Lease Agreement dated March 30, 2000 between the Registrant
and MEPT West Hills, LLC, relating to the premises located at
8433 Fallbrook Ave. (incorporated by reference to Exhibit
10.68 of MRVs Form 10-K filed with the SEC on March 21,
2002).                                                             
|        |  |                                                                                                                                                                                                                                                                                                                 
|10.38   |  | Lease Agreement dated August 14, 2000 between George DeRado
and Luminent, Inc. relating to the premises located at 20520
Nordhoff Street (incorporated by reference to Exhibit 10.68 of
MRVs Form 10-K filed with the SEC on March 21, 2002).                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                 
|10.39   |  | Candy Glazer Stock Option Agreement (incorporated by reference
to Exhibit 4 of the Registration Statement on Form S-8 filed
with the SEC on March 22, 2002).                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                 
|10.40   |  | Share Purchase Agreement dated September 30, 2002, by and
among Luminent and Lin, Son-Fure (Steve), Chen, Chao Hsien
(Goodman), Hou, Janpu Hsu and Jen Hsu (Rio) (incorporated by
reference to Exhibit 2.1 of MRVs Form 8-K filed with the SEC
on October 23, 2002).                                           
|        |  |                                                                                                                                                                                                                                                                                                                 
|10.41   |  | MRV Communications, Inc. 2002 International Stock Option Plan
(incorporated by reference to Exhibit 4.1 of the Registration
Statement on Form S-8 filed with the SEC on February 1, 2002).                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                 
|10.42   |  | Form of Stock Option Agreement for MRV Communications, Inc.
2002 International Stock Option Plan (incorporated by
reference to Exhibit 4.2 of the Registration Statement on Form
S-8 filed with the SEC on February 1, 2002).                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                 
|10.43   |  | Luminent, Inc. Amended and Restated 2000 Stock Option Plan
(incorporated by reference to Exhibit 4.1 of the Registration
Statement on Form S-8 filed with the SEC on February 1, 2002).                                                                                                                         

89



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|        |  |                                                                                                                                                                                                                   
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                   
|No.     |  | Description                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                   
|10.44   |  | Stock Option Agreement for Luminent, Inc. Amended and Restated
2000 Stock Option Plan (incorporated by reference to Exhibit
4.2 of the Registration Statement on Form S-8 filed with the
SEC on February 1, 2002).
|        |  |                                                                                                                                                                                                                   
|16.1    |  | Letter regarding Change in Certified Accountant (incorporated
by reference to Exhibit 16 Registrants Form 8-K filed with
the SEC on June 18, 2002).                                                              
|        |  |                                                                                                                                                                                                                   
|21.1    |  | Subsidiaries of Registrant.                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                   
|23.1    |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                                               
|        |  |                                                                                                                                                                                                                   
|23.2    |  | Notice Regarding Consent of Arthur Andersen LLP.                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                   
|25.1    |  | Power of Attorney (included on signature page).                                                                                                                                                                   

(b)  One report on Form 8-K (as amended by a Form 8-K/A) was filed during
the quarter ended December 31, 2002. That Form 8-K Report, dated October 21,
2002 and filed on October 23, 2002, reported under Item 2 registrants sale of
its equity in Fiber Optic Communications, Inc., a corporation organized and
existing under the laws of the Republic of China, and Quantum Optic, Inc. a
corporation organized and existing under the laws of the Republic of China, or
Taiwan. Pursuant to a Form 8-K/A dated and filed on December 4, 2002, the Form
8-K filed October 23, 2002 was amended with the following pro forma financial
information being filed as part of that report under Item 7:

Unaudited Pro Forma Consolidated Condensed Balance Sheet As of September 30,
2002;

Unaudited Pro Forma Condensed Consolidated Statements of Operations For the
Nine Months Ended September 30, 2002;

Unaudited Pro Forma Condensed Consolidated Statements of Operations For the
Year ended December 31, 2001; and

Notes to
Pro Forma Condensed Financial Information.

90



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SIGNATURE

Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant certifies that it has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized
on March 27, 2003.

|                                                                    
|--------------------------------------------------------------------
|MRV COMMUNICATIONS, INC                                             
|                                                                    
|By: /s/ Noam Lotan

Noam Lotan
President and Chief Executive Officer
|                                                                    
|By: /s/ Shay Gonen

Shay Gonen
Chief Financial Officer              

91



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POWER OF ATTORNEY

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

|                                       |  |                                                                     |  |                |  | 
|-------------------------------------- |  | ------------------------------------------------------------------- |  | -------------- |  | 
|Signature                              |  | Title                                                               |  | Date          
|                                       |  |                                                                     |  |               
|                                      
|/s/ Noam Lotan

(Noam Lotan)           |  | President and Chief Executive Officer
(Principal Executive Officer) |  | March 27, 2003
|                                       |  |                                                                     |  |                |  | 
|/s/ Shlomo Margalit

(Shlomo Margalit) |  | Chairman of the Board, Chief
Technology Officer, and Secretary      |  | March 27, 2003
|                                       |  |                                                                     |  |                |  | 
|/s/ Shay Gonen

(Shay Gonen)           |  | Chief Financial Officer
(Principal Finance and Accounting
Officer)  |  | March 27, 2003
|                                       |  |                                                                     |  |                |  | 
|/s/ Igal Shidlovsky

(Igal Shidlovsky) |  | Director                                                            |  | March 27, 2003
|                                       |  |                                                                     |  |                |  | 
|/s/ Guenter Jaensch

(Guenter Jaensch) |  | Director                                                            |  | March 27, 2003
|                                       |  |                                                                     |  |                |  | 
|/s/ Daniel Tsui

(Daniel Tsui)         |  | Director                                                            |  | March 27, 2003
|                                       |  |                                                                     |  |                |  | 
|/s/ Baruch Fischer

(Baruch Fischer)   |  | Director                                                            |  | March 27, 2003

92



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CERTIFICATION

I, Noam Lotan, certify that:

1.     I have reviewed this Annual Report on Form 10-K of MRV Communications, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual Report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | a. |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| | a. |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                                     
|-------------------------------------
|Date: March 27, 2003                 
|                                     
|/s/ Noam Lotan

Noam Lotan           
|President and Chief Executive Officer

93



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CERTIFICATION

I, Shay Gonen, certify that:

1.     I have reviewed this Annual Report on Form 10-K of MRV Communications, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Annual
Report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | a. |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| | a. |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                          
|--------------------------
|Date: March 27, 2003      
|                          
|/s/ Shay Gonen

Shay Gonen
|Chief Financial Officer   

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##### Table of Contents



CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of MRV Communications, Inc. (the
Company) on Form 10-K for the year ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the Report), each of
the undersigned, in the capacities and on March 27, 2003, hereby certifies
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to his knowledge:



| | 1. |  | The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and                       
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
MRV.



|MRV COMMUNICATIONS, INC              
|-------------------------------------
|                                     
|By: /s/ Noam Lotan

Noam Lotan       
|President and Chief Executive Officer
|                                     
|By: /s/ Shay Gonen

Shay Gonen       
|Chief Financial Officer              

95