MRV COMMUNICATIONS INC, S-3/A, 1998-12-09

MRV COMMUNICATIONS INC
S-3/A, 1998-12-09
SEMICONDUCTORS & RELATED DEVICES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1998
REGISTRATION NO. 333-64017

================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------

PRE-EFFECTIVE AMENDMENT NO. 1
TO

FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MRV COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<CAPTION>
DELAWARE 3577/3674 06-1340090
<S> <C> <C>
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

8943 FULLBRIGHT AVENUE
CHATSWORTH, CALIFORNIA 91311
(818) 773-9044
(818) 773-0906 (FAX)
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

NOAM LOTAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
8943 FULLBRIGHT AVENUE
CHATSWORTH, CALIFORNIA 91311
(818) 773-9044
(818) 773-0906 (FAX)
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

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

Copies to:

Mark A. Klein, Esq.
Susan B. Kalman, Esq.
Freshman, Marantz, Orlanski,
Cooper & Klein
9100 Wilshire Boulevard, 8-East
Beverly Hills, CA 90212-3480
Telephone: (310) 273-1870
Facsimile: (310) 274-8357

Approximate date of commencement of proposed sale to public: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]

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

The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.

<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION -- DATED DECEMBER 9, 1998

PROSPECTUS

$100,000,000

MRV COMMUNICATIONS, INC.
5% CONVERTIBLE SUBORDINATED NOTES DUE 2003

This Prospectus relates to the resale from time to time by the holders (the
"Selling Securityholders") of up to $100,000,000 aggregate principal amount of
5% Convertible Subordinated Notes due 2003 (the "Notes") of MRV Communications,
Inc., a Delaware corporation ("MRV" or the "Company"), and the resale of shares
of Common Stock, par value $0.0034 per share (the "Common Stock"), of the
Company issuable upon the conversion thereof (the "Conversion Shares"). The
Notes were originally issued by the Company in a private placement completed on
June 26, 1998 to the Initial Purchasers (as defined). The Notes were resold by
the Initial Purchasers in transactions exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act"), in the United States
to persons reasonably believed to be "qualified institutional buyers" as defined
in Rule 144A under the Securities Act.

The Notes are convertible into shares of Common Stock at any time on or
after September 21, 1998 and prior to the close of business on the maturity
date, unless previously redeemed or repurchased, at a conversion rate of 36.9720
shares of Common Stock per $1,000 principal amount of Notes (equivalent to a
conversion price of $27.0475 per share), subject to adjustment in certain
events. See "Description of the Notes -- Conversion Rights." The Company's
Common Stock is included for quotation in The Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol "MRVC." On December 8,
1998, the last reported sales price of the Common Stock in the Nasdaq National
Market was $6.50 per share.

Interest on the Notes is payable on June 15 and December 15 of each year,
commencing on December 15, 1998. The Notes may be redeemed at the option of the
Company on and after June 15, 2001 in whole or in part, at the redemption prices
set forth herein, plus accrued interest to the redemption date. See "Description
of the Notes -- Optional Redemption." Upon a Change of Control (as defined),
holders of Notes will have the right, subject to certain conditions, to require
the Company to purchase all or part of their Notes at 100% of the principal
amount thereof, plus accrued interest to the repurchase date. The Notes are not
entitled to the benefits of any sinking fund.

The Notes constitute unsecured obligations of the Company subordinated in
right of payment to all existing and future Senior Debt (as defined) of the
Company and effectively subordinated in right of payment to all indebtedness and
other liabilities of the Company's subsidiaries. As of June 30, 1998, the
Company and its subsidiaries had approximately $2.9 million of long-term debt
and capital lease obligations to which the Notes were subordinated in right of
payment. The Indenture (as defined) will not restrict the Company from incurring
additional Senior Debt or the Company and its subsidiaries from incurring
indebtedness and other liabilities. See "Description of the
Notes -- Subordination."

The Selling Securityholders may offer Notes or Conversion Shares from time
to time to purchasers directly or through underwriters, dealers or agents. Such
Notes or Conversion Shares may be sold at market prices prevailing at the time
of sale or at negotiated prices. Each Selling Securityholder will be responsible
for payment of any and all commissions to brokers, which will be negotiated on
an individual basis.

PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE NOTES. THE
COMPANY DOES NOT INTEND TO APPLY FOR LISTING OF THE NOTES ON ANY SECURITIES
EXCHANGE OR FOR QUOTATION OF THE NOTES THROUGH ANY AUTOMATED QUOTATION SYSTEM.
PRIOR TO THIS OFFERING, THE NOTES WERE DESIGNATED FOR TRADING ON THE PRIVATE
OFFERING, RESALE AND TRADING THROUGH AUTOMATED LINKAGES ("PORTAL") MARKET. THE
NOTES ARE NOT EXPECTED TO REMAIN ELIGIBLE FOR TRADING ON THE PORTAL MARKET.
THERE CAN BE NO ASSURANCE THAT ANY TRADING MARKET WILL DEVELOP FOR THE NOTES.

The Company will not receive any of the proceeds from the sale of any Notes
or Conversion Shares by the Selling Securityholders. Expenses of preparing and
filing the registration statement to which this Prospectus relates and all post-
effective amendments will be borne by the Company. See "Plan of Distribution"
for a description of the indemnification arrangements between the Company and
the Selling Securityholders.

SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES AND THE COMMON
STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE> 3

AVAILABLE INFORMATION

The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at the offices of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7
World Trade Center, New York, New York 10048. Copies of such materials can also
be obtained by written request to the Public Reference Section of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Common Stock is quoted on The Nasdaq National Market.
Reports and other information concerning the Company may be inspected at the
National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.

The Company has filed a Registration Statement under the Securities Act
with the Commission with respect to the Securities offered by this Prospectus.
This Prospectus, which constitutes part of the Registration Statement, omits
certain of the information contained in the Registration Statement and the
exhibits thereto on file with the Commission pursuant to the Securities Act of
1933, as amended (the "Securities Act") and the rules and regulations of the
Commission. Statements contained in this Prospectus such as the contents of any
contract or other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. A copy of the Registration Statement,
including the exhibits thereto, may be inspected without charge at the
Commission's principal office at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and copies of all or any part thereof may be obtained
from the Commission upon the payment of certain fees prescribed by the
Commission. The Commission also maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants, such as the Company, that file electronically with the Commission.
The address of the site is http://www.sec.gov.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents are incorporated herein by reference:

(1) The Company's Annual Report on Form 10-K for the year ended
December 31, 1997, filed with the Commission on April 15, 1998;

(2) The Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1998, June 30, 1998 and September 30, 1998 filed with the
Commission on May 15, 1998, August 14, 1998 and November 13, 1998,
respectively.

(3) The Company's Current Report on Form 8-K filed with the Commission
on February 13, 1998 as amended by the Company's Current Report on Form
8-K/A filed with the Commission on April 17, 1998.

(4) The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A filed with the Commission on June 8,
1992, as amended by its Form 8-A/A filed with the Commission on February
24, 1994, including any amendment or report filed for the purpose of
updating such description.

All reports and documents filed by the Company subsequent to the date of
this Prospectus pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange
Act and prior to the termination of the offering of the Securities covered by
this Prospectus shall be deemed to be incorporated by reference and to be a part
hereof from the date of filing of such documents.

Any statement contained herein or in a document incorporated by reference
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent

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<PAGE> 4

that such statement is modified or replaced by a statement contained in this
Prospectus or in any other subsequently filed document that also is or is deemed
to be incorporated by reference into this Prospectus. Any such statement so
modified or superseded shall not be deemed, except as so modified or replaced,
to constitute a part of this Prospectus.

The Company undertakes to provide without charge to each person to whom a
copy of this Prospectus has been delivered, upon the written or oral request of
any such person to the Company, a copy of any or all of the documents referred
to above that have been or may be incorporated into this Prospectus by
reference, (other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference to such documents). Requests for such
copies should be directed to the Chief Financial Officer at MRV Communications,
Inc., 8943 Fullbright Avenue, Chatsworth, California 91311, or by fax at (818)
773-0906 or by telephone at (818) 773-9044.

3
<PAGE> 5

This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Actual
results could differ materially from those projected in the forward-looking
statements as a result of the factors discussed in "Risk Factors" and elsewhere
in this Prospectus.

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this Prospectus.
This summary is not complete and may not contain all of the information that you
should consider before investing in the Notes or the Conversion Shares We have
adjusted the information in this Prospectus to reflect a 3-for-2 stock split
effected on March 20, 1996 and a 2-for-1 stock split effected on July 29, 1996.
Unless stated otherwise, we have presented information regarding outstanding
shares of Common Stock assuming that warrants and options to purchase up to
5,756,685 shares of Common Stock outstanding or reserved for future grants at
July 31, 1998 under the Company's Stock Option Plans will not be exercised.
Certain technical terms used relating to the computer networking industry are
defined in the Glossary included at page 78 of this Prospectus.

THE COMPANY

MRV is a leading manufacturer and marketer of optical high-speed networks
that integrate switching, routing, remote access and fiber optic transmission
systems. The Company designs, manufactures and sells two groups of products:

- computer networking products, primarily Ethernet local area network
routing switches, wide area network and remote access devices and

- fiber optic subsystems for the transmission of voice, video and data
across enterprise, telecommunications and cable TV networks.

The Company's advanced networking solutions greatly enhance the
functionality of local area networks, commonly called "LANs," and wide area
networks, commonly called "WANs," by reducing network congestion. At the same
time, these networking solutions allow end users to preserve their legacy
investments in pre-existing networks and provide cost-effective migration paths
to next generation technologies such as Gigabit Ethernet. The Company's fiber
optic subsystems incorporate proprietary technology, which delivers high
performance under demanding environmental conditions.

The Company offers a family of network, switching and related products that
enhance LAN performance and facilitate the migration to next generation
technologies such as Fast Ethernet, Gigabit Ethernet and Asynchronous Transfer
Mode. MRV's MegaSwitch and GigaFrame families of switching products range from
complete switching systems to stackable switches which upgrade performance of
existing LANs by relieving network congestion without requiring replacement of
existing technologies. In addition, the Company offers EdgeBlaster, a new remote
access router that connects enterprise LANs to remote offices and telecommuters
securely through the Internet using virtual private network technology.

Industry analysts estimate that the market for LAN switches will grow
rapidly, from $3.7 billion in 1996 to $10.9 billion by 1999, a compound annual
growth rate of 43.3%. Industry analysts also estimate that the market for
Wavelength Division Muliplexing ("WDM") equipment will grow from $1.0 billion in
1997 to $4.0 billion in 2000, a compounded annual growth rate of 58.7%. Industry
sources published in August 1997 estimated the fiber optics market at $8.6
billion in 1997 and projected its growth to $13.2 billion in 2001, a compound
annual growth rate of 11.3%. MRV has focused on developing technologies in the
most rapidly growing segments of these markets: Ethernet, Fast Ethernet and
Gigabit Ethernet switches, and the access networks and infrastructure segments
of the fiber optic market. The rapid growth of these segments is mainly due to
increased usage and higher bandwidth needs driven by:

- the increased number of users connected to networks,

- the proliferation of the Internet and intranets,

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<PAGE> 6

- the higher bandwidth applications and multimedia content,

- the lower costs as a result of advances in technology and

- the expansion and upgrade of access networks to provide advanced
communication services such as high-speed Internet access.

MRV believes that its historical growth in revenues and net income over the
last few years is a result of its strategy, which includes

- targeting high potential growth markets in the communications arena,

- bringing state of the art technology early to market,

- capitalizing on its manufacturing expertise and proprietary technologies,

- expanding its worldwide distribution system and

- selectively acquiring complementary businesses.

The Company's ability to bring state of the art technology early to market
has been a critical component of its success. MRV was among the first companies
to introduce Fast Ethernet and Gigabit Ethernet switches which increase the
transmission speed of traditional Ethernet LANs from 10 Mbps to 100 Mbps and 100
Mbps to 1,000 Mbps. In June 1996, MRV introduced MegaSwitch II, which the
Company believes was the first dual speed auto-negotiating Ethernet switch with
uplinks to Asynchronous Transfer Mode and Gigabit Ethernet. In July 1996, MRV
started volume shipments of a new bidirectional optical transmission and
reception module for Fiber-to-the-Curb ("FTTC") applications. In November 1996,
MRV's proposal to the IEEE Gigabit Ethernet Alliance ("GEA") for a new Gigabit
technology was accepted. The Company believes this acceptance validates its
technical ability and contributed to the Company's reputation for innovation. In
June 1997, MRV began shipping a series of DirectIP switching products that
provides intranets with cost effective switched networking solutions. In late
1997, MRV introduced the GigaFrame switch, a Gigabit Ethernet switch that
provides transmission over fiber optic cable to a distance of 100 kilometers.

MRV is rapidly expanding its marketing efforts in order to leverage its
research and development and production capabilities. The Company's worldwide
sales and marketing strategy is focused on five channels of distribution:

- the Company's direct sales force;

- original equipment manufacturer sales and partnerships with major
manufacturers such as Fujitsu and Newbridge Networks;

- value added resellers ("VARs") and systems integrators used to target
vertical niches;

- manufacturers' representatives;

- and domestic and international distributors.

5
<PAGE> 7

Recently, MRV has made a series of acquisitions that has expanded its
worldwide distribution capabilities, enhanced its research and development
efforts and broadened its product lines. These acquisitions include:

<TABLE>
<CAPTION>
DATE ACQUISITION EFFECT
---- ----------- ------
<S> <C> <C>
May 1995 The Company acquired the assets of
Galcom Networking, Ltd. ("Galcom")
June 1995 and Ace 400 Communications, Ltd. Through the Galcom, Ace and Fibronics
("Ace") for a total of approximately acquisitions MRV added established
$7 million. lines of complementary products, a
research
and development and manufacturing
September 1996 MRV acquired the assets of Elbit facility and European and U.S. sales
Ltd.'s ("Elbit") Fibronics business offices and personnel.
(the "Fibronics Business") for
approximately $22.8 million (the
"Fibronics Acquisition")

January 1998 The Company acquired Xyplex, Inc. The Xyplex Acquisition is enabling
("Xyplex") from Whittaker Corporation MRV to expand its product lines to
("Whittaker") for $35,000,000 plus include products having WAN and
warrants to purchase up to 500,000 remote access capabilities. This
shares of MRV's Common Stock (the product line expansion is permitting
"Xyplex Acquisition"). the Company to offer discrete LAN and
WAN switching products and complete
LAN/WAN end-to-end solutions. The
Xyplex Acquisition also added a
significant customer base,
substantially increased MRV's direct
sales force and extended MRV's
distributor channels and customer
support and service organizations.
</TABLE>

- revenue will be down 10% to 15% from second quarter revenue of $65.7
million,

- the gross margin percentage will be down to or slightly below 43% from
the second quarter percentage of 44.1%

- and operating expenses, consisting of selling, general and administrative
expenses and research and development expenses, to be approximately 8% to
10% higher than second quarter total operating expenses of $17.4 million.

The Company currently plans to introduce its next generation networking
products before the end of 1998.

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

As used in this Prospectus, "MRV" or the "Company" refers to MRV
Communications, Inc., a Delaware corporation, its predecessor California
corporation and its wholly-owned consolidated subsidiaries, except where the
context otherwise indicates.
---------------

BranchRunner, ControlPoint, DirectIP, EdgeBlaster, Enterprise Hub, FocalPoint,
GigaFrame, GigaHub, LANBus, MAXserver MegaStack, MegaSwitch, MegaVision, MRV
Communications, NBase, Network 9000, RouteRunner, WANscape and West Hills LAN
System and Xyplex are trademarks or trade names of the Company. Trademarks of
other companies are also used in this Prospectus and are the property of their
respective owners.

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THE OFFERING

SECURITIES OFFERED............ $100,000,000 principal amount of 5% Convertible
Subordinated Notes due 2003 (the "Notes") and
shares of the Company's Common Stock, par value
$0.0034 per share, issuable upon conversion of
the Notes (the "Conversion Shares").

CONVERSION RATE............... 36.9720 shares per $1,000 principal amount of
Notes (equivalent to a conversion price of
$27.0475 per share of Common Stock), subject to
adjustment.

INTEREST PAYMENTS............. Interest on the Notes will be payable on June
15 and December 15 of each year, commencing on
December 15, 1998.

CONVERSION RIGHTS............. The Notes will be convertible into shares of
Common Stock of the Company at any time on or
after the 90th day following the last original
issue date of the Notes and prior to the close
of business on the maturity date, unless
previously redeemed or repurchased, at the
conversion price set forth above. Holders of
Notes called for redemption or repurchase will
be entitled to convert the Notes to and
including, but not after, the close of business
on the date fixed for redemption or repurchase,
as the case may be.

REDEMPTION AT THE OPTION OF
THE COMPANY................... The Notes may be redeemed at the option of the
Company, in whole or in part, on and after June
15, 2001 at the redemption prices set forth
herein plus accrued interest to the redemption
date.

REPURCHASE AT OPTION OF
HOLDERS....................... Upon a Change of Control (as defined), holders
of Notes will have the right, subject to
certain conditions, to require the Company to
purchase all or part of their Notes at 100% of
the principal amount thereof, plus accrued
interest to the repurchase date. The repurchase
price is payable in cash.

SUBORDINATION................. The Notes will be subordinated to present and
future Senior Debt (as defined) of the Company.
The Notes are also effectively subordinated in
right of payment to all indebtedness and other
liabilities of the Company's subsidiaries. As
of June 30, 1998, the Company and its
subsidiaries had approximately $2.9 million of
long-term debt and capital lease obligations to
which the Notes were subordinated in right of
payment. The Indenture does not restrict the
incurrence of Senior Debt by the Company or
other indebtedness or liabilities by the
Company or any of its subsidiaries.

EVENTS OF DEFAULT............. Events of default include: (a) failure to pay
principal of or premium, if any, on any Note
when due, whether or not such payment is
prohibited by the subordination provisions of
the Indenture; (b) failure to pay any interest
on any Note when due, continuing for 30 days,
whether or not such payment is prohibited by
the subordination provisions of the Indenture;
(c) failure to provide notice in the event of a
Change of Control; (d) failure to perform any
other covenant of the Company in the Indenture,
continuing for 60 days after written notice as
provided in the Indenture; (e) indebtedness for
money borrowed by the Company in an outstanding
principal amount in excess of $5,000,000 is not
paid at final maturity or the payment of which
is accelerated and

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which default or acceleration is not cured or
rescinded within 30 days after written notice
as provided in the Indenture; and (f) certain
events of bankruptcy, insolvency or
reorganization.

USE OF PROCEEDS............... The Company will not receive any proceeds from
the sale of the Notes or Conversion Shares by
the Selling Securityholders.

TRADING....................... Prior to this offering, there has been no
public market for the Notes. The Company does
not intend to apply for listing of the Notes on
any securities exchange or for quotation of the
Notes through any automated quotation system.
Prior to this offering, the Notes were
designated for trading on the private offering,
resale and trading through automated linkages
("Portal") market. The Notes are not expected
to remain eligible for trading on the Portal
market. There can be no assurance that any
trading market will develop for the Notes. The
Company's Common Stock is included for
quotation in the Nasdaq National Market under
the symbol "MRVC."

FORM AND DENOMINATION......... The Notes offered by this Prospectus were
issued only in registered form. The Notes were
initially issued in minimum denominations of
$1,000 and integral multiples thereof. The
Notes initially sold by the Initial Purchasers
were represented by a Restricted Global Note
(as defined) deposited with a custodian for and
registered in the name of a nominee of DTC.
Except as described herein, Notes in
certificated form will not be issued in
exchange for a Restricted Global Note or
interests therein. See "Description of the
Notes -- Form and Denomination" and
"-- Transfer, Exchange and Withdrawal."

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<PAGE> 10

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)

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

(1) In January 1998, The Company acquired Xyplex for $35,000,000 plus warrants
to purchase up to 500,000 shares of MRV's Common Stock. The Xyplex
Acquisition was accounted for as a purchase. The pro forma selected
statement of operations and balance sheet data for the year ended December
31, 1997 were derived from the pro forma financial statements of the Company
and Xyplex included elsewhere herein. The unaudited pro forma consolidated
balance sheet assumes that the Xyplex Acquisition took place on December 31,
1997 and consolidates MRV's December 31, 1997 consolidated balance sheet
with Xyplex's October 31, 1997 balance sheet. The unaudited pro forma
consolidated statement of income assumes that the Xyplex Acquisition took
place as of January 1, 1997 and consolidates MRV's consolidated statement of
operations for the year ended December 31, 1997 with Xyplex's statement of
operations for the fiscal year ended October 31, 1997. See "Unaudited Pro
Forma Consolidated Financial Statements" included herein.

(2) The selected statement of operations data for the six months ended June 30,
1997 and 1998 are derived from the Company's unaudited financial statements
included elsewhere herein, which in the opinion of management, reflect all
normal and recurring adjustments necessary for a fair presentation of the
financial position and results of operations for each of the periods
presented. The Company has included the results of operations of Xyplex with
its consolidated results beginning on January 31, 1998, the day following
completion of the Xyplex Acquisition.

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<PAGE> 11

a plan adopted by the Company on September 30, 1996 calling for the
reduction of workforce, closing of certain facilities, elimination of
particular product lines due to this acquisition and other items. Interest
expenses related to the acquisition for the years ended December 31, 1996
and 1997 were $4,357,000 and $843,000, respectively, and were connected with
the private placement of $30 million principal amount of Debentures, the
proceeds from which the Company used to finance the cash portion of the
Fibronics Acquisition. Unusual charges were not material to net income for
the year ended December 31, 1997. Purchased technology in progress for the
six months ended June 30, 1998 was $30,571,000 in conjunction with the
Xyplex Acquisition. Restructuring costs during the six months ended June 30,
1998 were $23,194,000 and were associated with a plan adopted by the Company
in March 1998 calling for the reduction of workforce, closing of certain
facilities, elimination of particular product lines, settlement of
distribution agreements and other costs resulting from this acquisition.
Unusual charges were not material to net income for the six months ended
June 30, 1997.

(4) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, "earnings" include pretax income from
continuing operations plus fixed charges. "Fixed charges" include interest,
whether expensed or capitalized, amortization of debt expense and the
portion of rental expense that is representative of the interest factor in
these rentals. The Company had no fixed charges in 1993 and 1994. Earnings
were insufficient to cover fixed charges in 1995, 1996, pro forma 1997 and
for the six months ended June 30, 1998 by $1,169,000, $8,958,000,
$24,665,000 and $30,923,000, respectively. Earnings were insufficient to
cover fixed charges for the nine months ended September 30, 1998 by
$27,119,000.

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RISK FACTORS

This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Such forward-looking statements may be
deemed to include the Company's plans to develop and offer new and enhanced
networking and optical transmission products and its efforts to expand its
customer base. Such forward-looking statements may also be deemed to include the
Company's expectations concerning factors affecting the markets for its
products, the growth in those markets in general, the timing of new product
introductions by the Company and anticipated benefits from such product
introductions or technological developments. Such forward-looking statements
also may include the Company's expectations of benefits from the acquisition of
Xyplex or its OEM or other arrangements with certain of its customers. Actual
results could differ from those projected in any forward-looking statements for,
among other things, the reasons detailed in the other sections of this "Risk
Factors" section. The forward-looking statements are made as of the date of this
Prospectus and the Company assumes no obligation to update the forward-looking
statements or to update the reasons why actual results could differ from those
projected in the forward-looking statements.

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

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

POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's revenue and
operating results could fluctuate substantially from quarter to quarter and from
year to year. This could result from any one or a combination of factors such as
the cancellation or postponement of orders, the timing and amount of significant
orders from the Company's largest customers, the Company's success in
developing, introducing and shipping product enhancements and new products, the
product mix sold by the Company, adverse effects

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to the Company's financial statements resulting from, or necessitated by,
possible future acquisitions, new product introductions by the Company's
competitors, pricing actions by the Company or its competitors, the timing of
delivery and availability of components from suppliers, changes in material
costs and general economic conditions. Moreover, the volume and timing of orders
received during a quarter are difficult to forecast. From time to time, the
Company's customers encounter uncertain and changing demand for their products.
Customers generally order based on their forecasts. If demand falls below such
forecasts or if customers do not control inventories effectively, they may
cancel or reschedule shipments previously ordered from the Company. The
Company's expense levels during any particular period are based, in part, on
expectations of future sales. If sales in a particular quarter do not meet
expectations, operating results could be materially adversely affected.
Moreover, in certain instances, sales cycles are becoming longer and more
uncertain as MRV bids on larger projects. As a result, MRV is finding it more
difficult to predict the timing of the awards of contracts and the actual
placement of orders stemming from awards. There can be no assurance that these
factors or others, such as those discussed in "International Operations" or
those discussed in the next paragraph would not cause future fluctuations in
operating results. Further, there can be no assurance that the Company will be
able to sustain its historical rate of growth or continue profitable operations.

As a result of some of the factors discussed above, specifically, weaker
than anticipated demand for its networking products, especially in Europe, and
delays in its transitions to next generation, higher margin, networking
products, in August 1998, MRV announced that it expects operating results in the
third quarter of 1998 to be adversely affected. In this regard, the Company
expects that revenue will be down 10 to 15 percent from second quarter revenue
of $65.7 million, gross margin percentage will be down to or slightly below 43
percent from the second quarter percentage of 44.1 percent and operating
expenses, consisting of selling, general and administrative expenses and
research and development expenses, to be approximately 8 to 10 percent higher
than second quarter total operating expenses of $17.4 million. Following that
announcement, the market price of the Company's Common Stock dropped
substantially. See "Price Range of Common Stock."

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

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

MANAGEMENT OF GROWTH. The Company has grown rapidly in recent years, with
revenues increasing from $7,426,000 for the year ended December 31, 1993, to
$39,202,000, $88,815,000 and $165,471,000 for the years ended December 31, 1995,
1996 and 1997, respectively. The Company's recent growth, both internally and
through the acquisitions it has made since January 1, 1995, has placed a
significant strain on the Company's financial and management personnel and
information systems and controls, and the Company must implement new and enhance
existing financial and management information systems and controls and must add
and train personnel to operate such systems effectively. While the strain placed
on the Company's personnel and

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systems has not had a material adverse effect on the Company to date, there can
be no assurance that a delay or failure to implement new and enhance existing
systems and controls will not have such an effect in the future. The Company's
recent growth through the acquisitions of the Fibronics Business and Xyplex
discussed in "Risks Associated with Recent Acquisitions and Potential Future
Acquisitions" below and its intention to continue to pursue its growth strategy
through efforts to increase sales of existing and new products can be expected
to place even greater pressure on the Company's existing personnel and compound
the need for increased personnel, expanded information systems, and additional
financial and administrative control procedures. There can be no assurance that
the Company will be able to successfully manage expanding operations.

RISKS ASSOCIATED WITH RECENT ACQUISITIONS AND POTENTIAL FUTURE
ACQUISITIONS. On September 26, 1996, the Company completed the Fibronics
Acquisition from Elbit of certain of the assets and selected liabilities of
Fibronics related to Fibronics' computer networking and telecommunications
businesses in Germany, the United States, the United Kingdom, the Netherlands
and Israel. The assets acquired included Fibronics' technology in progress and
existing technology, its marketing channels, its GigaHub family of computer
networking products and other rights. The purchase price for the Fibronics
Business was approximately $22,800,000, which was paid using a combination of
cash and Common Stock of the Company. During the years ended December 31, 1994
and 1995, and the period from January 1, 1996 through September 25, 1996 (the
day the Fibronics Business was acquired by the Company), the Fibronics Business
reported net revenues of $33,355,000, $35,003,000 and $19,481,000, respectively,
and net income (losses) of $(11,557,000), $79,000 and $(6,143,000),
respectively. In connection with the Fibronics Acquisition, the Company incurred
charges of $17,795,000, $6,974,000 and $5,200,000 for purchased technology,
restructuring and interest expense related to financing, respectively. These
charges caused the Company to incur a net loss of $9,654,000 for the year ended
December 31, 1996.

On January 30, 1998, MRV completed the Xyplex Acquisition from Whittaker.
Xyplex is a leading provider of access solutions between enterprise networks and
WAN and/or Internet service providers ("ISPs"). The purchase price paid to
Whittaker consisted of $35,000,000 in cash and three-year warrants to purchase
up to 500,000 shares of common stock of the Company at an exercise price of $35
per share. During the year ended December 31, 1995, the period from January 1,
1996 through April 9, 1996 (the day Xyplex was acquired by Whittaker), the
period from April 10, 1996 through October 31, 1996 and the fiscal year ended
October 31, 1997, Xyplex reported net revenues of $107,617,000, $28,100,000,
$52,021,000, and $75,663,000, respectively, and net losses of $37,360,000,
$2,269,000, $13,353,000 and $80,309,000, respectively. In connection with the
Xyplex Acquisition, the Company incurred charges of $30,571,000 and $23,194,000
for purchased technology and restructuring. Assuming the Xyplex Acquisition had
occurred on January 1, 1997, pro forma combined results of the Company and
Xyplex for the year ended December 31, 1997 reflect net revenues of $241,134,000
and a net loss of $27,727,000. While the Xyplex Acquisition will add 11 months
of Xyplex' revenues to those of the Company, the charges resulting from the
Xyplex Acquisition resulted in MRV incurring a net loss of $31,286,000 or $1.18
per share during the six months ended June 30, 1998 and are expected to have a
material adverse effect on the net operating results the Company expects to
report during remaining cumulative periods reported for the year ending December
31, 1998. The Company's ability to operate Xyplex profitably will depend upon
its ability to integrate this business successfully, including (i) the
completion of Xyplex' research and development projects in process, especially
the EdgeBlaster program, (ii) the integration of the products, technologies and
personnel of Xyplex into the Company, (iii) management's ability to reduce
Xyplex' operating costs, (iv) the continued market acceptance of Xyplex'
products and technology and (v) the ability of the Company to uphold promises to
deliver products with product features and improvements promised by former
management prior to the acquisition.

An important element of management's strategy is to review acquisition
prospects that would complement the Company's existing products, augment its
market coverage and distribution ability or enhance its technological
capabilities. Accordingly, the Company may acquire additional businesses,
products or technologies in the future. Future acquisitions by the Company could
result in charges similar to those incurred in connection with the Fibronics
Acquisition and the Xyplex Acquisition, potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities and amortization
expenses related to goodwill and

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other intangible assets, any of which could materially adversely affect the
Company's business, financial condition and results of operations and/or the
price of the Company's Common Stock. Acquisitions entail numerous risks,
including the assimilation of the acquired operations, technologies and
products, diversion of management's attention to other business concerns, risks
of entering markets in which the Company has no or limited prior experience, the
potential loss of key employees of acquired organizations and difficulties in
honoring commitments made to customers by management of the acquired entity
prior to the acquisition. Prior to the Fibronics Acquisition, management had
only limited experience in assimilating acquired organizations. There can be no
assurance as to the ability of the Company to successfully integrate the
products, technologies or personnel of any business that might be acquired in
the future, and the failure of the Company to do so could have a material
adverse effect on the Company's business, financial condition and results of
operations.

INTERNATIONAL OPERATIONS. International sales have become an increasingly
important segment of the Company's operations, with the acquisitions of Galcom
and Ace in 1995, the Fibronics Business in 1996 and Xyplex in 1998.
Approximately 45%, 53% and 60% of the Company's net revenues for the years ended
December 1995, 1996 and 1997, respectively, were from sales to customers in
foreign countries. The Company has offices in, and conducts a significant
portion of its operations in and from, Israel. MRV is, therefore, directly
influenced by the political and economic conditions affecting Israel. Any major
hostilities involving Israel, the interruption or curtailment of trade between
Israel and its trading partners or a substantial downturn in the economic or
financial condition of Israel could have a material adverse effect on the
Company's operations. Sales to foreign customers are subject to government
controls and other risks associated with international sales, including
difficulties in obtaining export licenses, fluctuations in currency exchange
rates, political instability, trade restrictions and changes in duty rates.
Although the Company has not experienced any material difficulties in this
regard to date, there can be no assurance that it will not experience any such
material difficulties in the future. The Company's sales are currently
denominated in U.S. dollars and to date its business has not been significantly
affected by currency fluctuations or inflation. However, the Company conducts
business in several different countries and thus fluctuations in currency
exchange rates could cause the Company's products to become relatively more
expensive in particular countries, leading to a reduction in sales in that
country. In addition, inflation in such countries could increase the Company's
expenses. To date, the Company has not hedged against currency exchange risks.
In the future, the Company may engage in foreign currency denominated sales or
pay material amounts of expenses in foreign currencies and, in such event, may
experience gains and losses due to currency fluctuations. The Company's
operating results could be adversely affected by such fluctuations or as a
result of inflation in particular countries where material expenses are
incurred. Moreover, the Company's operating results could also be adversely
affected by seasonality of international sales, which are typically lower in
Asia in the first calendar quarter and in Europe in the third calendar quarter.
These international factors could have a material adverse effect on future sales
of the Company's products to international end-users and, consequently, the
Company's business, operating results and financial condition.

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

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therefore, could result in a delay in product shipments. While the Company has
not experienced delays in the receipt of ASICs or other key components, any
future difficulty in obtaining any of these key components could result in
delays or reductions in product shipments which, in turn, could have a material
adverse effect on the Company's business, operating results and financial
condition.

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

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

SHARE PRICES HAVE BEEN AND MAY CONTINUE TO BE HIGHLY
VOLATILE. Historically, the market price of the Company's Common Stock has been
extremely volatile. The market price of the Common Stock is likely to continue
to be highly volatile and could be significantly affected by factors such as
actual or anticipated fluctuations in the Company's operating results,
announcement of technological innovations or new product introductions by the
Company or its competitors, changes of estimates of the Company's future
operating results by securities analysts, developments with respect to patents,
copyrights or proprietary rights, general market conditions and other factors.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the common stocks of technology companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. In
addition, it is possible that in a future fiscal quarter, the Company's results
of operations will fail to meet the expectations of securities analysts or
investors and, in such event, the market price of the Company's Common Stock
would be materially adversely affected. For example, following the Company's
August 1998 announcement that weaker than anticipated demand for its networking
products, especially in Europe, and delays in its transitions to next
generation, higher margin, networking products would adversely affect operating
results that MRV expects to report in the third quarter of 1998, the market
price of the Company's Common Stock dropped substantially. See "-- Potential
Fluctuations in Operating Results" and "Price Range of Common Stock."

PRESENT LACK OF PATENT PROTECTION; DEPENDENCE ON PROPRIETARY
TECHNOLOGY. The Company holds no patents and only recently has filed two patent
applications and a provisional patent application in the United

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

By letter to the Company dated March 19, 1997, a party has made a claim
against the Company alleging that the Company's DirectIP switching products make
use of unspecified information and know-how covered by a pending patent
application of such party. This allegation is under review by the Company and
the Company believes that the allegation is without merit. However, a complete
assessment cannot be made with respect to the merits of the allegation until
further details of the information and know-how are provided by such third
party. Currently, sales of DirectIP products are not material to the Company,
however, if the DirectIP switching products comprise a material part of the
Company's revenues in the future and a conclusion in respect of the claim
unfavorable to the Company is reached, the claim, if pursued by such party,
could materially and adversely affect the business, operating results and
financial condition of the Company. In addition, on December 27, 1996, Datapoint
Corporation ("Datapoint") brought an action against NBase Communications, Inc.,
a subsidiary of the Company ("NBase"), and others alleging infringement of two
of Datapoint's patents. The other defendants include Dayna Communications, Inc.,
Sun Microsystems, Inc., Adaptec, Inc., International Business Machines
Corporation, Lantronix and SVEC America Computer Corporation. Intel and Cisco
Systems, Inc. have also had actions brought against them by Datapoint with
respect to the same two patents. The Company is cooperating with several of
these companies in pursuit of common defenses and believes it has meritorious
defenses to this action. If a conclusion unfavorable to the Company is reached,
however, Datapoint's claim could materially and adversely affect the business,
operating results and financial condition of the Company. For further
information concerning this litigation, see "Business -- Legal Proceedings."

RISKS FROM YEAR 2000 ISSUES. Many existing computer programs, including
some programs used by the Company, use only two digits to identify a year in the
date field. These programs were designed without

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

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

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

POSSIBLE ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS. The Company
is authorized to issue up to 1,000,000 shares of Preferred Stock, par value $.01
per share (the "Preferred Stock"). The Preferred Stock may be issued in one or
more series, the terms of which may be determined at the time of issuance by the
Board of Directors without further action by stockholders. The terms of any such
series of preferred stock may include voting rights (including the right to vote
as a series on particular matters), preferences as to dividend, liquidation,
conversion and redemption rights and sinking fund provisions. No preferred stock
is currently outstanding. The issuance of any such preferred stock could
materially adversely affect the rights of the holders of Common Stock, and
therefore, reduce the value of the Common Stock. In particular, specific rights
granted to future holders of preferred stock could be used to restrict the
Company's ability to merge with, or sell its assets to, a third party, thereby
preserving control of the Company by the present owners.

SUBORDINATION. The Notes will be unsecured and subordinated in right of
payment to all existing and future Senior Debt of the Company. As a result, in
the event of the Company's liquidation or insolvency, a payment or covenant
default with respect to Senior Debt, or upon acceleration of the Notes due to an
event of default, the assets of the Company will be available to pay obligations
on the Notes only after all Senior Debt has been paid in full, and there may not
be sufficient assets remaining to repay in full all of the Notes then
outstanding. The Notes are also effectively subordinated in right of payment to
all indebtedness and other liabilities, including trade payables, of the
Company's subsidiaries. The incurrence of additional indebtedness and other
liabilities by the Company or its subsidiaries could adversely affect the
Company's ability to pay its obligations on the Notes. The Indenture does not
limit the Company's ability to incur Senior Debt or the Company's or any
subsidiary's ability to incur other indebtedness and liabilities. Senior Debt
includes substantially all indebtedness of the Company other than all
indebtedness that is made subordinate to or pari passu with the Notes by the
instrument creating the indebtedness. As of June 30, 1998, the Company and its
subsidiaries had approximately $2.9 million of long-term debt and capital lease
obligations to which the Notes were subordinated in right of payment. See
"Description of Notes -- Subordination".

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REPURCHASE OF NOTES AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL;
AVAILABILITY OF FUNDS. In the event of a Change of Control (as defined herein),
each holder of Notes has the right to require the Company to repurchase the
Notes in whole or in part at a redemption price of 100% of the principal amount
thereof, plus accrued interest to the repurchase date. If a Change of Control
were to occur, there can be no assurance that the Company would have the
financial resources or be able to arrange financing on acceptable terms to pay
the repurchase price for all the Notes as to which the purchase right is
exercised. Further, any repurchase in connection with a Change of Control could,
depending on the circumstances and absent a waiver from the holders of Senior
Debt, be blocked by the subordination provisions of the Notes. See "Description
of Notes -- Subordination." Failure by the Company to repurchase the Notes when
required may result in an Event of Default with respect to the Notes (and with
respect to Senior Debt) whether or not such repurchase is permitted by the
subordination provisions. See "Description of Notes."

ABSENCE OF PRIOR PUBLIC MARKET. Prior to this offering, there has been no
public trading market for the Notes and there can be no assurance as to the
liquidity of any markets that may develop for the Notes, the ability of the
holders to sell their Notes or the price at which holders of the Notes may be
able to sell their Notes. Future trading prices of the Notes will depend on many
factors, including, among other things, prevailing interest rates, the Company's
operating results, the price of the Common Stock and the market for similar
securities. The Initial Purchasers have informed the Company that they intend to
make a market in the Notes offered by this Prospectus; however, the Initial
Purchasers are not obligated to do so, and any such market making activity may
be terminated at any time without notice to the holders of the Notes. The Notes
have been designated for trading in the Portal market; however, the Company does
not intend to apply for listing of the Notes on any securities exchange or for
quotation through Nasdaq and it is not expected that the Notes will remain
eligible for trading on the Portal Market following this offering.

DIVIDEND POLICY. The Company has never declared or paid a cash dividend and
the Company does not intend to declare or pay any cash dividends on the Common
Stock in the future. The declaration and payment of dividends by the Company
will be at the discretion of the board of directors of the Company. There can be
no assurance that any dividends will be paid in the future.

USE OF PROCEEDS

The Company will not receive any proceeds from the sale of the Notes or the
Conversion Shares by the Selling Securityholders.

DIVIDEND POLICY

The Company has not declared or paid cash dividends on the Common Stock
since its inception. The Company currently intends to retain all of its
earnings, if any, for use in the operation and expansion of its business and
does not intend to declare or pay any cash dividends to its stockholders in the
foreseeable future. The declaration or payment of dividends is at the discretion
of the board of directors.

18
<PAGE> 20

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is included for quotation in the Nasdaq National
Market under the symbol "MRVC." The following table sets forth the high and low
closing sale prices of the Common Stock for the periods indicated as reported by
the Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996:
First Quarter............................................. $17.67 $ 8.42
Second Quarter............................................ 37.13 15.63
Third Quarter............................................. 27.94 15.00
Fourth Quarter............................................ 24.88 17.00
1997:
First Quarter............................................. 29.88 18.25
Second Quarter............................................ 30.75 18.25
Third Quarter............................................. 38.75 25.75
Fourth Quarter............................................ 37.75 21.13
1998:
First Quarter............................................. 29.00 21.13
Second Quarter............................................ 28.38 19.38
Third Quarter............................................. 24.00 5.06
Fourth Quarter (through December 8, 1998)................. 9.06 5.13
</TABLE>

At December 1, 1998, the Company had 288 stockholders of record, as
indicated on the records of the Company's transfer agent, who held, management
believes, for approximately 19,520 beneficial holders.

On December 8, 1998, the last reported sales price of the Common Stock was
$6.50 per share as reported by the Nasdaq National Market.

19
<PAGE> 21

CAPITALIZATION

The following table sets forth the capitalization of the Company at June
30, 1998. The financial data in the following table should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AT JUNE 30, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Current maturities of capital lease obligations............. $ 141
========
Capital lease obligations, net of current portion........... $ 882
Convertible subordinated notes due 2003..................... 100,000
Other long-term liabilities................................. 1,579
--------
Total financing lease obligations and long-term
liabilities...................................... 102,461
Minority interests.......................................... 2,633
Stockholders' equity:
Preferred stock, $0.01 par value; authorized 1,000,000
shares, no shares outstanding or as adjusted.......... --
Common stock, $0.0034 par value: authorized 40,000,000
shares(1); issued and outstanding, 26,519,721 shares
actual and as adjusted................................ 90
Additional paid-in capital................................ 183,324
Retained earnings (deficit)............................... (16,651)
Cumulative translation adjustment......................... (562)
--------
Total stockholders' equity............................. 166,201
--------
Total capitalization.............................. $271,295
========
</TABLE>

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

(1) On October 30, 1998 stockholders approved an increase in the authorized
Common Stock of the Company to 80,000,000 shares at its 1998 Annual Meeting
of Shareholders.

20
<PAGE> 22

THE COMPANY

MRV is a leading manufacturer and marketer of optical high speed networks
that integrate switching, routing, remote access and fiber optic transmission
systems. The Company designs, manufactures and sells two groups of products: (i)
computer networking products, primarily Ethernet LAN routing switches, WAN and
remote access devices and (ii) fiber optic components for the transmission of
voice, video and data across enterprise, telecommunications and cable TV
networks. The Company's advanced networking solutions greatly enhance the
functionality of LANs and WANs by reducing network congestion while allowing end
users to preserve their legacy investments in pre-existing networks and
providing cost-effective migration paths to next generation technologies such as
Gigabit Ethernet. The Company's fiber optic components incorporate proprietary
technology which delivers high performance under demanding environmental
conditions.

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

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

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

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

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

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

On January 30, 1998, MRV completed the Xyplex Acquisition by acquiring all
of the outstanding capital stock of Whittaker Xyplex, Inc., a Delaware
corporation, from Whittaker. Whittaker Xyplex, Inc., (whose name the Company has
since changed to NBase Xyplex, Inc.) is a holding corporation owning all of the
outstanding capital stock of Xyplex. Xyplex is a leading provider of access
solutions between enterprise networks and wide area network and/or ISPs. The
purchase price paid to Whittaker consisted of $35,000,000 in cash and three-year
warrants to purchase up to 500,000 shares of Common Stock of the Company at an
exercise price of $35.00 per share.

The Xyplex Acquisition is enabling MRV to expand its product lines with
products having WAN and remote access capabilities, permitting the Company to
offer both discrete networking products and complete LAN/WAN end-to-end
solutions not only to MRV's own existing base of customers, but also to the
customer base added by Xyplex. The acquisition of Xyplex has also increased
MRV's sales force, distribution channels and customer support and service
capabilities.

21
<PAGE> 23

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected statement of operations data for the three years in
the period ended December 31, 1997 and the balance sheet data as of December 31,
1996 and 1997 are derived from the financial statements and notes thereto
included elsewhere herein audited by Arthur Andersen LLP, independent public
accountants, as set forth in their report also incorporated by reference herein.
The selected statement of operations data for the two years in the period ended
December 31, 1994 and the balance sheet data as of December 31, 1993, 1994 and
1995 were derived from audited financial statements of the Company not included
herein. The pro forma selected statement of operations and balance sheet data
for the year ended December 31, 1997 were derived from the pro forma financial
statements of the Company and Xyplex included elsewhere herein. The selected
statement of operations data for the six months ended June 30, 1997 and 1998 are
derived from the Company's unaudited financial statements included elsewhere
herein, which in the opinion of management, reflect all normal and recurring
adjustments necessary for a fair presentation of the financial position and
results of operations for each of the periods presented. The results of
operations for the six months ended June 30, 1998 are not necessarily indicative
of results to be expected for a full year. 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 herein.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------ SIX MONTHS ENDED
PRO JUNE 30,
FORMA -------------------
1993 1994 1995 1996 1997 1997(1) 1997 1998(2)
------- ------- ------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues, net............................ $ 7,426 $17,526 $39,202 $ 88,815 $165,471 $241,134 $ 75,092 $126,568
Cost of goods sold....................... 3,936 10,328 22,608 51,478 94,709 131,713 43,061 70,754
Research and development expenses........ 1,103 2,144 4,044 8,201 13,093 26,558 5,789 10,525
Selling, general and administrative
expenses............................... 1,259 2,615 6,799 14,025 27,365 61,077 12,007 23,581
Parent company allocations............... -- -- -- -- -- 3,346 -- --
Amortization of goodwill and other
intangible assets...................... -- -- -- -- -- 13,414 -- --
------- ------- ------- -------- -------- -------- -------- --------
Operating income before unusual
charges................................ 1,128 2,439 5,751 15,111 30,304 5,026 14,235 21,708
Unusual charges(3)....................... -- -- 7,676 24,769 -- 30,500 -- 53,765
------- ------- ------- -------- -------- -------- -------- --------
Operating income (loss).................. $ 1,128 $ 2,439 $(1,925) $ (9,658) $ 30,304 $(25,474) $ 14,235 $(32,057)
Other income (expense)................... $ 198 $ 162 $ 654 $ 153 $ 2,744 $ 832 $ 119 $ 1,374
Interest expense related to convertible
debentures and acquisition(3).......... -- -- -- (4,357) (843) (843) (427) --
------- ------- ------- -------- -------- -------- -------- --------
Income (loss) before provision for income
taxes and minority interests........... 1,326 2,601 (1,271) (13,862) 32,205 (25,485) 13,927 (30,683)
Provision (credit) for income taxes...... 487 983 2 (4,404) 9,474 2,096 4,305 363
Minority interests....................... -- -- -- 196 146 146 70 240
------- ------- ------- -------- -------- -------- -------- --------
Net income (loss)(3)..................... $ 839 $ 1,618 $(1,273) $ (9,654) $ 22,585 $(27,727) $ 9,552 $(31,286)
======= ======= ======= ======== ======== ======== ======== ========
Net income (loss) per share --Basic(3)... $ 0.07 $ 0.13 $ (0.07) $ (0.49) $ 0.95 $ (1.17) $ 0.42 $ (1.18)
======= ======= ======= ======== ======== ======== ======== ========
Net income (loss) per
share -- Diluted(3).................... $ 0.07 $ 0.13 $ (0.07) $ (0.49) $ 0.88 $ (1.17) $ 0.38 $ (1.18)
======= ======= ======= ======== ======== ======== ======== ========
Shares used in per share
calculation -- Basic................... 11,771 12,335 18,377 19,739 23,670 23,670 22,501 26,440
Shares used in per share
calculation -- Diluted................. 12,050 12,560 18,377 19,739 25,734 23,670 24,892 26,440
BALANCE SHEET DATA:
Working capital.......................... $ 3,514 $11,303 $22,019 $ 56,973 $111,559 $ 75,882 $ 66,090 $203,225
Total assets..................... 7,328 16,667 33,307 96,943 236,236 234,188 107,239 329,279
Total liabilities................ 1,537 3,761 8,049 43,790 45,610 69,737 28,148 160,445
Long-term debt and obligations under
capital leases......................... -- -- 271 18,892 2,853 8,653 1,589 102,886
Stockholders' equity..................... 5,791 12,906 25,258 41,771 189,969 163,794 78,169 166,201
OTHER DATA:
Ratio of earnings to fixed
charges(3)(4).......................... -- -- -- -- 34.4x -- 28.1x --
</TABLE>

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

(1) In January 1998, The Company acquired Xyplex for $35,000,000 plus warrants
to purchase up to 500,000 shares of MRV's Common Stock. The Xyplex
Acquisition was accounted for as a purchase. The

22
<PAGE> 24

pro forma selected statement of operations and balance sheet data for the
year ended December 31, 1997 were derived from the pro forma financial
statements of the Company and Xyplex included elsewhere herein. The
unaudited pro forma consolidated balance sheet assumes that the Xyplex
Acquisition took place on December 31, 1997 and consolidates MRV's December
31, 1997 consolidated balance sheet with Xyplex's October 31, 1997 balance
sheet. The unaudited pro forma consolidated statement of income assumes that
the Xyplex Acquisition took place as of January 1, 1997 and consolidates
MRV's consolidated statement of operations for the year ended December 31,
1997 with Xyplex's statement of operations for the fiscal year ended October
31, 1997. See "Unaudited Pro Forma Consolidated Financial Statements"
included herein.

(3) The unusual charges consist of purchased technology in progress,
restructuring charges and interest expense incurred in connection with
acquisitions. Purchased technology in progress for the year ended December
31, 1995 was $6,211,000. The purchased technology was for research and
development ("R&D") projects in progress at the time of acquisition of
assets from Acc and Galcom. Restructuring costs during the year ended
December 31, 1995 were $1,456,000 and were associated with a plan adopted by
the Company in 1995 calling for the merger of the newly acquired
subsidiaries and the Company's LAN product division. The plan also called
for the closure of some facilities, termination of redundant employees and
cancellation of representation agreement. Purchased technology in progress
for the year ended December 31, 1996 was $17,795,000 and was in conjunction
with the Fibronics Acquisition. Restructuring costs during the year ended
December 31, 1996 were $6,974,000 and were associated with a plan adopted by
the Company on September 30, 1996 calling for the reduction of workforce,
closing of certain facilities, elimination of particular product lines due
to this acquisition and other items. Interest expenses related to the
acquisition for the years ended December 31, 1996 and 1997 were $4,357,000
and $843,000, respectively, and were connected with the private placement of
$30 million principal amount of Debentures, the proceeds from which the
Company used to finance the cash portion of the Fibronics Acquisition.
Unusual charges were not material to net income for the year ended December
31, 1997. Purchased technology in progress for the six months ended June 30,
1998 was $30,571,000 in conjunction with the Xyplex Acquisition.
Restructuring costs during the six months ended June 30, 1998 were
$23,194,000 and were associated with a plan adopted by the Company in March
1998 calling for the reduction of workforce, closing of certain facilities,
elimination of particular product lines, settlement of distribution
agreements and other costs resulting from this acquisition. Unusual charges
were not material to net income for the six months ended June 30, 1997.

(4) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, "earnings" include pretax income from
continuing operations plus fixed charges. "Fixed charges" include interest,
whether expensed or capitalized, amortization of debt expense and the
portion of rental expense that is representative of the interest factor in
these rentals. The Company had no fixed charges in 1993 and 1994. Earnings
were insufficient to cover fixed charges in 1995, 1996, proforma 1997 and
for the six months ended June 30, 1998 by $1,169,000, $8,958,000,
$24,665,000 and $30,923,000, respectively. Earnings were insufficient to
cover fixed charges for the nine months ended September 30, 1998 by
$27,119,000.

23
<PAGE> 25

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of the Company appearing
elsewhere in this Prospectus.

GENERAL

Since its inception in 1988, the Company has manufactured and marketed
semiconductor optical transmission products for the fiber optics communications
industry. In 1993, the Company expanded its product line to include products
incorporating Ethernet switching technology that improved network throughput and
enhanced efficiency of LANs and introduced its first switch marketed under the
NBase trademark in the fourth quarter of 1993. During 1994, the Company expanded
commercial shipments of its LAN switching products. In 1995, the Company
augmented its networking products with the acquisitions of certain assets of
Galcom and Ace, which resulted in charges of $6,211,000 and $1,465,000 for
purchased technology in progress and restructuring, respectively. Net revenues
from sales of networking products and semiconductor optical transmission
products were 60% and 40%, respectively, during the year ended December 31,
1995, approximately 69% and 31%, respectively, during the year ended December
31, 1996 and approximately 76% and 24%, respectively, during the year ended
December 31, 1997.

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

In September 1996, the Company completed a private placement of an
aggregate of $30,000,000 principal amount of 5% convertible subordinated
debentures due August 6, 1999 (the "Debentures"). Proceeds from this private
placement were used to purchase the Fibronics Business. The Debentures were
convertible into Common Stock of the Company at any time at the option of the
holders at a discount from the market price of the Common Stock at the time of
conversion that decreased over the life of the Debentures until it reached a
floor. At a meeting of the Emerging Issues Task Force held on March 13, 1997,
the staff of the Commission announced its position on the accounting treatment
for the issuance of convertible preferred stock and debt securities with a
beneficial conversion feature such as that contained in the Debentures. As
announced, the Commission requires that a beneficial conversion feature attached
to instruments such as the Debentures that are convertible into equity be
recognized and measured by allocating a portion of the proceeds equal to the
intrinsic value of that feature to additional paid-in capital and charging it to
interest expense. As a result of the Commission's position, the Company added an
unusual, non-cash charge to its results of operations for the years ended
December 31, 1996 and 1997 related to the issuance of the Debentures in the
amounts of $4,357,000 and $843,000, respectively. The Company will not need to
report future charges relating to the issuance of the Debentures as the
outstanding principal and accrued interest were paid in full at April 4, 1997
through conversion into Common Stock. See "Liquidity and Capital Resources"
below.

On January 30, 1998, MRV completed the Xyplex Acquisition from Whittaker.
Xyplex is a leading provider of access solutions between enterprise networks and
WANs and/or ISPs. The purchase price paid to Whittaker consisted of $35,000,000
in cash and three-year warrants to purchase up to 500,000 shares of

24
<PAGE> 26

Common Stock of the Company at an exercise price of $35 per share. During the
year ended December 31, 1995, the period from January 1, 1996 through April 9,
1996 (the day Xyplex was acquired by Whittaker), the period from April 10, 1996
through October 31, 1996 and the fiscal year ended October 31, 1997, Xyplex
reported net revenues of $107,617,000, $28,100,000, $52,021,000, and
$75,663,000, respectively, and net losses of $37,360,000, $2,269,000,
$13,353,000 and $80,309,000, respectively. In connection with the Xyplex
Acquisition, the Company incurred charges of $30,571,000 and $23,194,000 for
purchased technology and restructuring. Assuming the Xyplex Acquisition had
occurred on January 1, 1997, pro forma combined results of the Company and
Xyplex for the year ended December 31, 1997 reflect net revenues of $241,134,000
and a net loss of $27,727,000. While the Xyplex Acquisition will add 11 months
of Xyplex' revenues to those of the Company, the charges resulting from the
Xyplex Acquisition resulted in MRV incurring a net loss of $31,286,000 or $1.18
per share during the six months ended June 30, 1998 and are expected to have a
material adverse effect on the net operating results the Company expects to
report during remaining cumulative periods reported for the year ending December
31, 1998. The Company's ability to operate Xyplex profitably will depend upon
its ability to integrate this business successfully, including (i) the
completion of Xyplex' research and development projects in process, especially
the EdgeBlaster program, (ii) the integration of the products, technologies and
personnel of Xyplex into the Company, (iii) management's ability to reduce
Xyplex' operating costs and (iv) the continued market acceptance of Xyplex'
products and technology.

The Company's international sales are not concentrated in any specific
country. The estimated operating profit from international sales for the years
ended December 31, 1997, 1996 and 1995 were $18,113,000, $8,009,000, $2,646,000,
respectively. The amounts for the years ended December 31, 1996 and 1995 are
before unusual charges. Including unusual charges, operating losses from
international sales for the years ended December 31, 1995 and 1996 were
$2,789,000 and $16,054,000, respectively. At December 31, 1995, 1996 and 1997,
16%, 14% and 17%, respectively, of the Company's assets were located in the
Middle East and at December 31, 1996 and 1997, 17% and 14%, respectively, of the
Company's assets were located in the European Community. Except for such assets,
there were no significant assets located in geographic regions outside of the
U.S. at December 31, 1995, 1996 or 1997. In years prior to 1995, substantially
all the assets were located in the U.S.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31 JUNE 30
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues, net...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................. 57.7 58.0 57.2 57.3 55.9
----- ----- ----- ----- -----
Gross profit....................................... 42.3 42.0 42.8 43.7 44.1
Operating expenses:
Research and development expenses................ 10.3 9.2 7.9 7.7 8.3
Selling, general and administrative expenses..... 17.3 15.8 16.5 16.0 18.6
----- ----- ----- ----- -----
Operating income before unusual charges............ 14.7 17.0 18.3 19.0 17.2
Purchased technology in progress................... 15.8 20.0 -- -- 24.2
Restructuring costs................................ 3.7 7.9 -- -- 18.3
----- ----- ----- ----- -----
Operating income................................... (4.9) (10.9) 18.3 19.0 (25.3)
Other income (expense), net........................ 1.7 -- 1.6 0.2 1.1
Interest expense related to convertible debentures
and acquisition.................................. -- (4.9) (0.5) 0.6 --
----- ----- ----- ----- -----
Income (loss) before taxes......................... (3.2)% (15.8)% 19.4% 12.7% (24.7)%
===== ===== ===== ===== =====
Pro forma financial data (excluding unusual
charges):
Operating income................................... 14.7% 17.0% 18.3% 19.0% 17.2%
Income (loss) before taxes......................... 16.3 17.0 19.9 12.7 12.8
</TABLE>

25
<PAGE> 27

SIX MONTHS ENDED JUNE 30, 1998 AND 1997

Revenues. Revenues for the six months ended June 30, 1998 were $126,568,000
as compared to revenues for the six months ended June 30, 1997 of $75,092,000.
The changes represented increases of $51,476,000 or 68.6% for the six months
ended June 30, 1998 over the six months ended June 30, 1997. Revenues increased
as a result of a larger sales force, greater marketing efforts and greater
market acceptance of the Company's products, both domestically and
internationally. International sales accounted for approximately 62% of revenues
for the six months ended June 30, 1998, as compared to 57% of revenues for the
six months ended June 30, 1997. International sales, as a percentage of total
revenues, increased mainly because of increased sales, marketing and support
resources in place in Europe. Sales of networking products represented
approximately 82% of total sales for the six months ended June 30, 1998 compared
to approximately 75% of total sales during the six months ended June 30, 1997.

Gross Profit. Gross profit for the six months ended June 30, 1998 was
$55,814,000, compared to a gross profit of $32,031,000 for the six months ended
June 30, 1997. The changes represented increases of $23,783,000 for the six
months ended June 30, 1998, or 74.2% for the six months ended June 30, 1998 over
the six months ended June 30, 1997. Gross profit as a percentage of revenues
increased from 42.7% during the six months ended June 30, 1997, to 44.1% during
the six months ended June 30, 1998, as a result of increased sales of higher
margin products.

Research and Development. Research and development ("R&D") expenses were
$10,525,000, and represented 8.3% of revenues, for the six months ended June 30,
1998. R&D expenses were $5,789,000, and represented 7.7% of revenues, for the
six months ended June 30, 1997. The increase of 81.8% in R&D spending during the
six months ended June 30, 1998 over the comparable period in 1997 was
attributable to the continued development of, as well as for new projects
involving, the Company's networking and fiber optic products. The Company
intends to continue to invest in the research and development of new products.
Management believes that the ability of the Company to develop and commercialize
new products is an important competitive factor.

Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased to $23,581,000 for the six months
ended June 30, 1998 from $12,007,000 for the six months ended June 30, 1997. As
a percentage of revenues, SG&A increased from 16.0% for the six months ended
June 30, 1997 to 18.6% for the six months ended June 30, 1998. The increases in
SG&A expense, both in dollar amounts and as a percentage of sales, were due
primarily to substantially increased marketing efforts as well as increased
personnel and overhead costs in expanded locations.

Purchased Technology in Progress and Restructuring Costs. Purchased
technology in progress for the six months ended June 30, 1998 of $30,571,000 was
related to R&D projects of Xyplex in progress at the time of the Xyplex
Acquisition on January 30, 1998. Restructuring costs during the six months ended
June 30, 1998 were $23,194,000. The restructuring costs in the first six months
of 1998 were associated with a plan adopted by the Company in March 1998 calling
for the reduction of the workforce, closing of certain facilities, elimination
of particular product lines, settlement of distribution agreements and other
costs. The Company did not incur these charges in the six months ended June 30,
1997. The Company did, however, incur charges of $427,000 during the six months
ended June 30, 1997 as additional interest expense related to the issuance in
1996 of convertible subordinated debentures (the "Debentures"), proceeds from
which were used to finance the Company's acquisition of the Fibronics business
in 1996. The Company did not report charges relating to the issuance of the
Debentures for periods after June 30, 1997 as the outstanding principal and
accrued interest were paid in full at April 4, 1997 through conversion into
Common Stock.

Net Income (Loss). The Company reported net loss of $31,286,000 during the
six months ended June 30, 1998, compared to net income of $9,552,000 during the
six months ended June 30, 1997. Net income for the six months ended June 30,
1998 would have been $16,213,000, excluding $53,765,000 of charges, associated
with the Xyplex Acquisition, as compared to net income of $9,979,000, excluding
unusual charges of $427,000 relating to interest expenses attributable to
financing the acquisition of the Fibronics business. Excluding these unusual
items, net income increased by $6,234,000 or 63% for the six months ended June
30, 1998 over the six months ended June 30, 1997.
26
<PAGE> 28

YEARS ENDED DECEMBER 31, 1997 AND 1996

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

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

Research and Development. For the years ended December 31, 1997 and 1996,
R&D expenses were $13,093,000 and $8,201,000, respectively. In the case of
absolute dollars, the 59.7% increase in R&D spending during the year ended
December 31, 1997 over the year ended December 31, 1996 was attributable to the
continued development of the Company's networking and fiber optic products
including Ethernet/Fast Ethernet/Gigabit Ethernet switches, GigaHub modules,
GigaFrame switch and fiber optic components. Additional costs were also
associated with the hiring of new research and development personnel and
consultants. R&D expenses as a percentage of revenues declined from 9.2% of
revenues during year ended December 31, 1996, to 7.9% of revenues for year ended
December 31, 1997. This decrease was primarily caused because the Company's
revenues during the periods increased at a faster rate than R&D expenses. The
Company intends to continue to invest in the research and development of new
products. Management believes that the ability of the Company to develop and
commercialize new products is a key competitive factor.

Selling, General and Administrative. For the years ended December 31, 1997
and 1996, SG&A expenses increased to $27,365,000 from $14,025,000. As a
percentage of revenues, SG&A increased from 15.8% for the year ended December
31, 1996 to 16.5% for the year ended December 31, 1997. The increases in SG&A
expense, both in dollar amounts and as a percentage of sales were due primarily
to substantially increased marketing efforts as well as the addition of
personnel and overhead costs in additional and expanded locations.

Interest Expense Related to Convertible Debentures. In September 1996, the
Company completed a private placement of $30,000,000 principal amount of
convertible Debentures. See "-- Liquidity and Capital Resources," below. To give
effect to the accounting treatment announced by the staff of the Securities and
Exchange Commission at the March 13, 1997 meeting of the Emerging Issues Task
Force relevant to the Company's issuance of the Debentures having "beneficial
conversion" features, the value of the fixed discount has been reflected in the
Company's consolidated financial statements for the years ended December 31,
1996
27
<PAGE> 29

and 1997 as additional interest expense and such fixed discount was accredited
through the first possible conversion date of the respective issuance. The
Company will not need to report future charges relating to the issuance of the
Debentures as the outstanding principal and accrued interest were paid in full
at April 4, 1997 through conversion into Common Stock. See "Liquidity and
Capital Resources" below.

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

YEARS ENDED DECEMBER 31, 1996 AND 1995

Revenues. Revenues for the year ended December 31, 1996 were $88,815,000
compared to $39,202,000 for the year ended December 31, 1995, an increase of
126%. Revenues from sales of networking products and optical transmission
products were 69% and 31%, respectively, of total revenues during the year ended
December 31, 1996 as compared to 60% and 40%, respectively, of total revenues
during the year ended December 31, 1995. The changes represented increases of
$38,140,000 or 162% and $11,473,000 or 73% in revenues from networking products
and optical transmission products, respectively, for the year ended December 31,
1996. Total revenues increased as a result of strong demand for LAN connectivity
and fiber optic products. Revenues from networking products increased primarily
due to sales of the MegaSwitch product line and revenues from optical
transmission products increased primarily as a result of volume shipments,
beginning in the third quarter of 1996, of a new bidirectional optical
transmission and reception module for FTTC applications and sales to the cable
TV industry. International sales accounted for approximately 53% of revenues for
the year ended December 31, 1996 as compared to approximately 45% of revenues
for the year ended December 31, 1995. International sales, as a percentage of
total revenues, increased because of increased concentration of sales and
marketing efforts overseas. The Company estimates that most of the growth in
international sales resulted from the increased concentration of sales and
marketing and that the acquisition of Fibronics accounted for approximately 12%
of the growth. The Fibronics Acquisition, which was not completed until
September 26, 1996, resulted in only a marginal increase in total revenues for
1996, primarily caused from sales of older Fibronics products that were not
eliminated as part of the Company's restructuring of the Fibronics business.

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

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

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

28
<PAGE> 30

respectively. The decrease as a percentage of sales in the year ended December
31, 1996 resulted primarily due to increased sales in 1996.

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

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

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

SELECTED QUARTERLY FINANCIAL DATA

The following table sets forth certain selected operating data for the
quarters indicated. This information has been derived from the unaudited
consolidated financial statements of the Company which in the opinion of
management contain all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of such information. These operating results
are not necessarily indicative of results for any future period and results may
fluctuate significantly from quarter to quarter in the future.
<TABLE>
<CAPTION>
1995 1996 1997
------------------------------------ -------------------------------------- -----------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
------ ------- ------- ------- ------- ------- -------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues, net.......... $6,737 $ 8,310 $11,135 $13,020 $15,529 $19,586 $ 22,664 $31,036 $35,564 $39,528
Gross profit........... 2,477 3,475 4,826 5,816 6,540 8,175 9,382 13,240 15,388 16,643
Operating income before
unusual charges....... 858 1,221 1,645 2,027 2,720 3,224 3,558 5,609 6,865 7,370
Operating income
(loss)................ 858 (6,455) 1,645 2,027 2,720 3,224 (21,211) 5,609 6,865 7,370
Net income (loss)...... 705 (4,707) 1,155 1,574 1,879 2,283 (15,504) 1,688 4,343 5,209

<CAPTION>
1997 1998
----------------- ------------------
Q3 Q4 Q1 Q2
------- ------- -------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues, net.......... $41,979 $48,400 $ 60,826 $65,742
Gross profit........... 18,174 20,557 26,821 28,993
Operating income before
unusual charges....... 8,131 7,938 10,116 11,592
Operating income
(loss)................ 8,131 7,938 (43,649) 11,592
Net income (loss)...... 5,922 7,111 (40,021) 8,735
</TABLE>

In August 1998, MRV announced that it expects operating results in the
third quarter of 1998 to be adversely affected by weaker than anticipated demand
for its networking products, especially in Europe, and delays in its transitions
to next generation, higher margin, networking products. In this regard, the
Company expects that revenue will be down 10% to 15% from second quarter revenue
of $65.7 million, gross margin percentage will be down to or slightly below 43%
from the second quarter percentage of 44.1% and operating expenses, consisting
of selling, general and administrative expenses and research and development
expenses, to be approximately 8% to 10% higher than second quarter total
operating expenses of $17.4 million. The Company currently plans to introduce
its next generation networking products before the end of 1998.
29
<PAGE> 31

LIQUIDITY AND CAPITAL RESOURCES

In September 1996, the Company completed a private placement of $30,000,000
principal amount of the Debentures. The Debentures were convertible into Common
Stock of the Company at any time at the option of the holders at a discount from
the market price of the Common Stock at the time of conversion that increased
over the life of the Debentures until it reached a floor. As of June 30, 1997,
the entire $30,000,000 principal amount of Debentures and accrued interest had
been converted into 1,816,159 shares of Common Stock.

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

In November 1996, the Company completed a private placement of 200,000
shares of Common Stock to Intel Corporation ("Intel") for $4,000,000 ($20.00 per
share). As part of the private placement, the Company issued to Intel three-year
warrants to purchase up to an additional 500,000 shares of Common Stock at
$20.00 per share. Of such warrants, warrants to purchase 100,000 shares of
Common Stock have not and will not become exercisable and warrants to purchase
400,000 shares of Common Stock are exercisable.

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

Cash and cash equivalents and short-term investments totaled approximately
$138,622,000 at June 30, 1998. Such cash and cash equivalents and short-term
investments, as well as cash flow from operations, are the Company's principal
sources of liquidity.

Net cash used in operating activities for the six months ended June 30,
1998 was $13,553,000. The funds were used primarily to purchase technology in
progress and for restructuring costs in connection with the Xyplex Acquisition.
Net cash provided by investing activities for the six months ended June 30, 1998
was $14,120,000. Cash provided by the sale of investments to finance the Xyplex
acquisition accounted for most of the cash provided by investing activities for
the six months ended June 30, 1998 and cash used in the Xyplex acquisition
accounted for most of the cash used in investing activities for the same period.
The sale of the Notes in the 1998 Private Placement accounted for substantially
all of the $96,904,000 of cash provided by financing activities during the six
months ended June 30, 1998.

Net cash used in operating activities for the years ended December 31, 1997
was $2,761,000. The funds were used primarily for increased inventories and
receivables as a result of increased revenues. Net cash provided by financing
activities for year December 31, 1997 and 1996 were $95,153,000 and $38,882,000,
respectively. The cash provided by financing activities in 1997 came principally
from the proceeds from the 1997 Public Offering, which were partially offset by
the repurchase of Common Stock from Elbit. Net cash used in investing activities
for the year ended December 31, 1997 was $87,454,000. The cash used in investing
activities was primarily used to purchase investments in U.S. Government
securities.

Net cash used in operating activities for the year ended December 31, 1996
was $148,000. The funds were used primarily for increased inventories and
receivables as a result of increased revenues. Net cash used in investing
activities for the year ended December 31, 1996 was $26,047,000, which primarily
related to the net purchases of investments and net cash used in acquisitions.
Cash provided by financing activities in 1996 was primarily from the private
placement of $30,000,000 principal amount of Debentures relating to the
Fibronics Acquisition and proceeds from the issuance of Common Stock. The
majority of cash used for
30
<PAGE> 32

investing activities during 1996 was for the purchase of the Fibronics Business
and net purchases of investments.

Accounts receivable were $60,636,000 at June 30, 1998 as compared to
$47,258,000 at December 31, 1997. The increase in accounts receivable was
primarily attributable to the increase in overall sales in Europe where terms of
sale are traditionally longer than in the United States.

Inventories were $45,389,000 at June 30, 1998 as compared to $41,689,000 at
December 31, 1997. The increase in inventories was primarily attributable to the
Company's decision to add larger inventories to shorten lead times for customers
and the Xyplex Acquisition. Management believes that MRV's inventory levels at
various points in time may not necessarily be comparable to those of many other
companies in its industry. This is because MRV conducts significant in-house
manufacturing of various components used in its products and thus carries
substantial raw materials and work-in-progress in addition to finished products
in its inventories. In contrast, many competitors outsource to turnkey contract
manufacturers substantial portions of their production requirements and thus do
not include material amounts of raw materials or work in progress in inventories
and may in some circumstances not even include finished products in inventory if
the contract manufacturer ships directly to the competitors' customers.

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

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

EFFECTS OF INFLATION AND CURRENCY EXCHANGE RATES

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

The Company's sales are currently denominated in U.S. dollars and to date
its business has not been significantly affected by currency fluctuations or
inflation. However, the Company conducts business in several different countries
and thus fluctuations in currency exchange rates could cause the Company's
products to become relatively more expensive in particular countries, leading to
a reduction in sales in that country. In addition, inflation in such countries
could increase the Company's expenses. To date, the Company has not
31
<PAGE> 33

hedged against currency exchange risks. In the future, the Company may engage in
foreign currency denominated sales or pay material amounts of expenses in
foreign currencies and, in such event, may experience gains and losses due to
currency fluctuations. The Company's operating results could be adversely
affected by such fluctuations or as a result of inflation in particular
countries where material expenses are incurred.

POST-RETIREMENT BENEFITS

The Company does not provide post-retirement benefits affected by SFAS 106.

YEAR 2000

Many existing computer programs, including some programs used by the
Company, use only two digits to identify a year in the date field. These
programs were designed without considering the impact of the upcoming change in
the century. If not corrected, these computer applications and systems could
fail or create erroneous results by, at, or after the year 2000. Based on the
Company's investigation to date, management does not anticipate that the Company
will incur material operating expenses or be required to incur material costs to
be year 2000 compliant. To the extent the Company's systems are not fully year
2000 compliant, there can be no assurance that potential systems interruptions
or the cost necessary to update software would not have a material adverse
effect on the Company's business, financial condition, results or operations and
business prospects.

32
<PAGE> 34

BUSINESS

OVERVIEW

The Company offers a family of network, switching and related products that
enhance LAN performance and facilitate the migration to next generation
technologies such as Fast Ethernet, Gigabit Ethernet and Asynchronous Transfer
Mode ("ATM"). MRV's MegaSwitch and GigaFrame families of switching products
range from complete switching systems to stackable switches which upgrade
performance of existing LANs by relieving network congestion without requiring
replacement of existing technologies. In addition, the Company plans to offer
EdgeBlaster, a new remote access router that will connect enterprise LANs to
remote offices and telecommuters securely through the Internet using virtual
private network ("VPN") technology.

The Company complements its switching products with a family of optical
transmission components and modules designed for transmission over fiber optic
cable. These products enable the transmission of voice, data, and video across
fiber and are also used in optical fiber test equipment. The Company's products
include discrete components, such as laser diodes and LEDs, and integrated
components such as transmitters, receivers and transceivers. The Company's
components are used in data networks, telecommunication transmission and access
networks.

To position the Company for growth, management's strategy has been to focus
on rapidly developing markets in the communications arena, such as LAN switching
and access networks, and to concentrate on improving performance of networks
employing Ethernet protocols, thereby addressing the largest installed base of
network users. Management's strategy has also been to emphasize development of
innovative products that the Company may bring to market early and to capitalize
on MRV's manufacturing expertise and ability to use proprietary fiber optic
transmission and advanced switching technologies to create high-speed, cost-
effective networking solutions.

INDUSTRY BACKGROUND

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

High-speed switching systems enhance the bandwidth of LANs so that a
greater number of users can utilize more complex applications without
experiencing network congestion. Fiber optic transmission components also
enhance the functionality of enterprise and access networks by enabling
high-speed transmission of voice, video and data across fiber optic cable.
Market research firms forecast strong growth in both of these
33
<PAGE> 35

sectors. In the fall of 1997, industry sources estimated that the market for LAN
switches would grow from $3.7 billion in 1996 to $10.9 billion in 1999, a
compounded annual growth rate of 43.3%. Other industry sources projected in a
March 1998 report that the market for WDM equipment would grow from $1.0 billion
in 1997 to $4.0 billion in 2000, a compounded annual growth rate of 58.7%. In
August 1997, industry sources estimated that the fiber optics industry was $8.6
billion in 1997 and would grow to $13.2 billion in 2001, a compounded annual
growth rate of 11.3 percent. The Company believes that the growth of fiber optic
components will outpace that of the overall fiber optics market.

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

NETWORKING ENVIRONMENT

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

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

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

Another important benefit of switches is their ability to combine groups of
computers into virtual LANs ("VLANs"). As a result, workgroups can be set up
according to business relationships rather than physical proximity. Unlike hub
and router systems, which require segment users to be physically grouped
together,

34
<PAGE> 36

VLANs simplify network administration as users relocate. VLANs can also be used
for controlling bandwidth and directing excess capacity to workgroups and users
as needed. Moreover, by confining traffic to desired workgroups, VLANs improve
network security.

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

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

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

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

FIBER OPTIC ENVIRONMENT

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

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

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<PAGE> 37

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

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

STRATEGY

MRV's objective is to be the leading supplier of high-speed network
equipment and fiber optic transmission components. The key elements of the
Company's strategy to achieve these objectives include:

Target Rapidly Growing Communication Markets. The Company leverages its
transmission expertise by targeting the high growth markets in the
communications arena. Accordingly, MRV has focused on two of the fastest growing
communication markets: (i) the worldwide LAN switching market, which according
to industry analysts was estimated to grow from $3.7 billion in 1996 to $10.9
billion in 1999 and (ii) access networks in order to capitalize on the
increasing demand for bandwidth and the efforts of both cable and telephone
companies in this area. MRV continually monitors and develops products for
additional growth markets, such as wireless communications infrastructure.

Bring State of the Art Standards-Based Technology Early to Market. The
Company believes that bringing standards-based state of the art technology early
to market has been a critical component of its success. MRV plans to continue to
invest significant resources in research and development to maintain its
leadership position. As an example of how it has leveraged its technology
leadership, MRV was one of the first companies to introduce Fast Ethernet and
Gigabit Ethernet switches. MRV also was one of the first companies to offer
switches with the smart/selective flow control feature and full duplex
transmission, designed to eliminate Ethernet packet losses in highly congested
networks and enable Gigabit Ethernet transmission distance of over 100
kilometers over fiber optic cable.

In June 1996, the Company introduced MegaSwitch II, which management
believes was the first dual speed auto-select 10/100 Mbps Ethernet switch with
uplinks to enterprise networks based on high-speed transmission technologies
such as ATM and Gigabit Ethernet. The Company has started shipping a series of
DirectIP switching products, which provide enterprise LANs with the agility and
speed of high-performance systems, with intranet routing functionality and
control. In addition, in the first quarter of 1996, the Company started volume
shipments of a new bidirectional optical transmission and reception module for
FTTC applications such as Bell South's FTTC project, one of the largest FTTC
projects in the United States. The Company believes that participation in such
leading-edge projects helps maintain MRV's technology leadership position within
the industry.

Focus on the Large and Fast Growing Switching Market. MRV has targeted and
developed expertise in Ethernet, the most commonly used technology within the
LAN market. In January 1998, industry analysts
36
<PAGE> 38

estimated that over 80% of installed LANs are Ethernet-based and that Ethernet
switching represents about 95% of LAN switching sales. Moreover, the Company
believes that Ethernet will continue to dominate the LAN arena due to its
rapidly improving performance and its large installed base of users. The Company
has developed high-speed network solutions which improve Ethernet network
performance without rendering the end user's existing network equipment
obsolete. As a result of this strategy, the Company is offering a complete
migration path to Any Speed to Any Speed Ethernet technologies, including 10
Mbps (Ethernet), 100 Mbps (Fast Ethernet) and 1,000 Mbps (Gigabit Ethernet). The
Company has developed an expertise in ATM as it anticipates that such technology
will be increasingly used in backbones. In addition, the Company is developing
multi-Gigabit switching platforms.

Leverage Proprietary Knowledge of Switching and Fiber Optic Transmission
Technologies. As the need for capacity and speed increases, management believes
that fiber will increasingly be used in all transmission modes and technologies.
Thus, MRV's ability to combine proprietary fiber optic transmission and
switching technologies to create high-speed, long distance networking solutions
is a key competitive advantage. Management further believes that as the
convergence of voice, video and data networking continues, closer integration of
the Company's core technologies, namely, fiber optic transmission, high-speed
LAN switching and ATM, will result. Convergence is also expected to enable the
Company to cross market both of its core technologies to existing customers of
only one of its product lines.

Leverage Manufacturing Expertise. The Company has developed proprietary
ASICs to implement high level component integration in its networking product
development process. Using ASICs allows MRV to reduce manufacturing costs,
enhance product reliability and protect its intellectual property. The Company
outsources the assembly, test and quality control of its computer networking
products to third party contract manufacturers. This affords it scaleability and
allows it to react quickly to market demand, while avoiding the significant
capital investment required to establish and maintain manufacturing and assembly
facilities and allowing it to concentrate its resources on product design and
development.

The Company relies exclusively on its own production capability for
critical semiconductor lasers and LEDs used in its optical transmission
products. These semiconductor devices are manufactured under stringent and
accurate procedures using state of the art wafer fabrication technology. The
Company believes that this provides it with competitive advantages, including
quicker time to market, better quality control, significant cost benefits and
better protection of its intellectual property and trade secrets.

Facilitate Growth by Expanding Distribution Channels. The Company
continually seeks to facilitate its growth by expanding its distribution
channels and capability to capitalize on its technological expertise and
production capacity. LAN switching products are sold through VARs, systems
integrators, distributors, manufacturers' representatives and OEM customers. The
Company continues to add distribution channels and has entered into OEM
agreements with Fujitsu and Newbridge Networks. In addition, the acquisitions of
the Fibronics Business and Xyplex have greatly expanded MRV's distribution
channels in Europe and North America and significantly increased its direct
sales force.

Selectively Target Acquisitions of Complementary Businesses, Products or
Technology. Management frequently evaluates acquisition prospects that would
complement the Company's existing products, augment its market coverage and
distribution capability or enhance its technological capabilities. The 1995
acquisitions of Galcom and Ace, both Israel-based switching providers, enhanced
MRV's European market presence and distribution capabilities. To continue its
European expansion efforts, in May 1996, MRV acquired a controlling interest in
EDS LAN, a computer networking distributor in Italy and in September 1996, the
Company completed the Fibronics Acquisition, which greatly increased the
Company's presence in Europe. The Fibronics Acquisition also gave the Company
new products and technology, including the GigaHub, which, in addition to being
a significant product line, also allows it to target the enterprise market. In
January 1998, the Company completed the Xyplex Acquisition which strengthened
its North American sales capabilities, direct sales force and distribution
channels and expanded into new and complementary products lines for its
networking switching business. With Xyplex the Company acquired EdgeBlaster, a
new access solution between LANs, WANs and ISPs. The Xyplex Acquisition also
enabled the Company to improve substantially its customer service and support
organization. Management plans to evaluate selective acquisi-

37
<PAGE> 39

tion opportunities as they arise, and the Company may make additional
acquisitions of businesses, products or technologies in the future.

PRODUCTS AND TECHNOLOGY

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

ENTERPRISE NETWORKING SOLUTIONS

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

The GigaFrame Product Family. In 1997, the Company announced a GigaFrame
product strategy, the architecture for which consists of a Gigabit Ethernet
Switch, a GigaHub enterprise switch, MegaSwitch and two new low cost 10 Mbps to
100 Mbps stackable switches, all of which are now available. The Company shipped
its first GigaFrame switch, the 12 port GFS 3012, in the fourth quarter of 1997.
This switch, which also provides Gigabit Ethernet transmission over fiber optic
cable to a distance of 100 kilometers, won a best switching product award at
ComNet '98 and the Editor's choice award by Communications News magazine.

The GigaFrame family of products is a group of routing switches providing a
wide range of choices that fit current enterprise networking requirements. With
layer 3 routing, long distance fiber optic connections, differentiated quality
and class of services and the ability to handle video and voice traffic the
GigaFrame line is well positioned for the convergence of voice, video and data
on today's networks. MRV's GigaFrame products are designed for corporate, campus
and metropolitan deployment.

The MegaSwitch Product Family. The Company's MegaSwitch products are a
family of Fast Ethernet and Gigabit Ethernet switches which are marketed under
MRV's NBase trade name. The MegaSwitch products range from complete switching
systems to stackable switches which upgrade performance of existing LANs by
relieving congestion of overloaded network segments, enable full duplex and flow
control and provide an easy, cost-effective migration to higher transmission
speeds without requiring replacement of existing infrastructure. The Company's
MegaSwitch products are a family of workgroup switches designed for deployment
as a cost-effective method of connecting existing networks with higher-speed
backbones and are based on Any Speed to Any Speed Ethernet switching, including
Gigabit Ethernet with access to ATM, FDDI and ISDN. Fast Ethernet, Gigabit and
ATM uplink modules incorporate InterSwitch VLAN capabilities. InterSwitch VLANs
enable the network administrator to define separate VLANs spanning multiple
switches in order to achieve optimal network performance and serve multiple
workgroups.

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<PAGE> 40

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

<TABLE>
<CAPTION>
PRODUCT NAME APPLICATION AND FUNCTIONALITY
------------ -----------------------------
<S> <C>
Network 9000 This hub enables the integration of routing,
switching, access serving and media concentration
technologies. Primarily used at the central site of
corporate networks and at the edge of ISP networks,
the Network 9000 supports any combination of
Ethernet, Token Ring, FDDI, ISDN, ATM, local and
remote bridge/router connectivity.
Network 3000 This family of branch office routers provides a
modular, scalable solution geared toward accessing
the corporate network and the Internet from remote
offices. Any combination of Ethernet, ISDN, Frame
Relay and asynchronous connections is available.
RouteRunner is a low-cost ISDN router designed to
meet the WAN needs of small offices, home offices and
branch offices such as doctors' offices or sales
offices.
MAXserver This family of low-cost, scalable remote access
server solutions enables terminals, PCs, modems,
printers and other asynchronous devices to connect to
the LAN and/or WAN. Ideal for supporting workgroups,
the stackable MAXserver offers 8-40 ports (and up to
280 ports in the modular Network 9000 solution) to
provide network access locally and remotely via
dial-up services. A variety of protocols are
supported including TCP/IP, IPX, and Appletalk.
Security capabilities such as Kerberos, RADIUS,
SecurID, password and dial-back are also offered.
</TABLE>

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

<TABLE>
<CAPTION>
PRODUCT NAME APPLICATION AND FUNCTIONALITY
------------ -----------------------------
<S> <C>
GigaHub This enterprise network solution for medium to large
corporate networks requiring both shared and switched
connectivity in a mixed protocol environment,
provides a 12 Gbps modular enterprise switching hub,
supporting Ethernet, Fast Ethernet, Gigabit Ethernet,
FDDI, ATM and Token Ring, and allowing integration of
LAN distribution and switching in a single hub.
MegaStack This high-speed auto-sensing stackable hub system
implements Ethernet/Fast Ethernet LAN segments,
provides performance for mission-critical and
bandwidth-intensive applications, connects from 24 to
196 users, is stackable with fiber optic connectivity
to remote locations and offers plug-and-play
convenience and built-in auto-partitioning for
instant isolation of network failures.
MegaVision This full-featured network management system provides
affordable and comprehensive management and control
of all MegaSwitch and MegaStack products and
automatically detects and monitors any SNMP compliant
devices. It operates on all major NMS platforms
including Windows 3.1, Windows 95, Windows 98,
Windows NT Client, Novell NMS, HP/Open View for
Windows or UNIX.
</TABLE>

39
<PAGE> 41

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

<TABLE>
<CAPTION>
PRODUCT NAME DESCRIPTION AND FUNCTIONALITY
------------ -----------------------------
<S> <C>
Fiber Optic Transceivers and converters These products consist of Ethernet and Fast Ethernet
fiber optic transceivers that enable campus or
metropolitan deployment of Ethernet or Fast Ethernet
networks through fiber optic interconnection of LANs
to a distance of Converters over 100 km, and
multimode to single mode fiber for FDDI, ATM and
SONET that extend the range of FDDI, ATM and SONET
via fiber.
Token Ring These products consist of multimedia Token Ring hubs
with fiber, coax, UTP and STP connectivity which
extends the distance between segments of Token Ring
networks, and fiber optic transceivers with multimode
and single mode fiber, which allow flexible
implementation of IBM mid-range and mainframe
terminal connectivity.
Mid-range Connectivity These products consist of Twinax Star panels,
multiplexers and repeaters which allow flexible
implementation of IBM mid-range and mainframe
terminal connectivity.
</TABLE>

DirectIP Switching. The Company has developed, and recently introduced as
part of its MegaSwitch product line a series of DirectIP switching products
which provides the control and security of traditional routing with the
performance of switching. The Company has also incorporated its DirectIP
switching technology into its GigaFrame switch.

EdgeBlaster. In April 1998, the Company announced the Xyplex EdgeBlaster, a
network edge server that allows remote users to dial into corporate networks
over secure Internet links, rather than more expensive telephone lines. The
EdgeBlaster uses VPN technology to provide secure access to corporate networks
through the Internet by utilizing hardware-based technology integrated with a
feature-rich WAN router. Generally, VPN devices from other vendors either
provide software encryption or limited routing functionality. VPN technology
offers encryption, authentication and integrity, using industry-standard
protocols. The EdgeBlaster features high-performance, industry-standard
encryption, combined with a full WAN router and the ability to transport voice
traffic over Internet Protocol ("IP"). It can support up to 2,000 simultaneous
connections. The Company began shipping its first product utilizing the
EdgeBlaster technology during the third quarter of 1998.

OPTICAL TRANSMISSION PRODUCTS

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

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

Integrated Components. The Company's integrated components include an LED
and laser based transmitter/receiver product line, designed for computer
networking applications and data link products
40
<PAGE> 42

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

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

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

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

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

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

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

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

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

PRODUCT DEVELOPMENT

All of the Company's research and development projects are geared toward
technological advances with the goal of enabling the Company to introduce
innovative products early to market. New networking and fiber

41
<PAGE> 43

optic components are constantly introduced to the market. This product
introduction is driven by a combination of rapidly evolving technology and
standards, as well as changing customer needs. MRV's research and product
development strategy emphasizes continuing evaluation of emerging trends and
technical challenges in order to identify new markets and product opportunities.
The Company believes that its success is due in part to its ability to maintain
sophisticated technology research programs while simultaneously focusing on
practical applications to its customers' strategic needs.

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

The Company has successfully integrated Fibronics' research and development
projects with its own programs and has integrated its MegaSwitch technology,
including Gigabit Ethernet, with Fibronics' GigaHub architecture. The Company is
in the process of completing the consolidation of Xyplex' research and
development projects with its own and to date has integrated certain aspects of
MegaSwitch with Xyplex' networking products, including its Network 9000.

The Company also has a number of other new networking product development
programs underway, including multi-Gigabit Ethernet switching, ATM and FDDI
uplink modules. These products are being developed in response to current
technological trends and end user demands for greater bandwidth and product
flexibility. In addition, the Company is developing a WDM module for its
GigaFrame products, which will combine four-gigabit ports onto one fiber optic
cable. This is expected to provide enterprise customers with four-gigabit links
between switches on one single mode fiber. The Company plans to provide a stand-
alone version as well. These product development efforts target enterprise
customers as well as LECs and aim at providing backbone connectivity for IP
networks.

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

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

At December 31, 1997, the Company had 88 employees dedicated to research
and product development. Research and development expenditures totaled
approximately $4,044,000, $8,201,000 and $13,093,000 for years ended December
31, 1995, 1996 and 1997, respectively. At June 30, 1998, the Company had 162
employees dedicated to research and development.

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<PAGE> 44

CUSTOMERS

The Company has sold its products worldwide to over 500 diverse customers
in a wide range of industries, primarily; data communications,
telecommunications and cable TV. The Company anticipates that these customers
will continue to purchase its products in the foreseeable future. No customer
accounted for more than 10% of the Company's revenues in 1995, 1996 or 1997.
Current customers include:

NETWORK SWITCHING

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

BANKING, FINANCE AND INSURANCE DIVERSIFIED AND OTHER
- Bankgarot Sweden - ADP
- Chase Manhattan Bank - Bayer AG
- GE Capital - Eastman Kodak
- HBOC - Tele-Communications, Inc.
- Nationsbank - The Walt Disney Co.

FIBER OPTIC COMPONENTS

DATA COMMUNICATIONS TELECOMMUNICATIONS
- Bay Networks, Inc. - Broadband Network Inc.
- Cabletron - Ciena
- Cisco Systems, Inc. - Crosscom
- Optical Data Systems - Reltec
- Packet Engines - Tellabs
- Xylan - Transcom

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

MARKETING

The Company markets and sells its products under the NBase Communications,
MRV Communications, West Hills LAN Systems, Xyplex and Xyplex Networks brand
names. Each product line has a dedicated sales and marketing organization. At
December 31, 1997, the Company had 129 employees engaged in marketing and sales
and at June 30, 1998 it had 280 employees so engaged. The Company employs
various methods, such as public relations, advertising, and trade shows to build
awareness of its products. Public relations activities are conducted both
internally and through relationships with outside agencies. Major public
relation activities are focused around new product introductions, corporate
partnerships and other events of interest to the market. The Company supplements
its public relations through media advertising programs and attendance at
various trade shows throughout the year, both in the United States and
internationally.

The Company also establishes working relationships with trade analysts,
testing facilities and high visibility corporate and government accounts. Since
the results obtained by these organizations can often

43
<PAGE> 45

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

SALES, SUPPORT AND DISTRIBUTION

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

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

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

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

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

44
<PAGE> 46

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

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

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

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

MANUFACTURING

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

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

The Company relies almost exclusively on its own production capability for
critical semiconductor lasers and LEDs used in its products. The Company's
optical transmission production process involves (i) a wafer processing facility
for semiconductor laser diode and LED chip manufacturing under stringent and
accurate
45
<PAGE> 47

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

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

COMPETITION

The communications equipment and component industry is intensely
competitive. The Company competes directly with a number of established and
emerging computer, communications and networking device companies. Direct
competitors in network switching include Bay Networks, Inc., Cabletron Systems,
Inc., Cisco Systems Inc., FORE Systems, Inc., Lucent Technologies, 3Com
Corporation and Xylan. Direct competitors in the network access market include
Ascend, Bay Networks, Cisco Systems, Inc., Lucent Technologies, Shiva and 3Com.
Direct competitors in fiber optic transmission products include AMP
Incorporated, Fujitsu, Hewlett-Packard Company, Lucent Technologies Inc.,
Mitsubishi, NEC Electronics Inc., Ortel Corporation and Siemens Components, Inc.
Many of the Company's competitors have significantly greater financial,
technical, marketing, distribution and other resources and larger installed
customer bases than MRV. Several of these competitors have recently introduced
or announced their intentions to introduce new competitive products. Many of the
larger companies with which the Company competes offer customers a broader
product line which provides a more comprehensive networking solution than the
Company's products. The ability to act as a single source vendor and provide a
customer with an enterprise-wide networking solution has increasingly become an
important competitive factor. In addition, there are a number of early stage
companies which are developing Fast Ethernet, Gigabit Ethernet switching and
alternative solutions. If developed successfully, these solutions could be
higher in performance or more cost-effective than the Company's products.

46
<PAGE> 48

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

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

PROPRIETARY RIGHTS

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

There has been substantial industry litigation regarding intellectual
property rights involving technology companies. By letter to the Company dated
March 19, 1997, a party has made a claim against the Company alleging that the
Company's DirectIP switching products make use of unspecified information and
know-how covered by a pending patent application of such party. This allegation
is under review by the Company and the Company believes that the allegation is
without merit. However, a complete assessment cannot be made with respect to the
merits of the allegation until further details of the information and know-how
are provided by such third party. Currently, sales of DirectIP products are not
material to the Company, however, if the DirectIP switching products comprise a
material part of the Company's revenues in the future and a conclusion in
respect of the claim unfavorable to the Company is reached, the claim, if
pursued by such party, could materially and adversely affect the business,
operating results and financial condition of the Company. In addition, on
December 27, 1996, Datapoint brought an action against NBase, a subsidiary of
the Company, and others alleging infringement of two of Datapoint's patents. The
other defendants include Dayna Communications, Inc., Sun Microsystems, Inc.,
Adaptec, Inc., International Business Machines Corporation, Lantronix and SVEC
America Computer Corporation. Intel and Cisco Systems, Inc. have also had
actions brought against them by Datapoint with respect to the same two patents.
The Company is cooperating with several of these companies in pursuit of common
defenses and believes it has meritorious defenses to this action. If a
conclusion unfavorable to the Company is reached, however, Datapoint's claim
could materially and adversely affect the business, operating results and
financial condition of the Company. For further information concerning this
litigation, see "-- Legal Proceedings".

In the future, additional litigation may be necessary to protect trade
secrets and other intellectual property rights owned by the Company, to enforce
any patents issued to the Company, to defend the Company against claimed
infringement of the rights of others and to determine the scope and validity of
the proprietary rights of others. Any such litigation could be costly and a
diversion of management's attention, which could have a material adverse effect
on the Company's business, operating results and financial condition. An adverse
determination in such litigation could further result in the loss of the
Company's proprietary rights,
47
<PAGE> 49

subject the Company to significant liabilities, require the Company to seek
licenses from third parties or prevent the Company from manufacturing or selling
its products, any of which could have a material adverse effect on the Company's
business, operating results and financial condition. The Company typically has
agreed to indemnify its customers and key suppliers for liability incurred in
connection with the infringement of a third party's intellectual property
rights.

EMPLOYEES

As of June 30, 1998, the Company had 723 employees, including 208 in
production, 280 in sales, marketing and support, 162 in research and
development, 67 in general and administration and six executive officers. None
of the Company's employees are represented by a union or governed by a
collective bargaining agreement, and the Company believes its relationship with
its employees is good.

FACILITIES

The Company's principal administrative, sales and marketing, research and
development and manufacturing facility is located in Chatsworth, California. The
facility covers approximately 17,700 square feet and is leased from an
unaffiliated third party at an annual base rent of approximately $122,256 (plus
local taxes) for a lease term expiring in March 1999. In addition, the Company
leases space in three buildings near its primary facility in Chatsworth,
consisting of approximately 5,000 square feet, approximately 12,800 square feet
and approximately 20,950 square feet from unaffiliated third parties at annual
base rentals of approximately $43,000, $91,000 and $131,000 respectively. The
terms of these leases expire in March 1999, March 1999 and January 2003,
respectively.

Xyplex occupies a facility in Littleton, Massachusetts, consisting of
approximately 101,000 square feet under a lease that expires in October 1998.
Annual base rent under this lease is approximately $425,000. Xyplex has
exercised an option to renew this lease through October 2001 on the same terms
except with respect to rent which will be at the prevailing market rate. Most of
the square footage is used for manufacturing, engineering, and product
development, while the remainder is used for sales, marketing, and other general
and administrative support.

The Company also leases space in Germantown, Maryland for its sales office
and warehouses. This facility covers approximately 4,800 square feet and is
leased from an unaffiliated third party at an annual base rent of approximately
$38,000 per year (plus local taxes) for a lease term expiring October 2001.

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

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

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

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

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

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<PAGE> 50

LEGAL PROCEEDINGS

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

49
<PAGE> 51

MANAGEMENT

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

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Noam Lotan(1)................ 46 President, Chief Executive Officer and Director
Shlomo Margalit(1)........... 56 Chairman of the Board of Directors, Chief Technical
Officer
and Secretary
Zeev Rav-Noy(1).............. 50 Chief Operating Officer, Treasurer and Director
Edmund Glazer................ 38 Vice President of Finance and Administration and Chief
Financial Officer
Khalid (Ken) Ahmad........... 46 Vice President of Marketing and Sales
Ofer Iny..................... 30 Vice President of Engineering
Igal Shidlovsky(2)(3)........ 62 Director
Guenter Jaensch(2)(3)........ 59 Director
</TABLE>

- ---------------
(1) Member of the Executive Committee.

(2) Member of the Compensation Committee.

(3) Member of the Audit Committee.

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

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

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

Edmund Glazer was appointed Vice President of Finance and Administration
and Chief Financial Officer in June 1995. He has been with the Company since
October 1994 serving as Operations Manager. In 1993 and 1994, Mr. Glazer served
as a consultant providing document imaging and information systems to clients.
From

50
<PAGE> 52

1986 to 1993, Mr. Glazer served as Vice President of Finance at Concord
Electrical Supply, a distributor of electrical and electronic products. From
1984 to 1986, Mr. Glazer worked as a certified public accountant at the
accounting firm of Singer, Lewak Greenbaum & Goldstein. From 1981 to 1984, Mr.
Glazer worked as an auditor at the accounting firm of Weber, Lipshie & Co. In
1983, Mr. Glazer qualified as a Certified Public Accountant from the State of
California. Mr. Glazer holds a Bachelor of Science degree in Business
Administration from the University of Southern California.

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

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

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

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

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

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<PAGE> 53

EXECUTIVE COMPENSATION

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

The following table sets forth a summary of all compensation paid by the
Company to its Chief Executive Officer and for each of its other executive
officers whose total annual salary and bonus exceeded $100,000 (the "Named
Executive Officers") during the fiscal year ended December 31, 1997:

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
SECURITIES
ANNUAL COMPENSATION UNDERLYING
--------------------------- OPTIONS
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS (#)(1)
---------------------------- ---- -------- ------- ------------
<S> <C> <C> <C> <C>
Noam Lotan........................................ 1997 $100,000 $ 0 0
President and Chief Executive Officer 1996 100,000 0 30,000
1995 100,000 0 0
Shlomo Margalit................................... 1997 110,000 0 0
Chairman of the Board of Directors, 1996 110,000 0 0
Chief Technical Officer and Secretary 1995 110,000 0 0
Zeev Rav-Noy...................................... 1997 110,000 60,000 0
Chief Operating Officer 1996 110,000 60,000 0
1995 110,000 60,000 0
Ken Ahmad......................................... 1997 90,000 45,830 0
Vice President of Marketing and Sales 1996 90,000 57,170 0
1995 90,000 43,500 150,000
</TABLE>

FISCAL YEAR-END OPTION VALUES

None of the Named Executive Officers were granted or exercised any stock
options during the year ended December 31, 1997. Neither Dr. Margalit nor Dr.
Rav-Noy hold any stock options. The following table provides certain information
concerning stock options held by the other Named Executive Officers at December
31, 1997:

<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997(1)
---------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Noam Lotan................................ 10,000 20,000 $ 154,550 $ 309,100
Ken Ahmad................................. 100,000 50,000 2,024,500 1,012,250
</TABLE>

- ---------------
(1) Based on the difference between $23.88 per share (the last sale price per
share of Common Stock on December 31, 1997 as reported on the Nasdaq
National Market) and the per share exercise price.

EMPLOYMENT AGREEMENTS

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

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<PAGE> 54

introductions, profitability levels, revenue goals, market expansion and other
criteria as established by the Compensation Committee.

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

STOCK OPTION PLANS

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

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

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

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

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

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<PAGE> 55

Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed with the Company become available once again for
issuance. At July 31, 1998, options for 1,124,707 shares were outstanding under
the 1992 Plan and none were reserved thereunder for options available for future
grant.

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

The maximum number of shares of the Company's Common Stock that may be
issued pursuant to the exercise of options granted under the 1997 Plan is
500,000 shares (subject to adjustment in the event of stock dividends, splits,
reverse splits, recapitalizations, mergers or other similar changes in the
Company's capital structure). No more than 500,000 shares may be optioned and
sold to directors or non-director officers under the Stock Option Plan as
amended. All options must be granted, if at all, not later than November 10,
2007. The aggregate fair market value (determined as of the date the option is
granted) of the shares of Common Stock to which incentive stock options granted
under the Stock Option Plan are exercisable for the first time by any employee
of the Company during any calendar year may not exceed $100,000. This limitation
does not apply with respect to nonstatutory stock options.

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

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

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

As of July 31, 1998, options to purchase an aggregate of 383,000 shares of
Common Stock were outstanding, no options granted under the 1997 Plan had been
exercised and 117,000 were available for future grant. The Company plans to seek
shareholder approval at it 1998 Annual Meeting of Shareholders to increase by
500,000 shares the maximum number of shares of the Company's Common Stock that
may be issued pursuant to the exercise of options granted under the 1997 Plan.

Other Option Plans. The Company also has two other outstanding option
programs: (1) its 1998 Nonstatutory Stock Option Plan, under which the Company
may grant nonstatutory stock options to purchase up to 1,100,000 shares of
Common Stock to employees the Company and any person who performs consulting or
advisory services for the Company and who is, by the Board of Directors or the
Stock Option Committee, determined to be eligible to participate, and (2) its
German Employees Warrant Program under which the Company may grant warrants to
purchase up to 100,000 shares of Common Stock to employees of its German
subsidiaries. Directors and officers of the Company are not eligible to
participate in either of these plans. At

54
<PAGE> 56

July 31, 1998 options for 1,031,000 shares were outstanding under the 1998
Nonstatutory Stock Option Plan and 69,000 were reserved thereunder for options
available for future grant. At July 31, 1998, warrants for 100,000 shares were
outstanding under the German Employees Warrant Program and none were reserved
thereunder for warrants available for future grant.

LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation includes a provision that
eliminates or limits the personal financial liability of the Company's
directors, except in situations where there has been a breach of the director's
duty of loyalty to the Company or its stockholders, acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, liability under Section 174 of the Delaware General Corporation Law
("Section 174") relative to unlawful payment of dividends, stock purchases or
redemptions, or any transaction from which the director derived an improper
personal benefit. Furthermore, Section 174 eliminates monetary liability for
gross negligence in exercising the duty of due care related to the directors'
fiduciary duties under state corporate law, however, such section does not
eliminate monetary liability of directors under the federal Securities laws. In
addition, the Company's Bylaws include provisions to indemnify its officers and
directors and other persons against expenses, judgments, fines and amounts paid
in settlement in connection with threatened, pending or completed suits or
proceedings against such persons by reason of serving or having served as
officers, directors or in other capacities, except that in relation to matters
with respect to which such persons shall be determined to be liable for
misconduct or negligence in the performance of their duties, the Company's
Bylaws provide for indemnification only to the extent that the Company
determines that such person acted in good faith and in a manner not opposed to
the best interests of the Company. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to directors, officers
or persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against the public policy as expressed in the
Act and is therefore unenforceable.

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<PAGE> 57

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of July 31, 1998, of (i) each person known by
the Company to own beneficially 5% or more of the Common Stock, (ii) each
current director of the Company owning Common Stock, (iii) each of the Named
Executive Officers and (iv) all current directors and executive officers as a
group.

<TABLE>
<CAPTION>
COMMON STOCK
NAME AND ADDRESS(1) OF BENEFICIAL --------------------
OWNER(2) OR IDENTITY OF GROUP NUMBER PERCENT
--------------------------------- --------- -------
<S> <C> <C>
Shlomo Margalit............................................. 1,843,930 6.9%
Zeev Rav-Noy................................................ 1,713,915 6.4%
Noam Lotan(3)............................................... 883,437 3.3%
Ken Ahmad(4)................................................ 313,464 1.2%
Provident Investment Counsel, Inc.(5)....................... 1,673,235 6.3%
300 North Lake Avenue
Pasadena, CA 91101-4022
The TCW Group, Inc.(5)...................................... 1,413,900 5.3%
865 South Figueroa Street
Los Angeles, CA 90017
Robert Day(5)(6)............................................ 1,413,900 5.3%
200 Park Avenue
New York, New York 10166
All executive officers and directors as a group (8
persons)(7)............................................... 4,934,646 18.3%
</TABLE>

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

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

(3) Includes 20,000 shares issuable pursuant to stock options exercisable within
60 days from July 31, 1998.

(4) Includes 150,000 shares issuable pursuant to stock options exercisable
within 60 days from July 31, 1998.

(5) Based on the latest Schedule 13G filed by the listed person with the
Commission through July 31, 1998.

(6) Consists of the same shares as those reflected for The TCW Group, Inc.

(7) Includes 349,900 shares issuable pursuant to stock options exercisable
within 60 days from July 31, 1998.

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<PAGE> 58

DESCRIPTION OF THE NOTES

The Notes were issued under an Indenture, dated as of June 26, 1998 (the
"Indenture"), between the Company and American Stock Transfer & Trust Company,
as Trustee (the "Trustee"), copies of which available for inspection at the
Corporate Trust Office of the Trustee in the Borough of Manhattan, The City of
New York. A copy of the Indenture is also included as an Exhibit to the
Registration Statement of which this Prospectus is a part. Wherever particular
defined terms of the Indenture (including the Notes and the various forms
thereof) are referred to, such defined terms are incorporated herein by
reference (the Notes and various terms relating to the Note, being referred to
in the Indenture as "Securities"). References in this section to the "Company"
are solely to MRV Communications, Inc. and not to its subsidiaries. The
following summaries of certain provisions of the Indenture do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, the detailed provisions of the Notes and the Indenture, including the
definitions therein of certain terms. Section references below are references to
sections of the Indenture.

GENERAL

The Notes will be unsecured subordinated obligations of the Company, will
be limited to $100,000,000 aggregate principal amount, and will mature on June
15, 2003. The Notes bear interest at the rate of 5 percent per annum from June
26, 1998 or from the most recent Interest Payment Date to which interest has
been paid or provided for, payable semiannually on June 15 and December 15 of
each year, commencing on December 15, 1998.

The Notes will be convertible into Common Stock initially at the conversion
rate stated on the cover page hereof, subject to adjustment upon the occurrence
of certain events described under "Conversion Rights," at any time on and after
the 90th day following the last original issue date of the Notes and prior to
the close of business on the maturity date, unless previously redeemed or
repurchased.

The Notes are redeemable at the option of the Company under the
circumstances and at the redemption prices set forth below under "Optional
Redemption," plus accrued interest to the redemption date. The Notes also are
subject to repurchase by the Company at the option of the Holders as described
under "Repurchase at Option of Holders Upon Change of Control."

The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.

FORM AND DENOMINATION

Notes initially resold to "qualified institutional buyers" as defined in
Rule 144A under the Securities Act ("QIBs") in reliance upon Rule 144A were
initially represented by one or more global Notes in fully registered form
without interest coupons (collectively, the "Restricted Global Note") and were
deposited with the Trustee as custodian for DTC and registered in the name of a
nominee of DTC.

Any beneficial interest in one of the Global Notes that is transferred to a
person who takes delivery in the form of an interest in the other Global Note
will, upon transfer, cease to be an interest in such Global Note and will become
an interest in the other Global Note and, accordingly, will thereafter be
subject to all transfer restrictions and other procedures applicable to
beneficial interests in such other Global Note for so long as it remains such an
interest.

The Company initially appointed the Trustee at its Corporate Trust Office
as paying agent, transfer agent, registrar and conversion agent for the Notes.
In such capacities, the Trustee is responsible for, among other things, (i)
maintaining a record of the aggregate holdings of Notes represented by the
Regulation S Global Note and the Restricted Global Note and accepting Notes for
exchange and registration of transfer, (ii) ensuring that payments of principal,
premium, if any, and interest in respect of the Notes received by the Trustee
from the Company are duly paid to DTC or its nominees, (iii) transmitting to the
Company any

57
<PAGE> 59

notices from holders, (iv) accepting conversion notices and related documents,
and transmitting the relevant items to the Company and (v) delivering
certificates for Common Stock issued in conversion of the Notes.

The Company will cause each transfer agent to act as a registrar and will
cause to be kept at the office of each transfer agent a register in which,
subject to such reasonable regulations as it may prescribe, the Company will
provide for the registration of the Notes and registration of transfers of the
Notes. The Company may vary or terminate the appointment of any paying agent,
transfer agent or conversion agent, or appoint additional or other such agents
or approve any change of the office through which any such agent acts, provided
that there shall at all times be a paying agent, a transfer agent and a
conversion agent in the Borough of Manhattan, The City of New York, New York.
The Company will cause notice of any registration, termination or appointment of
the Trustee or any paying agent, transfer agent or conversion agent, and of any
change of the office through which any such agent will act, to be provided to
holders of the Notes.

The following description of the operations and procedures of DTC is
provided solely as a matter of convenience. These operations and procedures are
solely within the control of the respective settlement systems and are subject
to changes by them from time to time. The Company takes no responsibility for
these operations and procedures and urges investors to contact the system or
their participants directly to discuss these matters.

DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code, as amended, and a "Clearing Agency" registered pursuant
to the provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participating organizations (collectively, "participants")
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical transfer and delivery of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other organizations.
Indirect access to the DTC system is available to other entities such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").

Upon the issuance of the Restricted Global Note, DTC credited, on its
internal system, the respective principal amount of the individual beneficial
interests represented by such Global Note to the accounts of DTC participants or
persons who hold interests through participants. Ownership of beneficial
interests in the Global Notes will be shown on, and the transfer of that
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of participants) or by the participants and
the indirect participants (with respect to other owners of beneficial interests
in the Global Notes).

As long as DTC, or its nominee, is the registered Holder of a Global Note,
DTC or such nominee, as the case may be, will be considered the sole owner and
Holder of the Notes represented by such Global Note for all purposes under the
Indenture and the Notes. Unless DTC notifies the Company that it is unwilling or
unable to continue as depository for a Global Note, or ceases to be a "Clearing
Agency" registered under the Exchange Act, or announces an intention permanently
to cease business or does in fact do so, or an Event of Default has occurred and
is continuing with respect to a Global Note, owners of beneficial interests in a
Global Note will not be entitled to have any portions of such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of Notes in definitive form and will not be considered the owners or
Holders of the Global Note (or any Notes presented thereby) under the Indenture
or the Notes. In addition, no beneficial owner of an interest in a Global Note
will be able to transfer that interest except in accordance with DTC's
applicable procedures (in addition to those under the Indenture referred to
herein). In the event that owners of beneficial interests in a Global Note
become entitled to receive Notes in definitive form, such Notes will be issued
only in registered form in denominations of U.S. $1,000 and integral multiples
thereof.

Except as described above and under "Certificated Notes," owners of
interests in Global Notes will not have Notes registered in their names, will
not receive physical delivery of Notes in certificated form and will not be
considered the registered owners or holders thereof under the Indenture for any
purpose.

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<PAGE> 60

Payments of the principal of, premium, if any, and interest on Global Notes
will be made to DTC or its nominee as the registered owner thereof. The Company
expects that DTC or its nominee, upon receipt of any payment of principal or
interest in respect of a Global Note representing any Notes held by it or its
nominee, will immediately credit participants' accounts with payment in amounts
proportionate to their respective beneficial interests in the principal amount
of such Global Notes for such Notes as shown on the records of DTC or its
nominee. The Company also expects that payments by participants to owners of
beneficial interests in such Global Notes held through such participants will be
governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers registered in "street name."
Such payments will be the responsibility of such participants. Neither the
Company, the Trustee nor any of their respective agents will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.

Transfers of beneficial interests in the Global Notes between participants
will be effected in accordance with DTC's procedures and will trade in DTC's
Same-Day Funds Settlement System, and secondary market trading activity in such
interests will therefore settle in immediately available funds.

DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account with DTC interests in the Global Notes are credited and only in respect
of such portion of the aggregate principal amount of the Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default (as defined below) under the Notes, DTC reserves the
right to exchange the Global Notes for Notes in certificated form, and to
distribute such Notes to its participants.

Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of beneficial ownership interests in the Global Notes among
participants of DTC, it is under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time. None of
the Company, the Trustee nor any of their respective agents will have any
responsibility for the performance by DTC, its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations, including maintaining, supervising or reviewing the
records relating to, or payments made on account of, beneficial ownership
interests in Global Notes.

CERTIFICATED NOTES

If DTC is at any time unwilling or unable to continue as a depositary for
the reasons set forth above under "Form and Denomination," the Company will
issue certificates for the Notes in definitive, fully registered, nonglobal form
without interest coupons in exchange for the Restricted Global Note.

The holder of a Note in non-global form may transfer such Note by
surrendering it at the office or agency maintained by the Company for such
purpose in the Borough of Manhattan, the City of New York, which initially will
be the office of the Trustee. Notwithstanding any statement herein, the Company
and the Trustee reserve the right to impose such transfer, certification,
exchange or other requirements, and to require such restrictive legends on
certificates evidencing Notes, as they may determine are necessary to ensure
compliance with the securities laws of the United States and the States therein
and any other applicable laws, to ensure that any amendment to the Shelf
Registration Statement covering the Notes and the Common Stock is declared
effective by the Commission or as DTC may require.

REGISTRATION RIGHTS

The holders of the Notes and the Common Stock issuable upon conversion
thereof are entitled to the benefits of a Registration Rights Agreement dated as
of June 26, 1998 between the Company and the Initial Purchasers (the
"Registration Rights Agreement"). Pursuant to the Registration Rights Agreement,
the Company has agreed for the benefit of the holders from time to time of the
Notes and the Common Stock issuable upon conversion thereof that it will, at its
expense, use its best efforts to maintain this Shelf Registration Statement
continuously effective under the Securities Act until the second annual
anniversary of
59
<PAGE> 61

the date of the effectiveness of the Shelf Registration Statement or such
earlier date as is provided in the Registration Rights Agreement.

If on or prior to December 23, 1998, such Shelf Registration Statement is
not declared effective (each, a "Registration Default"), additional interest
("Liquidated Damages") will accrue on the Notes from and including the day
following such Registration Default to but excluding the day on which such
Registration Default has been cured. Liquidated Damages will be paid
semi-annually in arrears, with the first semi-annual payment due on the first
Interest Payment Date in respect of the Notes following the date on which such
Liquidated Damages begin to accrue, and will accrue at a rate per annum equal to
an additional one-quarter of one percent (0.25%) of the principal amount of the
Notes to and including the 90th day following such Registration Default and at a
rate per annum equal to one-half of one percent (0.50%) thereof from and after
the 91st day following such Registration Default. In the event that the Shelf
Registration Statement ceases to be effective prior to the second annual
anniversary of the initial effective date of the Shelf Registration Statement or
such earlier date as is provided in the Registration Rights Agreement for a
period in excess of 60 days, whether or not consecutive, during any 12-month
period, then the interest rate borne by the Notes shall increase by an
additional one-half of one percent (0.50%) per annum on the 61st day of the
applicable 12-month period such Shelf Registration Statement ceases to be
effective to but excluding the day on which the Shelf Registration Statement
again becomes effective.

A holder who elects to sell any Registrable Securities pursuant to the
Shelf Registration Statement will be required to be named as a selling security
holder in the related prospectus, may be required to deliver a prospectus to
purchasers, may be subject to certain civil liability provisions under the
Securities Act in connection with such sales and will be bound by the provisions
of the Registration Rights Agreement which are applicable to a holder making
such election (including certain indemnification provisions).

CONVERSION RIGHTS

The Holder of any Note will have the right, at the Holder's option, to
convert any portion of the principal amount of a Note that is an integral
multiple of $1,000 into shares of Common Stock at any time on or after September
21, 1998 and prior to the close of business on the maturity date, unless
previously redeemed or repurchased, at a conversion rate of 36.9720 shares of
Common Stock per $1,000 principal amount of Notes (the "Conversion Rate")
(equivalent to a conversion price of $27.0475 per share of Common Stock),
subject to adjustment as described below. The right to convert a Note called for
redemption or delivered for repurchase will terminate at the close of business
on the Redemption Date or Repurchase Date for such Note.

The right of conversion attaching to any Note may be exercised by the
Holder by delivering the Note at the specified office of the Conversion Agent,
accompanied by a duly signed and completed notice of conversion, a copy of which
may be obtained from the Trustee. The conversion date will be the date on which
the Note and the duly signed and completed notice of conversion are so
delivered. As promptly as practicable on or after the conversion date, the
Company will issue and deliver to the Trustee a certificate or certificates for
the number of full shares of Common Stock issuable upon conversion, together
with payment in lieu of any fraction of a share or, at the Company's option,
rounded up to the next whole number of shares; such certificate will be sent by
the Trustee to the Conversion Agent (if other than the Trustee) for delivery to
the Holder. Such shares of Common Stock issuable upon conversion of the Notes,
in accordance with the provisions of the Indenture, will be fully paid and
nonassessable and will rank pari passu with the other shares of Common Stock of
the Company outstanding from time to time. Any Note surrendered for conversion
during the period from the close of business on any Regular Record Date to the
opening of business on the next succeeding Interest Payment Date (except Notes
called for redemption on a Redemption Date or to be repurchased on a Repurchase
Date during, in each case, such period) must be accompanied by payment of an
amount equal to the interest payable on such Interest Payment Date on the
principal amount of such Notes being surrendered for conversion, and the
interest payable on such Interest Payment Date in respect of such Note shall be
paid to the Holder of such Note as of the Regular Record Date. The interest
payable on such Interest Payment Date with respect to any Note which has been
called for redemption on a Redemption Date, or is repurchaseable on a Repurchase
Date, occurring, in either case, during the period referred to in the
parenthetical in the immediately preceding sentence, which Note is surrendered
for conversion during such
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<PAGE> 62

period, shall be paid to the Holder of such Note being converted in an amount
equal to the interest that would have been payable on such Note if such Note had
been converted as of the close of business on such Interest Payment Date.
Interest payable in respect of any Note surrendered for conversion on or after
an Interest Payment Date shall be paid to the Holder of such Note as of the next
preceding Regular Record Date, notwithstanding the exercise of the right of
conversion.

As a result of the foregoing provisions, Holders that surrender Notes for
conversion on a date that is not an Interest Payment Date will not receive any
interest for the period from the Interest Payment Date next preceding the date
of conversion to the date of conversion or for any later period, even if the
Notes are surrendered after a notice of redemption (except for the payment of
interest on Notes called for redemption on a Redemption Date or to be
repurchased on a Repurchase Date between a Regular Record Date and the Interest
Payment Date to which it relates). No other payment or adjustment for interest,
or for any dividends in respect of Common Stock, will be made upon conversion.
Holders of Common Stock issued upon conversion will not be entitled to receive
any dividends payable to holders of Common Stock as of any record time before
the close of business on the conversion date. No fractional shares will be
issued upon conversion but, in lieu thereof, the Company will calculate an
appropriate amount to be paid in cash on the basis set forth in the Indenture
or, at its option, round up to the next whole number of shares.

A Holder delivering a Note for conversion will not be required to pay any
taxes or duties in respect of the issue or delivery of Common Stock on
conversion but will be required to pay any tax or duty which may be payable in
respect of any transfer involved in the issue or delivery of the Common Stock in
a name other than that of the Holder of the Note. Certificates representing
shares of Common Stock will not be issued or delivered unless the person
requesting such issue has paid to the Company the amount of any such tax or duty
or has established to the satisfaction of the Company that such tax or duty has
been paid.

The Conversion Rate is subject to adjustment in certain events, including,
without duplication: (a) dividends (and other distributions) payable in Common
Stock on shares of capital stock of the Company, (b) the issuance to all holders
of Common Stock of rights, options or warrants entitling them to subscribe for
or purchase Common Stock at less than the then current market price of such
Common Stock (determined as provided in the Indenture) as of the record date for
shareholders entitled to receive such rights, options or warrants, (c)
subdivisions, combinations and reclassifications of Common Stock, (d)
distributions to all holders of Common Stock of evidences of indebtedness of the
Company, shares of capital stock, cash or assets (including securities, but
excluding those dividends, rights, options, warrants and distributions referred
to above, dividends and distributions paid exclusively in cash and in mergers
and consolidations to which the second succeeding paragraph applies), (e)
distributions consisting exclusively of cash (excluding any cash portion of
distributions referred to in (d) above or cash distributed upon a merger or
consolidation to which the next succeeding paragraph applies) to all holders of
Common Stock in an aggregate amount that, combined together with (i) other such
all-cash distributions made within the preceding 12 months in respect of which
no adjustment has been made and (ii) any cash and the fair market value of other
consideration payable in respect of any tender offer by the Company or any of
its subsidiaries for Common Stock concluded within the preceding 12 months in
respect of which no adjustment has been made exceeds 10% of the Company's market
capitalization (being the product of the then current market price (determined
as provided in the Indenture) per share of the Common Stock and the number of
shares of Common Stock then outstanding) on the record date for such
distribution, and (f) the successful completion of a tender offer made by the
Company or any of its subsidiaries for Common Stock which involves an aggregate
consideration that, together with (i) any cash and other consideration payable
in a tender offer by the Company or any of its subsidiaries for Common Stock
expiring within the 12 months preceding the expiration of such tender offer in
respect of which no adjustment has been made and (ii) the aggregate amount of
any such all-cash distributions referred to in (e) above to all holders of
Common Stock within the 12 months preceding the expiration of such tender offer
in respect of which no adjustments have been made, exceeds 10% of the Company's
market capitalization on the expiration of such tender offer. The Company
reserves the right to make such increases in the Conversion Rate in addition to
those required in the foregoing provisions as it considers to be advisable in
order that any event treated for federal income tax purposes as a dividend or
distribution of stock or issuance of rights or warrants to purchase or subscribe
for stock will not be taxable to

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the recipients. No adjustment of the Conversion Rate will be required to be made
until the cumulative adjustments amount to 1.0% or more of the Conversion Rate.
The Company shall compute any adjustments to the Conversion Rate pursuant to
this paragraph and will give notice to the Holders of the Notes of any
adjustments.

In case of any consolidation or merger of the Company with or into another
Person or any merger of another Person into the Company (other than a merger
which does not result in any reclassification, conversion, exchange or
cancellation of the Common Stock), or in case of any sale or transfer of all or
substantially all of the assets of the Company, each Note then outstanding will,
without the consent of the Holder of any Note, become convertible only into the
kind and amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares of
Common Stock into which such Note was convertible immediately prior thereto
(assuming such holder of Common Stock failed to exercise any rights of election
and that such Note was then convertible).

The Company from time to time may increase the Conversion Rate by any
amount for any period of at least 20 days, in which case the Company shall give
at least 15 days' notice of such increase, if the Board of Directors has made a
determination that such increase would be in the best interests of the Company,
which determination shall be conclusive. No such increase shall be taken into
account for purposes of determining whether the closing price of the Common
Stock exceeds the Conversion Price by 105% in connection with an event which
otherwise would be a Change of Control.

If at any time the Company makes a distribution of property to its
stockholders which would be taxable to such stockholders as a dividend for
federal income tax purposes (e.g., distributions of evidences of indebtedness or
assets of the Company, but generally not stock dividends on Common Stock or
rights to subscribe for Common Stock) and, pursuant to the anti-dilution
provisions of the Indenture, the number of shares into which Notes are
convertible is increased, such increase may be deemed for federal income tax
purposes to be the payment of a taxable dividend to Holders of Notes. See
"Certain Federal Income Tax Considerations."

SUBORDINATION

The payment of the principal of, premium, if any, and interest on
(including any amounts payable upon the redemption or repurchase of the Notes
permitted by the Indenture) the Notes will be subordinated in right of payment,
to the extent set forth in the Indenture, to the prior payment in full of the
principal of, premium, if any, interest and other amounts in respect of all
Senior Debt of the Company. The Notes also are effectively subordinated in right
of payment to all indebtedness and other liabilities of the Company's
subsidiaries. As of June 30, 1998, the Company and its subsidiaries had
approximately $2.9 million of long-term debt and capital lease obligations to
which the Notes were subordinated in right of payment.

Senior Debt is defined in the Indenture to mean the principal of (and
premium, if any) and interest (including all interest accruing subsequent to the
commencement of any bankruptcy or similar proceeding, whether or not a claim for
post-petition interest is allowable as a claim in any such proceeding) on, and
all fees and other amounts payable in connection with, the following, whether
direct or indirect, absolute or contingent, secured or unsecured, due or to
become due, outstanding on the date of the Indenture or thereafter created,
incurred or assumed: (a) indebtedness of the Company for money borrowed or
evidenced by credit or loan agreement, bonds, debentures, notes or similar
instruments, (b) all obligations of the Company evidenced by a note or similar
instrument or written agreement given in connection with the acquisition of any
businesses, properties or assets, including securities, (c) obligations of the
Company as lessee under leases capitalized on the balance sheet of the lessee
under generally accepted accounting principles, (d) obligations of the Company
under interest rate and currency swaps, caps, floors, collars, hedge agreements,
forward contracts, or similar agreements or arrangements intended to protect the
Company against fluctuations in interest or currency exchange rates or commodity
prices, (e) all reimbursement obligations of the Company with respect to letters
of credit, bankers' acceptances or similar facilities issued for the account of
the Company, (f) indebtedness of others of the kinds described in the preceding
clauses (a), (b), (c), (d) and (e) that the Company has assumed, guaranteed or
otherwise assured the payment thereof, directly or

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indirectly, and/or (g) deferrals, renewals, extensions and refundings of, or
bonds, debentures, notes or other evidences of indebtedness issued in exchange
for, or amendments, modifications or supplements to, or covenants and other
obligations of the Company in connection with, the indebtedness described in the
preceding clauses (a) through (f) whether or not there is any notice to or
consent of the Holders of Notes; except (i) indebtedness and advances among the
Company and its direct and indirect subsidiaries; and (ii) any particular
indebtedness, deferral, renewal, extension or refunding, if it is expressly
stated in the governing terms or in the assumption thereof that the indebtedness
involved is not Senior Debt.

No payment on account of principal, premium if any, or interest on the
Notes may be made if there shall have occurred (i) a default in the payment of
the principal of, premium, if any, interest (including a default under any
repurchase or redemption obligation) with respect to any Senior Debt or (ii) any
other event of default with respect to any Senior Debt, permitting the holders
thereof to accelerate the maturity thereof, and such event of default shall not
have been cured or waived or shall not have ceased to exist after written notice
of such event of default shall have been given to the Company and the Trustee by
any holder of Senior Debt. Upon the acceleration of the principal due on the
Notes or payment or distribution of assets of the Company to creditors upon any
dissolution, winding up, liquidation or reorganization, whether voluntary or
involuntary, or in bankruptcy, insolvency, receivership or other proceedings,
all principal, premium, if any and interest due on all Senior Debt must be paid
in full before the Holders of the Notes are entitled to receive any payment. By
reason of such subordination, in the event of insolvency, creditors of the
Company who are holders of Senior Debt may recover more, ratably, than the
Holders of the Notes, and such subordination may result in a reduction or
elimination of payments to the Holders of the Notes.

The Indenture does not limit the Company's ability to incur Senior Debt or
any other indebtedness or the ability of any subsidiary of the Company to incur
any indebtedness or other liabilities.

OPTIONAL REDEMPTION

The Notes may not be redeemed prior to June 15, 2001. Thereafter, the Notes
may be redeemed, in whole or in part, at the option of the Company, upon not
less than 30 nor more than 60 days' prior notice as provided under "Notices"
below, at the redemption prices set forth below. Such redemption prices
(expressed as a percentage of principal amount) are as follows for the 12-month
period beginning on June 15 of the following years:

<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001...................................................... 102%
2002...................................................... 101
</TABLE>

in each case together with accrued interest to the date of redemption

No sinking fund is provided for the Notes.

REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE OF CONTROL

If a Change of Control (as defined) occurs, each Holder of Notes shall have
the right, at the Holder's option, to require the Company to repurchase all of
such Holder's Notes, or any portion of the principal amount thereof that is
equal to $1,000 or an integral multiple of $1,000 in excess thereof, on the date
(the "Repurchase Date") that is 45 days after the date of the Company Notice (as
defined), at a price equal to 100% of the principal amount of the Notes to be
repurchased, together with interest accrued to the Repurchase Date (the
"Repurchase Price").

Within 30 days after the occurrence of a Change of Control, the Company is
obligated to give to all Holders of the Notes notice, as provided in the
Indenture (the "Company Notice"), of the occurrence of such Change of Control
and of the repurchase right arising as a result thereof. The Company must also
deliver a copy of the Company Notice to the Trustee. To exercise the repurchase
right, a Holder of Notes must deliver on or before the 30th day after the date
of the Company Notice irrevocable written notice to the Trustee of the Holder's
exercise of such right, together with the Notes with respect to which the right
is being exercised.

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A Change of Control shall be deemed to have occurred at such time after the
original issuance of the Notes as there shall occur:

(i) the acquisition by any Person (including any syndicate or group
deemed to be a "person" under Section 13(d)(3) of the Exchange Act) of
beneficial ownership, directly or indirectly, through a purchase, merger or
other acquisition transaction or series of transactions, of shares of
capital stock of the Company entitling such Person to exercise 50% or more
of the total voting power of all shares of capital stock of the Company
entitled to vote generally in elections of directors, other than any such
acquisition by the Company, any subsidiary of the Company or any employee
benefit plan of the Company; or

(ii) any consolidation of the Company with, or merger of the Company
into, any other Person, any merger of another Person into the Company, or
any conveyance, sale, transfer or lease of all or substantially all of the
assets of the Company to another Person (other than (a) any such
transaction (x) which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of capital stock of the
Company and (y) pursuant to which the holders of the Common Stock
immediately prior to such transaction are entitled to exercise, directly or
indirectly, 50% or more of the total voting power of all shares of capital
stock entitled to vote generally in the election of directors of the
continuing or surviving corporation immediately after such transaction and
(b) any merger which is effected solely to change the jurisdiction of
incorporation of the Company and results in a reclassification, conversion
or exchange of outstanding shares of Common Stock solely into shares of
common stock; provided, however, that a Change of Control shall not be
deemed to have occurred if the last reported sale price per share of the
Common Stock for any five Trading Days within the period of 10 consecutive
Trading Days ending immediately after the later of the Change of Control or
the public announcement of the Change of Control (in the case of a Change
of Control under clause (a) above) or ending immediately before the Change
of Control (in the case of a Change of Control under clause (b) above)
shall equal or exceed 105% of the Conversion Price of the Notes in effect
on each such Trading Day. "Beneficial owner" shall be determined in
accordance with Rule 13d-3 promulgated by the Commission under the Exchange
Act, as in effect on the date of original execution of the Indenture.

The Company's ability to repurchase Notes upon the occurrence of a Change
of Control is subject to limitations. There can be no assurance that the Company
would have the financial resources or be able to arrange financing on acceptable
terms to pay the Repurchase Price for all the Notes as to which the purchase
right is exercised. Further, any repurchase in connection with a Change of
Control could, depending on the circumstances and absent a waiver from the
holders of Senior Debt, be blocked by the subordination provisions of the Notes.
See "Subordination." The Agreements relating to the Company's current Senior
Debt would limit the Company's ability to repurchase the Notes. Failure by the
Company to repurchase the Notes when required may result in an Event of Default
with respect to the Notes (and with respect to Senior Debt) whether or not such
repurchase is permitted by the subordination provisions. See "-- Events of
Default" and "Risk Factors -- Repurchase of Notes at the Option of Holders Upon
a Change of Control; Availability of Funds."

Rule 13e-4 under the Exchange Act requires the dissemination of certain
information to security holders in the event of an issuer tender offer and may
apply in the event that the repurchase option becomes available to Holders of
the Notes. The Company will comply with this rule to the extent applicable at
that time.

The foregoing provisions would not necessarily afford Holders of the Notes
protection in the event of highly leveraged or other transactions involving the
Company that may adversely affect Holders.

MERGERS AND SALES OF ASSETS BY THE COMPANY

The Company may not consolidate with or merge into any other Person or,
directly or indirectly, convey, transfer, sell, lease or otherwise dispose of
its properties and assets substantially as an entirety to any Person (other than
a conveyance, sale, transfer or lease to a wholly-owned subsidiary), and the
Company may not permit any Person (other than a wholly-owned subsidiary) to
consolidate with or merge into the Company or convey, transfer, lease or
otherwise dispose of all or substantially all of its properties and assets
substantially as an entirety to the Company, unless (a) the Person formed by
such consolidation or into which the Company is
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<PAGE> 66

merged or the Person to which the properties and assets of the Company are so
conveyed, transferred sold or leased is a corporation, limited liability
company, partnership or trust organized and existing under the laws of the
United States, any State thereof or the District of Columbia and has expressly
assumed the due and punctual payment of the principal of, premium, if any, and
interest on the Notes and the performance of the other covenants of the Company
under the Indenture, (b) immediately after giving effect to such transaction, no
Event of Default, and no event which, after notice or lapse of time or both,
would become an Event of Default, shall have occurred and be continuing, and (c)
the Company has provided to the Trustee an Officer's Certificate and Opinion of
Counsel if required by the Indenture.

EVENTS OF DEFAULT

The following will be Events of Default under the Indenture: (a) failure to
pay principal or Redemption Price of any Note when due, whether or not such
payment is prohibited by the subordination provisions of the Indenture; (b)
failure to pay any interest (including Liquidated Damages) on any Note when due,
continuing for 30 days, whether or not such payment is prohibited by the
subordination provisions of the Indenture; (c) failure to provide a Company
Notice in the event of a Change of Control; (d) failure to perform any other
covenant or warranty of the Company in the Indenture, continuing for 60 days
after written notice as provided in the Indenture; (e) any indebtedness for
money borrowed by the Company in an aggregate principal amount in excess of
$5,000,000 is not paid at final maturity or the payment thereof is accelerated
and such default in payment or acceleration is not cured or rescinded within 30
days after written notice as provided in the Indenture; and (f) certain events
of bankruptcy, insolvency or reorganization. Subject to the provisions of the
Indenture relating to the duties of the Trustee in case an Event of Default
shall occur and be continuing, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request or
direction of any of the Holders, unless such Holders shall have offered to the
Trustee reasonable indemnity. Subject to such provisions for the indemnification
of the Trustee, the Holders of a majority in aggregate principal amount of the
Outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee.

If an Event of Default (other than an Event of Default specified in
subsections (a), (b), and (f) above) occurs and is continuing, the Trustee
shall, at the written request of the Holders of not less than 25% in aggregate
principal amount of the Outstanding Notes, by notice in writing to the Company,
declare the principal of all the Notes to be due and payable immediately, and
upon any such declaration such principal and any accrued interest and any unpaid
Liquidated Damages thereon will become immediately due and payable. If an Event
of Default specified in subsections (a) or (b) occurs and is continuing, the
holder of any Outstanding Note may, by notice in writing to the Company (with a
copy to the Trustee), declare the principal of such Note to be due and payable
immediately, and upon any such declaration such principal and (subject to the
Indenture) any accrued interest and Liquidated Damages thereon will become
immediately due and payable. If an Event of Default specified in subsection (f)
occurs and is continuing, the principal and any accrued interest, together with
any Liquidated Damages thereon, on all of the then Outstanding Notes shall ipso
facto become due and payable immediately without any declaration or other Act on
the part of the Trustee or any Holder.

At any time after a declaration of acceleration has been made but before a
judgment or decree based on acceleration, the Holders of a majority in aggregate
principal amount of Outstanding Notes may, under certain circumstances, rescind
and annul such acceleration if all Events of Default, other than the nonpayment
of accelerated principal and interest, have been cured or waived as provided in
the Indenture.

No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless also the Holders of at least 25% in aggregate principal
amount of the Outstanding Notes shall have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as trustee,
and the Trustee shall not have received from the Holders of a majority in
aggregate principal amount of the Outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. However, such limitations do not apply to a suit instituted
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<PAGE> 67

by a Holder of a Note for the enforcement of payment of the principal of,
premium, if any, or interest on such Note on or after the respective due dates
expressed in such Note or of the right to convert such Note in accordance with
the Indenture.

The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance.

MEETINGS, MODIFICATION AND WAIVER

The Indenture contains provisions for convening meetings of the Holders of
Notes to consider matters affecting their interests.

Modifications and amendments of the Indenture may be made, and certain past
defaults by the Company may be waived, (i) with the written consent of the
Holders of not less than a majority in aggregate principal amount of the Notes
at the time Outstanding or (ii) by the adoption of a Resolution, at a meeting of
Holders of the Notes at which a quorum is present, by the Holders of at least
66% in aggregate principal amount of the Outstanding Notes represented at such
meeting. However, no such modification or amendment may, without the consent of
the Holder of each outstanding Note affected thereby, (a) change the Stated
Maturity of the principal of, or any installment of interest on, any Note, (b)
reduce the principal amount of, or the premium, if any, or rate of interest on,
any Note, (c) reduce the amount payable upon redemption or repurchase, (d)
modify the provisions with respect to the repurchase right of the Holders in a
manner adverse to the Holders, (e) change the place or currency of payment of
principal of, premium, if any, or interest on, any Note (including any payment
of any Liquidated Damages or the Repurchase Price in respect of such Note), (f)
impair the right to institute suit for the enforcement of any payment on or with
respect to any Note, (g) modify the obligation of the Company to maintain an
office or agency in New York City, (h) except as otherwise permitted by the
Indenture or contemplated by provisions concerning consolidation, merger,
conveyance, transfer, sale or lease of all or substantially all of the property
and assets of the Company, adversely affect the right of Holders to convert any
of the Notes or to require the Company to repurchase any Note other than as
provided in the Indenture, (i) modify the subordination provisions in a manner
adverse to the Holders of the Notes, (j) reduce the above-stated percentage of
Outstanding Notes necessary to modify or amend the Indenture, (k) reduce the
percentage of aggregate principal amount of Outstanding Notes necessary for
waiver of compliance with certain provisions of the Indenture or for waiver of
certain defaults, (1) reduce the percentage in aggregate principal amount of
Notes Outstanding required for the adoption of a Resolution or the quorum
required at any meeting of Holders of Notes at which a Resolution is adopted, or
(m) modify the obligation of the Company to deliver information required under
Rule 144A to permit resales of Notes and Common Stock issuable upon conversion
thereof in the event the Company ceases to be subject to certain reporting
requirements under the United States securities laws. The quorum at any meeting
called to adopt a Resolution will be persons holding or representing a majority
in aggregate principal amount of the Notes at the time Outstanding and, at any
reconvened meeting adjourned for lack of quorum, 25% of such aggregate principal
amount.

The Holders of a majority in aggregate principal amount of the Outstanding
Notes may waive compliance by the Company with certain restrictive provisions of
the Indenture. The Holders of a majority in aggregate principal amount of the
Outstanding Notes also may waive any past default under the Indenture, except a
default in the payment of principal, premium, if any, or interest.

TRANSFER, EXCHANGE AND WITHDRAWAL

The Company has initially appointed the Trustee as security registrar and
transfer agent, acting through its Corporate Trust Office in New York City. The
Company reserves the right to vary or terminate the appointment of the security
registrar or of any transfer agent or to appoint additional or other transfer
agents or to approve any Change of the office through which any security
registrar or any transfer agent acts.

In the event of a redemption of the Notes for any of the reasons set forth
below under "Redemption", the Company will not be required (a) to register the
transfer or exchange of Notes for a period of 15 days immediately preceding the
date notice is given identifying the serial numbers of the Notes called for such
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<PAGE> 68

redemption or (b) to register the transfer of or exchange any Registered Note,
or portion thereof, called for redemption.

PURCHASE AND CANCELLATION

The Company or any subsidiary may at any time and from time to time
purchase Notes at any price in the open market or otherwise.

All Notes surrendered for payment, redemption, repurchase, registration of
transfer or exchange or conversion shall, if surrendered to any Person other
than the Trustee, be delivered to the Trustee. All Notes so delivered to the
Trustee shall be canceled promptly by the Trustee. No Notes shall be
authenticated in lieu of or in exchange for any Notes canceled as provided in
the Indenture. Unless otherwise requested by the Company and confirmed in
writing, the Trustee shall, from time to time but not less than once annually,
destroy all canceled Notes and deliver to the Company a certificate of
destruction, which certificate shall specify the number, principal amount and,
in the case of Notes the form of each canceled Note so destroyed.

TITLE

The Company and the Trustee may treat the registered owner (as reflected in
the Security Register) of any Note as the absolute owner thereof (whether or not
such Note shall be overdue) for the purpose of making payment and for all other
purposes.

NOTICES

Notice to Holders of the Notes will be given by mail to the addresses of
such Holders as they appear in the Security Register. Such notices will be
deemed to have been given on the date of the first such publication or on the
date of such mailing, as the case may be.

Notice of a redemption of Notes will be given at least once not less than
30 nor more than 60 days prior to the redemption date (which notice shall be
irrevocable) and will specify the redemption date.

REPLACEMENT OF NOTES

Notes that become mutilated, destroyed, stolen or lost will be replaced by
the Company at the expense of the Holder upon delivery to the Trustee of the
mutilated Notes or evidence of the loss, theft or destruction thereof
satisfactory to the Company and the Trustee. In the case of a lost, stolen or
destroyed Note, indemnity satisfactory to the Trustee and the Company may be
required at the expense of the Holder of such Note before a replacement Note
will be issued.

PAYMENT OF STAMP AND OTHER TAXES

The Company shall pay all stamp and other duties, if any, which may be
imposed by the United States or United Kingdom or any political subdivision
thereof or taxing authority thereof or therein with respect to the issuance of
the Notes. The Company will not be required to make any payment with respect to
any other tax, assessment or governmental charge imposed by any government or
any political subdivision thereof or taxing authority therein.

SATISFACTION AND DISCHARGE

The Company may discharge its payment obligations under the Indenture while
Notes remain outstanding if (a) all outstanding Notes have become due and
payable or will become due and payable at their scheduled maturity within one
year, (b) all outstanding Notes are scheduled for redemption within one year or
(c) all outstanding Notes are delivered to the Trustee for conversion in
accordance with the Indenture and in the case of (a) or (b) above, the Company
has deposited with the Trustee an amount sufficient to pay and discharge the
entire indebtedness on all outstanding Notes on the date of their scheduled
maturity or the scheduled date of redemption.

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GOVERNING LAW

The Indenture and the Notes will be governed by and construed in accordance
with the laws of the State of New York.

THE TRUSTEE

In case an Event of Default shall occur (and shall not be cured), the
Trustee will be required to use the degree of care of a prudent person in the
conduct of his own affairs in the exercise of its powers. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the Holders of
Notes, unless they shall have offered to the Trustee reasonable security or
indemnity.

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DESCRIPTION OF CAPITAL STOCK

AUTHORIZED CAPITAL STOCK

The authorized capital stock of the Company consists of 40,000,000 shares
of Common Stock and 1,000,000 shares of Preferred Stock. Upon filing by the
Company with the Delaware Secretary of State of a Certificate of Amendment to
its Certificate of Incorporation, which was approved by stockholders on October
30, 1998, the authorized capital stock of the Company will consist of 80,000,000
shares of Common Stock and 1,000,000 shares of Preferred Stock. As of July 31,
1998, there were 26,592,883 shares of Common Stock outstanding.

COMMON STOCK

The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders. Holders of Common Stock also are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefore, subject to preferences that
may be applicable to any outstanding Preferred Stock. In the event of
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption, conversion
or cumulative voting rights. All the outstanding shares of Common Stock are, and
the shares of Common Stock offered by this Prospectus will be, when issued and
paid for, validly authorized and issued, fully paid and nonassessable.

PREFERRED STOCK

Pursuant to the Company's Certificate of Incorporation, the Board of
Directors has the authority to issue 1,000,000 shares of Preferred Stock in one
or more series and to fix the powers, designations, preferences, and relative,
participating, optional, or other rights thereof, including dividend rights,
conversion rights, voting rights, redemption terms, liquidation preferences, and
the number of shares constituting any series, without any further vote or action
by the Company's stockholders. The issuance of Preferred Stock in certain
circumstances may have the effect of delaying, deferring, or preventing a change
of control of the Company without further action by the stockholders, may
discourage bids for the Common Stock at a premium over the market price of the
Common Stock, and may adversely affect the market price of, and the voting and
other rights of the holders of, the Common Stock. The Company has no shares of
Preferred Stock outstanding and has no plans to issue any such shares.

WARRANTS

At July 31, 1998, excluding 100,000 warrants granted under the German
Employees Warrant Program (see "Management -- Stock Option Programs"), the
Company had outstanding warrants to purchase an aggregate of 2,931,978 shares of
Common Stock at exercise prices ranging from $4.25 to $35.00 and expiring from
January 1998 to July 2002.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar of the Common Stock is American Stock
Transfer & Trust Co., New York, New York.

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<PAGE> 71

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of certain United States federal income and
estate tax considerations relating to the purchase, ownership and disposition of
the Notes and of Common Stock into which Notes may be converted, but does not
purport to be a complete analysis of all the potential tax considerations
relating thereto. This summary is based on the Internal Revenue Code of 1986, as
amended (the "Code"), existing temporary and currently proposed Treasury
Regulations thereunder, existing administrative interpretations and practices of
the Internal Revenue Service (the "IRS"), and judicial decisions, all of which
are subject to change, possibly on a retroactive basis. This summary deals only
with holders that will hold Notes and Common Stock into which Notes may be
converted as "capital assets" (within the meaning of Section 1221 of the Code)
and does not address tax considerations applicable to investors that may be
subject to special tax rules, such as banks, tax-exempt organizations, insurance
companies, dealers in securities or currencies, persons that will hold Notes as
a position in a hedging transaction, "straddle" or "conversion transaction" for
tax purposes, persons that have a "functional currency" other than the U.S.
dollar. This summary discusses the tax considerations applicable to an initial
purchaser of the Notes or investors in pass-through entities who purchase the
Notes at their "issue price" as defined in Section 1273 of the Code and does not
discuss the tax considerations applicable to subsequent purchasers of the Notes.
The Company has not sought any ruling from the IRS with respect to the
statements made and the conclusions reached in the following summary, and there
can be no assurance that the IRS will agree with such statements and
conclusions.

INVESTORS CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME AND
ESTATE TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES
ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION OR
UNDER ANY APPLICABLE TAX TREATY.

UNITED STATES HOLDERS

As used herein, the term "United States Holder" means the beneficial owner
of a Note or Common Stock that for United States federal income tax purposes is
(i) a citizen or resident (as defined in Section 7701(b)(1) of the Code) of the
United States, (ii) a corporation, partnership or other entity created or
organized in the United States or under the laws of the United States or of any
political subdivision thereof, or (iii) an estate or trust other than a "foreign
estate" or "foreign trust" as defined in Section 7701(a)(31) of the Code.

PAYMENT OF INTEREST

Interest on a Note will be includable in the income of a United States
Holder as ordinary income at the time such interest is received or accrued, in
accordance with such Holder's method of accounting for United States federal
income tax purposes.

SALE, EXCHANGE OR REDEMPTION OF THE NOTES

Upon the sale, exchange or redemption of a Note, a United States Holder
generally will recognize capital gain or loss equal to the difference between
(i) the amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption (except to the extent such amount
is attributable to accrued interest income, which is taxable as ordinary income)
and (ii) such Holder's adjusted tax basis in the Note. A United States Holder's
adjusted tax basis in a Note generally will equal the cost of the Note to such
Holder, less any principal payments received by such Holder.

The tax rate applicable to such a capital gain will depend, among other
things, upon the Holder's holding period for the Notes that are sold, exchanged
or redeemed. Generally, such capital gain or loss will be long-term if the Note
is held more than 18 months. The maximum tax rate on net long-term gains is 20%
for individuals trust and estates, (10% if the individual is in the 15% tax
bracket) and 35% for corporations. For individuals, trusts, and estates, if the
Note is held more than 12 months, but less than 18 months, then such

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<PAGE> 72

capital gain or loss is mid-term, taxable at a maximum tax rate of 28% (15% if
an individual is in the 15% bracket). For individuals, trusts and estates, if
the Note is held for 12 months or less, than such capital gain is taxable at
ordinary income tax rates.

CONVERSION OF THE NOTES

A United States Holder generally will not recognize any income, gain or
loss upon conversion of a Note into Common Stock except to the extent of
ordinary income recognized with respect to accrued and unpaid interest on the
Notes at that time. A Holder also will recognize capital gain or loss upon the
receipt of cash in lieu of a fractional share of Common Stock equal to the
amount of cash received less the Holder's tax basis in such fractional share.
Such Holder's tax basis in the Common Stock received on conversion of a Note
will be the same as such Holder's adjusted tax basis in the Note at the time of
conversion (reduced by any basis allocable to a fractional share interest), and
the holding period for the Common Stock received on conversion will generally
include the holding period of the Note converted.

DIVIDENDS

Distributions with respect to Common Stock generally will be includable in
the income of a United States Holder as ordinary income to the extent of the
Company's current or accumulated earnings and profits. To the extent, if any,
that a Holder receives a distribution with respect to Common Stock that exceeds
the Holder's allocable share of the Company's current and accumulated earnings
and profits, the excess will be treated as a non-taxable return of capital which
will reduce the Holder's tax basis in the Common Stock. Any amount in excess of
the Holder's basis will be treated as gain from the sale or exchange of such
Common Stock.

In general, a dividend distribution to a corporate Holder will qualify for
a 70% dividends received deduction if the Holder owns less than 20% of the
voting power and value of the Company's stock (other than certain non-voting,
non-convertible, non-participating preferred stock). A corporate Holder that
owns 20% or more of the voting power and value of the Company's stock (other
than certain non-voting, non-convertible, non-participating preferred stock)
generally will qualify for an 80% dividends received deduction. The dividends
received deduction is subject, however, to certain holding period, taxable
income and other limitations.

SALE OF COMMON STOCK

Upon the sale or exchange of Common Stock, a United States Holder generally
will recognize capital gain or loss equal to the difference between (i) the
amount of cash and the fair market value of any property received upon the sale
or exchange and (ii) such Holder's adjusted tax basis in the Common Stock. The
tax rate applicable to such capital gain will depend, among other things, upon
the Holder's holding period for the shares of Common Stock that are sold or
exchanged. The impact of the holding period upon capital gains rates is
discussed under "-- Sales, Exchange or Redemption of the Notes." A United States
Holder's basis and holding period in Common Stock received upon conversion of a
Note are determined as discussed above under "Conversion of the Notes."

ADJUSTMENT OF CONVERSION PRICE

Treasury Regulations promulgated under Section 305 of the Code treat
Holders of the Notes as having received a constructive distribution from the
Company in the event that the conversion ratio of the Notes is adjusted if (i)
as a result of such adjustment, the proportionate interest (measured by the
quantum of Common Stock into or for which the Notes are convertible or
exchangeable) of the Holders of the Notes in the assets or earnings and profits
of the Company is increased, and (ii) the adjustment is not made pursuant to a
bona fide, reasonable anti-dilution formula. An adjustment in the conversion
ratio, as described in "Description of the Notes -- Conversion Rights," would
not be considered made pursuant to such formula if the adjustment was made to
compensate for certain taxable distributions with respect to the Common Stock.
Thus, under certain circumstances, a reduction in the conversion price for the
Holders may result in deemed dividend income to Holders to the extent of the
Company's current or accumulated earnings and profits.

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<PAGE> 73

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

In general, information reporting requirements will apply to payments of
principal, premium, if any, and interest on a Note, payments of dividends on
Common Stock, payments of the proceeds of the sale of a Note and payments of the
proceeds of the sale of Common Stock to certain noncorporate United States
Holders, and a 31% backup withholding tax may apply to such payments if the
United States Holder (i) fails to furnish or certify his correct taxpayer
identification number to the payor in the manner required, (ii) is notified by
the IRS that he has failed to report payments of interest and dividends
properly, or (iii) under certain circumstances, fails to certify that he has not
been notified by the IRS that he is subject to backup withholding for failure to
report interest and dividend payments. Any amounts withheld under the backup
withholding rules from a payment to a United States Holder will be allowed as a
credit against such Holder's United States federal income tax and may entitle
the Holder to a refund, provided that the required information is furnished to
the IRS.

NON-UNITED STATES HOLDERS

As used herein, the term "Non-United States Holder" means any beneficial
owner of a Note or Common Stock that is not a United States Holder. The rules
governing the United States federal income and estate taxation of a Non-United
States Holder are complex and no attempt will be made herein to provide more
than a summary of such rules. NON-UNITED STATES HOLDERS SHOULD CONSULT WITH
THEIR OWN TAX ADVISORS TO DETERMINE THE EFFECT OF FEDERAL, STATE, LOCAL AND
FOREIGN TAX LAWS WITH REGARD TO AN INVESTMENT IN THE NOTES AND COMMON STOCK,
INCLUDING ANY REPORTING REQUIREMENTS.

PAYMENT OF INTEREST

Generally, payment of interest on a Note by the Company or any Paying Agent
to a Non-United States Holder will qualify for the "portfolio interest
exemption" and therefore will not be subject to United States federal income tax
or withholding tax, provided that such interest income is not effectively
connected with a United States trade or business of the Non-United States Holder
and provided that the Non-United States Holder (i) does not actually or
constructively own 10% or more of the combined voting power of all classes of
stock of the Company entitled to vote, (ii) is not a controlled foreign
corporation related to the Company actually or constructively through stock
ownership, (iii) is not a bank receiving interest on a loan entered into in the
ordinary course of business and (iv) either (a) provides a Form W-8 (or a
suitable substitute form) signed under penalties of perjury that includes its
name and address and certifies as to its non-United States status in compliance
with applicable law and regulations, or (b) a securities clearing organization,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business holds the Note and provides a statement
to the Company or its agent under penalties of perjury in which it certifies
that such a Form W-8 (or a suitable substitute) has been received by it from the
Non-United States Holder or qualifying intermediary and furnishes the Company or
its agent with a copy thereof.

Recently released Treasury Regulations provide alternative methods for
satisfying the certification requirements described in clause (iv) above. The
Treasury Regulations generally are effective for payments made after December
31, 1999, subject to certain transition rules. Non-United States Holders are
urged to consult their own tax advisors regarding the new Treasury Regulations.

Except to the extent that an applicable treaty otherwise provides, a
Non-United States Holder generally will be taxed in the same manner as a United
States Holder with respect to interest if the interest income is effectively
connected with a United States trade or business of the Non-United States
Holder. Effectively connected interest received by a corporate Non-United States
Holder may also, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate (or, if applicable, a lower treaty rate).
Even though such effectively connected interest is subject to income tax, and
may be subject to the branch profits tax, it is not subject to withholding tax
if the Holder delivers IRS Form 4224 to the payor.

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<PAGE> 74

Interest income of a Non-United States Holder that is not effectively
connected with a United States trade or business and that does not qualify for
the portfolio interest exemption described above will generally be subject to a
withholding tax at a 30% rate (or, if applicable, a lower treaty rate).

SALE, EXCHANGE OR REDEMPTION OF THE NOTES

A Non-United States Holder of a Note will generally not be subject to
United States federal income tax or withholding tax on any gain realized on the
sale, exchange or redemption of the Note (including the receipt of cash in lieu
of fractional shares upon conversion of a Note into Common Stock) unless (1) the
gain is effectively connected with a United States trade or business of the
Non-United States Holder, (2) in the case of a Non-United States Holder who is
an individual, such Holder is present in the United States for a period or
periods aggregating 183 days or more during the taxable year of the disposition,
and either such Holder has a "tax home" in the United States or the disposition
is attributable to an office or other fixed place of business maintained by such
Holder in the United States, (3) the Holder is subject to tax pursuant to the
provisions of the Code applicable to certain United States expatriates, or (4)
the Company is a United States real property holding corporation see discussion
under "-- United States Foreign Investment in Real Property Tax Act" below.

CONVERSION OF THE NOTES

In general, no United States federal income tax or withholding tax will be
imposed upon the conversion of a Note into Common Stock by a Non-United States
Holder except with respect to the receipt of cash in lieu of fractional shares
by Non-United States Holders upon conversion of a Note where any of the
conditions described above under "Non-United States Holders -- Sale, Exchange or
Redemption of the Notes" is satisfied.

SALE OR EXCHANGE OF COMMON STOCK

A Non-United States Holder generally will not be subject to United States
federal income tax or withholding tax on the sale or exchange of Common Stock
unless any of the conditions described above under "Non-United States
Holders -- Sale, Exchange or Redemption of the Notes" is satisfied.

DIVIDENDS

Dividends paid (or deemed paid, as described above under "United States
Holders -- Dividends") on Common Stock to a Non-United States Holder (excluding
dividends that are effectively connected with the conduct of a trade or business
in the United States by such Holder and are taxable as described below) will be
subject to United States federal withholding tax at a 30% rate (or lower rate
provided under any applicable income tax treaty). Except to the extent that an
applicable tax treaty otherwise provides, a Non-United States Holder will be
taxed in the same manner as a United States Holder on dividends paid (or deemed
paid) that are effectively connected with the conduct of a trade or business in
the United States by the Non-United States Holder. If such Non-United States
Holder is a foreign corporation, it may also be subject to a United States
branch profits tax on such effectively connected income at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty. Even though
such effectively connected dividends are subject to income tax, and may be
subject to the branch profits tax, they will not be subject to U.S. withholding
tax if the Holder delivers IRS Form 4224 to the payor.

Under currently applicable Treasury Regulations, dividends paid to an
address in a foreign country are presumed to be paid to a resident of that
country (unless the payor has knowledge to the contrary) for purposes of the
withholding discussed above and for purposes of determining the applicability of
a tax treaty rate. Under recently issued Treasury Regulations, however,
Non-United States Holders of Common Stock who wish to claim the benefit of an
applicable treaty rate would be required to satisfy certain certification
requirements. The new Treasury Regulations are generally effective for payments
made after December 31, 1999. Non-United States Holders are urged to consult
their own tax advisors regarding the new Treasury Regulations.

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<PAGE> 75

DEATH OF A NON-UNITED STATES HOLDER

A Note held by an individual who is not a citizen or resident of the United
States at the time of death will not be includable in the decedent's gross
estate for United States estate tax purposes, provided that such Holder or
beneficial owner did not at the time of death actually or constructively own 10%
or more of the combined voting power of all classes of stock of the Company
entitled to vote, and provided that, at the time of death, payments with respect
to such Note would not have been effectively connected with the conduct by such
Non-United States Holder of a trade or business within the United States.

Common Stock actually or beneficially held (other than through a foreign
corporation) by a Non-United States Holder at the time of his or her death (or
previously transferred subject to certain retained rights or powers) will be
subject to United States federal estate tax unless otherwise provided by an
applicable estate tax treaty.

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

United States information reporting requirements and backup withholding tax
will not apply to payments on a Note to a Non-United States Holder if the
statement described in "Non-United States Holders -- Payment of Interest" is
duly provided by such Holder, provided that the payor does not have actual
knowledge that the Holder is a United States person.

Information reporting requirements and backup withholding tax will not
apply to any payment of the proceeds of the sale of a Note or any payment of the
proceeds of the sale of Common Stock effected outside the United States by a
foreign office of a "broker" (as defined in applicable Treasury Regulations),
unless such broker (i) is a United States person, (ii) derives 50% or more of
its gross income for certain periods from the conduct of a trade or business in
the United States or (iii) is a controlled foreign corporation as to the United
States. Payment of the proceeds of any such sale effected outside the United
States by a foreign office of any broker that is described in (i), (ii) or (iii)
of the preceding sentence will not be subject to backup withholding tax, but
will be subject to information reporting requirements unless such broker has
documentary evidence in its records that the beneficial owner is a Non-United
States Holder and certain other conditions are met, or the beneficial owner
otherwise establishes an exemption. Payment of the proceeds of any such sale to
or through the United States office of a broker is subject to information
reporting and backup withholding requirements, unless the beneficial owner of
the Note provides the statement described in "Non-United States
Holders -- Payment of Interest" or otherwise establishes an exemption.

Recently released Treasury Regulations make certain modifications to the
withholding, backup withholding and information reporting rules described above.
The new Treasury Regulations will generally be effective for payments made after
December 31, 1999, subject to certain transition rules. Prospective investors
are urged to consult their own tax advisors regarding the new Treasury
Regulations.

UNITED STATES FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT

Under the Foreign Investment in Real Property Tax Act ("FIRPTA"), any
person who acquires a "United States real property interest" (as described
below) from a foreign person must deduct and withhold a tax equal to 10% of the
amount realized by the foreign transferor. In addition, a foreign person who
disposes of a United States real property interest generally is required to
recognize gain or loss that is subject to United States federal income tax. A
"United States real property interest" generally includes any interest (other
than an interest solely as a creditor) in a United States corporation unless it
is established under specific procedures that the corporation is not (and was
not for the prior five-year period) a "United States real property holding
corporation". The Company does not believe that it is a United States real
property holding corporation as of the date hereof, although it has not
conducted or obtained an appraisal of its assets to determine whether it is now
or will be a United States real property holding corporation. Unless it is
established that the Company is not a United States real property holding
corporation, then, unless an exemption applies, both the Common Stock and the
Notes would be treated as United States real property interests. As discussed
below, however, an exemption should apply to the Common Stock and the Notes
except with respect to a Non-United States

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<PAGE> 76

Holder whose beneficial ownership of Common Stock or Notes exceeds 5% of the
total fair market value of the Common Stock.

An interest in a United States corporation generally will not be treated as
a United States real property interest if, at any time during the calendar year,
any class of stock of the corporation is "regularly traded" on an established
securities market (the "regularly-traded exemption"). The Company believes that
the Company's Common Stock is regularly traded on an established securities
market within the meaning of the applicable regulations, although there can be
no assurance that the Common Stock will remain regularly traded. The remainder
of this discussion assumes that the Common Stock is and will remain regularly
traded on an established securities market.

The regularly-traded exemption is not available to a regularly traded
interest (such as the Common Stock) if such interest is owned by a person who
beneficially owns (actually or constructively) more than 5% of the total fair
market value of that class of interests at any time during the five-year period
ending on the date of disposition of such interest or other applicable
determination date. Accordingly, except with respect to a sale or other
disposition of Common Stock by a Non-United States Holder whose aggregate
beneficial ownership has exceeded that 5% threshold, no withholding or income
taxation under the FIRPTA rules should be required with respect to the sale,
exchange or other disposition of Common Stock by a Non-United States Holder.

The regularly-traded exemption will apply to a "non-regularly traded class
of interests" in a United States corporation that is convertible into a
regularly traded class of interests in the corporation unless, on the date such
non-regularly traded interest was acquired by its present holder, such interest
had a fair market value greater than the fair market value on that date of 5% of
the regularly traded class of the corporation's stock into which it is
convertible. (Interests of a irregularly traded class acquired over a period of
time will be aggregated and valued as of the date of the subsequent acquisition
for purposes of applying the 5% test described above.) Accordingly, except with
respect to the sale, exchange, conversion or redemption of the Notes by a
Non-United States Holder whose aggregate actual or constructive ownership of
such Notes on an applicable determination date had a fair market value greater
than 5% of the Common Stock, no withholding or income taxation under the FIRPTA
rules should be required with respect to the sale, exchange, conversion or
redemption of Notes by a Non-United States Holder. The foregoing discussion
assumes that the Notes constitute interests that are irregularly traded
interests convertible into a regularly traded class of interests. If the Notes
were to become regularly traded, the regularly-traded exemption might not apply
to Notes owned by a person who beneficially owns (actually or constructively)
more than 5% of the total fair market value of the Notes at any time during the
five year period ending on the date of disposition of the Notes or other
applicable determination date.

Any investor that may approach or exceed any of the 5% ownership thresholds
discussed above, either alone or in conjunction with related persons, should
consult its own tax advisor concerning the United States tax consequences that
may result. A Non-United States Holder who sells or otherwise disposes of Notes
may be required to inform its transferee whether such Notes constitute a United
States real property interest.

SELLING SECURITYHOLDERS

The Notes were originally issued by the Company in a private placement on
June 26, 1998 to Prudential Securities Incorporated and Bear Stearns & Co. Inc.
(the "Initial Purchasers"). The Notes were resold by the Initial Purchasers, in
transactions exempt from the registration requirements of the Securities Act, in
the United States to persons reasonably believed by the Initial Purchaser to be
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act).

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<PAGE> 77

Unless otherwise noted, the following table sets forth information, as of
November 27, 1998, with respect to the Selling Securityholders and the
respective principal amount of Notes and Common Stock beneficially owned by each
Selling Securityholder that may be offered pursuant to this Prospectus and the
percentage of Common Stock owned. Except as otherwise indicated, to the
knowledge of the Company, all persons listed below have sole voting and
investment power with respect to their securities. Such information has been
obtained from the Selling Securityholders and the Trustee. The term "Selling
Securityholders" includes the holders listed below and the beneficial owners of
the Notes and their transferees, pledgees, donees or other successors.

<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF NOTES
NAME OF --------------------------
SELLING SECURITYHOLDERS OWNED OFFERED
----------------------- ----------- -----------
<S> <C> <C>
AAM/Zazove Institutional Income Fund, L.P................... $4,000,000 $4,000,000
Alexandra Global Fund 1 LTD. ............................... 3,000,000 3,000,000
AON Pension Plan............................................ 3,000,000 3,000,000
Arnhold and S. Bleichroeder, Inc.(1)........................ 4,500,000 4,500,000
Bear, Stearns & Co. Inc. ................................... 3,690,000 3,690,000
BNP Arbitrage SNC........................................... 4,000,000 4,000,000
D.E. Shaw Investments, L.P. ................................ 700,000 700,000
D.E. Shaw Securities, L.P. ................................. 2,300,000 2,300,000
Deutsche Bank A.G. ......................................... 3,750,000 3,750,000
Donaldson Lufkin & Jenrette Securities Corp. ............... 3,000,000 3,000,000
Forest Alternative Strategies Fund A5....................... 2,750,000 2,750,000
Forest Alternative Strategies Fund A5I...................... 250,000 250,000
Forest Alternative Strategies Fund A5M...................... 50,000 50,000
Forest Alternative Strategies Fund B-3...................... 275,000 275,000
Forest Global Convertible Fund A-1.......................... 10,000 10,000
Forest Global Convertible Fund A-5.......................... 3,870,000 3,870,000
Forest Global Convertible Fund B-1.......................... 200,000 200,000
Forest Global Convertible Fund B-2.......................... 175,000 175,000
Forest Global Convertible Fund B-3.......................... 200,000 200,000
Forest Global Convertible Fund B-5.......................... 100,000 100,000
Forest Greyhound............................................ 200,000 200,000
c/o Forest Investment Management LLC
Forest Performance Fund..................................... 300,000 300,000
Fox Family Foundation....................................... 45,000 45,000
DTD 10/10/87
c/o Forest Investment Management LLC
General Motors Investment Management Corporation(2)......... 8,000,000 8,000,000
Highbridge Capital Corporation.............................. 3,000,000 3,000,000
HT Insight Funds............................................ 1,000,000 1,000,000
KA Investments LDC.......................................... 6,000,000 6,000,000
LLT Limited................................................. 175,000 175,000
Merrill Lynch International Ltd............................. 5,500,000 5,500,000
The Northwestern Mutual Life Insurance Company.............. 3,000,000 3,000,000
Oaktree Capital Management:
Foundation Account No. 1.................................. 360,000 360,000
LLC Account No. 1......................................... 160,000 160,000
Winchester Convertible Plus Ltd........................... 480,000 480,000
Prudential Securities, Inc. ................................ 9,410,000 9,410,000
John S. Stafford, Jr........................................ 1,000,000 1,000,000
</TABLE>

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<PAGE> 78

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

(1) As of December 4, 1998.

(2) General Motors Investment Management Corporation ("GMIMC"), a wholly-owned
subsidiary of General Motors Corporation ("General Motors"), provides
investment advice and investment management services with respect to the
assets of certain employee benefit plans of General Motors and its
subsidiaries, including the General Motors Employees Domestic Group Pension
Trust (the "GM Pension Trust"), and with respect to certain assets of
certain direct and indirect subsidiaries of General Motors and associated
entities, including Motors Insurance Corporation ("MIC") and the General
Motors Foundation, Inc. (the "Foundation"). In its capacity as investment
manager to the GM Pension Trust, MIC and the Foundation, GNIMC is authorized
to vote and dispose of $6,460,000, $1,337,000 and $203,000 of Notes owned by
the GM Pension Trust, MIC and the Foundation, respectively, included in the
$8,000,000 represented above.

<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------
NUMBER OF NUMBER OF
SHARES SHARES
BENEFICIALLY OFFERED UPON PERCENT
NAME OF OWNED PRIOR TO CONVERSION OF OF OUTSTANDING
SELLING SECURITYHOLDERS THIS OFFERING THE NOTES(1) SHARES(2)
----------------------- -------------- ------------- --------------
<S> <C> <C> <C>
AAM/Zazove Institutional Income Fund,
L.P. ..................................... 147,901 147,901 *
Alexandra Global Fund 1 LTD. ............... 110,915 110,915 *
AON Pension Plan............................ 110,915 110,915 *
Arnhold and S. Bleichroeder, Inc.(3)........ 144,200 144,200 *
Bear, Stearns & Co. Inc..................... 136,426 136,426 *
BNP Arbitrage SNC........................... 147,887 147,887 *
D.E. Shaw Investments, L.P. ................ 25,880 25,880 *
D.E. Shaw Securities, L.P................... 85,035 85,035 *
Deutsche Bank A.G. ......................... 138,644 138,644 *
Donaldson Lufkin & Jenrette Securities
Corp...................................... 110,915 110,915 *
Forest Alternative Strategies Fund A5....... 101,672 101,672 *
Forest Alternative Strategies Fund A5I...... 9,242 9,242 *
Forest Alternative Strategies Fund A5M...... 1,848 1,848 *
Forest Alternative Strategies Fund B-3...... 10,167 10,167 *
Forest Global Convertible Fund A-1.......... 369 369 *
Forest Global Convertible Fund A-5.......... 143,081 143,081 *
Forest Global Convertible Fund B-1.......... 7,394 7,394 *
Forest Global Convertible Fund B-2.......... 6,470 6,470 *
Forest Global Convertible Fund B-3.......... 7,394 7,394 *
Forest Global Convertible Fund B-5.......... 3,697 3,697 *
Forest Greyhound............................ 7,394 7,394 *
c/o Forest Investment Management LLC
Forest Performance Fund..................... 11,091 11,091 *
Fox Family Foundation....................... 1,663 1,663 *
DTD 10/10/87
c/o Forest Investment Management LLC
General Motors Investment Management
Corporation(4)............................ 295,775 295,775 1.1%
Highbridge Capital Corporation.............. 110,915 110,915 *
HT Insight Funds............................ 36,971 36,971 *
</TABLE>

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<PAGE> 79

- ---------------
* Less than 1%.

(1) Assumes conversion of the full amount of Notes held by such Selling
Securityholder into Common Stock at the initial conversion price of $27.0475
per share. Except as otherwise indicated, also assumes that the Selling
Securityholder or any future transferees, pledgees, donees or successors of
or from such Selling Securityholder do not beneficially own any Common Stock
other than the Common Stock issuable upon conversion of the Notes. The
conversion price and the number of shares of Common Stock issuable upon
conversion of the Notes are subject to adjustment under certain
circumstances. Accordingly, the number of shares of Common Stock issuable
upon conversion of the Notes may increase or decrease from time to time.
Under the terms of the Indenture, the Company will pay cash in lieu of
issuing fractional shares upon conversion of the Notes. See "Description of
Notes -- Conversion Rights."

(2) Calculated based upon 26,646,121 shares of Common Stock outstanding as of
November , 1998. The percentages shown include the shares of Common Stock
actually owned as of November , 1998 and the shares of Common Stock that
the identified person had the right to acquire within 60 days of such date.
In calculating the percentage of ownership, all shares of Common Stock that
the identified person had the right to acquire within 60 days of November
, 1998 are deemed to be outstanding for the purpose of computing the
percentage of the shares of Common Stock owned by such person, but are not
deemed to be outstanding for the purpose of computing the percentage of the
shares of Common Stock owned by any other person.

(3) Includes 10,000 shares of Common Stock beneficially owned by the Selling
Securityholder.

(4) GMIMC, in its capacity as investment manager to the GM Pension Trust, MIC
and the Foundation, is authorized to vote and dispose of 238,839 shares,
49,431 shares and 7,505 shares owned by the GM Pension Trust, MIC and the
Foundation, respectively, included in the 295,775 shares represented above.

None of the Selling Securityholders has, or within the past three years has
had any position, office or other material relationship with the Company or any
of its affiliates, except that Bear, Stearns & Co., Inc. ("Bear Stearns") and
Prudential Securities Incorporated ("Prudential") acted as Initial Purchasers in
the original offering of the Notes, and Bear Stearns has in the past provided
investment banking and investment advisory services to the Company. In each
case, Bear Stearns and Prudential received only customary fees in connection
with the provision of such services.

78
<PAGE> 80

PLAN OF DISTRIBUTION

The Notes were originally issued by the Company in a private placement. The
Notes and Conversion Shares offered by this Prospectus may be sold from time to
time by the Selling Securityholders in one or more transactions in the over-the-
counter market, in negotiated transactions, or a combination of such methods of
sale, at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. The Notes and Conversion
Shares may be sold directly or through broker-dealers, to whom Selling
Securityholders may pay brokerage commissions and charges. The sale of Notes and
Conversion Shares may be effected as follows: (a) in a block trade in which the
broker or dealer so engaged will attempt to sell the securities as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) by a broker or dealer as principal and resale by such broker or
dealer for its own account pursuant to this Prospectus; (c) in exchange
distributions and/or secondary distributions; (d) in ordinary brokerage
transactions and transactions in which the broker solicits purchasers; and (e)
in privately negotiated transactions.

Pursuant to the provisions of the Registration Rights Agreement between the
Company and the Initial Purchaser, the Company will pay the costs and expenses
incident to the registration and qualification of the Notes and Conversion
Shares offered by this Prospectus, including registration and filing fees. In
addition, the Company has agreed to indemnify the Selling Securityholders
against certain liabilities, including liabilities arising under the Securities
Act.

The Company believes that the holders of the Notes and/or Conversion Shares
are qualified institutional buyers within the meaning of Rule 144A of the
Securities Act. Prior to any use of this Prospectus for the resale of the Notes
and Conversion Shares, this Prospectus will be amended or supplemented, if
necessary, to set forth the name of the Selling Securityholder, the amount of
the Notes and/or the number of Conversion Shares beneficially owned by such
Selling Securityholder, and the amount of the Notes and/or the number of
Conversion Shares to be offered for resale by such Selling Securityholder. The
supplemented or amended Prospectus will also disclose whether any Selling
Securityholder has held any position or office with, been employed by or
otherwise had a material relationship with, the Company or any of its affiliates
during the three years prior to the date of the supplemented or amended
prospectus.

The Selling Securityholders and any broker-dealer participating in the
distribution of the Notes and Conversion Shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any profit and any
commissions paid, or any discounts or concessions allowed to any such
broker-dealer may be deemed to be underwriting discounts and commissions under
the Securities Act. The Selling Securityholders may indemnify any broker- dealer
that participates in transactions involving the sale of Notes and Conversion
Shares against certain liabilities, including liabilities under the Securities
Act.

There can be no assurance that the Selling Securityholders will sell any or
all of the Notes and/or Conversion Shares offered by them hereunder. The Notes
and/or the Conversion Shares may be sold pursuant to Rule 144A or Rule 144
rather than pursuant to this Prospectus.

The resale of the Notes and/or Conversion Shares will be freely
transferable in the hands of persons other than affiliates of the Company. The
Common Stock is included for quotation in the Nasdaq Stock Market's under the
symbol "MRVC."

The Company will not receive any of the proceeds from the resale of the
Notes and/or Conversion Shares.

LEGAL MATTERS

The validity of the Notes offered by this Prospectus will be passed upon
for the Company by Freshman, Marantz, Orlanski, Cooper & Klein, a law
corporation, Beverly Hills, California.

79
<PAGE> 81

EXPERTS

The audited financial statements of the Company included in this
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report dated February 20, 1998 and
appearing on page F-2 with respect thereto, and are included herein in reliance
upon the authority of said firm as experts in giving said reports.

The financial statements of Xyplex, Inc. at October 31, 1997 and 1996, and
for the year end October 31, 1997 and the period from April 10, 1996 to October
31, 1996, appearing in this Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance on their report given on their
authority as experts in accounting and auditing.

The financial statements of Xyplex, Inc. as of December 31, 1995 and 1994
and for each of the two years in the period ended December 31, 1995 and the
financial statements of Xyplex, Inc. as of April 9, 1996 and for the period
January 1, 1996 through April 9, 1996 included in this Registration Statement,
have been included herein in reliance on the report of PricewaterhouseCoopers
LLP, independent public accountants, given on the authority of that firm as
experts in accounting and auditing.

80
<PAGE> 82

GLOSSARY

The following computer networking terms are used in this Prospectus:

ASIC (Application Specific Integrated Circuits) -- an integrated circuit on
a chip designed for a specific purpose, as opposed to an integrated circuit
designed for general applications such as a microprocessor.

ATM (Asynchronous Transfer Mode) -- a high speed network switching
technology in which a dedicated circuit is set up between two end systems before
a communication session can begin. Information is transmitted in cells; a cell
is a fixed-size packet of information, as opposed to a frame, which is a
variable-length packet of information.

Bandwidth -- technically, bandwidth refers to the difference between the
highest and lowest frequencies in a communications channel; the term is now
commonly used to refer to the data carrying capacity of the channel.

DFB (Distributed Feedback Laser) -- single frequency, narrow spectrum
laser.

End-To-End Solution -- a network solution with common technical
architecture that allows network services to be consistently provided to all
users on the network.

Ethernet -- a term used to refer to all forms of shared CSMA/CD (carrier
sense multiple access/collision detection) networking. In a CSMA/CD network a
computer will "listen" to determine if the network cable is in use, and will
wait until the cable is clear before transmitting. If two computers try to send
at the same time, the collision is detected, both computers stop transmitting
and wait a random length of time and then transmit. Too much traffic on such a
network will result in so many collisions that the network's performance is
significantly degraded.

Fast Ethernet -- Ethernet with 100 Mbps capacity.

FDDI (Fiber Distributed Data Interface) -- a high-speed networking
technology originally designed for fiber optic cable.

Fiber Optic -- relating to the transmission of data using light, as opposed
to transmission using electricity.

Frame Relay -- a WAN networking solution that implements a form of
packet-switching technology which routes frames of information from one computer
to another over a switching network owned by a carrier such as AT&T, Sprint, MCI
or one of the Bell companies. Frame relay is designed to provide short duration
communication links between router connected devices.

FTTC (Fiber-To-The-Curb) -- deployment of fiber optic cable in the
subscribers local loop, i.e., the last mile to consumer homes sometimes
designated as the onramp to the information superhighway, also to the home.

Fiber-In-The-Loop -- a network in which fiber optic is used between the
central office and the customer's location (i.e. the portion of the telephone
system known as the loop).

Frame -- a variable-length packet of information transmitted between
computers.

GBPS -- a data transfer rate of one billion bits per second.

Gigabit Ethernet -- Ethernet with Gbps capacity.

Hub -- a central component in a network which allows each computer
connected to the hub to communicate with each other; configuring a network with
multiple hubs, and connecting the hubs, allows the network to keep local traffic
local and conserve the capacity of the overall network. In contrast to switches,
hubs indiscriminately forward data to all ports connected to the hub. In
addition hubs require computers to alternate communication over a single LAN,
thereby allowing a computer to send information only when other computers are
not doing so.

Intranet -- an internal network of computers connecting only those
computers within a company or other organization.
81
<PAGE> 83

ISP (Internet Service Provider) -- a company that supplies access to the
Internet.

ISDN (Integrated Services Digital Network) -- an all digital,
circuit-switched telephone system that can provide bandwidth on demand.

IP (Internet Protocol) -- the underlying protocol for routing packets on
the Internet and other IP-based networks.

LAN (Local Area Network) -- a shared communication system tying together a
group of computers located within a limited area.

LEC (Local Exchange Carriers) -- a telephone company that operates within a
local area.

LED (Light Emitting Diode) -- an electronic device that when provided the
proper power will emit a beam of light. LEDs may be used to generate the light
transmitted over optical fiber cables.

MBPS -- a data transfer rate of a million bits per second.

Network -- a group of computers connected so as to be able to exchange
information. One method of constructing a network is a switch-based network in
which the computers are connected to dedicated ports on Ethernet switches,
Gigabit Ethernet switches, ATM switches or other switches.

NMS (Network Management System) -- a system for active and passive
monitoring of a network.

Packets -- a package of data sent by a computer over a network.

PCS (Personal Communications System) -- a digital wireless communications
technology that includes voice, data and video. Digital cellular phones are an
example of PCS.

Router -- an electronic device that moves information from one network to
another, applying intelligence in the process to ensure that the information
reaches its destination securely and quickly.

SONET (Synchronous Optical Network) -- a standard that defines
telecommunication transmissions over fiber optic cable.

Switch -- an electronic device that allows the connection of a computer
directly on a private line to another computer on the network. A large network
may be divided into subsets using switches so as to help avoid congestion on the
network.

Token Ring -- a network standard in which only the computer "holding" the
token frame may transmit on the network. The other computers wait to receive the
token before transmitting. This is in contrast to competitive access standards,
such as Ethernet, which may have "collisions" when two computers try to access
the network at the same time.

Uplink -- switched connectivity to a different speed LAN.

VLAN (Virtual Lan) -- a subset of computers in a larger network which are
set up as a subnetwork; a VLAN within a network is connected to other VLANs on
the network by routers.

VPN (Virtual Private Network) -- a private, encrypted "network" that
transports voice and data between an organization's different sites; the VPN may
use the Internet as the path over which it transmits the data.

WAN (Wide Area Network) -- a network that connects computers, not within a
local area, over public or private data communication channels.

WDM (Wavelength Division Multiplexer) -- a product that increases the
amount of data that can be transmitted over a fiber optic network at any time by
increasing the number of wavelengths in a fiber optic network.

82
<PAGE> 84

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MRV COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Independent Public Accountants (Arthur Andersen
LLP)...................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-3
Consolidated Statements of Operations for the three years
ended December 31, 1997................................... F-4
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1997....................... F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1997................................... F-6
Notes to Consolidated Financial Statements.................. F-7
Unaudited Condensed Consolidated Balance Sheet as of June
30, 1998.................................................. F-21
Unaudited Condensed Consolidated Statements of Operations
for the six months ended June 30, 1997 and 1998........... F-22
Unaudited Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1997 and 1998........... F-23
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-24
Unaudited Pro Forma Consolidated Financial Statements....... F-26
Unaudited Pro Forma Consolidated Balance Sheet as of
December 31, 1997......................................... F-27
Unaudited Pro Forma Consolidated Statements of Operations
for the year ended December 31, 1997...................... F-28
Notes and Assumptions to Unaudited Pro Forma Consolidated
Financial Statements...................................... F-29

XYPLEX, INC
Report of Independent Auditors (Ernst & Young LLP).......... F-30
Balance Sheets as of October 31, 1997 and 1996.............. F-31
Statements of Operations for the year ended October 31, 1997
and for the period April 10, 1996 to October 31, 1996..... F-32
Statements of Changes in Stockholder's Equity for the year
ended October 31, 1997 and the period April 10, 1996 to
October 31, 1996.......................................... F-33
Statements of Cash Flows for the year ended October 31, 1997
and the period April 10, 1996 to October 31, 1996......... F-34
Notes to Financial Statements............................... F-35
Report of Independent Accountants (Coopers & Lybrand
L.L.P.)................................................... F-43
Balance Sheet as of April 9, 1996........................... F-44
Statement of Loss for the period January 1, 1996 through
April 9, 1996............................................. F-45
Statement of Parent Company Investment for the period
January 1, 1996 through April 9, 1996..................... F-46
Statement of Cash Flows for the period January 1, 1996
through April 9, 1996..................................... F-47
Notes to Financial Statements............................... F-48
Report of Independent Accountants (Coopers & Lybrand
L.L.P.)................................................... F-53
Balance Sheets as of December 31, 1995 and 1994............. F-54
Statements of Income for the years ended December 31, 1995
and 1994.................................................. F-55
Statements of Stockholder's Equity for the years ended
December 31, 1995 and 1994................................ F-56
Statements of Cash Flows for the years ended December 31,
1995 and 1994............................................. F-57
Notes to Financial Statements............................... F-58
</TABLE>

F-1
<PAGE> 85

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO MRV COMMUNICATIONS, INC.:

We have audited the accompanying consolidated balance sheets of MRV
COMMUNICATIONS, INC. (a Delaware corporation) and subsidiaries as of December
31, 1996 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MRV Communications, Inc. and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP
--------------------------------------
Arthur Andersen LLP

Los Angeles, California
February 20, 1998

F-2
<PAGE> 86

MRV COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $14,641 $ 19,428
Short-term investments.................................... 17,659 36,413
Accounts receivable, net of allowance of $2,468 in 1996
and $4,252 in 1997...................................... 24,296 47,258
Inventories............................................... 18,238 41,689
Deferred income tax asset................................. 2,660 2,280
Other current assets...................................... 4,377 7,248
------- --------
Total current assets............................... 81,871 154,316
------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Building.................................................. 1,464 3,127
Machinery and equipment................................... 3,941 4,294
Furniture and fixtures.................................... 286 560
Computer hardware and software............................ 1,513 2,134
Leasehold improvements.................................... 533 710
------- --------
7,737 10,825
Less -- Accumulated depreciation and amortization......... (1,489) (2,642)
------- --------
6,248 8,183
------- --------
OTHER ASSETS:
Investments............................................... -- 62,382
Deferred income tax asset................................. 6,036 6,231
Goodwill, net of accumulated amortization of $210 in 1996
and $372 in 1997........................................ 2,788 5,077
Other..................................................... -- 47
------- --------
8,824 73,737
------- --------
$96,943 $236,236
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations.............. $ 119 $ 111
Accounts payable.......................................... 11,328 30,439
Accrued liabilities....................................... 6,389 8,429
Accrued restructuring costs............................... 3,549 --
Customer deposit.......................................... 1,500 293
Income taxes payable...................................... 2,013 3,485
------- --------
Total current liabilities.......................... 24,898 42,757
------- --------
LONG-TERM LIABILITIES:
Convertible debentures.................................... 17,325 --
Capital lease obligations, net of current portion......... 1,035 788
Other long-term liabilities............................... 532 2,065
------- --------
Total long-term liabilities........................ 18,892 2,853
------- --------
COMMITMENTS AND CONTINGENCIES (Note 7)
MINORITY INTEREST........................................... 852 657
COMMON STOCK ISSUED IN CONNECTION WITH ACQUISITION (Note
3)........................................................ 10,530 --
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value:
Authorized -- 1,000 shares; no shares issued or
outstanding............................................ -- --
Common stock, $0.0034 par value:
Authorized -- 40,000 shares Issued and
outstanding -- 21,286 shares in 1996 and 26,360 in
1997................................................... 70 88
Capital in excess of par value............................ 49,636 175,874
Retained earnings (deficit)............................... (7,950) 14,635
Cumulative translation adjustments........................ 15 (628)
------- --------
41,771 189,969
------- --------
$96,943 $236,236
======= ========
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 87

MRV COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
REVENUES, net:.............................................. $39,202 $88,815 $165,471
------- ------- --------
COSTS AND EXPENSES:
Cost of goods sold........................................ 22,608 51,478 94,709
Research and development expenses......................... 4,044 8,201 13,093
Selling, general and administrative expenses.............. 6,799 14,025 27,365
Purchased technology in progress.......................... 6,211 17,795 --
Restructuring costs....................................... 1,465 6,974 --
------- ------- --------
41,127 98,473 135,167
------- ------- --------
Operating income (loss)........................... (1,925) (9,658) 30,304
------- ------- --------
OTHER INCOME (EXPENSE):
Interest expense related to convertible debentures and
acquisition............................................ -- (4,357) (843)
Minority interest......................................... -- (196) (146)
Interest income........................................... 641 702 2,841
Interest expense.......................................... (102) (743) (118)
Other..................................................... 115 194 21
------- ------- --------
654 (4,400) 1,755
------- ------- --------
Income (loss) before provision (benefit) for
income taxes.................................... (1,271) (14,058) 32,059
PROVISION (BENEFIT) FOR INCOME TAXES........................ 2 (4,404) 9,474
------- ------- --------
NET INCOME (LOSS)........................................... $(1,273) $(9,654) $ 22,585
======= ======= ========
EARNINGS (LOSS) PER COMMON SHARE INFORMATION:
Basic earnings (loss) per common share.................... $ (.07) $ (.49) $ 0.95
======= ======= ========
Diluted earnings (loss) per common share.................. $ (.07) $ (.49) $ 0.88
======= ======= ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic..................................................... 18,377 19,739 23,670
======= ======= ========
Diluted................................................... 18,377 19,739 25,734
======= ======= ========
</TABLE>

The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 88

MRV COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN RETAINED CUMULATIVE
--------------- EXCESS OF EARNINGS TRANSLATION
SHARES AMOUNT PAR VALUE (DEFICIT) ADJUSTMENTS TOTAL
------ ------ ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995............. 19,049 $63 $ 23,491 $ 1,704 $ -- $ 25,258
Shares held by trustee relating to
Fibronics acquisition............. 137 -- -- -- -- --
Conversion of debentures............. 812 2 12,851 -- -- 12,853
Exercise of stock warrants and
options........................... 1,088 4 4,938 -- -- 4,942
Issuance of common stock for cash.... 200 1 3,999 -- -- 4,000
Interest expense related to
convertible debentures and
acquisition (see Note 4).......... -- -- 4,357 -- -- 4,357
Translation adjustments.............. -- -- -- -- 15 15
Net loss............................. -- -- -- (9,654) -- (9,654)
------ --- -------- ------- ----- --------
BALANCE, December 31, 1996............. 21,286 70 49,636 (7,950) 15 41,771
------ --- -------- ------- ----- --------
Issuance of common stock in connection
with public offering................. 2,785 9 93,311 -- -- 93,320
Issuance of common stock in connection
with the acquisition of Fibronics
Ltd.................................. 275 1 6,299 -- -- 6,300
Return of shares held by trustee
relating to Fibronics acquisition.... (137) -- -- -- -- --
Conversion of debentures............... 1,013 4 17,737 -- -- 17,741
Exercise of stock warrants and options,
including related tax benefit........ 1,138 4 8,464 -- -- 8,468
Interest expense related to convertible
debentures and acquisition........... -- -- 427 -- -- 427
Translation adjustment................. -- -- -- -- (643) (643)
Net income........................... -- -- -- 22,585 -- 22,585
------ --- -------- ------- ----- --------
BALANCE, December 31, 1997............. 26,360 $88 $175,874 $14,635 $(628) $189,969
====== === ======== ======= ===== ========
</TABLE>

The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 89

MRV COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
------- ------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(1,273) $(9,654) $ 22,585
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization.......................... 305 943 1,439
Provision for losses on accounts receivable............ 525 1,643 1,951
(Gain) loss on sale of property and equipment.......... (6) 192 --
Realized (gain) loss on investment..................... -- (180) (215)
Purchased technology in progress....................... 5,691 17,795 --
Interest related to convertible debentures and
acquisition........................................... -- 4,357 843
Amortization of premium on U.S. Treasury notes......... 8 -- 37
Minority interests' share of income.................... -- 196 146
Changes in assets and liabilities, net of effects from
acquisitions:
Decrease (increase) in:
Accounts receivable.................................. (6,859) (10,937) (22,568)
Inventories.......................................... (5,397) (5,697) (21,867)
Deferred income taxes................................ (1,357) (6,839) 185
Other assets......................................... 166 (3,031) (2,824)
Increase (decrease) in:
Accounts payable..................................... 1,457 1,912 17,435
Accrued liabilities and restructuring................ 154 6,623 (2,092)
Income taxes payable................................. 425 798 3,622
Customer deposits.................................... (15) 1,500 (1,207)
Accrued severance pay................................ (19) 231 (231)
Deferred rent........................................ (3) -- --
------- ------- ---------
Net cash used in operating activities............. (6,198) (148) (2,761)
------- ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (1,035) (2,593) (1,207)
Proceeds from the sale of property and equipment.......... 14 -- --
Purchases of investments.................................. (22,013) (45,612) (148,948)
Proceeds from sale of investments......................... 24,741 29,133 67,990
Restricted cash........................................... (6,272) 6,272 --
Cash used in acquisitions, net of cash received........... (1,000) (13,247) (5,289)
------- ------- ---------
Net cash used in investing activities............. (5,565) (26,047) (87,454)
------- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock................ 9,715 8,942 99,638
Proceeds from the issuance of debentures.................. -- 30,000 --
Principal payments on capital lease obligations........... (78) (60) (255)
Loans receivable from officers............................ 32 -- --
Repurchase of common stock issued in connection with
acquisition............................................ -- -- (4,230)
------- ------- ---------
Net cash provided by financing activities......... 9,669 38,882 95,153
------- ------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... -- 3 (151)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (2,094) 12,690 4,787
CASH AND CASH EQUIVALENTS, beginning of year................ 4,045 1,951 14,641
------- ------- ---------
CASH AND CASH EQUIVALENTS, end of year...................... $ 1,951 $14,641 $ 19,428
======= ======= =========
</TABLE>

The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 90

MRV COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997

1. BACKGROUND

MRV Communications, Inc. (the Company) designs, manufactures, markets and
sells high speed network switching and fiber optic transmission systems which
enhance the performance of existing data and telecommunications networks. The
Company sells two groups of products: (1) computer networking products,
primarily Ethernet local area network (LAN) switches, hubs and related
equipment, and (2) fiber optic components for the transmission of voice, video
and data across enterprise telecommunications and cable TV networks. The
Company's networking solutions enhance the functionality of LAN's by reducing
network congestion while allowing end users to preserve their investments in
pre-existing networks and providing cost-effective migration paths to next
generation technologies such as Gigabit Ethernet. The Company markets and sells
its products both domestically and internationally.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, NBase Communications, Inc., NBase
Communications, Ltd. (Nbase Ltd.), NBase Europe GmbH (Nbase Europe), NBase
Fibronics, Ltd. (Fibronics), Netsoft Solutions, Ltd. (Netsoft), and its 70
percent-owned subsidiary, EDSLAN SRL (EDS). All significant intercompany
transactions and accounts have been eliminated.

Foreign Currency Translation

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

Transactions and balances originally denominated in U.S. dollars are
presented at their original amounts. Transactions and balances in other
currencies are translated into U.S. dollars in accordance with Statement of
Financial Accounting Standards No. 52, and are included in determining net
income or loss.

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

Assets and liabilities are translated from the local currencies into U.S.
dollars at the exchange rate prevailing at the balance sheet date. Revenues,
expenses and cash flows are translated at weighted average exchange rates for
the period to approximate translation at the exchange rates prevailing at the
dates those elements are recognized in the financial statements. Translation
adjustments resulting from the process of translating the local currency
financial statements into U.S. dollars are not included in determining net
income or loss but are accumulated and reported as a separate component of
stockholders' equity in the accompanying consolidated balance sheets.

Use of Estimates

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

F-7
<PAGE> 91
MRV COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997

Stock-Based Compensation Plan

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

Revenue Recognition

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

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

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

Purchased Technology in Progress and Restructuring Costs

In connection with the Company's acquisitions (see Note 3), the Company
acquired incomplete research and development (R&D) projects that will be
included in the current R&D activities of the Company. For projects that will
have no alternative future use to the Company and where technological
feasibility had not yet been established, the Company allocated $6,211,000 and
$17,795,000 to technology in progress and recorded the expense during the years
ended December 31, 1995 and 1996, respectively.

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

Cash and Cash Equivalents

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

Restricted Cash Balances

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

Concentration of Credit Risk

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

F-8
<PAGE> 92
MRV COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997

Investments

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

At December 31, 1996 and 1997, short- and long-term investments consisted
of U.S. Treasury notes. As defined by the standard, the Company has classified
its investments in these debt securities as "held-to-maturity" investments and
all investments are recorded at their amortized cost basis, which approximated
their fair value at December 31, 1996 and 1997. All short-term investments
mature by December 1998.

Inventories

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

Inventories consisted of the following as of December 31, 1996 and 1997 (in
thousands):

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

Property and Equipment

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

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

Goodwill

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

Customer Deposit

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

Warranty

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

Statements of Cash Flows

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

F-9
<PAGE> 93
MRV COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997

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

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

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

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

Common Stock Splits

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

Net Income per Common Share

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

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Net income (loss)..................................... $(1,273) $(9,654) $22,585
======= ======= =======
Weighted average number of common shares used to
compute basic net income per common share........... 18,377 19,739 23,670
Dilutive effect of common share equivalents........... -- -- 2,064
------- ------- -------
Weighted average number of common shares used to
compute diluted net income per common share......... 18,377 19,739 25,734
======= ======= =======
Basic net income (loss) per common share.............. .07 (.49) .95
Diluted net income (loss) per common share............ .07 (.49) .88
</TABLE>

New Authoritative Pronouncements

In June 1997, the Financial Accounting Standards Board (FASB) introduced
SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires certain
disclosures regarding changes in the equity of the Company that result from
transactions and other economic events other than transactions with

F-10
<PAGE> 94
MRV COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997

stockholders. SFAS No. 130 will be adopted by the Company in 1998. Management
does not expect the adoption of this standard to have a material effect on the
Company's financial position or results of operations.

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

Reclassifications

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

3. ACQUISITIONS AND RESTRUCTURING

NBase Communications

On May 1, 1995, the Company acquired certain assets and the distribution
business of Galcom Networking, Ltd. (Galcom), a network equipment company
located in Israel. The purchase price paid by the Company was approximately
$900,000 in cash and the assumption of approximately $1,800,000 in liabilities
and debts.

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

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

EDSLAN

In May 1996, the Company purchased 50 percent of the outstanding stock of
EDSLAN SRL, an Italian networking company. The purchase price paid by the
Company was approximately $1,050,000. The purchase agreement calls for the
Company to receive 80 percent of EDS' profits or losses from the date of
acquisition. In June and November, 1997, the Company purchased an additional 10
percent of the outstanding stock of EDSLAN SRL, for $500,000, respectively. At
December 31, 1997, the Company owns 70 percent of EDSLAN SRL.

FIBRONICS

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

F-11
<PAGE> 95
MRV COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997

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

In March 1997, the Company and Elbit agreed to amend their agreement
regarding the common stock portion of the purchase price paid to Elbit for the
distribution business of Fibronics, Ltd. First, the Company repurchased
approximately 184,000 shares, paying Elbit $4,230,000 (approximately $23.00 per
share) (plus accrued interest thereon at 0.67% per month from January 1, 1997
through March 13, 1997). Second, with respect to the remaining 275,000 shares
(the "Additional Shares"), the Company guaranteed that the Additional Shares
could be resold by Elbit for at least $6,300,000 (approximately $23.00 per
share), plus interest thereon at 0.67% per month from January 1, 1997 through
the date of Elbit's resale. To secure any shortfall, the Company delivered to
Elbit pending resale of the Additional Shares a letter of credit from a major
bank, expiring on June 15, 1997, in the amount of approximately $6,536,000.
Elbit is due to pay to the Company any excess above $23.00 per share, which is
an immaterial amount. As part of the amended agreement, Elbit also returned the
137,000 shares to the Company.

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

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

<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
Inventory................................................... $ 319 $ 3,574
Accounts receivable......................................... -- 2,686
Property and equipment...................................... 600 1,793
Other assets................................................ -- 315
Current liabilities and debt................................ (2,267) (3,962)
------- --------
Net assets acquired or liabilities assumed........ (1,348) 4,406
Cash paid for legal, consulting and other costs............. (395) (450)
Accrued legal, consulting and others costs.................. (125) (365)
Common stock issued to sellers.............................. (3,910) (10,530)
Cash paid to sellers........................................ (1,000) (13,287)
------- --------
Paid or accrued................................... (5,430) (24,632)
Allocated to purchased technology in progress............... 6,211 17,795
------- --------
Goodwill.................................................... $ 567 $ 2,431
======= ========
</TABLE>

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

F-12
<PAGE> 96
MRV COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997

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

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

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

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

Netsoft

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

4. CONVERTIBLE DEBENTURES

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

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

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

F-13
<PAGE> 97
MRV COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997

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

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

5. WARRANTS

Common Stock Purchase Warrants

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

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

<TABLE>
<CAPTION>
NUMBER EXERCISE
OF SHARES PRICES
--------- --------------
<S> <C> <C>
Balance, December 31, 1994................................. 268 $ .27 to 1.71
Issued................................................... 2,100 4.25 to 7.38
Exercised................................................ (236) .27 to 1.67
Redeemed................................................. -- --
----- --------------
Balance, December 31, 1995................................. 2,132 .27 to 7.38
Issued................................................... 2,106 8.42 to 26.65
Exercised................................................ (776) .27 to 8.42
Redeemed................................................. -- --
----- --------------
Balance, December 31, 1996................................. 3,462 $ .27 to 26.65
Issued................................................... 10 32.50
Exercised................................................ (766) 1.67 to 14.25
Redeemed................................................. -- --
Canceled................................................. (100) 20.00
----- --------------
Balance, December 31, 1997................................. 2,606 $ .27 to 32.50
===== ==============
</TABLE>

6. INCOME TAXES

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

Under SFAS 109, deferred income tax assets or liabilities are computed
based on temporary differences between the financial statement and income tax
bases of assets and liabilities using the enacted marginal income tax rate in
effect for the year in which the differences are expected to reverse. Deferred
income tax expenses or credits are based on the changes in the deferred income
tax assets or liabilities from period to period.

F-14
<PAGE> 98
MRV COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997

The components of the net deferred income tax asset at December 31, 1996
and 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Allowance for bad debts..................................... $ 777 $1,071
Inventory reserve........................................... 280 466
Warranty reserve............................................ 160 320
Accrued restructuring costs................................. 1,147 --
State income taxes.......................................... 296 331
Other, net.................................................. -- 92
------ ------
Current portion........................................... 2,660 2,280
Purchased technology in progress............................ 6,998 6,231
Valuation reserve........................................... (962) --
------ ------
6,036 6,231
------ ------
$8,696 $8,511
====== ======
</TABLE>

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

<TABLE>
<CAPTION>
1995 1996 1997
------- ------- ------
<S> <C> <C> <C>
Current
Federal.............................................. $ 1,112 $ 1,692 $7,635
State................................................ 247 324 828
Foreign.............................................. -- 547 1,356
------- ------- ------
1,359 2,563 9,819
------- ------- ------
Deferred
Federal.............................................. (333) (5,694) 157
State................................................ (99) (1,022) 28
Foreign.............................................. (925) (251) (530)
------- ------- ------
(1,357) (6,967) (345)
------- ------- ------
Provision (benefit)for income taxes.................... $ 2 $(4,404) $9,474
======= ======= ======
</TABLE>

F-15
<PAGE> 99
MRV COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997

Differences between the provision (benefit) for income taxes and income
taxes at the statutory federal income tax rate based on U.S. pre-tax income for
the years ended December 31, 1995, 1996 and 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
1995 1996 1997
----------------- ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Income tax provision (benefit) at
statutory federal rate............ $ 889 34.0% $(4,780) (34.0)% $11,222 35.0%
State and local income taxes, net of
federal income tax effect......... 160 6.1 563 4.0 1,924 6.0
Non-deductible interest expense..... -- -- 1,542 11.0 175 .5
Research and development credit..... (173) (6.7) (374) (2.7) (1,669) (5.2)
Effect of foreign net operating loss
carryforwards..................... (925) (35.4) -- -- -- --
Foreign taxes at rates less than
domestic rates, other............. 51 2.0 (1,892) (13.4) (1,216) (3.8)
Change in valuation reserve......... -- -- 537 3.8 (962) (3.0)
----- ----- ------- ----- ------- ----
$ 2 --% $(4,404) (31.3)% $ 9,474 29.5%
===== ===== ======= ===== ======= ====
</TABLE>

In 1995, NBase Ltd. qualified for a program under which it will be eligible
for a tax exemption on its income for a period of ten years from the beginning
of the benefits period. The Company estimates the benefit period will begin in
1998.

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

7. COMMITMENTS AND CONTINGENCIES

Lease Commitments

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

F-16
<PAGE> 100
MRV COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997

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

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

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

Royalty Commitment

As part of the purchase agreements of the Israeli companies referred to in
Note 3, the selling companies' commitments to pay royalties to the State of
Israel were assigned to the Company. The commitments arose as a consequence of
the participation of the Israeli Government in product development through the
payment of grants.

The royalties are payable at a rate of between 1.5 percent and 5.0 percent
of the sales proceeds of the products developed up to 150 percent of the amount
of the grants received. $276,000 was provided for in 1997 for royalties to be
paid under these agreements.

Accounts Receivable

The Company has agreements with several financial institutions to sell its
receivables with recourse; in the event of customer's default, the Company must
repurchase the receivable. At December 31, 1997 the Company is contingently
liable in the amount of $5,148,916 relating to such receivables sold with
recourse.

Litigation

In December, 1996, Datapoint brought an action against Nbase
Communications, Inc., a subsidiary of the Company ("Nbase") and several other
defendants in the United States District Court, for the Eastern District of New
York alleging infringement of two of Datapoint's patents related to LANs, more
particularly to claimed improved LANs which interoperatively combine additional
enhanced capability and/or which provide multiple different operational
capabilities. In the same lawsuit, Datapoint alleges that other defendants
including Dayna Communications, Inc. Sun Microsystems, Inc., Adaptec, Inc.,
International Business Machines Corporation, Lantronix and SVEC America Computer
Corporation have infringed the same two patents. The Company has been advised
that several other companies, including Intel Corporation and Cisco Systems,
Inc. have also had actions brought against them by Datapoint with respect to the
same two patents. The action against Nbase and its codefendants seeks, among
other things, an injunction against the

F-17
<PAGE> 101
MRV COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997

manufacture or sale or products which embody the inventions set forth in
the two patents and single and treble damages for the alleged infringement.
Datapoint's complaint also seeks to have the court determine that the named
defendants shall serve as representatives of a defendant class of manufacturers,
vendors and users of products allegedly infringing on Datapoint's claimed
patents from which defendant class Datapoint seeks the same relief as from the
individual defendants. The Company is cooperating with several of the defendants
in pursuit of common defenses and believes the claim is without merit. If a
conclusion unfavorable to the Company is reached, however, Datapoint's claim
could materially affect the business, operating results and financial condition
of the Company.

8. STOCK-BASED COMPENSATION PLAN

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

The Company has an additional stock option plan (the 1997 Plan) that
provides for the granting of options to purchase up to 500,000 shares of common
stock, consisting of both incentive stock options and non-qualified options.
Incentive stock options are issuable only to employees of the Company.
Non-qualified stock options may be issued to non-employee directors, consultants
and others, as well as to employees. The exercise price of all stock options
granted under the 1997 Plan must be at least equal to the fair market value of
such shares on the date of grant.

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

<TABLE>
<CAPTION>
1995 1996 1997
------- -------- -------
<S> <C> <C> <C> <C>
Net Income (Loss): As Reported.................... $(1,273) $ (9,654) $22,585
Pro Forma...................... (2,066) (11,254) 20,943
Income (Loss) Per Common Share:
Basic: As Reported.................... $ (0.07) $ (0.49) $ 0.95
Pro Forma...................... (0.11) (0.57) 0.88
Diluted: As Reported.................... $ (0.07) $ (0.49) $ 0.88
Pro Forma...................... (0.11) (0.57) 0.81
</TABLE>

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

F-18
<PAGE> 102
MRV COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997

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

<TABLE>
<CAPTION>
1995 1996 1997
------------------- ------------------- -------------------
WTD. AVG. WTD. AVG. WTD. AVG.
SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year... 391 $2.10 1,156 $3.59 1,475 $6.02
Granted............................ 812 4.07 672 12.45 110 19.45
Exercised.......................... (47) 2.11 (312) 3.28 (372) 4.86
Forfeited.......................... -- -- (41) 5.72 (5) 8.19
----- ----- ----- ----- ----- -----
Outstanding at end of year......... 1,156 $3.59 1,475 $6.02 1,208 $8.77
----- ----- ----- ----- ----- -----
Exercisable at end of year......... 84 $2.10 172 3.05 548 5.31
----- ----- ----- ----- ----- -----
Weighted average fair value of
options granted.................. $1.74 $4.28 $5.89
----- ----- -----
</TABLE>

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

9. FOREIGN OPERATIONS

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

<TABLE>
<CAPTION>
UNITED EUROPEAN MIDDLE PACIFIC ALL OTHER
STATES COMMUNITY EAST RIM AREAS TOTAL
------- --------- ------ ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.................. $66,562 $68,719 $5,178 $21,607 $3,405 $165,471
Income from operations....... 12,191 12,585 947 3,957 624 30,304
Identifiable assets.......... 163,462 32,584 40,190 -- -- 236,236
</TABLE>

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

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

10. 401(k) PLAN

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

F-19
<PAGE> 103
MRV COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997

11. SUBSEQUENT EVENTS

Xyplex Acquisition

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

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

F-20
<PAGE> 104

MRV COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

ASSETS

<TABLE>
<CAPTION>
JUNE 30,
1998
-----------
<S> <C>
CURRENT ASSETS:
Cash & cash equivalents................................... $116,971
Short-term investments.................................... 21,651
Accounts receivable, net of reserves of $6,337 in 1998 and
$4,252 in 1997......................................... 60,636
Inventories............................................... 45,389
Deferred income taxes..................................... 8,567
Other current assets...................................... 7,570
--------
Total current assets.............................. 260,784
PROPERTY AND EQUIPMENT -- At cost, net of depreciation and
amortization.............................................. 19,470
OTHER ASSETS:
Goodwill.................................................. 21,533
Investments............................................... 16,971
Deferred income taxes..................................... 6,112
Loan acquisition costs and other.......................... 4,409
--------
$329,279

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of financing lease obligations......... $ 141
Accounts payable.......................................... 27,406
Accrued liabilities....................................... 11,700
Accrued restructuring costs............................... 8,713
Deferred revenue.......................................... 4,876
Income taxes payable...................................... 4,723
--------
Total current liabilities......................... 57,559
LONG-TERM LIABILITIES
Convertible debentures.................................... 100,000
Capital lease obligations, net of current portion......... 882
Deferred income taxes..................................... 425
Other long-term liabilities............................... 1,579
--------
Total long term liabilities....................... 102,886
MINORITY INTERESTS.......................................... 2,633
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value:
1,000 shares authorized no shares outstanding.......... --
Common stock, $0.0034 par value:
40,000,000 shares authorized and 26,520 shares
outstanding in 1998 and 26,360 shares outstanding in
1997................................................... 90
Additional paid-in capital................................ 183,324
Retained earnings (deficit)............................... (16,651)
Cumulative translation adjustments........................ (562)
--------
Total stockholders' equity........................ 166,201
--------
$329,279
--------
</TABLE>

See accompanying notes.
F-21
<PAGE> 105

MRV COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
REVENUES, net............................................... $75,092 $126,568
COSTS AND EXPENSES:
Cost of goods sold........................................ 43,061 70,754
Research and development expenses......................... 5,789 10,525
Selling, general and administrative expenses.............. 12,007 23,581
Purchased technology in progress.......................... -- 30,571
Restructuring costs....................................... -- 23,194
------- --------
Operating (loss) income................................... 14,235 (32,057)
Interest expense related to convertible debentures and
acquisition............................................ 427 --
Other income (expense), net............................... 119 1,374
Provision for income taxes................................ 4,305 363
Minority interests........................................ 70 240
------- --------
NET INCOME (LOSS)........................................... $ 9,552 $(31,286)
------- --------
NET INCOME (LOSS) PER SHARE
Basic..................................................... $ 0.42 $ (1.18)
Diluted................................................... $ 0.38 $ (1.18)
------- --------
SHARES USED IN PER -- SHARE CALCULATION
Basic..................................................... 22,501 26,440
Diluted................................................... 24,892 26,440
------- --------
</TABLE>

See accompanying notes.
F-22
<PAGE> 106

MRV COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... 9,552 (31,286)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization.......................... 735 2,556
Interest related to convertible debentures and
acquisition........................................... 427 --
Purchased technology in progress....................... -- 30,571
Minority interests' share of income.................... 70 240
Decrease (increase) in:
Accounts receivable.................................. (8,484) 6,779
Inventories.......................................... (3,026) 5,339
Deferred income taxes................................ 20 (5,636)
Other assets......................................... 369 891
Increase (decrease) in:
Accounts payable..................................... 4,921 (20,670)
Accrued liabilities.................................. (1,864) (10,559)
Accrued restructuring................................ (1,062) 8,713
Income taxes payable................................. 755 (818)
Deferred revenue..................................... (1,026) 938
Accrued severance pay................................ 131 (611)
------- -------
Net cash (used in) provided by operating
activities....................................... 1,518 (13,553)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (373) (4,117)
Purchases of investments.................................. (31,178) (4,058)
Proceeds from sale of investments......................... 23,856 64,231
Cash used in acquisitions, net of cash received........... -- (41,946)
------- -------
Net cash provided by (used in) investing
activities....................................... (7,695) 14,120
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock................ 3,114 451
Repurchase of common stock................................ (4,230) --
Proceeds from issuance of convertible debentures, net of
loan acquisition costs................................. -- 96,423
Principal payments on capital lease obligations........... (172) 30
------- -------
Net cash provided by (used in) financing
activities....................................... (1,288) 96,904
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... (320) 72
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (7,785) 97,543
CASH AND CASH EQUIVALENTS, beginning of period.............. 14,641 19,428
------- -------
CASH AND CASH EQUIVALENTS, end of period.................... 6,856 116,971
------- -------
</TABLE>

See accompanying notes.
F-23
<PAGE> 107

MRV COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

Basis of Presentation -- The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the requirements of
Form 10-Q and, therefore, do not include all information and footnotes which
would be presented if such financial statements were prepared in accordance with
generally accepted accounting principles. These statements should be read in
conjunction with the audited financial statements presented in the Company's
Annual Report or Form 10-K for the year ended December 31, 1997.

In the opinion of management, these interim financial statements reflect
all normal and recurring adjustments necessary for a fair presentation of the
financial position and results of operations for each of the periods presented.
The results of operations and cash flows for such periods are not necessarily
indicative of results to be expected for the full year.

2. NET EARNINGS (LOSS) PER SHARE

The following schedule summarizes the information used to compute net
income per common share for the six months and three months ended June 30, 1997
and 1998 (in thousands):

<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Weighted number of common shares used to compute basic
earnings (loss) per share................................. 22,501 26,440
Weighted common share equivalents........................... 2,391 --
------ ------
Weighted number of common shares used to compute diluted
earnings (loss) per share................................. 24,892 26,440
====== ======
</TABLE>

3. COMPREHENSIVE INCOME

On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." For year-end financial statements, SFAS 130 requires the
display of comprehensive income, which is the total of net income and all other
non-owner changes in equity, in a financial statement with the same prominence
as other consolidated financial statements. In addition, the standard encourages
companies to display the components of other comprehensive income below the
total for net income. The following schedule summarizes comprehensive income for
the six months and three months ended June 30, 1997 and 1998 (in thousands):

<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net (loss) income........................................... $9,552 $(31,286)
Translation adjustment...................................... (230) 66
------ --------
Comprehensive (loss) income................................. $9,232 $(31,220)
====== ========
</TABLE>

The cumulative translation adjustment at June 30, 1998 was $(562,000).

4. PRO FORMA FINANCIAL DATA

On January 30, 1998, MRV completed an acquisition from Whittaker
Corporation ("Whittaker") of all of the outstanding capital stock of Whittaker
Xyplex, Inc. a Delaware corporation (the "Xyplex Acquisition"). Whittaker
Xyplex, Inc., (whose name the Company has since changed to NBase Xyplex, Inc.)
is a

F-24
<PAGE> 108
MRV COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

holding corporation owning all of the outstanding capital stock of Xyplex, Inc.,
a Massachusetts corporation ("Xyplex"). Xyplex is a leading provider of access
solutions between enterprise networks and wide area network and/or Internet
service providers ("ISPs"). The purchase price paid to Whittaker consisted of
$35,000,000 in cash and three-year warrants to purchase up to 500,000 shares of
Common Stock of the Company at an exercise price of $35 per share.

As a result of the acquisition, the Company adopted a restructuring plan in
March 1998. The plan calls for reduction of workforce, closing of certain
facilities, elimination of particular product lines, settlement of distribution
agreements and other costs. The Company provided $23,194,000 for the costs of
the restructuring.

The following unaudited pro forma summary sets forth results of operations
of excluding the unusual charges for purchased technology in progress and
restructuring resulting from the Xyplex Acquisition as if the acquisition took
place at the beginning of each period presented (in thousands, expect per share
information):

<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING INCOME.................................... $14,235 $21,708
NET INCOME.......................................... $ 9,552 $16,213
------- -------
NET INCOME PER SHARE
Basic............................................. $ 0.42 $ 0.61
Diluted........................................... $ 0.38 $ 0.57
------- -------
SHARES USED IN PER SHARE CALCULATION
Basic............................................. 22,501 26,440
Diluted........................................... 24,892 28,493
------- -------
</TABLE>

F-25
<PAGE> 109

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma consolidated financial statements give
effect to the Acquisition under the purchase method of accounting. The unaudited
pro forma consolidated financial statements are based on the historical
consolidated financial statements and notes there to (as applicable) of MRV
Communications, Inc. (MRV), which are included in MRV's Form 10-K for the year
ended December 31, 1997, and the historical financial statements and notes
thereto (as applicable) of Xyplex Inc. (Xyplex) which are included elsewhere
herein. The unaudited pro forma consolidated balance sheet assumes that the
Xyplex Acquisition took place on December 31, 1997 and consolidates MRV's
December 31, 1997 consolidated balance sheet with Xyplex's October 31, 1997
balance sheet. The unaudited pro forma consolidated statement of income assumes
that the Acquisition took place as of January 1, 1997 and consolidates MRV's
consolidated statement of operations for the year ended December 31, 1997 with
Xyplex's statement of operations for the fiscal year ended October 31, 1997.

The unaudited pro forma consolidated financial statements are based on the
estimates and assumptions set forth in the notes to such statements. The pro
forma adjustments made in connection with the development of the pro forma
information are preliminary and have been made solely for purposes of developing
such pro forma information for illustrative purposes necessary to comply with
the disclosure requirements of the Securities and Exchange Commission. The
unaudited pro forma consolidated financial statements do not purport to be
indicative of the results of operations for future periods or the consolidated
financial position or the results that actually would have been realized had the
entities been consolidated during the period. The pro forma adjustments and
purchase price allocations are preliminary estimates only and are subject to
change. In connection with the Xyplex Acquisition, MRV expects to restructure
certain operations. The restructure is expected to include closing of certain
facilities, reductions in workforce and settlement of distribution agreements.
The pro forma adjustments and financial statements do not include any amounts
related to the restructure of operations due to the Xyplex Acquisition.

MRV estimates that it will incur direct transaction costs of approximately
$2,500,000 associated with the Acquisition. The purchase price also includes
$7,000,000 as the fair value of certain warrants given to the seller. The
warrants were valued using the Black Scholes method.

These unaudited pro forma consolidated financial statements should be read
in conjunction with the historical consolidated financial statements and the
related notes thereto of MRV, which are included in MRV's Form 10-K for the year
ended December 31, 1997, and the historical financial statements and the related
notes thereto of Xyplex, which are included elsewhere herein.

F-26
<PAGE> 110

MRV COMMUNICATIONS, INC.

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
MRV
COMMUNICATIONS, XYPLEX
INC. INC. PRO FORMA
1997 1997 ADJUSTMENTS CONSOLIDATED
--------------- ------- ----------- ------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................... $ 19,428 $ 1,037 $ (1,925)(4) $ 18,540
Notes receivable.................................. -- 8 -- 8
Short-term investments............................ 36,413 -- (35,000)(1) 1,413
Accounts receivable, net.......................... 47,258 12,319 (1,500)(1) 58,077
Inventories....................................... 41,689 3,276 (1,500)(1) 43,465
Deferred income tax asset......................... 2,280 5,071 -- 7,351
Other current..................................... 7,248 864 -- 8,112
-------- ------- ---------- --------
Total current assets...................... 154,316 22,575 (39,925) 136,966
PROPERTY, PLANT AND EQUIPMENT, net.................. 8,183 4,832 2,000(1) 15,015
OTHER ASSETS:
Investments....................................... 62,382 -- -- 62,382
Deferred income tax asset......................... 6,231 -- -- 6,231
Goodwill, net..................................... 5,077 -- 9,500(1)
(1,350)(3) 13,227
Other intangibles................................. -- 21,607 (21,607)(1) --
Other............................................. 47 320 -- 367
-------- ------- ---------- --------
73,737 21,927 (11,457) 82,207
$236,236 $49,334 $ (51,382) $234,188
======== ======= ========== ========
CURRENT LIABILITIES:
Current portion of capital lease obligations...... $ 111 $ 57 $ -- $ 168
Accounts payable.................................. 30,439 5,257 2,500(1) 38,196
Accrued liabilities............................... 8,429 6,614 1,203(1) 16,246
Customer deposit.................................. 293 -- 293
Income taxes payable.............................. 3,485 -- (600)(5) 2,885
Deferred revenue.................................. -- 3,296 3,296
-------- ------- ---------- --------
Total current liabilities................. 42,757 15,224 3,103 61,084
LONG-TERM LIABILITIES:
Capital lease obligations, net of current
portion........................................ 788 112 -- 900
Other long-term liabilities....................... 2,065 -- -- 2,065
Deferred income taxes............................. -- 5,688 -- 5,688
Due to parent company............................. -- 6,932 (6,932)(1) --
-------- ------- ---------- --------
Total long-term liabilities............... 2,853 12,732 (6,932) 8,653
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST................................... 657 -- -- 657
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value:................. -- -- -- --
Authorized -- 1,000 shares; no shares issued or
outstanding Common stock, $0.0034 par value:
Authorized -- 40,000 shares Issued and
outstanding -- 26,360........................ 88 -- 88
Capital in excess of par value.................... 175,874 -- 7,000(1) 182,874
Retained earnings (deficit)....................... 14,635 -- (33,175)(6) (18,540)
Cumulative translation adjustments................ (628) -- -- (628)
PARENT COMPANY INVESTMENT......................... -- 21,378 (21,378)(1) --
-------- ------- ---------- --------
189,969 21,378 (47,553) 163,794
$236,236 $49,334 $ (51,382) $234,188
======== ======= ========== ========
</TABLE>

See accompanying notes to unaudited pro forma consolidated financial statements.
F-27
<PAGE> 111

MRV COMMUNICATIONS, INC.

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXPECT PER SHARE DATA)

<TABLE>
<CAPTION>
MRV
COMMUNICATIONS, XYPLEX
INC. INC. PRO FORMA
1997 1997 ADJUSTMENTS CONSOLIDATED
--------------- -------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES, net......................... $165,471 $ 75,663 $ -- $241,134
COSTS AND EXPENSES:
Cost of goods sold.................. 94,709 37,004 -- 131,713
Research and development expenses... 13,093 13,465 -- 26,558
Selling, general and administrative
expenses......................... 27,365 33,712 -- 61,077
Purchased technology in progress.... -- -- 30,500(1) 30,500
Parent company allocations.......... -- 3,346 -- 3,346
Amortization of goodwill and other
intangible assets................ -- 12,064 1,350(3) 13,414
Impairment of goodwill and other
intangible assets................ -- 63,172 (63,172)(2)(6) --
-------- -------- -------- --------
135,167 162,763 (31,322) 266,608
-------- -------- -------- --------
Operating income (loss)............. 30,304 (87,100) 31,322 (25,474)
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense related to
convertible debentures and
acquisition...................... (843) -- -- (843)
Minority interest................... (146) -- -- (146)
Interest income..................... 2,841 18 (1,925)(4) 934
Interest expense.................... (118) (5) -- (123)
Other............................... 21 -- -- 21
-------- -------- -------- --------
1,755 13 (1,925) (157)
-------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes....... 32,059 (87,087) 29,397 (25,631)
PROVISION (BENEFIT) FOR INCOME TAX.... 9,474 (6,778) (600)(5) 2,096
-------- -------- -------- --------
NET INCOME (LOSS)..................... $ 22,585 $(80,309) $ 29,997(6) $(27,727)
======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE
INFORMATION:
Basic earnings (loss) per common
share............................ $ 0.95 $ (1.17)
Diluted earnings (loss) per common
share............................ $ 0.88 $ (1.17)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic............................... 23,670 23,670
Diluted............................. 25,734 23,670
</TABLE>

See accompanying notes to unaudited pro forma consolidated financial statements.

F-28
<PAGE> 112

MRV COMMUNICATIONS, INC.

NOTES AND ASSUMPTIONS TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
ADJUSTMENT
NUMBER COMMENTS
- ---------- --------
<C> <S> <C>
(1) The purchase price of Xyplex and the estimated allocation of the purchase
price is summarized as follows:
Cash........................................................ $35,000,000
Warrants.................................................... 7,000,000
Other costs................................................. 2,500,000
-----------
$44,500,000
===========
PARENT COMPANY INVESTMENT................................... $21,378,000
Add -- Due to parent........................................ 6,932,000
-----------
28,310,000
Less -- Intangibles per Xyplex.............................. 21,607,000
-- Other write-offs......................................... 4,203,000
-----------
Net assets before allocation of purchase price.............. 2,500,000
Allocation of purchase price to --
Purchased technology in progress............................ 30,500,000
Goodwill and other intangibles.............................. 9,500,000
Property, Plant & Equipment................................. 2,000,000
-----------
$44,500,000
===========
(2) In the fiscal year ended October 31, 1997, Xyplex recorded an impairment
loss of $63,172,000 related to goodwill. This pro forma adjustment
reflects results as if the write-off was recorded prior to November 1,
1996.
(3) To record the amortization of $9,500,000 of goodwill over 7 years or
approximately $1,350,000 per year.
(4) To reduce interest income by $1,925,000 to reflect use of investments of
$35,000,000 to fund purchase price, assumes 5.5 percent return on
investments.
(5) After the above pro forma adjustments the income (loss) before provision
for income tax was a pro forma loss of $29,397,000. This adjustment
reflects the recording of a tax benefit related to the taxable portion of
the loss at an estimated effective rate of 30 percent or $600,000.
(6) The net effect on 1997 income of the pro forma adjustments is
$29,997,000. The net effect on retained earnings (deficit) is
$(33,175,000), as $63,172,000 of the adjustments to the operations were
to move expense from 1997 to earlier periods.
</TABLE>

F-29
<PAGE> 113

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Whittaker Corporation

We have audited the accompanying balance sheets of Xyplex, Inc. (the
Company) as of October 31, 1997 and 1996, and the related statements of
operations, changes in stockholder's equity, and cash flows for the year ended
October 31, 1997 and the period from April 10, 1996 to October 31, 1996. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Xyplex, Inc. at October 31,
1997 and 1996, and the results of its operations and its cash flows for the year
ended October 31, 1997 and the period from April 10, 1996 to October 31, 1996,
in conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG
--------------------------------------
ERNST & YOUNG LLP

November 26, 1997, except
Note 13, as to which the
date is March 11, 1998

F-30
<PAGE> 114

XYPLEX, INC.

BALANCE SHEETS
(IN THOUSANDS)

ASSETS

<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1997 1996
------- --------
<S> <C> <C>
Cash and cash equivalents................................... $ 1,037 $ 1,225
Notes receivable............................................ 8 344
Accounts receivable, less reserve of $1,712 and $1,042 in
1997 and 1996, respectively............................... 12,319 14,543
Inventory................................................... 3,276 6,694
Deferred income taxes....................................... 5,071 6,281
Prepaid expenses and other current assets................... 864 928
------- --------
Total current assets........................................ 22,575 30,015
------- --------
Property and equipment, net................................. 4,832 6,974
Other assets................................................ 320 1,464
Goodwill.................................................... -- 61,025
Developed technology........................................ 7,968 13,344
Customer relations.......................................... 12,110 19,264
Other intangible assets..................................... 1,529 3,556
------- --------
Total assets................................................ $49,334 $135,642
======= ========

LIABILITIES AND PARENT COMPANY INVESTMENT
Current liabilities:
Accounts payable.......................................... $ 5,257 $ 5,964
Accrued payroll taxes and deductions...................... 489 130
Accrued warranty expense.................................. 1,029 1,183
Other accrued expenses.................................... 5,096 6,265
Deferred revenue.......................................... 3,296 3,359
Current portion of capital lease obligations.............. 57 150
------- --------
Total current liabilities................................... 15,224 17,051
------- --------
Long-term portion of capital lease obligations.............. 112 --
Deferred income taxes....................................... 5,688 11,197
Due to parent company....................................... 6,932 4,290
Commitments and contingencies Parent company investment..... 21,378 103,104
------- --------
Total liabilities and parent company investment............. $49,334 $135,642
======= ========
</TABLE>

See accompanying notes.
F-31
<PAGE> 115

XYPLEX, INC.

STATEMENTS OF OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
PERIOD
YEAR ENDED APRIL 10, 1996 TO
OCTOBER 31, 1997 OCTOBER 31, 1996
---------------- -----------------
<S> <C> <C>
Net sales................................................... $ 75,663 $ 52,021
Cost of sales............................................... 37,004 25,168
-------- --------
Gross profit................................................ 38,659 26,853
Operating expenses:
Selling and marketing..................................... 25,542 17,963
General and administrative................................ 8,170 2,719
Research and development.................................. 13,465 7,797
Parent company allocations................................ 3,346 1,895
Amortization of goodwill and other intangible assets...... 12,064 4,827
Impairment of goodwill and other intangible assets........ 63,172 --
Write off of acquired in-process research and
development............................................ -- 11,700
-------- --------
Total operating expenses.......................... 125,759 46,901
-------- --------
Operating loss.............................................. (87,100) (20,048)
Interest expense............................................ (5) (9)
Interest income............................................. 18 --
-------- --------
Net loss before income tax benefit.......................... (87,087) (20,057)
Benefit from federal income taxes........................... (6,778) (6,704)
-------- --------
Net loss.................................................... $(80,309) $(13,353)
======== ========
</TABLE>

See accompanying notes.
F-32
<PAGE> 116

XYPLEX, INC.

STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
PERIOD APRIL 10, 1996 TO OCTOBER 31, 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
PARENT
COMPANY
INVESTMENT
----------
<S> <C>
Acquisition by Whittaker.................................... $116,457
Net loss.................................................... (13,353)
--------
Balance at October 31, 1996................................. 103,104
Dividend to parent.......................................... (1,417)
Net loss.................................................... (80,309)
--------
Balance at October 31, 1997................................. $ 21,378
========
</TABLE>

See accompanying notes.
F-33
<PAGE> 117

XYPLEX, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR PERIOD APRIL 10,
ENDED 1996 TO
OCTOBER 31, OCTOBER 31,
1997 1996
----------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(80,309) $(13,353)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 16,050 6,855
Impairment of goodwill and other intangible assets........ 63,172 --
Loss on sale and retirement of equipment.................. 241 34
Write off of acquired in-process research and
development............................................ -- 11,700
Write off of other intangible assets...................... 220 --
Deferred income tax benefit............................... (4,299) (5,278)
Deferred revenue.......................................... (63) (37)
Changes in assets and liabilities:
Accounts receivable....................................... 807 2,647
Inventory................................................. 3,418 68
Prepaid expenses and other current assets................. 64 269
Accounts payable.......................................... 439 (1,846)
Accrued expenses.......................................... (363) (4,648)
-------- --------
Net cash used in operating activities....................... (623) (3,589)
INVESTING ACTIVITIES
Purchase of equipment....................................... (1,940) (1,017)
Proceeds from sale of equipment............................. 45 --
Notes receivable............................................ 336 --
Other....................................................... 662 (1,358)
-------- --------
Net cash used in investing activities....................... (897) (2,375)
FINANCING ACTIVITIES
Change in cash overdrafts................................... (1,146) (450)
Principal payments on capital lease obligations............. (164) (243)
Net receipts from parent company............................ 2,642 4,290
-------- --------
Net cash provided by financing activities................... 1,332 3,597
-------- --------
Net decrease in cash and cash equivalents................... (188) (2,367)
Cash and cash equivalents at beginning of the period........ 1,225 3,592
-------- --------
Cash and cash equivalents at end of the period.............. $ 1,037 $ 1,225
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................... $ 13 $ 23
Income taxes........................................... 388 115
</TABLE>

See accompanying notes.
F-34
<PAGE> 118

XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Xyplex, Inc. (the Company or Xyplex) designs, manufactures, markets and
supports data networking products. On April 10, 1996, Xyplex was acquired by
Whittaker Corporation (Whittaker) for total consideration of $116.5 million,
and, during the period from April 10, 1996 to January 13, 1997, Xyplex was a
wholly-owned subsidiary of Whittaker. Since January 13, 1997, the Company has
been owned by Whittaker Xyplex, Inc., a wholly-owned subsidiary of Whittaker.
Pursuant to the purchase method of accounting, the assets and liabilities
acquired by Whittaker were revalued to their fair value at the date of
acquisition. As a result of the transaction, the Company recorded intangible
assets of $37.2 million and goodwill of $62.8 million. Acquired in-process
research and development valued at $11.7 million was expensed at the acquisition
date.

The accompanying historical financial statements represent the Company's
results of operations and its financial condition as a wholly-owned subsidiary
of Whittaker. Interest expense associated with Whittaker's general corporate
debt has not been allocated to the Company's financial statements. Certain costs
and expenses presented in the financial statements represent intercompany
allocations and management's estimates of the costs of services provided to the
Company by Whittaker. During the first quarter of 1997, certain operations of
another subsidiary of Whittaker were integrated into the operations of the
Company. The financial statements of the Company for 1997 reflect the results of
operations and its financial position net of certain costs and balance sheet
amounts allocated to this integrated operation. (See Note 2 for further
discussion of allocations and amounts due to parent company.)

Parent Company Investment

The parent company investment account represents the net assets of the
Company and includes a $1.4 million dividend distribution in the form of a
transfer of assets to Whittaker in 1997.

Use of Estimates

The accompanying financial statements include the accounts of the Company.
The preparation of financial statements in conformity with generally accepted
accounting principles may require management to make certain estimates and
assumptions that could affect the amounts reported in the financial statements
and accompanying notes. Actual costs could differ from those estimates.

Revenue Recognition

The Company recognizes product revenue upon shipment of goods and software.
Maintenance and support fees greater than $10,000 are recognized ratably over
the life of the contract.

Inventory

Inventories are stated at the lower of cost (first-in, first-out method) or
market.

F-35
<PAGE> 119
XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1997

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment

Property and equipment are recorded at cost. Expenditures for maintenance
and repairs are charged to expense, while the costs of significant improvements
are capitalized. Depreciation is computed using the straight-line method and
allocates the cost of these assets over their estimated useful lives as follows:

<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -------------
<S> <C>
Equipment................................................... 3 - 5 years
Computer equipment.......................................... 3 years
Furniture and fixtures...................................... 5 years
Leasehold improvements...................................... Term of lease
Equipment under capital lease............................... Term of lease
</TABLE>

Upon retirement or sale, the cost of assets disposed and the related
accumulated depreciation are eliminated, and the related gains or losses are
reflected in income.

Intangible Assets

Until May of 1997, goodwill and other intangible assets were amortized on a
straight-line basis over periods of 20 years in the case of goodwill, 15 years
in the case of developed technologies and customer relations, and five years in
the case of other intangible assets. Beginning in May of 1997, the amortization
periods for goodwill and customer relations were reduced to seven years.

At October 31, 1997 and 1996, intangible assets consisted of the following
(in thousands):

<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
------- ------------ ------- ------------
<S> <C> <C> <C> <C>
Goodwill............................... $62,786 $1,761
Developed technology................... $12,624 $4,656 15,000 1,656
Customer relations..................... 16,388 4,278 20,000 736
Other intangibles...................... 4,141 2,612 4,956 1,400
</TABLE>

Impairment of Long-Lived Assets

When indicators of impairment of long-lived assets used in operations or
long-lived assets to be disposed of are present, and the undiscounted future
cash flows estimated to be generated by those assets are less than the carrying
value of such assets, an impairment loss would be recorded by the Company (see
Note 3).

Research and Development and Software Development Costs

Research and development costs are charged to expense as incurred. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
capitalization of internally developed computer software costs begins upon the
establishment of technological feasibility. The Company believes that once a
working model has been established, the additional development costs to bring
the product to a commercially acceptable level are not significant. There were
no software development costs capitalized as of October 31, 1997 and 1996.

F-36
<PAGE> 120
XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1997

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes

The Company records income taxes based on an asset and liability approach
which results in the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the book and
tax bases of assets and liabilities. For purposes of these financial statements,
income taxes have been calculated as if Xyplex had prepared a tax return on a
stand-alone basis.

New Accounting Standards

In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income, effective for the 1999 fiscal year.
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components in the financial statements. Comprehensive income is
defined as the change in the equity of a business enterprise during a period
from transactions and other events from nonowner sources. The Company does not
expect the adoption of SFAS No. 130 will have a material effect on its financial
statements.

In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, effective for the 1999 fiscal year. SFAS
No. 131 requires the reporting of certain information about operating segments
of a business enterprise and supersedes SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise, but retains the requirements to report
information about major customers. The Company does not expect the adoption of
SFAS No. 131 to have a material effect on its financial statements.

2. ALLOCATED COSTS AND DUE TO PARENT COMPANY

The historical statements of operations include charges from Whittaker
representing the Company's share of the cost of support services provided. These
charges are allocations of allowable corporate expenses, as defined in the
Federal Acquisitions Regulation, associated with legal, marketing, management
and financial services. The basis of the allocation is the Company's relative
amount of payroll, sales and the year-to-date change in fixed assets and
inventory compared to Whittaker's consolidated balances for such amounts.

Following the acquisition of the Company by Whittaker, the Company has
participated in the Whittaker cash management program. All of this cash
management activity is reflected in "due to parent company." Intercompany
activity also includes, among other things, allocations of corporate expenses,
state and federal income tax payments and credits, and insurance costs. An
analysis of due to parent company for the period from April 10, 1996 to October
31, 1997 is as follows (in thousands):

<TABLE>
<S> <C>
Balance at April 10, 1996................................... $ --
Net cash transferred from parent company.................. (2,747)
Allocation of costs from parent company................... (1,895)
Net payments on behalf of affiliates...................... 352
-------
Balance at October 31, 1996................................. (4,290)
-------
Net cash transferred from parent company.................. (4,157)
Allocation of costs from parent company................... (3,605)
Net payments on behalf of affiliates...................... 345
Transfers to affiliates................................... 4,775
-------
Balance at October 31, 1997................................. $(6,932)
=======
</TABLE>

F-37
<PAGE> 121
XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1997

2. ALLOCATED COSTS AND DUE TO PARENT COMPANY (CONTINUED)
The average amount due to parent for the year ended October 31, 1997 and
the period from April 10, 1996 to October 31, 1996 was $6.3 million and $4.1
million, respectively.

During the first quarter of 1997, certain operations of Whittaker
Communications, Inc., another wholly-owned subsidiary of Whittaker formerly
located in Santa Clara, California, were integrated into the Company. The
results of operations and the financial position of the two operations are
segregated and reported separately. This segregation procedure involves the
allocation of certain costs and balance sheet amounts which cannot be directly
assigned to the appropriate operation.

Management of the Company believes the methods used to allocate the costs
are reasonable based on the Company's use of such services.

3. IMPAIRMENT CHARGE

In connection with the April 1996 acquisition of the Company by Whittaker,
goodwill and other intangible assets of $62.8 million and $37.2 million,
respectively, were recorded. These assets were being amortized, on a
straight-line basis, over periods of 20 years in the case of goodwill and five
to 15 years in the case of other intangible assets. During the third quarter of
1997, the Company reduced the amortization periods for goodwill and certain
other intangible assets from 20 and 15 years, respectively, to seven years. This
adjustment resulted in an $8.1 million goodwill and other intangible asset
impairment charge which represents the increased amortization from the date of
acquisition to the beginning of the third quarter of 1997. As a result of the
Company's declining revenues and continued operating losses in 1997, an
additional goodwill and other intangible asset impairment charge of $55.1
million was recorded by the Company in the fourth quarter of 1997. The fair
value of these assets was based on the estimated value of consideration offered
to Whittaker by a third party in November 1997 for the sale of the Company.

4. INVENTORY

Inventories, net of reserves for excess and obsolete inventory of $3.0
million and $7.0 million at October 31, 1997 and 1996, respectively, consist of
the following (in thousands):

<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Raw materials.............................................. $ 410 $ 928
Work in process............................................ 319 2,002
Finished goods............................................. 2,547 3,764
------ ------
$3,276 $6,694
====== ======
</TABLE>

Work in process and finished goods inventories include materials, labor and
manufacturing overhead.

F-38
<PAGE> 122
XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1997

5. PROPERTY AND EQUIPMENT

Property and equipment at October 31, 1997 and 1996 consist of the
following (in thousands):

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Equipment................................................ $ 5,669 $ 6,381
Furniture and fixtures................................... 990 1,167
Leasehold improvements................................... 752 852
Equipment under capital lease............................ 444 452
Construction in progress................................. 104 57
------- -------
7,959 8,909
Less accumulated depreciation and amortization........... (3,127) (1,935)
------- -------
$ 4,832 $ 6,974
======= =======
</TABLE>

Depreciation expense, which includes amortization expense of assets under
capital leases, was approximately $4.0 million and $2.0 million for the twelve
months ended October 31, 1997 and the period April 10, 1996 to October 31, 1996,
respectively.

Equipment under capital leases has accumulated amortization of $0.2 million
and $0.2 million as of October 31, 1997 and 1996. Acquisitions of equipment
under capital lease obligations totaled $0.2 million in 1997. There were no such
acquisitions in 1996.

6. LONG-TERM DEBT

Long-term debt at October 31, 1997 and 1996 consisted of the following
(dollars in thousands):

<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
------ -------- ------ --------
<S> <C> <C> <C> <C>
Capitalized lease obligations with monthly
installments through July of 2000, with
interest rates ranging to 11.36%............ $169 9.15% $150 7.05%
Less current maturities....................... 57 150
---- ----
$112 $ --
==== ====
</TABLE>

Since April 10, 1996, the Company has guaranteed the obligations of
Whittaker under Whittaker's bank credit agreement. Since such date, the Company
has also pledged its accounts receivable, inventory, equipment and certain other
assets to secure such obligations.

F-39
<PAGE> 123
XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1997

7. INCOME TAXES

Income tax benefit for the year ended October 31, 1997 and the period from
April 10, 1996 to October 31, 1996 consists of the following (in thousands):

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Components of the provision:
Federal................................................ $(6,778) $(5,972)
State.................................................. -- (732)
------- -------
$(6,778) $(6,704)
======= =======
Classification of the provision:
Current................................................ $(2,479) $(1,426)
Deferred............................................... (4,299) (5,278)
------- -------
$(6,778) $(6,704)
======= =======
</TABLE>

Foreign income taxes were not material.

A reconciliation of income tax computed at the U.S. federal statutory tax
rate to the effective tax rate for the year ended October 31, 1997 and the
period from April 10, 1996 to October 31, 1996 is as follows:

<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
U.S. federal statutory rate................................. (34.0)% (34.0)%
State taxes, net of U.S. federal income tax benefit......... 0.0 (2.4)
Goodwill amortization....................................... 24.1 3.0
Valuation allowance......................................... 1.8 0.0
Other items................................................. 0.3 0.0
----- -----
Effective tax rate.......................................... (7.8)% (33.4)%
===== =====
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the reported amounts of assets and liabilities in the financial
statements and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities at October 31, 1997 and
1996 were as follows (in thousands):

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Receivables valuation.................................. $ 719 $ 438
Inventory valuation.................................... 2,023 4,277
Excess of book over tax depreciation................... 1,689 1,081
Benefits from net operating loss carryforward.......... 1,584 --
Other.................................................. 3,670 3,806
------- -------
Total before valuation allowance......................... 9,685 9,602
Valuation allowance...................................... (1,584) --
------- -------
Net deferred tax assets.................................. $ 8,101 $ 9,602
======= =======
Deferred tax liabilities:
Intangible assets...................................... $ 8,718 $14,518
======= =======
</TABLE>

In 1997 and 1996, the Company was reimbursed by its Parent $3.5 million and
$1.6 million, respectively, for the tax benefit of its sustained losses. In
1997, the Company established a full allowance against its net

F-40
<PAGE> 124
XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1997

7. INCOME TAXES (CONTINUED)
operating loss carryforward in compliance with SFAS No. 109. At October 31,
1997, the Company has $4.7 million total net operating loss carryforwards, which
will expire in the years 2011 and 2012.

8. 401(k) RETIREMENT PLAN

The Company sponsors a defined contribution 401(k) plan covering a majority
of its domestic employees under which participants can make pretax contributions
of up to 15% of eligible compensation and receive a matching contribution of 75%
on up to 6% of their eligible compensation. The Company has recorded as expense
for the year ended October 31, 1997 and the period April 10, 1996 to October 31,
1996 $0.8 million and $0.2 million, respectively, representing its contributions
to this plan.

9. LEASE COMMITMENTS

The Company has both operating and capital lease commitments for certain
facilities and equipment. Future minimum payments under capital leases and under
noncancellable operating leases, net of rentals to be received from existing
noncancellable operating subleases, as of October 31, 1997 were as follows (in
thousands):

<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR LEASES LEASES
---- --------- -------
<S> <C> <C>
1998...................................................... $1,329 $ 70
1999...................................................... 664 70
2000...................................................... 414 52
2001...................................................... 281 --
------ ----
Total minimum lease payments.................... $2,688 192
====== ====
Less amount representing interest......................... 23
----
Present value of net minimum lease payments............... $169
====
</TABLE>

Rent expense was $2.6 million and $1.6 million for the year ended October
31, 1997 and the period from April 10, 1996 to October 31, 1996, respectively.

10. SIGNIFICANT CUSTOMERS AND EXPORT SALES

No single customer accounted for more than 10% of net sales during 1997 or
1996. Export sales as a percentage of net sales for the year ended October 31,
1997 and the period from April 10, 1996 to October 31, 1996 were as follows:

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Europe...................................................... 13.5% 13.9%
Pacific Rim................................................. 4.5 3.9
Canada...................................................... 4.5 4.8
Other....................................................... 7.1 5.8
---- ----
29.6% 28.4%
==== ====
</TABLE>

F-41
<PAGE> 125
XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1997

11. EMPLOYMENT AGREEMENTS

During 1997, the Company initiated a long-term retention bonus program
covering certain key employees. Payments under the plan will be made, on varying
dates from March 1998 to December 1998, to individuals covered under the plan
who are active, full-time employees of the Company at various dates ranging from
January 1, 1998 to December 31, 1998. Potential payments under the program total
approximately $1.7 million.

12. YEAR 2000 COMPLIANCE (UNAUDITED)

In 1997, the Company upgraded its information management system to be Year
2000 compliant. The Company has also communicated with its suppliers and others
it does business with and has addressed any significant issues identified. No
further significant expenditures are expected to be made related to Year 2000
compliance.

13. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT AUDITORS

On January 30, 1998, Whittaker sold all of the common stock of its
wholly-owned subsidiary, Whittaker Xyplex, Inc., which, since January 13, 1997,
has been the parent company of Xyplex, Inc., to MRV Communications, Inc. (MRV)
for $35 million in cash plus warrants to purchase 421,402 shares of common stock
of MRV. Whittaker shall be entitled to receive warrants to purchase an
additional 78,598 shares of common stock of MRV upon Whittaker's timely
performance of certain covenants. The stock purchase agreement provides for the
reattribution of the Company's net operating losses to Whittaker. Concurrently
with the sale of the Company, the liens on the Company's assets securing
Whittaker's obligations under Whittaker's bank credit agreement were released,
and the Company's guarantee of such obligations was canceled.

F-42
<PAGE> 126

[COOPERS & LYBRAND LETTERHEAD]

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
Raytheon Company:

We have audited the accompanying balance sheet of Xyplex, Inc. as of April
9, 1996, and the related statements of loss, parent company investment and cash
flows for the period January 1, 1996 through April 9, 1996. These financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these financial statements based on our audit.

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

As discussed in Note 1, interest expense associated with Raytheon Company's
general corporate debt has not been allocated to Xyplex, Inc.'s financial
statements. Also as discussed in Note 1, Xyplex, Inc. has earned interest income
primarily on its intercompany receivable from Raytheon based on an agreed-upon
rate. As discussed in Note 2, certain costs and expenses presented in the
financial statements represent allocations of the costs of services provided to
Xyplex, Inc. by Raytheon Company. As a result of these factors, the financial
statements presented may not be indicative of the financial position or results
of operations that would have been achieved had Xyplex, Inc. operated as a
nonaffiliated entity.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Xyplex, Inc. as of April 9,
1996, and the results of its operations and its cash flows for the period
January 1, 1996 through April 9, 1996 in conformity with generally accepted
accounting principles.

/s/ COOPERS & LYBRAND L.L.P.

Boston, Massachusetts
May 24, 1996

F-43
<PAGE> 127

XYPLEX, INC.

BALANCE SHEET

ASSETS

<TABLE>
<CAPTION>
APRIL 9, 1996
-------------
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 200,000
Accounts receivable, less reserve of $585,000............. 18,159,000
Inventory................................................. 9,695,000
Other current assets...................................... 922,000
Receivable from parent company............................ 32,412,000
------------
Total current assets.............................. 61,388,000
Property and equipment, net................................. 7,840,000
Deferred tax asset.......................................... 6,790,000
Other assets................................................ 2,025,000
Goodwill.................................................... 83,357,000
------------
Total assets...................................... $161,400,000
============

LIABILITIES AND PARENT COMPANY INVESTMENT
Current liabilities:
Current portion of capital lease obligations.............. 366,000
Accounts payable.......................................... 5,392,000
Accrued payroll and employee benefits..................... 4,386,000
Other accrued expenses.................................... 1,973,000
Deferred revenue.......................................... 3,900,000
------------
Total current liabilities......................... 16,017,000
Long-term portion of capital lease obligations.............. 27,000
Commitments and contingencies Parent company investment..... 145,356,000
------------
Total liabilities and parent company investment... $161,400,000
============
</TABLE>

The accompanying notes are an integral part of the financial statements.
F-44
<PAGE> 128

XYPLEX, INC.

STATEMENT OF LOSS
FOR THE PERIOD JANUARY 1, 1996 THROUGH APRIL 9, 1996

<TABLE>
<S> <C>
Net sales................................................... $28,100,000
Cost of sales............................................... 13,141,000
-----------
Gross profit................................................ 14,959,000
-----------
Operating expenses:
Selling and marketing..................................... 9,456,000
General and administrative................................ 1,573,000
Research and development.................................. 4,458,000
Parent company allocations................................ 100,000
Amortization of goodwill.................................. 2,267,000
-----------
Total operating expenses.......................... 17,854,000
-----------
Loss from operations........................................ (2,895,000)
Interest expense............................................ (10,000)
Interest income from parent company......................... 698,000
-----------
Net loss before income tax provision........................ (2,207,000)
Provision for federal income taxes.......................... 62,000
-----------
Net loss.................................................... $(2,269,000)
===========
</TABLE>

The accompanying notes are an integral part of the financial statements.
F-45
<PAGE> 129

XYPLEX, INC.

STATEMENT OF PARENT COMPANY INVESTMENT
FOR THE PERIOD JANUARY 1, 1996 THROUGH APRIL 9, 1996

<TABLE>
<CAPTION>
PARENT
COMPANY
INVESTMENT
------------
<S> <C>
Balance, January 1, 1996.................................... $147,625,000
Net loss.................................................... (2,269,000)
------------
Balance, April 9, 1996...................................... $145,356,000
============
</TABLE>

The accompanying notes are an integral part of the financial statements.
F-46
<PAGE> 130

XYPLEX, INC.

STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1996 THROUGH APRIL 9, 1996

<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(2,269,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 3,554,000
Deferred income tax provision.......................... (654,000)
Changes in assets and liabilities:
Accounts receivable.................................. 1,425,000
Inventory............................................ (721,000)
Other current assets................................. (132,000)
Accounts payable and accrued expenses................ (4,508,000)
Deferred revenue..................................... 766,000
-----------
Net cash used in operating activities............. (2,539,000)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase and sale of equipment, net....................... (1,154,000)
Purchase of licenses and other intangible assets.......... (112,000)
Proceeds from maturities of securities.................... 400,000
-----------
Net cash used in investing activities............. (866,000)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in accounts payable related to cash overdrafts... 2,293,000
Payments of capital leases................................ (163,000)
Net receipts from parent company.......................... 1,362,000
-----------
Net cash provided by financing activities......... 3,492,000
-----------
Net increase in cash and cash equivalents................... 87,000
Cash and cash equivalents, beginning of period.............. 113,000
-----------
Cash and cash equivalents, end of period.................... $ 200,000
===========
</TABLE>

The accompanying notes are an integral part of the financial statements.
F-47
<PAGE> 131

XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Xyplex, Inc. (the "Company" or "Xyplex") designs, manufactures, markets and
supports data networks. On October 7, 1994, Xyplex was acquired by Raytheon
Company ("Raytheon") for total consideration of $186,000,000. Pursuant to the
purchase method of accounting, the assets and liabilities acquired by Raytheon
were revalued to their fair value. The excess of the purchase price over the
fair value of the net assets acquired was approximately $125,000,000 and
accordingly, goodwill and the parent company investment were increased by
$125,000,000. Effective on the close of business on April 9, 1996, Xyplex was
acquired by Whittaker Corporation.

The accompanying historical financial statements present the Company's
results of operations and its financial condition as a wholly-owned subsidiary
of Raytheon from January 1, 1996 through April 9, 1996. Interest expense
associated with Raytheon's general corporate debt has not been allocated to the
Company's financial statements. Certain costs and expenses presented in the
financial statements represent intercompany allocations and management's
estimates of the costs of services provided to the Company by Raytheon. (See
Note 2 for further discussion of allocations.) Additionally, as discussed in
further detail below, Xyplex earned interest income primarily on its
intercompany receivable from Raytheon based on an agreed-upon rate. As a result
of these factors, the financial statements presented may not be indicative of
the results that would have been achieved had the Company operated as a
non-affiliated entity.

The Company has had transactions in the normal course of business with
Raytheon and its subsidiaries. Revenues from these transactions, totaling
$142,000 for the period ended April 9, 1996, are in accordance with Xyplex's
normal terms and conditions. The remaining receivables from these transactions
with Raytheon are included in trade accounts receivable and totaled $26,000 as
of April 9, 1996.

Additionally, Xyplex transferred a substantial amount of its cash and
investments to Raytheon upon the acquisition date and has subsequently
participated in the Raytheon cash management program. All of this cash
management activity is recorded in the receivable from parent company account.
Intercompany activity also includes allocations of corporate expenses, state and
federal income tax payments and credits, and interest earned on the intercompany
receivable balance itself. Interest is earned on the intercompany receivable
balance at a rate of 6.50% in 1996 and totaled approximately $698,000 for the
period ended April 9, 1996.

Parent Company Investment

The parent company investment account represents the net assets of the
company. As described above, this account was credited with the excess of the
purchase price over the fair value of Xyplex's net assets at the time of
Raytheon's purchase.

Use of Accounting Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount 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.

Cash Equivalents

Cash equivalents include all highly liquid investments with original
maturities of ninety days or less at the time of acquisition. Under the
Company's cash management system with Raytheon, checks issued but not presented
to banks frequently result in overdraft balances for accounting purposes. The
Company has

F-48
<PAGE> 132
XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
determined the net overdraft balance by bank and has correspondingly
reclassified these amounts to Accounts Payable.

Revenue Recognition

The Company recognizes product revenue upon shipment of goods and software.
Maintenance and support fees greater than $10,000 are recognized ratably over
the life of the contract. A provision is made at the time of shipment for
estimated warranty costs to be incurred.

Inventory

Inventories are stated at the lower of cost (first-in, first-out method) or
market.

Property and Equipment

Property and equipment are recorded at cost. Expenditures for maintenance
and repairs are charged to expense while the costs of significant improvements
are capitalized. Depreciation is computed using the straight-line and
accelerated methods in amounts that allocate the cost of these assets over their
estimated useful lives as follows:

<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -------------
<S> <C>
Equipment................................................... 5 years
Computer equipment.......................................... 3 years
Furniture and fixtures...................................... 5 years
Leasehold improvements...................................... Term of Lease
Demonstration units......................................... 3 years
Equipment under capital lease............................... Term of Lease
</TABLE>

Upon retirement or sale, the cost of assets disposed and the related
accumulated depreciation are eliminated and the related gains or losses are
reflected in income.

Intangibles

Goodwill, which represents the amount Raytheon incurred in excess of the
fair value of the net assets of Xyplex on the date of purchase, is amortized on
a straight-line basis over a period of 15 years. For the period ended April 9,
1996, the Company incurred amortization expense related to this asset of
$2,267,000. Accumulated amortization related to goodwill totaled $42,018,000 as
of April 9, 1996.

Other intangible assets, consisting primarily of licenses, are included in
other assets. These assets are amortized over a one to three year period based
on net realizable value. For the period ended April 9, 1996, the Company
incurred amortization expense of $60,000. Accumulated amortization related to
these other assets totaled $684,000 as of April 9, 1996.

The Company periodically reviews the carrying value of its intangible
assets as well as the amortization periods to determine whether current events
and circumstances warrant adjustment to the carrying values or estimated useful
lives. At each balance sheet date, management evaluates the carrying value of
intangible assets to determine whether there has been any permanent impairment.
No such adjustments were made for the period ended April 9, 1996.

F-49
<PAGE> 133
XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research and Development and Software Development Costs

Income Taxes

In accordance with Raytheon's policy, all state and local taxes have been
included in general and administrative expenses.

2. ALLOCATED COSTS

The historical statements of operations include charges from Raytheon
representing the Company's share of the cost of support services provided. These
charges are allocations of corporate expenses associated with legal, marketing,
management, financial and facilities management services. The basis of the
allocation is dependent on the functions and includes net sales, square feet
occupied, and percentage share of all other corporate assessments. For these
services, the Company was charged $100,000 for the period ended April 9, 1996.

Management believes the methods used to allocate the costs are reasonable
based on the company's use of such facilities and services.

3. INVENTORY

Inventories consist of the following at April 9, 1996:

<TABLE>
<S> <C>
Raw materials............................................ $ 756,000
Work in process.......................................... 3,454,000
Finished goods........................................... 5,485,000
----------
$9,695,000
==========
</TABLE>

Work in process and finished goods inventories include materials, labor and
manufacturing overhead. As of April 9, 1996, finished goods include
approximately $2,563,000, of demonstration products located at the sales and
support offices and potential customer sites.

F-50
<PAGE> 134
XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:

<TABLE>
<S> <C>
Equipment................................................... $ 6,126,000
Computer equipment.......................................... 8,817,000
Furniture and fixtures...................................... 1,633,000
Leasehold improvements...................................... 2,515,000
Demonstration units......................................... 3,528,000
Equipment under capital lease............................... 3,511,000
------------
26,130,000
Less -- Accumulated depreciation and amortization........... (18,290,000)
------------
$ 7,840,000
============
</TABLE>

Equipment under capital leases had accumulated amortization of $2,563,000
as of April 9, 1996.

5. INCOME TAXES

The provision for income taxes in the accompanying consolidated statements
of income consists of the following as of April 9, 1996:

<TABLE>
<S> <C>
Federal:
Current................................................... $716,000
Deferred.................................................. (654,000)
--------
$ 62,000
========
</TABLE>

A reconciliation of the federal statutory rate percentage to the Company's
effective tax rate percentage is as follows for the period ended April 9, 1996.

<TABLE>
<S> <C>
Income tax benefit at federal statutory rate................ (35.0)%
Amortization of nondeductible goodwill...................... 35.9
Other....................................................... 1.9
-----
Effective tax rate.......................................... 2.8%
=====
</TABLE>

The approximate income tax effect of each type of temporary difference
comprising the deferred tax asset as of April 9, 1996 is as follows:

<TABLE>
<S> <C>
Inventory................................................... $1,940,000
Deferred revenue............................................ 1,189,000
Depreciation................................................ 1,035,000
Accrued vacation............................................ 575,000
Accrued warranty............................................ 349,000
Bad debt.................................................... 205,000
Other, net.................................................. 299,000
----------
Total federal deferred tax asset.................. 5,592,000
State deferred tax asset, net............................... 1,198,000
----------
Total deferred tax asset.......................... $6,790,000
==========
</TABLE>

Income taxes paid to the parent company for the period ended April 9, 1996
totaled approximately $6,032,000.

F-51
<PAGE> 135
XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. 401(k) RETIREMENT PLAN

The Company had a 401(k) retirement plan covering all employees who are
regularly scheduled to work 1,000 or more hours of service per year.
Participants may elect to defer up to 15% of their compensation for deposit
under the plan, subject to certain IRS limitations. The Company may elect to
make contributions to the plan. The contributions are allocated to each eligible
participant's account in proportion to each participant's deferrals for the plan
year, subject to IRS limitations; participants' deferrals in excess of 6% of
compensation are not matched. The Company elected to make contributions of
$124,000 to the plan for the period ended April 9, 1996.

7. LEASE COMMITMENTS

The Company has both operating and capital lease commitments for certain
facilities and equipment. These leases expire at various dates through the year
2014.

Future minimum lease payments under these noncancelable leases are as
follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR LEASES LEASES
---- ---------- --------
<S> <C> <C>
1996................................................. $1,458,000 $332,000
1997................................................. 761,000 85,000
1998................................................. 633,000 --
1999................................................. 416,000 --
2000................................................. 416,000 --
Thereafter........................................... 2,278,000 --
---------- --------
Total minimum lease payments............... $5,962,000 417,000
==========
Less amount representing interest.................... 24,000
--------
Present value of minimum lease payments.............. 393,000
Less current portion of capital lease obligations.... 366,000
--------
$ 27,000
========
</TABLE>

Rent expense was approximately $605,000 for the period ended April 9, 1996.

8. EXPORT SALES

Export sales as a percentage of net sales for the period ended April 9,
1996 are as follows:

<TABLE>
<CAPTION>
1995
----
<S> <C>
Europe...................................................... 15.6%
Pacific Rim................................................. 5.4
Canada...................................................... 4.7
Other....................................................... 10.3
----
36.0%
====
</TABLE>

9. EMPLOYMENT AGREEMENTS

During 1995, Raytheon and Xyplex provided strategic resolution bonuses to
key employees. These bonuses, totaling approximately $1,500,000, were due and
payable on March 1, 1996 for each employee who continued to be an employee on
March 1, 1996. Of the $1,500,000 charge, approximately $250,000 was funded by
Xyplex with the remainder funded by Raytheon.

Also during 1995, Raytheon entered into employment agreements with certain
key employees of the Company which provide for salary continuation of up to 12
months in the event of termination of employment without cause. The aggregate
commitment under these employment agreements should all covered employees be
terminated is approximately $1,500,000.

F-52
<PAGE> 136

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
Raytheon Company:

We have audited the accompanying balance sheets of Xyplex, Inc. as of
December 31, 1995 and 1994, and the related statements of income, stockholder's
equity, and cash flows for the years then ended. These financial statements are
the responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Xyplex, Inc. as of December
31, 1995 and 1994, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.

/s/ COOPERS & LYBRAND L.L.P.

Boston, Massachusetts
April 22, 1996

F-53
<PAGE> 137

XYPLEX, INC.

BALANCE SHEETS
DECEMBER 31, 1995 AND 1994

ASSETS

<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 113,000 $ 140,000
Short-term investments.................................... 400,000 400,000
Accounts receivable, less reserve of $805,000 and $719,000
in 1995 and 1994, respectively......................... 19,584,000 18,663,000
Inventory................................................. 8,974,000 8,397,000
Other current assets...................................... 790,000 456,000
Receivable from parent company............................ 33,774,000 35,447,000
------------ ------------
Total current assets.............................. 63,635,000 63,503,000
Property and equipment, net................................. 7,854,000 6,386,000
Deferred tax asset.......................................... 6,136,000 3,168,000
Other assets................................................ 2,032,000 1,627,000
Goodwill.................................................... 85,624,000 123,982,000
------------ ------------
Total assets...................................... $165,281,000 $198,666,000
============ ============

LIABILITIES AND PARENT COMPANY INVESTMENT
Current liabilities:
Current portion of capital lease obligations.............. $ 472,000 $ 796,000
Accounts payable.......................................... 7,517,000 6,504,000
Accrued payroll and employee benefits..................... 4,749,000 3,326,000
Other accrued expenses.................................... 1,700,000 900,000
Deferred revenue.......................................... 3,134,000 1,551,000
------------ ------------
Total current liabilities......................... 17,572,000 13,077,000
Long-term portion of capital lease obligations.............. 84,000 604,000
Commitments and contingencies
Parent company investment................................... 147,625,000 184,985,000
------------ ------------
Total liabilities and parent company investment... $165,281,000 $198,666,000
============ ============
</TABLE>

The accompanying notes are an integral part of the financial statements.
F-54
<PAGE> 138

XYPLEX, INC.

STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994

<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Net sales................................................... $107,617,000 $95,233,000
Cost of sales............................................... 49,360,000 40,646,000
------------ -----------
Gross profit................................................ 58,257,000 54,587,000
------------ -----------
Operating expenses:
Selling and marketing..................................... 35,675,000 25,283,000
General and administrative................................ 6,300,000 5,008,000
Research and development.................................. 16,039,000 13,045,000
Parent company allocations................................ 425,000 24,000
Amortization of goodwill.................................. 8,358,000 1,393,000
Impairment of goodwill.................................... 30,000,000 --
Acquisition charges....................................... -- 4,299,000
------------ -----------
Total operating expenses.......................... 96,797,000 49,052,000
------------ -----------
(Loss) income from operations............................... (38,540,000) 5,535,000
Interest expense............................................ (74,000) (131,000)
Interest income............................................. 22,000 834,000
Interest income from parent company......................... 2,238,000 212,000
------------ -----------
Net (loss) income before tax provision...................... (36,354,000) 6,450,000
Provision for federal income taxes.......................... 1,006,000 3,152,000
------------ -----------
Net (loss) income........................................... $(37,360,000) $ 3,298,000
============ ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.
F-55
<PAGE> 139

XYPLEX, INC.

STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL PARENT TOTAL
--------------------- RETAINED PAID-IN COMPANY STOCKHOLDERS'
SHARES AMOUNT EARNINGS CAPITAL INVESTMENT EQUITY
---------- -------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994.......... 6,055,000 $ 61,000 $ 22,083,000 $ 34,537,000 $ 56,681,000
Exercise of stock options......... 141,000 1,000 -- 46,000 47,000
Tax benefit related to employee
stock options................... -- -- -- 1,172,000 1,172,000
Sale of common stock under
employee stock purchase plan.... 60,000 1,000 -- 805,000 806,000
Net income earned through date of
acquisition..................... -- -- 1,641,000 -- 1,641,000
Acquisition by Raytheon Company... (6,256,000) (63,000) (23,724,000) (36,560,000) $ 60,347,000 --
Allocation of goodwill to parent
company investment.............. -- -- -- -- 122,981,000 122,981,000
Net income........................ -- -- -- -- 1,657,000 1,657,000
---------- -------- ------------ ------------ ------------ ------------
Balance, December 31, 1994........ -- -- -- -- 184,985,000 184,985,000
Net loss.......................... -- -- -- -- (37,360,000) (37,360,000)
---------- -------- ------------ ------------ ------------ ------------
Balance, December 31, 1995........ -- -- -- -- $147,625,000 $147,625,000
========== ======== ============ ============ ============ ============
</TABLE>

The accompanying notes are an integral part of the financial statements.
F-56
<PAGE> 140

XYPLEX, INC.

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994

<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income......................................... $(37,360,000) $ 3,298,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 13,868,000 5,239,000
Impairment of goodwill................................. 30,000,000 --
Tax benefit from employee stock options................ -- 1,172,000
Deferred income tax provision.......................... (2,968,000) (2,453,000)
Changes in assets and liabilities:
Accounts receivable.................................. (921,000) (5,546,000)
Inventory............................................ (577,000) (3,402,000)
Other current assets................................. (334,000) (114,000)
Accounts payable and accrued expenses................ 1,096,000 893,000
Deferred revenue..................................... 1,583,000 720,000
Other assets......................................... (110,000) (18,000)
------------ ------------
Net cash provided by (used in) operating
activities...................................... 4,277,000 (211,000)
------------ ------------
Cash flows from investing activities:
Purchase and sale of equipment, net....................... (6,437,000) (3,760,000)
Purchase of licenses and other intangible assets.......... (836,000) (1,090,000)
Net proceeds from sales of securities..................... -- 19,917,000
------------ ------------
Net cash (used in) provided by investing
activities...................................... (7,273,000) 15,067,000
Cash flows from financing activities:
Increase in accounts payable related to cash overdrafts... 2,140,000 1,866,000
Repayment of note payable................................. -- (253,000)
Proceeds from exercise of stock options................... -- 46,000
Proceeds from sale of stock under employee stock purchase
plan................................................... -- 805,000
Payments of capital leases................................ (844,000) (863,000)
Net receipts from (payments to) parent company............ 1,673,000 (33,140,000)
------------ ------------
Net cash provided by (used in) financing
activities...................................... 2,969,000 (31,539,000)
Net decrease in cash and cash equivalents................... (27,000) (16,683,000)
Cash and cash equivalents, beginning of year................ 140,000 16,823,000
------------ ------------
Cash and cash equivalents, end of year...................... $ 113,000 $ 140,000
============ ============
</TABLE>

The accompanying notes are an integral part of the financial statements.
F-57
<PAGE> 141

XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying historical financial statements present the Company's
results of operations and its financial condition as a stand alone entity
through October 7, 1994 and as a wholly-owned subsidiary of Raytheon thereafter.
Interest expense associated with Raytheon's general corporate debt has not been
allocated to the Company's financial statements. Certain costs and expenses
presented in the financial statements represent intercompany allocations and
management's estimates of the costs of services provided to the Company by
Raytheon. (See Note 2 for further discussion of allocations.) Additionally, as
discussed in further detail below, Xyplex earned interest income primarily on
its intercompany receivable from Raytheon based on an agreed-upon rate. As a
result of these factors, the financial statements presented may not be
indicative of the results that would have been achieved had the Company operated
as a non-affiliated entity.

The Company has had transactions in the normal course of business with
Raytheon and its subsidiaries. Revenues from these transactions, totaling
$1,172,000 in 1995 and $128,000 in 1994, are in accordance with Xyplex's normal
terms and conditions. The remaining receivables from these transactions with
Raytheon are included in trade accounts receivable and totaled $458,000 and
$28,000 as of December 31, 1995 and 1994, respectively.

Additionally, Xyplex transferred a substantial amount of its cash and
investments to Raytheon upon the acquisition date and has subsequently
participated in the Raytheon cash management program. All of this cash
management activity is recorded in the receivable from parent company account.
Intercompany activity also includes allocations of corporate expenses, state and
federal income tax payments and credits, and interest earned on the intercompany
receivable balance itself. Interest is earned on the intercompany receivable
balance at a rate of 6.25% in 1995 and 5% in 1994 and totaled approximately
$2,238,000 in 1995 and $212,000 in 1994.

Parent Company Investment

Principles of Consolidation

The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries, Xyplex Foreign Sales Corporation, Inc., a
foreign sales corporation formed in April 1990 and Xyplex Security Corp., formed
in May 1991. Significant intercompany accounts and transactions have been
eliminated in consolidation. The assets of Xyplex Security Corp. were liquidated
during 1994 after the Company was purchased by Raytheon. Effective in 1995, the
Company's foreign sales were reported under Raytheon's foreign sales corporation
(RITL).

Use of Accounting Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the

F-58
<PAGE> 142
XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Cash Equivalents and Short-term Investments

Cash equivalents include all highly liquid investments with original
maturities of ninety days or less at the time of acquisition. All other
investments are considered to be short-term investments and are recorded at cost
which approximates fair value. Under the Company's cash management system with
Raytheon, checks issued but not presented to banks frequently result in
overdraft balances for accounting purposes. The Company has determined the net
overdraft balance by bank and has correspondingly reclassified these amounts to
Accounts Payable.

Revenue Recognition

Inventory

Inventories are stated at the lower of cost (first-in, first-out method) or
market.

Property and Equipment

<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -------------
<S> <C>
Equipment................................................... 5 years
Computer equipment.......................................... 3 years
Furniture and fixtures...................................... 5 years
Leasehold improvements...................................... Term of Lease
Demonstration units......................................... 3 years
Equipment under capital lease............................... Term of Lease
</TABLE>

Upon retirement or sale, the cost of assets disposed and the related
accumulated depreciation are eliminated and the related gains or losses are
reflected in income.

Intangibles

Goodwill, which represents the amount Raytheon incurred in excess of the
fair value of the net assets of Xyplex on the date of purchase, is amortized on
a straight-line basis over a period of 15 years. For the years ended December
31, 1995 and 1994, the Company incurred amortization expense related to this
asset of 8,358,000 and $1,393,000. Accumulated amortization related to goodwill
totaled $9,751,000 and $1,393,000 as of December 31, 1995 and 1994.

Other intangibles assets, consisting primarily of licenses, are included in
other assets. These assets are amortized over a one to three year period based
on net realizable value. For the years ended December 31, 1995 and 1994, the
Company incurred amortization expense of $444,000 and $245,000. Accumulated
amortization related to these other assets totaled $624,000 and $180,000 as of
December 31, 1995 and 1994.

F-59
<PAGE> 143
XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company periodically reviews the carrying value of its intangible
assets as well as the amortization periods to determine whether current events
and circumstances warrant adjustment to the carrying values or estimated useful
lives. At each balance sheet date, management evaluates the carrying value of
intangible assets to determine whether there has been any permanent impairment.
As of December 31, 1995, the Company recognized goodwill impairment of
$30,000,000. This amount represents the approximate difference between the fair
value and the carrying value of the Company's net assets based on the
anticipated sale of the Company.

Research and Development and Software Development Costs

Income Taxes

In accordance with Raytheon's policy, all state and local taxes have been
included in general and administrative expenses.

2. ALLOCATED COSTS

Management believes the methods used to allocate the costs are reasonable
based on the company's use of such facilities and services.

3. INVENTORY

Inventories consist of the following at December 31, 1995 and 1994:

<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Raw materials....................................... $ 987,000 $1,753,000
Work in process..................................... 3,856,000 2,874,000
Finished goods...................................... 4,131,000 3,770,000
---------- ----------
$8,974,000 $8,397,000
========== ==========
</TABLE>

Work in process and finished goods inventories include materials, labor and
manufacturing overhead. At December 31, 1995 and 1994, finished goods include
approximately $2,553,000 and $1,747,000, respectively, of demonstration products
located at the sales and support offices and potential customer sites.

F-60
<PAGE> 144
XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Equipment....................................... $ 5,810,000 $ 3,413,000
Computer equipment.............................. 8,433,000 6,302,000
Furniture and fixtures.......................... 1,626,000 835,000
Leasehold improvements.......................... 2,515,000 2,090,000
Demonstration units............................. 3,080,000 2,372,000
Equipment under capital lease................... 3,513,000 3,528,000
------------ ------------
24,977,000 18,540,000
Less -- Accumulated depreciation and
amortization.................................. (17,123,000) (12,154,000)
------------ ------------
$ 7,854,000 $ 6,386,000
============ ============
</TABLE>

Equipment under capital leases had accumulated amortization of $2,942,000
and $2,078,000 as of December 31, 1995 and 1994. Acquisitions for equipment
under capital lease obligations totaled $477,000 in 1994. There were no such
acquisitions in 1995.

5. LONG-TERM DEBT

At December 31, 1993, the Company had approximately $253,000 outstanding
under a term note payable. Until the acquisition by Raytheon, the Company made
the required monthly principal payments of approximately $23,000 plus interest.
In October 1994, the Company paid this note off in full.

6. STOCK PLANS

During 1994, the Company had two stock options plans in effect: the 1991
Restated Stock Option Plan (the "1991 Plan") and the 1989 Consultant's Stock
Option Plan (the "1989 Plan"). Under the 1991 Plan, incentive stock options were
granted at an exercise price of not less than the fair market value of common
stock as determined in accordance with the 1991 Plan and nonqualified options
were granted at an exercise price of not less than 50% of the fair market value
of the common stock at the date of grant. Under the 1989 Plan, stock options
were granted to eligible consultants, as defined, at a price of not less than
the fair value of the common stock at the date of grant. At the time the Company
was acquired by Raytheon, the outstanding options of both of these plans were
exchanged for options to purchase Raytheon stock.

A summary of stock option activity under the 1991 Plan and the 1989 Plan
follows:

<TABLE>
<CAPTION>
1991 1989
RELATED CONSULTANT'S
STOCK OPTION PLAN STOCK OPTION PLAN
--------------------------- -------------------
NUMBER OF OPTION NUMBER OF OPTION
OPTIONS PRICE OPTIONS PRICE
--------- -------------- --------- ------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1993...... 613,532 $ .12 - 28.62 333 $.12
Granted............................. 24,069 $11.63 - 18.50
Exercised........................... (140,963) $ .12 - 26.00
Canceled............................ (28,075) $ 1.84 - 21.25
Exchanged for Raytheon stock
options.......................... 468,563 (333)
-------- ----
Outstanding at December 31, 1994...... -- --
======== ====
</TABLE>

Prior to the acquisition by Raytheon, the Company also had the 1991
Employee Stock Purchase Plan (the "ESPP") in effect. Under the terms of the
ESPP, the Company was authorized to grant options to purchase an aggregate of
140,000 shares of common stock in a series of six-month periods. The purchase
price was 85% of the lower of the fair value per share of common stock, as
defined in the ESPP. At the time the Company was acquired by Raytheon, these
shares were converted to Raytheon stock.

F-61
<PAGE> 145
XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. INCOME TAXES

The provision for income taxes in the accompanying consolidated statements
of income consists of the following at December 31, 1995 and 1994:

<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Federal:
Current......................................... $ 3,450,000 $ 4,238,000
Deferred........................................ (2,444,000) (1,086,000)
----------- -----------
$ 1,006,000 $ 3,152,000
=========== ===========
</TABLE>

A reconciliation of the federal statutory rate percentage to the Company's
effective tax rate percentage is as follows for the years ended December 31,
1995 and 1994.

<TABLE>
<CAPTION>
1995 1994
----- ----
<S> <C> <C>
Income tax provision at federal statutory rate.............. (35.0)% 35.0%
Amortization of nondeductible goodwill...................... 36.9 7.6
Non-deductible acquisition charges.......................... -- 16.2
Other....................................................... 0.9 (9.9)
----- ----
Effective tax rate.......................................... 2.8% 48.9%
----- ----
</TABLE>

The approximate income tax effect of each type of temporary difference
compromising the deferred tax asset at December 31, 1995 and 1994 is as follows:

<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Inventory........................................... $1,736,000 $ 829,000
Deferred revenue.................................... 957,000 305,000
Depreciation........................................ 935,000 443,000
Accrued vacation.................................... 463,000 394,000
Accrued warranty.................................... 306,000 181,000
Bad debt............................................ 282,000 252,000
Other, net.......................................... 374,000 205,000
---------- ----------
Total federal deferred tax asset.......... 5,053,000 2,609,000
State deferred tax asset, net....................... 1,083,000 559,000
---------- ----------
Total deferred tax asset.................. $6,136,000 $3,168,000
========== ==========
</TABLE>

Income taxes paid totaled approximately $3,322,000 and $2,935,000 in 1995
and 1994, respectively.

8. 401(k) RETIREMENT PLAN

The Company had a 401(k) retirement plan covering all employees who are
regularly scheduled to work 1,000 or more hours of service per year.
Participants may elect to defer up to 15% of their compensation for deposit
under the plan, subject to certain IRS limitations. The Company may elect to
make contributions to the plan. The contributions are allocated to each eligible
participant's account in proportion to each participant's deferrals for the plan
year, subject to IRS limitations; participants' deferrals in excess of 6% of
compensation are not matched. The Company elected not to make contributions to
the plan for the year ended December 31, 1994. In 1995, the Company contributed
approximately $275,000.

F-62
<PAGE> 146
XYPLEX, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. LEASE COMMITMENTS

The Company has both operating and capital lease commitments for certain
facilities and equipment. These leases expire at various dates through the year
2014.

Future minimum lease payments under these noncancelable leases are as
follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR LEASES LEASES
---- ---------- --------
<S> <C> <C>
1996................................................. $1,458,000 $495,000
1997................................................. 761,000 85,000
1998................................................. 633,000 --
1999................................................. 416,000 --
2000................................................. 416,000 --
Thereafter........................................... 2,278,000 --
---------- --------
Total minimum lease payments............... $5,962,000 580,000
==========
Less amount represent interest....................... 24,000
--------
Present value of minimum lease payments.............. 556,000
Less current portion of capital lease obligations.... 472,000
--------
$ 84,000
========
</TABLE>

Rent expense was approximately $1,911,000 and $1,479,000 in 1995 and 1994,
respectively.

10. SIGNIFICANT CUSTOMERS AND EXPORT SALES

During 1994, sales to one customer totaled approximately $12,045,000 or
12.5% of net sales. No single customer accounted for more than 10% of net sales
during 1995.

Export sales as a percentage of net sales for the years ended December 31,
1995 and 1994, respectively, are as follows:

<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Europe...................................................... 12.5% 12.0%
Pacific Rim................................................. 5.0 4.1
Canada...................................................... 4.0 4.4
Other....................................................... 9.8 5.1
---- ----
31.3% 25.6%
==== ====
</TABLE>

11. EMPLOYMENT AGREEMENTS

F-63
<PAGE> 147

ANNEX A

NOTICE OF TRANSFER PURSUANT TO REGISTRATION STATEMENT

American Stock Transfer & Trust Company

40 Wall Street

New York, New York 10005

Attention: Corporate Trust Services

Re: MRV Communications, Inc. (the "Company")

5% Convertible Subordinated Notes due 2003 (the "Notes")

Dear Sirs:

Please be advised that has transferred $ aggregate
principal amount of the above-referenced Notes pursuant to an effective
Registration Statement on Form S-3 (File No. 333-64017) filed by the Company.

We hereby certify that the prospectus delivery requirements, if any, of the
Securities Act of 1933, as amended, have been satisfied and that the above-named
beneficial owner of the Notes is named as a "Selling Securityholder" in the
Prospectus dated , 1998 or in supplements thereto, and that
the aggregate principal amount of the Notes transferred are the Notes listed in
such Prospectus opposite such owner's name.

Dated:

Very truly yours,

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

(Name)

By:

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

(Authorized Signature)

<PAGE> 148

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

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THE OFFER MADE HEREBY OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE NOTES OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................ 2
Incorporation of Certain Documents by
Reference.......................... 2
Prospectus Summary................... 4
Risk Factors......................... 11
Use of Proceeds...................... 18
Dividend Policy...................... 18
Price Range of Common Stock.......... 19
Capitalization....................... 20
The Company.......................... 21
Selected Consolidated Financial
Data............................... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 24
Business............................. 33
Management........................... 50
Principal Stockholders............... 56
Description of the Notes............. 57
Description of Capital Stock......... 69
Certain Federal Income Tax
Considerations..................... 70
Selling Securityholders.............. 75
Plan of Distribution................. 79
Legal Matters........................ 79
Experts.............................. 80
Glossary............................. 81
Index to Financial Statements........ F-1
Annex A.............................. A-1
</TABLE>

- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$100,000,000

MRV
COMMUNICATIONS, INC.
5% CONVERTIBLE SUBORDINATED NOTES
DUE 2003
------------------------
PROSPECTUS
------------------------
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 149

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of the Common Stock being registered
hereby, other than underwriting commissions and discounts, all of which are
estimated except for the SEC filing fee.

<TABLE>
<CAPTION>
Item Amount
---- ------
<S> <C>
SEC registration fee............................................................... $ 29,500
Printing expenses.................................................................. 20,000
Legal fees and expenses............................................................ 25,000
Accounting fees and expenses....................................................... 30,000
Miscellaneous expenses............................................................. 10,500
--------
Total................................................................... $115,000
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article 8 of the Registrant's
Certificate of Incorporation and Article IX of the Registrant's Bylaws provide
for indemnification of the Registrant's directors, officers, employees, and
other agents to the extent and under the circumstances permitted by the Delaware
General Corporation Law. The Registrant has also entered into agreements with
its directors and executive officers that will require the Registrant, among
other things, to indemnify them against certain liabilities that may arise by
reason of their status or service as directors to the fullest extent not
prohibited by law.

II-1

<PAGE> 150

ITEM 16. EXHIBITS

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

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

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

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

4.5+ Specimen certificate of Common Stock.

5 Opinion of Freshman, Marantz, Orlanski, Cooper & Klein, a law
corporation

12.1+ Computation of Ratio of Earnings to Fixed Charges

23.1 Consent of Arthur Andersen LLP

23.2 Consent of Ernst & Young LLP

23.3 Consent of PricewaterhouseCoopers LLP

23.4 Consent of Freshman, Marantz, Orlanski, Cooper & Klein, a law
corporation (contained in Exhibit 5)

24.1 Power of Attorney (contained in Signature page)

25.1+ Statement of Eligibility of Trustee under the Trust Indenture Act of
1939 on Form T-1.

- ----------

+ Previously filed.

II-2
<PAGE> 151

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:

(a) to include any prospectus required by Section 10(a)(3) of the
Securities Act;

(b) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b), if in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.

(c) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.

provided, however, that the undertakings set forth in paragraph (a) and (b)
above shall not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by the Registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") that are incorporated by reference in
this Registration Statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable in the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.

The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this Registration
Statement as of the time it was declared effective. For the purpose of
determining any liability under the Securities Act of 1933, each post-effective
that contains a form of prospectus shall be deemed

II-3
<PAGE> 152

to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

II-4
<PAGE> 153

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chatsworth, State of California, on the 9th day of
December 1998.

MRV COMMUNICATIONS, INC.

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

POWER OF ATTORNEY

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

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
Names Title Date
----- ----- ----
<S> <C> <C>
/s/ NOAM LOTAN President, Chief Executive Officer (Principal December 9, 1998
- ---------------------------------- Executive Officer), and a Director
Noam Lotan

/s/ ZEEV RAV-NOY* Chief Operating Officer, December 9, 1998
- ---------------------------------- Treasurer, and a Director
Zeev Rav-Noy

/s/ SHLOMO MARGALIT* Chairman of the Board, Chief Technical December 9, 1998
- ---------------------------------- Officer, Secretary, and a Director
Shlomo Margalit

/s/ EDMUND GLAZER* Vice President of Finance and December 9, 1998
- ---------------------------------- Administration, Chief Financial Officer
Edmund Glazer (Principal Financial and Accounting Officer)

/s/ IGAL SHIDLOVSKY* Director December 9, 1998
- ----------------------------------
Igal Shidlovsky

/s/ GUENTER JAENSCH* Director December 9, 1998
- ----------------------------------
Guenter Jaensch

*By: NOAM LOTAN, pursuant to power of attorney

</TABLE>

II-5

<PAGE> 1

EXHIBIT 5

[FRESHMAN, MARANTZ LETTERHEAD]

December 9, 1998

MRV Communications, Inc.
8943 Fulbright Avenue
Chatsworth, California 91311

Ladies and Gentlemen:

We have acted as counsel to MRV Communications, Inc., a Delaware corporation
(the "Company"), in connection with the preparation and filing with the
Securities and Exchange Commission (the "SEC") of the Registration Statement on
Form S-3, File No. 333-64017, together with Amendment No.1 thereto
(collectively, the "Registration Statement"), of the Company, with exhibits as
filed in connection therewith and the form of prospectus contained therein, for
registration under the Securities Act of 1933, as amended (the "Securities Act),
of $100,000,000 aggregate principal amount of 5% Convertible Subordinated Notes
due 2003 (the "Notes") and such indeterminate number of shares of the Company's
common stock, par value $0.0034 per share (the "Common Stock") issuable upon
conversion of the Notes (the "Shares"). The Notes were originally issued by the
Company in a private placement completed on June 26, 1998 to Prudential
Securities Incorporated and Bear, Stearns & Co. Inc. (the "Initial Purchasers").
The Notes were resold by the Initial Purchasers in transactions exempt from
registration under the Securities Act, in the United States to persons
reasonably believed to be "qualified institutional buyers" as defined in Rule
144A under the Securities Act.

For purposes of this opinion, we have examined such matters of law and
originals, or copies certified or otherwise identified to our satisfaction, of
such documents, corporate records and other instruments as we have deemed
necessary. In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified,
photostatic or conformed copies, and the authenticity of the originals of all
such latter documents. We have also assumed the due execution and delivery of
all documents where due execution and delivery are prerequisites to the
effectiveness thereof. We have relied upon certificates of public officials and
certificates of officers of the Company for the accuracy of material, factual
matters contained therein which were not independently established.

Based on the foregoing and on all other instruments, documents and matters
examined for the rendering of this opinion, it is our opinion that: (1) the
Notes are legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms;

<PAGE> 2

and (2) subject to effectiveness of the Registration Statement with the SEC
(such Registration Statement as amended and finally declared effective, and the
form of Prospectus contained therein or subsequently filed pursuant to Rule 430A
of Rule 424 under the Securities Act, being hereinafter referred to as the
"Registration Statement" and the "Prospectus," respectively) upon the conversion
of the Notes in the manner referred to in the Registration Statement and in
accordance with the terms of the Indenture, the Shares will be legally issued,
fully paid and non-assessable shares of the Common Stock of the Company.

We express no opinion as to the applicability or effect of any laws, orders or
judgments of any state or jurisdiction other than the substantive laws of the
State of Delaware. Further, our opinion is based solely upon existing laws,
rules and regulations, and we undertake no obligation to advise you of any
changes that may be brought to our attention after the date hereof.

We consent to the use of our name under the caption "Legal Matters" in the
Prospectus, constituting part of the Registration Statement, and to the filing
of this opinion as an exhibit to the Registration Statement.

By giving you this opinion and consent, we do not admit that we are experts with
respect to any part of the Registration Statement or Prospectus within the
meaning of the term "expert" as used in Section 11 of the Securities Act, or the
rules and regulations promulgated thereunder by the SEC, nor do we admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act.

Very truly yours,

FRESHMAN, MARANTZ, ORLANSKI,
COOPER & KLEIN

<PAGE> 1
EXHIBIT 23.1

[ARTHUR ANDERSEN LLP LOGO]

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our report
dated February 20, 1998 on the consolidated financial statements of MRV
Communications, Inc. (and to all references to our Firm) included in or made a
part of this registration statement.

/s/ ARTHUR ANDERSEN LLP
------------------------------
ARTHUR ANDERSEN LLP

Los Angeles, California
December 7, 1998

<PAGE> 1

EXHIBIT 23.2

CONSENT OF ERNST & YOUNG LLP

We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of MRV Communications,
Inc. for the registration of $100,000,000 of MRV Communications, Inc. 5%
Convertible Subordinated Notes due 2003 and to the inclusion of our report
dated November 26, 1997, except Note 13, as to which the date is March 11, 1998,
with respect to the financial statements of Xyplex, Inc. for the year ended
October 31, 1997 and the period from April 10, 1996 to October 31, 1996.

/s/ ERNST & YOUNG LLP
----------------------------------------
ERNST & YOUNG LLP

December 7, 1998
Boston, Massachusetts

<PAGE> 1
EXHIBIT 23.3

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this registration statement on Form S-3 of our
reports dated April 22, 1996 and May 24, 1996, on our audits of the financial
statements of Xyplex, Inc. as of December 31, 1995 and 1994 and for the years
then ended and as of April 9, 1996 and for the period January 1, 1996 through
April 9, 1996, respectively. We also consent to the reference to our firm under
the caption "Experts."

/s/ PricewaterhouseCoopers LLP
--------------------------------
PricewaterhouseCoopers LLP

Boston, Massachusetts
December 7, 1998