MRV COMMUNICATIONS INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------

FORM 10-Q

(Mark One)

[X] Quarterly report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended JUNE 30, 2002

[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act for the transition period from ______________ to _____________

Commission file number 0-25678

MRV COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

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

20415 NORDHOFF STREET, CHATSWORTH, CA 91311
(Address of principal executive offices, Zip Code)

Issuer's telephone number, including area code: (818) 773-0900

Check whether the issuer: (1) has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.

Yes [X] No [ ]

As of August 7, 2002, there were 94,453,254 shares of Common Stock, $.0017 par
value per share, outstanding.

MRV COMMUNICATIONS, INC.

FORM 10-Q, JUNE 30, 2002

INDEX

Page Number
-----------

PART I Financial Information 3

Item 1. Financial Statements: 3

Consolidated Condensed Statements of Operations (unaudited) for the 4
Three and Six Months ended June 30, 2002 and 2001

Consolidated Condensed Balance Sheets as of June 30, 2002 (unaudited) 5
and December 31, 2001

Consolidated Condensed Statements of Cash Flows (unaudited) for the Six 7
Months ended June 30, 2002 and 2001

Notes to Unaudited Consolidated Condensed Financial Statements 8

Item 2. Management's Discussion and Analysis of Financial Condition and Results 14
of Operations

PART II Other Information 37

Item 2. Changes in Securities and Use of Proceeds 37

Item 6. Exhibits and Reports in Form 8-K 37

Signatures 38

Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to 39
Section 906 of the Sarbanes-Oxley Act of 2002

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

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The consolidated condensed financial statements included herein have
been prepared by MRV, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations, although MRV
believes that the disclosures are adequate to make the information presented not
misleading. It is suggested that these condensed financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
included in MRV's latest annual report on Form 10-K.

In the opinion of MRV, these unaudited statements contain all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the financial position of MRV Communications, Inc. and Subsidiaries as of
June 30, 2002, and the results of their operations and their cash flows for the
three and six months then ended.

MRV COMMUNICATIONS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS ENDED Six Months Ended
--------------------------- ---------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
JUNE 30, June 30, JUNE 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------

NET REVENUE $ 61,627 $ 89,530 $ 124,045 $ 189,634
Cost of goods sold 40,723 88,765 83,828 155,156
--------- --------- --------- ---------
GROSS PROFIT 20,904 765 40,217 34,478
OPERATING COSTS AND EXPENSES:
Product development and engineering 14,425 25,782 30,045 50,787
Selling, general and administrative 24,320 43,711 47,859 82,123
Amortization of intangibles 2,330 29,028 4,834 57,167
--------- --------- --------- ---------
Total operating costs and expenses 41,075 98,521 82,738 190,077
--------- --------- --------- ---------
OPERATING LOSS (20,171) (97,756) (42,521) (155,599)
Other expense, net 76 2,373 9,954 2,893
--------- --------- --------- ---------

LOSS BEFORE MINORITY INTEREST AND PROVISION (BENEFIT)
FOR TAXES (20,247) (100,129) (52,475) (158,492)
Minority interest (3) (5,051) 102 (6,439)
Provision (benefit) for taxes 856 (939) 1,042 (3,622)
- - - -
--------- --------- --------- ---------
NET LOSS $ (21,100) $ (94,139) $ (53,619) $(148,431)
========= ========= ========= =========

EARNINGS PER SHARE:
Basic and diluted loss per share $ (0.23) $ (1.24) $ (0.61) $ (1.97)
========= ========= ========= =========

WEIGHTED AVERAGE NUMBER OF SHARES:
Basic and diluted 90,319 76,111 87,570 75,245
========= ========= ========= =========

See accompanying notes

MRV COMMUNICATIONS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PAR VALUES)

JUNE 30, December 31,
2002 2001
--------- ---------
(UNAUDITED)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 95,639 $164,676
Short-term marketable securities 39,045 46,696
Time deposits 8,069 9,341
Accounts receivable, net 48,856 55,106
Inventories 48,442 57,308
Other current assets 12,138 10,044
-------- --------
TOTAL CURRENT ASSETS 252,189 343,171

PROPERTY, PLANT AND EQUIPMENT, NET 70,184 72,012

GOODWILL AND OTHER INTANGIBLES 390,085 395,312

LONG-TERM MARKETABLE SECURITIES 2,957 -

DEFERRED INCOME TAXES 23,634 23,229

INVESTMENTS 6,358 16,937

OTHER NON-CURRENT ASSETS 9,562 13,834
-------- --------
$754,969 $864,495
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 2,314 $ 52,226
Convertible subordinated notes 61,346 -
Short-term obligations 14,232 18,679
Accounts payable 47,451 48,586
Accrued liabilities 32,683 39,035
Other current liabilities 8,021 9,277
-------- --------
TOTAL CURRENT LIABILITIES 166,047 167,803

LONG-TERM DEBT 8,341 8,871

CONVERTIBLE SUBORDINATED NOTES - 89,646

OTHER LONG-TERM LIABILITIES 3,990 3,737

MINORITY INTEREST 9,522 9,762

COMMITMENTS AND CONTINGENCIES

MRV COMMUNICATIONS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PAR VALUES)

JUNE 30, December 31,
2002 2001
----------- -----------
(UNAUDITED)

STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value:
Authorized -- 1,000 shares; no shares issued or outstanding - -
Common stock, $0.0017 par value:
Authorized -- 160,000 shares
Issued -- 90,638 shares in 2002 and 82,824 in 2001
Outstanding -- 90,570 shares in 2002 and 82,776 in 2001 154 141
Additional paid-in capital 1,143,056 1,118,942
Accumulated deficit (551,302) (497,683)
Deferred stock compensation, net (14,228) (26,344)
Treasury stock, 68 shares in 2002 and 48 shares in 2001 (156) (133)
Accumulated other comprehensive loss (10,455) (10,247)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 567,069 584,676
----------- -----------
$ 754,969 $ 864,495
=========== ===========

See accompanying notes

MRV COMMUNICATIONS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

Six Months Ended
---------------------------
JUNE 30, June 30,
2002 2001
--------- ---------
(UNAUDITED) (Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:
NET CASH USED IN OPERATING ACTIVITIES $ (7,293) $ (43,529)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (5,659) (26,580)
Proceeds from sale or maturity of investments 4,694 71,150
Investments in unconsolidated equity method subsidiaries - (59,521)
Proceeds from sale of property, plant and equipment 137 -
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (828) (14,951)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 134 20,534
Payment to terminate interest rate swap (3,198) -
Purchase of treasury shares (23) -
Payments on short-term obligations (37,081) (92)
Borrowings on short-term obligations 32,634 3,587
Payments on long-term obligations (50,442) (204)
Borrowings on long-term obligations - 373
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (57,976) 24,198
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (2,940) (911)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (69,037) (35,193)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 164,676 210,080
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 95,639 $ 174,887
========= =========

See accompanying notes

MRV COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. EARNINGS PER SHARE

Basic earnings per common share are computed using the weighted average
number of common shares outstanding during the period. Diluted earnings per
common share include the incremental shares issuable upon the assumed exercise
of stock options, warrants and conversion of the convertible subordinated notes.
The effect of the assumed conversion of $61.3 million and $89.6 million of
convertible subordinated notes for the three and six months ended June 30, 2002
and 2001, respectively, have not been included, as it would be anti-dilutive.
The dilutive effect of all of MRV's stock options and warrants outstanding for
the three and six months ended June 30, 2002 and 2001, respectively, have not
been included in the loss per share computation as their effect would be
anti-dilutive.

2. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS 142

Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill
and Other Intangible Assets", which was adopted on January 1, 2002, requires
disclosure of what reported income before extraordinary items and net income
would have been in all periods presented exclusive of amortization expense
(including any related tax effects) recognized in those periods related to
goodwill and other intangible assets that are no longer being amortized and
changes in amortization periods for intangible assets that will continue to be
amortized (including any related tax effects). Similarly, adjusted per share
amounts also are required to be disclosed for all periods presented. MRV
initially applied this statement as of January 1, 2002. The amortization of
goodwill and net loss for the initial application and prior corresponding period
follows (in thousands, except per share amounts).

Three Months Ended Six Months Ended
------------------------------ ------------------------------
JUNE 30, June 30, JUNE 30, June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------

NET LOSS:
Reported net loss $ (21,100) $ (94,139) $ (53,619) $ (148,431)
Amortization of goodwill - 25,764 - 51,326
----------- ----------- ----------- -----------
Adjusted net loss $ (21,100) $ (68,375) $ (53,619) $ (97,105)
=========== =========== =========== ===========

BASIC AND DILUTED EARNINGS PER SHARE:
Reported net loss $ (0.23) $ (1.24) $ (0.61) $ (1.97)
Amortization of goodwill - 0.34 - 0.68
----------- ----------- ----------- -----------
Adjusted net loss $ (0.23) $ (0.90) $ (0.61) $ (1.29)
=========== =========== =========== ===========

When a company initially adopts SFAS No. 142, it must perform a fair
value-based goodwill impairment test. The first step ("Step One") of the
impairment test involves comparing the estimated fair value of the reporting
unit that houses acquired goodwill to the carrying value, or book value, of the
reporting unit. MRV's reporting units are generally considered to be the
business units that are one level below the operating segments underlying the
segments identified in Note 6--Segment Reporting and Geographical Information.
If the fair value of the reporting unit is less than its carrying amount, a
second step ("Step Two") of the impairment test is performed to determine a
goodwill impairment charge, if any. This second step requires a "memo"
allocation of the reporting unit's estimated fair value to its assets and
liabilities, as though the reporting unit had just been acquired in a business
combination, with the remaining fair value allocated to goodwill. An impairment
is recognized for the amount that the carrying amount of the goodwill exceeds
its fair value.

MRV completed Step One in the transitional goodwill impairment test
during the quarter ended June 30, 2002. MRV expects to perform its annual
impairment review during the fourth quarter of each year, commencing in the
fourth quarter of 2002. Step One indicated that the carrying value of the
reporting units exceeded the fair value by an estimated $290 million to $330
million in its operating enterprises segment. MRV will complete the second step
of the impairment test during the quarter ended September 30, 2002. MRV
anticipates reporting an impairment charge in the third quarter ended September
30, 2002.

3. COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss) were as follows (in
thousands):

Three Months Ended Six Months Ended
--------------------------- ---------------------------
JUNE 30, June 30, JUNE 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------

Net loss $ (21,100) $ (94,139) $ (53,619) $(148,431)
Realized loss on interest rate swap - - 3,198 -
Unrealized gain (loss) on interest
rate swap - 167 - (2,379)
Foreign currency translation (1,374) (1,898) (3,406) (911)
--------- --------- --------- ---------
$ (22,474) $ (95,870) $ (53,827) $(151,721)
========= ========= ========= =========

4. CASH AND CASH EQUIVALENTS, TIME DEPOSITS AND SHORT-TERM INVESTMENTS

MRV considers all highly liquid investments with an original maturity of
90 days or less to be cash equivalents. Investments with maturities of less than
one year are considered short-term. Time deposits represent investments, which
are restricted as to withdrawal or use based on maturity terms. Furthermore, MRV
maintains cash balances and investments in highly qualified financial
institutions. At various times such amounts are in excess of federally insured
limits.

MRV accounts for its investments under the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." As of June
30, 2002 and 2001, short-term investments consisted principally of U.S. Treasury
Bonds, Municipal Bonds and Corporate Bonds. As defined by SFAS No. 115, MRV has
classified these investments in debt securities as "held-to-maturity"
investments and all investments are recorded at their amortized cost basis,
which approximated their fair market value at June 30, 2002 and 2001.

5. INVENTORIES

Inventories are stated at the lower of cost or market and consist of
materials, labor and overhead. Cost is determined by the first-in, first-out
method. Inventories consisted of the following (in thousands):

JUNE 30, December 31,
2002 2001
------- -------

Raw materials $15,809 $15,444
Work-in process 9,237 19,230
Finished goods 23,396 22,634
------- -------
$48,442 $57,308
======= =======

6. SEGMENT REPORTING AND GEOGRAPHICAL INFORMATION

MRV operates under a business model that includes its operating
divisions as well as start-up enterprises. These companies provide network
infrastructure products and services and fall into two business segments:
operating enterprises and development stage enterprises. Segment information is
therefore being provided on this basis.

MRV's operating enterprises design, manufacture and distribute optical
components, optical subsystems, optical networking solutions and Internet
infrastructure products. The primary activities of operating enterprises are to
provide solutions which enable high-speed broadband communications. Development
stage enterprises, which MRV has created or invested in, focus on core routing,
network transportation, switching and IP services, and fiber optic components
and systems. The primary activities of development stage enterprises have been
to develop solutions and technologies of which significant revenues have yet to
be earned.

The accounting policies of the segments are the same as those described
in the summary of significant accounting polices in our latest annual report on
Form 10-K. MRV evaluates segment performance based on revenues and operating
income (loss) of each segment. As such, there are no separately identifiable
segment assets nor are there any separately identifiable statements of
operations data below operating income.

Business segment net revenues for the three and six months ended June
30, 2002 and 2001 were generated from operating enterprises. For the three and
six months ended June 30, 2002, there were no significant net revenues generated
by development stage enterprises. There were no inter-segment sales during the
three and six months ended June 30, 2002 and 2001. Net revenues by product group
for the three and six months ended June 30, 2002 and 2001 were as follows (in
thousands):

Three Months Ended Six Months Ended
------------------------ ------------------------
JUNE 30, June 30, JUNE 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------

Optical passive components $ 8,685 $ 11,373 $ 15,326 $ 22,842
Optical active components 12,850 31,505 28,492 67,907
Switches and routers 11,689 18,492 24,412 37,815
Remote device management 4,734 4,930 8,635 8,995
Network physical infrastructure 12,947 13,248 27,382 31,336
Services 6,412 4,325 11,106 8,396
Other network products 4,310 5,657 8,692 12,343
-------- -------- -------- --------
$ 61,627 $ 89,530 $124,045 $189,634
======== ======== ======== ========

For the three and six months ended and as of June 30, 2002 and 2001, MRV
had no single customer that accounted for more than 10% of net revenues or
accounts receivable, respectively. MRV does not track customer sales by
geographical region for each individual reporting segment. A summary of external
net revenues by geographical region is as follows (in thousands):

Three Months Ended Six Months Ended
------------------------ ------------------------
JUNE 30, June 30, JUNE 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------

United States $ 18,316 $ 27,675 $ 36,549 $ 69,578
Asia Pacific 7,127 11,634 13,746 26,454
Europe 35,834 48,432 73,078 89,750
Other 350 1,789 672 3,852
-------- -------- -------- --------
$ 61,627 $ 89,530 $124,045 $189,634
======== ======== ======== ========

Business segment operating loss for the three and six months ended June
30, 2002 and 2001 was as follows (in thousands):

Three Months Ended Six Months Ended
--------------------------- ---------------------------
JUNE 30, June 30, JUNE 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------

Operating enterprises $ (13,086) $ (83,494) $ (27,193) $(127,358)
Development stage enterprises (7,085) (14,262) (15,328) (28,241)
--------- --------- --------- ---------
$ (20,171) $ (97,756) $ (42,521) $(155,599)
========= ========= ========= =========

Loss before provision (benefit) for income taxes for the three and six
months ended June 30, 2002 and 2001 was as follows (in thousands):

Three Months Ended Six Months Ended
--------------------------- ---------------------------
JUNE 30, June 30, JUNE 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------

United States $ (16,875) $ (53,335) $ (36,228) $ (82,818)
Foreign (3,369) (41,743) (16,349) (69,235)
--------- --------- --------- ---------
$ (20,244) $ (95,078) $ (52,577) $(152,053)
========= ========= ========= =========

7. RESTRUCTURING CHARGES

From November 9, 2000 through December 28, 2001, MRV owned approximately
92% of Luminent, Inc. and approximately 8% of Luminent's shares where publicly
traded. During the second quarter of 2001, Luminent's management approved and
implemented a restructuring plan in order to adjust operations and
administration as a result of the dramatic slowdown in the communications
equipment industry generally and the optical components sector in particular.
Major actions primarily involved the reduction of workforce, the abandonment of
certain assets and the cancellation and termination of purchase commitments.
These actions are expected to realign the business based on current and
near-term growth rates. All of these actions are expected to be completed by the
end of the fiscal year 2002.

Employee severance costs and related benefits of $1.3 million are
related to approximately 700 layoffs through June 30, 2002, bringing Luminent's
total workforce to approximately 1,000 employees as of June 30, 2002. Affected
employees came from all divisions and areas of Luminent. The majority of
affected employees were in the manufacturing group.

A summary of the restructuring costs through June 30, 2002 is as follows
(in thousands):

2001 June 30,
Provision Utilized Adjustment (1) 2002
--------- -------- ------------- --------

EXIT COSTS:
Asset impairment $10,441 $10,441 $ - $ -
Closed and abandoned facilities 2,405 537 - 1,868
Purchase commitments 6,173 1,841 1,094 3,238
------- ------- ------- -------
19,019 12,819 1,094 5,106
Employee severance costs 1,281 736 - 545
------- ------- ------- -------
$20,300 $13,555 $ 1,094 $ 5,651
======= ======= ======= =======

(1) Includes $457,000 in reduction of future liabilities based on current
negotiations with vendors and $637,000 in usage of previously reserved
purchase commitments for inventory and equipment. The provisions
previously recognized for these items have been reversed in the six
months ended June 30, 2002.

A summary of the restructuring costs by line item for the six months
ended June 30, 2002 and 2001 is as follows (in thousands):

8. INTEREST RATE SWAP

MRV entered into an interest rate swap (the "Swap") in the second
quarter of 2000 to effectively change the interest rate characteristics of its
$50.0 million variable-rate term loan presented in long-term debt, with the
objective of fixing its overall borrowing costs. The Swap was considered to be
100% effective and was therefore recorded using the short-cut method. The Swap
was designated as a cash flow hedge and changes in fair value of the debt were
generally offset by changes in fair value of the related security, resulting in
negligible net impact. The gain or loss from the change in fair value of the
Swap as well as the offsetting change in the hedged fair value of the long-term
debt were recognized in other comprehensive loss. In February 2002, MRV paid off
the long-term debt of $50.0 million (see Note 9) and terminated the Swap. The
realized loss on the Swap of $3.2 million has been recorded as interest expense
and included in other expense, net in the accompanying consolidated condensed
statements of operations.

9. LONG-TERM DEBT AND CONVERTIBLE SUBORDINATED NOTES

In February 2002, MRV paid off a $50.0 million term loan. Additionally,
during the six months ended June 30, 2002, MRV acquired $28.3 million in
convertible subordinated notes (the "Notes") in exchange for MRV's issuance of
7.8 million shares of its common stock to the holders of the Notes. In
connection therewith, MRV recognized a gain of $3.8 million, net of associated
taxes. MRV retired the Notes acquired in the exchange.

10. STOCK REPURCHASE PROGRAM

On June 13, 2002, MRV announced that its Board of Directors had approved
a program to repurchase up to 7.0 million shares of its common stock. As of June
30, 2002, MRV had repurchased 20,000 shares of its common stock at a cost of
$23,000 under this program.

11. RECENT ACCOUNTING PRONOUNCEMENTS

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

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. MRV adopted this statement on January 1, 2002 and there has not been
a material impact on its financial position, results of operations or cash
flows.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". This statement is effective for fiscal years beginning after May
15, 2002. For certain provisions, including the rescission of Statement No. 4,
early application is encouraged. MRV has adopted this statement for the six
months ended June 30, 2002, and the immediate impact of its application was the
reclassification of the gain on the extinguishment of debt (see Note 9) from an
extraordinary item to other income.

12. SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION

Six Months Ended
---------------------
JUNE 30, June 30,
2002 2001
------- -------

SUPPLEMENTAL STATEMENT OF CASH FLOW
INFORMATION (IN THOUSANDS):
Cash paid during period for interest $2,645 $4,578
------ ------
Cash paid during period for taxes $1,414 $2,075
------ ------

During the six months ended June 30, 2002, MRV exchanged $28.3 million
in convertible subordinated notes for 7.8 million shares of its common stock.
This non-cash transaction has been excluded from the accompanying statements of
cash flows.

13. RECLASSIFICATIONS

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

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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

OVERVIEW

We create, acquire, finance and operate companies, and through them,
design, develop, manufacture and market products, which enable high-speed
broadband communications. We concentrate on companies and products devoted to
optical components and network infrastructure solutions. We have leveraged our
early experience in fiber optic technology into a number of well-focused
operating enterprises and development stage enterprises specializing in optical
passive components, optical active components, network physical infrastructure,
switches, routers, remote device management and wireless optical transmission.

We market and sell our products world-wide, through a variety of
channels, which include a dedicated direct sales force, manufacturers'
representatives, value-added-resellers, distributors and systems integrators. In
addition, we maintain subsidiaries in France, Italy, Switzerland and Sweden,
which are involved in sales, distribution and services. The activities of these
subsidiaries include system design, integration and support as well as product
sales to enterprise customers and service providers. Products sold include
products manufactured by MRV, as well as products manufactured by third party
vendors. Such specialization enhances access to customers and allows us to
penetrate targeted vertical and regional markets.

Revenues for the three and six months ended June 30, 2002 were $61.6
million and $124.0 million, respectively, compared to $89.5 million and $189.6
million, respectively for the three and six months ended June 30, 2001, a
decrease of 31% and 35%. We reported a net loss of $21.1 million and $94.1
million for the three months ended June 30, 2002 and 2001, respectively. A
significant portion of these losses were due to the amortization of goodwill and
other intangibles and deferred stock compensation related to our acquisitions in
2000 and our employment arrangements with Luminent's former President and its
former Chief Financial Officer. We will continue to amortize deferred stock
compensation through 2004 relating to these acquisitions. Effective January 1,
2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, and
we no longer amortize goodwill. However, our adoption of SFAS 142 has required,
and we expect in the future it will require, us to record impairment charges. We
completed the first step in the transitional goodwill impairment test during the
quarter ended June 30, 2002. The first step indicated that the carrying value of
the reporting units exceeded the fair value by an estimated $290 million to $330
million. We will complete the second step of the impairment test during the
quarter ended September 30, 2002 and anticipate reporting an impairment charge
at that time. We expect to perform our annual impairment review during the
fourth quarter of each year, commencing in the fourth quarter of 2002. For the
six months ended June 30, 2002, we recorded impairment charges of $7.6 million
in connection with certain equity method investments as the fair value of these
assets was less than their carrying value. As a consequence of deferred stock
compensation charges and anticipated impairment charges, we do not expect to
report net income in the foreseeable future.

TRANSACTIONS WITH STOCK OF SUBSIDIARIES

In November 2000, Luminent completed the initial public offering of its
common stock, selling 12.0 million shares at $12.00 per share for net proceeds
of approximately $132.3 million. Luminent designs, manufactures and sells a
comprehensive line of fiber optic components that enable communications
equipment manufacturers to provide optical networking equipment for the
metropolitan and access segments of the communications networks. While we had
planned to distribute all of our shares of Luminent common stock to our
stockholders, unfavorable business and economic conditions in the fiber optic,
data networking and telecommunications industries and the resulting adverse
effects on the market prices of our common stock and Luminent common stock,
caused us to

determine to abandon the distribution and effect a short-form merger of Luminent
into one of our wholly-owned subsidiaries, thereby eliminating public ownership
of Luminent. This merger was completed on December 28, 2001.

In July 2000, we and Luminent, entered into employment agreements with
Luminent's former President and Chief Executive Officer and its former Vice
President of Finance and Chief Financial Officer. The agreements provide for
annual salaries, performance bonuses and combinations of stock options to
purchase shares of our common stock and Luminent's common stock. The stock
options were granted to Luminent's executives at exercise prices below market
value, resulting in deferred stock compensation. Luminent's President and Chief
Executive Officer resigned in September 2001 and its Vice President of Finance
and Chief Financial Officer resigned in June 2002. The resignations were
considered by the parties to be terminations other than for cause under the
employment agreements, providing severance benefits based on the employment
agreements, and the vesting of all of the unvested Luminent options. The MRV and
Luminent stock options are now exercisable at various dates through June 2004.

RESTRUCTURING CHARGES

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

Employee severance costs and related benefits of $1.3 million were
associated with approximately 700 layoffs through June 30, 2002, bringing
Luminent's total workforce to approximately 1,000 employees as of June 30, 2002.
Affected employees came from all divisions and areas of Luminent. The majority
of affected employees were in the manufacturing group.

A summary of the restructuring costs for the six months ended June 30,
2002 is as follows (in thousands):

2001 June 30,
Provision Utilized Adjustment (1) 2002
--------- -------- ------------- --------

EXIT COSTS:
Asset impairment $10,441 $10,441 $ - $ -
Closed and abandoned facilities 2,405 537 - 1,868
Purchase commitments 6,173 1,841 1,094 3,238
------- ------- ------- -------
19,019 12,819 1,094 5,106
Employee severance costs 1,281 736 - 545
------- ------- ------- -------
$20,300 $13,555 $ 1,094 $ 5,651
======= ======= ======= =======

(1) Includes $457,000 in reduction of future liabilities based on current
negotiations with vendors and $637,000 in usage of previously reserved
purchase commitments for inventory and equipment. The provisions
previously recognized for these items have been reversed in the six
months ended June 30, 2002.

A summary of the restructuring costs by line item for the six months
ended June 30, 2002 and 2001 is as follows (in thousands):

MARKET CONDITIONS AND CURRENT OUTLOOK

Macroeconomic factors, such as an economic slowdown in the U.S. and
abroad, have detrimentally impacted demand for optical components and network
infrastructure products and services. The unfavorable economic conditions and
reduced capital spending has detrimentally affected sales to service providers,
network equipment companies, e-commerce and Internet businesses, and the
manufacturing industry in the United States during 2002 to date, and may
continue to affect them for the remainder of 2002 and thereafter. Announcements
by industry participants and observers indicate there is a slowdown in industry
spending and participants are seeking to reduce existing inventories.

RESULTS OF OPERATIONS

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

Three Months Ended Six Months Ended
------------------------- -------------------------
JUNE 30, June 30, JUNE 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
(Unaudited) (Unaudited)

NET REVENUES 100% 100% 100% 100%
Cost of goods sold 66 99 68 82
GROSS PROFIT 34 1 32 18
OPERATING COSTS AND EXPENSES:
Product development and engineering 23 29 24 27
Selling, general and administrative 39 49 39 43
Amortization of intangibles 4 32 4 30
Total operating costs and expenses 67 110 67 100
OPERATING LOSS (33) (109) (34) (82)
Other expense, net - 3 8 2
LOSS BEFORE MINORITY INTEREST AND
PROVISION (BENEFIT) FOR TAXES (33) (112) (42) (84)
Minority interest - (6) - (3)
Provision (benefit) for taxes 1 (1) 1 (2)
NET LOSS (34) (105) (43) (78)

The following management discussion and analysis refers to and analyzes
our results of operations into two segments as defined by our management. These
two segments are Operating Enterprises and Development Stage Enterprises, which
includes all start-up activities.

THREE MONTHS ENDED JUNE 30, 2002 AND 2001

NET REVENUES

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

Operating Enterprises. Revenues for the three months ended June 30, 2002
decreased $27.9 million, or 31%, to $61.6 million from $89.5 million for the
three months ended June 30, 2001. Overall, the communications equipment industry
was extremely depressed, as were the end markets that we serve. Revenues
generated from our optical passive and active components represented the most
significant impact on revenues, decreasing $21.4 million, or 50%, during the
three months ended June 30, 2002 to $21.5 million from $42.9 million for the
same period last year. The decrease in our optical passive and active components
was primarily the result of the dramatic downturn in the communications
equipment industry and specifically the optical components sector. Revenues
generated from our switches and routers decreased $6.8 million, or 37%, to $11.7
million for the three months ended June 30, 2002 as compared to $18.5 million
for the three months ended June 30, 2001. Revenues to the United States
decreased $9.4 million, or 34%, for the three months ended June 30, 2002, to
$18.3 million as compared to $27.7 million for the three months ended June 30,
2001. Revenues to the Asia Pacific decreased $4.5 million, or 39%, for the three
months ended June 30, 2002 to $7.1 million as compared to $11.6 million for the
three months ended June 30, 2001. Revenue to Europe decreased $12.6 million, or
26%, for the three months ended June 30, 2002 to $35.8 million as compared to
$48.4 million for the three months ended June 30, 2001.

Development Stage Enterprises. No significant revenues were generated by
these entities for the three months ended June 30, 2002 and 2001.

GROSS PROFIT

Gross profit is equal to our net revenues less our cost of goods sold.
Our cost of goods sold includes materials, direct labor and overhead. Cost of
inventory is determined by the first-in, first-out method.

Operating Enterprises. Gross profit for the three months ended June 30,
2002 was $20.9 million, compared to gross profit of $765,000 for the three
months ended June 30, 2001. Gross profit increased $20.1 million for the three
months ended June 30, 2002 as compared to the three months ended June 30, 2001.

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

Our gross margin increased to 34% for the three months ended June 30,
2002, compared to gross margin of 1% for the three months ended June 30, 2001.
The improvement in gross margin was attributed to the write-off of inventory and
other market-related one-time charges of $29.3 million taken by Luminent during
the three months ended June 30, 2001. Prior to deferred stock compensation
amortization of $1.0 million and $2.4 million for the three months ended June
30, 2002 and 2001, respectively, and Luminent's inventory write-downs and other
market-related charges of $29.3 million for the three months ended June 30,
2001, gross margins would have been $21.9 million, or 36% of net revenues and
$32.5 million, or 36% of net revenues, respectively.

Development Stage Enterprises. No significant gross margins were
produced by these entities for the three months ended June 30, 2002 and 2001.

PRODUCT DEVELOPMENT AND ENGINEERING

Product development and engineering expenses decreased 44%, to $14.4
million for the three months ended June 30, 2002 as compared to $25.8 million
for the three months ended June 30, 2001.

Operating Enterprises. Product development and engineering expenses from
our operating enterprises were $8.9 million, or 14% of net revenues, for the
three months ended June 30, 2002, as compared to $14.7 million, or 16% of net
revenues, for the three months ended June 30, 2001. This represents a decrease
of $5.8 million, or 39%, for the three months ended June 30, 2002. Prior to
deferred stock compensation amortization charges of $1.6 million and $4.1
million for the three months ended June 30, 2002 and 2001, respectively, and
Luminent's restructuring and other market-related charges of $501,000, product
development and engineering expenses would have decreased by 28% to $7.3
million, or 12% of net revenues, from $10.1 million, or 11% of net revenues, for
the three months ended June 30, 2002 and 2001, respectively.

Development Stage Enterprises. Product development and engineering
expenses of the development stage enterprises were $5.5 million, or 9% of net
revenues, for the three months ended June 30, 2002, as compared to $11.1
million, or 12% of net revenues, for the three months ended June 30, 2001. This
represents a decrease of $5.6 million, or 50%, for the three months ended June
30, 2002. This decrease was substantially due to cost reduction efforts in line
with current operations.

SELLING, GENERAL AND ADMINISTRATIVE (SG&A)

SG&A expenses decreased $19.4 million to $24.3 million for the three
months ended June 30, 2002, compared to $43.7 million for the three months ended
June 30, 2001. SG&A expenses were 40% and 49% of net revenues for the three
months ended June 30, 2002 and 2001, respectively. Prior to deferred stock
compensation amortization charges of $3.6 million and $12.6 million for the
three months ended June 30, 2002 and 2001, respectively, and Luminent's
restructuring and other market-related charges of $11.4 million, SG&A would have
increased 5% to $20.8 million from $19.8 million for the three months ended June
30, 2001. As a percentage of net revenue, SG&A prior to deferred stock
compensation amortization expenses and restructuring and other market-related
charges would have been 34% for the three months ended June 30, 2002 and 22% for
the three months ended June 30, 2001.

Operating Enterprises. SG&A expenses decreased 45% over the prior period
to $22.4 million for the three months ended June 30, 2002. SG&A expenses were
36% and 46% of our net revenue for the three months ended June 30, 2002 and
2001, respectively. Prior to deferred stock compensation amortization charges of
$3.6 million and $12.6 million for the three months ended June 30, 2002 and
2001, respectively, and Luminent's restructuring and other market-related
charges of $11.4 million, SG&A would have increased 11% to $18.8 million for the
three months ended June 30, 2002, as compared to $16.9 million for the three
months ended June 30, 2001. As a percentage of net revenues, SG&A prior to
deferred stock compensation charges and restructuring and other market-related
charges would have been 31% for the three months ended June 30, 2002, as
compared to 19% for the three months ended June 30, 2001. These decreases are
mainly due to the reduction of overhead expenses to align operations with
current revenue levels.

Development Stage Enterprises. SG&A expenses decreased 31% over the
prior period to $2.0 million for the three months ended June 30, 2002, as
compared to $2.9 million for the three months ended June 30, 2001. SG&A expenses
for these entities also decreased due to reductions in overhead expenses.

AMORTIZATION OF INTANGIBLES

Operating Enterprises. Amortization of intangibles decreased to $2.3
million for the three months ended June 30, 2002, as compared to $29.0 million
for the three months ended June 30, 2001. The decrease of $26.7 million was the
result of the adoption of SFAS No. 142. In accordance with SFAS No. 142, the
amortization of goodwill and certain other intangibles was discontinued
effective on January 1, 2002. However, instead of amortization, an annual
impairment analysis is to be performed. We completed the first step in the
transitional goodwill impairment test during the quarter ended June 30, 2002. We
expect to perform our annual impairment review during the fourth quarter of each
year, commencing in the fourth quarter of 2002. The first step indicated that
the carrying value of the reporting units exceeded the fair value by an
estimated $290 million to $330 million. We will complete the second step of the
impairment test during the quarter ended September 30, 2002 and anticipate
reporting an impairment charge at that time.

Development Stage Enterprises. No significant amortization of
intangibles was recorded for these entities for the three months ended June 30,
2002 and 2001.

OTHER EXPENSE, NET

In June 1998, we issued $100.0 million principal amount of 5%
convertible subordinated notes (the Notes) due in June 2003. The Notes were
offered in a 144A private placement to qualified institutional investors at the
stated amount, less a selling discount of 3%. During the three months ended June
30, 2002, we acquired $4.0 million in Notes in exchange for our issuance of 1.4
million shares of our common stock to the holders of the Notes. In connection
with the acquisition and retirement of these Notes, we recognized a gain of
$393,000, net of associated taxes. This gain has been reported in other expense,
net in the accompanying consolidated condensed statements of operations. In late
1998, we repurchased $10.0 million principal amount of these notes for cash at a
discount from the stated amount. We incurred $923,000 and $1.3 million in
interest expense relating to the Notes for the three months ended June 30, 2002
and 2001, respectively.

We account for certain unconsolidated subsidiaries using the equity
method. The decrease in other expense from $2.4 million to $76,000 for the three
months ended June 30, 2002 is primarily attributable to our share of losses from
our unconsolidated subsidiaries, partially offset by interest income. Our share
of losses from our unconsolidated subsidiaries was $1.3 million for the three
months ended June 30, 2002, as compared to $1.8 million for the three months
ended June 30, 2001.

PROVISION (BENEFIT) FOR TAXES

The provision for taxes for the three months ended June 30, 2002 was
$856,000, compared to a benefit for taxes of $939,000 for the three months ended
June 30, 2001. Our tax expense fluctuates primarily due to the tax jurisdictions
where we currently have operating facilities and the varying tax rates in those
jurisdictions. For the three months ended June 30, 2002, there was no benefit
provided for net operating losses.

SIX MONTHS ENDED JUNE 30, 2002 AND 2001

NET REVENUES

Operating Enterprises. Revenues for the six months ended June 30, 2002
decreased $65.6 million, or 35%, to $124.0 million from $189.6 million for the
six months ended June 30, 2001. Overall, the communications equipment industry
was extremely depressed, as was the end markets that we serve. Revenues
generated from our optical passive and active components represented the most
significant impact on revenues, decreasing $46.9 million, or 52%, during the six
months ended June 30, 2002 to $43.8 million from $90.7 million for the same
period last year. The decrease in our optical passive and active components was
primarily the result of the dramatic

downturn in the communications equipment industry and specifically the optical
components sector. Revenues generated from our switches and routers decreased
$13.4 million, or 35%, to $24.4 million for the six months ended June 30, 2002
as compared to $37.8 million for the six months ended June 30, 2001. Network
physical infrastructure revenues decreased $3.9 million, or 13%, to $27.4
million for the six months ended June 30, 2002 as compared to $31.3 million for
the six months ended June 30, 2001. Revenues to the United States decreased
$33.0 million, or 48%, for the six months ended June 30, 2002, to $36.5 million
as compared to $69.6 million for the six months ended June 30, 2001. Revenues to
the Asia Pacific decreased $12.7 million, or 48%, for the six months ended June
30, 2002 to $13.7 million as compared to $26.4 million for the six months ended
June 30, 2001. Revenue to Europe decreased $16.7 million, or 19%, for the six
months ended June 30, 2002 to $73.1 million as compared to $89.8 million for the
six months ended June 30, 2001.

Development Stage Enterprises. No significant revenues were generated by
these entities for the six months ended June 30, 2002 and 2001.

GROSS PROFIT

Gross profit is equal to our net revenues less our cost of goods sold.
Our cost of goods sold includes materials, direct labor and overhead. Cost of
inventory is determined by the first-in, first-out method.

Operating Enterprises. Gross profit for the six months ended June 30,
2002 was $40.2 million, compared to gross profit of $34.5 million for the six
months ended June 30, 2001. Gross profit improved $5.8 million for the six
months ended June 30, 2002 as compared to the six months ended June 30, 2001.

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

Our gross margin increased to 32% for the six months ended June 30,
2002, compared to gross margin of 18% for the six months ended June 30, 2001.
The improvement in gross margin was attributed to improved operating
efficiencies and the write-off of inventory and other market-related one-time
charges of $29.3 million taken by Luminent during the six months ended June 30,
2001. Prior to deferred stock compensation amortization of $4.1 million and $9.8
million for the six months ended June 30, 2002 and 2001, respectively, and
Luminent's inventory write-downs and other market-related charges of $29.3
million for the six months ended June 30, 2001, gross margins would have been
$42.3 million, or 34% of net revenues and $68.0 million, or 36% of net revenues,
respectively.

Development Stage Enterprises. No significant gross margins were
produced by these entities for the six months ended June 30, 2002 and 2001.

PRODUCT DEVELOPMENT AND ENGINEERING

Product development and engineering expenses decreased 41%, to $30.0
million for the six months ended June 30, 2002 as compared to $50.8 million for
the six months ended June 30, 2001.

Operating Enterprises. Product development and engineering expenses from
our operating enterprises were $19.1 million, or 15% of net revenues, for the
six months ended June 30, 2002, as compared to $27.9 million, or 15% of net
revenues, for the six months ended June 30, 2001. This represents a decrease of
$8.8 million, or 32%, for the six months ended June 30, 2002. Prior to deferred
stock compensation amortization charges of $4.1 million and $9.8 million for the
six months ended June 30, 2002 and 2001, respectively, and Luminent's
restructuring and other market-related charges of $501,000, product development
and engineering expenses would have decreased by 15% to $15.0 million, or 12% of
net revenues, from $17.5 million, or 9% of net revenues, for the six months
ended June 30, 2002 and 2001, respectively. The decrease is due to cost
reduction efforts in line with current operations.

Development Stage Enterprises. Product development and engineering
expenses of the development stage enterprises were $11.0 million, or 9% of net
revenues, for the six months ended June 30, 2002, as compared to $22.9 million,
or 12% of net revenues, for the six months ended June 30, 2001. This represents
a decrease of $12.0

million, or 52%, for the six months ended June 30, 2002. The decrease is due to
cost reduction efforts in line with current operations.

SELLING, GENERAL AND ADMINISTRATIVE (SG&A)

SG&A expenses decreased $34.3 million to $47.9 million for the six
months ended June 30, 2002, compared to $82.1 million for the six months ended
June 30, 2001. SG&A expenses were 39% and 43% of net revenues for the six months
ended June 30, 2002 and 2001, respectively. Prior to deferred stock compensation
amortization charges of $5.8 million and $19.9 million for the six months ended
June 30, 2002 and 2001, respectively, and Luminent's restructuring and other
market-related charges of $11.4 million, SG&A would have decreased 17% to $42.1
million from $50.9 million for the six months ended June 30, 2001. As a
percentage of net revenue, SG&A prior to deferred stock compensation
amortization expenses and restructuring and other market-related charges would
have been 34% for the six months ended June 30, 2002 and 27% for the six months
ended June 30, 2001.

Operating Enterprises. SG&A expenses decreased 43% over the prior period
to $44.0 million for the six months ended June 30, 2002. SG&A expenses were 36%
and 41% of our net revenue for the six months ended June 30, 2002 and 2001,
respectively. Prior to deferred stock compensation amortization charges of $5.8
million and $19.9 million for the six months ended June 30, 2002 and 2001,
respectively, and Luminent's restructuring and other market-related charges of
$11.4 million, SG&A would have decreased 16% to $38.2 million for the six months
ended June 30, 2002, as compared to $45.5 million for the six months ended June
30, 2001. As a percentage of net revenues, SG&A prior to deferred stock
compensation charges and restructuring and other market-related charges would
have been 31% for the six months ended June 30, 2002, as compared to 24% for the
six months ended June 30, 2001. These decreases are mainly due to the reduction
of overhead expenses to align operations with current revenue levels.

Development Stage Enterprises. SG&A expenses decreased 27% over the
prior period to $3.9 million for the six months ended June 30, 2002, as compared
to $5.3 million for the six months ended June 30, 2001. SG&A expenses for these
entities decreased due to reductions in overhead expenses.

AMORTIZATION OF INTANGIBLES

Operating Enterprises. Amortization of intangibles decreased to $4.8
million for the six months ended June 30, 2002, as compared to $57.2 million for
the six months ended June 30, 2001. The decrease of $52.3 million was the result
of the adoption of SFAS No. 142. In accordance with SFAS No. 142, the
amortization of goodwill and certain other intangibles was discontinued
effective on January 1, 2002. However, instead of amortization, an annual
impairment analysis is to be performed. We completed the first step in the
transitional goodwill impairment test during the quarter ended June 30, 2002. We
expect to perform our annual impairment review during the fourth quarter of each
year, commencing in the fourth quarter of 2002. The first step indicated that
the carrying value of the reporting units exceeded the fair value by an
estimated $290 million to $330 million. We will complete the second step of the
impairment test during the quarter ended September 30, 2002 and anticipate
reporting an impairment charge at that time.

Development Stage Enterprises. No significant amortization of
intangibles was recorded for these entities for the six months ended June 30,
2002 and 2001.

OTHER EXPENSE, NET

In June 1998, we issued $100.0 million principal amount of 5%
convertible subordinated notes (the Notes) due in June 2003. The Notes were
offered in a 144A private placement to qualified institutional investors at the
stated amount, less a selling discount of 3%. During the six months ended June
30, 2002, we acquired $28.3 million in Notes in exchange for our issuance of 7.8
million shares of our common stock to the holders of the Notes. In connection
with the acquisition and retirement of these Notes, we recognized a gain of $3.7
million, net of associated taxes. This gain has been reported in other expense,
net in the accompanying consolidated condensed statements of operations. In late
1998, we repurchased $10.0 million principal amount of these notes for cash at a
discount from the stated amount. We incurred $2.0 million and $2.6 million in
interest expense relating to the Notes for the six months ended June 30, 2002
and 2001, respectively.

We account for certain unconsolidated subsidiaries using the equity
method. The increase in other expense from $2.9 million to $10.0 million for the
six months ended June 30, 2002 is primarily attributable to impairment charges
of $7.6 million on our investments in these subsidiaries, $2.5 million from our
share of losses from our unconsolidated subsidiaries and interest expense of
$3.2 million associated with the termination of our interest rate swap,
partially offset by interest income. Our share of losses from our unconsolidated
subsidiaries was $3.0 million for the six months ended June 30, 2001.

PROVISION (BENEFIT) FOR TAXES

The provision for taxes for the six months ended June 30, 2002 was $1.0
million, compared to a benefit for taxes of $3.6 million for the six months
ended June 30, 2001. Our tax expense fluctuates primarily due to the tax
jurisdictions where we currently have operating facilities and the varying tax
rates in those jurisdictions. For the six months ended June 30, 2002, there was
no benefit provided for net operating losses.

CRITICAL ACCOUNTING POLICIES

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

RECENTLY ISSUED ACCOUNTING STANDARDS

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

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. We adopted this statement on January 1, 2002, and there has not been
a material impact on our financial position, results of operations or cash
flows.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement is effective for fiscal years beginning after May
15, 2002. For certain provisions, including the rescission of Statement No. 4,
early application is encouraged. We adopted this statement for the six months
ended June 30, 2002 and the immediate impact of its application was the
reclassification of our gain on the extinguishment of debt from an extraordinary
item to other income.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $95.6 million as of June 30, 2002, a
decrease of $69.0 million from cash and cash equivalents of $164.7 million as of
December 31, 2001. The decrease in cash and cash equivalent is substantially the
result of paying off $50.0 million of long-term debt, terminating our interest
rate swap for $3.2 million and net payments on short-term obligations of $4.7
million. Working capital as of June 30, 2002 was $86.1 million compared to
$175.4 million as of December 31, 2001. Our ratio of current assets to current
liabilities as of June 30, 2002 was 1.5 to 1.0 compared to 2.0 to 1.0 as of
December 31, 2001. The decrease in working capital is substantially attributed
to our consolidated net operating losses and the classification, beginning at
June 30, 2002, of our convertible subordinated notes, which are due in June
2003, as a current liability. As of June 30, 2002 and December 31, 2001, we did
not have any "off-balance sheet" financing arrangements.

Cash used in operating activities was $7.3 million for the six months
ended June 30, 2002, as compared to cash used in operating activities of $43.5
million for the six months ended June 30, 2001. Cash used in operating
activities is a result of our net operating loss of $53.6 million, adjusted for
non-cash items such as depreciation and amortization and deferred stock
compensation charges, and offset by cash generated from operating assets and
liabilities. Cash used in operating activities were positively affected by
decreased accounts receivables, inventories and other assets partially offset by
decreases in accounts payable and accrued liabilities, during the period. The
decrease in accounts receivable is due to lower revenue volumes coupled with
increased collection efforts, while the decrease in inventory is primarily the
result of the utilization of inventories on hand. Decreases in accounts payable
and accrued liabilities are the result of dramatic slowdown in the
communications equipment industry and reductions in overhead expenses.

Cash flows used in investing activities were $828,000 for the six months
ended June 30, 2002, compared to cash used in investing activities of $15.0
million for the six months ended June 30, 2001. Cash flows used in investing
activities for the three months ended June 30, 2002 were the result of capital
expenditures of $5.7 million, partially offset by maturities of short-term and
long-term marketable securities of $4.7 million and proceeds from the
dispositions of property, plant and equipment of $137,000. As of June 30, 2002,
there were no plans for major capital expenditures. Cash flows provided by
investing activities for the prior period resulted from the net cash provided by
the maturity of investments, offset by net cash used for capital expenditures
and investments in consolidated equity method subsidiaries.

Cash flows from financing activities were $58.0 million for the six
months ended June 30, 2002, as compared to cash provided in financing activities
of $24.2 million for the six months ended June 30, 2001. Cash used in financing
activities was primarily the result of paying off $50.0 million of long-term
debt, terminating our interest rate swap for $3.2 million and net payments on
short-term obligations of $4.4 million, offset by proceeds received from the
exercise of stock options of $134,000. Cash flows provided by financing
activities in the prior period represent the cash received through borrowings on
our short-term obligations and the exercise of stock options, offset by payments
on our short-term and long-term obligations.

On November 10, 2000, Luminent completed the initial public offering of
its common stock, selling 12.0 million shares at $12 per share. Their initial
public offering raised net proceeds of approximately $132.3 million. In December
2001, we reacquired, through a short-form merger, the minority interest of
Luminent representing approximately 8% of Luminent's outstanding common stock
(see the discussion above). Following this merger, we increased our liquidity
based on Luminent's cash, cash equivalents, restricted cash and cash equivalents
and short-term investments on hand as of the consummation of the merger, or
$107.7 million at December 31, 2001.

In June 1998, we issued $100.0 million principal amount of 5%
Convertible Subordinated Notes (the Notes) due in June 2003, in a private
placement raising net prioceeds of $96.4 million. The share (equivalent to a
conversion rate of approximately 73.94 share per $1,000 principal amount of
notes), representing an initial conversion premium of 24% for a total of
approximately 7.4 million shares of our common stock. The notes bear interest at
5% per annum, which is payable semi-annually on June 15 and December 15 of each
year. The notes have a five-year term and have been callable by us since June
15, 2001. The premiums payable to call these notes are 102% of the outstanding
principal amount during the 12 months ending June 14, 2002 and 101% during the
12 months ending June 14, 2003, plus accrued interest through the date of
redemption. During the six months ended June 30, 2002, we

acquired $28.3 million in Notes in exchange for the issuance of 7.8 million
shares of our common stock. In connection with the acquisition and retirement of
these Notes, we recognized a gain of $3.8 million net of associated taxes.

The following table illustrates our total contractual cash obligations
as of June 30, 2002 (in thousands):

Less
than 1 1 - 3 4 - 5 After 5
Cash Obligations TOTAL Year Years Years Years
-------- -------- -------- -------- --------

Long-term debt $ 10,655 $ 2,314 $ 4,719 $ 2,616 $ 1,006
Convertible subordinated notes 61,346 61,346 - - -
Unconditional purchase
obligations 11,518 10,823 681 14 -
Operating leases 21,638 4,262 7,930 4,760 4,686
Investments 2,144 1,232 912 - -
-------- -------- -------- -------- --------
Total contractual cash
obligations $107,301 $ 79,977 $ 14,242 $ 7,390 $ 5,692
======== ======== ======== ======== ========

Our total contractual cash obligations as of June 30, 2002, were $107.3
million, of which, $80.0 million are due within the next 12 months. These total
contractual cash obligations primarily consist of long-term financing
obligations including our convertible subordinated notes, operating leases for
our equipment and facilities, unconditional purchase obligations for necessary
raw materials and funding commitments for certain development stage enterprises.
Historically, these obligations have been satisfied through cash generated from
our operations or other avenues (see discussion below), and we expect that this
will continue to be the case.

Our remaining short-term obligations of $80.0 million consist primarily
of $61.3 million in remaining convertible subordinated notes, $4.3 million for
operating leases, $10.8 million for unconditional purchase obligations and $1.2
million for funding commitments for our development stage enterprises. Our
unconditional purchase obligations are to secure the necessary raw goods for
production of our products. As part of Luminent's restructure plan (see our
discussion above and the Footnotes to our Consolidated Condensed Financial
Statements), $3.2 million in unconditional purchase obligations have been
recorded as a liability and Luminent is in negotiations to cancel or renegotiate
contracts that are no longer required due to its significantly reduced orders
for optical components and sales projections. The remaining purchase commitments
are part of our ordinary course of business.

Our remaining long-term obligations as of June 30, 2002 of $27.3 million
consist primarily of $17.4 million of long-term financing obligations, $8.3
million in operating leases for our equipment and facilities and $912,000 for
funding commitments for certain development stage enterprises. Our remaining
long-term financing obligations consist of financing obtained for capital
expenditures and production expansion. Our operating leases expire at various
dates through 2049.

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

MARKET RISKS

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

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

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

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

CERTAIN RISK FACTORS THAT COULD AFFECT FUTURE RESULTS

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

WE INCURRED NET LOSSES IN THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001, YEARS
ENDED DECEMBER 31, 2001 AND 2000, PRIMARILY AS A RESULT OF THE AMORTIZATION OF
GOODWILL AND OTHER INTANGIBLES AND DEFERRED COMPENSATION CHARGES FROM RECENT
ACQUISITIONS. WE EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE FORESEEABLE
FUTURE.

We reported net losses of $53.6 million and $148.4 million for the six
months ended June 30, 2002 and 2001, respectively, $326.4 million for the year
ended December 31, 2001 and $153.0 million for the year ended December 31, 2000.
A major contributing factor to the net losses was the amortization of goodwill
and intangibles and deferred stock compensation related to our acquisitions of
Fiber Optic Communications, Jolt, Quantum Optech, AstroTerra and Optronics and
our employment arrangements with Luminent's former President and Luminent's
Chief Financial Officer. We will continue to record deferred stock compensation
relating to these acquisitions and the employment arrangements with these
executives going forward. In accordance with SFAS No. 142, the amortization of
goodwill and certain other intangibles was discontinued effective on January 1,
2002. However, instead of amortization, an annual impairment analysis is to be
performed. We completed the first step in the transitional goodwill impairment
test during the quarter ended June 30, 2002. For the six months ended June 30,
2002, we recorded impairment charges of $7.6 million in connection with certain
equity method investments, as the fair value of these assets was less than their
carrying value. We expect to perform our annual impairment review during the
fourth quarter of each year, commencing in the fourth quarter of 2002. The first
step indicated that the carrying value of the reporting units exceeded the fair
value by an estimated $290 million to $330 million. We will complete the second
step of the impairment test during the quarter ended September 30, 2002 and
anticipate reporting an impairment charge at that time. As a consequence of
deferred stock compensation charges and anticipated impairment charges, we do
not expect to report net income in the foreseeable future.

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

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

- reduced demand for our products, particularly Luminent's fiber optic
components;

- increased risk of excess and obsolete inventories;

- increased price competition for our products;

- excess manufacturing capacity under current market conditions; and

- higher overhead costs, as a percentage of revenues.

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

Additionally, these economic conditions are making it very difficult for
MRV and our other companies, our customers and our vendors to forecast and plan
future business activities. This level of uncertainty severely challenges our
ability to operate profitably or to grow our businesses. In particular, it is
difficult to develop and implement strategy, sustainable business models and
efficient operations, and effectively manage manufacturing and supply chain
relationships. We lost a key member of our management team in the terrorists
attacks on the World Trade Center of September 11, 2001 and thus the attacks
have already had adverse consequences on our business. However, we do not know
how the consequences of these attacks will additionally affect our business. It
is possible

that a decrease in business and consumer confidence in the economy and the
financial markets may lead to delays or reductions in capital expenditures by
our customers and potential customers. Concerns over accounting practices of
service providers and faltering growth prospects among equipment manufactures
could delay the economic recovery in the telecommunications industry beyond
2002. In addition, further disruptions of the air transport system in the United
States and abroad may negatively impact our ability to deliver products to
customers, visit potential customers, to provide support and service to our
existing customers and to obtain components in a timely fashion. If the economic
or market conditions continue to languish or further deteriorate, or if the
economic downturn is exacerbated as a result of political, economic or military
conditions associated with current domestic and world events, our businesses,
financial condition and results of operations could be further impaired.

OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND TO COMPETE
EFFECTIVELY, WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE MARKET
ACCEPTANCE.

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

- changing product specifications and customer requirements;

- difficulties in hiring and retaining necessary technical personnel;

- difficulties in reallocating engineering resources and overcoming
resource limitations;

- difficulties with contract manufacturers;

- changing market or competitive product requirements; and

- unanticipated engineering complexities.

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

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

Complex products, such as those our companies and we offer, may contain
undetected software or hardware errors when we first introduce them or when we
release new versions. The occurrence of these errors in the future, and our
inability to correct these errors quickly or at all, could result in the delay
or loss of market acceptance of our products. It could also result in material
warranty expense, diversion of engineering and other resources from our product
development efforts and the loss of credibility with, and legal actions by, our
customers, system integrators and end users. For instance, during late 2000, we
were informed that certain Luminent transceivers sold to Cisco were experiencing
field failures. Through discussions with Cisco through September 2001,
Luminent's management agreed to replace the failed units, which we believe
resolves this issue. We expect the ultimate replacement of these failed
transceivers will cost approximately $2.9 million which has been fully reserved.
Any of

these or other eventualities resulting from defects in our products could cause
our sales to decline and have a material adverse effect on our business,
operating results and financial condition.

OUR OPERATING RESULTS COULD FLUCTUATE SIGNIFICANTLY FROM QUARTER TO QUARTER.

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

- the cancellation or postponement of orders,

- the timing and amount of significant orders from our largest customers,

- our success in developing, introducing and shipping product enhancements
and new products,

- the mix of products we sell,

- software, hardware or other errors in the products we sell requiring
replacements or increased warranty reserves,

- adverse effects to our financial statements resulting from, or
necessitated by, past and future acquisitions or deferred compensation
charges,

- new product introductions by our competitors,

- pricing actions by our competitors or us,

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

- changes in material costs, and

- general economic conditions.

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

Our success is dependent, in part, on the overall growth rate of the
fiber optic components and networking industry. We can give no assurance that
the Internet or the industries that serve it will continue to grow or that we
will achieve higher growth rates. Our business, operating results or financial
condition may be adversely affected by any decreases in industry growth rates.
In addition, we can give no assurance that our results in any particular period
will fall within the ranges for growth forecast by market researchers.

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

THE LONG SALES CYCLES FOR OUR PRODUCTS MAY CAUSE REVENUES AND OPERATING RESULTS
TO VARY FROM QUARTER TO QUARTER, WHICH COULD CAUSE VOLATILITY IN OUR STOCK
PRICE.

The timing of our revenue is difficult to predict because of the length
and variability of the sales and implementation cycles for our products. We do
not recognize revenue until a product has been shipped to a customer, all
significant vendor obligations have been performed and collection is considered
probable. Customers often view the purchase of our products as a significant and
strategic decision. As a result, customers typically expend significant effort
in evaluating, testing and qualifying our products and our manufacturing
process. This customer evaluation and qualification process frequently results
in a lengthy initial sales cycle of, depending on the products, many months or
more. In addition, some of our customers require that our products be subjected
to lifetime and reliability testing, which also can take months or more. While
our customers are evaluating our products and before they place an order with
us, we may incur substantial sales and marketing and research and development
expenses to customize our products to the customer's needs. We may also expend
significant

management efforts, increase manufacturing capacity and order long lead-time
components or materials prior to receiving an order. Even after this evaluation
process, a potential customer may not purchase our products. Even after
acceptance of orders, our customers often change the scheduled delivery dates of
their orders. Because of the evolving nature of the optical networking and
network infrastructure markets, we cannot predict the length of these sales,
development or delivery cycles. As a result, these long sales cycles may cause
our net sales and operating results to vary significantly and unexpectedly from
quarter-to-quarter, which could cause volatility in our stock price.

THE PRICES OF OUR SHARES MAY CONTINUE TO BE HIGHLY VOLATILE.

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

- actual or anticipated fluctuations in our operating results,

- announcements of technological innovations or new product introductions
by us or our competitors,

- changes of estimates of our future operating results by securities
analysts,

- developments with respect to patents, copyrights or proprietary rights,
and

- general market conditions and other factors.

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

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

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

OUR BUSINESS IS INTENSELY COMPETITIVE AND THE EVIDENT TREND OF CONSOLIDATIONS IN
OUR INDUSTRY COULD MAKE IT MORE SO.

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

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

WE MAY HAVE DIFFICULTY MANAGING OUR BUSINESSES.

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

WE FACE RISKS FROM OUR INTERNATIONAL OPERATIONS.

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

Six Months Ended Year Ended
-------------------- --------------------------------------------
June 30, June 30, December 31, December 31, December 31,
2002 2001 2001 2000 1999
------- ------- ----------- ----------- -----------

Percent of total revenue
from foreign sales 71% 63% 67% 63% 58%

We have companies and offices in, and conduct a significant portion of
our operations in and from, Israel. We are, therefore, directly influenced by
the political and economic conditions affecting Israel. Any major hostilities
involving Israel, the interruption or curtailment of trade between Israel and
its trading partners or a substantial downturn in the economic or financial
condition of Israel could have a material adverse effect on our operations. In
addition, the recent acquisition of operations in Taiwan and People's Republic
of China has increased both the administrative complications we must manage and
our exposure to political, economic and other conditions affecting Taiwan and
People's Republic of China. Luminent has a large manufacturing facility in the
People's Republic of China in which it manufactures passive fiber optic
components and both Luminent and we make sales of our products in the People's
Republic of China. Our total sales in the People's Republic of China amounted to
approximately $10.4 million during the year ended December 31, 2001 and $2.7
million during the year ended December 31, 2000. Currently there is significant
political tension between Taiwan and People's Republic of China, which could
lead to hostilities. Risks we face due to international sales and the use of
overseas manufacturing include:

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

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

- unexpected changes in regulatory requirements;

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

- certification requirements;

- potentially adverse tax consequences;

- unanticipated cost increases;

- unavailability or late delivery of equipment;

- trade restrictions;

- limited protection of intellectual property rights;

- unforeseen environmental or engineering problems; and

- personnel recruitment delays.

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

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

WE DEPEND ON THIRD-PARTY CONTRACT MANUFACTURERS FOR NEEDED COMPONENTS AND
THEREFORE COULD FACE DELAYS HARMING OUR SALES.

We outsource the board-level assembly, test and quality control of
material, components, subassemblies and systems relating to our networking
products to third-party contract manufacturers. Though there are a large number
of contract manufacturers that we can use for outsourcing, we have elected to
use a limited number of vendors for a significant portion of our board assembly
requirements in order to foster consistency in quality of the products and to
achieve economies of scale. These independent third-party manufacturers also
provide the same services to other companies. Risks associated with the use of
independent manufacturers include unavailability of or delays in obtaining
adequate supplies of products and reduced control of manufacturing quality and
production costs. If our contract manufacturers failed to deliver needed
components timely, we could face difficulty in obtaining adequate supplies of
products from other sources in the near term. We can give no assurance that our
third party manufacturers will provide us with adequate supplies of quality
products on a timely basis, or at all. While we could outsource with other
vendors, a change in vendors may require significant lead-time and may result in
shipment delays and expenses. Our inability to obtain these products on a timely
basis, the loss of a vendor or a change in the terms and conditions of the
outsourcing would have a material adverse effect on our business, operating
results and financial condition.

WE MAY LOSE SALES IF SUPPLIERS OF OTHER CRITICAL COMPONENTS FAIL TO MEET OUR
NEEDS.

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

OUR INABILITY TO ACHIEVE ADEQUATE PRODUCTION YIELDS FOR CERTAIN COMPONENTS WE
MANUFACTURE INTERNALLY COULD RESULT IN A LOSS OF SALES AND CUSTOMERS.

We rely heavily on our own production capability for critical
semiconductor lasers and light emitting diodes used in our products. Because we
manufacture these and other key components at our own facilities and these
components are not readily available from other sources, any interruption of our
manufacturing processes could have a material adverse effect on our operations.
Furthermore, we have a limited number of employees dedicated to the operation
and maintenance of our wafer fabrication equipment, the loss of any of whom
could result in our inability to effectively operate and service this equipment.
Wafer fabrication is sensitive to many factors, including variations and
impurities in the raw materials, the fabrication process, performance of the
manufacturing equipment, defects in the masks used to print circuits on the
wafer and the level of contaminants in the manufacturing environment. We can
give no assurance that we will be able to maintain acceptable production yields
and avoid product shipment delays. In the event adequate production yields are
not achieved, resulting in product shipment delays, our business, operating
results and financial condition could be materially adversely affected.

WE MAY BE HARMED BY OUR FAILURE TO PURSUE ACQUISITIONS AND IF WE DO PURSUE
ACQUISITIONS HARM COULD RESULT.

An important element of our strategy has been to review acquisition
prospects that would complement our existing companies and products, augment our
market coverage and distribution ability or enhance our technological
capabilities. We expect that our acquisitions of businesses or product lines
will decrease in comparison to historical levels. The networking business is
highly competitive and our failure to pursue future acquisitions could hamper
our ability to enhance existing products and introduce new products on a timely
basis. If we do choose to pursue acquisitions, they could have a material
adverse effect on our business, financial condition and results of operations
because of the following:

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

- potentially dilutive issuances of equity securities;

- incurrence of debt and contingent liabilities;

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

- difficulties assimilating the acquired operations, technologies and
products;

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

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

- potential loss of key employees of acquired organizations; and

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

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

IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, WE MAY NOT BE ABLE
TO COMPETE.

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

WE ARE CURRENTLY, AND COULD IN THE FUTURE BECOME, SUBJECT TO LITIGATION
REGARDING INTELLECTUAL PROPERTY RIGHTS, WHICH COULD BE COSTLY AND SUBJECT US TO
SIGNIFICANT LIABILITY.

From time to time, third parties, including our competitors, may assert
patent, copyright and other intellectual property rights to technologies that
are important to us. We expect we will increasingly be subject to license offers
and infringement claims as the number of products and competitors in our market
grows and the functioning of products overlaps. In this regard:

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

- In April 1999, we received a written notice from Rockwell Automation
Technologies Corporation in which Rockwell claimed to have patent
rights in certain technology related to our metal organic chemical
vapor deposition, or MOCVD, processes and this claim initially
resulted in litigation, which has since been dismissed pending the
results of litigation not directly involving us.

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

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

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

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

As was the case with Rockwell, Lemelson, Lucent, Agere, Nortel or IBM,
or other companies may pursue litigation with respect to these or other claims.
The results of any litigation are inherently uncertain. In the event of an
adverse result in any litigation with respect to intellectual property rights
relevant to our products that could arise in the future, we could be required to
obtain licenses to the infringing technology, to pay substantial damages under
applicable law, to cease the manufacture, use and sale of infringing products or
to expend significant resources to develop non-infringing technology. Licenses
may not be available from third parties, including Lemelson, Rockwell, Lucent,
Ortel, Nortel or IBM, either on commercially reasonable terms or at all. In
addition, litigation frequently involves substantial expenditures and can
require significant management attention, even if we ultimately prevail.
Accordingly, any infringement claim or litigation against us could significantly
harm our business, operating results and financial condition.

IN THE FUTURE, WE MAY INITIATE CLAIMS OR LITIGATION AGAINST THIRD PARTIES FOR
INFRINGEMENT OF OUR PROPRIETARY RIGHTS TO PROTECT THESE RIGHTS OR TO DETERMINE
THE SCOPE AND VALIDITY OF OUR PROPRIETARY RIGHTS OR THE PROPRIETARY RIGHTS OF
COMPETITORS. THESE CLAIMS COULD RESULT IN COSTLY LITIGATION AND THE DIVERSION OF
OUR TECHNICAL AND MANAGEMENT PERSONNEL.

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

WE ARE DEPENDENT ON CERTAIN MEMBERS OF OUR SENIOR MANAGEMENT.

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

OUR BUSINESS REQUIRES US TO ATTRACT AND RETAIN QUALIFIED PERSONNEL.

Our ability to develop, manufacture and market our products, run our
companies and our ability to compete with our current and future competitors
depends, and will depend, in large part, on our ability to attract and retain
qualified personnel. Competition for executives and qualified personnel in the
networking and fiber optics industries is intense, and we will be required to
compete for that personnel with companies having substantially greater financial
and other resources than we do. To attract executives, we have had to enter into
compensation arrangements, which have resulted in substantial deferred
compensation charges and adversely affected our results of operations. We may
enter into similar arrangements in the future to attract qualified executives If
we should be unable to attract and retain qualified personnel, our business
could be materially adversely affected. We can give no assurance that we will be
able to attract and retain qualified personnel.

ENVIRONMENTAL REGULATIONS APPLICABLE TO OUR MANUFACTURING OPERATIONS COULD LIMIT
OUR ABILITY TO EXPAND OR SUBJECT US TO SUBSTANTIAL COSTS.

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

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

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

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

WE ARE AT RISK OF SECURITIES CLASS ACTION OR OTHER LITIGATION THAT COULD RESULT
IN SUBSTANTIAL COSTS AND DIVERT MANAGEMENT'S ATTENTION AND RESOURCES.

In the past, securities class action litigation has been brought against
a company following periods of volatility in the market price of its securities.
Due to the volatility and potential volatility of our stock price or the
volatility of Luminent's stock price following its initial public offering, we
may be the target of securities litigation in the future. Additionally, while
Luminent and we informed investors that we were under no obligation to, and
might not, make the distribution to our stockholders of our Luminent common
stock and that we could and might eliminate public ownership of Luminent through
a short-form merger with us, our decisions to abandon our distribution of
Luminent's common stock to our stockholders or to eliminate public ownership of
Luminent's common stock through the merger of Luminent into one of our
wholly-owned subsidiaries may result in securities or other

litigation. Securities or other litigation could result in substantial costs and
divert management's attention and resources.

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

In the past through 2000, we embarked upon a business strategy of
creating, acquiring and managing companies in the optical technology and
Internet infrastructure areas, with a view toward creating equity growth by
operating or investing in these companies and then potentially spinning them
off, taking them public or selling them or our interest in them. If this
strategy proved successful, we were concerned that we might incur significant
costs to avoid investment company status and would suffer other adverse
consequences if deemed to be an investment company under the Investment Company
Act of 1940. The Investment Company Act of 1940 requires registration for
companies that are engaged primarily in the business of investing, reinvesting,
owning, holding or trading in securities. A company may be deemed to be an
investment company if it owns investment securities with a value exceeding 40%
of the value of its total assets (excluding government securities and cash
items) on an unconsolidated basis, unless an exemption or safe harbor applies.
Securities issued by companies other than majority-owned subsidiaries are
generally counted as investment securities for purposes of the Investment
Company Act. Investment companies are subject to registration under, and
compliance with, the Investment Company Act unless a particular exclusion or
safe harbor provision applies. If we were to be deemed an investment company, we
would become subject to the requirements of the Investment Company Act. As a
consequence, we would be prohibited from engaging in business or issuing our
securities as we have in the past and might be subject to civil and criminal
penalties for noncompliance. In addition, certain of our contracts might be
voidable.

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

Moreover, although our portfolio of investment securities currently
comprises substantially less than 40% of our total assets, fluctuations in the
value of these securities or of our other assets as a result of future economic
conditions or events, or, more likely, the sale of one or more of companies in
exchange for the securities of the purchaser, may cause this limit to be
exceeded. In any case where our investment securities resulting from a sale of
one or more of our companies or otherwise were in excess of the 40% limit, we
would have to attempt to reduce our investment securities as a percentage of our
total assets unless an exclusion or safe harbor was available to us. This
reduction could be attempted in a number of ways, including the disposition of
investment securities and the acquisition of non-investment security assets. If
we were required to sell investment securities, we may sell them sooner than we
otherwise would. These sales may be at depressed prices and we may never realize
anticipated benefits from, or may incur losses on, these investments. We may be
unable to sell some investments due to contractual or legal restrictions or the
inability to locate a suitable buyer. Moreover, we may incur tax liabilities
when we sell assets. We may also be unable to purchase additional investment
securities that may be important to our operating strategy. If we decide to
acquire non-investment security assets, we may not be able to identify and
acquire suitable assets and businesses or the terms on which we are able to
acquire these assets may be unfavorable. The mere existence of these issues
could cause us to forego a transaction, which might otherwise have been
beneficial to us.

DELAWARE LAW AND OUR ABILITY TO ISSUE PREFERRED STOCK MAY HAVE ANTI-TAKEOVER
EFFECTS THAT COULD PREVENT A CHANGE IN CONTROL, WHICH MAY CAUSE OUR STOCK PRICE
TO DECLINE.

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

PART II - OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a) Not applicable.

(b) Not applicable.

(c) During the three months ended June 30, 2002, registrant issued an
aggregate of 1,438,495 shares of its common stock to two holders of its
5% Convertible Subordinated Notes due 2003 (the "Notes") in exchange
for $4.0 million principal amount of the Notes.

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

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

11.1 - Computation of per share earnings - See Note 1 of Notes to
Unaudited Consolidated Condensed Financial Statements.

(b) Reports on Form 8-K

One report on Form 8-K were filed during the period covered by this
Report, as follows:

A report on Form 8-K dated June 18, 2002 was filed on June 18, 2002
reporting matters under Item 4.

SIGNATURE

Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant certifies that it has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized on August 14, 2002.

MRV COMMUNICATIONS, INC.

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

By: /s/ Shay Gonen
------------------------------------------------
Shay Gonen
Chief Financial Officer

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

In connection with the Quarterly Report of MRV Communications, Inc. (the
"Company") on Form 10-Q for the period ended June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), each of
the undersigned, in the capacities and on August 14, 2002, hereby certifies
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to his knowledge:

1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.

MRV COMMUNICATIONS, INC.

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

By: /s/ Shay Gonen
------------------------------------------------
Shay Gonen
Chief Financial Officer