10-K405

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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)

   [x]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934

                   For the fiscal year ended December 31, 1997

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

          For the transition period from _____________ to ___________


                         Commission file number 0-25678


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

            Delaware                                      06-1340090
 (State or other jurisdiction of                       (I.R.S. employer 
  incorporation or organization)                      identification number)

        8917 Fullbright Avenue                                91311
     Chatsworth, California 91311                           (Zip Code)
(Address of principal executive offices)

Issuer's telephone number: (818) 773-9044; (818) 773-0906 (Fax)

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

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

                         Common Stock, $0.0034 par value

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

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

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which common equity was
sold, or the average bid and asked prices of such stock, as of a specified date
within the past 60 days:

     $518,865,557 based on the closing sale price of a share of Common Stock 
     at March 31, 1998 as reported by The Nasdaq National Market.

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 26,757,203 shares of Common
Stock, $0.0034 par value at March 31, 1998.


                      DOCUMENTS INCORPORATED BY REFERENCE:

                                      None



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     The Annual Report on Form 10-K contains forward-looking statements. These
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those anticipated in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the Section under Item 1 Description
of Business -- Risk Factors.

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

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     As used in this Report, "MRV" or the "Company" refers to MRV
Communications, Inc., its predecessor and its wholly-owned consolidated
subsidiaries, except where the context otherwise indicates. Any Speed to Any
Speed Ethernet, BranchRunner, ControlPoint, Enterprise Hub, FocalPoint, GigaHub,
JavaMan, LANBus, MAXserver MegaStack, MegaSwitch, MegaSwitch II, MegaVision, MRV
Communications, NBase, Network 9000, RouteRunner, WANscape and West Hills LAN
System and Xyplex are trademarks or trade names of the Company. Trademarks of
other companies are also used in this Report and are the property of their
respective owners.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

OVERVIEW

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

     The Company offers a family of network, switching and related products that
enhance LAN performance and facilitate the migration to next generation
technologies such as Fast Ethernet, Gigabit Ethernet and Asynchronous Transfer
Mode ("ATM"). MRV's MegaSwitch family of switching products range from complete
switching systems to stackable switches which upgrade performance of existing
LANs by relieving congestion of overloaded transmission speeds without requiring
replacement of existing technologies. In addition, the Company offers GigaHub, a
multi-platform switchable hub, and MegaStack, a LAN stackable hub supporting
shared and switches connectivity in a multiplatform and protocol environment, as
well as a network management system and a number of other products that support
network connectivity.

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

     To position the Company for growth, management's strategy has been to focus
on rapidly developing markets in the communications arena, such as LAN switching
and access networks, and to concentrate on improving



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performance of networks employing Ethernet protocols, thereby addressing the
largest installed base of network users. Management's strategy has also been to
emphasize development of innovative products that the Company may bring to
market early and to capitalize on MRV's manufacturing expertise and ability to
use proprietary fiber optic transmission and advanced switching technologies to
create high-speed, cost-effective networking solutions.

     The Company's principal executive offices are located at 8917 Fullbright
Avenue, Chatsworth, California 91311 and its telephone and fax numbers are (818)
773-9044 and (818) 773-0906, respectively. The Company maintains Web sites at
"http://www.mrv.com," "http://www.nbase.com" and "http://www.xyplex.com."
Information contained in the Company's Web sites shall not be deemed part of
this Report.

BACKGROUND

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

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

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

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

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

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

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



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of access solutions between enterprise networks and wide area network and/or
Internet service providers ("ISPs"). The purchase price paid to Whittaker
consisted of $35,000,000 in cash and three-year warrants to purchase up to
500,000 shares of Common Stock of the Company at an exercise price of $35 per
share.

     The Xyplex Acquisition is enabling MRV to expand its product lines with
products having wide area network ("WAN") and remote access capabilities,
permitting the Company to offer both individual networking products and a
complete end-to-end solution from LAN to WAN not only to MRV's own existing base
of customers but also to the customer base added by Xyplex. The
acquisition of Xyplex has also increased MRV's sales force, distribution 
channels, customer support and service organization.

RISK FACTORS

     The Company may from time to time 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 shareholders. 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" the Company is 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:

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

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



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     Potential Fluctuations in Operating Results. The Company's revenue and
operating results could fluctuate substantially from quarter to quarter and from
year to year. This could result from any one or a combination of factors such as
the cancellation or postponement of orders, the timing and amount of significant
orders from the Company's largest customers, the Company's success in
developing, introducing and shipping product enhancements and new products, the
product mix sold by the Company, adverse effects to the Company's financial
statements resulting from, or necessitated by, possible future acquisitions, new
product introductions by the Company's competitors, pricing actions by the
Company or its competitors, the timing of delivery and availability of
components from suppliers, changes in material costs and general economic
conditions. Although the Company has not had adverse fluctuations in results
from continuing operations in the past, there can be no assurance that these
factors or others, such as those discussed in "International Operations," would
not cause such fluctuations in the future. The volume and timing of orders
received during a quarter are difficult to forecast. The Company's customers
from time to time encounter uncertain and changing demand for their products.
Customers generally order based on their forecasts. If demand falls below such
forecasts or if customers do not control inventories effectively, they may
cancel or reschedule shipments previously ordered from the Company. The
Company's expense levels during any particular period are based, in part, on
expectations of future sales. If sales in a particular quarter do not meet
expectations, operating results could be materially adversely affected. Further,
there can be no assurance that the Company will be able to sustain its recent
rate of growth or continue profitable operations.

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

     Management of Growth. The Company has grown rapidly in recent years, with
revenues increasing from $2,400,000 for the year ended December 31, 1991, to
$39,200,000, $88,815,000 and $165,471,000 for the years ended December 31, 1995,
1996 and 1997, respectively. The Company's recent growth, both internally and
through the acquisitions it has made since January 1, 1995, has placed a
significant strain on the Company's financial and management personnel and
information systems and controls, and the Company must implement new and enhance
existing financial and management information systems and controls and must add
and train personnel to operate such systems effectively. While the strain placed
on the Company's personnel and systems has not had a material adverse effect on
the Company to date, there can be no assurance that a delay or failure to
implement new and enhance existing systems and controls will not have such an
effect in the future. The Company's recent growth through the acquisitions of
the Fibronics Business and Xyplex discussed in "Risks Associated with Recent
Acquisition and Potential Future Acquisitions" below and its intention to
continue to pursue its growth strategy through efforts to increase sales of
existing and new products can be expected to place even greater pressure on the
Company's existing personnel and compound the need for increased personnel,
expanded information systems, and additional financial and administrative
control procedures. There can be no assurance that the Company will be able to
successfully manage expanding operations.

     Risks Associated with Recent Acquisitions and Potential Future
Acquisitions. On September 26, 1996, the Company completed the Fibronics
Acquisition from Elbit of certain of the assets and selected liabilities of
Fibronics related to Fibronics' computer networking and telecommunications
businesses in Germany, the United States, the United Kingdom, the Netherlands
and Israel. The assets acquired included Fibronics' technology in progress and
existing 




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technology, its marketing channels, its GigaHub family of computer networking
products and other rights. The purchase price for the Fibronics Business was
approximately $22,800,000, which was paid using a combination of cash and Common
Stock of the Company. During the years ended December 31, 1994 and 1995, and the
period from January 1, 1996 through September 25, 1996 (the day the Fibronics
Business was acquired by the Company), the Fibronics Business reported net
revenues of $33,355,000, $35,003,000 and $19,481,000, respectively, and net
income (losses) of $(11,557,000), $79,000 and $(6,143,000), respectively. In
connection with the Fibronics Acquisition, the Company incurred charges of
$17,795,000, $6,974,000 and $4,357,000 for purchased technology, restructuring
and interest expense related to financing, respectively. These charges caused
the Company to incur a net loss of $9,654,000 for the year ended December 31,
1996.

     On January 30, 1998, MRV completed the Xyplex Acquisition from Whittaker.
Xyplex is a leading provider of access solutions between enterprise networks and
wide area network and/or ISPs. The purchase price paid to Whittaker consisted of
$35,000,000 in cash and three-year warrants to purchase up to 500,000 shares of
common stock of the Company at an exercise price of $35 per share. During the
year ended December 31, 1995, the period from January 1, 1996 through April 9,
1996 (the day Xyplex was acquired by Whittaker), the period from April 10, 1996
through October 31, 1996 and the fiscal year ended October 31, 1997, Xyplex 
reported net revenues of $107,617,000, $28,100,000, $52,021,000, and 
$75,663,000, respectively, and net losses of $37,360,000, $2,269,000, 
$13,355,000 and $80,309,000, respectively. While adding 11 months of Xyplex' 
revenues to those of the Company, the charges resulting from the Xyplex 
Acquisition are expected to have a material adverse effect on the net operating
results the Company expects to report during and for the year ending 
December 31, 1998. The Company's ability to operate Xyplex profitably will 
depend upon its ability to integrate this business successfully, including 
(i) the completion of Xyplex' research and development projects in process, 
especially the EdgeBlaster program, (ii) the integration of the products, 
technologies and personnel of Xyplex into the Company, (iii) management's 
ability to reduce Xyplex' operating costs and (iv) the continued market 
acceptance of Xyplex' products and technology.

     An important element of management's strategy is to review acquisition
prospects that would complement the Company's existing products, augment its
market coverage and distribution ability or enhance its technological
capabilities. Accordingly, the Company may acquire additional businesses,
products or technologies in the future. Future acquisitions by the Company could
result in charges similar to those incurred in connection with the Fibronics
Acquisition and the Xyplex Acquisition, potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities and amortization
expenses related to goodwill and other intangible assets, any of which could
materially adversely affect the Company's business, financial condition and
results of operations and/or the price of the Company's Common Stock.
Acquisitions entail numerous risks, including the assimilation of the acquired
operations, technologies and products, diversion of management's attention to
other business concerns, risks of entering markets in which the Company has no
or limited prior experience and potential loss of key employees of acquired
organizations. Prior to the Fibronics Acquisition, management had only limited
experience in assimilating acquired organizations. There can be no assurance as
to the ability of the Company to successfully integrate the products,
technologies or personnel of any business that might be acquired in the future,
and the failure of the Company to do so could have a material adverse effect on
the Company's business, financial condition and results of operations.

     International Operations. International sales have become an increasingly
important segment of the Company's operations, with the acquisitions of Galcom
and Ace in 1995, the Fibronics Business in 1996 and Xyplex in 1998.
Approximately 45%, 53% and 60% of the Company's net revenues for the years ended
December 1995, 1996 and 1997, respectively, were from sales to customers in
foreign countries. The Company has offices in, and conducts a significant
portion of its operations in and from, Israel. MRV is, therefore, directly
influenced by the political and economic conditions affecting Israel. Any major
hostilities involving Israel, the interruption or curtailment of trade between
Israel and its trading partners or a substantial


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downturn in the economic or financial condition of Israel could have a material
adverse effect on the Company's operations.

     Sales to foreign customers are subject to government controls and other
risks associated with international sales, including difficulties in obtaining
export licenses, fluctuations in currency exchange rates, political instability,
trade restrictions and changes in duty rates. Although the Company has not
experienced any material difficulties in this regard to date, there can be no
assurance that it will not experience any such material difficulties in the
future. The Company's sales are currently denominated in U.S. dollars and to
date its business has not been significantly affected by currency fluctuations
or inflation. However, the Company conducts business in several different
countries and thus fluctuations in currency exchange rates could cause the
Company's products to become relatively more expensive in particular countries,
leading to a reduction in sales in that country. In addition, inflation in such
countries could increase the Company's expenses. To date, the Company has not
hedged against currency exchange risks. In the future, the Company may engage in
foreign currency denominated sales or pay material amounts of expenses in
foreign currencies and, in such event, may experience gains and losses due to
currency fluctuations. The Company's operating results could be adversely
affected by such fluctuations or as a result of inflation in particular
countries where material expenses are incurred. Moreover, the Company's
operating results could also be adversely affected by seasonality of
international sales, which are typically lower in Asia in the first calendar
quarter and in Europe in the third calendar quarter. These international factors
could have a material adverse effect on future sales of the Company's products
to international end-users and, consequently, the Company's business, operating
results and financial condition.

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

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



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

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

     By letter to the Company dated March 19, 1997, a party has made a claim
against the Company alleging that the Company's DirectIP switching products make
use of unspecified information and know-how covered by a pending patent
application of such party. This allegation is under review by the Company and
the Company believes that the allegation is without merit. However, a complete
assessment cannot be made with respect to the merits of the allegation until
further details of the information and know-how are provided by such third
party. Currently, sales of DirectIP products are not material to the Company,
however, if the DirectIP switching products comprise a material part of the
Company's revenues in the future and a conclusion in respect of the claim
unfavorable to the Company is reached, the claim, if pursued by such party,
could materially and adversely affect the business, operating results and
financial 



                                       8
   9

condition of the Company. In addition, on December 27, 1996 Datapoint
Corporation ("Datapoint") brought an action against NBase Communications, Inc.,
a subsidiary of the Company ("NBase"), and others alleging infringement of two
of Datapoint's patents. The other defendants include Dayna Communications, Inc.,
Sun Microsystems, Inc., Adaptec, Inc., International Business Machines
Corporation, Lantronix and SVEC America Computer Corporation. Intel and Cisco
Systems, Inc. have also had actions brought against them by Datapoint with
respect to the same two patents. The Company is cooperating with several of
these companies in pursuit of common defenses and believes it has meritorious
defenses to this action. If a conclusion unfavorable to the Company is reached,
however, Datapoint's claim could materially and adversely affect the business,
operating results and financial condition of the Company. For further
information concerning this litigation, see Item 3. Legal Proceedings.

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

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

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

     Share Prices Have Been and May Continue to Be Highly Volatile.
Historically, the market price of the Company's Common Stock has been extremely
volatile. See Item 5. Market for Common Equity and Related Stockholder Matters.
The market price of the Common Stock is likely to continue to be highly volatile
and could be significantly affected by factors such as actual or anticipated
fluctuations in the Company's operating results, announcement of technological
innovations or new product introductions by the Company or its competitors,
changes of estimates of the Company's future operating results by securities
analysts, developments with respect to patents, copyrights or proprietary
rights, general market conditions and other factors. In addition, the stock
market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the common
stocks of technology companies. These broad market fluctuations may adversely
affect the market price of the Company's Common Stock. In addition, it is
possible that in a future fiscal quarter, the Company's results of operations
will fail to meet the expectations of securities analysts or investors and, in
such event, the market price of the Company's Common Stock would be materially
adversely affected.

     Possible Issuance of Preferred Stock; Anti-takeover Provisions. The Company
is authorized to issue up to 1,000,000 shares of Preferred Stock, par value $.01
per share. The Preferred Stock may be issued in one or more series, 



                                       9
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the terms of which may be determined at the time of issuance by the Board of
Directors without further action by stockholders. The terms of any such series
of preferred stock may include voting rights (including the right to vote as a
series on particular matters), preferences as to dividend, liquidation,
conversion and redemption rights and sinking fund provisions. No preferred stock
is currently outstanding. The issuance of any such preferred stock could
materially adversely affect the rights of the holders of Common Stock, and
therefore, reduce the value of the Common Stock. In particular, specific rights
granted to future holders of preferred stock could be used to restrict the
Company's ability to merge with, or sell its assets to, a third party, thereby
preserving control of the Company by the present owners.

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

INDUSTRY BACKGROUND

     The global communications industry has undergone significant transformation
and growth since the mid-1980's as a result of increased demand for
communications services and applications, as well as advances in technology and
changes in network architectures and public policy. The client server network
architecture with its shared information and resources, the increased power of
conventional applications as well as the proliferation of graphic intensive
applications such as multimedia, the Internet and intranets, have resulted in a
strong demand for additional bandwidth. This trend is expected to continue as
additional bandwidth intensive applications, such as video conferencing, are
increasingly used. Further, as a result of changes in communications regulations
and the adoption of common standards, enterprise networks, such as LANs and
WANs, and access networks, such as telecommunications and cable TV, are expected
to converge. The demand for high bandwidth applications, as well as the
convergence of data communications and telecommunications, has significantly
increased the requirement for networking and fiber optic equipment that
increases the capacity of networks through high speed and more efficient
transmission technologies.

     High-speed switching systems enhance the bandwidth of LANs so that a
greater number of users can utilize more complex applications without
experiencing network congestion. Fiber optic transmission components also
enhance the functionality of enterprise and access networks by enabling
high-speed transmission of voice, video and data across fiber optic cable.
Market research firms forecast strong growth in both of these sectors. In
October 1997, an industry analyst estimated that the market for LAN switches
will grow from $4 billion in 1996 to $12 billion in 1999, a compounded annual
growth rate of 46%. The same analyst estimated that the fiber optics industry
was $6.1 billion in 1995 and will grow to $12.3 billion by 1999, a compounded
annual growth rate of 19%. The Company believes that the growth of fiber optic
components will outpace that of the overall fiber optics market.

     Growth in the use and availability of wide area networks is being
stimulated by many factors including the need to share information between
centralized repositories and remote enterprise locations, to access and use the
Internet for communications and marketing and to electronically access external
resources used by the enterprise for outsourcing. Growth is also being fueled by
the increasing availability of more cost-effective WAN services such as Frame
Relay and Integrated Service Digital Network ("ISDN") making it more affordable
for many organizations to set up a WAN or expand an existing one. The growth in
the use and availability of wide area networks coupled with increasing use,
power, speed and complexity of local area networks has resulted in the
increasing need for equipment that permits high speed connections between LANs
and WANs and ISPs. As a result of these factors, in March 1997 an industry
source 



                                       10
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estimated the market for products connecting LANs and WANs at $4.5 billion,
growing at 34 percent annually, and the market for products connecting LANs and
ISPs at $800 million, growing at 40% annually.

LAN ENVIRONMENT

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

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

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

     Another important benefit of switches is their ability to combine groups of
computers into virtual LANs ("VLANs"). As a result, workgroups can be set up
according to business relationships rather than physical proximity. Unlike hub
and router systems, which require segment users to be physically grouped
together, VLANs simplify network administration as users relocate. VLANs can
also be used for controlling bandwidth and directing excess capacity to
workgroups and users as needed. Moreover, by confining traffic to desired
workgroups, VLANs improve network security.

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



                                       11
   12

necessary if data transfer is to occur between devices that operate at different
speeds. Second, as high-speed file servers or fiber backbones are upgraded, the
system's switches must be upgraded as well.

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

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

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

     To promote the implementation of Gigabit Ethernet, the Gigabit Ethernet
Alliance ("GEA") was formed in May 1996. The Company is a member of the GEA
which also includes Advanced Micro Devices, Inc., Bay Networks, Inc., Cabletron
Systems, Inc., Cisco Systems, Inc., Compaq Computer Corporation, Digital
Equipment Corporation, Hewlett-Packard Company, Intel Corporation, Lucent
Technologies Inc., Newbridge Networks, Sun Microsystems, Inc. and 3Com
Corporation.

FIBER OPTIC ENVIRONMENT

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

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

     Fiber Optic Transmission in Data Communications. As higher speed
connections are implemented in LAN/WAN systems, fiber optic transmission becomes
an essential element in computer networks. From transmission speeds of 100 Mbps
and higher, and transmission distances of 100 meters and longer, fiber optic
transmission must be deployed. Virtually all high-speed transmission standards,
such as FDDI, ATM, Fast Ethernet and Gigabit Ethernet, 



                                       12
   13

specify fiber optic media as the most practical technology for transmission. The
steady rise in high-speed connections and the growth in the span of networks,
including the need to connect remote workgroups, are driving the deployment of
fiber optic cable throughout enterprise networks.

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

PRODUCTS AND TECHNOLOGY

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

     ENTERPRISE NETWORKING SOLUTIONS

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

     The MegaSwitch Product Family. The Company's MegaSwitch products are a
family of Fast Ethernet switches which are marketed under MRV's NBase trade
name. The MegaSwitch products range from complete switching systems to stackable
switches which upgrade performance of existing LANs by relieving congestion of
overloaded network segments, enable full duplex and flow control and provide an
easy, cost-effective migration to higher transmission speeds without requiring
replacement of existing infrastructure. The MegaSwitch I, which was first
introduced in 1995, is a family of three Fast Ethernet switches, which enhance
the bandwidth of the corporate backbone to support higher traffic levels. These
systems are scalable and compatible with a wide range of existing network
protocols and technologies. The Company's MegaSwitch II products, introduced in
1996, are designed for corporate, campus and metropolitan deployment as a
cost-effective method of connecting existing networks with higher-speed
backbones and are based on "Any Speed to Any Speed" Ethernet switching,
including Gigabit Ethernet with access to ATM. Fast Ethernet, Gigabit and ATM
uplink modules incorporate InterSwitch VLAN capabilities. InterSwitch VLANs
enable the network administrator to define separate VLANs spanning multiple
switches in order to achieve optimal network performance and serve multiple
workgroups.



                                       13
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Product Name                    Application and Functionality
- ------------                    -----------------------------
                 
MegaSwitch II      This cost-effective stackable switch is a 12 port, high
                   performance switch which provides an uplink to ATM and
                   Gigabit Ethernet backbones, supports Ethernet/Fast Ethernet
                   traffic by automatically configuring for 10 Mbps/100 Mbps,
                   provides for zero packet loss even at extended network links
                   of up to 110 km and incorporates VLAN capability. This switch
                   can be used as an upgrade for an existing workgroup or as a
                   fully configured enterprise switch.

MegaSwitch I       These stackable switches, with up to 13 ports, provide a
                   migration path to upgrade from a legacy 10 Mbps LAN to a 100
                   Mbps network. These switches provide segmentation of 10 Mbps
                   shared LAN and higher speed server or backbone connections
                   enabling interconnection of workgroups or high-speed
                   workstations.


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



Product Name                    Application and Functionality
- ------------                    -----------------------------
                 
GigaHub            This enterprise network solution for medium to large
                   corporate networks requiring both shared and switched
                   connectivity in a mixed protocol environment, provides a 12
                   Gbps modular enterprise switching hub, supporting Ethernet,
                   Fast Ethernet, FDDI, ATM and Token Ring, as well as voice and
                   point-to-point protocols, and allowing integration of LAN
                   distribution and switching in a single hub.

MegaStack          This high-speed stackable hub system implements Ethernet and
                   Fast Ethernet LAN segments, provides performance for
                   mission-critical and bandwidth-intensive applications,
                   connects from 12 to 180 users, is stackable with fiber optic
                   connectivity to remote locations and offers plug-and-play
                   convenience and built-in auto-partitioning for instant
                   isolation of network failures.

MegaVision         This full-featured network management system provides
                   affordable and comprehensive management and control of all
                   MegaSwitch and MegaStack products and automatically detects
                   and monitors any SNMP compliant devices. It operates on all
                   major NMS platforms including Windows 3.1, Windows 95,
                   Windows NT Client, Novell NMS, HP/Open View for Windows or
                   UNIX.



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



Product Name                    Description and Functionality
- ------------                    -----------------------------
                 
Fiber Optic        These products consist of Ethernet and Fast Ethernet fiber
Transceivers and   optic transceivers that enable campus or metropolitan 
Converters         deployment of Ethernet or Fast Ethernet networks through 
                   fiber optic interconnection of LANs to a distance of over 100
                   km, and multimode to single mode fiber converters for FDDI,
                   ATM and SONET that extend the range of FDDI, ATM and SONET
                   via fiber.

Token Ring         These products consist of multimedia Token Ring hubs with
                   fiber, coax, UTP and STP connectivity which extends the
                   distance between segments of Token Ring networks, and fiber
                   optic transceivers with multimode and single mode fiber,
                   which allow flexible implementation of IBM midrange and
                   mainframe terminal connectivity.

Midrange           These products consist of Twinax Star panels, multiplexers
Connectivity       and repeaters which allow flexible implementation of IBM 
                   mid-range and mainframe terminal connectivity.




                                       14
   15

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




Product Name                    Application and Functionality
- ------------                    -----------------------------
                 
Network 9000       This hub enables the integration of routing, switching,
                   access serving and media concentration technologies.
                   Primarily used at the central site of corporate networks and
                   at the edge of ISP networks, the Network 9000 supports any
                   combination of Ethernet, Token Ring, FDDI, ISDN, ATM, local
                   and remote bridge/router connectivity.

Network 3000       This family of branch office routers provides a modular,
                   scalable solution geared toward accessing the corporate
                   network and the Internet from remote offices. Any combination
                   of Ethernet, ISDN, Frame Relay and asynchronous connections
                   is available. RouteRunner is a low-cost ISDN router designed
                   to meet the WAN needs of small office home offices and branch
                   offices such as doctors' offices or sales offices.

MAXserver          This family of low-cost, scalable remote access server
                   solutions enables terminals, PCs, modems, printers and other
                   asynchronous devices to connect to the LAN and/or WAN. Ideal
                   for supporting workgroups, the stackable MAXserver offers
                   8-40 ports (and up to 280 ports in the modular Network 9000
                   solution) to provide network access locally and remotely via
                   dial-up services. A variety of protocols are supported
                   including TCP/IP, IPX, and Appletalk. Security capabilities
                   such as Kerberos, RADIUS, SecurID, password and dial-back are
                   also offered.


     The Company's Advance in Gigabit Ethernet. Gigabit Ethernet aims to support
the extension of Ethernet and Fast Ethernet standards to higher speeds while
insuring full interoperability with existing networks. The Company developed an
advance in Gigabit technology which it proposed to the GEA and which proposal
was accepted in November 1996. The Company's technology maximizes bandwidth
utilization and doubles the span of the network while also providing for delay
sensitive applications such as video. At the core of this technology is the
ability to "save" one frame during a collision event. This way, at least one
frame transmitted will reach its destination, thereby doubling throughput. The
key advantages to the Company's Gigabit Ethernet implementation include
guaranteed bandwidth utilization not influenced by collision, multimedia support
and superior quality of service.

     Direct IP Switching. The Company has developed, and recently introduced as
part of its MegaSwitch product line, a series of DirectIP switching products
which provides the control and security of traditional routing with the
performance of switching.

     OPTICAL TRANSMISSION PRODUCTS

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

     Discrete Components. Discrete components include laser diodes and LEDs.
Every fiber optic communication system utilizes semiconductor laser diodes or
LEDs as its source of optical power. Laser diodes and LEDs are solid state
semiconductor devices that efficiently convert electronic signals into pulses of
light of high purity and brightness. The 



                                       15
   16

Company believes that its lasers and LEDs, which can carry data over distances
in excess of 20 km are among the most powerful in their wavelength range in
terms of optical power coupled into single mode fiber.

     Integrated Components. The Company's integrated components include an LED
and laser based transmitter/receiver product line, designed for computer
networking applications and data link products designed for SONET and ATM
transmission standards. This product line consists of products compatible with
single mode fiber optic cable, which is more suitable for long distance and
high-speed transmission than multimode fiber optic cable. As most currently
available data link modules are designed for multimode fiber optic cable, the
Company has designed its products to be adaptable, providing for easy conversion
from a multimode type data link to a single mode optical fiber.

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

     FTTC: Telephone and High-speed Internet Access. The Company offers a new
     "Bi-directional" optical transmission and reception module for two-way
     simultaneous transmission of telephony and data over one fiber instead of
     the two fibers normally used to transmit and receive information. This
     product is integrated into the DISC system currently deployed by Bell South
     in one of the largest FTTC projects in the United States.

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

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

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

PRODUCT DEVELOPMENT

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

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



                                       16
   17

     From its product development programs the Company expects to introduce a
number of new products within the next 12 months. One new product is JavaMan, a
platform independent, Internet-ready Network Management System ("NMS") which the
Company created to expand the reach of MegaVision over the Internet. All
necessary software is expected to reside on MegaSwitch II, pre-configured prior
to customer delivery. JavaMan's use of existing Web standards provides remote
manageability in both Internet and intranet environments.

     The Company also has a number of other new networking product development
programs underway, including Gigabit Ethernet switching, ATM and FDDI uplink
modules. These products are being developed in response to current technological
trends and end user demands for greater bandwidth and product flexibility. The
Company is in the process of consolidating Xyplex' research and development
projects with its own programs. As a result of its consolidation of Fibronics'
research and development projects with its programs, the Company integrated the
MegaSwitch II technology, including Gigabit Ethernet, with the GigaHub
architecture. In 1997, the Company recently announced a GigaFrame product
strategy, the architecture for which will consist of a Gigabit Ethernet Switch,
a GigaHub enterprise switch, MegaSwitch II and two new low cost 10 Mbps to 100
Mbps stackable switches, all of which are now available. The Company shipped its
first GigaFrame switch, the 12 port GFS 3012, in the fourth quarter of 1997.
This switch, which also provides Gigabit Ethernet transmission over fiber optic
cable to a distance of 100 kilometers, won a best switching product award at
ComNet '98 and the Editor's choice award by Communications News magazine.

     New products under development in the area of fiber optics include
transmission products for cellular and personal communication systems which
allow transmission over fiber optic cable between sites and also fiber optic
components that will improve cable TV transmission. These products are expected
to be available within the next six months. MRV also has research and
development projects underway seeking to enhance its various fiber optic
transmission products and is participating in Bell South's FTTC project.

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

     At December 31, 1997, the Company had 88 employees dedicated to research
and product development. Research and development expenditures totaled
approximately $4,000,000, $8,201,000 and $13,089,000 for years ended December
31, 1995, 1996 and 1997, respectively. 

CUSTOMERS

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

                                NETWORK SWITCHING


- --------------------------------------------------------------------------------
COMPUTERS AND ELECTRONICS                          GOVERNMENT AGENCIES
- -------------------------                          -------------------
                                                
o     AMP Incorporated                             o     Ealing (Borough of London)
o     Data General Corporation                     o     Federal Bureau of Investigation
o     Fujitsu Ltd. (Japan)                         O     MITI (Japan)
o     International Business Machines Corporation  o     National Security Administration
O     Intel Corporation                            o     Police Department of Berlin/Potsdam
o     Matsushita (Germany)                         o     Social Security Administration
o     Newbridge Networks                           o     US Coast Guard
- --------------------------------------------------------------------------------




                                       17
   18



- --------------------------------------------------------------------------------
BANKING, FINANCE AND INSURANCE                     DIVERSIFIED AND OTHER
- ------------------------------                     ---------------------
                                                
o     Bankhaus Rinderknecht (Zurich)               o     Bayer AG
o     GE Capital                                   o     The Walt Disney Co.
o     NationsBank                                  O     Eastman Kodak
o     Trans America Corporation                    O     Tele-Communications, Inc.
- --------------------------------------------------------------------------------



FIBER OPTIC COMPONENTS



- --------------------------------------------------------------------------------
DATA  COMMUNICATIONS                               TELECOMMUNICATIONS
- --------------------                               ------------------
                                                
o Bay Networks, Inc.                               o Asea Brown Boveri
o Canoga Perkins                                   o Broadband Network Inc.
o Cisco Systems, Inc.                              o Crosscom
o Connectware                                      o Lucent Technologies Inc.
o Network Systems Corporation                      o Photon Technology (China)
o Nortel                                           o Reltec
o Optical Data Systems                             o Transcom
- --------------------------------------------------------------------------------
VIDEO AND VOICE COMMUNICATIONS                     INSTRUMENTATION
- ------------------------------                     ---------------
o Augat Communication Products Inc.                 o EXFO
o C-Cor                                             o GN Nettest
o General Instrument                                o Kingfisher International
O Optelecom, Inc.                                   o Noyes Fiber Systems
o Tektronix                                         O 3M
- --------------------------------------------------------------------------------


MARKETING

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

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

SALES AND DISTRIBUTION

     The Company continually seeks to expand its distribution capability to
capitalize on its technological expertise and production capacity and to augment
and increase distribution channels to accelerate its growth. Products are sold
through the Company's direct sales force, VARs, systems integrators,
distributors, manufacturer's representatives and 



                                       18
   19

OEM customers. The Company's sales and distribution divisions are organized
along four primary lines: OEM sales and partnerships; VARs and systems
integrators; manufacturer's representatives; and domestic and international
distributors.

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

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

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

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

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

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

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




                                       19
   20

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

MANUFACTURING

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

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

     The Company relies exclusively on its own production capability for
critical semiconductor lasers and LEDs used in its products. The Company's
optical transmission production process involves (i) a wafer processing facility
for semiconductor laser diode and LED chip manufacturing under stringent and
accurate procedures using state-of-the-art wafer fabrication technology, (ii)
high precision electronic and mechanical assembly, and (iii) final assembly and
testing. Relevant assembly processes include die attach, wirebond, substrate
attachment and fiber coupling. The Company also conducts tests throughout its
manufacturing process using commercially available and in-house built testing
systems that incorporate proprietary procedures. The Company performs final
product tests on all of its products prior to shipment to customers. Many of the
key processes used in the Company's products are proprietary; and, therefore,
many of the key components of the Company's products are designed and produced
internally. Because the Company manufactures these and other key components of
its products at its own facility and such components are not readily available
from other sources, any interruption of the Company's manufacturing process
could have a material adverse 



                                       20
   21

effect on the Company's operations. Furthermore, the Company has a limited
number of employees dedicated to the operation and maintenance of its wafer
fabrication equipment, the loss of any of whom could result in the Company's
inability to effectively operate and service such equipment. Wafer fabrication
is sensitive to a wide variety of factors, including variations and impurities
in the raw materials, difficulties in the fabrication process and performance of
the manufacturing equipment. There can be no assurance that the Company will be
able to maintain acceptable production yields and avoid product shipment delays.
In the event adequate production yields are not achieved resulting in product
shipment delays, the Company's business, financial condition and results of
operations could be materially adversely affected. The Company believes that it
has sufficient manufacturing capacity for growth in the coming years. In
addition, at various times there have been shortages of parts in the electronics
industry, and certain critical components have been subject to limited
allocations. Although shortages of parts and allocations have not had a material
adverse effect on the Company's results of operations, there can be no assurance
that any future shortages or allocations would not have such an effect.

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

COMPETITION

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

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

     The networking industry has become increasingly concentrated in recent
years as a result of consolidation. This consolidation is likely to permit the
Company's competitors to devote significantly greater resources to the
development and marketing of new competitive products and the marketing of
existing competitive products to their larger installed 



                                       21
   22

bases. The Company expects that competition will increase substantially as a
result of these and other industry consolidations and alliances, as well as the
emergence of new competitors.

PROPRIETARY RIGHTS

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

     There has been substantial industry litigation regarding intellectual
property rights involving technology companies. By letter to the Company dated
March 19, 1997, a party has made a claim against the Company alleging that the
Company's DirectIP switching products make use of unspecified information and
know-how covered by a pending patent application of such party. This allegation
is under review by the Company and the Company believes that the allegation is
without merit. However, a complete assessment cannot be made with respect to the
merits of the allegation until further details of the information and know-how
are provided by such third party. Currently, sales of DirectIP products are not
material to the Company, however, if the DirectIP switching products comprise a
material part of the Company's revenues in the future and a conclusion in
respect of the claim unfavorable to the Company is reached, the claim, if
pursued by such party, could materially and adversely affect the business,
operating results and financial condition of the Company. In addition, on
December 27, 1996 Datapoint Corporation ("Datapoint") brought an action against
NBase Communications, Inc., a subsidiary of the Company ("NBase"), and others
alleging infringement of two of Datapoint's patents. The other defendants
include Dayna Communications, Inc., Sun Microsystems, Inc., Adaptec, Inc.,
International Business Machines Corporation, Lantronix and SVEC America Computer
Corporation. Intel and Cisco Systems, Inc. have also had actions brought against
them by Datapoint with respect to the same two patents. The Company is
cooperating with several of these companies in pursuit of common defenses and
believes it has meritorious defenses to this action. If a conclusion unfavorable
to the Company is reached, however, Datapoint's claim could materially and
adversely affect the business, operating results and financial condition of the
Company. For further information concerning this litigation, see Item 3. Legal
Proceedings. 

     In the future, additional litigation may be necessary to protect trade
secrets and other intellectual property rights owned by the Company, to enforce
any patents issued to the Company, to defend the Company against claimed
infringement of the rights of others and to determine the scope and validity of
the proprietary rights of others. Any such litigation could be costly and a
diversion of management's attention, which could have a material adverse effect
on the Company's business, operating results and financial condition. An adverse
determination in such litigation could further result in the loss of the
Company's proprietary rights, subject the Company to significant liabilities,
require the Company to seek licenses from third parties or prevent the Company
from manufacturing or selling its products, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company typically has agreed to indemnify its customers and key
suppliers for liability incurred in connection with the infringement of a third
party's intellectual property rights.

EMPLOYEES

     As of December 31, 1997, the Company had 438 full-time employees, including
six executive officers, 174 in production, 129 in marketing and sales, 88 in
research and development and 41 in general administration. None of the Company's
employees are represented by a union or governed by a collective bargaining
agreement, and the Company believes its relationship with its employees is good.
As of January 30, 1998, the day Xyplex was acquired, Xyplex had 330 employees, 
including 45 in production, 142 



                                       22
   23

in marketing and sales, 82 in research and development and 61 in general
administration.

ITEM 2. PROPERTIES

     The Company's principal administrative, sales and marketing, research and
development and manufacturing facility is located in Chatsworth, California. The
facility covers approximately 17,700 square feet and is leased from an
unaffiliated third party at an annual base rent of approximately $122,256 (plus
local taxes) for a lease term expiring in March 1999. In addition, the Company
leases space in three buildings near its primary facility in Chatsworth,
consisting of approximately 5,000 square feet, approximately 12,800 square feet
and approximately 20,950 square feet from unaffiliated third parties at annual
base rentals of approximately $43,000, $91,000 and $131,000 respectively. The
terms of these leases expire in March 1999, March 1999 and January 31, 2003,
respectively.

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

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

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

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

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

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

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

ITEM 3. LEGAL PROCEEDINGS

     On December 27, 1996, Datapoint brought an action against NBase and several
other defendants in the United States District Court for the Eastern District of
New York alleging infringement of two of Datapoint's patents related to LANs,
more particularly to claimed improved LANs which interoperatively combine
additional enhanced capability and/or which provide multiple different
operational capabilities. In the same lawsuit, Datapoint alleges that other
defendants including Dayna Communications, Inc., Sun Microsystems, Inc.,
Adaptec, Inc., International Business Machines Corporation, Lantronix and SVEC
America Computer Corporation have infringed the same two patents. The 



                                       23
   24

Company has been advised that several other companies, including Intel
Corporation and Cisco Systems, Inc. have also had actions brought against them
by Datapoint with respect to the same two patents. The action against NBase and
its codefendants seeks, among other things, an injunction against the
manufacture or sale of products which embody the inventions set forth in the two
patents and single and treble damages for the alleged infringement. Datapoint's
complaint also seeks to have the court determine that the named defendants shall
serve as representatives of a defendant class of manufacturers, vendors and
users of products allegedly infringing on Datapoint's claimed patents from which
defendant class Datapoint seeks the same relief as from the individual
defendants. The Company is cooperating with several of the defendants in pursuit
of common defenses and believes it has meritorious defenses to this action. If a
conclusion unfavorable to the Company is reached, however, Datapoint's claim
could materially affect the business, operating results and financial condition
of the Company. 

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

     On December 12, 1997, the Company held its Annual Meeting of Shareholders
(the "Annual Meeting") at which, among other things, the Company's entire board
of directors was elected. The name of each director elected at the Annual
Meeting, and the number of votes cast for and against (or withheld) were as
follows:



                                                Number of Votes
                                     -------------------------------------------
         Name                               For            Against or Withheld
- -----------------------------------  ------------------   ----------------------
                                                    
Noam Lotan                               20,518,439              193,250 

Shlomo Margalit                          20,518,639              193,050

Zeev Rav-Noy                             20,518,739              192,950

Igal Shidlovsky                          20,518,639              193,050         

Eddie Kawamura                           20,518,739              192,950


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



               PROPOSAL                       FOR         AGAINST      ABSTAIN
- ----------------------------------------   ----------    ---------   -------------
                                                             
To approve the adoption of the Company's                                                     
1997 Incentive and Nonstatutory Stock
Option Plan covering options to purchase
up to 500,000 shares of Common Stock of
the Company.                               20,381,847     327,400        2,442

To ratify the selection of Arthur
Andersen LLP as independent auditors for
the Company for the fiscal year ending
December 31, 1997.                         20,707,289       1,700        2,700

To consider and act upon any matters
incidental to the foregoing and any
other matters which may properly come
before the meeting or any adjournment or
adjournments thereof.                      18,408,784   2,207,105       95,800    




                                       24
   25

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's Common Stock is traded in the over-the-counter market and has
been included in the Nasdaq National Market since February 28, 1994 under the
symbol "MRVC." The following table sets forth the high and low closing sale
prices of the Common Stock for the periods indicated as reported by The Nasdaq
National Market.



                                                        HIGH        LOW
  1996:                                                ------      ------
  -----
                                                                
First Quarter* ...........................             $17.67      $ 8.42
Second Quarter* ..........................             $37.13      $15.63
Third Quarter* ...........................             $27.94      $15.00
Fourth Quarter ...........................             $24.88      $17.00
  1997
  ----
First Quarter ............................             $29.88      $18.25
Second Quarter ...........................             $30.75      $18.25
Third Quarter ............................             $38.75      $25.75
Fourth Quarter ...........................             $37.75      $21.13

- ----------
*As adjusted for the 3-for-2 stock split effected May 20, 1996 and the 2-for-1
 stock split effected July 29, 1996.

     At March 31, 1998 the Company had 265 stockholders of record, as indicated
on the records of the Company's transfer agent, who held, management believes,
for approximately 13,197 beneficial holders.

     The Company has never declared or paid cash dividends on the Common Stock
since its inception. The Company currently intends to retain all of its
earnings, if any, for use in the operation and expansion of its business and
does not intend to pay any cash dividends to its stockholders in the foreseeable
future.




                                       25
   26

ITEM 6. SELECTED FINANCIAL DATA

     The following selected statement of operations data for the three years in
the period ended December 31, 1997 and the balance sheet data as of December 31,
1996 and 1997 are derived from the financial statements and notes thereto
included elsewhere herein audited by Arthur Andersen LLP, independent public
accountants, as set forth in their report also incorporated by reference herein.
The selected statement of operations data for the two years in the period ended
December 31, 1994 and the balance sheet data as of December 31, 1993, 1994 and
1995 were derived from audited financial statements of the Company not included
herein. The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company, including the notes
thereto, included elsewhere in this Report.

CONSOLIDATED STATEMENT OF OPERATIONS DATA:


                                                                                       Year ended December 31,
                                                                          ------------------------------------------------
                                                                           1993       1994      1995      1996      1997
                                                                          ------    -------   -------   --------   -------
                                                                               (In thousands, except per share amounts)
                                                                                                        
Revenues, net........................................................... $ 7,426    $17,526   $39,202   $ 88,815  $165,471
Cost of goods sold......................................................   3,936     10,328    22,608     51,478    94,709
Research and development expenses.......................................   1,103      2,144     4,044      8,201    13,093
Selling, general and administrative expenses............................   1,259      2,615     6,799     14,025    27,365
                                                                          ------  ---------  --------  ---------  --------
Operating income before non-recurring charges...........................   1,128      2,439     5,751     15,111    30,304
Purchased technology in progress(1).....................................       -          -     6,211     17,795         -
Restructuring costs(1)..................................................       -          -     1,465      6,974         -
                                                                          ------  ---------  --------  ---------  --------
Operating income (loss).................................................   1,128      2,439    (1,925)    (9,658)   30,304
Other income (expense)..................................................     198        162       654        153     2,744
Interest expense related to convertible debentures and
   acquisition(1)                                                              -          -         -     (4,357)     (843)
                                                                          ------  ---------  --------  ---------  --------
Income (loss) before provision for income taxes, minority interests
   and extraordinary items..............................................   1,326      2,601    (1,271)   (13,862)   32,205
Provision (credit) for income taxes.....................................     487        983         2     (4,404)    9,474
Minority interests......................................................       -          -         -        196       146
                                                                          ------  ---------  --------  ---------  --------
Net income (loss)(1)................................................... . $  839   $  1,618   $(1,273)  $ (9,654)  $22,585
                                                                          ======  =========  ========  =========  ========
Net income (loss)  per share - Basic(1).................................  $ 0.07   $   0.13   $ (0.07)  $  (0.49)  $  0.95
                                                                          ======  =========  ========  =========  ========
Net income (loss)  per share - Diluted(1)...............................  $ 0.07   $   0.13   $ (0.07)  $  (0.49)  $  0.88
                                                                          ======  =========  ========  =========  ========
Shares used in per share calculation -- Basic                             11,771     12,335    18,377     19,739    23,670
Shares used in per share calculation -- Diluted                           12,050     12,560    18,377     19,739    25,734



CONSOLIDATED BALANCE SHEET DATA:



                                                            At December 31,
                                          ----------------------------------------------------
                                            1993      1994       1995       1996       1997
                                          --------   --------   --------   --------   --------
                                                             (In thousands)
                                                                            
Working capital .......................   $  3,514   $ 11,303   $ 22,019   $ 56,973   $111,559
Total assets ..........................      7,328     16,667     33,307     96,943    236,236
Total liabilities .....................      1,537      3,761      8,049     43,790     45,610
Long-term  debt, net of current portion         --         --        271     18,892      2,853
Stockholders' equity ..................      5,791     12,906     25,258     41,771    189,969

- -----------
(1) The non-recurring charges consist of purchased technology in progress and
    restructuring charges incurred as a result of acquisitions. Purchased
    technology in progress for the year ended December 31, 1995 was $6,211,000.
    The purchased technology was for research and development ("R&D") projects
    in progress at the time of acquisition of assets from Ace and Galcom.
    Restructuring costs during the year ended December 31, 1995 were $1,465,000
    and are associated with a plan adopted by the Company in 1995 calling for
    the merger


                                       26
   27
    of the newly acquired subsidiaries and the Company's LAN product division.
    The plan also called for the closure of some facilities, termination of
    redundant employees and cancellation of representation agreements. Excluding
    the non-recurring charges, net of their tax effects, net income would have
    increased to $4,345,000 or $0.24 per share - basic and $0.22 per share -
    diluted for the year ended December 31, 1995. Purchased technology in
    progress for the year ended December 31, 1996 was $17,795,000 and was in
    conjunction with the Fibronics Acquisition. Restructuring costs during the
    year ended December 31, 1996 were $6,974,000 and were associated with a plan
    adopted by the Company on September 30, 1996 calling for the reduction of
    workforce, closing of certain facilities, retraining of certain employees
    and elimination of particular product lines due to this acquisition.
    Interest expenses related to the acquisition for the years ended December
    31, 1996 and 1997 were $4,357,000 and $427,000, respectively, and were
    connected with the private placement of $30 million principal amount of
    Debentures, the proceeds from which the Company used to finance the cash
    portion of the Fibronics Acquisition. Excluding the non-recurring charges,
    net of their tax effects, net income would have been $10,555,000 or $0.54
    per share - basic and $0.46 per share - diluted for the year ended December
    31, 1996. Non-recurring charges were not material to net income for the year
    ended December 31, 1997. 

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

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

GENERAL

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

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



                                       27
   28

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

     On January 30, 1998, MRV completed the Xyplex Acquisition from Whittaker.
The purchase price paid to Whittaker consisted of $35,000,000 in cash and 3-year
warrants to purchase up to 500,000 shares of common stock of the Company at an
exercise price of $35 per share. During the year ended December 31, 1995, the
period from January 1, 1996 through April 9, 1996 (the day Xyplex was acquired
by Whittaker), the period from April 10, 1996 through October 31, 1996 and the
fiscal year ended October 31, 1997, Xyplex reported net revenues of 
$107,617,000, $28,100,000, $52,021,000, and $75,663,000, respectively, and net
losses of $37,360,000, $2,269,000, $13,353,000 and $80,309,000, respectively. 
While adding 11 months of Xyplex' revenues to those of the Company, the charges
resulting from the Xyplex Acquisition are expected to have a material adverse 
effect on the net operating results the Company expects to report during and 
for the year ending December 31, 1998. The Company's ability to operate Xyplex
profitably will depend upon its ability to integrate this business
successfully, including (i) the completion of Xyplex' research and
development projects in process, especially the EdgeBlaster program, (ii) the 
integration of the products, technologies and personnel of Xyplex into the 
Company, (iii) management's ability to reduce Xyplex' operating costs, 
and (iv) the continued market acceptance of Xyplex' products and technology.

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



                                       28
   29

RESULTS OF OPERATIONS

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



                                                                        Year ended December 31,
                                                                       -------------------------
                                                                        1995      1996      1997
                                                                       ------    ------    ------
                                                                                     
Revenues, net ....................................................     100.0%    100.0%    100.0%
Revenue growth rate from prior period ............................     124.0     126.6      86.3
Cost of goods sold ...............................................      57.7      58.0      57.2
                                                                       -----     -----     -----
Gross profit .....................................................      42.3      42.0      42.8
Operating expenses:
   Research and development expenses .............................      10.3       9.2       7.9
   Selling, general and administrative expenses ..................      17.3      15.8      16.5
                                                                       -----     -----     -----
Operating income before non-recurring charges ....................      14.7      17.0      18.3
   Purchased technology in progress ..............................      15.8      20.0      --
   Restructuring costs ...........................................       3.7       7.9      --
                                                                       -----     -----     -----
Operating income .................................................      (4.9)    (10.9)     18.3
Other income (expense), net ......................................       1.7       0.2       1.6
Interest expense related to convertible debentures and acquisition      --        (4.9)     (0.5)
                                                                       -----     -----     -----
Income (loss) before taxes .......................................      (3.2)%   (15.8)%    19.4%
                                                                       =====     =====     =====
Pro forma financial data (excluding non-recurring charges):
    Operating income .............................................      14.6%     17.0%     18.3%
    Income (loss) before taxes ...................................      16.3      17.2      20.0



Years ended December 31, 1997 and 1996

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

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

     Research and Development. For the years ended December 31, 1997 and 1996,
research and development expenses ("R&D") expenses were $13,093,000 and
$8,201,000, respectively. In the case of absolute dollars, the 59.7% increase in
R&D spending during the year ended December 31, 1997 over the year ended
December 31, 1996 was attributable to the continued development of the Company's
networking and fiber optic products including Ethernet/Fast Ethernet/Gigabit
Ethernet switches, GigaHub modules, GigaFrame switch and fiber optic components.
Additional costs were also associated with the hiring of new research and
development personnel and consultants. R&D expenses as a percentage of revenues
declined from 9.2% of revenues during year ended December 31, 1996, to 7.9% of
revenues for year ended December 31, 1997. This decrease was primarily caused
because the Company's revenues during the periods 



                                       29
   30

increased at a faster rate than R&D expenses. The Company intends to continue to
invest in the research and development of new products. Management believes that
the ability of the Company to develop and commercialize new products is a key
competitive factor.

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

     Purchased Technology in Progress and Restructuring Costs. Purchased
technology in progress for the year ended December 31, 1996 was $17,795,000. The
purchased technology in 1996 was for R&D projects of Fibronics in progress at
the time of the Fibronics Acquisition on September 26, 1996. Restructuring costs
during the year ended December 31, 1996 were $6,974,000. The restructuring in
1996 was associated with a plan adopted by the Company on September 30, 1996, in
conjunction with the Fibronics Acquisition, calling for the reduction of
workforce, closing of certain facilities, retraining of certain employees and
elimination of particular product lines. Purchased technology in progress for
the year ended December 31, 1995 was $6,211,000. The Company did not incur these
charges in 1997.

     Interest Expense Related to Convertible Debentures and Acquisition. In
September 1996, the Company completed a private placement of $30,000,000
principal amount of convertible Debentures. See "Liquidity and Capital
Resources," below. To give effect to the accounting treatment announced by the
staff of the Securities and Exchange Commission at the March 13, 1997 meeting of
the Emerging Issues Task Force relevant to the Company's issuance of the
Debentures having "beneficial conversion" features, the value of the fixed
discount has been reflected in the Company's consolidated financial statements
for the years ended December 31, 1996 and 1997 as additional interest expense
and such fixed discount was accreted through the first possible conversion date
of the respective issuance. The Company will not need to report future charges
relating to the issuance of the Debentures as the outstanding principal and
accrued interest were paid in full at April 4, 1997 through conversion into
Common Stock. See "Liquidity and Capital Resources" below.

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

Years ended December 31, 1996 and 1995

     Revenues. Revenues for the year ended December 31, 1996 were $88,815,000
compared to $39,202,000 for the year ended December 31, 1995, an increase of
126%. Revenues from sales of networking products and optical transmission
products were 69% and 31%, respectively, of total revenues during the year ended
December 31, 1996 as compared to 60% and 40%, respectively, of total revenues
during the year ended December 31, 1995. The changes represented increases of
$38,140,000 or 162% and $11,473,000 or 73% in revenues from networking products
and optical transmission products, respectively, for the year ended December 31,
1996. Total revenues increased as a result of strong demand for LAN connectivity
and fiber optic products. Revenues from networking products increased primarily
due to sales of the MegaSwitch II product line and revenues from optical
transmission products increased primarily as a result of volume shipments,
beginning in the third quarter of 1996, of a new bidirectional optical
transmission and reception module for Fiber-to-the-Curb ("FTTC") applications
and sales to the cable TV industry. International sales accounted for
approximately 53% of revenues for the year ended December 31, 1996 as compared
to approximately 45% of revenues for the year ended December 31, 1995.
International sales, as a percentage of total revenues, increased because of
increased concentration of sales and marketing efforts overseas. The Company
estimates that most of the growth in international sales resulted from the
increased concentration of sales and marketing and that 



                                       30
   31

the acquisition of Fibronics accounted for approximately 12% of the growth. The
Fibronics Acquisition, which was not completed until September 26, 1996,
resulted in only a marginal increase in total revenues for 1996, primarily
caused from sales of older Fibronics products that were not eliminated as part
of the Company's restructuring of the Fibronics business.

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

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

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

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

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

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



                                       31
   32

Selected Quarterly Financial Data

     The following table sets forth certain selected operating data for the
quarters indicated. This information has been derived from the unaudited
consolidated financial statements of the Company which in the opinion of
management contain all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of such information. These operating results
are not necessarily indicative of results for any future period and results may
fluctuate significantly from quarter to quarter in the future.



                                                                      (Amounts in thousands)
                                            1995                               1996                               1997
                               --------------------------------  ----------------------------------  -------------------------------
                                 Q1      Q2      Q3       Q4       Q1       Q2       Q3        Q4      Q1      Q2       Q3      Q4
                               ------  ------  -------  -------  -------  -------  -------  -------  ------- ------- ------- -------
                                                                                             
Revenues, net................  $6,737  $8,310  $11,135  $13,020  $15,529  $19,586  $22,664  $31,036  $35,564 $39,528 $41,979 $48,400
Gross profit.................   2,477   3,475    4,826    5,816    6,540    8,175    9,382   13,240   15,388  16,643  18,174  20,557
Operating income before
 non-recurring charges.......     858   1,221    1,645    2,027    2,720    3,224    3,558    5,609    6,865   7,370   8,131   7,938
Operating income (loss)......     858  (6,455)   1,645    2,027    2,720    3,224  (21,211)   5,609    6,865   7,370   8,131   7,938
Net income (loss)............     705  (4,707)   1,155    1,574    1,879    2,283  (15,504)   1,688    4,343   5,209   5,922   7,111



LIQUIDITY AND CAPITAL RESOURCES

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

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

     In November 1996, the Company completed a private placement of 200,000
shares of Common Stock to Intel Corporation ("Intel") for $4,000,000 ($20.00 per
share). As part of the private placement, the Company issued to Intel three-year
warrants to purchase up to an additional 500,000 shares of Common Stock at
$20.00 per share. Of such warrants, warrants to purchase 200,000 shares of
Common Stock are exercisable under certain conditions.

     In September 1997, the Company completed a follow-on public offering of
2,785,000 shares of Common Stock raising net proceeds of $93,320,000 (the "1997
Public Offering").

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

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



                                       32
   33

issuance of Common Stock. The majority of cash used for investing activities
during 1996 was for the purchase of the Fibronics Business and net purchases of
investments.

     Accounts receivable were $47,258,000 at December 31, 1997 as compared to
$24,296,000 at December 31, 1996. The increase in accounts receivable was
primarily attributable to the increase in overall sales.

     Inventories were $41,689,000 at December 31, 1997 as compared to
$18,238,000 at December 31, 1996. The increase in inventories was primarily
attributable to the Company's decision to add larger inventories to shorten lead
times for customers. Also contributing to the increase were a ramp-up of new
products which did not begin shipping until the end of the quarter and a drop in
orders anticipated from certain OEMs during the quarter. Management believes
that MRV's inventory levels at various points in time may not necessarily be
comparable to those of many other companies in its industry. This is because MRV
conducts significant in-house manufacturing of various components used in its
products and thus carries substantial raw materials and work-in-progress in
addition to finished products in its inventories. In contrast, many competitors
outsource to turnkey contract manufacturers substantial portions of their
production requirements and thus do not include material amounts of raw 
materials or work in progress in inventories and may not even include finished
products in inventory if the contract manufacturer ships directly to the
competitors' customers.

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

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

EFFECTS OF INFLATION AND CURRENCY EXCHANGE RATES

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

     The Company's sales are currently denominated in U.S. dollars and to date
its business has not been significantly affected by currency fluctuations or
inflation. However, the Company conducts business in several different countries
and thus fluctuations in currency exchange rates could cause the Company's
products to become relatively 



                                       33
   34

more expensive in particular countries, leading to a reduction in sales in that
country. In addition, inflation in such countries could increase the Company's
expenses. To date, the Company has not hedged against currency exchange risks.
In the future, the Company may engage in foreign currency denominated sales or
pay material amounts of expenses in foreign currencies and, in such event, may
experience gains and losses due to currency fluctuations. The Company's
operating results could be adversely affected by such fluctuations or as a
result of inflation in particular countries where material expenses are
incurred.

POST-RETIREMENT BENEFITS

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

YEAR 2000

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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



                                                                                  PAGE
                                                                                  ----
                                                                               
Report of Independent Public Accountants.........................................  F-1

Consolidated Balance Sheets as of December 31, 1996 and 1997.....................  F-2

Consolidated Statements of Operations for each of the three years in the period
ended December 31, 1997 .........................................................  F-4

Consolidated Statements of Stockholders' Equity for each of the three years in
the period ended December 31, 1997 ..............................................  F-5

Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1997 .........................................................  F-6

Notes to Consolidated Financial Statements ......................................  F-8




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

Not applicable.



                                       34
   35
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To MRV Communications, Inc.:

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

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

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


                                                        
                                               /S/ ARTHUR ANDERSON LLP   

                                                   ARTHUR ANDERSEN LLP



Los Angeles, California
February 20, 1998










                                      F-1
   36
                            MRV COMMUNICATIONS, INC.

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

                                 (IN THOUSANDS)






                                                           DECEMBER 31,
                                                  --------------------------
                                                    1996               1997
                                                  --------           -------
                                                               
CURRENT ASSETS:
  Cash and cash equivalents                         $14,641          $ 19,428
  Short-term investments                             17,659            36,413
  Accounts receivable, net of allowance of
    $2,468 in 1996 and $4,252 in 1997                24,296            47,258
  Inventories                                        18,238            41,689
  Deferred income tax asset                           2,660             2,280
  Other current assets                                4,377             7,248
                                                    -------           -------
               Total current assets                  81,871           154,316
                                                    -------           -------

PROPERTY, PLANT AND EQUIPMENT, at cost:
  Building                                            1,464             3,127
  Machinery and equipment                             3,941             4,294
  Furniture and fixtures                                286               560
  Computer hardware and software                      1,513             2,134
  Leasehold improvements                                533               710
                                                    -------           -------
                                                      7,737            10,825
  Less--Accumulated depreciation and
    amortization                                     (1,489)           (2,642)
                                                    -------           -------
                                                      6,248             8,183
                                                    -------           -------
OTHER ASSETS:
  Investments                                             -            62,382
  Deferred income tax asset                           6,036             6,231
  Goodwill, net of accumulated
    amortization of $210 in 1996
    and $372 in 1997                                  2,788             5,077
  Other                                                   -                47
                                                    -------           -------
                                                      8,824            73,737
                                                    -------           -------
                                                    $96,943          $236,236
                                                    =======           =======



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




                                      F-2
   37
                            MRV COMMUNICATIONS, INC.

                           CONSOLIDATED BALANCE SHEETS

                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                 (IN THOUSANDS)





                                                             DECEMBER 31,
                                                       ------------------------
                                                         1996            1997
                                                       ---------      ---------
                                                                      
CURRENT LIABILITIES:
  Current portion of capital
    lease obligations                                  $     119      $     111
  Accounts payable                                        11,328         30,439
  Accrued liabilities                                      6,389          8,429
  Accrued restructuring costs                              3,549           --
  Customer deposit                                         1,500            293
  Income taxes payable                                     2,013          3,485
                                                       ---------      ---------
               Total current liabilities                  24,898         42,757
                                                       ---------      ---------

LONG-TERM LIABILITIES:
  Convertible debentures                                  17,325           --
  Capital lease obligations, net of
    current portion                                        1,035            788
  Other long-term liabilities                                532          2,065
                                                       ---------      ---------
               Total long-term liabilities                18,892          2,853
                                                       ---------      ---------

COMMITMENTS AND CONTINGENCIES (Note 7)

MINORITY INTEREST                                            852            657
COMMON STOCK ISSUED IN CONNECTION WITH 
  ACQUISITION (Note 3)                                    10,530           --
STOCKHOLDERS' EQUITY:
  Preferred stock, $0.01 par value:
    Authorized - 1,000 shares;
      no shares issued or outstanding                       --             --
  Common stock, $0.0034 par value:
    Authorized - 40,000 shares
    Issued and outstanding - 21,286
      shares in 1996 and 26,360 in 1997                       70             88
  Capital in excess of par value                          49,636        175,874
  Retained earnings (deficit)                             (7,950)        14,635
  Cumulative translation adjustments                          15           (628)
                                                       ---------      ---------
                                                          41,771        189,969
                                                       ---------      ---------
                                                       $  96,943      $ 236,236
                                                       =========      =========




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




                                      F-3
   38
                            MRV COMMUNICATIONS, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                    (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)





                                                  YEAR ENDED DECEMBER 31,
                                          -------------------------------------
                                            1995           1996          1997
                                          ---------     ---------     ---------
                                                                   
REVENUES, net:                            $  39,202     $  88,815     $ 165,471
                                          ---------     ---------     ---------
COSTS AND EXPENSES:
  Cost of goods sold                         22,608        51,478        94,709
  Research and development expenses           4,044         8,201        13,093
  Selling, general and
    administrative expenses                   6,799        14,025        27,365
  Purchased technology in
    progress                                  6,211        17,795          --
  Restructuring costs                         1,465         6,974          --
                                          ---------     ---------     ---------
                                             41,127        98,473       135,167
                                          ---------     ---------     ---------
      Operating income (loss)                (1,925)       (9,658)       30,304
                                          ---------     ---------     ---------
OTHER INCOME (EXPENSE):
  Interest expense related to
    convertible debentures
    and acquisition                            --          (4,357)         (843)
  Minority interest                            --            (196)         (146)
  Interest income                               641           702         2,841
  Interest expense                             (102)         (743)         (118)
  Other                                         115           194            21
                                          ---------     ---------     ---------
                                                654        (4,400)        1,755
                                          ---------     ---------     ---------
      Income (loss) before provision
        (benefit) for income taxes           (1,271)      (14,058)       32,059

PROVISION (BENEFIT) FOR INCOME TAXES              2        (4,404)        9,474
                                          ---------     ---------     ---------
NET INCOME (LOSS)                         $  (1,273)    $  (9,654)    $  22,585
                                          =========     =========     =========
EARNINGS (LOSS) PER COMMON SHARE
  INFORMATION:

      Basic earnings (loss) per
        common share                      $    (.07)    $    (.49)    $    0.95
                                          =========     =========     =========
      Diluted earnings (loss)
        per common share                  $    (.07)    $    (.49)    $    0.88
                                          =========     =========     =========
WEIGHTED AVERAGE NUMBER OF
  COMMON SHARES OUTSTANDING:

      Basic                                  18,377        19,739        23,670
                                          =========     =========     =========
      Diluted                                18,377        19,739        25,734
                                          =========     =========     =========



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




                                      F-4
   39
                            MRV COMMUNICATIONS, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                 (IN THOUSANDS)





                                                              
                                          COMMON STOCK           CAPITAL IN      RETAINED     CUMULATIVE  
                                     -----------------------      EXCESS OF      EARNINGS     TRANSLATION 
                                      SHARES          AMOUNT      PAR VALUE      (DEFICIT)     ADJUSTMENTS          TOTAL
                                      ------          ------      ---------      ---------     -----------          -----
BALANCE,
                                                                                                     
  December 31, 1995                   19,049              63      $  23,491      $   1,704       $    --        $  25,258

  Shares held by trustee
    relating to Fibronics
    acquisition                          137            --             --             --              --              --

  Conversion of
    debentures                           812               2         12,851           --              --            12,853

  Exercise of stock
    warrants and options               1,088               4          4,938           --              --             4,942

  Issuance of common
    stock for cash                       200               1          3,999           --              --             4,000

  Interest expense related
    to convertible debentures
    and acquisition
    (see Note 4)                        --              --            4,357           --              --             4,357

  Translation adjustments               --              --             --             --                15              15

  Net loss                              --              --             --           (9,654)           --            (9,654)
                                   ---------       ---------      ---------      ---------       ---------       ---------
BALANCE,
  December 31, 1996                   21,286       $      70         49,636         (7,950)             15          41,771
                                   ---------       ---------      ---------      ---------       ---------       ---------

Issuance of common stock
  in connection with
  public offering                      2,785               9         93,311           --              --            93,320

Issuance of common stock
  in connection with
  the acquisition of
  Fibronics Ltd.                         275               1          6,299           --              --             6,300

Return of shares held
  by trustee relating
  to Fibronics acquisition              (137)           --             --             --              --              --

Conversion of debentures               1,013               4         17,737           --              --            17,741

Exercise of stock warrants
  and options, including
  related tax benefit                  1,138               4          8,464           --              --             8,468

Interest expense related
  to convertible debentures
  and acquisition                       --              --              427           --              --               427


Translation adjustment                  --              --             --             --              (643)           (643)

  Net income                            --              --             --           22,585            --            22,585
                                   ---------       ---------      ---------      ---------       ---------       ---------
BALANCE,
  December 31, 1997                   26,360       $      88      $ 175,874      $  14,635       $    (628)      $ 189,969
                                   =========       =========      =========      =========       =========       =========



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




                                      F-5
   40
                            MRV COMMUNICATIONS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)





                                                          YEAR ENDED DECEMBER 31,
                                               -----------------------------------------
                                                 1995           1996             1997
                                               --------       --------       -----------
                                                                    
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                            $ (1,273)      $ (9,654)      $22,585
  Adjustments to reconcile net income
    (loss) to net cash used in
    operating activities:
      Depreciation and amortization                 305            943         1,439
      Provision for losses on accounts
        receivable                                  525          1,643         1,951
      (Gain) loss on sale of property and
        equipment                                    (6)           192          --
      Realized (gain) loss on investment           --             (180)         (215)
      Purchased technology in progress            5,691         17,795          --
      Interest related to convertible
        debentures and acquisition                 --            4,357           843
      Amortization of premium 
        on U.S. Treasury notes                        8           --              37
      Minority interests' share of income          --              196           146
      Changes in assets and
        liabilities, net of effects
        from acquisitions:
        Decrease (increase) in:
          Accounts receivable                    (6,859)       (10,937)      (22,568)
          Inventories                            (5,397)        (5,697)      (21,867)
          Deferred income taxes                  (1,357)        (6,839)          185
          Other assets                              166         (3,031)       (2,824)
        Increase (decrease) in:
          Accounts payable                        1,457          1,912        17,435
          Accrued liabilities and
            restructuring                           154          6,623        (2,092)
          Income taxes payable                      425            798         3,622
          Customer deposits                         (15)         1,500        (1,207)
          Accrued severance pay                     (19)           231          (231)
          Deferred rent                              (3)          --            --
                                               --------       --------       --------
             Net cash used in operating
               activities                        (6,198)          (148)       (2,761)
                                               --------       --------       --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment            (1,035)        (2,593)       (1,207)
  Proceeds from the sale of property
    and equipment                                    14           --            --
  Purchases of investments                      (22,013)       (45,612)     (148,948)
  Proceeds from sale of investments              24,741         29,133        67,990
  Restricted cash                                (6,272)         6,272          --
  Cash used in acquisitions, net of
    cash received                                (1,000)       (13,247)       (5,289)
                                               --------       --------       --------
             Net cash used in
               investing activities              (5,565)       (26,047)      (87,454)
                                               --------       --------       --------




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



                                      F-6
   41




                                                   YEAR ENDED DECEMBER 31,
                                         -----------------------------------------
                                           1995           1996             1997
                                         --------       --------       -----------
                                                              
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from issuance of
    common stock                            9,715          8,942            99,638
  Proceeds from the issuance of
    debentures                                 --         30,000                --
  Principal payments on capital
    lease obligations                         (78)           (60)             (255)
  Loans receivable from officers               32             --                --
  Repurchase of common stock
    issued in connection with
    acquisition                                --             --            (4,230)
                                         --------       --------       -----------
             Net cash provided by
               financing activities         9,669         38,882            95,153
                                         --------       --------       -----------

EFFECT OF EXCHANGE RATE CHANGES
  ON CASH AND CASH EQUIVALENTS                 --              3              (151)

NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                     (2,094)        12,690             4,787

CASH AND CASH EQUIVALENTS,
  beginning of year                         4,045          1,951            14,641
                                         --------       --------       -----------
CASH AND CASH EQUIVALENTS,
  end of year                            $  1,951       $ 14,641       $    19,428
                                         ========       ========       ===========





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



                                      F-7
   42
                            MRV COMMUNICATIONS, INC.


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997



1.      BACKGROUND

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

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        PRINCIPLES OF CONSOLIDATION

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

        FOREIGN CURRENCY TRANSLATION

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

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

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

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


                                      F-8
   43

        USE OF ESTIMATES

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

        STOCK-BASED COMPENSATION PLAN

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

        REVENUE RECOGNITION

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

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

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

        PURCHASED TECHNOLOGY IN PROGRESS AND RESTRUCTURING COSTS

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

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

                                      F-9
   44
        CASH AND CASH EQUIVALENTS

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

        RESTRICTED CASH BALANCES

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

        CONCENTRATION OF CREDIT RISK

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

        INVESTMENTS

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

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

                                      F-10
   45
        INVENTORIES

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

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



                                                 1996              1997
                                               -------           -------
                                                               
        Raw materials                           $8,295           $17,568
        Work-in-process                          3,975            13,436
        Finished goods                           5,968            10,685
                                               -------           -------
                                               $18,238           $41,689
                                               =======           =======


        PROPERTY AND EQUIPMENT

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

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

        GOODWILL

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

        CUSTOMER DEPOSIT

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

        WARRANTY

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

        STATEMENTS OF CASH FLOWS

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

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


                                      F-11
   46
        During 1996, the Company acquired property and equipment with a cost of
$1,147,000 through a capital lease agreement. Also in 1996, $12,675,000
principal amount of debentures and $178,000 of accrued interest was converted
into approximately 812,000 shares of common stock. During 1995, the Company
purchased property and equipment with a cost of $100,000 through a capital lease
agreement.

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

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

        COMMON STOCK SPLITS

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

        NET INCOME PER COMMON SHARE

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

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




                                                  Years Ended December 31,
                                          ---------------------------------------
                                             1995           1996           1997
                                          ---------      --------      -------- 
                                                              

Net income (loss)                          $ (1,273)     $ (9,654)     $ 22,585
                                           ========      ========      ========
Weighted average number of common shares
  used to compute basic net income per
  common share                               18,377        19,739        23,670

Dilutive effect of common share
  equivalents                                    --            --         2,064    
                                            -------       -------       -------
Weighted average number of common shares
  used to compute diluted net income
  per common share                           18,377        19,739        25,734
                                            ========      ========      ========
Basic net income (loss) per common
  share                                         .07          (.49)          .95

Diluted net income (loss) per common 
  share                                         .07          (.49)          .88


        NEW AUTHORITATIVE PRONOUNCEMENTS

        In June 1997, the Financial Accounting Standards Board (FASB) introduced
SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires certain
disclosures regarding changes in the equity of the Company that result from
transactions and other economic events other than transactions with
stockholders. SFAS No. 130 will be adopted by the Company in 1998. Management
does not expect the adoption of this standard to have a material effect on the
Company's financial position or results of operations.

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


                                      F-12


   47
        RECLASSIFICATIONS

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

3.      ACQUISITIONS AND RESTRUCTURING

        NBase Communications

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

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

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

        EDSLAN

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

        Fibronics

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

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

        In March 1997, the Company and Elbit agreed to amend their agreement
regarding the common stock portion of the purchase price paid to Elbit for the
distribution business of Fibronics, Ltd. First, the Company repurchased
approximately 184,000 shares, paying Elbit $4,230,000 (approximately $23.00 per
share) (plus accrued interest thereon at 0.67% per month from January 1, 1997
through March 13, 1997). Second, with respect to the remaining 275,000 shares
(the "Additional Shares"), the Company guaranteed that the Additional Shares
could be resold by Elbit for at least $6,300,000 (approximately $23.00 per
share),


                                      F-13
   48


plus interest thereon at 0.67% per month from January 1, 1997 through the date
of Elbit's resale. To secure any shortfall, the Company delivered to Elbit
pending resale of the Additional Shares a letter of credit from a major bank,
expiring on June 15, 1997, in the amount of approximately $6,536,000. Elbit is
due to pay to the Company any excess above $23.00 per share, which is an
immaterial amount. As part of the amended agreement, Elbit also returned the
137,000 shares to the Company.

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

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



                                                                  1995             1996
                                                                --------         --------
                                                                                
        Inventory                                               $   319          $  3,574
        Accounts receivable                                        -                2,686
        Property and equipment                                      600             1,793
        Other assets                                               -                  315
        Current liabilities and debt                             (2,267)           (3,962)
                                                                -------          --------
               Net assets acquired or
                 liabilities assumed                             (1,348)            4,406

        Cash paid for legal, consulting and
          other costs                                              (395)             (450)
        Accrued legal, consulting and others
          costs                                                    (125)             (365)
        Common stock issued to sellers                           (3,910)          (10,530)
        Cash paid to sellers                                     (1,000)          (13,287)
                                                                -------          --------
               Paid or accrued                                   (5,430)          (24,632)

        Allocated to purchased
          technology in progress                                  6,211            17,795
                                                                -------          --------
        Goodwill                                                $   567          $  2,431
                                                                =======          ========


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


                                      F-14
   49



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

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



                                              1995             1996
                                            --------         --------
                                                      
Revenues, net                                $82,008         $111,000
Net income                                       762            1,294
Earnings per common share                    $  0.04         $   0.07
                                            ========         ========


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

        Netsoft

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

4.      CONVERTIBLE DEBENTURES

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

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

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

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

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


                                      F-15
   50
5.      WARRANTS            

        COMMON STOCK PURCHASE WARRANTS

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

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



                                                  Number           Exercise
                                                of Shares           Prices
                                                ---------       --------------- 
                                                          
        Balance, December 31, 1994                 268             .27 to  1.71

          Issued                                 2,100            4.25 to  7.38
          Exercised                               (236)            .27 to  1.67
          Redeemed                                -                     -
                                                 -----          ---------------
        Balance, December 31, 1995               2,132             .27 to  7.38

          Issued                                 2,106            8.42 to 26.65
          Exercised                               (776)            .27 to  8.42
          Redeemed                                -                     -
                                                 -----          ---------------
        Balance, December 31, 1996               3,462          $  .27 to 26.65

          Issued                                    10                    32.50
          Exercised                               (766)           1.67 to 14.25 
          Redeemed                                -                     -
          Canceled                                (100)                   20.00
                                                 -----          ---------------
        Balance, December 31, 1997               2,606          $  .27 to 32.50
                                                 =====          ===============





                                      F-16
   51
6.      INCOME TAXES

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

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

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



                                                             1996           1997
                                                            ------         -------
                                                                        
        Allowance for bad debts                             $  777         $1,071
        Inventory reserve                                      280            466
        Warranty reserve                                       160            320
        Accrued restructuring costs                          1,147           -
        State income taxes                                     296            331
        Other, net                                            -                92
                                                            ------         ------
               Current portion                               2,660          2,280

        Purchased technology in progress                     6,998          6,231
        Valuation reserve                                     (962)          -
                                                            ------         ------
                                                             6,036          6,231
                                                            ------         ------
                                                            $8,696         $8,511
                                                            ======         ======


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



                                              1995           1996          1997
                                             -------        --------      -------
                                                                     
        Current  - Federal                   $ 1,112        $ 1,692        $7,635
                 - State                         247            324           828
                 - Foreign                      -               547         1,356
                                              ------        -------        ------
                                               1,359          2,563         9,819
                                              ------        -------        ------

        Deferred - Federal                      (333)        (5,694)          157
                 - State                         (99)        (1,022)           28
                 - Foreign                      (925)          (251)         (530)
                                              ------        -------        ------
                                              (1,357)        (6,967)         (345)
                                              ------        -------        ------
        Provision (benefit)for
          income taxes                       $     2        $(4,404)       $9,474
                                             =======        =======        ======




                                      F-17
   52

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



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


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

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

7.            COMMITMENTS AND CONTINGENCIES

              LEASE COMMITMENTS

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

                                      F-18
   53
        The Company leases all of its facilities and certain equipment under
noncancelable capital and operating leases. Minimum future obligations under
such agreements at December 31, 1996 are as follows (in thousands):



                                                       Capital            Operating
                                                       Leases              Leases
                                                                      
              1998                                     $   172              $   760
              1999                                         171                  602
              2000                                         171                  550
              2001                                         171                  550
              2002                                         171                  466
              Thereafter                                   279                  238
                                                       -------              -------
                                                         1,135              $ 3,166
                                                                            =======
              Less--Amount
                representing interest                     (236)
                                                       -------
                                                           899
              Less--Current portion                       (111)
                                                       -------
                                                       $   788
                                                       =======


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

        ROYALTY COMMITMENT

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

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





                                      F-19
   54
        ACCOUNTS RECEIVABLE

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

        LITIGATION

        In December, 1996, Datapoint brought an action against Nbase
Communications, Inc., a subsidiary of the Company ("Nbase") and several other
defendants in the United States District Court, for the Eastern District of New
York alleging infringement of two of Datapoint's patents related to LANs, more
particularly to claimed improved LANs which interoperatively combine additional
enhanced capability and/or which provide multiple different operational
capabilities. In the same lawsuit, Datapoint alleges that other defendants
including Dayna Communications, Inc. Sun Microsystems, Inc., Adaptec, Inc.,
International Business Machines Corporation, Lantronix and SVEC America Computer
Corporation have infringed the same two patents. The Company has been advised
that several other companies, including Intel Corporation and Cisco Systems,
Inc. have also had actions brought against them by Datapoint with respect to the
same two patents. The action against Nbase and its codefendants seeks, among
other things, an injunction against the manufacture or sale or products which
embody the inventions set forth in the two patents and single and treble damages
for the alleged infringement. Datatpoint's complaint also seeks to have the
court determine that the named defendants shall serve as representatives of a
defendant class of manufacturers, vendors and users of products allegedly
infringing on Datapoint's claimed patents from which defendant class Datapoint
seeks the same relief as from the individual defendants. The Company is
cooperating with several of the defendants in pursuit of common defenses and
believes the claim is without merit. If a conclusion unfavorable to the Company
is reached, however, Datapoint's claim could materially affect the business,
operating results and financial condition of the Company.



                                      F-20
   55
8.      STOCK-BASED COMPENSATION PLAN

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

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

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



                                             1995           1996             1997
                                           --------       --------           -----
                                                                       
Net Income (Loss):       As Reported       $(1,273)       $ (9,654)        $22,585
                         Pro Forma          (2,066)        (11,254)         20,943

Income (Loss) Per Common 
  Share:
  Basic:                 As Reported       $ (0.07)         $(0.49)          $0.95
                         Pro Forma           (0.11)          (0.57)           0.88 

  Diluted:               As Reported       $ (0.07)         $(0.49)          $0.88 
                         Pro Forma           (0.11)          (0.57)           0.81


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




                                      F-21





   56
        A summary of the status of the Company's outstanding stock options at
December 31, 1995, 1996 and 1997 and changes during the years then ended is
presented in the table and narrative below (shares are in thousands):




                                      1995                  1996                    1997
                                -----------------     ------------------    -------------------
                                        Wtd. Avg.               Wtd. Avg.             Wtd. Avg.
                                Shares  Ex. Price     Shares   Ex. Price    Shares    Ex. Price
                                ------  ---------     ------   ----------   ------    ---------
                                                                    
Outstanding at beginning
  of year                         391    $2.10         1,156    $ 3.59      1,475       $ 6.02
Granted                           812     4.07           672     12.45        110        19.45 
Exercised                         (47)    2.11          (312)     3.28       (372)        4.86
Forfeited                         -        -             (41)     5.72         (5)        8.19
                                -----     ----         ------   ------      -----       ------ 

Outstanding at end of year      1,156    $3.59         1,475    $ 6.02      1,208       $ 8.77
                                -----    -----         -----    ------      -----       ------

Exercisable at end of year         84    $2.10           172      3.05        548         5.31
                                -----    -----         -----     -----      -----       ------
Weighted average fair value
  of options granted                     $1.74                  $ 4.28                  $ 5.89
                                         -----                  ------                  ------


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

9.      FOREIGN OPERATIONS

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



                                    United     European    Middle     Pacific     All other
                                    States     Community    East        Rim         Areas       Total
                                                                              
        Sales to unaffiliated
          customers                $ 66,562    $68,719    $ 5,178     $21,607     $3,405        $165,471
        Income from operations       12,191     12,585        947       3,957        624          30,304
        Identifiable assets         163,462     32,584     40,190           -          -         236,236


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



                                                                             
        From the Middle East to the United States                               $10,866
        From the United States to the Middle East                                 8,699 
        From the Middle East to the European Community                           13,058
        From the United States to the European Community                          4,387


10.     401(K) PLAN

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


11.      SUBSEQUENT EVENTS

        XYPLEX ACQUISITION

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

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

                                      F-22
   57

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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



            NAME             AGE                           POSITION
            ----             ---                           --------
                                        
Noam Lotan(1)                 45        President, Chief Executive Officer and Director
Shlomo Margalit(1)            56        Chairman of the Board of Directors, Chief Technical Officer and
                                        Secretary
Zeev Rav-Noy(1)               50        Chief Operating Officer, Treasurer and Director
Edmund Glazer                 37        Vice President of Finance and Administration and Chief Financial
                                        Officer
Khalid (Ken) Ahmad            44        Vice President of Marketing and Sales
Ofer Iny                      29        Vice President of Engineering
Igal Shidlovsky(2)(3)         70        Director
Guenter Jaensch(2)(3)         59        Director

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

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

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

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



                                      35
   58

     Edmund Glazer was appointed Vice President of Finance and Administration
and Chief Financial Officer in June 1995. He has been with the Company since
October 1994 serving as Operations Manager. In 1993 and 1994, Mr. Glazer served
as a consultant providing document imaging and information systems to clients.
From 1986 to 1993, Mr. Glazer served as Vice President of Finance at Concord
Electrical Supply, a distributor of electrical and electronic products. From
1984 to 1986, Mr. Glazer worked as a certified public accountant at the
accounting firm of Singer, Lewak Greenbaum & Goldstein. From 1981 to 1984, Mr.
Glazer worked as an auditor at the accounting firm of Weber, Lipshie & Co. In
1983, Mr. Glazer qualified as a Certified Public Accountant from the State of
California. Mr. Glazer holds a Bachelor of Science Degree in Business
Administration from the University of Southern California.

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

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

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

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

     Each director is elected for a period of one year at the Company's annual
meeting of stockholders and serves until the next annual meeting and until his
successor is duly elected and qualified. Officers are elected by, and serve 



                                       36
   59

at the discretion of, the Board of Directors, subject to relevant employment
agreements. None of the Directors of the Company are related by blood, marriage
or adoption to any of the Company's Directors or executive officers.

     Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission ("SEC") initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Directors, executive officers and 10% or greater shareholders are required by
the SEC regulations to furnish the Company with copies of all Section 16(a)
forms they file.

     The Company believes, based solely on a review of the copies of such
reports furnished to the Company, that each report required of the Company's
executive officers, directors and 10% or greater shareholders was duly and
timely filed during the year ended December 31, 1997.

ITEM 11. EXECUTIVE COMPENSATION

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

            The following table sets forth a summary of all compensation paid by
the Company to its Chief Executive Officer and for each of its other executive
officers whose total annual salary and bonus exceeded $100,000 (the "Named
Executive Officers") during the fiscal year ended December 31, 1996:



                                                                               LONG-TERM
                                                 ANNUAL COMPENSATION          COMPENSATION
                                           ------------------------------     ------------
                                                                               SECURITIES
                                                                               UNDERLYING
NAME AND PRINCIPAL POSITIONS               YEAR        SALARY     BONUS        OPTIONS(#)
- --------------------------------------------------------------    ------      ------------
                                                                  
Noam Lotan                                 1997       $100,000    $     0             0
President and Chief Executive Officer      1996       $100,000    $     0        30,000
                                           1995       $100,000    $     0             0

Shlomo Margalit                            1997       $110,000    $     0             0
Chairman of the Board of Directors,        1996       $110,000    $     0             0
Chief Technical Officer and Secretary      1995       $110,000    $     0             0

Zeev Rav-Noy                               1997       $110,000    $60,000             0
Chief Operating Officer                    1996       $110,000    $60,000             0
                                           1995       $110,000    $60,000             0

Ken Ahmad                                  1997       $ 90,000    $45,830             0
Vice President of Marketing and Sales      1996       $ 90,000    $57,170             0
                                           1995       $ 90,000    $43,500       150,000



     None of the Named Executive Officers were granted or exercised any stock
options during the year ended December 31, 1997. Neither Drs. Margalit nor
Rav-Noy hold any stock options.


                                       37
   60
                         FISCAL YEAR-END OPTION VALUES

     The following table provides certain information concerning stock options
held by the other Named Executive Officers at December 31, 1997:



                           NUMBER OF SHARES                     
                        UNDERLYING UNEXERCISED                           VALUE OF UNEXERCISED       
                             OPTIONS AT                                IN-THE-MONEY OPTIONS AT 
                          DECEMBER 31, 1997                             DECEMBER 31, 1997 (1)
                   ----------------------------------           ------------------------------------
                   Exercisable          Unexercisable           Exercisable            Unexercisable
                   -----------          -------------           -----------            -------------
                                                                           
Noam Lotan            10,000               20,000               $  154,550               $  309,100
Ken Ahmad            100,000               50,000               $2,024,500               $1,012,250

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


EMPLOYMENT AGREEMENTS

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



                                       38
   61

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

     Each officer also receives employee benefits, such as vacation, sick pay
and insurance, in accordance with the Company's policies which are applicable to
all employees. The Company has obtained, and is the beneficiary of, key man life
insurance policies in the amount of $1,000,000 on the lives of each of Drs.
Margalit and Rav-Noy and Mr. Lotan. All benefits under these policies will be
payable to the Company upon the death of an insured. In November 1994, each of
Mr. Lotan and Drs. Margalit and Rav-Noy agreed to extend the terms of their
respective employment agreement until March 1998.

STOCK OPTION PLANS

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

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

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

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

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



                                       39
   62

     Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed with the Company become available once again for
issuance. At July 30, 1997, options for 1,466,108 shares were outstanding under
the 1992 Plan and none were reserved thereunder for options available for future
grant.

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

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

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

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

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

LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS

     The Company's Certificate of Incorporation includes a provision that
eliminates or limits the personal financial liability of the Company's
directors, except in situations where there has been a breach of the director's
duty of loyalty to the Company or its stockholders, acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, liability under Section 174 of the Delaware General Corporation Law
("Section 174") relative to unlawful payment of dividends, stock purchases or
redemptions, or any transaction from which the director derived an improper
personal benefit. Furthermore, Section 174 eliminates monetary liability for
gross negligence in exercising the duty of due care related to the directors'
fiduciary duties under state corporate law, however, such section does not
eliminate monetary liability of directors under the federal Securities laws. In
addition, the Company's Bylaws include provisions to indemnify its officers and
directors and other persons against expenses, judgments, fines and amounts paid
in settlement in connection with threatened, pending or completed suits or
proceedings against such persons by reason of serving or having served as
officers, directors or in other capacities, except that in relation to matters
with respect 



                                       40
   63

to which such persons shall be determined to be liable for misconduct or
negligence in the performance of their duties, the Company's Bylaws provide for
indemnification only to the extent that the Company determines that such person
acted in good faith and in a manner not opposed to the best interests of the
Company. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Securities and Exchange Commission such indemnification is
against the public policy as expressed in the Act and is therefore
unenforceable.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

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



                                                COMMON STOCK
                                          ------------------------
NAME AND ADDRESS(1) OF BENEFICIAL
OWNER(2) OR IDENTITY OF GROUP               NUMBER       PERCENT
- ----------------------------------        ----------    ---------
                                                 

Shlomo Margalit                            1,833,930      6.9%
Zeev Rav-Noy                               1,703,915      6.4%   
Noam Lotan(3)                                878,437      3.3%
Ken Ahmad (4)                                313,464      1.2%     
All executive officers and directors
  as a group (7 persons)(5)                4,828,746     17.9% 

- ----------
*    Less than 1%
(1)  The address of each of the person listed is c/o MRV Communications, Inc.,
     8917 Fullbright Avenue, Chatsworth, CA 91311.
(2)  Pursuant to the rules of the Securities and Exchange Commission, shares of
     Common Stock that an individual or group has a right to acquire within 60
     days pursuant to the exercise of options or warrants are deemed to be
     outstanding for the purpose of computing the percentage ownership of such
     individual or group, but are not deemed to be outstanding for the purpose
     of computing the percentage ownership of any other person shown in the
     table.
(3)  Includes 20,000 shares issuable pursuant to stock options exercisable
     within 60 days from March 31, 1998.
(4)  Includes 150,000 shares issuable pursuant to stock options exercisable
     within 60 days from March 31, 1998.
(5)  Includes 269,000 shares issuable pursuant to stock options exercisable
     within 60 days from March 31, 1998.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.



                                       41
   64



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

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

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

 3.2    Certificate of Amendment of Certificate of Incorporation filed with the
        Delaware Secretary of State on March 20, 1996 incorporated by reference to
        Exhibit 3.2 filed as part of Annual Report on Form 10-K for the year ended
        December 31, 1996.

 3.3    Certificate of Amendment of Certificate of Incorporation filed with the
        Delaware Secretary of State on July 29, 1996 incorporated by reference to
        Exhibit 3.3 filed as part of Annual Report on Form 10-K for the year ended
        December 31, 1996.

 3.4    Bylaws (incorporated by reference to Exhibit 3b filed as part of
        Registrant's Registration Statement on Form S-1 (File No.33-48003)).

10.1    Form of Underwriter's Warrant issued to Hampshire Securities
        (incorporated by reference to Exhibit 4f filed as part of Registrant's
        Registration Statement on Form S-1 (File No.33-86516)).

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

10.3    Lease for premises at 8943 Fullbright Avenue, Chatsworth, CA dated March
        3, 1993 (incorporated by reference to Exhibit 10a(1) filed as part of
        Registrant's Registration Statement on Form S-1 (File No. 33-48003)).

10.4    Key Employee Agreement between the Company and Noam Lotan dated March
        23, 1992 (incorporated by reference to Exhibit 10b(1) filed as part of
        Registrant's Registration Statement on Form S-1 (File No. 33-48003)).

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

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

10.7    Key Employee Agreement between the Company and Zeev Rav-Noy dated March
        23, 1992 (incorporated by reference to Exhibit 10b(2) filed as part of
        Registrant's Registration Statement on Form S-1 (File No. 33-48003)).

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




                                       42
   65



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

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

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

10.12   [omitted]

10.13   Employment Letter between the Company and Khalid (Ken) Ahmad dated
        August 8, 1990 (incorporated by reference to Exhibit 10b(4) filed as
        part of Registrant's Registration Statement on Form S-1 (File No.
        33-48003)).

10.14   Form of Warrant issued in connection with Bridge Financing and to
        certain consultants (incorporated by reference to Exhibit 10c(2)filed as
        part of Registrant's Registration Statement on Form S-1(File No.
        33-48003)).

10.15   License Agreement between the Company and Laser Precision Corporation
        dated December 13, 1990 (incorporated by reference to Exhibit 101(1)
        filed as part of Registrant's Registration Statement on Form S-1 (File
        No. 33-48003)).

10.16   Form of Distributor Agreement (incorporated by reference to Exhibit 10m
        filed as part of Registrant's Registration Statement on Form S-1 (File
        No. 33-48003)).

10.17   Form of Sales Representative Agreement (incorporated by reference to
        Exhibit 10n filed as part of Registrant's Registration Statement on Form
        S-1 (File No. 33-48003)).

10.18   Form of Warrant issued to Managerial Resources, Inc. (incorporated by
        reference to Exhibit 10o filed as part of Registrant's Registration
        Statement on Form S-1 (File No. 33-48003))

10.19   Agreement for Sale and Purchase of Assets of ACE dated June 29,1995
        (incorporated by reference to Exhibit No. 2.1 & 2.1a of Registrant's
        Report on Form 8-K (0-23452) dated June 29, 1995,with respect to the ACE
        Acquisition).

10.20   Agreement for Purchase of Galcom Assets dated March 21, 1995
        (incorporated by reference to Exhibit No. 2.1 and 2.1a of Registrant's
        Report on Form 8-K (0-23452) dated May 1, 1995, with respect to the
        Galcom Acquisition).

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

10.22   Asset Purchase Agreement dated September 26, 1996 between the Company,
        Elbit Ltd and certain of its Fibronics subsidiaries (incorporated by
        reference to Exhibit No. 2.1 of Registrant's Report on Form 8-K
        (0-23452), dated October 9, 1996 with respect to the Fibronics
        Acquisition).

10.22.1 First Amendment to Asset Purchase Agreement dated March 13, 1997 between
        Elbit Ltd. and Registrant (incorporated by reference to Exhibit No.
        10.22.1 of Registrant's Annual Report on Form 10-K (0-23452) for the
        year ended December 31, 1996 filed April 15, 1997).




                                       43
   66



Exhibit
  No.                           Description
- -------                         -----------
     
10.23   Standard Industrial/Commercial Single-Tenant Lease dated October 8, 1996
        between the Company and Nordhoff Development relating to the premises
        located at 20415 Nordhoff Street, Chatsworth, California (incorporated
        by reference to Exhibit No. 10.23 of Registrant's Annual Report on Form
        10-K (0-23452) for the year ended December 31, 1996 filed April 15,
        1997).

10.24   Form of Debenture (aggregating $30,000,000 principal amount)issued in
        private placement completed in September 1996 (incorporated by reference
        to Exhibit No. 10.24 of Registrant's Annual Report on Form 10-K
        (0-23452) for the year ended December 31, 1996 filed April 15, 1997).

10.25   Form of Warrants (aggregating 600,000) issued in private placement
        completed in September 1996 (incorporated by reference to Exhibit No.
        10.25 of Registrant's Annual Report on Form 10-K (0-23452) for the year
        ended December 31, 1996 filed April 15, 1997).

10.26   Form of Registration Rights Agreement entered into with investors in
        private placement completed in September 1996 (incorporated by reference
        to Exhibit No. 10.26 of Registrant's Annual Report on Form 10-K
        (0-23452) for the year ended December 31, 1996 filed April 15, 1997).

10.27   Common Stock Purchase Agreement dated November 26, 1996 between the
        Company and Intel Corporation (incorporated by reference to Exhibit No.
        10.27 of Registrant's Annual Report on Form 10-K (0-23452) for the year
        ended December 31, 1996 filed April 15, 1997).

10.28   Investor Agreement dated November 26, 1996 between the Company and Intel
        Corporation (incorporated by reference to Exhibit No. 10.28 of
        Registrant's Annual Report on Form 10-K (0-23452) for the year ended
        December 31, 1996 filed April 15, 1997).

10.29   Warrant to Purchase 300,000 shares of Common Stock in favor of Intel
        Corporation (incorporated by reference to Exhibit No. 10.29 of
        Registrant's Annual Report on Form 10-K (0-23452) for the year ended
        December 31, 1996 filed April 15, 1997).

10.30   Warrant to Purchase 100,000 shares of Common Stock in favor of Intel
        Corporation (incorporated by reference to Exhibit No. 10.29 of
        Registrant's Annual Report on Form 10-K (0-23452) for the year ended
        December 31, 1996 filed April 15, 1997).

10.31   Warrant to Purchase 100,000 shares of Common Stock in favor of Intel
        Corporation (incorporated by reference to Exhibit No. 10.29 of
        Registrant's Annual Report on Form 10-K (0-23452) for the year ended
        December 31, 1996 filed April 15, 1997).

10.32   Stock Purchase Agreement dated January 19, 1998 by and between Whittaker
        and Registrant (incorporated by reference to Exhibit No. 2.1(a) of
        Registrant's Report on Form 8-K filed February 13, 1998 with respect to
        the Xyplex Acquisition).

10.33   Warrant Agreement dated January 30, 1998 by and between Whittaker and
        Registrant (incorporated by reference to Exhibit No. 2.1(b) of
        Registrant's Report on Form 8-K filed February 13, 1998 with respect to
        the Xyplex Acquisition).

10.34   Warrant Certificate No. Whittaker # 1 to purchase 421,402 shares of
        Common Stock of Registrant issued to Whitaker on January 30, 1998
        (incorporated by reference to Exhibit No. 2.1(c) of Registrant's Report
        on Form 8-K filed February 13, 1998 with respect to the Xyplex
        Acquisition).

10.35   American Industrial Real Estate Association, Standard
        Industrial/Commerical Single-Tenant Lease - Net dated November 17, 1997
        by and between Ruth G Fisher Living Trust U/D/T dated June 28 1990 and
        Registrant relating to the premises located at 8928 Fullbright Avenue,
        Chatsworth, California.

10.36   New Lease dated February 22, 1993 by and between 495 Littleton
        Associates and Xyplex, Inc. relating to the premises located at 295
        Foster Street, Littleton, Mass.




                                       44
   67



Exhibit
  No.                           Description
- -------                         -----------
     
10.37   Underwriting Agreement dated September 18, 1997 by and among Registrant,
        the Selling Stockholders named on Schedule I thereto and the
        Underwriters named on Schedule II thereto.

21      Subsidiaries of the Registrant.

23      Consent of Arthur Andersen LLP to incorporation of Report on Financial
        Statements into Company's Form S-8 (File No. 33-96458)and Form S-3
        (File No. 333-17537).

25      Power of Attorney (contained on Signature Page).














                                       45
   68

                                   SIGNATURES

        In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"), the Registrant caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chatsworth,
State of California, on April 14, 1998.


                                        MRV COMMUNICATIONS, INC.


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

                                POWER OF ATTORNEY

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

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



     Names                               Title                                      Date
     -----                               -----                                      ----
                                                                          
/s/ NOAM LOTAN            President, Chief Executive Officer (Principal
- -----------------------   Executive Officer), and a Director                    April 14, 1998
Noam Lotan                                                             

/s/ ZEEV RAV-NOY          Chief Operating Officer,                     
- -----------------------   Treasurer, and a Director                             April 14, 1998
Zeev Rav-Noy                                                                                     

/s/ SHLOMO MARGALIT       Chairman of the Board, Chief Technical                                 
- -----------------------   Officer, Secretary, and a Director                    April 14, 1998
Shlomo Margalit                                                                                  
                          Vice President of Finance  and                                         
/s/ EDMUND GLAZER         Administration, Chief Financial Officer                                
- -----------------------   (Principal Financial and Accounting Officer)          April 14, 1998
Edmund Glazer                                                                                    
                                                                                                 
/s/ IGAL SHIDLOVSKY
- -----------------------   Director                                              April 14, 1998
Igal Shidlovsky                                                                                  
                                                                                                 
/s/ GUENTER JAENSCH                                                                                                 
- -----------------------   Director                                              April 14, 1998
Guenter Jaensch           




                                       46

EX-10.35

   1
                                                                   EXHIBIT 10.35

                  AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION

           STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET
               (DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)

1.   BASIC PROVISIONS ("BASIC PROVISIONS")

     1.1  PARTIES: This Lease ("Lease"), dated for reference purposes only
November 17, 97,is made by and between the Ruth G Fisher Living Trust U/D/T
dated June 28 1990  ("LESSOR") and MRV Communications, Inc., a Delaware
Corporation ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY").

     1.2  PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 8928 Fullbright Avenue, Chatsworth, located in the County of Los
Angeles, State of California, and generally described as (describe briefly the
nature of the property and, if applicable, the "PROJECT", if the property is
located within a Project) an approximate 20,950 square foot MR2, 1 zoned free
standing industrial building situated on approximately 44,886 square feet of
land. ("PREMISES".) (See also Paragraph 2)

     1.3  TERM: five (5) years and two (2) months ("ORIGINAL TERM") commencing
December 1, 1997 ("COMMENCEMENT DATE") and ending January 31, 2003 ("EXPIRATION
DATE"). (See also Paragraph 3)

     1.4  EARLY POSSESSION: upon execution of lease, by Lessor and Lessee
("EARLY POSSESSION DATE"). (See also Paragraphs 3.2 and 3.3)

     1.5  BASE RENT: $10,894.00 per month ("BASE RENT"), payable on the first
(1st) day of each commencing January 1, 1998 (See also Paragraph 4)
[XX] If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.

     1.6  BASE RENT PAID UPON EXECUTION: $10,894.00 as Base Rent for the period
January 1998.

     1.7  SECURITY DEPOSIT: $13,134.00 ("SECURITY DEPOSIT"). (See also
Paragraph 5)

     1.8  AGREED USE: office, sales, computer software and hardware and
computer related products and all legal activities related thereto. (See also
Paragraph 6)

     1.9  INSURING PARTY. Lessee is the "INSURING PARTY" unless otherwise stated
herein. (See also Paragraph 8)

     1.10 REAL ESTATE BROKERS: (See also Paragraph 15)

          (a) REPRESENTATION: The following real estate brokers (collectively,
the "BROKERS") and brokerage relationships exist in this transaction (check
applicable boxes):

[X] The Seeley Company represents Lessor exclusively ("LESSOR'S BROKER");

[X] CB Commercial represents Lessee exclusively ("LESSEE'S BROKER"); or 

[ ]                           represents both Lessor and Lessee ("DUAL AGENCY").

          (b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by
both Parties, Lessor shall pay to the Broker the fee agreed to in their
separate written agreement.

     1.11

     1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 50 through 56 and Exhibits A and B, all of which
constitute a part of this Lease.

2.   PREMISES.

     2.1  LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of size set forth in this Lease, or that may
have been used in calculating rental, is an approximation which the Parties
agree is reasonable and the rental based thereon is not subject to revision
whether or not the actual size is more or less.

     2.2  CONDITION. Lessor shall deliver the Premises to Lessee broom clean
and free of debris on the Commencement Date or the Early Possession Date,
whichever first occurs ("START DATE"), and so long as the required service
contracts described in Paragraph 7.1(b) below are obtained by Lessee within
thirty (30) days following the Start Date, warrants that the existing
electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air
conditioning systems ("HVAC"), loading  doors, if any, and all other such
elements in the Premises, other than those constructed by Lessee, shall be in
good operating condition on said date and that the structural elements of the
roof, bearing walls and foundation of any buildings on the Premises (the
"BUILDING") shall be free of material defects. If a non-compliance with said
warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation
with respect to such matter, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify same at
Lessor's expense. If, after the Start Date, Lessee does not give Lessor written
notice of any non-compliance with this warranty within: (i) one year as to the
surface of the roof and the structural portions of the roof and sixty (60)
months as to the foundations and bearing walls, (ii) six (6) months as to the
HVAC systems, (iii) thirty (30) days as to the remaining systems and other
elements of the Building, correction of such non-compliance shall be the
obligation of Lessee at Lessee's sole cost and expense.

     2.3  COMPLIANCE. Lessor warrants that the improvements on the Premises
comply with all applicable laws, covenants or restrictions of record, building
codes, regulations and ordinances ("APPLICABLE REQUIREMENTS") in effect on the
Start Date. Said warranty does not apply to the use to which Lessee will put
the premises or to any Alterations or Utility Installations (as defined in
Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for
determining whether or not the zoning is appropriate for Lessee's intended use,
and acknowledges that past uses of the Premises may no longer be allowed. If
the Premises do not comply with said warranty, Lessor shall, except as
otherwise provided, promptly after receipt of written notice from Lessee
setting forth with specificity the nature and extent of such non-compliance,
rectify the same at Lessor's expense. If Lessee does not give Lessor written
notice of non-compliance with this warranty within six (6) months following the
Start Date, correction of that non-compliance shall be the obligation of Lessee
at Lessee's sole cost and expense.

                                                            INITIALS [ILLEGIBLE]
                                                                     [ILLEGIBLE]

                                     PAGE 1


      
                                                                        
   
 
   2
(a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required
as a result of the specific and unique use of the Premises by Lessee as compared
with uses by tenants in general, Lessee shall be fully responsible for the cost
thereof.

(b)

(c)

      2.4   ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been advised
by Lessor and/or Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical, HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with Applicable
Requirements), and their suitability for Lessee's intended use, (b) Lessee has
made such investigation as it deems necessary with reference to such matters and
assumes all responsibility therefor as the same relate to its occupancy of the
Premises, and (c) neither Lessor, Lessor's agents, nor any Broker has made any
oral or written representations or warranties with respect to said matters other
than as set forth in this Lease. In addition, Lessor acknowledges that: (a)
Broker has made no representations, promises or warranties concerning Lessee's
ability to honor the Lease or suitability to occupy the Premises, and (b) it is
Lessor's sole responsibility to investigate the financial capability and/or
suitability of all proposed tenants.

      2.5   LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.

3.    TERM.

      3.1   TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.

      3.2   EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this
Lease (including but not limited to the obligations to pay Real Property Taxes
and insurance premiums and to maintain the Premises) shall, however, be in
effect during such period. Any such early possession shall not affect the
Expiration Date.

      3.3   DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease. Lessee shall not, however,
be obligated to pay Rent or perform its other obligations until it receives
possession of the Premises. If possession is not delivered within sixty (60)
days after the Commencement Date, Lessee may, at its option, by notice in
writing within ten (10) days after the end of such sixty (60) day period,
cancel this Lease, in which event the Parties shall be discharged from all
obligations hereunder. If such written notice is not received by Lessor within
said ten (10) day period, Lessee's right to cancel shall terminate. Except as
otherwise provided, if possession is not tendered to Lessee by the Start Date
and Lessee does not terminate this Lease, as aforesaid, any period of rent
abatement that Lessee would otherwise have enjoyed shall run from the date of
delivery of possession and continue for a period equal to what Lessee would
otherwise have enjoyed under the terms hereof, but minus any days of delay
caused by the acts or omissions of Lessee. If possession of the Premises is not
delivered within four (4) months after the Commencement Date, this Lease shall
terminate unless other agreements are reached between Lessor and Lessee, in
writing.

      3.4   LESSEE COMPLIANCE. Lessor shall not be required to tender possession
of the Premises to Lessee until Lessee complies with its obligation to provide
evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee
shall be required to perform all of its obligations under this Lease from and
after the Start Date, including the payment of Rent, notwithstanding Lessor's
election to withhold possession pending receipt of such evidence of insurance.
Further, if Lessee is required to perform any other conditions prior to or
concurrent with the Start Date, the Start Date shall occur but Lessor may elect
to withhold possession until such conditions are satisfied.

4.    RENT.

      4.1.  RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease (except for the Security Deposit) are deemed to be rent
("Rent").

      4.2   PAYMENT. Lessee shall cause payment of Rent to be received by Lessor
in lawful money of the United States, without offset or deduction (except as
specifically permitted in this Lease), on or before the day on which it is due.
Rent for any period during the term hereof which is for less than one (1) full
calendar month shall be prorated based upon the actual number of days of said
month. Payment of Rent shall be made to Lessor at its address stated herein or
to such other persons or place as Lessor may from time to time designate in
writing. Acceptance of a payment which is less than the amount then due shall
not be a waiver of Lessor's rights to the balance of such Rent, regardless of
Lessor's endorsement of any check so stating.

5.    SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults
under this Lease, Lessor may use, apply or retain all or any portion of said
Security Deposit for the payment of any amount due Lessor or to reimburse or
compensate Lessor for any liability, expense, loss or damage which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request therefor deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. If the Base Rent increases
during the term of this Lease, Lessee shall, upon written request from Lessor,
deposit additional moneys with Lessor so that the total amount of the Security
Deposit shall at all times bear the same proportion to the increased Base Rent
as the initial Security Deposit bore to the initial Base Rent. Should the Agreed
Use be amended to accommodate a material change in the business of Lessee or to
accommodate a sublessee or assignee, Lessor shall have the right to increase the
Security Deposit to the extent necessary, in Lessor's reasonable judgment, to
account for any increased wear and tear that the Premises may suffer as a result
thereof. If a change in control of Lessee occurs during this Lease and following
such change the financial condition of Lessee is, in Lessor's reasonable
judgment, significantly reduced, Lessee shall deposit such additional monies
with Lessor as shall be sufficient to cause the Security Deposit to be at a
commercially reasonable level based on said change in financial condition.
Lessor shall not be required to keep the Security Deposit separate from its
general accounts. Within fourteen (14) days after the expiration or termination
of this Lease, if Lessor elects to apply the Security Deposit only to unpaid
Rent, and otherwise within thirty (30) days after the Premises have been vacated
pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the
Security Deposit not used or applied by Lessor. No part of the Security Deposit
shall be considered to be held in trust, to bear interest or to be prepayment
for any monies to be paid by Lessee under this Lease.


                                     PAGE 2            Initials [ILLEGIBLE]
                                                                ----------------
                                                                FORM 204N-R-2/97
   3
6.    USE.

      6.1   USE. Lessee shall use and occupy the Premises only for the Agreed
Use, or any other legal use which is reasonably comparable thereto, and for no
other purpose. Lessee shall not use or permit the use of the Premises in a
manner that is unlawful, creates damage, waste or a nuisance, or that disturbs
owners and/or occupants of, or causes damage to neighboring properties. Lessor
shall not unreasonably withhold or delay its consent to any written request for
a modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request give written notification of same, which notice
shall include an explanation of Lessor's objections to the change in use.

      6.2   HAZARDOUS SUBSTANCES.

            (a)   REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, or waste
whose presence, use, manufacture, disposal, transportation, or release, either
by itself or in combination with other materials expected to be on the Premises,
is either: (i) potentially injurious to the public health, safety or welfare,
the environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substances shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, and/or crude oil or any products, by-products or fractions
thereof. Lessee shall not engage in any activity in or on the Premises which
constitutes a Reportable Use of Hazardous Substances without the express prior
written consent of Lessor and timely compliance (at Lessee's expense) with all
Applicable Requirements. "REPORTABLE USE" shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, so long as such use
is in compliance with all Applicable Requirements, is not a Reportable Use, and
does not expose the Premises or neighboring property to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may condition its consent to any Reportable Use upon receiving such
additional assurances as Lessor reasonably deems necessary to protect itself,
the public, the Premises and/or the environment against damage, contamination,
injury and/or liability, including, but not limited to, the installation (and
removal on or before Lease expiration or termination) of protective
modifications (such as concrete encasements) and/or increasing the Security
Deposit.

            (b)   DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises, other than as previously consented to by Lessor,
Lessee shall immediately give written notice of such fact to Lessor, and provide
Lessor with a copy of any report, notice, claim or other documentation which it
has concerning the presence of such Hazardous Substance.

            (c)   LESSEE REMEDIATION. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any Hazardous
Substance brought onto the Premises during the term of this Lease, by or for
Lessee, or any third party.

            (d)   LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless
from and against any and all loss of rents and/or damages, liabilities,
judgments, claims, expenses, penalties, and attorneys' and consultants' fees
arising out of or involving any Hazardous Substance brought onto the Premises by
or for Lessee, or any third party (provided, however, that Lessee shall have no
liability under this Lease with respect to underground migration of any
Hazardous Substance under the Premises from adjacent properties). Lessee's
obligations shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created or
suffered by Lessee, and the cost of investigation, removal, remediation,
restoration and/or abatement, and shall survive the expiration or termination of
this Lease. NO TERMINATION, CANCELLATION OR RELEASE AGREEMENT ENTERED INTO BY
LESSOR AND LESSEE SHALL RELEASE LESSEE FROM ITS OBLIGATIONS UNDER THIS LEASE
WITH RESPECT TO HAZARDOUS SUBSTANCES, UNLESS SPECIFICALLY SO AGREED BY LESSOR IN
WRITING AT THE TIME OF SUCH AGREEMENT.

            (e)   LESSOR INDEMNIFICATION. Lessor and its successors and assigns
shall indemnify, defend, reimburse and hold Lessee, its employees and lenders,
harmless from and against any and all environmental damages, including the cost
of remediation, which existed as a result of Hazardous Substances on the
Premises prior to the Start Date or which are caused by the gross negligence or
willful misconduct of Lessor, its agents or employees. Lessor's obligations, as
and when required by the Applicable Requirements, shall include, but not be
limited to, the cost of investigation, removal, remediation, restoration and/or
abatement, and shall survive the expiration or termination of this Lease.

            (f)   INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to the Start Date, unless such
remediation measure is required as a result of Lessee's use (including
"Alterations", as defined in paragraph 7.3(a) below) of the Premises, in which
event Lessee shall be responsible for such payment. Lessee shall cooperate fully
in any such activities at the request of Lessor, including allowing Lessor and
Lessor's agents to have reasonable access to the Premises at reasonable times in
order to carry out Lessor's investigative and remedial responsibilities.

            (g)   LESSOR TERMINATION OPTION. If a Hazardous Substance Condition
occurs during the term of this Lease, unless Lessee is legally responsible
therefor (in which case Lessee shall make the investigation and remediation
thereof required by the Applicable Requirements and this Lease shall continue in
full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and
Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and
remediate such Hazardous Substance Condition, if required, as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in full
force and effect, or (ii) if the estimated cost to remediate such condition
exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is
greater, give written notice to Lessee, within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of
Lessor's desire to terminate this Lease as of the date sixty (60) days following
the date of such notice. In the event Lessor elects to give a termination
notice, Lessee may, within ten (10) days thereafter, give written notice to
Lessor of Lessee's commitment to pay the amount by which the cost of the
remediation of such Hazardous Substance Condition exceeds an amount equal to
twelve (12) times the then monthly Base Rent or $100,000, whichever is greater.
Lessee shall provide Lessor with said funds or satisfactory assurance thereof
within thirty (30) days following such commitment. In such event, this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time provided, this Lease shall terminate as of the
date specified in Lessor's notice of termination.

      6.3   LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as
otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or consultants
which relate in any manner to the Premises, without regard to whether said
requirements are now in effect or become effective after the Start Date. Lessee
shall, within ten (10) days after receipt of Lessor's written request, provide
Lessor with copies of all permits and other documents, and other information
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall immediately upon receipt, notify Lessor in writing (with
copies of any documents involved) of any threatened or actual claim, notice,
citation, warning, complaint or report pertaining to or involving the failure of
Lessee or the Premises to comply with any Applicable Requirements.

      6.4   INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined in
Paragraph 30 below) and consultants shall have the right to enter into Premises
at any time, in the case of an emergency, and otherwise at reasonable times, for
the purpose of inspecting the condition of the Premises and for verifying
compliance by Lessee with this Lease. The cost of any such inspections shall be
paid by Lessor, unless a violation of Applicable Requirements, or a
contamination is found to exist or be imminent, or the inspection is requested
or ordered by a governmental authority. In such case, Lessee shall upon request
reimburse Lessor for the cost of such inspections, so long as such inspection is
reasonably related to the violation or contamination.


                                     PAGE 3            Initials [ILLEGIBLE]
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                                                                FORM 204N-R-2/97
   4
7.    MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.

      7.1   LESSEE'S OBLIGATIONS.

            (a)   In General. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations, and Alterations in good order, condition and repair
(whether or not the portion of the Premises requiring repairs, or the means of
repairing the same, are reasonably or readily accessible to Lessee, and whether
or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises), including, but
not limited to, all equipment or facilities, such as plumbing, heating,
ventilating, air-conditioning, electrical, lighting facilities, boilers,
pressure vessels, fire protection system, fixtures, walls (interior and
exterior), ceilings, roofs, floors, windows, doors, plate glass, skylights,
landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks
and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the
Premises in good order, condition and repair, shall exercise and perform good
maintenance practices, specifically including the procurement and maintenance of
the service contracts required by Paragraph 7.1 (b) below. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair. Lessee shall, during the term of this Lease, keep the
exterior appearance of the Building in a first-class condition consistent with
the exterior appearance of other similar facilities of comparable age and size
in the vicinity, including, when necessary, the exterior repainting of the
Building.

            (b)   SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements, if any, if and when
installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure
vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke
detection, (iv) landscaping and irrigation systems, (v) roof covering and
drains, (vi) driveways and parking lots, (vii) clarifiers (viii) basic utility
feed to the perimeter of the Building, and (ix) any other equipment, if
reasonably required by Lessor.

            (c)   REPLACEMENT

      7.2   LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation),
it is intended by the Parties hereto that Lessor have no obligation, in any
manner whatsoever, to repair and maintain the Premises, or the equipment
therein, all of which obligations are intended to be that of the Lessee. It is
the intention of the Parties that the terms of this Lease govern the respective
obligations of the Parties as to maintenance and repair of the Premises, and
they expressly waive the benefit of any statute now or hereafter in effect to
the extent it is inconsistent with the terms of this Lease.

      7.3   UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.

            (a)   DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" refers to all floor and window coverings, air lines, power
panels, electrical distribution, security and fire protection systems,
communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing
in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery
and equipment that can be removed without doing material damage to the Premises.
The term "ALTERATIONS" shall mean any modification of the improvements, other
than Utility Installations or Trade Fixtures, whether by addition or deletion.
"LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or
Utility Installations to the Premises without Lessor's prior written consent.
Lessee may, however, make non-structural Utility Installations to the interior
of the Premises (excluding the roof) without such consent but upon notice to
Lessor, as long as they are not visible from the outside, do not involve
puncturing, relocating or removing the roof or any existing walls, and the
cumulative cost thereof during this Lease as extended does not exceed $50,000 in
the aggregate or $10,000 in any one year. * See Addendum, Paragraph 53

            (b)   CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. Consent shall be deemed
conditioned upon Lessee's: (i) acquiring all applicable governmental permits,
(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent, or
$10,000, Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility Installation and/or upon Lessee's posting an
additional Security Deposit with Lessor.

            (c)   INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have the
right to post notices of non-responsibility. If Lessee shall contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend and protect itself, Lessor and the Premises against the same and
shall pay and satisfy any such adverse judgment that may be rendered thereon
before the enforcement thereof. If Lessor shall require, Lessee shall furnish a
surety bond in an amount equal to one and one-half times the amount of such
contested lien, claim or demand, indemnifying Lessor against liability for the
same. If Lessor elects to participate in any such action, Lessee shall pay
Lessor's attorneys' fees and costs.

      7.4   OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.

            (a)   OWNERSHIP. Subject to Lessors right to require removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered a
part of the Premises. Lessor may, at any time, elect in writing to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
termination of this Lease, become the property of Lessor and be surrendered by
Lessee with the Premises. 

            (b)   REMOVAL. By delivery to Lessee of written notice from Lessor
not earlier than ninety (90) and not later than thirty (30) days prior to the
end of the term of this Lease, Lessor may require that any or all Lessee Owned
Alterations or Utility Installations be removed by the expiration or termination
of this Lease. Lessor may require the removal at any time of all or any part of
any Lessee Owned Alterations or Utility Installations made without the required
consent.

            (c)   SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or deterioration
that would have been prevented by good maintenance practice. Lessee shall repair
any damage occasioned by the installation, maintenance or removal of Trade
Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings,
and equipment as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
groundwater contaminated by Lessee. Trade Fixtures shall remain the property of
Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate
the Premises pursuant to this Paragraph 7.4(c) without the express written
consent of Lessor shall constitute a holdover under the provisions of Paragraph
26 below.


                                     PAGE 4            Initials 
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                                                                FORM 204N-R-2/97
   5
8.    INSURANCE; INDEMNITY.

      8.1   PAYMENT FOR INSURANCE. Lessee shall pay for all insurance under
Paragraph 8

      8.2   LIABILITY INSURANCE.

            (a)   CARRIED BY LESSEE. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury, personal injury and property damage based upon
or arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such insurance shall be on an occurrence
basis providing single limit coverage in an amount not less than $3,000,000 per
occurrence with an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF PREMISES
ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT"
for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall
not contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an "insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance carried by Lessee shall be primary to and not contributory with any
similar insurance carried by Lessor, whose insurance shall be considered excess
insurance only.

            (b)   CARRIED BY LESSOR.

      8.3   PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.

            (a)   BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and
keep in force a policy or policies in the name of Lessor, with loss payable to
Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the
Premises. The amount of such insurance shall be equal to the full replacement
cost of the Premises, as the same shall exist from time to time, or the amount
required by any Lenders. If Lessor is the Insuring Party, however, Lessee Owned
Alterations and Utility Installations, Trade Fixtures, and Lessee's personal
property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor.
,such policy or policies shall insure against all risks of direct physical loss
or damage (except the perils of flood and/or earthquake unless required by a
Lender), including coverage for debris removal and the enforcement of any
Applicable Requirements requiring the upgrading, demolition, reconstruction or
replacement of any portion of the Premises as the result of a covered loss. Said
policy or policies shall also contain an agreed valuation provision in lieu of
any coinsurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the Premises are located. If
such insurance coverage has a deductible clause, the deductible amount shall not
exceed $1,000 per occurrence, and Lessee shall be liable for such deductible
amount in the event of an Insured Loss.

            (b)   RENTAL VALUE. The Insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor with loss payable to Lessor and
any Lender, insuring the loss of the full Rent for one (1) year. Said insurance
shall provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide for
one full year's loss of Rent from the date of any such loss. Said insurance
shall contain an agreed valuation provision in lieu of any coinsurance clause,
and the amount of coverage shall be adjusted annually to reflect the projected
Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee
shall be liable for any deductible amount in the event of such loss.

            (c)   ADJACENT PREMISES.

      8.4   LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.

            (a)   PROPERTY DAMAGE. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.

            (b)   BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss
of income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.

            (c)   NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.

      8.5   INSURANCE POLICIES. Insurance required herein shall be by companies
duly licensed or admitted to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least Ax V, as set forth in the most current issue of "Best's
Insurance Guide", or such other rating as may be required by a Lender. Lessee
shall not do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after thirty (30) days prior
written notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand. Such policies shall be for a term of at least
one year, or the length of the remaining term of this Lease, whichever is less.
If either Party shall fail to procure and maintain the insurance required to be
carried by it, the other Party may, but shall not be required to, procure and
maintain the same.

      8.6   WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages against the other, for loss of or damage
to its property arising out of or incident to the perils required to be insured
against herein. The effect of such releases and waivers is not limited by the
amount of insurance carried or required, or by any deductibles applicable
hereto. The Parties agree to have their respective property damage insurance
carriers waive any right to subrogation that such companies may have against
Lessor or Lessee, as the case may be, so long as the insurance is not
invalidated thereby.

      8.7   INDEMNITY. Except for Lessor's gross negligence or willful
misconduct, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or
liabilities arising out of, involving, or in connection with, the use and/or
occupancy of the Premises by Lessee. If any action or proceeding is brought
against Lessor by reason of any of the foregoing matters, Lessee shall upon
notice defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be defended or indemnified.

      8.8   EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under
no circumstances be liable for injury to Lessee's business or for any loss of
income or profit therefrom.

9.    DAMAGE OR DESTRUCTION.

      9.1   DEFINITIONS.

            (a)   "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, which can reasonably be repaired in six (6) months or
less from the date of the damage or destruction.


                                     PAGE 5            Initials 
                                                                ----------------
                                                                FORM 204N-R-2/97
   6
Lessor shall notify Lessee in writing within thirty (30) days from the date of
the damage or destruction as to whether or not the damage is Partial or Total.

            (b)   "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee Owned Alterations and Utility Installations
and Trade Fixtures, which cannot reasonably be repaired in six (6) months or
less from the date of the damage or destruction. Lessor shall notify Lessee in
writing within thirty (30) days from the date of the damage or destruction as to
whether or not the damage is Partial or Total.

            (c)   "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.

            (d)   "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of Applicable Requirements, and
without deduction for depreciation.

            (e)   "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.

      9.2   PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required insurance was not in
force or the insurance proceeds are not sufficient to effect such repair, the
Insuring Party shall promptly contribute the shortage in proceeds (except as to
the deductible which is Lessee's responsibility) as and when required to
complete said repairs. In the event, however, such shortage was due to the fact
that, by reason of the unique nature of the improvements, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, the party responsible for making the repairs shall complete them as
soon as reasonably possible and this Lease shall remain in full force and
effect. If such funds or assurance are not received, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to: (i) make
such restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall
not be entitled to reimbursement of any funds contributed by Lessee to repair
any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be
some insurance coverage, but the net proceeds of any such insurance shall be
made available for the repairs if made by either Party.

      9.3   PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either: (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) terminate this Lease by giving written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage. Such termination shall be effective sixty (60) days following the date
of such notice. In the event Lessor elects to terminate this Lease, Lessee shall
have the right within ten (10) days after receipt of the termination notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage without reimbursement from Lessor. Lessee shall provide Lessor with
said funds or satisfactory assurance thereof within thirty (30) days after
making such commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not make the
required commitment, this Lease shall terminate as of the date specified in the
termination notice. 

      9.4   TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs, this Lease shall immediately terminate
following such Destruction. If the damage or destruction was caused by the gross
negligence or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.

      9.5   DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of this Lease there is damage for which the cost to repair exceeds one
(1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this
Lease effective sixty (60) days following the date of occurrence of such damage
by giving a written termination notice to Lessee within thirty (30) days after
the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee
at that time has an exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option and
(b) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (ii) the day prior to the date upon which
such option expires. If Lessee duly exercises such option during such period and
provides Lessor with funds (or adequate assurance thereof) to cover any shortage
in insurance proceeds, Lessor shall, at Lessor's commercially reasonable
expense, repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during such period, then this Lease shall
terminate on the date specified in the termination notice and Lessee's option
shall be extinguished.

      9.6   ABATEMENT OF RENT; LESSEE'S REMEDIES.

            (a)   ABATEMENT. In the event of Premises Partial Damage or Premises
Total Destruction or a Hazardous Substance Condition for which Lessee is not
responsible under this Lease, the Rent payable by Lessee for the period required
for the repair, remediation or restoration of such damage shall be abated in
proportion to the degree to which Lessee's use of the Premises is impaired, but
not to exceed the proceeds received from the Rental Value insurance. All other
obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall
have no liability for any such damage, destruction, remediation, repair or
restoration except as provided herein.

            (b)   REMEDIES. If Lessor shall be obligated to repair or restore
the Premises and does not commence, in a substantial and meaningful way, such
repair or restoration within ninety (90) days after such obligation shall
accrue, Lessee may, at any time prior to the commencement of such repair or
restoration, give written notice to Lessor and to any Lenders of which Lessee
has actual notice, of Lessee's election to terminate this Lease on a date not
less than sixty (60) days following the giving of such notice. If Lessee gives
such notice and such repair or restoration is not commenced within thirty (30)
days thereafter, this Lease shall terminate as of the date specified in said
notice. If the repair or restoration is commenced within said thirty (30) days,
this Lease shall continue in full force and effect. "Commence" shall mean either
the unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.

      9.7   TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be
made concerning advance Base Rent and any other advance payments made by Lessee
to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's
Security Deposit as has not been, or is not then required to be, used by Lessor.

      9.8   WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.

10.   REAL PROPERTY TAXES.

      10.1  DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL
PROPERTY TAXES" shall include any form of assessment; real estate, general,
special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal income or estate taxes); improvement bond; and/or license
fee imposed upon or levied against any legal or equitable interest of Lessor in
the Premises, Lessor's right to other income therefrom, and/or Lessor's business
of leasing, by any authority having the direct or indirect power to tax and
where the funds are generated


                                     PAGE 6            Initials
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                                                                FORM 204N-R-2/97
   7
with reference to the Building address and where the proceeds so generated are
to be applied by the city, county or other local taxing authority of a
jurisdiction within which the Premises are located. The term "REAL PROPERTY
TAXES" shall also include any tax, fee, levy, assessment or charge, or any
increase therein, imposed by reason of events occurring during the term of this
Lease, including but not limited to, a change in the ownership of the Premises.

      10.2  

            (a)   PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease. Subject to Paragraph
10.2(b), all such payments shall be made at least ten (10) days prior to any
delinquency date. Lessee shall promptly furnish Lessor with satisfactory
evidence that such taxes have been paid. If any such taxes shall cover any
period of time prior to or after the expiration or termination of this Lease,
Lessee's share of such taxes shall be prorated to cover only that portion of the
tax bill applicable to the period that this Lease is in effect, and Lessor shall
reimburse Lessee for any overpayment. If Lessee shall fail to pay any required
Real Property Taxes, Lessor shall have the right to pay the same, and Lessee
shall reimburse Lessor therefor upon demand.

            (b)   ADVANCE PAYMENT. In the event Lessee incurs a late charge on
any Rent payment, Lessor may, at Lessor's option, estimate the current Real
Property Taxes, and require that such taxes be paid in advance to Lessor by
Lessee, either: (i) in a lump sum amount equal to the installment due, at least
twenty (20) days prior to the applicable delinquency date, or (ii) monthly in
advance with the payment of the Base Rent. If Lessor elects to require payment
monthly in advance, the monthly payment shall be an amount equal to the amount
of the estimated installment of taxes divided by the number of months remaining
before the month in which said installment becomes delinquent. When the actual
amount of the applicable tax bill is known, the amount of such equal monthly
advance payments shall be adjusted as required to provide the funds needed to
pay the applicable taxes. If the amount collected by Lessor is insufficient to
pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand,
such additional sums as are necessary to pay such obligations. All moneys paid
to Lessor under this Paragraph may be intermingled with other moneys of Lessor
and shall not bear interest. In the event of a Breach by Lessee in the
performance of its obligations under this Lease, then any balance of funds paid
to Lessor under the provisions of this Paragraph may at the option of Lessor, be
treated as an additional Security Deposit.

      10.3  JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available.

      10.4  PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency, all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of Lessee's said
personal property shall be assessed with Lessor's real property, Lessee shall
pay Lessor the taxes attributable to Lessee's property within ten (10) days
after receipt of a written statement.

11.   UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.

12.   ASSIGNMENT AND SUBLETTING.

      12.1  LESSOR'S CONSENT REQUIRED.


            (a)   Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent which Lessor shall not unreasonably withhold.

            (b)

            (c)

            (d)   An assignment or subletting without consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1 (c), or a
noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unapproved assignment or subletting as a noncurable
Breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30)
days written notice, increase the monthly Base Rent to one hundred ten percent
(110%) of the Base Rent then in effect. Further, in the event of such Breach and
rental adjustment, (i) the purchase price of any option to purchase the Premises
held by Lessee shall be subject to similar adjustment to one hundred ten percent
(110%) of the price previously in effect, and (ii) all fixed and non-fixed
rental adjustments scheduled during the remainder of the Lease term shall be
increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent.

            (e)   Lessee's remedy for any breach of Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.

      12.2  TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.

            (a)   Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Rent or for the performance of any other
obligations to be performed by Lessee.

            (b)   Lessor may accept Rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.

            (c)   Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.

            (d)   In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any assignee
or sublessee, without first exhausting Lessor's remedies against any other
person or entity responsible therefore to Lessor, or any security held by
Lessor.

            (e)   Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a fee of
$1,000 or ten percent (10%) of the current monthly Base Rent applicable to the
portion of the Premises which is the subject of the proposed assignment or
sublease, whichever is greater, as consideration for Lessor's considering and
processing said request. Lessee agrees to provide Lessor with such other or
additional information and/or documentation as may be reasonably requested.

            (f)   Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed to
have assumed and agreed to conform and comply with each and every term,
covenant, condition and obligation herein to be observed or performed by Lessee
during the term of said assignment or sublease, other than such obligations as
are contrary to or inconsistent with provisions of an assignment or sublease to
which Lessor has specifically consented to in writing.

      12.3  ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:

            (a)   Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all Rent payable on any sublease, and Lessor may collect such Rent
and apply same toward Lessee's obligations under this Lease; provided, however,
that until a Breach shall occur in the performance of Lessee's obligations,
Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or
any assignment of such sublease, nor by reason of the collection of Rent, be
deemed liable to the sublessee for any failure of Lessee to perform and comply
with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably
authorizes and directs any such sublessee, upon receipt of a written notice


                                     PAGE 7            Initials 
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                                                                FORM 204N-R-2/97
   8
from Lessor stating that a Breach exists in the performance of Lessee's
obligations under this Lease, to pay to Lessor all Rent due and to become due
under the sublease. Sublessee shall rely upon any such notice from Lessor and
shall pay all Rents to Lessor without any obligation or right to inquire as to
whether such Breach exists, notwithstanding any claim from Lessee to the
contrary.

            (b)   In the event of a Breach by Lessee, Lessor may, at its option,
require sublessee to attorn to Lessor, in which event Lessor shall undertake the
obligations of the sublessor under such sublease from the time of the exercise
of said option to the expiration of such sublease; provided, however, Lessor
shall not be liable for any prepaid rents or security deposit paid by such
sublessee to such sublessor or for any prior Defaults or Breaches of such
sublessor.

            (c)   Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.

            (d)   No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.

            (e)   Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The sublessee
shall have a right of reimbursement and offset from and against Lessee for any
such Defaults cured by the sublessee.

13.   DEFAULT; BREACH; REMEDIES.

      13.1  DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee
to comply with or perform any of the terms, covenants, conditions or rules under
this Lease. A "BREACH" is defined as the occurrence of one or more of the
following Defaults, and the failure of Lessee to cure such Default within any
applicable grace period:

            (a)   The abandonment of the Premises; or the vacating of the
Premises without providing a commercially reasonable level of security, or where
the coverage of the property insurance described in Paragraph 8.3 is jeopardized
as a result thereof, or without providing reasonable assurances to minimize
potential vandalism.

            (b)   The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder, whether to Lessor or
to a third party, when due, to provide reasonable evidence of insurance or
surety bond, or to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) business days following written notice to Lessee.

            (c)   The failure by Lessee to provide (i) reasonable written
evidence of compliance with Applicable Requirements, (ii) the service contracts,
(iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy
Statement, (v) a requested subordination, (vi) evidence concerning any guaranty
and/or Guarantor, (vii) any document requested under Paragraph 42 (easements),
or (viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice to Lessee.

            (d)   A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1 (a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided, however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.

            (e)   The occurrence of any of the following events: (i) the making
of any general arrangement or assignment for the benefit of creditors; (ii)
becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor statute
thereto (unless, in the case of a petition filed against Lessee, the same is
dismissed within sixty (60) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subparagraph (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.

            (f)   The discovery that any financial statement of Lessee or of any
Guarantor given to Lessor was materially false.

            (g)   If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory basis, and
Lessee's failure, within sixty (60) days following written notice of any such
event, to provide written alternative assurance or security, which, when coupled
with the then existing resources of Lessee, equals or exceeds the combined
financial resources of Lessee and the Guarantors that existed at the time of
execution of this Lease.

      13.2  REMEDIES. If Lessee fails to perform any of its affirmative duties
or obligations, within ten (10) days after written notice (or in case of an
emergency, without notice), Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee upon receipt of invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made by Lessee to
be by cashier's check. In the event of a Breach, Lessor may, with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach:

            (a)   Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of the District within which the Premises are located
at the time of award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Breach of this Lease shall not waive Lessor's right
to recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding any unpaid Rent and damages as are recoverable
therein, or Lessor may reserve the right to recover all or any part thereof in a
separate suit. If a notice and grace period required under Paragraph 13.1 was
not previously given, a notice to pay rent or quit, or to perform or quit given
to Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and
the failure of Lessee to cure the Default within the greater of the two such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.

            (b)   Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may sublet or assign,
subject only to reasonable limitations. Acts of maintenance, efforts to relet,
and/or the appointment of a receiver to protect the Lessor's interests, shall
not constitute a termination of the Lessee's right to possession.

            (c)   Pursue any other remedy now or hereafter available under the
laws or judicial decisions of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's right
to possession shall not relieve Lessee from liability


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                                                                FORM 204N-R-2/97
   9
under any indemnity provisions of this Lease as to matters occurring or accruing
during the term hereof or by reason of Lessee's occupancy of the Premises.

      13.3  INDUCEMENT RECAPTURE. Any agreement for free or abated rent or other
charges, or for the giving or paying by Lessor to or for Lessee of any cash or
other bonus, inducement or consideration for Lessee's entering into this Lease,
all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS,"
shall be deemed conditioned upon Lessee's full and faithful performance of all
of the terms, covenants and conditions of this Lease. Upon Breach of this Lease
by Lessee, any such Inducement Provision shall automatically be deemed deleted
from this Lease and of no further force or effect, and any rent, other charge,
bonus, inducement or consideration theretofore abated, given or paid by Lessor
under such an Inducement Provision shall be immediately due and payable by
Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee.
The acceptance by Lessor of rent or the cure of the Breach which initiated the
operation of this paragraph shall not be deemed a waiver by Lessor of the
provisions of this paragraph unless specifically so stated in writing by Lessor
at the time of such acceptance.

      13.4  LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
of Rent will cause Lessor to incur costs not contemplated by this Lease the
exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within ten (10) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a one-time late charge equal to ten percent (10%) of each such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of such late
payment. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent the exercise of any of the other rights and remedies granted hereunder.
In the event that a late charge is payable hereunder, whether or not collected,
for three (3) consecutive installments of Base Rent, then notwithstanding any
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.

      13.5  INTEREST. Any monetary payment due Lessor hereunder, other than late
charges, not received by Lessor, when due as to scheduled payments (such as Base
Rent) or within thirty (30) days following the date on which it was due for
non-scheduled payment, shall bear interest from the date when due, as to
scheduled payments, or the thirty-first (31st) day after it was due as to
non-scheduled payments. The interest ("INTEREST") charged shall be equal to the
prime rate reported in the Wall Street Journal as published closest prior to the
date when due plus four percent (4%), but shall not exceed the maximum rate
allowed by law. Interest is payable in addition to the potential late charge
provided for in Paragraph 13.4. 

      13.6  BREACH BY LESSOR.

            (a)   NOTICE OF BREACH. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and any Lender whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days are reasonably
required for its performance, then Lessor shall not be in breach if performance
is commenced within such thirty (30) day period and thereafter diligently
pursued to completion.

            (b)   PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that
neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said notice, or if having commenced said cure they do not diligently
pursue it to completion, then Lessee may elect to cure said breach at Lessee's
expense and offset from Rent an amount equal to the greater of one month's Base
Rent or the Security Deposit, and to pay an excess of such expense under
protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall
document the cost of said cure and supply said documentation to Lessor.

14.   CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "CONDEMNATION"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building portion of the
premises, or more than twenty-five percent (25%) of the land area portion of the
premises not occupied by any building, is taken by Condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in
proportion to the reduction in utility of the Premises caused by such
Condemnation. Condemnation awards and/or payments shall be the property of
Lessor, whether such award shall be made as compensation for diminution in value
of the leasehold, the value of the part taken, or for severance damages;
provided, however, that Lessee shall be entitled to any compensation for
Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures,
without regard to whether or not this Lease is terminated pursuant to the
provisions of this Paragraph. All Alterations and Utility Installations made to
the Premises by Lessee, for purposes of Condemnation only, shall be considered
the property of the Lessee and Lessee shall be entitled to any and all
compensation which is payable therefor. In the event that this Lease is not
terminated by reason of the Condemnation, Lessor shall repair any damage to the
Premises caused by such Condemnation.

15.   BROKERS' FEE.

      15.1

      15.2  ASSUMPTION OF OBLIGATIONS.

      15.3  REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee and
Lessor each represent and warrant to the other that it has had no dealings with
any person, firm, broker or finder (other than the Brokers, if any) in
connection with this Lease, and that no one other than said named Brokers is
entitled to any commission or finder's fee in connection herewith. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto.

16.  ESTOPPEL CERTIFICATES.

            (a)   Each Party (as "RESPONDING PARTY") shall within ten (10) days
after written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "ESTOPPEL CERTIFICATE" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.

            (b)   If the Responding Party shall fail to execute or deliver the
Estoppel Certificate within such ten day period, the Requesting Party may
execute an Estoppel Certificate stating that: (i) the Lease is in full force and
effect without modification except as may be represented by the Requesting
Party, (ii) there are no uncured defaults in the Requesting Party's performance,
and (iii) if Lessor is the Requesting Party, not more than one month's rent has
been paid in advance. Prospective purchasers and encumbrancers may rely upon the
Requesting Party's Estoppel Certificate, and the Responding Party shall be
estopped from denying the truth of the facts contained in said Certificate.


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            (c)   If Lessor desires to finance, refinance, or sell the Premises,
or any part thereof, Lessee and all Guarantors shall deliver to any potential
lender or purchaser designated by Lessor such financial statements as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.

17.   DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's interest in the prior lease. In the event of
a transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined. Notwithstanding the above, and subject to the provisions of Paragraph
20 below, the original Lessor under this Lease, and all subsequent holders of
the Lessor's interest in this Lease shall remain liable and responsible with
regard to the potential duties and liabilities of Lessor pertaining to Hazardous
Substances as outlined in Paragraph 6 above.

18.   SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.

19.   DAYS. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.

20.   LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17 above,
the obligations of Lessor under this Lease shall not constitute personal
obligations of Lessor*, the individual partners of Lessor* or its or their
individual partners, directors, officers or shareholders, and Lessee shall look
to the Premises, and to no other assets of Lessor, for the satisfaction of any
liability of Lessor with respect to this Lease, and shall not seek recourse
against the individual partners of Lessor, or its or their individual partners,
directors, officers or shareholders, or any of their personal assets for such
satisfaction. *See Addendum

21.   TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.

22.   NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. The liability (including court costs and Attorneys'
fees), of any Broker with respect to negotiation, execution, delivery or
performance by either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the fee received by such
Broker pursuant to this Lease; provided, however, that the foregoing limitation
on each Broker's liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.

23.   NOTICES.

      23.1  NOTICE REQUIREMENTS. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by courier) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notices. Either Party may by written
notice to the other specify a different address for notice, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.

      23.2  DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantee next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the Postal Service or courier. Notices transmitted by
facsimile transmission or similar means shall be deemed delivered upon telephone
confirmation of receipt, provided a copy is also delivered via delivery or mail.
If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed
received on the next business day.

24.   WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. The acceptance of
Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any
payment by Lessee may be accepted by Lessor on account of moneys or damages due
Lessor, notwithstanding any qualifying statements or conditions made by Lessee
in connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.

25.   RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.

26.   NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (150%) of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.

27.   CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.

28.   COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of
this Lease to be observed or performed by Lessee are both covenants and
conditions. In construing this Lease, all headings and titles are for the
convenience of the parties only and shall not be considered a part of this
Lease. Whenever required by the context, the singular shall include the plural
and vice versa. This Lease shall not be construed as if prepared by one of the
parties, but rather according to its fair meaning as a whole, as if both parties
had prepared it.

29.   BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.

30.   SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.

      30.1  SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lessor's Lender") shall have no liability or obligation to
perform any of the obligations of Lessor under this Lease. Any Lender may elect
to have this Lease and/or any Option granted hereby superior to the lien of its
Security Device by giving written notice thereof to Lessee, whereupon this Lease
and such Options shall be deemed prior to such Security Device, notwithstanding
the relative dates of the documentation or recordation thereof.

      30.2  ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new


                                     PAGE 10            Initials    E.G.  R.F.
                                                                ----------------
                                                                FORM 204N-R-2/97
   11
owner shall not: (i) be liable for any act or omission of any prior lessor or
with respect to events occurring prior to acquisition of ownership; (ii) be
subject to any offsets or defenses which Lessee might have against any prior
lessor, or (iii) be bound by prepayment of more than one (1) month's rent.

      30.3  NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises. Further, within sixty (60) days after the execution of this Lease,
Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance
Agreement from the holder of any pre-existing Security Device which is secured
by the Premises. In the event that Lessor is unable to provide the
Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at
Lessee's option, directly contact Lessor's lender and attempt to negotiate for
the execution and delivery of a Non-Disturbance Agreement.

      30.4  SELF-EXECUTING. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.

31.   ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding
involving the Premises to enforce the terms hereof or to declare rights
hereunder, the Prevailing Party (as hereafter defined) in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such
fees may be awarded in the same suit or recovered in a separate suit, whether or
not such action or proceeding is pursued to decision or judgment. The term,
"PREVAILING PARTY" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be, whether
by compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fees award shall not be computed
in accordance with any court fee schedule, but shall be such as to fully
reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be
entitled to attorneys' fees, costs and expenses incurred in the preparation and
service of notices of Default and consultations in connection therewith, whether
or not a legal action is subsequently commenced in connection with such Default
or resulting Breach.

32.   LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises as Lessor may deem necessary.
All such activities shall be without abatement of rent or liability to Lessee.
Lessor may at any time place on the Premises any ordinary "FOR SALE" signs and
Lessor may during the last six (6) months of the term hereof place on the
Premises any ordinary "FOR LEASE" signs. Lessee may at any time place on or
about the Premises any ordinary "FOR SUBLEASE" sign.

33.   AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any
auction upon the Premises without Lessor's prior written consent. Lessor shall
not be obligated to exercise any standard of reasonableness in determining
whether to permit an auction.

34.   SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place
any sign upon the Premises without Lessor's prior written consent. All signs
must comply with all Applicable Requirements.

35.   TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.

36.   CONSENTS. Except as otherwise provided herein, wherever in this Lease the
consent of a Party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs
and expenses (including but not limited to architects', attorneys', engineers'
and other consultants' fees) incurred in the consideration of, or response to, a
request by Lessee for any Lessor consent, including but not limited to consents
to an assignment, a subletting or the presence or use of a Hazardous Substance,
shall be paid by Lessee upon receipt of an invoice and supporting documentation
therefor. Lessor's consent to any act, assignment or subletting shall not
constitute an acknowledgment that no Default or Breach by Lessee of this Lease
exists, nor shall such consent be deemed a waiver of any then existing Default
or Breach, except as may be otherwise specifically stated in writing by Lessor
at the time of such consent. The failure to specify herein any particular
condition to Lessor's consent shall not preclude the imposition by Lessor at the
time of consent of such further or other conditions as are then reasonable with
reference to the particular matter for which consent is being given. In the
event that either Party disagrees with any determination made by the other
hereunder and reasonably requests the reasons for such determination, the
determining party shall furnish its reasons in writing and in reasonable detail
within ten (10) business days following such request.

37.

38.   QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance
of all of the covenants, conditions and provisions on Lessee's part to be
observed and performed under this Lease, Lessee shall have quiet possession and
quiet enjoyment of the Premises during the term hereof.

39.   OPTIONS.

      39.1  DEFINITION. "OPTION" shall mean: (a) the right to extend the term of
or renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor; (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of Lessor.

      39.2  OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee
in this Lease is personal to the original Lessee, and cannot be assigned or
exercised by anyone other than said original Lessee and only while the original
Lessee is in full possession of the Premises and, if requested by Lessor, with
Lessee certifying that Lessee has no intention of thereafter assigning or
subletting.

      39.3  MULTIPLE OPTIONS. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options have been validly exercised.

      39.4  EFFECT OF DEFAULT ON OPTIONS.

            (a)   Lessee shall have no right to exercise an Option: (i) during
the period commencing with the giving of any notice of Default and continuing
until said Default is cured, (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof is given Lessee), (iii) during the
time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has
been given three (3) or more notices of separate Default, whether or not the
Defaults are cured, during the twelve (12) month period immediately preceding
the exercise of the Option.

            (b)   The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).

            (c)   An Option shall terminate and be of no further force or
effect, notwithstanding Lessee's due and timely exercise of the Option, if,
after such exercise and prior to the commencement of the extended term, (i)
Lessee fails to pay Rent for a period of thirty (30) days after such Rent
becomes due (without any necessity of Lessor to give notice thereof), (ii)
Lessor gives to Lessee three (3) or more notices of separate Default during any
twelve (12) month period, whether or not the Defaults are cured, or (iii) if
Lessee commits a Breach of this Lease.

40.   MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, and care of said properties, including


                                   PAGE 11             Initials   E.G.   R.F.
                                                                ----------------
                                                                FORM 204N-R-2/97
   12
the care and cleanliness of the grounds and including the parking, loading and
unloading of vehicles, and that Lessee will pay its fair share of common
expenses incurred in connection therewith.

41.   SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.

42.   RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.

43.   PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay.

44.   AUTHORITY. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. Each party
shall, within thirty (30) days after request, deliver to the other party
satisfactory evidence of such authority.

45.   CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.

46.   OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.

47.   AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.

48.   MULTIPLE PARTIES. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.

49.   MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation
and/or the Arbitration of all disputes between the Parties and/or Brokers
arising out of this Lease [ ] is [X} is not attached to this Lease.

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.

ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO:

1.    SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.

2.    RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES,THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE
SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. 

WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.

The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.

                                                    
Executed at: Las Vegas, NV on November __, 1997.       Executed at Chatsworth on: November 24, 1997

By: LESSOR                                             By: LESSEE
                                                                                        
The Ruth G. Fisher Living Trust U/D/T dated           MRV Communications, Inc.,
June 28, 1990                                          a Delaware Corporation

By: RUTH FISHER                                        By: EDMUND GLAZER
Name Printed: Ruth Fisher                              Name Printed: Edmund Glazer
Title: TTEE                                            Title: Chief Financial Officer

By: RANDALL FISHER                                     By: ____________________________
Name Printed: Randall Fisher                           Name Printed: __________________
Title: TTEE                                            Title: _________________________
Address: c/o EVEREN Securities                         Address: 8943 Fullbright Avenue
         3800 Houser Hughes Pky. #1500                 Chatsworth, CA 91311
         Las Vegas, NV 89109                           Telephone: (818) 773-9044
Telephone: (702) 732-4222                              Facsimile: (818) 407-5656
Facsimile: (   ) Where rent is sent                    Federal ID No. 06-1340090
Federal ID No. 568 05 8942



NOTE: These forms are often modified to meet changing requirements of law and
      industry needs. Always write or call to make sure you are utilizing the
      most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So.
      Flower Street, Suite 600, Los Angeles, California 90017. (213) 687-8777.
      Fax NO. (213) 687-8616


@COPYRIGHT 1997 - BY AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION. ALL RIGHTS
RESERVED. NO PART OF THESE WORKS MAY BE REPRODUCED IN ANY FORM WITHOUT
PERMISSION IN WRITING.


                                    PAGE 12            Initials  E.G.   R.F.
                                                                ----------------
                                                                FORM 204N-R-2/97
   13
ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE NET DATED
NOVEMBER 17,1997, FOR THE PROPERTY COMMONLY KNOWN AS 8928 FULLBRIGHT AVENUE,
CHATSWORTH, CALIFORNIA, BY AND BETWEEN THE RUTH G. FISHER LVING TRUST U/D/T
DATED JUNE 28, 1990 AS LESSOR AND MRV COMMUNICATIONS, INC., A DELAWARE
CORPORATION AS LESSEE


50.   RENTAL ABATEMENT. Provided that Lessee is not then in default of any of
the terms, convenants and/or conditions of this lease agreement, Lessor shall
grant to Lessee base rental abatement for the months of December 1997 and
December 1998. Lessee shall be responsible for all other costs associated with
conducting business during such time with the exception of rent.

51.   Lessee, at Lessee's sole cost and expense, may obtain a title report in
order to satisfy itself that the building shall be free and clear of any claims
or liens or other encumbrances that will inhibit the use of the building by the
Lessee as contemplated by this agreement.

52.   ITEM 20. LIMITATION ON LIABILITY. Please note the following additional
sentence: Except with respect to Lessee's fraud, gross negligence or willful
misconduct, the obligations of Lessee under this Lease shall not constitute
personal obligations of the individual partners of Lessee or its or their
individual partners, directors, officers or shareholders for the satisfaction of
any liability of Lessee with respect to this Lease, and Lessor shall not seek
recourse against the individual partners of Lessee, or its or their individual
partners, directors, officers or shareholders, or any of their personal assets
for such satisfaction.

53.   LESSEE TENANT IMPROVEMENTS: Pursuant to Paragraph 7.3(a) DEFINITIONS:
Consent Required, Lessor hereby gives Lessee consent to construct those certain
improvements as outlined in Exhibit "B" of this document.

54.   DAMAGE DUE TO EARTHQUAKE: In the event an earthquake damages the
structural elements of the subject building, the Lessee shall not be responsible
for the repair of the building. In the event of an earthquake and Lessee has
made modifications to the building which compromise its structural integrity,
Lessee shall be responsible for repairing all earthquake damage caused by such
modifications. This Paragraph shall not supersede Section 9.3 of this Lease.

CONSULT YOUR ATTORNEY/ADVISORS - This document has been prepared for approval by
your attorney. No representation or recommendation is made by The Seeley Company
or the American Industrial Real Estate Association (A.I.R.), or their agents or
employees, regarding this document or the transaction to which it relates. These
are questions for your attorney.

On any real estate transaction, it is recommended that you consult with a
professional, such as a civil engineer, industrial hygienist or other person
with experience in evaluating the condition of the property, including the
possible presence of asbestos, hazardous materials and underground storage
tanks.

In addition, please be advised that an Owner or Tenant of real property may be
subject to the Americans with Disabilities Act (the ADA), a Federal law codified
at 42 USC Section 12101 et seq. Among other requirements of the ADA that could
apply to your property, Title III of the ADA requires Owners and Tenants of
"public accommodations" to remove barriers to access by disabled persons and
provide auxiliary aids and services for hearing, vision or speech impaired
persons by January 26, 1992. The regulations under Title III of the ADA are
codified at 28 CFR Part 36.

The Seeley Company recommends that you and your attorney, engineer and/or
architect review the ADA and the regulations, and, if appropriate, your proposed
lease agreement, to determine if this law would apply to you, and the nature of
the equipment.

LESSOR:                                 LESSEE:


By: Ruth Fisher                         By: Edmund Glazer

Date: 11/26/97                          Date: 11/23/97


                                     PAGE 2
   14
                                      [LOGO]
                              OPTION(S) TO EXTEND

                                  ADDENDUM TO
                                 STANDARD LEASE

      DATED November 17, 1997
            ----------------------------------------------------------
                               The Ruth G. Fisher Living Trust U/D/T 
      BY AND BETWEEN (LESSOR)  Dated June 28, 1990
                               ---------------------------------------

                     (LESSEE)  MRV Communications, Inc., a Delaware Corporation
                               ---------------------------------------
    
     PROPERTY ADDRESS: 8928 Fullbright Avenue, Chatsworth, CA
                       -----------------------------------------------

Paragraph   56
          ------

A.    OPTION(S) TO EXTEND:

      Lessor hereby grants to Lessee the option to extend the term of this Lease
for 1 additional 36 month period(s) commencing when the prior term expires upon
each and all of the following terms and conditions.

 (i)   Lessee gives to Lessor, and Lessor actually receives on a date which is
prior to the date that the option period would commence (if exercised) by at
least 6 and not more than 12 months, a written notice of the exercise of the
option(s) to extend this Lease for said additional term(s), time being of
essence. If said notification of the exercise of said option(s) is (are) not so
given and received, the option(s) shall automatically expire; said option(s) may
(if more than one) only be exercised consecutively;

 (ii)  The provisions of paragraph 39, including the provision relating to
default of Lessee set forth in paragraph 39.4 of this Lease are conditions of
this Option;

 (iii) All of the terms and conditions of this Lease except where specifically
modified by this option shall apply; 

 (iv)  The monthly rent for each month of the option period shall be calculated
as follows, using the method(s) indicated below:

(Check Method(s) to be Used and Fill in Approximately)

[XX]   I.   COST OF LIVING ADJUSTMENT(S) (COL)

      (a)   On (Fill in COL Adjustment Date(s): December 1, 2003, 2004 and 2005

- -------------------------------------------------------------------------- the
monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease
shall be adjusted by the change, if any, from the Base Month specified below,
in the Consumer Price Index of the Bureau of Labor Statistics of the U.S.
Department of Labor for (select one): [X] CPI W (Urban Wage Earners and
Clerical Workers) or [] CPI U (All Uran Consumers), for (Fill in Urban Area):
Los Angeles-Anaheim-Riverside, All items (1982-1984 = 100), herein referred to
as "C.P.I."

      (b)   The monthly rent payable in accordance with paragraph AI(a) of this
Addendum shall be calculated as follows: the Base Rent set forth in paragraph
1.5 of the attached Lease, shall be multiplied by a fraction the numerator of
which shall be the C.P.I. of the calendar month 2 (two) months prior to the
month(s) specified in paragraph AI(a) above during which the adjustment is to
take effect, and the denominator of which shall be the C.P.I. of the calendar
month which is two (2) months prior to (select one): [] the first month of this
Lease as set forth in paragraph 1.3 ("Base Month") or [x] (Fill in Other "Base
Month"): for January 2002. The sum so calculated shall constitute the new
monthly rent hereunder, but in no event, shall any such new monthly rent be less
than the rent payable for the month immediately preceding the date for rent
adjustment. In no event, however, shall said increase be less than two percent
(2%) nor greater than five percent (5%) per annum.

      (c)   In the event the compilation and/or publication of the C.P.I. shall
be transferred to any other governmental department or bureau or agency or shall
be discontinued, then the index most nearly the same as the C.P.I. shall be used
to make such calculation. In the event that Lessor and Lessee cannot agree on
such alternative index, then the matter shall be submitted for decision to the
American Arbitration Association in accordance with the then rules of said
association and the decision of the arbitrators shall be binding upon the
parties. The cost of said Arbitrators shall be paid equally by Lessor and
Lessee.

Initials: __________                                      Initials:  E.G.
                                                                     R.F.
          __________                                                


                              OPTION(S) TO EXTEND
                                  PAGE 1 OF 2

NOTICE: These forms are often modified to meet changing requirements of law and
        industry needs. Always write or call to make sure you are utilizing the
        most current form: American Industrial Real Estate Association, 345
        South Figueroa Street, Suite M-1, Los Angeles, CA 90071. (213) 687-8777.
        Fax No. (213) 687-8616.

[c] 1991 American Industrial Real Estate Association

   15

B.    NOTICE: Unless specified otherwise herein, notice of any escalations other
than Fixed Rental Adjustments shall be made as specified in paragraph 23 of the
attached Lease.

C.    BROKER'S FEE:




Initials:   R.F.                                           Initials: _________
          ---------                                                  
            E.G.    
          ---------                                                  _________
                  


                               OPTION(S) TO EXTEND
                                   PAGE 2 OF 2

NOTICE: These forms are often modified to meet changing requirements of law and
        industry needs. Always write or call to make sure you are utilizing the
        most current form: American Industrial Real Estate Association, 345
        South Figueroa Street, Suite M-1, Los Angeles, CA 90071. (213) 687-8777.
        Fax No. (213) 687-8616.

(C) 1991 American Industrial Real Estate Association.
   16
                               RENT ADJUSTMENT(S)

                             STANDARD LEASE ADDENDUM

              DATED  November 17, 1997
                     ------------------------------------------------------
                                      The Ruth G. Fisher Living Trust U/D/T
              BY AND BETWEEN (LESSOR) dated June 28, 1990
                                      -------------------------------------
                                      MRV Communications, Inc.
                             (LESSEE) a Delaware Corporation
                                      -------------------------------------
              ADDRESS OF PREMISES: 8928 Fullbright Avenue, Chatsworth, CA

Paragraph 55

A.    RENT ADJUSTMENTS:

The monthly rent for each month of the adjustment period(s) specified below
shall be increased using the method(s) indicated below: 

(Check Method(s) to be Used and Fill in Appropriately)

      I.    COST OF LIVING ADJUSTMENT(S) (COLA)

      II.   MARKET RENTAL VALUE ADJUSTMENT(S) (MRV)

Initials:   R.F.                                          Initials: 
         --------------                                             -----------
            E.G.                                                    
         --------------                                             -----------
                                                                    
                                                                    
                               RENT ADJUSTMENT(S)
                                  PAGE 1 OF 2
   17
[ ]   III.   FIXED RENTAL ADJUSTMENT(S) (FRA)

The Base Rent shall be increased to the following amounts on the dates set forth
below:

  On (Fill in FRA 
  Adjustment Date(s)):  The New Base Rent shall be:

  December 1, 1998            $ 11,302.50           December 1, 2002: $13,095.50
  -------------------         ----------------     
  December 1, 1999            $ 11,726.30
  -------------------         ----------------     
  December 1, 2000            $ 12,166.00
  -------------------         ----------------     
  December 1, 2001            $ 12,622.20
  -------------------         ----------------     

B.    NOTICE:

Unless specified otherwise herein, notice of any such adjustments, other than
Fixed Rental Adjustments, shall be made as specified in paragraph 23 of the
Lease.

C.    BROKER'S FEE:


Initials:  R.F.                                            Initials: 
          -----                                                      -----------
           E.G.
          -----                                                      -----------
                                                                     
                                                                     -----------


                               RENT ADJUSTMENT(S)
                                   PAGE 2 OF 2

   18

                                   EXHIBIT A


                                  [FLOOR PLAN]


                                FULLBRIGHT AVE.


INITIAL                                                              INITIAL
   19

                          LESSEE TENANT IMPROVEMENTS:


Add one restroom with two toilets, two urinals and two sinks (behind existing
restrooms).

Add a hard wall from the top of the one office to the warehouse from the drop
ceiling to cover existing exposed ducting and power. (Unsightly).

Add HVAC and 12 foot high drop ceiling to the production area.

Open up the office area as shown.

Tile the production area as shown.


                                  [FLOOR PLAN]


                                   EXHIBIT B

EX-10.36

   1
                                                                   EXHIBIT 10.36

                                    NEW LEASE

                                    ARTICLE 1

                                 Reference Data


        1.1     Subjects Referred To

        Each reference in this Lease to any of the following subjects shall be
construed to incorporate the data stated for that subject in this Section 1.1.

        Date of this Lease:                  February 22 , 1993



        Building                       Two level building containing
                                       approximately 101,031 square feet of
                                       floor area, as described in Exhibit A
                                       hereto.



        Premises:                      The Premises shall consist of the
                                       Building and the (acre/square foot)
                                       parcel of land on which the Building is
                                       situated, such parcel of land being
                                       described in Exhibit A hereto.



                Phase One:             The portion of the Building
                Space:                 containing 52,223 square feet of floor
                                       area, being shown on Exhibit A-1 hereto.

                Phase Two
                Space:                 The remainder of the Building containing
                                       48,808 square feet of floor area, being
                                       shown on Exhibit A-2 hereto.



        Landlord:                      495 Littleton Associates



        Original Notice Address
        of Landlord:                   c/o Nordblom Company
                                       31 Third Avenue
                                       Burlington, MA 01803



Landlord's Construction Representative: Steve Logan


Tenant:                                Xyplex, Inc.

Original Notice Address


   2
        of Tenant:                     Xyplex, 330 Codman Hill Road, Boxborough,
                                       MA 01719 Attn: Mr. Robert F. Hoefer

        Tenant's Construction
        Representative.                Vicki Baraiolo

        Term:                          The period terminating on October 1, 1998



        Commencement Date:             The earlier of (x) sixty (60) days after
                                       the Date of this Lease or (y) the date
                                       Tenant occupies the Premises

        Phase Two
        Commencement Date:             The earlier of (x) the date that Tenant
                                       occupies the entirety of the Phase Two
                                       Space, or (y) October 1, 1995

        Annual Fixed Rent Rate:        $214,114.30 until the Phase Two
                                       Commencement Date and thereafter
                                       $433,750.30 unless the Phase Two
                                       Commencement Date occurs on or before
                                       October 1, 1993, in which event the
                                       Annual Fixed Rent Rate shall be
                                       $414,227.10 after the Phase Two
                                       Commencement Date.

        Monthly Fixed Rent Rate:       $17,842.86 until the Phase Two
                                       Commencement Date and thereafter
                                       $36,145.86 unless the Phase Two
                                       Commencement Date occurs on or before
                                       October 1, 1993, in which event the
                                       Monthly Fixed Rent Rate shall be
                                       $34,518.93 after the Phase Two
                                       Commencement Date.

        Tenant's Percentage:

                Commencement Date through the day before the Phase Two
                Commencement Date:

                                       The ratio of the Rentable Floor Area of
                                       the portion of the Building occupied by
                                       Tenant, from time to time, to the total
                                       rentable area of the Building, which
                                       shall, in no event, be less than 51.69%.

                Phase Two Commencement Date through October 1, 1998:


                                      -2-
   3
                                       100%

        Security Deposit:              $17,842.86

        Additional Security
        Deposit:                       $18,303.01, unless the Phase Two
                                       Commencement Date occurs on or before
                                       October 1, 1993, in which event the
                                       Additional Security Deposit shall be
                                       $16,676.07



        Permitted Uses:                General office, research and development,
                                       light assembly, testing, light
                                       manufacturing, and warehousing of
                                       Tenant's products

        Liability Insurance Limits:

                                       $1,000,000 per person
                                       $5,000,000 general aggregate

        1.2 Exhibits.

        The Exhibits listed below in this section are incorporated in this Lease
by reference and are to be construed as a part of this Lease.

        EXHIBIT       A.       Description of Premises
        EXHIBIT       A-1.     Plan showing the Phase One Space
        EXHIBIT       A-2.     Plan showing the Phase Two Space
        EXHIBIT       B.       Description of Landlord's Work
        EXHIBIT       B-1.     Description of Tenant's Work
        EXHIBIT       C.       Plan showing Additional Premises

        1.3 Table of Articles and Sections.

ARTICLE I - Reference Data

1.1   Subjects Referred To ....................................................1

1.2   Exhibits ................................................................3

1.3   Table of Articles and Sections ..........................................3

ARTICLE 2 - Premises and Term

2.1   Premises ................................................................6

2.2   Term ....................................................................6


                                      -3-
   4
2.3   Extension Option.........................................................6

2.4   Tenant's Right of First Offer............................................8

ARTICLE 3 - Improvements

3.1   Condition of Premises...................................................11

3.2   Pre-Commencement Work by Tenant.........................................11

3.3   Construction Representatives............................................12

ARTICLE 4 - Rent

4.1   The Fixed Rent..........................................................12

4.2   Additional Rent.........................................................14

       4.2.1  Real Estate Taxes...............................................14
       4.2.2  Betterment Assessments..........................................16
       4.2.3  Tax Fund Payments...............................................17
       4.2.4  Operating Costs.................................................18
       4.2.5  Insurance.......................................................20
       4.2.6  Utilities.......................................................23

4.3   Late Payment of Rent....................................................24

4.4   Security Deposit........................................................24

ARTICLE 5 - Landlord's Covenants

5.1   Affirmative Covenants...................................................26

       5.1.1 Repairs..........................................................26
       5.1.2 Insurance........................................................26

ARTICLE 6 - Tenant's-Additional Covenants

6.1   Affirmative Covenants...................................................28

       6.1.1  Perform Obligations.............................................28
       6.1.2  Use.............................................................29
       6.1.3  Repair and Maintenance..........................................29
       6.1.4  compliance with Law.............................................30
       6.1.5  Indemnification.................................................31
       6.1.6  Landlord's Right to-Enter.......................................32
       6.1.7  Personal Property at Tenant's Risk..............................32
       6.1.8  Payment of Landlord's Cost of Enforcement.......................32
       6.1.9  Yield-Up........................................................33
       6.1.10 Estoppel Certificate............................................34


                                      -4-
   5
6.2   Negative Covenants......................................................35

       6.2.1  Assignment and Subletting.......................................35
       6.2.2  Overloading and Nuisance........................................39
       6.2.3  Hazardous Wastes and Materials..................................39
       6.2.4  Installation, Alterations or Additions..........................42
       6.2.5  Abandonment.....................................................44
       6.2.6  Signs...........................................................44
       6.2.7  Parking and Storage.............................................44
                                                                    
ARTICLE 7A  - Casualty

7A.1. Termination.............................................................45
7A.2  Restoration.............................................................45

ARTICLE 7B - CONDEMNATION

7B.1  Termination.............................................................47

7B.2  Restoration.............................................................49

7B.3  Refund and Award........................................................50

7B.4  Divestiture.............................................................50

ARTICLE 8 - Defaults

8.1   Events of Default.......................................................50

8.2   Remedies................................................................52

8.3   Remedies Cumulative.....................................................54

8.4   Landlord's Right to Cure Defaults.......................................54

8.5   Effect of Waivers of Default............................................55

8.6   No Waiver, etc..........................................................55

8.7   No Accord and Satisfaction..............................................55

ARTICLE 9 - Rights of Mortgage Holders

9.1 Rights of Mortgage Holders................................................56

9.2 Lease Superior or Subordinate to Mortgages................................57

ARTICLE 10 - Miscellaneous Provisions

10.1 Notices From One Party to the Other......................................59


                                      -5-
   6
10.2 Quiet Enjoyment..........................................................59
                                                                       
10.3 Lease Not to be Recorded.................................................60
                                                                       
10.4  Limitation of Landlord's Liability......................................60
                                                                       
10.5  Acts of God.............................................................61
                                                                       
10.6  Landlord's Default......................................................62
                                                                       
10.7  Brokerage...............................................................62
                                                                       
10.8  Landlord's Warranties...................................................63
                                                                       
10.9  Applicable Law and Construction.........................................64
                                                                      


                                    ARTICLE 2

                                Premises and Term



        2.1     Premises. Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord, subject to and with the benefit of the terms, covenants,
conditions and provisions of this Lease, the Premises. The cafeteria equipment
and the energy management system presently installed in the Building are part of
the Premises.

        2.2     Term. TO HAVE AND TO HOLD for a term (the "original term")
beginning on the Commencement Date and continuing for the Term, unless sooner
terminated as hereinafter provided.

        2.3     Extension Option. Tenant shall have the right to extend the term
of this Lease for two additional periods of three years each, each such period
to begin immediately upon the expiration of the then current term of this Lease
(the "extended terms"). All of the terms, covenants and provisions of this Lease
shall apply to each such extended term except that the


                                      -6-
   7
Annual Fixed Rent Rate for each such extension period shall be equal to
ninety-five (95%) percent of the market rate at the beginning of such extended
term. If Tenant shall elect to exercise either of the aforesaid options, it
shall do so by giving Landlord notice in Writing of its intention to do so not
later than six (6) months prior to the expiration of the then current term of
this Lease. If Tenant gives such notice, the extension of this Lease shall be
automatically effected without the execution of any additional documents. The
original term and the extended terms are hereinafter collectively called the
"term".

        If the parties cannot agree upon the market rate, then the market rate
shall be submitted to arbitration as follows: market rate shall be determined by
impartial appraisers, one to be chosen by the Landlord, one to be chosen by
Tenant, and a third to be selected, if necessary, as below provided. The
unanimous written decision of the two first chosen, without selection and
participation of a third appraiser, or otherwise, the written decision of a
majority of three appraisers chosen and selected as aforesaid, shall be
conclusive and binding upon Landlord and Tenant. Landlord and Tenant shall each
notify the other of its chosen appraiser within ten (10) days following the call
for arbitration and, unless such two appraisers shall have reached a unanimous
decision within thirty (30) days after their designation, they shall so notify
the then President of the Boston Bar Association and request him to select an
impartial


                                      -7-
   8
third appraiser, to determine market rate as herein defined. Such third
appraiser and the first two chosen shall hear the parties and their evidence and
render their decision within thirty (30) days following the conclusion of such
hearing and notify Landlord and Tenant thereof. Any appraiser chosen or selected
shall have had experience dealing with like types of properties, and shall be a
member of M.A.I. (or successor professional organization). Landlord and Tenant
shall share equally the expense of the third appraiser (if any). If the dispute
between the parties as to a market rate has not been resolved before the
commencement of Tenant's obligation to pay Fixed Rent based upon such market
rate, then Tenant shall pay Fixed Rent under the Lease based upon the current
rate until either the agreement of the parties as to the market rate, or the
decision of the arbitrators, as the case may be, at which time Tenant shall pay
any underpayment of Fixed Rent to Landlord, or Landlord shall refund any
overpayment of Fixed Rent to Tenant.

        In any event, the Annual Fixed Rent Rate for each extended term shall
not be less than the Annual Fixed Rent Rate for the last year of the prior term
of this Lease.

        2.4     Tenant's Right of First Offer

        Tenant, during the original term of this Lease, shall have the following
right to lease the building known as 305 Foster Street containing 81,128 square
feet of floor area, substantially as shown on Exhibit C hereto ("Additional
Premises"), provided that Xyplex, Inc. occupies the Phase One Space and is not
in


                                      -8-
   9
default hereunder beyond any applicable grace period at the time of exercise of
such right:

        A.      Should Landlord make a specific, written proposal with respect
to the Additional Premises or a portion thereof to a prospective tenant, other
than the then tenant thereof, or receive such a proposal, other than from the
then tenant thereof, which Landlord intends to accept, Landlord shall
simultaneously give Tenant notice that such proposal is being made or has been
received, and if the proposal is for less than the entire Additional Premises,
the notice shall specify which portion of the Additional Premises is the subject
of the proposal.

        B.      Tenant shall have until the later of (a) December 1, 1993 or (b)
fifteen (15) business days following the receipt of Landlord's notice to
exercise its right to lease the entire Additional Premises, or, at Tenant's
election, the portion thereof that is the subject of such proposal.

        C.      Upon the exercise of the foregoing right, Landlord and Tenant
shall both negotiate in good faith a lease agreement acceptable to both parties,
which lease agreement shall contain a market fixed rent rate. If the parties can
not agree upon such market rate, the market rate shall be submitted to
arbitration in the manner provided in Section 2.3.

        D.      If Landlord and Tenant enter into a lease for a portion of the
Additional Premises, then, with respect to a notice from Landlord pursuant to
subparagraph A with respect to the remaining portion, Tenant shall have until
the later of (a) six months from


                                      -9-
   10
receipt of Landlord's notice to Tenant with respect to the portion leased by
Tenant or (b) fifteen (15) business days following the receipt of Landlord's
notice with respect to the remaining portion, to exercise its right to lease the
remaining portion.

        E.      If Tenant does not give written notice to Landlord that it is
exercising its right to lease the Additional Premises or a portion thereof
within the period set forth in subparagraph B or D above, as the case may be,
Landlord may proceed to lease the Additional Premises or the portion thereof, to
the prospective tenant. If Landlord does not enter into such a lease with the
prospective tenant within six (6) months of Tenant's receipt of Landlord's
notice or if prior to the expiration of such six (6) month period Landlord makes
a proposal to, or receives a proposal it intends to accept from, another
prospective tenant, then Landlord shall again be obligated to give notice
pursuant to subparagraph A and Tenant shall have the right, in the manner set
forth in this Section 2.4, to lease the Additional Premises.

        F.      If Landlord enters into a lease ("Subsequent Lease") for the
Additional Premises, then Landlord shall, after the expiration of the term of
the Subsequent Lease, again be obligated to give notice pursuant to subparagraph
A and Tenant shall have the right, in the manner set forth in this Section 2.4
(except that clause (b) of subparagraph D shall not be applicable), to lease the
Additional Premises.


                                      -10-
   11
                                    ARTICLE 3

                                  Improvements


        3.1     Condition of Premises. Tenant shall lease the Premises "as-is",
in the condition in which the Premises are in as of the Commencement Date,
without any obligation on the part of Landlord to prepare or construct the
Premises for Tenant's occupancy, but subject to Landlord's obligations as
provided in subparagraph (a) of the third grammatical paragraph of subsection
4.2.4, with respect to latent defects, and except that, prior to the
Commencement Date, Landlord shall perform the work specified in Exhibit B.
Landlord shall undertake to minimize interference with Tenant's pre commencement
work, but should such Landlord's work interfere with Tenant's work, the
Commencement Date shall be extended by the number of days by which Tenant's work
was delayed by such interference.

        3.2     Pre-Commencement Work by Tenant. Tenant agrees that it will,
proceeding with all reasonable dispatch from the time the Lease is fully
executed by Landlord and Tenant perform any work to be done by Tenant so as to
ready the Premises for occupancy (including, without limitation, the work
specified in Exhibit B1), provided that no other work shall be done or fixtures
or equipment installed by Tenant except with the written approval of Landlord,
which approval shall not be unreasonably withheld or delayed. All such work
shall be done in accordance with, and Tenant shall comply with, and Landlord
shall cooperate with


                                      -11-
   12
Tenant in accordance with, the provisions of Section 6.2.4 hereof. During the
period of occupancy of the Premises by Tenant prior to the Commencement Date, no
rent shall accrue or be payable but otherwise such occupancy shall be subject to
all the terms, covenants and conditions contained in this Lease. Tenant agrees
to employ for such work one or more responsible contractors whose labor will
work without interference with other labor working on the Premises and to cause
such contractors employed by Tenant to carry Workmen's Compensation Insurance in
accordance with statutory requirements and Comprehensive Public Liability
Insurance covering such contractors on or about the Premises in amounts at least
equal to the limits set forth in Section 1.1 and to submit certificates
evidencing such coverage to Landlord prior to the commencement of such work.

        3.3     Construction Representatives. Each party authorizes the other to
rely in connection with plans and construction upon approval and other actions
on the party's behalf by any Construction Representative of the party named in
Section 1.1 or any person hereafter designated in substitution or addition by
notice to the party relying.

                                    ARTICLE 4

                                      Rent

        4.1     The Fixed Rent. A. Tenant covenants and agrees to pay Fixed Rent
to Landlord at the Original Notice Address of Landlord or at such other place or
to such other person or entity as


                                      -12-
   13
Landlord may by notice in writing to Tenant from time to time direct, at the
Annual Fixed Rent Rate, in equal installments at the Monthly Fixed Rent Rate
(which is 1/12th of the Annual Fixed Rent Rate), in advance, on the first day of
each calendar month included in the term; and for any portion of a calendar
month at the beginning or end of the term, at that rate payable in advance for
such portion.

        B.      The parties acknowledge that Tenant intends to occupy the Phase
One Space on the Commencement Date and to occupy the Phase Two Space on or
before October 1, 1995. The parties further acknowledge that Tenant shall have
the right, prior to October 1, 1995, to occupy the Phase Two Space in
increments, the first increment of which shall be at least 25,000 square feet of
floor area or more, and the second such increment of which shall be the
remainder of the Phase Two Space. In the event that Tenant elects to so occupy
such portion of the Phase Two Space prior to the Phase Two Commencement Date,
then the Annual Fixed Rent Rate for the period from the date that Tenant
occupies such portion of the Phase Two Space through the Phase Two Commencement
Date shall be increased by the product of (x) $4.50 multiplied by (y) the number
of square feet of the floor area of the Phase Two Space occupied by Tenant
(e.g., if Tenant occupies 25,000 square feet of floor area of the Phase Two
Space on September 1, 1993, then the Annual Fixed Rent Rate as of September 1,
1993 shall be increased from $214,114.30 to $326,614.30).


                                      -13-
   14
        C.      In the event that Tenant desires to occupy the entirety of the
Phase Two Space on or before October 1, 1993, Tenant shall so notify Landlord in
writing on or before October 1, 1993. If Tenant fails timely to so notify
Landlord, then, notwithstanding anything to the contrary in Article I of the
Lease, the Annual Fixed Rent Rate after the Phase Two Commencement Date shall be
$433,750.30.

        4.2     Additional Rent. In order that the Fixed Rent shall be
absolutely net to Landlord, Tenant covenants and agrees to pay, as Additional
Rent, taxes, betterment assessments, operating costs, insurance costs, and
utility charges with respect to the portion of Premises occupied by Tenant as
provided in this Section 4.2 as follows:

                4.2.1   Real Estate Taxes. Tenant shall pay to Landlord Tenant's
Percentage of all taxes levied or assessed by, or becoming payable to the
municipality or any governmental authority having jurisdiction of the Premises,
for or in respect of the Premises or which may become a lien on the Premises,
for each tax period partially or wholly included in the term, such payments to
be made to Landlord in the manner provided in Subsection 4.2.3 of this Section
4.2. For any fraction of a tax period included in the term at the beginning or
end thereof, Tenant shall pay to Landlord the fraction of taxes so levied or
assessed or becoming payable which is allocable to such included period. Tenant
may prosecute appropriate proceedings for abatement or reduction of any tax with
respect to which Tenant is


                                      -14-
   15
required to make payments as hereinbefore provided, such proceedings to be
conducted jointly with Landlord, if Landlord has contributed to the payment of
such taxes, and Tenant agrees to save Landlord harmless from all costs and
expenses incurred on account of Tenant's participation in such proceedings.
Landlord, without obligating itself to incur any costs or expenses in connection
with such proceedings, shall cooperate with Tenant with respect to such
proceedings so far as reasonably necessary. Any abatement or reduction effected
by such proceedings shall accrue to the benefit of Tenant and Landlord and such
other parties as their interests may appear according to their respective
contributions to the taxes involved in any such proceedings. Nothing contained
in this Lease shall, however, require Tenant to pay any franchise, corporate,
estate, inheritance, succession, capital levy or transfer tax of Landlord, or
any income, profits or revenue tax or charge upon the rent payable by Tenant
under this Lease; provided, however, that if, at any time during the term
hereof, the present system of ad valorem taxation of real property shall be
changed so that in lieu of, or in addition to, the whole or any part thereof
there shall be assessed on Landlord a capital levy or other tax on the Fixed
Rent, Additional Rentals or other charges payable by Tenant hereunder, or if
there shall be assessed on Landlord a federal, state, county, municipal, or
other local income, franchise, excise or similar tax, assessment, levy or charge
measured by or based, in whole or in part, upon the Fixed


                                      -15-
   16
Rentals, Additional Rents or other charges payable by Tenant hereunder, then any
and all of such taxes, assessments, levies or charges, to the extent that the
same would be payable if the Premises were the only property of Landlord subject
to same, and if the income from the Premises were the only taxable income of
Landlord during the year in question, shall be deemed to be included in the
taxes to be paid by Tenant pursuant to this subsection 4.2.1. Landlord
represents that the Premises were assessed for the fiscal tax year ending Jane
30, 1993, as completed and fully occupied.

                4.2.2   Betterment Assessments. Tenant shall pay to Landlord
Tenant's Percentage of each installment of all public, special or betterment
assessments levied or assessed by or becoming payable to any municipality or
other governmental authority having jurisdiction of the Premises, for or in
respect of the Premises for each installment period partially or wholly included
in the term, such payments to be made to Landlord in the manner provided in
Subsection 4.2.3 of this Section 4.2. For any fraction of an installment period
included in the term at the beginning or end thereof, Tenant shall pay to
Landlord the fraction of such installment allocable to such included period.
Tenant may prosecute appropriate proceedings to contest the validity or amount
of any assessment with respect to which Tenant is required to make payments as
hereinbefore provided, such proceedings to be conducted jointly with Landlord,
if Landlord has contributed to the payment of such assessments, and Tenant


                                      -16-
   17
agrees to save Landlord harmless from all costs and expenses incurred on account
of Tenant's participation in such proceedings. Landlord, without obligating
itself to incur any costs or expenses in connection with such proceedings, shall
cooperate with Tenant with respect to such proceedings so far as reasonably
necessary. Landlord shall promptly furnish to Tenant a copy of any notice of
public, special or betterment assessment received by Landlord concerning the
Premises. Landlord represents that there are no betterment assessment applicable
to the Premises as of the Date of this Lease.

                4.2.3   Tax Fund Payments. Tenant shall, as Additional Rent, on
the first day of each month of the term, make tax fund payments to Landlord.
"Tax fund payments" refer to payments to provide in the aggregate a fund
adequate to pay Tenant's Percentage of all taxes and assessments referred to in
subsection 4.2.1 and 4.2.2 of this Section 4.2 when they become due and payable
and all such payments shall, to the extent thereof, relieve Tenant of its
obligations under said subsections. Such payments shall be based upon the taxes
and assessments for the previous tax period, until such time as the actual taxes
and assessments for the current tax period are known, at which time appropriate
adjustments shall be made. If the aggregate of said tax fund payments is not
adequate to pay all said taxes and assessments, Tenant shall pay to Landlord the
amount by which such aggregate is less than the amount equal to Tenant'
Percentage of all of said taxes and assessments, such payment to


                                      -17-
   18
be made within ten (10) days after receipt by Tenant of notice from Landlord of
such amount, except that if the due date for payment by Landlord of such taxes
is less than thirty (30) days from receipt of such notice, such payment by
Tenant shall be made by the later of (i) ten (10) days prior to such due date or
(ii) ten (10) days after receipt of Landlord's notice. If Tenant shall have made
the aforesaid payments, Landlord shall on or before the last day on which the
same may be paid without interest or penalty, pay to the proper authority
charged with the collection thereof all taxes and assessments referred to in
said subsections 4.2.1 and 4.2.2 and furnish Tenant" upon request, reasonable
evidence of such payment. Any balance remaining after such payment by Landlord
shall be credited against the next accruing payments to be made by Tenant
pursuant to this subsection 4.2.3.

                4.2.4   Operating Costs. Subject to the immediately following
sentence, Tenant shall pay to Landlord Tenant's Percentage of Operating Costs
(as hereinafter defined) incurred BY Landlord in any calendar year. Tenant shall
remit to Landlord, on the first day of each calendar month, estimated payments
on account of Operating Costs, such monthly amounts to be sufficient to provide
Landlord, BY the end of the calendar year, a sum equal to the Operating Costs,
as reasonably estimated BY Landlord from time to time. If, at the expiration of
the year in respect of which monthly installments of Operating Costs shall have
been made as aforesaid, the total of such monthly


                                      -18-
   19
remittances is greater than the actual Operating Costs for such year, Landlord
shall promptly pay to Tenant, or credit against the next accruing payments to be
made by Tenant pursuant to this subsection 4.2.4, the difference; if the total
of such remittances is less than the Operating Costs for such year, Tenant shall
pay the difference to Landlord within twenty (20) days from the date Landlord
shall furnish to Tenant an itemized statement of such Operating Costs, prepared
and computed in accordance with generally accepted accounting principles.

        Any reimbursement for Operating Costs due and payable by Tenant with
respect to periods of less than twelve (12) months shall be equitably prorated.

        The term "Operating Costs" shall mean:

        (a)     all costs incurred by Landlord in performing maintenance and
making repairs and replacements pursuant to subsection 5.1.1 (but excluding (i)
any costs incurred during the first year following the Commencement Date
applicable to the Phase One or Phase Two Space, as the case may be, with respect
to latent defects in such Space requiring replacement and (ii) any costs
incurred during the term, with respect to repairs and replacements of the
foundation or structural walls);

        (b)     all costs of any insurance carried by Landlord pursuant to
subsection 5.1.2; and

        (c)     payments under all service contracts relating to matters
referred to in Items (a) through (b) hereof.


                                      -19-
   20
        If, during the term of this Lease, Landlord shall replace any capital
items or make any capital expenditures in connection with repair or replacement
of the roof or the exterior walls (collectively called "capital expenditures")
and such capital expenditures are not occasioned by any act or negligence of
Tenant, its employees, customers, suppliers, contractors, and the like, the
total amount of such capital expenditures shall not be included in Operating
Costs for the calendar year in which they are made, but there shall nevertheless
be included -in Operating Costs for each calendar year in which and after such
capital expenditure is made the annual charge-off of such capital expenditure.
(Annual charge-off shall be determined by (i) dividing the original cost of the
capital expenditure by the number of years of useful life thereof [The useful
life shall be reasonably determined by Landlord in accordance with generally
accepted accounting principles and practices in effect at the time of
acquisition of the capital item.]; and (ii) adding to such quotient an interest
factor computed on the unamortized balance of such capital expenditure based
upon the interest rate then being charged for long-term mortgages by
institutional lenders on like properties within the locality in which the
Building is located.)

        4.2.5   Insurance. Tenant shall, at its expense, as Additional Rent,
take out and maintain throughout the term the following insurance protecting
Landlord:


                                      -20-
   21
                        4.2.5.1 Comprehensive general liability insurance naming
Tenant as insured and Landlord and Landlord's managing agent and any mortgagee
of which Tenant has been given notice as additional insureds and indemnifying
the parties so named against all claims and demands for death or any injury to
person or damage to property which may be claimed to have occurred on the
Premises or, if arising from Tenant's use of the Premises, on any property,
streets or ways adjoining the Premises, in amounts which shall, at the beginning
of the term, be at least equal to the limits set forth in Section 1.1, and,
which, from time to time during the term, shall be for such higher limits, if
any, as are customarily carried in the area in which the Premises are located on
property similar to the Premises and used for similar purposes; and workmen's
compensation insurance with statutory limits covering all of Tenant's employees
working on the Premises.

                        4.2.5.2 Fire insurance with the usual extended coverage
endorsements covering all Tenant's furniture, furnishings, fixtures and
equipment, and any other contents or improvements not covered by the insurance
to be maintained under subsection 5.1.3.1.

                        4.2.5.3 All such policies shall be obtained from
responsible companies qualified to do business and in good standing in
Massachusetts, which companies and the amount of insurance allocated thereto
shall be subject to Landlord's reasonable approval. Tenant agrees to furnish
Landlord with


                                      -21-
   22
certificates evidencing all such insurance prior to the beginning of the term
hereof and evidencing renewal thereof at least thirty (30) days prior to the
expiration of any such policy. Each such policy shall be non-cancelable with
respect to the interest of Landlord without at least ten (10) days' prior
written notice thereto. Provision for any such insurance may be by a blanket
insurance policy, provided the policy shall allocate the amounts of coverage to
the Premises required by this Lease.

                        4.2.5.4 All insurance which is carried by-either party
with respect to the Building, Premises or to furniture, furnishings, fixtures or
equipment therein or alterations or improvements thereto, whether or not
requited, shall include provisions which either designate the other party as an
additional insured or deny to the insurer acquisition by subrogation of rights
of recovery against the other party to the extent such rights have been waived
by the insured party prior to occurrence of loss or injury, insofar as, and to
the extent that, such provisions may be effective without making it impossible
to obtain insurance coverage from responsible companies qualified to do business
in the state in which the Premises are located (even though extra premium may
result therefrom). In the event that extra premium is payable by either party as
a result of this provision, the other party shall reimburse the party paying
such premium the amount of such extra premium. If at the request of one party,
this non-subrogation provision is waived, then the obligation of reimbursement
shall cease for such period of time


                                      -22-
   23
as such waiver shall be effective, but nothing contained in this subsection
shall derogate from or otherwise affect releases elsewhere herein contained of
either party for claims. Each party shall be entitled to have certificates of
any policies containing such provisions. Each party hereby waives all rights of
recovery against the other for loss or injury against which the waiving party is
protected by insurance containing said provisions, reserving, however, any
rights with respect to any excess of loss or injury over the amount recovered by
such insurance. Tenant shall not acquire as additional insured under any
insurance carried on the Premises any right to participate in the adjustment of
loss or to receive insurance proceeds and agrees upon request promptly to
endorse and deliver to Landlord any checks or other instruments in payment of
loss in which Tenant is named as payee.

                4.2.6   Utilities. Tenant shall pay directly to the proper
authorities charged with the collection thereof all charges for water, sewer,
gas, oil, electricity, telephone and other utilities or services used or
consumed on the Premises, whether designated as a charge, tax, assessment, fee
or otherwise, including, without limitation, water and sewer use charges and
taxes, if any, all such charges to be paid as the same from time to time become
due. It is understood and agreed that Tenant shall make its own arrangements for
the installation or provision of all such utilities and that Landlord shall be
under no obligation to furnish any utilities to the Premises and


                                      -23-
   24
shall not be liable for any interruption or failure in the supply of any such
utilities to the Premises. However, in each instance of failure or interruption
resulting from Landlord's failure to perform its obligations which renders the
Premises or a material portion thereof untenantable, continues for a period in
excess of ninety (90) days, and is not caused by either the act or negligence of
Tenant, Tenant shall have the right to terminate this Lease by giving written
notice of such termination to Landlord, effective at the expiration of ten (10)
days from the giving of such notice; provided, however, that such termination
shall be rendered ineffective if, prior to expiration of such ten (10) day
period, such failure or interruption no longer continues.

        4.3     Late Payment of Rent. If any installment of rent is paid more
than five (5) days after the date the same was due, and if on a prior occasion
in the twelve (12) month period prior to the date such installment was due an
installment of rent was paid after the same was due, then Tenant shall pay
Landlord a late payment fee equal to five (5%) percent of the overdue payment.

        4.4     Security Deposit. Upon the execution of this Lease, Tenant shall
deposit with Landlord the Security Deposit, and on the Phase Two Commencement
Date, Tenant shall deposit with Landlord the Additional Security Deposit, both
of which Landlord shall deposit in its name in an interest bearing account. Said
deposits shall be held by Landlord as security for the faithful performance by
Tenant of all the terms of this Lease by said


                                      -24-
   25
Tenant to be observed and performed. The security deposit shall not be
mortgaged, assigned, transferred or encumbered by Tenant without the written
consent of Landlord and any such act on the part of Tenant shall be without
force and effect and shall not be binding upon Landlord. In the event of a
foreclosure or a transfer of the Premises, the security deposit shall be
transferred to the mortgage holder or transferee.

        If the Fixed Rent or Additional Rent payable hereunder shall be overdue
and unpaid or should Landlord make payments on behalf of the Tenant, or Tenant
shall fail to perform any of the terms of this Lease, then Landlord may, at its
option and without prejudice to any other remedy which Landlord may have on
account thereof, appropriate and apply said entire deposit or so much thereof as
may be necessary to compensate Landlord toward the payment of Fixed Rent,
Additional Rent or other sums or loss or damage sustained by Landlord due to
such breach on the part of Tenant; and Tenant shall forthwith upon demand
restore said security to the original sum deposited. Should Tenant comply with
all of said terms and promptly pay all of the rentals as they fall due and all
other sums payable by Tenant to Landlord, said deposit and any interest earned
thereon shall be returned in full to Tenant at the end of the term.

        In the event of bankruptcy or other creditor-debtor proceedings against
Tenant, all securities shall be deemed to be applied first to the payment of
rent and other charges due Landlord for all periods prior to the filing of such
proceedings.


                                      -25-
   26
                                    ARTICLE 5


                              Landlord's Covenants


        5.1     Affirmative Covenants. Landlord covenants with Tenant:

                5.1.1   Repairs. To make such repairs and replacements to the
roof, exterior walls (other than doors, windows and glass) and structural
elements as may be necessary, and to maintain, and make such replacements (to
the extent not provided under the maintenance contracts referred to in
subsection 6.1.3) to, the heating, ventilating and air conditioning systems of
the Building, as may be necessary. Structural elements, for purposes of this
subsection, shall include, but are not limited to, (i) all footings,
foundations, floor slabs, columns, girders, mullions, beams, loadbearing and
non-loadbearing exterior walls; (ii) all utility lines located outside of the
Building up to the interior primary connection points within the interior walls
of the Building; (iii) parking lots and areas, exterior lighting, walkways,
drives and curbs, and all other improvements on the land outside of the
Building; (iv) septic system and any lines associated therewith up to and
including the connection for the Building; and (v) exterior facade of the
Building.

                5.1.2   Insurance. To take out and maintain throughout the term
the following insurance:

                        5.1.2.1 All risk casualty insurance, with endorsement
for difference in conditions coverage, debris removal and demolition, in an
amount at least equal to the replacement cost of the Building and other
improvements on the Premises, as


                                      -26-
   27
such replacement cost may from time to time be determined by agreement or by
appraisal made at Tenant's expense by an accredited insurance appraiser approved
by Landlord which may be required by either party whenever three (3) years have
elapsed since the last such agreement or appraisal, or alteration or additions
have been made. In the event such insurance is to be by a blanket insurance
policy, there shall be no reduction of the coverage to be provided pursuant to
this subsection 5.1.2.1. At Tenant's request, Landlord shall notify Tenant of
any quotations obtained by Landlord with respect to the present costs and the
costs of any renewals or replacements of the insurance policies maintained by
Landlord from time to time with respect to the Premises. Such notice (the
"Premium Notice") shall provide a complete description of the coverages included
in such quotation, the period of coverage and the cost of same on an annualized
basis. Tenant shall have the right within thirty days after the date of the
Premium Notice to submit to Landlord a quotation from a competitive insurance
carrier qualified to do business in the Commonwealth of Massachusetts which has
substantially the same financial rating as Landlord's insurance carrier (as
designated by Best's insurance rating service) and, is at least of a
substantially similar size (in terms of total assets) as Landlord's insurance
carrier, in which such carrier agrees to provide the same coverage for the same
term as described in the Premium Notice at a cost which is less than 90% of the
cost set forth in the Premium Notice (the "Tenant's Quotation"). In the


                                      -27-
   28
event that Tenant fails to provide the Tenant's Quotation within said thirty day
period, the Tenant shall be deemed to have waived its rights to submit a
competing bid for the insurance premiums paid by Landlord with respect to the
Premises in accordance with the Premium Notice for the period of coverage. In
the event that Tenant submits the Tenant's Quotation in compliance with all the
terms and conditions herein set forth, there shall not be included in Operating
Costs the amount by which the insurance premiums paid by Landlord exceed the
amount stated in the Tenant's Quotation for the period of coverage.

                        5.1.2.2 Insurance protecting Landlord against abatement
or loss of rent in an amount equal to at least all the Fixed Rent and Additional
Rent payable for one year under Article 4.


                                    ARTICLE 6

                          Tenant's Additional Covenants

        6.1     Affirmative Covenants. Tenant covenants at all times during the
term and for such further time (prior or subsequent thereto) as Tenant occupies
the Premises or any part thereof:

                6.1.1   Perform Obligations. To perform promptly all of the
obligations of Tenant set forth in this Lease; and to pay when due the Fixed
Rent and Additional Rent and all charges, rates and other sums which by the
terms of this Lease are to be paid by Tenant.


                                      -28-
   29
                6.1.2   Use. To use the Premises only for the Permitted Uses,
and from time to time to procure all licenses and permits necessary therefor, at
Tenant's sole expense. With respect to any licenses or permits for which Tenant
may apply, pursuant to this subsection 6.1.2 or any other provision hereof,
Tenant shall furnish Landlord copies of applications therefor on or before their
submission to the governmental authority.

                6.1.3   Repair and Maintenance. Except as otherwise provided in
subsection 5.1.1 and Articles 7A and 7B, to keep the Premises (including,
without limitation, the exterior of the Building, all improvements thereon and
all heating, plumbing, electrical, air-conditioning, mechanical and other
fixtures and equipment now or hereafter on the Premises) in good order,
condition and repair and at least as good order, condition and repair as they
are in on the Commencement Date or may be put in during the term, reasonable use
and wear only excepted; to maintain in good condition all lawns and planted
areas and to keep clean and neat and free of snow and ice all surfaced roadways,
walks, and parking and loading areas; and to make all repairs and replacements
and to do all other work necessary for the foregoing purposes whether the same
may be ordinary or extraordinary, foreseen or unforeseen. Tenant shall secure,
pay for and keep in force contracts with appropriate and reputable service
companies providing for the regular maintenance of the heating and
air-conditioning systems and copies of such contracts shall be furnished to
Landlord. It is further agreed that the


                                      -29-
   30
exception of reasonable use and wear shall not apply so as to permit Tenant to
keep the Premises in anything less than suitable, tenant like, and efficient and
usable condition, or in less than good and tenantlike repair.

                Landlord shall reimburse Tenant for the (a) difference between
(i) the costs (including the portion of the water charges for the Premises which
is reasonably allocable to such maintenance) incurred by Tenant for the period
prior to the Phase Two Commencement Date, to maintain the lawns and planted
areas and (ii) the Tenant's Percentage of such costs, and (b) the costs incurred
to heat the portions of the Phase Two Space not occupied by Tenant (calculated
based on an annual cost to heat such unoccupied space of $.50 per square foot).

                6.1.4   Compliance with Law. To make all repairs, alterations,
additions or replacements to the Premises required by any law or ordinance or
any order or regulation of any public authority; to keep the Premises equipped
with all safety appliances so required; and to comply with the orders and
regulations of all governmental authorities with respect to zoning, building,
fire, health and other codes, regulations, ordinances or laws applicable to the
Premises, except that Tenant may defer compliance so long as the validity of any
such law, ordinance, order or regulation shall be contested by Tenant in good
faith and by appropriate legal proceedings, if Tenant first gives Landlord
appropriate assurance or security against any loss, cost or expense on account
thereof.


                                      -30-
   31
                6.1.5   Indemnification. To save Landlord harmless, and to
exonerate and indemnify Landlord from and against any and all claims,
liabilities or penalties asserted by or on behalf of any person, firm,
corporation or public authority on account of injury, death, damage or loss to
person or property in or upon the Premises arising out of the use or occupancy
of the Premises by Tenant or by any person claiming by, through or under Tenant
(including, without limitation, all patrons, employees and customers of Tenant),
or arising out of any delivery to or service supplied to the Premises, or on
account of or based upon anything whatsoever done on the Premises, except to the
extent the same was caused by the negligence, fault or willful misconduct of
Landlord, its agents, servants, employees or contractors. In respect of all of
the foregoing, Tenant shall indemnify Landlord from and against all costs,
expenses (including reasonable attorneys' fees), and liabilities incurred in or
in connection with any such claim, action or proceeding brought thereon; and, in
case of any action or proceeding brought against Landlord by reason of any such
claim, Tenant, upon notice from Landlord and at Tenant's expense, shall resist
or defend such action or proceeding and employ counsel therefor reasonably
satisfactory to Landlord. Landlord shall endeavor to give Tenant timely notice
of claims, and Landlord, without obligating itself to incur any costs or
expenses in connection therewith, shall cooperate with Tenant in its
investigation and defense.


                                      -31-
   32
                6.1.6   Landlord's Right to Enter. Upon reasonable notice from
Landlord (except in emergencies) and provided that Landlord undertakes to
minimize interference with Tenant's business conducted on the Premises, to
permit Landlord and its agents to enter into and examine the Premises at
reasonable times and to show the Premises, and to make repairs to the Premises,
and, during the last six (6) months prior to the expiration of this Lease, to
keep affixed in suitable places notices of availability of the Premises.

                6.1.7   Personal Property at Tenant's Risk. All of the
furnishings, fixtures, equipment, effects and property of every kind, nature and
description of Tenant and of all persons claiming by, through or under Tenant
which, during the continuance of this Lease or any occupancy of the Premises by
Tenant or anyone claiming under Tenant, may be on the Premises, shall be at the
sole risk and hazard of Tenant and if the whole or any part thereof shall be
destroyed or damaged by fire, water or otherwise, or by the leakage or bursting
of water pipes, steam pipes, or other pipes, by theft or from any other cause,
no part of said loss or damage is to be charged to or to be borne by Landlord,
except that Landlord shall in no event be indemnified or held harmless or
exonerated from any loss or damage to Tenant or to any other person, for any
loss or damage to the extent prohibited by law.

                6.1.8   Payment of Landlord's Cost of Enforcement. To pay on
demand Landlord's expenses, including reasonable


                                      -32-
   33
attorneys' fees, incurred in enforcing any obligation of Tenant under this Lease
or in curing any default by Tenant under this Lease as provided in Section 8.4.

                6.1.9   Yield Up. At the expiration of the term or earlier
termination of this Lease: to surrender all keys to the Premises; to remove all
of its trade fixtures and personal property in the Premises; to remove such
installations made by it as Landlord may request and all Tenant's signs wherever
located; to repair all damage caused by such removal and to yield up the
Premises (including all installations and improvements made by Tenant except for
trade fixtures and such of said installations or improvements as Landlord shall
request Tenant to remove), broomclean and in the same good order and repair in
which Tenant is obliged to keep and maintain the Premises by the provisions of
this Lease. Tenant, at the time of making any installation, may request in
writing Landlord's permission to leave such installation in the Premises, and if
Landlord grants permission, then, notwithstanding the foregoing provisions of
this subsection 6.1.9, Landlord may not request removal of such installation.
Any property not so removed shall be deemed abandoned and may be removed and
disposed of by Landlord in such manner as Landlord shall determine and Tenant
shall pay Landlord the entire cost and expense incurred by it in effecting such
removal and disposition and in making any incidental repairs and replacements to
the Premises and for use and occupancy during the period after the expiration of
the term and prior to its performance of its


                                      -33-
   34
obligations under this subsection 6.1.9. Tenant shall further indemnify Landlord
against all loss, cost and damage resulting from Tenant's failure and delay in
excess of thirty (30) days in surrendering the Premises as above provided.

                If the Tenant remains in the Premises beyond the expiration or
earlier termination of this Lease, such holding over shall be without right and
shall not be deemed to create any tenancy, but the Tenant shall be a tenant at
sufferance only at a daily rate of rent equal to one and 5/10ths (1.5) times the
rent and other charges in effect under this Lease as of the day prior to the
date of expiration of this Lease.

                Tenant's trade fixtures and personal property (collectively
called "Tenant's Property") however installed or located on the Premises shall
be and remain the property of the Tenant and may be removed at any time and from
time to time during the term. Tenant shall repair any damage caused by such
removal or installation. In no event (including a default under this Lease)
shall Landlord have any lien or other security interest in any of Tenant's
Property located in the Premises or elsewhere, and Landlord hereby expressly
waives and releases any such lien or other security interest however created or
arising. Tenant's failure at the end of the term of the Lease to remove all or
any part of its property shall not constitute a holding over by Tenant nor be an
extension of the term of the Lease. 

                6.1.10  Estoppel, Certificate. Upon not less than fifteen (15)
days' prior written request by Landlord, to execute,


                                      -34-
   35
acknowledge and deliver to Landlord a statement in writing certifying that this
Lease is unmodified and in full force and effect and that Tenant has no
defenses, offsets or counterclaims against its obligations to pay the Fixed Rent
and Additional Rent and any other charges and to perform its other covenants
under this Lease (or, if there have been any modifications, that the Lease is in
full force and effect as modified and stating the modifications and, if there
are any defenses, offsets or counterclaims, setting them forth in reasonable
detail), and the dates to which the Fixed Rent and Additional Rent and other
charges have been paid. Any such statement delivered pursuant to this subsection
6.1.10 may be relied upon by any prospective purchaser or mortgagee of the
Premises, or any prospective assignee of such mortgage. Upon not less than
fifteen (15) days prior written request by Tenant, Landlord agrees to execute,
acknowledge and deliver to Tenant a similar estoppel certificate, including a
statement as to whether Tenant is in default, in a form reasonably acceptable to
Landlord. Tenant shall also deliver to Landlord such publicly available
financial information as may be reasonably required by Landlord to be provided
to any mortgagee or prospective purchaser of the Premises.

        6.2     Negative Covenants. Tenant covenants at all times during the
term and such further time (prior or subsequent thereto) as Tenant occupies the
Premises or any part thereof:

                6.2.1   Assignment and Subletting. Not to assign, transfer,
mortgage or pledge this Lease or to sublease (which


                                      -35-
   36
term shall be deemed to include the granting of concessions and licenses and the
like) all or any part of the Premises or suffer or permit this Lease or the
leasehold estate hereby created or any other rights arising under this Lease to
be assigned, transferred or encumbered, in whole or in part, whether
voluntarily, involuntarily or by operation of law, or permit the occupancy of
the Premises by anyone other than Tenant without the prior written consent of
Landlord. In the event Tenant desires to assign this Lease or sublet, in any one
instance, fifty (50%) percent or more of the Premises, Tenant shall notify
Landlord in writing of Tenant's intent to so assign this Lease or sublet the
Premises and the proposed effective date of such subletting or assignment, and
shall request in such notification that Landlord consent thereto. Landlord may
terminate this Lease in the case of a proposed assignment, or suspend this Lease
pro tanto for the period and with respect to the space involved in the case of a
proposed subletting, by giving written notice of termination or suspension to
Tenant within fifteen (15) business days following receipt by Landlord of
Tenant's request, with such termination or suspension to be effective as of the
effective date of such assignment or subletting. If Landlord does not so
terminate or suspend within such fifteen (15) business day period, Landlord
shall be deemed not to have terminated or suspended and Landlord's consent shall
not be unreasonably withheld to an assignment or subletting during the term of
this Lease, provided that the assignee or subtenant shall use the Premises only
for


                                      -36-
   37
the Permitted Uses. Such consent shall be deemed granted if Landlord does notify
Tenant it is withholding consent within fifteen (15) business days following the
date Landlord is deemed not to have terminated or suspended. Tenant shall, as
Additional Rent, reimburse Landlord promptly for Landlord's reasonable legal
expenses incurred in connection with any request by Tenant for such consent. No
subletting or assignment shall in any way impair the continuing primary
liability of Tenant hereunder, and no consent to any subletting or assignment in
a particular instance shall be deemed to be a waiver of the obligation to obtain
the Landlord's written approval in the case of any other subletting or
assignment. With respect to any assignment or sublease during the original term
of this Lease, such assignment shall not include the right granted to Tenant
under Section 2.3 hereinabove to extend the term, and such sublease shall be for
a term expiring no later than the expiration of the original term of this Lease.
Notwithstanding anything to the contrary herein contained, but subject to the
sixth (6th) sentence of this Subsection 6.2.1, Tenant shall have the right, upon
30 days' prior written notice to Landlord and without Landlord's consent, to
assign this Lease or sublet the Premises to: (i) an affiliate of Tenant, (ii) a
subsidiary of Tenant, or (iii) any entity resulting from the merger,
consolidation or sale of all or substantially all of the assets of Tenant.

        In the event Tenant desires to sublet less than fifty (50%) percent of
the Premises, Tenant shall notify Landlord in writing


                                      -37-
   38
of Tenant's intent to so sublet such portion of the Premises and the proposed
effective date of such subletting and shall request in such notification that
Landlord consent thereto. Landlord agrees that its consent to such proposed
subletting shall not be unreasonably withheld or delayed. If for any sublease so
consented to by Landlord hereunder Tenant receives rent or other consideration,
either initially or over the term of the sublease, in excess of such rent fairly
allocable to the part, after appropriate adjustments to assure that all other
payments called for hereunder are appropriately taken into account, and after
deduction for reasonable expenses of Tenant in connection with the assignment or
sublease, Tenant shall pay to Landlord as additional rent fifty percent (50%) of
the excess of each such payment of rent or other consideration received by
Tenant promptly after its receipt.

        If, at any time during the term of this Lease, Tenant is:

                (i)     a corporation or a trust (whether or not having shares
                        of beneficial interest) and there shall occur any change
                        in the identity of any of the persons then having power
                        to participate in the election or appointment- of the
                        directors, trustees or other persons exercising like
                        functions and managing the affairs of Tenant; or

                (ii)    a partnership or association or otherwise to a natural
                        person (and is not a corporation or


                                      -38-
   39
                        a trust) and there shall occur any change in the
                        identity of any of the persons who then are members of
                        such partnership or association or who comprise Tenant;
                        Tenant shall so notify Landlord and (whether or not
                        Tenant so notifies Landlord) Landlord may terminate this
                        Lease by notice to Tenant given within ninety (90) days
                        thereafter. This paragraph shall not apply if the
                        initial Tenant named herein is a corporation and the
                        outstanding voting stock thereof is listed on a
                        recognized securities exchange and shall not apply to an
                        assignment or subletting not requiring Landlord's
                        consent as provided in the eighth (8th) sentence of this
                        subsection 6.2.1.

                6.2.2   Overloading and Nuisance. Not to injure, overload,
deface or otherwise harm the Premises; nor commit any nuisance; nor permit the
emission of any noise or odor; nor make, allow or suffer any waste; nor make any
use of the Premises which is contrary to any law or ordinance or which will
invalidate any of Landlord's insurance; nor conduct any auction, fire, "going
out of business" or bankruptcy sales.

                6.2.3   Hazardous Wastes and Materials. Not to dispose of any
Hazardous Substance on the Premises, or into any of the plumbing, sewage, or
drainage systems thereon, and to indemnify


                                      -39-
   40
and save Landlord harmless from all claims, liability, loss or damage arising on
account of the use or disposal by Tenant (or any person claiming by, through or
under Tenant, including, without limitation, all patrons, employees, suppliers
and customers of Tenant), including, without limitation, liability under
Applicable Law, or damage to any of the aforesaid systems. Tenant shall comply
with all governmental reporting requirements with respect to Hazardous
Substances, and shall deliver to Landlord copies of all reports filed with
governmental authorities.

        "Hazardous Substance", for purposes of this subsection 6.2.3, means any
substance, waste or material which is deemed hazardous, toxic, a pollutant or
contaminant, under any Federal, State or local statute, law, ordinance, rule,
regulation, or judicial or administrative order or decision, now or hereafter in
effect. "Hazardous Substance on the Premises" means any hazardous substance
present in or on the Premises including, without limitation, in or on the
surface or beneath the Premises, the surface water or groundwater, and in or on
any improvement or part thereof at or beneath the surface of the Premises.
"Applicable Law" shall mean all Federal, State and local statutes, laws,
ordinances, rules and regulations and judicial and administrative orders,
rulings and decisions that are applicable now or in the future to the Premises
or any portion thereof or to any activity which shall take place thereon.


                                      -40-
   41
        Landlord represents and warrants that it has never generated, stored,
disposed of or otherwise handled any Hazardous Substance on the Premises
contrary to Applicable Law and Landlord shall not generate, store, dispose of or
otherwise handle and Hazardous Substance on the Premises contrary to Applicable
Law. Landlord, to the best of its knowledge, is not aware of the generation,
storage, disposal or other handling of any Hazardous Substance on the Premises
by anyone else contrary to Applicable Law. Landlord, to the best of its
knowledge, also is not aware of the presence of any Hazardous Substance on the
Premises which may require remedial action or cleanup under Applicable Law or
which may pose a threat to human health or the environment.

        Landlord warrants and represents that:

                (i)     there are no underground storage tanks on the Premises;
                        and

                (ii)    there are no transformers or other equipment on the
                        Premises which contain PCBs, and Landlord shall not
                        bring any such equipment onto the Premises during the
                        term of this Lease.

        Landlord shall defend, indemnify and hold harmless Tenant from and
against any and all liability, loss, suits, claims, actions, causes of action,
proceedings, demands, costs, penalties, fines and expenses, including without
limitation attorneys' fees, consultants' fees, and clean-up costs, arising out
of the generation, storage, treatment, handling,


                                      -41-
   42
transportation, disposal or release by Landlord of any Hazardous Substance at or
near the Premises, or arising out of any violations) by Landlord of any
Applicable Law regarding Hazardous Substances, and any clean-up costs on the
Premises arising out of the presence of a Hazardous Substance which Tenant
proves was not generated, disposed or released by Tenant (or any person claiming
by, through or under Tenant, including, without limitation, all patrons,
employees, suppliers and customers of Tenant) shall be the responsibility of
Landlord. In the event of the presence of a Hazardous Substance, the costs of
which are the Landlord's responsibility pursuant to the foregoing and which
poses a threat to human health, if Landlord has not completed remediation within
ninety (90) days of the governmental determination of the appropriate
remediation with respect to such threat, Tenant shall have the right to
terminate this Lease by giving a written notice for such termination to
Landlord, effective at the expiration of ten (10) days from the giving of such
notice, provided however that such termination shall be rendered ineffective if,
prior to expiration of such ten (10) day period, such remediation is completed.

                6.2.4   Installation, Alterations or Additions. Not to make any
installations, alterations or additions in, to or on the Premises (including,
without limitation, buildings, lawns, planted areas, walks, roadways, parking
and loading areas) nor to permit the making of any holes (other than for hanging
pictures and the like) in the walls, partitions, ceilings or floors


                                      -42-
   43
without on each occasion obtaining the prior written consent of Landlord, (which
consent, in the case of nonstructural, interior installations or alterations
which do not (i) impair the structural integrity of the Building, (ii) do
not-materially adversely affect any of the Building's systems, (iii) reduce its
value or (iv) involve penetrations of the roof or exterior walls, shall not be
unreasonably withheld or delayed if the work is $10,000 or more in cost, and
shall not be required if the work is less than $10,000 in cost, provided that in
each instance Tenant furnish Landlord with as built plans upon completion of
such work) and then only pursuant to plans and specifications approved by
Landlord in advance in each instance; Tenant shall pay promptly when due the
entire cost of any work to the Premises undertaken by Tenant so that the
Premises shall at all times be free of liens for labor and materials, and, if
Tenant's net worth is less than ten million ($10,000,000) dollars, at Landlord's
request Tenant shall furnish to Landlord a bond or other security acceptable to
Landlord assuring that any work commenced by Tenant will be completed in
accordance with the plans and specifications theretofore approved by Landlord
and assuring that the Premises will remain free of any mechanics, lien or other
encumbrance arising out of such work. In any event, Tenant shall forthwith bond
against or discharge any mechanics, liens or other encumbrances that may arise
out of such work. Tenant shall procure all necessary licenses and permits at
Tenant's sole expense before undertaking such work, and Landlord, without


                                      -43-
   44
obligating itself to incur any costs or expenses in connection therewith, shall
cooperate with Tenant in such procurement so far as reasonably necessary. All
such work shall be done in a good and workmanlike manner employing materials of
good quality and so as to conform with all applicable zoning, building, fire,
health and other codes, regulations, ordinances and laws. Tenant shall save
Landlord harmless and indemnified from all injury, loss, claims or damage to any
person or property occasioned by or growing out of such work.

                6.2.5   Abandonment. Not to abandon the Premises during the
term.

                6.2.6   Signs. Not to place any signs on the Building or
elsewhere on the Premises without Landlord's prior written approval, which shall
not be unreasonably withheld or delayed. Such signs shall be maintained in good
repair by Tenant and shall conform to applicable requirements of public
authorities. In any event, if Landlord or its affiliate has placed signs on the
Building or elsewhere on the Premises regarding availability of the Premises or
a portion thereof, Tenant shall not place any signs on the Building or elsewhere
on the Premises regarding availability of the Premises.

                6.2.7   Parking and Storage. Not to permit any storage of
materials outside of the Building except for a shed for storage of employee
bicycles; to use reasonable diligence to prevent Tenant's employees from using
any street abutting the Premises for parking; and, not to permit the use of the
Premises


                                      -44-
   45
for either temporary or permanent storage of trucks, or for any use for which
heavy trucking to or from the site would be customary, except that deliveries by
Tenant's suppliers and shipping of Tenant's products shall be permitted.


                                   ARTICLE 7A

                                    Casualty

        7A.1    Termination. In the event that the Premises shall be destroyed
or damaged by fire or casualty, then Landlord shall give Tenant notice within
fifteen (15) days after the date of the casualty of Landlord's reasonable
estimate of the time for completion of restoration, and if Landlord's estimate
is greater than one hundred eighty (180) days from the date of the casualty,
then this Lease may be terminated at the election of Landlord or Tenant, which
election shall be made by the giving of notice to the other party within ten
(10) days after the date of receipt by Tenant of Landlord's estimate.

        7A.2    Restoration. If Landlord or Tenant does not elect to so
terminate, this Lease shall continue in force and a just proportion of the rent
reserved, according to the nature and extent of the damages sustained by the
Premises, but not in excess of the net proceeds of insurance recovered by
Landlord under the rent form No. 1 endorsement of the fire insurance carried by
Landlord pursuant to subsection 5.1.2.2, shall be suspended or abated until the
Premises (including any Tenant improvements that Landlord has not designated for
removal upon


                                      -45-
   46
expiration of the term), or what may remain thereof, shall be put by Landlord in
substantially their condition at the time of such damage or destruction, which
Landlord covenants to do with reasonable diligence to the extent permitted by
the net proceeds of insurance recovered for such destruction or damage and
subject to zoning and building laws or ordinances then in existence. "Net
proceeds of insurance recovered" refers to the, gross amount of such insurance
less the reasonable expenses of Landlord incurred in connection with the
collection of the same, including without limitation, fees and expenses for
legal and appraisal services. In the event the net proceeds recovered are
inadequate to restore the Premises to the aforesaid condition, Tenant may, but
shall not be obligated to, contribute the necessary amount in excess of such
proceeds, or Tenant may terminate this Lease unless Landlord agrees to expend
such necessary amount. If Landlord shall not have restored the Premises within
one hundred eighty (180) days of the casualty (or such longer period estimated
by Landlord pursuant to Section 7A.1), Tenant shall have the right to terminate
this Lease by giving notice of such termination to Landlord, effective at the
expiration of fifteen (15) days from the giving of such notice; provided,
however, that such termination shall be rendered ineffective if, prior to
expiration of said fifteen (15) day period, Landlord shall have completed such
restoration.


                                      -46-
   47
                                   ARTICLE 7B

                                  CONDEMNATION

        7B.1    Termination. In the event of a taking by condemnation or by the
exercise of the power of eminent domain by a public or quasi-public authority or
entity, whether or not there is a taking of title, or conveyance in lieu thereof
(all hereinafter referred to as "Taking") of the entire Building, or of the
entire Premises, or of the entire parking area serving the Building, this Lease
shall terminate as of the earlier of the vesting of title in the Taking
authority or entity or of the taking possession by such authority or entity so
as to deprive Tenant of the use thereof without the necessity for any further
act or notice by either party hereto.

        In the event any one of the following occurs: (i) a portion of the
Premises is the subject of a Taking such that, even after restoration, undue
hardship or substantial interference would be caused in the conduct of Tenant's
business operations in the Premises, or (ii) Tenant's access to the Building or
Premises is denied or interfered with substantially and alternative access can
not be provided , Tenant shall have the right to terminate this Lease upon
notice to Landlord given within thirty (30) days of the Taking -- whether or not
title is divested by such Taking -- specifying the effective date of such
termination, which date shall not be more than fifteen (15) days after the date
of such notice.


                                      -47-
   48
        In the event only a portion of the parking area serving the Building is
the subject of a Taking, and such Taking reduces the ratio of parking spaces to
rentable square feet in the Demised Premises below 3.5:1,000, then Tenant shall
have the right to terminate the Lease on notice to Landlord given within fifteen
(15) days after the earlier of the vesting of title to such portion in the
Taking authority or entity or the taking of possession of that portion by such
authority or entity so as to deprive Tenant of the use thereof. Notwithstanding
the foregoing, however, Landlord may suspend the effectiveness of such
notice by giving its own notice to Tenant within ten (10) days of receipt of
Tenant's termination notice that Landlord shall provide substitute parking
spaces equal to the number taken within 1000 feet of the Building within sixty
(60) days of the earlier of the vesting of title to or the taking of possession
of those parking spaces and which substitute spaces shall restore the ratio of
parking spaces to rentable square feet of Demised Premises to 3.5:1,000. In the
event Landlord restores such ratio within the sixty (60) days, Tenant's notice
of termination shall be nullified and of no force and effect. If Landlord fails
to restore the ratio within such sixty (60) day period this Lease shall be
terminated at the expiration of such sixty (60) day period. In the event the
Landlord does not notify Tenant within the time herein set forth of its intent
to restore said ratio, Tenant's notice of termination to Landlord shall remain
in full force and effect.


                                      -48-
   49
        7B.2    Restoration. In the event this Lease is not terminated as a
result of a Taking: (i0 the Annual Rent payable hereunder shall abate from the
earlier of the date of vesting of title in the Taking authority or entity or the
date of taking of possession by such authority or entity whether or not there is
divestiture of title; such abatement in Annual Rent shall be in proportion to
the amount of the Premises subject to a Taking and shall be permanent in the
case of divestiture of title; there shall be no abatement for taking of parking
spaces; (ii) Landlord shall commence the work of repairing and restoring the
Building to a complete architectural unit and the work of restoring the
remainder of the Premises as nearly as possible to their condition existing
immediately prior to the Taking to the extent permitted by the net proceeds of
damages awarded for such taking and subject to zoning and building laws or
ordinances then in existence and to restore Tenant's access to the Building and
Premises or provide alternative access thereto within one hundred twenty (120)
days of taking of possession by the Taking authority or entity and shall
complete such work within one hundred eighty (180) days ("Work Date") of the
effective date of such possession. In the event Landlord fails to complete the
work of repair and restoration within the time herein provided, Tenant shall
have the right to terminate this Lease by notice given to Landlord within
fifteen (15) days of the Work Date effective fifteen (15) days from the giving
of such notice; provided, however, that such termination shall be rendered
ineffective if,


                                      -49-
   50
prior to expiration of said fifteen (15) day period following the giving of such
notice, Landlord shall have completed such restoration.

        7B.3    Refund and Award. In the event of a Taking: (i) Tenant shall,
within ten (10) days of the effective date of the termination of this Lease or
of the effective date of abatement of Annual Rent receive a refund from Landlord
of the appropriate Annual Rent amount paid by Tenant for any period subsequent
to the effective date of termination or abatement and (ii) Tenant shall be
entitled to any awards specifically made to Tenant for moving expenses, and
trade fixtures and equipment, provided Landlord's award is not reduced or
otherwise adversely affected thereby. Landlord hereby expressly permits Tenant
to make a claim for such amount in any appropriate proceeding.

        7B.4    Divestiture. Landlord and Tenant may exercise any rights of
termination herein granted even though their respective right, title or interest
may have been taken or divested.

                                    ARTICLE 8

                                    Defaults

        8.1     Events of Default. (a) If Tenant shall default in the
performance of any of its obligations to pay the Fixed Rent or Additional Rent
hereunder and if such default shall continue for ten (10) days after written
notice from Landlord designating such default or if within thirty (30) days
after written notice from Landlord to Tenant specifying any other default or
defaults Tenant has not commenced diligently to correct the default or


                                      -50-
   51
defaults so specified or has not thereafter diligently pursued such correction
to completion, or (b) if any assignment shall be made by Tenant or any guarantor
of Tenant for the benefit of creditors, or (c) if Tenant's leasehold interest
shall be taken on execution, or (d) if a lien or other involuntary encumbrance
is filed against Tenant's leasehold interest or Tenant's other property,
including said leasehold interest, and is not discharged within ten (10) days
thereafter, or (e) if a petition is filed by Tenant or any guarantor of Tenant
for liquidation, or for reorganization or an arrangement under any provision of
any bankruptcy law or code as then in force and effect, or (f) if an involuntary
petition under any of the provisions of any bankruptcy law or code is filed
against Tenant or any guarantor of Tenant and such involuntary petition is not
dismissed within sixty (60) thereafter, then, and in any of such cases, Landlord
and the agents and servants of Landlord lawfully may, in addition to and not in
derogation of any remedies for any preceding breach of covenant, immediately or
at any time thereafter without demand or notice and with or without process of
law (forcibly, if necessary) enter into and upon the Premises or any part
thereof in the name of the whole or mail a notice of termination addressed to
Tenant, and repossess the same as of Landlord's former estate and expel Tenant
and those claiming through or under Tenant and remove its and their effects
(forcibly, if necessary) without being deemed guilty of any manner of trespass
and without prejudice to any remedies which might otherwise be


                                      -51-
   52
used for arrears of rent or prior breach of covenant, and upon such entry or
mailing as aforesaid this Lease shall terminate, Tenant hereby waiving all
statutory rights to the Premises (including without limitation rights of
redemption, if any, to the extent such rights may be lawfully waived) and
Landlord, without notice to Tenant, may store Tenant's effects, and those of any
person claiming through or under Tenant, at the expense and risk of Tenant, and,
if Landlord so elects, may sell such effects at public auction or private sale
and apply the net proceeds to the payment of all sums due to Landlord from
Tenant, if any, and pay over the balance, if any, to Tenant.

        8.2     Remedies. In the event that this Lease is terminated under any
of the provisions contained in Section 8.1 or shall be otherwise terminated for
breach of any obligation of Tenant, Tenant covenants to pay forthwith to
Landlord, as compensation, the excess of the total rent reserved for the residue
of the term over the rental value of the Premises for said residue of the term.
In calculating the rent reserved there shall be included, in addition to the
Fixed Rent and Additional Rent, the value of all other considerations agreed to
be paid or performed by Tenant for said residue. Tenant further covenants as
additional and cumulative obligations after any such termination, to pay
punctually to Landlord all the sums and to perform all the obligations which
Tenant covenants in this Lease to pay and to perform in the same manner and to
the same extent and at the same time as if this Lease had not been terminated.
In calculating


                                      -52-
   53
the amounts to be paid by Tenant pursuant to the next preceding sentence Tenant
shall be credited with any amount paid to Landlord as compensation as in this
Section 8.2 provided and also with the net proceeds of any rent obtained by
Landlord by reletting the Premises, after deducting all Landlord's actual and
reasonable expense in connection with such reletting, including, without
limitation, all repossession costs, brokerage commissions, fees for legal
services and expenses of preparing the Premises for such reletting, it being
agreed by Tenant that Landlord may (i) relet the Premises or any part or parts
thereof, for a term or terms which may at Landlord's option be equal to or less
than or exceed the period which would otherwise have constituted the balance of
the term and may grant such concessions and free rent as Landlord in its sole
judgment considers advisable or necessary to relet the same and (ii) make such
alterations, repairs and decorations in the Premises as Landlord in its sole
judgment considers advisable or necessary to relet the same, and no action of
Landlord in accordance with the foregoing or failure to relet or to collect rent
under reletting shall operate or be construed to release or reduce Tenant's
liability as aforesaid. Landlord shall use reasonable efforts to mitigate
damages.

        In lieu of any other damages or indemnity and in lieu of full recovery
by Landlord of all sums payable under all the foregoing provisions of this
Section 8.2, Landlord may by written notice to Tenant, at any time after this
Lease is terminated


                                      -53-
   54
under any of the provisions contained in Section 8.1 or is otherwise terminated
for breach of any obligation of Tenant and before such full recovery, elect to
recover, and Tenant shall thereupon pay, as liquidated damages, an amount equal
to the aggregate of the Fixed Rent and Additional Rent accrued in the twelve
(12) months ended next prior to such termination plus the amount of rent of any
kind accrued and unpaid at the time of termination and less the amount of any
recovery by Landlord under the foregoing provisions of this Section 8.2 up to
the time of payment of such liquidated damages. Nothing contained in this Lease
shall, however, limit or prejudice the right of Landlord to prove for and obtain
in proceedings for bankruptcy or insolvency by reason of the termination of this
Lease, an amount equal to the maximum allowed by any statute or rule of law in
effect at the time when, and governing the proceedings in which, the damages are
to be proved, whether or not the amount be greater than, equal to, or less than
the amount of the loss or damages referred to above.

        8.3     Remedies Cumulative. Any and all rights and remedies which
Landlord may have under this Lease, and at law and equity, shall be cumulative
and shall not be deemed inconsistent with each other, and any two or more of all
such rights and remedies may be exercised at the same time insofar as permitted
by law.

        8.4     Landlord's Right to Cure Default. Landlord may, but shall not be
obligated to, cure, at any time, without notice, any default by Tenant under
this Lease; and whenever Landlord so


                                      -54-
   55
elects, all costs and expenses incurred by Landlord, including reasonable
attorneys, fees, in curing a default shall be paid, as Additional Rent, by
Tenant to Landlord on demand, together with lawful interest thereon from the
date of payment by Landlord to the date of payment by Tenant.

        8.5     Effect of Waivers of Default. Any consent or permission by
Landlord or Tenant to any act or omission which otherwise would be a breach of
any covenant or condition herein, shall not in any way be held or construed
(unless expressly so declared) to operate so as to impair the continuing
obligation of any covenant or condition herein, or otherwise, except as to the
specific instance, operate to permit similar acts or omissions.

        8.6     No Waiver, etc. The failure of Landlord or Tenant to seek
redress for violation of, or to insist upon the strict performance of, any
covenant or condition of this Lease shall not be deemed a waiver of such
violation nor prevent a subsequent act, which would have originally constituted
a violation, from having all the force and effect of an original violation. The
receipt by Landlord of rent with knowledge of the breach of any covenant of this
Lease shall not be deemed to have been a waiver of such breach by Landlord. No
consent or waiver, express or implied, by Landlord or Tenant to or of any breach
of any agreement or duty shall be construed as a waiver or consent to or of any
other breach of the same or any other agreement or duty.

        8.7     No Accord and Satisfaction. No acceptance by Landlord of a
lesser sum than the Fixed Rent, Additional Rent or any other


                                      -55-
   56
charge then due shall be deemed to be other than on account of the earliest
installment of such rent or charge due, nor shall any endorsement or statement
on any check or any letter accompanying any check or payment as rent or other
charge be deemed an accord and satisfaction, and Landlord may accept such check
or payment without prejudice to Landlord's right to recover the balance of such
installment or pursue any other remedy in this Lease provided.


                                    ARTICLE 9

                           Rights of Mortgage Holders


        9.1     Rights of Mortgage Holders. The word "mortgage" as used herein
includes mortgages, deeds of trust or other similar instruments evidencing other
voluntary liens or encumbrances, and modifications, consolidations, extensions,
renewals, replacements and substitutes thereof. The word "holder" shall mean a
mortgagee, and any subsequent holder or holders of a mortgage. Until the holder
of a mortgage shall enter and take possession of the Premises for the purpose of
foreclosure, such holder shall have only such rights of Landlord as are
necessary to preserve the integrity of this Lease as security. Upon entry and
taking possession of the Premises for the purpose of foreclosure, such holder
shall have all the rights of Landlord. No such holder of a mortgage shall be
liable either as mortgagee or as assignee, to perform, or be liable in damages
for failure to perform, any of the obligations of Landlord unless and until such
holder shall


                                      -56-
   57
enter and take possession of the Premises for the purpose of foreclosure. Upon
entry for the purpose of foreclosure, such holder shall be liable to perform all
of the obligations of Landlord, subject to and with the benefit of the
provisions of Section 10.4, provided that a discontinuance of any foreclosure
proceeding shall be deemed a conveyance under said provisions to the owner of
the equity of the Premises.

        The covenants and agreements contained in this Lease with respect to the
rights, powers and benefits of a holder of a mortgage (particularly, without
limitation thereby, the covenants and agreements contained in this Section 9.1)
constitute a continuing offer to any person, corporation or other entity, which
by accepting a mortgage subject to this Lease, assumes the obligations herein
set forth with respect to such holder; such holder is hereby constituted a party
of this Lease as an obligee hereunder to the same extent as though its name were
written hereon as such; and such holder shall be entitled to enforce such
provisions in its own name. Tenant agrees on request of Landlord to execute and
deliver from time to time any agreement which may be necessary to implement the
provisions of this Section 9.1, provided that such agreement shall not increase
Tenant's obligations under the Lease, change any of the business terms or
derogate from or limit any of Tenant's rights under the Lease. 

        9.2 Lease Superior or Subordinate to Mortgages. It is agreed that the
rights and interest of Tenant under this Lease shall be (i) subject or
subordinate to any present or future


                                      -57-
   58
mortgage or mortgages and to any and all advances to be made thereunder, and to
the interest of the holder thereof in the Premises or any property of which the
Premises are a part if Landlord shall elect by notice to Tenant to subject or
subordinate the rights and interest of Tenant under this Lease to such mortgage
or (ii) prior to any present or future mortgage or mortgages, if Landlord shall
elect, by notice to Tenant, to give the rights and interest of Tenant under this
Lease priority to such mortgage; in the event of either of such elections and
upon notification by Landlord to that effect, the rights and interest of Tenant
under this Lease should be deemed to be subordinate to, or have priority over,
as the case may be, said mortgage or mortgages, irrespective of the time of
execution or time of recording of any such mortgage or mortgages (provided that,
in the case of subordination of this Lease to any future mortgages, the holder
thereof agrees not to disturb the possession of Tenant and to observe the
Landlord obligations under the Lease should it succeed to the interest of
Landlord, so long as Tenant is not in default hereunder beyond any applicable
grace period). Tenant agrees it will, upon request of Landlord, execute,
acknowledge and deliver any and all instruments deemed by Landlord necessary or
desirable to give effect to or notice of such subordination or priority,
provided that any such instrument shall not increase Tenant's obligations under
the Lease, change any of the business terms or derogate from or limit any of
Tenant's rights under the Lease. Subject to the provisions of Sections 9.1 and
9.2, any


                                      -58-
   59
mortgage to which this Lease shall be subordinated may contain such terms,
provisions and conditions as the holder deems usual or customary.

        Landlord agrees to obtain from each holder of a present mortgage, if
any, an agreement that the possession of Tenant will not be disturbed so long as
Tenant is not in default hereunder beyond any applicable grace period.


                                   ARTICLE 10

                            Miscellaneous Provisions


        10.1    Notices from One Party to the Other. All notices required or
permitted hereunder shall be in writing and addressed, if to the Tenant, at the
Original Notice Address of the Tenant or such other address as Tenant shall have
last designated by notice in writing to Landlord and, if to Landlord, at the
Original Notice Address of Landlord or such other address as Landlord shall have
last designated by notice in writing to Tenant. Any notice shall be deemed duly
given when mailed to such address postage prepaid, by registered or certified
mail, return receipt requested, or when delivered to such address by hand.

        10.2    Quiet Enjoyment. Landlord agrees that upon Tenant's paying the
rent and performing and observing the agreements, conditions and other
provisions on its part to be performed and observed, Tenant shall and may
peaceably and quietly have, hold and enjoy the Premises during the term hereof
without any manner


                                      -59-
   60
of hindrance or molestation from Landlord or anyone claiming under Landlord,
subject, however, to the terms of this Lease; provided, however, Landlord
reserves the right, without the same constituting a breach of Landlord's
covenant of quiet enjoyment, to make such changes, alterations, additions,
improvements, repairs or replacements in or to the Premises as Landlord may deem
necessary, provided further, however, that Landlord give Tenant seven (7) days,
prior notice and that there be no unreasonable interference with Tenant's use of
the Premises.

        10.3    Lease not to be Recorded. Tenant agrees that it will not record
this Lease. Both parties shall, upon the request of either, execute and deliver
a notice or short form of this Lease in such form, if any, as may be permitted
by applicable statute.

        10.4    Limitation of Landlord's Liability. The term "Landlord" as used
in this Lease, so far as covenants or obligations to be performed by Landlord
are concerned, shall be limited to mean and include only the owner or owners at
the time in question of the Premises, and in the event of any transfer or
transfers of title to said property, the Landlord (and in case of any subsequent
transfers or conveyances, the then grantor) shall be concurrently freed and
relieved from and after the date of such transfer or conveyance, without any
further instrument or agreement, of all liability as respects the performance of
any covenants or obligations on the part of the Landlord contained in this Lease
thereafter to be performed, it being intended hereby that the covenants and
obligations contained in this Lease on the




                                      -60-
   61
part of Landlord, shall, subject as aforesaid, be binding on the Landlord, its
successors and assigns, only during and in respect of their respective
successive periods of ownership of said leasehold interest or fee, as the case
may be. Tenant, its successors and assigns, shall not assert nor seek to enforce
any claim for breach of this Lease against any of Landlord's assets other than
Landlord's interest in the Premises and in the rents, issues and profits
thereof, and Tenant agrees to look solely to such interest for the satisfaction
of any liability or claim against Landlord under this Lease, it being
specifically agreed that in no event whatsoever shall Landlord (which term shall
include, without limitation, any general or limited partner, trustees,
beneficiaries, officers, directors, or stockholders of Landlord) ever be
personally liable for any such liability.

        10.5 Acts of God. In any case where either party hereto is required to
do any act, delays caused by or resulting from Acts of God, war, civil
commotion, fire, flood or other casualty, labor difficulties, shortages of
labor, materials or equipment, government regulations, unusually severe weather,
or other causes beyond such party's reasonable control shall not be counted in
determining the time during which work shall be completed, whether such time be
designated by a fixed date, a fixed time or a "reasonable time", and such time
shall be deemed to be extended by the period of such delay. The application of
this Section 10.5 shall be limited to thirty (30) days with respect to


                                      -61-

   62

subsection 4.2.6 and to ninety (90) days with respect to Sections 7A and 7B.

        10.6 Landlord's Default. Landlord shall not be deemed to be in default
in the performance of any of its obligations hereunder unless it shall fail to
perform such obligations and such failure shall continue for a period of thirty
(30) days or such additional time as is reasonably required to correct any such
default after written notice has been given by Tenant to Landlord specifying the
nature of Landlord's alleged default. Landlord shall not be liable in any event
for incidental or consequential damages to Tenant by reason of Landlord default,
whether or not notice is given. Tenant shall have no right to terminate this
Lease for any default by Landlord hereunder and no right, for any such default,
to offset or counterclaim against any rent due hereunder.

        Tenant may, but shall not be obligated to, cure, after reasonable
notice, any default by Landlord under this Lease that is detrimental to Tenant's
business not to have cured, and whenever Tenant so elects, all costs and
expenses incurred by Tenant incurring a default shall be paid by Landlord to
Tenant on demand, together with lawful interest thereon from the date of payment
by Tenant to the date of payment by Landlord, provided, however, that Tenant
shall indemnify Landlord against any damage to the Premises resulting from
Tenant's effecting such cure.

        10.7 Brokerage. Tenant warrants and represents that it has dealt with no
broker in connection with the consummation of this


                                      -62-

   63

Lease other than Cushman & Wakefield of Massachusetts, Inc., and in the event of
any brokerage claims against Landlord predicated upon prior dealings with
Tenant, other than by Cushman & Wakefield of Massachusetts, Inc., Tenant agrees
to defend the same and indemnify and hold Landlord harmless against any such
claim.

        10.8 Landlord's Warranties. Landlord warrants and represents that:

        (a)     Landlord is the fee simple owner of the Premises;

        (b)     As of the Date of this Lease, there are no liens, restrictions
                or encumbrances affecting the Premises which materially
                adversely affect Tenant's use and occupancy of the Premises for
                the purposes leased;

        (c)     Landlord is not aware of any violations issued by any
                governmental entity outstanding against the Building or the
                Premises and to the best of its knowledge the Premises are in
                compliance with law;

        (d)     Access to the property is by public roadways, and occupants of
                the Building have access to the Building over the existing
                roads, paths, walks, and drives on the property owned by
                Landlord or by virtue of non-terminable easements appurtenant
                benefiting the property; and

        (e)     All utility lines and appurtenances necessary to the maintenance
                and operation of the property are located in public ways with
                appropriate consents, easements,


                                      -63-

   64

                and authorizations from the authorities, agencies, and bodies
                having jurisdiction having been obtained and not subject to
                termination; or, if such lines and appurtenances are in
                privately owned property, Landlord has obtained or has the
                benefit of easements, licenses, or other legal grants therefor
                which are non-terminable and appurtenant for the benefit of the
                property.

        (f)     The premises is served by the municipal water system.



        10.9 Applicable Law and Construction. This Lease shall be governed by
and construed in accordance with the laws of the Commonwealth of Massachusetts
and, if any provisions of this Lease shall to any extent be invalid, the
remainder of this Lease shall not be affected thereby. There are no oral or
written agreements between Landlord and Tenant affecting this Lease. This Lease
may be amended, and the provisions hereof may be waived or modified, only by
instruments in writing executed by Landlord and Tenant. The titles of the
several Articles and Sections contained herein are for convenience only and
shall not be considered in construing this Lease. Unless repugnant to the
context, the words "Landlord" and "Tenant" appearing in this Lease shall be
construed to mean those named above and their respective heirs, executors,
administrators, successors and assigns, and those claiming through or under them
respectively. If there be more than one tenant the obligations imposed by this
Lease upon Tenant shall be joint and several.


                                      -64-

   65

        WITNESS the execution hereof under seal on the day and year first above
written.

                                    Landlord:

                                    495 LITTLETON ASSOCIATES

                                    BY:  /s/ RODGER P. NORBLOM
                                        ----------------------------------------
                                        Rodger P. Norblom
                                        General Partner

                                    Tenant:

                                    XYPLEX, INC.


                                    BY /s/ [SIG]
                                      ------------------------------------------
                                      Its Vice President Manufaturing


                                      -65-

   66

                                    EXHIBIT A

                             DESCRIPTION OF PREMISES


      A certain parcel of land in Littleton, Massachusetts shown as Lot B on
that plan entitled "Plan of Land in Littleton, Mass." dated May 15, 1981,
revised July 2, 1981, prepared by Dana F. Perkins & Associates, Inc., recorded
in Book 14499, Page 318 with the Middlesex County South District Registry of
Deeds, bounded and described as follows:



NORTHWESTERLY and
NORTHEASTERLY                by the sideline of land now or formerly of the
                             Commonwealth of Massachusetts, being the Route 495
                             Exit Ramp and Route 2, 1438.84 feet; and



SOUTHEASTERLY,
NORTHEASTERLY,
SOUTHEASTERLY and
NORTHEASTERLY                by land now or formerly of Octave and Evelyn 
                             Cutreau, 341.51 feet; and

SOUTHEASTERLY                by Foster Street, 1095.07 feet; and

SOUTHWESTERLY                by Lot A as shown on said plan, 939.63 feet.


Being 19.54 acres, more or less, as shown on said plan.


                                      -1-

   67

            SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT

     THIS AGREEMENT is made as of this 22nd day of February 1993 by and among
CONNECTICUT GENERAL LIFE INSURANCE COMPANY, a Connecticut corporation having
its principal office and place of business at 900 Cottage Grove Road,
Bloomfield, Connecticut 06002 ("Lender"), 495 Littleton Associates a MA Limited
Partnership, whose address is c/o Nordblom Company ("Landlord"), and Xyplex,
Inc., a Mass, 31 Third Ave., Burlington, MA 01803 Corporation with offices at
330 Codman Hill Rd., Boxborough, MA 01719 ("Tenant").


                                   WITNESSETH:

     WHEREAS, Tenant has entered into a certain lease (the "Lease") dated
February 22, 1993 with Landlord covering premises (the "Premises") within a
certain building known as 295 Foster Street located in the City of Littleton,
Middlesex County, Massachusetts, on the real property more particularly 
described in Exhibit "A" attached hereto and incorporated herein; and

     WHEREAS, Lender has agreed to make $___________ loan (the "Loan") to
Landlord to be evidenced by the promissory note issued by Landlord to Lender
(the "Note") and to be secured by a Mortgage [and Security Agreement] (the
"Mortgage") and by an Assignment of [Rents and Leases] (the
"Assignment")encumbering, inter alia, the Premises; and

     WHEREAS, it is to the mutual benefit of the parties hereto that Lender
make such loan to Landlord; and

     WHEREAS, it is a condition precedent to obtaining the Loan that the
Mortgage be a lien or charge upon the Premises unconditionally prior and
superior to the Lease and the leasehold interest of Tenant thereunder; and

     WHEREAS, Tenant acknowledges that the Mortgage, when recorded, will
constitute a lien or charge upon the Premises which is unconditionally prior
and superior to the Lease and the leasehold interest of Tenant thereunder; and

     WHEREAS, Lender has been requested by Tenant and by Landlord to enter into
a non-disturbance agreement with Tenant;

     NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter contained, the parties hereto mutually covenant and agree as
follows:

     1.   The Lease and any extensions, renewals, replacements or modifications
thereof, and all of the right, title and interest of Tenant thereunder in and
to the Premises are and shall be subject and subordinate to the Mortgage and to
all of the terms and conditions contained therein, and to any renewals,
modifications, replacements, consolidations and extensions thereof.

   68
     2.  Lender consents to the Lease and, in the event Lender comes into
possession of or acquires title to the Premises as a result of the foreclosure
or other enforcement of Mortgage or the Note or as a result of any other means,
Lender agrees that, so long as Tenant is not then in default under the Lease
beyond any cure period allowed in the Lease and so long as Tenant is then in
possession of the Premises. Lender will recognize Tenant and will not disturb
Tenant in its possession of the Premises for any reason other than one which
would entitle Landlord to terminate the Lease under its terms or would cause,
without any further action by Landlord, the termination of the Lease or would
entitle Landlord to dispossess Tenant from the Premises and Lender shall be
bound to Tenant under all of the terms, covenants and provisions of the Lease
for the remainder of the term thereof, except as provided in Section 4 below.

     3.  Tenant agrees with Lender that if the interests of Landlord in the
Premises shall be transferred to and owned by Lender by reason of foreclosure
or other proceedings brought by it, or any other manner, or shall be conveyed
thereafter by Lender or shall be conveyed pursuant to a foreclosure sale of the
Premises, Tenant shall be bound to Lender under all of the terms, covenants and
conditions of the Lease for the balance of the term thereof remaining and any
extensions or renewals thereof which may be effected in accordance with any
option therefor in the Lease, with the same force and effect as if Lender were
the landlord under the Lease, and Tenant does hereby attorn to Lender as its
landlord, said attornment to be effective and self-operative without the
execution of any further instruments on the part of any of the parties hereto
immediately upon Lender succeeding to the interest of Landlord in the Premises.
Tenant agrees, however, upon the election of and written demand by Lender
within twenty (20) days after Lender receives title to the Premises, to execute
an instrument in confirmation of the foregoing provisions, satisfactory to
Lender, in which Tenant shall acknowledge such attornment and shall set forth
the terms and conditions of its tenancy.

     4.  Tenant agrees with Lender that if Lender shall succeed to the interest
of Landlord under the Lease, Lender shall not be (a) liable for any action or
omission of any prior landlord under the Lease, or (b) subject to any offsets
or defenses which Tenant might have against any prior landlord, or (c) bound by
any rent or additional rent which Tenant might have paid for more than the
current month to any prior landlord, or (d) bound by any security deposit which
Tenant may have paid to any prior landlord, unless such deposit is in an escrow
fund available to Lender, or (e) bound by any amendment or modification of the
Lease made without Lender's written consent which shall not be unreasonably
withheld or delayed or (f) bound by any provision in the Lease which obligates
the landlord to erect or complete any building or to perform any construction
work or to make any improvements to the Premises or to expand or rehabilitate
any existing improvements, or (g) bound by any notice of termination given by
Landlord to Tenant without Lender's written consent thereto, or (h) personally
liable under the Lease and Lender's liability under the Lease shall be limited
to the ownership interest of Lender in the Premises. Tenant further agrees with
Lender that Tenant will not voluntarily subordinate the Lease to any lien or
encumbrance without Lender's written consent.

     5.  In the event that Landlord shall default in the performance or
observance of any of the terms, conditions or agreements in the Lease, Tenant
shall give written notice thereof to Lender and Lender shall have the right
(but not the obligation) to cure such default. Tenant shall not take any action
with respect to such default under the Lease, including, without limitation, any
action in order to terminate, rescind or void the Lease or to withhold any
rental thereunder, for a period of 10 days after receipt of such written notice
by Lender with respect to any such default capable of being cured by the
payment of money and for a period of 30 days after receipt of such written
notice by Lender with respect to any other such default (provided, that in the
case of any default which cannot be cured by the payment of money and cannot
with diligence be cured within such 30-day period because of the nature of
such default or because Lender requires time to obtain possession of the
Premises in order to cure the default, if Lender shall proceed promptly to
attempt to obtain possession of the Premises, where possession is required, and
to cure the same and thereafter shall prosecute the curing of such default with
diligence and continuity, then the time within which such default may be cured
shall be extended for such period as may be necessary to complete the curing of
the same with diligence and continuity.) 
   69
     6.  Landlord has agreed in the Mortgage and in the Assignment that the
rentals payable under the Lease shall be paid directly by Tenant to Lender upon
the occurrence of a default by Landlord under the Mortgage. Accordingly, after
notice is given by Lender to Tenant that the rentals under the Lease should be
paid to Lender, Tenant shall pay to Lender,or in accordance with the directions
of Lender, all rentals and other moneys due and to become due to Landlord under
the Lease, or amounts equal thereto. tenant shall have no responsibility to
ascertain whether such demand by Lender is permitted under the Mortgage or the
Assignment. Landlord hereby waives any right, claim or demand it may now or
hereafter have against Tenant by reason of such payment to Lender, and any such
payment to Lender shall discharge the obligations of Tenant to make such
payment to Landlord.

     7. Tenant declares, agrees and acknowledges that:

          a. Lender, in making disbursements pursuant to any agreement relating
     to the Loan, is under no obligation or duty to, nor has Lender represented
     that it will, see to the application of such proceeds by the person or
     persons to whom Lender disburses such proceeds, and any application or use
     of such proceeds other than those provided for in such agreement shall not
     defeat the subordination herein made in whole or in part; and      

          b. it intentionally and unconditionally waives, relinquishes and
     subordinates the Lease and its leasehold interest thereunder in favor of
     the lien or charge upon said land of the Mortgage, and that in
     consideration of this waiver, relinquishment and subordination, specific
     loans and advances are being and will be made by Lender to Landlord and, as
     part and parcel thereof, specific monetary and other obligations are being
     and will be entered into by Landlord and Lender which would not be made or
     entered into but for said reliance upon this waiver.

     8.  This Agreement shall bind and inure to the benefit of the parties
hereto, their successors and assigns. As used herein the term "Tenant" shall
include Tenant, its successors and assigns; the words "foreclosure" and
"foreclosure sale" as used herein shall be deemed to include the acquisition of
Landlord's estate in the Premises by voluntary deed (or assignment) in lieu of
foreclosure; and the word "Lender" shall include the Lender herein specifically
named and any of its successors, participants and assigns, including anyone who
shall have succeeded to Landlord's interest in the Premises by, through or under
foreclosure of the Mortgage.

     9.  All notices, consents and other communications pursuant to the
provisions of this Agreement shall be in writing and shall be sent by registered
or certified mail, return receipt requested, or by a reputable commercial
overnight carrier that provides a receipt, such as Federal Express or Airborne,
and shall be deemed given when postmarked and addressed as follows:

If to Lender:                           CIGNA Investments, Inc.
                                        c/o CIGNA Investment Group
                                        900 Cottage Grove Road
                                        Bloomfield, Connecticut 06002
                                        Attn: Real Estate Investment Services

with a copy to:                         CIGNA Corporation
                                        900 Cottage Grove Road
                                        Bloomfield, Connecticut 06002
                                        Attn: Investment Law Department

If to Tenant:                           XYPLEX, INC.
                                        330 Codman Hill Rd.
                                        Boxborough, MA 01719
                                        Attn: R.F. Hoefer, V.P. Mfg.
to Landlord:                            495 LITTLETON ASSOCIATES
                                        c/o Norblom Company
                                        31 Third Ave.
                                        Burlington, MA 01803

or to such other address as shall from time to time have been designated by
written notice by such party to the other parties as herein provided.      

   70
        10. This Agreement shall be the whole and only agreement between the
parties hereto with regard to the subordination of the Lease and the leasehold
interest of Tenant thereunder to the lien or charge of the Mortgage in favor of
Lender, and shall supersede and control any prior agreements as to such, or
any, subordination, including, but not limited to, those provisions, if any,
contained in the Lease, which provide for the subordination of the Lease and
the leasehold interest of Tenant thereunder to a deed or deeds of trust or to a
mortgage or mortgages to be thereafter executed, and shall not be modified or
amended and no provision herein shall be waived except in writing signed by the
party against whom enforcement of any such modification or amendment is sought.

        The use of the neuter gender in this Amendment shall be deemed to
include any other gender, and words in the singular number shall be held to
include the plural, when the sense requires. In the event any one or more of
the provisions of this Agreement shall for any reason be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement, but
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein. This Agreement shall be governed by
and construed in accordance with the laws of the State of Massachusetts.

        11. Subject to the terms of this Agreement, Tenant's possession of the
Premises and Tenant's rights thereto shall not be disturbed, affected or
impaired by, nor will the Lease or the term thereof be terminated or otherwise
be affected by, any suit, action or proceeding upon the Mortgage or the
enforcement of any rights under the Mortgage or any other document(s) held by
the Lender, or by the judicial sale or execution on or other sale of the
Property or by any deed given in lieu of foreclosure, or by the exercise of any
other rights given to the Lender by any other document(s) or as a matter or
law, or by any default under the Mortgage, note or any other obligation(s)
secured thereby.

        12. All property owned by Tenant located or installed in or on the
Premises, regardless of the manner or mode of attachment, shall be and remain 
the property of Tenant and may be removed by Tenant at any time, provided Tenant
shall repair, at its own expense, all damage caused by such removal. In no
event, including a default under the Lease or Mortgage, shall Lender have any
lien on or right or claim to any of Tenant's property expressly waives all right
of levy, distraint or execution with respect to such property.

        13. Tenant shall not be named or joined as a party defendant in any
suit, action or proceeding for the foreclosure of the Mortgage or to enforce
any rights under the Mortgage or note or other obligation(s) secured thereby,
except as required by law under the Soldiers and Sailors Civil Relief Act.

   71
        IN WITNESS WHEREOF the parties hereto have placed their hands and seals
the day and year first above written.

                                     
Signed and acknowledged in the
presence of us.                         TENANT:  XYPLEX, INC.

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

/s/  VICTORIA A. BARAIOLO
- -----------------------------------     By:  /s/  ROBERT F. HOEFER
Typed Name:  Victoria A. Baraiolo          -------------------------------------
                                           Typed Name:  Robert F. Hoefer
                                           Title:  Vice President, Manufacturing

/s/  DENISE A. WELCH
- -----------------------------------     Attest:
Typed Name:  Denise A. Welch                   ---------------------------------

                                        
                                        LANDLORD:  495 LITTLETON ASSOCIATES

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

                                        By:  /s/  RODGER P. NORDBLOM 
- -----------------------------------        -------------------------------------
Typed Name:                                Typed Name:  RODGER P. NORDBLOM
                                           Title:  GENERAL PARTNER

/s/  STEPHEN E. LOGAN
- -----------------------------------     Attest:  /s/  STEPHEN E. LOGAN
Typed Name:                                    ---------------------------------
      


                                        LENDER:

                                        CONNECTICUT GENERAL LIFE INSURANCE
                                        COMPANY

                                        By CIGNA Investments, Inc.

/s/  [illegible]
- -----------------------------------     By:  /s/  FRANK SATALINE
Typed Name:                                -------------------------------------
                                           Typed Name:  Frank Sataline
                                           Title:  Vice President

/s/  [illegible]
- -----------------------------------     Attest:  /s/  CAREY A. WHITE
Typed Name                                     ---------------------------------


   72

                                    EXHIBIT A

                             DESCRIPTION OF PREMISES


        A certain parcel of land In Littleton, Massachusetts shown as Lot B on
that plan entitled "Plan of Land in Littleton, Mass." dated May 15, 1981,
revised July 2, 1981, prepared by Dana F. Perkins & Associates, Inc., recorded
in Book 14499, Page 318 with the Middlesex county South District Registry of
Deeds, bounded and described as follows:


NORTHWESTERLY and
NORTHEASTERLY                by the sideline of land now or formerly of the
                             Commonwealth of Massachusetts, being the Route 495
                             Exit Ramp and Route 2, 1438.84 feet; and


SOUTHEASTERLY,
NORTHEASTERLY,
SOUTHEASTERLY and
NORTHEASTERLY                by land now or formerly of Octave and Evelyn 
                             Cutreau, 341.51 feet; and

SOUTHEASTERLY                by Foster Street, 1095.07 feet; and

SOUTHWESTERLY                by Lot A as shown on said plan, 939.63 feet.


Being 19.54 acres, more or less, as shown on said plan.


                                      -1-

   73
COMMONWEALTH OF MASSACHUSETTS
COUNTY OF MIDDLESEX

        On this 22nd day of February, 1993 before me personally came RODGER P.
NORDBLOM, General Partner who did say that he executed the foregoing instrument
as his free act and deed and as the free act and deed of 495 Littleton
Associates.

MY COMMISSION EXPIRES: August 14, 1993       /s/ RINIA MARIA BECK
                                             ----------------------------------
                                             NOTARY PUBLIC




COMMONWEALTH OF MASSACHUSETTS
COUNTY OF MIDDLESEX

        On this 22nd day of February, 1993 before me came ROBERT F. HOEFER
known to me to be the VICE PRESIDENT MANUFACTURING of XYPLEX, INC., who did say
that he executed the foregoing instrument as his free act and deed and as the
free act and deed of said corporation.

MY COMMISSION EXPIRES: August 12, 1999         /s/  SARAHI DELGADO
                                             ----------------------------------
                                             NOTARY PUBLIC



STATE OF CONNECTICUT
COUNTY OF

        On this 23rd day of February, 1993 before me came FRANK SATALINE known
to me to be the VICE PRESIDENT of CONNECTICUT GENERAL LIFE INSURANCE COMPANY
who did say that (s)he executed the foregoing instrument as his/her free act
and deed and as the free act and deed of said corporation.

MY COMMISSION EXPIRES:  March 31, 1997         /s/  MARY BETH SEALA
                                             ---------------------------------
                                             NOTARY PUBLIC


   74

XYPLEX

March 1, 1993

495 Littleton Associates
c/o Nordblom Company
31 Third Avenue
Burlington, Massachusetts 01803


Re: First Amendment to Lease for 295 Foster Street, Littleton, Massachusetts
between 495 Littleton Associates, Landlord and Xyplex, Inc., Tenant


Dear Mr. Nordblom:

Given the week's delay in having the above captioned lease signed by 495
Littleton Associates as Landlord for reasons associated with Landlord's
mortgagee and current tenant of the premises, and pursuant to a verbal agreement
to change the date of the lease so that the sixty (60) day period from lease
date to lease commencement would take this additional time into account please
sign both copies of this letter in the appropriate place to amend the lease so
that the lease date shown on page one will change from February 22, 1993 to
March 2, 1993. Please return a fully executed copy to me for Xyplex's files.


Xyplex, Inc.

By /s/ ROBERT F. HOEFER
  --------------------------------------
        Robert F. Hoefer
        Vice President Manufacturing

The foregoing amendment is hereby agreed to this 8 day of March 1, 1993.

495 Littleton Associates

By /s/ [SIG]
  ---------------------------------------
        Hereunto Duly Authorized


   75

                                             [NORDBLOM
                                             MANAGEMENT
                                             COMPANY,INC.  REAL ESTATE LOGO]

July 7, 1993

Ms. Vicki Baraiolo
Facilities Manager
Xyplex, Inc.
330 Codman Hill Road
Boxborough, MA 01719-1708

Re: Lease between 495 Littleton Associates and Xyplex, Inc. dated February 22,
1993.

Dear Vicki:

This letter will confirm that 495 Littleton Associates and XypleX, Inc. wish to
amend the referenced lease by increasing the Phase One Space by 1,800 square
feet to 54,023 square feet. This additional square footage will be used as
storage space and will be leased at the rental rate of $4.50 per square foot.
This agreement will commence August 1, 1993 and will be in effect until the
Phase Two Commencement Date.

As a result of this change Tenant's Percentage as defined in the lease is now
53.47%.

Please acknowledge Xyplex Inc.'s acceptance of this agreement by having this
letter signed on the line provided and returning one original to my attention.


Sincerely,

/s/ STEPHEN LOGAN
- --------------------------------
Stephen Logan
Project Manager


LANDLORD:                                  TENANT:


495 Littleton Associates                   Xyplex Inc.

By: [SIG]                                  By: [SIG]
   -----------------------------           -------------------------------------
   As trustee but not individually.        Its:


   76

                            THIRD AMENDMENT TO LEASE

                                     BETWEEN

                   CONNECTICUT GENERAL LIFE INSURANCE COMPANY

                                       AND

                                   XYPLEX,INC.

        This Third Amendment to Lease executed this 29th day of June, 1995
between Connecticut General Life Insurance Company ("Landlord") and Xyplex, Inc.
("Tenant").

                                   WITNESSETH

        WHEREAS, 495 Littleton Associates (the "Original Landlord") and Tenant
executed a Net Lease dated February 22, 1993 (which Net Lease was amended to
change the date of the Lease to March 2, 1993 by First Amendment to Lease dated
March 1, 1993 between Original Landlord and Tenant) (as so amended and as
amended by the Second Amendment (as defined below), the "Lease") for the
Building located at 295 Foster Street in Littleton, Massachusetts (the
"Building");

        WHEREAS, Landlord succeeded to the interest of Original Landlord under
the Lease;

        WHEREAS, in accordance with the provisions of the Lease, Tenant occupied
52,223 square feet of Rentable Floor Area in the Building, as more particularly
described in the Lease (the "Phase One Space"), on the Commencement Date of the
Lease;

        WHEREAS, in accordance with the provisions of the Lease, the Tenant
intended to occupy the remainder of the Building containing 48,808 square feet
of Rentable Floor Area, as more particularly described in the Lease (the "Phase
Two Space"), on or before October 1, 1995;

        WHEREAS, by letter agreement dated July 7, 1993 between Original
Landlord and Tenant (the "Second Amendment"), Tenant occupied an additional
1,800 square feet of Rentable Floor Area and the Phase One Space was increased
to include such space;

        WHEREAS, Tenant occupied an additional 1,800 square feet of Rentable
Floor Area in the Building on November 1, 1994 and thereupon commenced paying an
additional $4.50 for each square foot of Rentable Floor Area added to the
Premises (i.e., $8,100);

   77

        WHEREAS, Tenant wishes to occupy an additional 25,154 square feet of
Rentable Floor Area in the building on or about April 1, 1995 and an additional
4,558 square feet of Rentable Floor Area in the Building on or about April 17,
1995; and

        WHEREAS, Landlord and Tenant wish to amend the Lease to permit Tenant to
occupy such additional space and to otherwise amend the Lease.

        NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:

        1. All capitalized terms used herein and not defined herein shall have
the meaning ascribed to them in the Lease.

        2. Notwithstanding the provisions of subsection B of Section 4.1 of the
Lease, Tenant was permitted to occupy an additional 1,800 square feet of
Rentable Floor Area in the Building as shown on Exhibit A-3 attached hereto (the
"First Expansion Space") on November 1, 1994. Effective on November 1, 1994, the
Phase One Space shall be deemed to include the First Expansion Space. The Annual
Fixed Rent Rate for the period commencing on November 1, 1994 through the Second
Expansion Space Commencement Date shall be increased by the product of (x) $4.50
multiplied by (y) 1,800 (i.e., $8,100.00) for a new total of $230,314.30.

        3. Notwithstanding the provisions of subsection B of Section 4.1 of the
Lease, Tenant shall be permitted to occupy an additional 25,154 square feet of
Rentable Floor Area in the Building as shown on Exhibit A-3 attached hereto (the
"Second Expansion Space") on or about April 1, 1995. The Phase One Space shall
be deemed to include the Second Expansion Space upon the earlier of substantial
completion of the Second Expansion Space or occupancy of the Second Expansion
Space by Tenant for purposes of its business (the "Second Expansion Space
Commencement Date"). The Annual Fixed Rent Rate for the period commencing on
the Second Expansion Space Commencement Date through the Third Expansion Space
Commencement Date shall be increased by the product of (x) $4.50 multiplied by
(y) 25,154 (i.e., $113,193.00) for a new total of $343,507.30.

        4. Notwithstanding the provisions of subsection B of Section 4.1 of the
Lease, Tenant shall be permitted to occupy an additional 4,558 square feet of
Rentable Floor Area in the Building as shown on Exhibit A-3 attached hereto (the
"Third Expansion Space") on or about April 17, 1995. The Phase One Space shall
be deemed to include the Third Expansion Space upon the earlier of substantial
completion of the Third Expansion Space or occupancy of the Third Expansion
Space by Tenant for purposes of its business (the "Third Expansion Space
Commencement Date"). The Annual Fixed Rent Rate for the period commencing on the
Third Expansion Space Commencement Date through the Phase Two Commencement Date
shall be increased by the product of (x) $4.50 multiplied by (y) 4,558 (i.e.,
$20,511.00) for a new total of $364,018.30.


   78

        5. Nothing stated herein shall affect the provisions of the Lease
relating to the Phase Two Space, including the provisions of Section 4.1 of the
Lease.

        6. In that as of November 1, 1994 Tenant was entitled to occupy 55,823
square feet of Rentable Floor Area in the Building effective on November 1,
1994, Tenant's Percentage shall be deemed to be, in no event, less than 55.25%.
In that Tenant shall be entitled to occupancy of 80,977 square feet of Rentable
Floor Area in the Building as of the Second Expansion Commencement Date,
effective on the Second Expansion Space Commencement Date Tenant's Percentage
shall be deemed to be, in no event, less than 80.02%. In that Tenant shall be
entitled to occupancy of 85,535 square feet of Rentable Floor Area in the
Building as of the Third Expansion Space Commencement Date, effective on the
Third Expansion Space Commencement Date Tenant's Percentage shall be deemed to
be, in no event, less than 84.66 %.

        7. Tenant acknowledges that it has had an opportunity to inspect the
First Expansion Space, the Second Expansion Space and the Third Expansion Space
(collectively, the "Expansion Space"). The First Expansion Space was delivered
and the Second Expansion Space and the Third Expansion Space shall be delivered
to Tenant As Is, Where Is, with all faults and without representation, warranty
or guaranty of any kind by Landlord to Tenant, but subject to Landlord's
obligations as provided in subparagraph (a) of the third grammatical paragraph
of subsection 4.2.4 of the Lease with respect to latent defects (but not latent
defects arising out of or in connection with improvements undertaken by Tenant).
Any and all improvements to the Expansion Space shall be at the sole cost of
Tenant, except as otherwise provided in the Lease, and shall be undertaken in
strict conformity with the provisions of the Lease. Except as otherwise
specifically provided in this Third Amendment to Lease, all of the terms,
covenants and conditions of the Lease shall apply to the Expansion Space.

        8. Notwithstanding the foregoing, Landlord shall (a) remove panels on
the windows in the first floor computer room and (b) repair or, if necessary,
replace all blinds behind such panels.

        9. As of the Third Expansion Space Commencement Date the Phase Two Space
mentioned in Article 1, Section 1. 1 of the Lease consists of 15,496 square
feet.


   79

        10. Except as set forth herein, the Lease shall remain unmodified and in
full force and effect.

        EXECUTED, as a sealed instrument as of the day and year first written
above.

                                      LANDLORD:

                                      CONNECTICUT GENERAL LIFE INSURANCE

                                      COMPANY


                                      By:  CIGNA Investments, Inc.



                                           By: /s/ JAMES H. ROGERS
                                              ----------------------------------
                                              Name:  JAMES H. ROGERS
                                              Title: MANAGING DIRECTOR

                                      TENANT:


                                      XYPLEX, INC.


                                           By: /s/ PETER J. NESBEDA
                                              ----------------------------------
                                              Name: Peter J. Nesbeda
                                              Title: President


   80

                            FOURTH AMENDMENT TO LEASE

                                     BETWEEN

                   CONNECTICUT GENERAL LIFE INSURANCE COMPANY

                                       AND

                                  XYPLEX, INC.

        This Fourth Amendment to Lease executed this 19th day of September, 1995
between Connecticut General Life Insurance Company ("Landlord") and Xyplex, Inc.
("Tenant").

                                   WITNESSETH

        WHEREAS, 495 Littleton Associates (the "Original Landlord") and Tenant
executed a Net Lease dated February 22, 1993 (which Net Lease was amended to
change the date of the Lease to March 2, 1993 by First Amendment to Lease dated
March 1, 1993 between Original Landlord and Tenant) (as so amended and as
amended by the Second Amendment and the Third Amendment (as defined below), the
"Lease") for the Building located at 295 Foster Street in Littleton,
Massachusetts (the "Building");

        WHEREAS, Landlord succeeded to the interest of Original Landlord under
the Lease;

        WHEREAS in accordance with the provisions of the Lease, Tenant occupied
52,223 square feet of Rentable Floor Area in the Building, as more particularly
described in the Lease (the "Phase One Space"), on the Commencement Date of the
Lease;

        WHEREAS, in accordance with the provisions of the Lease, the Tenant
intended to occupy the remainder of the Building containing 48,808 square feet
of Rentable Floor Area, as more particularly described in the Lease (the "Phase
Two Space"), on or before October 1, 1995;

        WHEREAS, by letter agreement dated July 7, 1993 between Original
Landlord and Tenant (the "Second Amendment"), Tenant occupied an additional
1,800 square feet of Rentable Floor Area and the Phase One Space was increased
to include such space;

        WHEREAS, Tenant occupied an additional 1,800 square feet of Rentable
Floor Area in the Building on November 1, 1994 and thereupon commenced paying an
additional $4.50 for each square foot of Rentable Floor Area added to the
Premises (i.e., $8, 100);

   81

        WHEREAS, Tenant occupied an additional 25,154 square feet of Rentable
Floor Area in the building on or about April 1, 1995 and an additional 4,558
square feet of Rentable Floor Area in the Building on or about April 17, 1995;
and thereupon commenced paying an additional $4.50 for each square foot of
Rentable Floor Area added to the Premises and Tenant wishes to occupy an
additional 15,496 square feet on October 1, 1995 ("Fourth Expansion Space
Commencement Date").

        WHEREAS, Landlord and Tenant wish to amend the Lease to permit Tenant
to occupy such additional space and to otherwise amend the Lease.

        NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:

        1. All capitalized terms used herein and not defined herein shall have
the meaning ascribed to them in the Lease.

        2. Notwithstanding the provisions of subsection B of Section 4.1 of the
Lease, Tenant was permitted to occupy an additional 1,800 square feet of
Rentable Floor Area in the Building as shown on Exhibit A-3 attached hereto (the
"First Expansion Space") on November 1, 1994. Effective on November 1, 1994, the
Phase One Space was deemed to include the First Expansion Space. The Annual
Fixed Rent Rate for the period commencing on November 1, 1994 through the Second
Expansion Space Commencement Date was increased by the product of (x) $4.50
multiplied by (y) 1,800 (i.e., $8,100.00) for a new total of $230,314.30.

        3. Notwithstanding the provisions of subsection B of Section 4.1 of the
Lease, Tenant was permitted to occupy an additional 25,154 square feet of
Rentable Floor Area in the Building as shown on Exhibit A-3 attached hereto (the
"Second Expansion Space") on or about April 1, 1995 by the Third Amendment to
Lease dated June 29, 1995. Effective April 1, 1995 the Phase One Space was
deemed to include the Second Expansion Space (the "Second Expansion Space
Commencement Date"). The Annual Fixed Rent Rate for the period commencing on the
Second Expansion Space Commencement Date through the Third Expansion Space
Commencement Date was increased by the product of (x) $4.50 multiplied by (y)
25,154 (i.e., $113,193.00) for a new total of $343,507.30.

        4. Notwithstanding the provisions of subsection B of Section 4.1 of the
Lease, Tenant was permitted to occupy an additional 4,558 square feet of
Rentable Floor Area in the Building (the "Third Expansion Space") on or about
April 17, 1995 by the Third Amendment to Lease. Effective April 17, 1995 the
Phase One Space shall be deemed to include the Third Expansion Space (the "Third
Expansion Space Commencement Date"). The Annual Fixed Rent Rate for the period
commencing on the Third Expansion Space Commencement Date through the Phase Two
Commencement Date was increased by the product of (x) $4.50 multiplied by (y)
4,558 (i.e., $20,511.00) for a new total of $364,018.30.

   82

        5. In that as of November 1, 1994 Tenant was entitled to occupy 55,823
square feet of Rentable Floor Area in the Building effective on November 1,
1994, Tenant's Percentage shall be deemed to be, in no event, less than 55.25 %.
In that Tenant was entitled to occupancy of 80,977 square feet of Rentable Floor
Area in the Building as of the Second Expansion Commencement Date, effective on
the Second Expansion Space Commencement Date Tenant's Percentage shall be deemed
to be, in no event, less than 80.02%. In that Tenant was entitled to occupancy
of 85,535 square feet of Rentable Floor Area in the Building as of the Third
Expansion Space Commencement Date, effective on the Third Expansion Space
Commencement Date Tenant's Percentage shall be deemed to be, in no event, less
than 84.66%. In that Tenant shall be entitled to occupancy of 101,031 square
feet of Rentable Floor Area in the Building as of the Fourth Expansion Space
Commencement Date, effective on the Fourth Expansion Space Commencement Date
Tenant's Percentage shall be deemed to be, in no event, less than 100%.

        6. Tenant acknowledges that it has had an opportunity to inspect the
First Expansion Space, the Second Expansion Space and the Third Expansion Space
(collectively, the "Expansion Space"). The First Expansion Space the Second
Expansion Space and the Third Expansion Space were delivered to Tenant As Is,
Where Is, with all faults and without representation, warranty or guaranty of
any kind by Landlord to Tenant, but subject to Landlord's obligations as
provided in subparagraph (a) of the third grammatical paragraph of subsection
4.2.4 of the Lease with respect to latent defects (but not latent defects
arising out of or in connection with improvements undertaken by Tenant). Any and
all improvements to the Expansion Space shall be at the sole cost of Tenant,
except as otherwise provided in the Lease, and shall be undertaken in strict
conformity with the provisions of the Lease. Except as otherwise specifically
provided in this Fourth Amendment to Lease, all of the terms, covenants and
conditions of the Lease shall apply to the Expansion Space.

        7. Notwithstanding the foregoing, Landlord shall (a) remove panels on
the windows in the first floor computer room and (b) replace all blinds behind
such panels in the Fourth Expansion Space and return the wall to building
standard condition.

        8. As of the Fourth Expansion Space Commencement Date the Phase Two
Space mentioned in Article 1, Section 1.1 of the Lease consists of 0 square
feet.

        9. Tenant shall pay the additional security deposit of $18,303.01 set
forth in Section 1.1 of the Lease dated March 1, 1993.

        10. Landlord shall reimburse Tenant the sum of Four Thousand One Hundred
Fifty and 00/100 Dollars ($4,150.00) for the work described in Paragraph 7
hereof in the Third Expansion Space upon Tenant's submission of an invoice
therefore.

   83

        11. Except as set forth herein, the Lease shall remain unmodified and in
full force and effect.

        EXECUTED, as a sealed instrument as of the day and year first written
above.

                                  LANDLORD:

                                  CONNECTICUT GENERAL LIFE INSURANCE

                                  COMPANY


                                  By: CIGNA Investments, Inc.


                                       By: /s/ JAMES H. ROGERS
                                          --------------------------------------
                                          Name:   JAMES H. ROGERS
                                          Title:  MANAGING DIRECTOR


                                   TENANT:

                                   XYPLEX, INC.


                                        By: /s/ PETER J. NESBEDA
                                           -------------------------------------
                                           Name: Peter J. Nesbeda
                                           Title:

EX-10.37

   1
                                                                   EXHIBIT 10.37

                        2,900,000 Shares of Common Stock



                            MRV COMMUNICATIONS, INC.


                             UNDERWRITING AGREEMENT


                                                   September 18, 1997


BEAR, STEARNS & CO. INC.
VOLPE BROWN WHELAN & COMPANY, LLC
  as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York  10167

Ladies and Gentlemen:

      MRV Communications, Inc., a corporation organized and existing under the
laws of Delaware (the "Company"), and the selling stockholders of the Company
named in Schedule I hereto (collectively, the "Selling Stockholders") propose,
subject to the terms and conditions stated herein, to issue and sell to the
several underwriters named in Schedule II hereto (the "Underwriters") an
aggregate of 2,900,000 shares (the "Firm Shares") of common stock, par value
$.0034 per share, of the Company (the "Common Stock"), and, for the sole purpose
of covering over-allotments in connection with the sale of the Firm Shares, the
Company proposes to issue 


   2
and sell to the Underwriters, at the option of the Underwriters, up to an
additional 435,000 shares (the "Additional Shares") of Common Stock. The Firm
Shares and any Additional Shares purchased by the Underwriters are referred to
herein collectively as the "Shares". The Shares are more fully described in the
Registration Statement referred to below.

      1.    Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriters and the Selling
Stockholders that:

            (a)   The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and may have filed an
amendment or amendments thereto, on Form S-3 (No. 333-30035), for the
registration of the Shares under the Securities Act of 1933, as amended (the
"Act"). Such registration statement, including the prospectus, financial
statements and schedules, exhibits and all other documents filed as a part
thereof, as amended at the time of effectiveness of the registration statement,
including any information deemed to be a part thereof as of the time of
effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434 of the Rules
and Regulations of the Commission under the Act (the "Regulations"), is herein
called the "Registration Statement". Any registration statement filed pursuant
to Rule 462(b) of the Regulations is herein called the "462(b) Registration
Statement", and after such filing the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. The prospectus, in the form
first filed with the Commission pursuant to Rule 424(b) of the Regulations or
filed as part of the Registration Statement at the time of effectiveness if no
Rule 424(b) or Rule 434 filing is required, is herein called the "Prospectus".
The term "preliminary prospectus" as used herein means a preliminary prospectus
as described in Rule 430 of the Regula- 


                                       2
   3
tions. Any reference herein to the Registration Statement, any preliminary
prospectus or the Prospectus shall be deemed to refer to and include the
documents incorporated by reference therein pursuant to Item 12 of Form S-3 that
were filed under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), on or before the effective date of the Registration Statement, the date
of such preliminary prospectus or the date of the Prospectus, as the case may
be, and any reference herein to the terms "amend", "amendment" or "supplement"
with respect to the Registration Statement, any preliminary prospectus or the
Prospectus shall be deemed to refer to and include (i) the filing of any
document under the Exchange Act after the effective date of the Registration
Statement, the date of such preliminary prospectus or the date of the
Prospectus, as the case may be, that is incorporated therein by reference and
(ii) any such document so filed. Neither the Commission nor the Blue Sky or
securities authority of any jurisdiction has issued a stop order suspending the
effectiveness of the Registration Statement, preventing or suspending the use of
any preliminary prospectus, the Prospectus, the Registration Statement or any
amendment or supplement thereto, refusing to permit the effectiveness of the
Registration Statement or suspending the registration or qualification of the
Shares, nor, to the Company's knowledge, has any of such authorities instituted
or threatened to institute any proceedings with respect to a stop order.

            (b)   At the respective time of the effectiveness of the
Registration Statement or any 462(b) Registration Statement or the effectiveness
of any post-effective amendment to the Registration Statement, when the
Prospectus is first filed with the Commission pursuant to Rule 424(b) or Rule
434 of the Regulations, when any supplement to or amendment of the Prospectus is
filed with the Commission, when any document filed under the Exchange Act is
filed and at the Closing Date and 


                                       3
   4
the Additional Closing Date, if any (as hereinafter respectively defined), the
Registration Statement, any 462(b) Registration Statement and the Prospectus and
any amendments thereof and supplements thereto complied or will comply in all
material respects with the applicable provisions of the Act and the Regulations
and the Exchange Act and the respective rules and regulations thereunder and
does not or will not contain an untrue statement of a material fact and does not
or will not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein (i), in the case of the
Registration Statement, not misleading and (ii), in the case of the Prospectus,
in the light of the circumstances under which they were made, not misleading.
When any related preliminary prospectus was first filed with the Commission
(whether filed as part of the Registration Statement or any amendment thereto or
pursuant to Rule 424(a) of the Regulations) and when any amendment thereof or
supplement thereto was first filed with the Commission, such preliminary
prospectus and any amendments thereof and supplements thereto complied in all
material respects with the applicable provisions of the Act and the Regulations
and the Exchange Act and the respective rules and regulations thereunder and did
not contain an untrue statement of a material fact and did not omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. No representation and warranty is made in this subsection
(b), however, with respect to any information contained in or omitted from the
Registration Statement or the Prospectus or any related preliminary prospectus
or any amendment thereof or supplement thereto in reliance upon and in
conformity with information furnished in writing to the Company by or on behalf
of any Underwriter through you as herein stated expressly for use in connection
with the preparation thereof. 


                                       4
   5
If Rule 434 is used, the Company will comply with the requirements of Rule 434.

            (c)   Arthur Andersen LLP and Luboshitz, Kasierer & Co. Arthur
Andersen, who have certified the financial statements and supporting schedule
included in the Registration Statement, are independent public accountants, as
required by the Act and the Regulations.

            (d)   Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as set forth in
the Registration Statement and the Prospectus, there has been no material
adverse change or any development involving a prospective material adverse
change in the business, prospects, properties, operations, condition (financial
or other) or results of operations of the Company and its subsidiaries taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and since the date of the latest balance sheet presented in the
Registration Statement and the Prospectus, neither the Company nor any of its
subsidiaries has incurred or undertaken any liabilities or obligations, direct
or contingent, which are material to the Company and its subsidiaries taken as a
whole, except for liabilities or obligations which are reflected in the
Registration Statement and the Prospectus. The Company's only significant
subsidiary, within the meaning of Rule 405 of the Regulations, is NBase
Communications, Ltd., an Israeli corporation (the "Significant Subsidiary").

            (e)   This Agreement and the transactions contemplated hereby have
been duly and validly authorized by the Company, and this Agreement has been
duly and validly executed and delivered by the Company.

            (f)   The execution, delivery and performance of this Agreement and
the consummation of the 


                                       5
   6
transactions contemplated hereby do not and will not (i) conflict with or result
in a breach of any of the terms and provisions of, or constitute a default (or
an event which with notice or lapse of time, or both, would constitute a
default) under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, any agreement, instrument, franchise, license or
permit to which the Company or any of its subsidiaries is a party or by which
any of such corporations or their respective properties or assets may be bound
or (ii) violate or conflict with any provision of the charter or by-laws of the
Company or any of its subsidiaries or any judgment, decree, order, statute, rule
or regulation of any court or any public, governmental or regulatory agency or
body having jurisdiction over the Company or any of its subsidiaries or any of
their respective properties or assets. No consent, approval, authorization,
order, registration, filing, qualification, license or permit of or with any
court or any public, governmental or regulatory agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
respective properties or assets is required for the execution, delivery and
performance of this Agreement or the consummation of the transactions
contemplated hereby, including the issuance, sale and delivery of the Shares to
be issued, sold and delivered by the Company hereunder, except the registration
under the Act of the Shares and such consents, approvals, authorizations,
orders, registrations, filings, qualifications, licenses and permits as may be
required under state securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters.

            (g)   All of the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders hereunder) are duly
and validly authorized and issued, fully paid and nonassess- 


                                       6
   7
able, and none of such shares was issued in violation of or is now subject to
any preemptive or similar rights. The Shares to be issued and sold by the
Company hereunder, when issued, delivered and sold in accordance with this
Agreement, will be duly and validly issued and outstanding, fully paid and
nonassessable, and will not have been issued in violation of or be subject to
any preemptive or similar rights. The Company had, at June 30, 1997, authorized
and outstanding capital stock as set forth in the Registration Statement and the
Prospectus. The authorized capital stock of the Company, including the Common
Stock, the Firm Shares and the Additional Shares, conforms to the descriptions
thereof contained in the Registration Statement and the Prospectus. Except as
disclosed in or specifically contemplated by the Registration Statement and the
Prospectus and except for the Company's plan to adopt a new or amend its
existing stock option plan to increase the number of shares of Common Stock
underlying options to be granted under its stock option plan(s) to officers,
directors, employees and consultants of the Company, there are no outstanding
options, warrants or other rights calling for the issuance of, and no
commitments, obligations, plans or arrangements to issue, any shares of capital
stock of the Company or any security convertible into or exchangeable for
capital stock of the Company.

            (h)   Each of the Company and each of its subsidiaries has been duly
organized and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation. Each of the Company and each of its
subsidiaries is duly qualified and in good standing as a foreign corporation in
each jurisdiction in which the character or location of its properties (owned,
leased or licensed) or the nature or conduct of its business makes such
qualification necessary, except for those failures to be so qualified or in good
standing which will not in the aggregate have a material adverse effect on the
Company and its subsid-


                                       7
   8
iaries taken as a whole. Each of the Company and each of its subsidiaries has
all requisite power and authority, and all necessary consents, approvals,
authorizations, orders, registrations, qualifications, licenses and permits of
and from all public, regulatory or governmental agencies and bodies, to own,
lease and operate its properties and conduct its business as now being conducted
and as described in the Registration Statement and the Prospectus, and no such
consent, approval, authorization, order, registration, qualification, license or
permit contains a materially burdensome restriction not adequately disclosed in
the Registration Statement and the Prospectus. All of the outstanding shares of
capital stock of the Company's subsidiaries are duly and validly issued, fully
paid and nonassessable and are owned by the Company free and clear of any liens,
mortgages, pledges, charges, security interests, claims, encumbrances or other
defects in title whatsoever.

            (i)   Neither the Company nor any of its subsidiaries is in
violation of its charter or by-laws, as the case may be, or in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any material bond, debenture, note or other evidence of
indebtedness or in any material contract, indenture, mortgage, deed of trust,
loan or credit agreement, lease, joint venture or other agreement or instrument
to which the Company or any of its subsidiaries is a party or by which any of
their properties may be bound, which default or defaults would have in the
aggregate a material adverse effect on the Company and its subsidiaries taken as
a whole, or in violation of any law, order, rule, regulation, writ, injunction,
judgment or decree of any court or governmental agency or body, the violation of
which would have in the aggregate a material adverse effect on the Company and
its subsidiaries taken as a whole.


                                       8
   9
            (j)   Except as described in the Prospectus, there is no litigation
or governmental proceeding to which the Company or any of its subsidiaries is a
party or to which any property of the Company or any of its subsidiaries is
subject or which is pending or, to the knowledge of the Company, contemplated
against the Company or any of its subsidiaries which might result in any
material adverse change or any development involving a material adverse change
in the business, prospects, properties, operations, condition (financial or
other) or results of operations of the Company and its subsidiaries taken as a
whole or which is required to be disclosed in the Registration Statement and the
Prospectus.

            (k)   The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which constitutes or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the sale
or resale of the Shares.

            (l)   The financial statements, including the notes thereto, and
supporting schedule included in the Registration Statement and the Prospectus
present fairly the consolidated financial position of the Company and its
consolidated subsidiaries as of the dates indicated and the results of their
operations for the periods specified; except as otherwise stated in the
Registration Statement, said financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis; the supporting schedule included in the Registration Statement presents
fairly the information required to be stated therein; and the selected financial
data and the summary financial information included in the Registration
Statement and the Prospectus present fairly the information shown therein and
have been compiled on a basis consistent with that of the financial statements


                                       9
   10
included in the Registration Statement and the Prospectus.

            (m)   The Company and its subsidiaries have filed all federal,
state, local and foreign tax returns that have been required to be filed and
have paid all taxes shown thereon and all assessments received by them or any of
them to the extent that such taxes have become due and are not being contested
in good faith. Except as disclosed in the Registration Statement and the
Prospectus, there is no tax deficiency that has been or might reasonably be
expected to be asserted or threatened against the Company or any of its
subsidiaries.

            (n)   Neither the Company nor any of its subsidiaries owns any items
of real property that singly or in the aggregate is or are material to the
business of the Company and its subsidiaries taken as a whole. Each of the
Company and each of its subsidiaries has good and marketable title to all
personal property owned by it, in each case free and clear of all liens,
encumbrances and defects except such as are described or referred to in the
Prospectus or such as do not materially affect the value of such property and do
not interfere with the use made or proposed to be made of such property by the
Company or its subsidiaries, as the case may be. Any real property and buildings
held under lease by the Company or any of its subsidiaries are held under valid,
existing and enforceable leases with such exceptions as are not material and do
not interfere with the use made or proposed to be made of such property and
buildings by the Company or its subsidiaries, as the case may be.

            (o)   Each of the Company and each of its subsidiaries owns or
possesses adequate patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or 


                                       10
   11
procedures), trademarks, service marks, trade names and other intellectual
property (collectively, "Intellectual Property") necessary to carry on the
business it now operates, and, except as disclosed in the Prospectus, neither
the Company nor any of its subsidiaries has received any notice or is otherwise
aware of (i) any claim, action or demand of any person in the United States or
elsewhere or any proceeding in the United States or elsewhere, pending or
threatened, that (A) challenges the ownership interests of the Company or any of
its subsidiaries in any of the Intellectual Property or (B) alleges that any
product or service of the Company or any of its subsidiaries infringes or
misappropriates the Intellectual Property rights of others, which claim, action,
demand or proceeding (including without limitation infringement,
misappropriation and unfair competition), if the subject of any unfavorable
decision, ruling or finding, or invalidity or inadequacy could reasonably be
expected to have, in the aggregate with all other such claims, actions, demands
and proceedings, a material adverse effect on the Company and its subsidiaries
taken as a whole or (ii) any facts or circumstances that would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of its subsidiaries therein.

            (p)   No relationship, direct or indirect, exists between or among
the Company or any of its subsidiaries, on the one hand, and the directors,
officers, stockholders, customers or suppliers of the Company or any of its
subsidiaries, on the other hand, that is required by the Act to be described in
the Registration Statement and the Prospectus that is not so described.

            (q)   The Common Stock currently outstanding is listed, and
application has been made to list the Shares, on the Nasdaq National Market.


                                       11
   12
            (r)   Except for such rights as have been waived or satisfied, no
holder of securities of the Company has any rights to the registration of
securities of the Company because of the filing of the Registration Statement or
otherwise in connection with the sale of the Shares contemplated hereby.

            (s)   The Company is not, and upon consummation of the transactions
contemplated hereby will not be, subject to registration as an "investment
company" under the Investment Company Act of 1940.

            (t)   There are no existing or, to the knowledge of the Company,
threatened labor disputes with any employees of the Company or any of its
subsidiaries that are likely in the aggregate to have a material adverse effect
on the Company and its subsidiaries taken as a whole.

            (u)   The Company and each of its subsidiaries (i) is in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) has received all permits, licenses or
other approvals required of it under applicable Environmental Laws to conduct
its respective business and (iii) is in compliance with all terms and conditions
of any such permit, license or approval, except where such noncompliance,
failure to receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or approvals will
not in the aggregate have a material adverse effect on the Company and its
subsidiaries taken as a whole.

            (v)   Each employee benefit plan, within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
that 


                                       12
   13
is maintained, administered or contributed to by the Company or any of its
subsidiaries for employees or former employees of the Company or any of its
subsidiaries has been maintained in compliance with its respective terms and the
requirements of any applicable statutes, orders, rules and regulations,
including but not limited to ERISA and the Internal Revenue Code of 1986, as
amended, (the "Code"). No prohibited transaction, within the meaning of Section
406 of ERISA or Section 4975 of the Code, has occurred with respect to any such
plan, excluding transactions effected pursuant to a statutory or administrative
exemption. For each such plan that is subject to the funding rules of Section
412 of the Code or Section 302 of ERISA, no "accumulated funding deficiency", as
defined in Section 412 of the Code, has been incurred, whether or not waived,
and the fair market value of the assets of each such plan (excluding for these
purposes accrued but unpaid contributions) exceeded the present value of all
benefits accrued under such plan determined using reasonable actuarial
assumptions.

            (w)   The Company and each of its subsidiaries maintain a system of
internal accounting controls that, taken as a whole, are sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability;
(iii) access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.

            (x)   Each of the Company and each of its subsidiaries maintains
insurance of the types and in the amounts generally deemed adequate for its
respective 


                                       13
   14
business, including, without limitation, insurance covering real and personal
property owned or leased by it against theft, damage, destruction, acts of
vandalism and all other material risks customarily insured against, all of which
insurance is in full force and effect. Neither the Company nor any of its
subsidiaries has any reason to believe that it will not be able to renew
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
respective business.

            (y)   The conditions for use of Form S-3, as set forth in the
General Instructions thereto, have been satisfied.

            (z)   The documents incorporated or deemed to be incorporated by
reference in the Prospectus, at the time they were or hereafter are filed with
the Commission, complied and will comply in all material respects with the
requirements of the Exchange Act and the rules and regulations of the Commission
under the Exchange Act, and, when read together with the other information in
the Prospectus, at the time the Registration Statement and any amendments
thereto become effective and at the Closing Date and the Additional Closing
Date, if any, will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.

      2.    Representations and Warranties of the Selling Stockholders. Each
Selling Stockholder severally represents and warrants to the Underwriters that:

            (a)   Such Selling Stockholder is the lawful owner of the Shares to
be sold by such Selling Stockholder pursuant to this Agreement and has, and on



                                       14
   15
the Closing Date will have, good and clear title to such Shares, free of all
restrictions on transfer, liens, encumbrances, security interests and claims
whatsoever.

            (b)   Upon delivery of and payment for such Shares pursuant to this
Agreement, good and clear title to such Shares will pass to the Underwriters,
free of all restrictions on transfer, liens, encumbrances, security interests
and claims whatsoever.

            (c)   Such Selling Stockholder has, and on the Closing Date will
have, full legal right, power and authority to enter into this Agreement and the
Custody Agreement, dated as of the date hereof, between the Selling Stockholders
and American Stock Transfer & Trust Company, as Custodian (the "Custody
Agreement"), and to sell, assign, transfer and deliver such Shares in the manner
provided herein and therein, and this Agreement and the Custody Agreement have
been duly authorized, executed and delivered by or on behalf of such Selling
Stockholder and each of this Agreement and the Custody Agreement is a valid and
binding agreement of such Selling Stockholder enforceable against such Selling
Stockholder in accordance with its terms, except as rights to indemnity and
contribution hereunder may be limited by applicable law and except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles.

            (d)   The power of attorney signed by such Selling Stockholder
appointing Noam Lotan, Zeev Rav-Noy and Edmund Glazer, or any one of them, as
such Selling Stockholder's attorney-in-fact, to the extent set forth therein
with regard to the transactions contemplated hereby and by the Registration
Statement and the Custody Agreement, has been duly authorized, executed and
delivered by or on behalf of such Selling Stockholder and is 


                                       15
   16
a valid and binding instrument of such Selling Stockholder enforceable in
accordance with its terms, and, pursuant to such power of attorney, such Selling
Stockholder has authorized Noam Lotan, Zeev Rav-Noy and Edmund Glazer, or any
one of them, to execute and deliver this Agreement and any document necessary or
desirable in connection with the transactions contemplated hereby and to deliver
the Shares to be sold by such Selling Stockholder pursuant to this Agreement.

            (e)   Such Selling Stockholder has not taken, and will not take,
directly or indirectly, any action designed to, or which might reasonably be
expected to, cause or result in stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the Shares
pursuant to the distribution contemplated by this Agreement, and other than as
permitted by the Act, such Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.

            (f)   The execution, delivery and performance of this Agreement by
such Selling Stockholder, compliance by such Selling Stockholder with all the
provisions hereof and the consummation of the transactions contemplated hereby
will not require any consent, approval, authorization or other order of any
court, regulatory body, administrative agency or other governmental body (except
as such may be required under the Act, state securities laws or Blue Sky laws)
and will not conflict with or constitute a breach of any of the terms or
provisions of, or a default under, any agreement, indenture or other instrument
to which such Selling Stockholder is a party or by which such Selling
Stockholder or property of such Selling Stockholder is bound, or violate or
conflict with any laws, administrative regulation or ruling or court decree
applicable to 


                                       16
   17
such Selling Stockholder or property of such Selling Stockholder.

            (g)   All information furnished by or on behalf of such Selling
Stockholder relating to such Selling Stockholder and the Selling Stockholder's
Shares that is set forth in the Registration Statement and the Prospectus is,
and at the time the Registration Statement became or becomes, as the case may
be, effective and at all times subsequent thereto up to and on the Closing Date
(as hereafter defined) was or will be, true, correct and complete, and does not,
and at the time the Registration Statement became or becomes, as the case may
be, effective and at all times subsequent thereto up to and on the Closing Date,
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.

            (h)   Neither such Selling Stockholder nor any of such Selling
Stockholder's affiliates directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
or had any other association with (within the meaning of Article I of the Bylaws
of the National Association of Securities Dealers, Inc. (the "NASD")), any
member firm of the NASD.

            (i)   At any time during the period described in Section 5(b)
hereof, if there is any change in the information referred to in Section 2(g)
above, such Selling Stockholder will immediately notify you of such change.

      3.    Purchase, Sale and Delivery of the Shares.


                                       17
   18
            (a)   On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company and the Selling Stockholders agree to issue and sell, as
applicable, to the Underwriters the number of Firm Shares set forth opposite
their respective names in Schedule I hereto, and the Underwriters, severally and
not jointly, agree to purchase from the Company and the Selling Stockholders, at
a purchase price per share of $33.784, the number of Firm Shares set forth
opposite the respective names of the Underwriters in Schedule II hereto, plus
any additional number of Shares which they may individually become obligated to
purchase pursuant to the provisions of Section 10 hereof.

            (b)   Payment of the purchase price for the Firm Shares shall be
made at the offices of Freshman, Marantz, Orlanski, Cooper & Klein, a law
corporation, Eighth Floor, East Tower, 9100 Wilshire Boulevard, Beverly Hills,
California, or at such other place as shall be agreed upon by you, the Company
and the Selling Stockholders, at 7:00 A.M., Pacific Daylight Time, on the third
or fourth Business Day (as permitted under Rule 15c6-1 under the Exchange Act)
(unless postponed in accordance with the provisions of Section 10 hereof)
following the date of the effectiveness of the Registration Statement (or, if
the Company has elected to rely upon Rule 430A of the Regulations, the third or
fourth Business Day (as permitted under Rule 15c6-1 under the Exchange Act)
after the determination of the public offering price of the Shares), or such
other time not later than ten Business Days after such date as shall be agreed
upon by you, the Company and the Selling Stockholders (such time and date of
payment and delivery being herein called the "Closing Date"). As used herein,
the term "Business Day" means any day other than a day on which banks are
permitted or required to be closed in New York City. Payment shall be made by
wire 

                                       18
   19
transfer in same day funds against delivery to you at the offices of Bear,
Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167 for the respective
accounts of the Underwriters of certificates for the Shares to be purchased by
them. Certificates for the Shares shall be registered in such name or names and
in such authorized denominations as you may request in writing at least two full
Business Days prior to the Closing Date. The Company and the Selling
Stockholders shall permit you to examine and package such certificates for
delivery at least one full Business Day prior to the Closing Date.

            (c)   In addition, the Company hereby grants to the Underwriters a
nontransferable option to purchase up to 435,000 Additional Shares at the same
purchase price per share to be paid by the Underwriters to the Company and the
Selling Stockholders for the Firm Shares as set forth in this Section 3, for the
sole purpose of covering over-allotments in the sale of Firm Shares by the
Underwriters. This option may be exercised at any time on or before the
thirtieth day following the date of the Prospectus, by written notice by you to
the Company. Such notice shall set forth the aggregate number of Additional
Shares as to which the option is being exercised and the date and time, as
reasonably determined by you, when the Additional Shares are to be delivered
(such date and time being herein sometimes referred to as the "Additional
Closing Date"); provided, however, that the Additional Closing Date shall not be
earlier than the Closing Date or earlier than the second full Business Day after
the date on which the option shall have been exercised nor later than the eighth
full Business Day after the date on which the option shall have been exercised
(unless such time and date are postponed in accordance with the provisions of
Section 10 hereof). Certificates for the Additional Shares shall be registered
in such name or names and in such authorized denominations as you may request in
writing at 


                                       19
   20
least two full Business Days prior to the Additional Closing Date. The Company
shall permit you to examine and package such certificates for delivery at least
one full Business Day prior to the Additional Closing Date.

      The number of Additional Shares to be sold to each Underwriter shall be
the number which bears the same ratio to the aggregate number of Additional
Shares being purchased as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule II hereto (or such number increased as set forth
in Section 10 hereof) bears to 2,900,000, subject, however, to such adjustments
to eliminate any fractional shares as you in your sole discretion shall make.

      Payment of the purchase price for the Additional Shares shall be made to
the Company by wire transfer in same day funds at the offices of Freshman,
Marantz, Orlanski, Cooper & Klein, a law corporation, Eighth Floor, East Tower,
9100 Wilshire Boulevard, Beverly Hills, California, or at such other place as
shall be agreed upon by you and the Company, against delivery to you at the
offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167
for the respective accounts of the Underwriters of certificates for the
Additional Shares to be purchased by them.

      4.    Offering. Upon your authorization of the release of the Firm Shares,
the Underwriters propose to offer the Shares for sale to the public upon the
terms set forth in the Prospectus.

      5.    Covenants of the Company. The Company covenants and agrees with the
Underwriters that:

            (a)   If the Registration Statement has not yet been declared
effective, the Company will use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly 


                                       20
   21
as possible, and if Rule 430A is used or the filing of the Prospectus is
otherwise required under Rule 424(b) or Rule 434, the Company will file the
Prospectus (properly completed if Rule 430A has been used) pursuant to Rule
424(b) or Rule 434 within the prescribed time period and will provide evidence
satisfactory to you of such timely filing. If the Company elects to rely on Rule
434, the Company will prepare and file a term sheet that complies with the
requirements of Rule 434.

            The Company will notify you immediately (and, if requested by you,
will confirm such notice in writing) (i) when the Registration Statement and any
amendments thereto become effective, (ii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iii) of the mailing or the delivery to the
Commission for filing of any amendment of or supplement to the Registration
Statement or the Prospectus, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or any
post-effective amendment thereto or of the initiation, or the threatening, of
any proceedings therefor, (v) of the receipt of any comments from the
Commission, and (vi) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for that
purpose. If the Commission shall propose or enter a stop order at any time, the
Company will make every reasonable effort to prevent the issuance of any such
stop order and, if issued, to obtain the lifting of such order as soon as
possible. The Company will not file any amendment to the Registration Statement,
any filing under Rule 462(b) of the Regulations, or any amendment of or
supplement to the Prospectus (including the prospectus required to be filed
pursuant to Rule 424(b) or Rule 434 of the Regulations that differs from the
prospectus on file at the time of the 


                                       21
   22
effectiveness of the Registration Statement before or after the effective date
of the Registration Statement or file any document under the Exchange Act if
such document would be deemed to be incorporated by reference into the
Prospectus to which you shall reasonably object in writing after being timely
furnished in advance a copy thereof.

            (b)   If at any time when a prospectus relating to the Shares is
required to be delivered under the Act any event shall have occurred as a result
of which the Prospectus as then amended or supplemented would, in the judgment
of the Underwriters or the Company, include an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it shall be necessary at any
time to amend or supplement the Prospectus or Registration Statement to comply
with the Act or the Regulations, or to file under the Exchange Act so as to
comply therewith any document incorporated by reference in the Registration
Statement or the Prospectus or in any amendment thereof or supplement thereto,
the Company will notify you promptly and prepare and file with the Commission an
appropriate amendment or supplement (in form and substance satisfactory to you)
which will correct such statement or omission or which will effect such
compliance and will use its best efforts to have any amendment to the
Registration Statement declared effective as soon as possible.

            (c)   The Company will promptly deliver to you three signed copies
of the Registration Statement, including exhibits and all documents incorporated
by reference therein and all amendments thereto, and the Company will promptly
deliver to each of the Underwriters such number of copies of any preliminary
prospectus, the Prospectus, the Registration Statement, all amend-


                                       22
   23
ments of and supplements to such documents, if any, and all documents
incorporated by reference in the Registration Statement and Prospectus or any
amendment thereof or supplement thereto, without exhibits, as you may reasonably
request.

            (d)   The Company will endeavor in good faith, in cooperation with
you, at or prior to the time of effectiveness of the Registration Statement, to
qualify the Shares for offering and sale under the securities laws relating to
the offering or sale of the Shares of such jurisdictions as you may designate
and to maintain such qualification in effect for so long as required for the
distribution thereof; except that in no event shall the Company be obligated in
connection therewith to qualify as a foreign corporation or to execute a general
consent to service of process.

            (e)   The Company will make generally available (within the meaning
of Section 11(a) of the Act) to its security holders and to you as soon as
practicable, but not later than 45 days after the end of its fiscal quarter in
which the first anniversary date of the effective date of the Registration
Statement occurs, an earning statement (in form complying with the provisions of
Rule 158 of the Regulations) covering a period of at least twelve consecutive
months beginning after the effective date of the Registration Statement.

            (f)   Except for shares of Common Stock issuable upon exercise of
warrants or options outstanding on the date hereof or options granted under its
stock option plans, during the period of 90 days from the date of the
Prospectus, the Company will not, without the prior written consent of Bear,
Stearns & Co. Inc., directly or indirectly, sell, offer or agree to sell, grant
any option for the sale of, or otherwise dispose of, whether directly or
synthetically, any shares of Common Stock or any securities convertible 


                                       23
   24
into, or exchangeable or exercisable for Common Stock, and the Company will
obtain the undertaking of each of its executive officers, within the meaning of
Rule 405 of the Regulations (each, an "Executive Officer") and directors who is
not a Selling Stockholder not to engage in any of the aforementioned
transactions on their own behalf.

            (g)   During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its stockholders; and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or any
national securities exchange.

            (h)   The Company will apply the proceeds from the sale of the
Shares as set forth under "Use of Proceeds" in the Prospectus.

            (i)   The Company will use its best efforts to cause the Shares to
be listed on the Nasdaq National Market and to maintain such listing so long as
any of the Shares are outstanding.

            (j)   The Company, during the period when the Prospectus is required
to be delivered under the Act or the Exchange Act, will file all documents
required to be filed with the Commission pursuant to Section 13, 14 or 15 of the
Exchange Act within the time periods required by the Exchange Act and the rules
and regulations thereunder.

            (k)   The Company will use its best efforts to do and perform all
things required or necessary to be done and performed under this Agreement by
the Company prior to or after the Closing Date or any Additional Closing Date,
as the case may be, and to satisfy all conditions precedent to the delivery of
the Shares.


                                       24
   25
      6.    Payment of Expenses. Whether or not the transactions contemplated by
this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company and the Selling Stockholders hereunder, including
those in connection with (i) preparing, printing, duplicating, filing and
distributing the Registration Statement, as originally filed and all amendments
thereof (including all exhibits thereto), any preliminary prospectus, the
Prospectus and any amendments or supplements thereto (including, without
limitation, fees and expenses of the Company's accountants and counsel), the
underwriting documents (including this Agreement and the Master Agreement among
Underwriters and the Master Selling Agreement) and all other documents related
to the public offering of the Shares (including those supplied to the
Underwriters in quantities as hereinabove stated), (ii) the issuance, transfer
and delivery of the Shares to the Underwriters, including any transfer or other
taxes payable thereon, (iii) listing of the Shares on the Nasdaq National
Market, (iv) filing fees of the Commission and the National Association of
Securities Dealers, Inc., (v) the cost of printing certificates representing the
Shares and (vi) the cost and charges of any transfer agent or registrar. Any
additional expenses incurred as a result of the sale of the Shares by the
Selling Stockholders will be borne collectively by the Company and the Selling
Stockholders. The provisions of this Section 6 are intended to relieve the
Underwriters from the payment of the expenses and costs that the Selling
Stockholders and the Company hereby agree to pay, but shall not affect any
agreement that the Selling Stockholders and the Company may make, or may have
made, for the sharing of expenses and costs. Any such agreement shall not impair
the respective obligations of the Company and the Selling Stockholders hereunder
to the several Underwriters.


                                       25
   26
      7.    Conditions of Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company herein contained, as of the date hereof and as of the
Closing Date (for purposes of this Section 7, "Closing Date" shall refer to the
Closing Date for the Firm Shares and any Additional Closing Date, if different,
for the Additional Shares), to the absence from any certificates, opinions,
written statements or letters furnished to you or to Skadden, Arps, Slate,
Meagher & Flom LLP ("Underwriters' Counsel") pursuant to this Section 7 of any
misstatement or omission, to the performance by the Company and the Selling
Stockholders of their respective obligations hereunder, and to the following
additional conditions:

            (a)   The Registration Statement, including any Rule 462(b)
Registration Statement, shall have become effective and all necessary approvals
of the Nasdaq National Market shall have been received not later than 5:30 P.M.,
New York City time, on the date of this Agreement, or at such later time and
date as shall have been consented to in writing by you; if the Company shall
have elected to rely upon Rule 430A or Rule 434 of the Regulations, the
Prospectus shall have been filed with the Commission in a timely fashion in
accordance with Section 5(a) hereof; and at or prior to the Closing Date, no
stop order suspending the effectiveness of the Registration Statement or any
post-effective amendment thereof shall have been issued and no proceedings
therefor shall have been initiated or threatened by the Commission.

            (b)   All the representations and warranties of the Selling
Stockholders contained in this Agreement shall be true and correct on the
Closing Date with the same force and effect as if made on and as of 


                                       26
   27
the Closing Date, and you shall have received a certificate to such effect,
dated the Closing Date, from each Selling Stockholder or his attorney-in-fact.

            (c)   At the Closing Date, you shall have received the opinion of
Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, counsel for the
Company and the Selling Stockholders, dated the Closing Date, addressed to the
Underwriters and in form and substance reasonably satisfactory to Underwriters'
Counsel, to the effect that:

                  (i)   The Company has been duly incorporated and is validly
      existing as a corporation in good standing under the laws of the State of
      Delaware. The Company is duly qualified and in good standing as a foreign
      corporation in each jurisdiction in which the character or location of its
      properties (owned, leased or licensed) or the nature or conduct of its
      business makes such qualification necessary, except for those failures to
      be so qualified or in good standing which will not in the aggregate have a
      material adverse effect on the Company and its subsidiaries taken as a
      whole. The Company has all requisite corporate authority to own, lease and
      license its properties and conduct its business as now being conducted and
      as described in the Registration Statement and the Prospectus.

                  (ii)  The Company had, at June 30, 1997, authorized capital
      stock as set forth in the Registration Statement and the Prospectus. All
      of the outstanding shares of capital stock of the Company (including the
      Shares to be sold by the Selling Stockholders) are duly and validly
      authorized and issued, 


                                       27
   28
      are fully paid and nonassessable, and none of such shares was issued in
      violation of or is now subject to any preemptive or similar rights. The
      Shares have been duly and validly authorized and, when delivered by the
      Company and the Selling Stockholders in accordance with this Agreement,
      will be duly and validly issued, fully paid and nonassessable and will not
      have been issued in violation of or be subject to any preemptive or
      similar rights. The Common Stock conforms to the description thereof
      contained in the Registration Statement and the Prospectus.

                  (iii) This Agreement has been duly and validly authorized,
      executed and delivered by the Company and each of the Selling Stockholders
      and is a valid and binding agreement of the Company and each Selling
      Stockholder enforceable in accordance with its terms.

                  (iv)  To such counsel's knowledge, there is no litigation or
      governmental or other action, suit, proceeding or investigation before any
      court or before or by any public, regulatory or governmental agency or
      body pending or, to such counsel's knowledge, threatened against, or
      involving the respective properties or businesses of, the Company, any of
      its subsidiaries or any Selling Shareholder, of a character required to be
      disclosed in the Registration Statement or the Prospectus by the Act or
      the Regulations, other than those disclosed therein.

                  (v)   The execution, delivery, and performance of this
      Agreement and the consummation of the transactions contemplated 


                                       28
   29
      hereby by the Company (other than the performance of the Company's
      indemnification obligations, hereunder, concerning which no opinion need
      be expressed) do not and will not (A) conflict with or result in a breach
      of any of the terms and provisions of, or constitute a default (or an
      event which with notice or lapse of time, or both, would constitute a
      default) under, or result in the creation or imposition of any lien,
      charge or encumbrance upon any property or assets of the Company pursuant
      to, any agreement, instrument, franchise, license or permit known to such
      counsel to which the Company is a party or by which the Company may be
      bound and which is material to the Company and its subsidiaries taken as a
      whole, (B) violate or conflict with any provision of the charter or
      by-laws of the Company or, to the knowledge of such counsel, any judgment,
      decree, order, statute, rule or regulation of any court or any public,
      governmental or regulatory agency or body of the State of California or
      the State of Delaware having jurisdiction over the Company the result of
      which would have a material adverse effect on the Company and its
      subsidiaries taken as a whole. No consent, approval, authorization, order,
      registration, filing, qualification, license or permit of or with any
      court or any public, governmental, or regulatory agency or body of the
      State of Delaware or the State of California having jurisdiction over the
      Company is required for the execution, delivery and performance of this
      Agreement or the consummation of the transactions contemplated hereby,
      including the issuance, sale and delivery of the Shares, except (1) such
      consents, approvals, authorizations, orders, registrations, filings,
      qualifications, licenses and permits 


                                       29
   30
      as may be required under state securities or Blue Sky laws in connection
      with the purchase and distribution of the Shares by the Underwriters (as
      to which such counsel need express no opinion) and (2) such as have been
      made or obtained under the Act.

                  (vi)  The Company is not an "investment company", as such term
      is defined in the Investment Company Act of 1940.

                  (vii) The Registration Statement and the Prospectus, and each
      amendment or supplement thereto (other than the financial statements and
      schedule and financial data derived therefrom as to which such counsel
      need express no opinion), as of the effective date of the Registration
      Statement, complied as to form in all material respects with the
      requirements of the Act and the applicable Regulations; and each of the
      documents incorporated by reference into the Registration Statement (other
      than the financial statements and schedule and the financial data derived
      therefrom as to which such counsel need express no opinion) complied when
      filed pursuant to the Exchange Act as to form in all material respects
      with the requirements of the Act and the Regulations and the Exchange Act
      and the applicable rules and regulations of the Commission thereunder.

                  (viii) Based upon telephonic confirmation to such counsel by a
      member of the staff of the Commission, the Registration Statement is
      effective under the Act, all filings required by Rule 424(b) of the
      Regulations have been made and, to the knowledge of such counsel, no stop
      order suspending the 


                                       30
   31
      effectiveness of the Registration Statement or any post-effective
      amendment thereof or supplement thereto has been issued and no proceedings
      therefor have been initiated or threatened by the Commission.

                  (ix)  The execution, delivery and performance of this
      Agreement by the Selling Stockholders will not contravene any agreement or
      other instrument binding upon any Selling Stockholder known to such
      counsel or any judgment, order or decree known to such counsel of any
      governmental body, agency or court of the State of Delaware or the State
      of California having jurisdiction over any Selling Stockholder, and no
      consent, approval, authorization or order of, or qualification with, any
      governmental body or agency of the State of Delaware of the State of
      California is required for the performance by any Selling Stockholder of
      his obligations under this Agreement or the Custody Agreement.

                  (x)   The statements in the Registration Statement and the
      Prospectus set forth (A) in the first two paragraphs under the captions
      "Business -- Facilities", (B) under the captions "Management -- Employment
      Agreements, -- Stock Option Plan, -- Limitation on Liability and
      Indemnification Matters" and "Description of Capital Stock" and (C) in
      Item 15 of Part II of the Registration Statement, to the extent such
      statements constitute a matter of law or legal conclusion, have been
      reviewed by such counsel and are correct in all material respects.


                                       31
   32
                  (xi)  The form of certificate used to evidence the Common
      Stock complies in all material respects with all applicable statutory
      requirements, with any applicable requirements of the certificate of
      incorporation and by-laws of the Company and the requirements of the
      Nasdaq National Market.

                  (xii) The Custody Agreement has been duly authorized, executed
      and delivered by each Selling Stockholder and is a valid and binding
      agreement of each Selling Stockholder enforceable in accordance with its
      terms.

                  (xiii) Each Selling Stockholder has full legal right, power
      and authority, and any approval required by law (other than any approval
      imposed by the applicable state securities and Blue Sky laws), to sell,
      assign, transfer and deliver the Shares to be sold by such Selling
      Stockholder in the manner provided in this Agreement and the Custody
      Agreement.

                  (xiv) Each Selling Stockholder has full right, power and
      authority to enter into and to perform his obligations under this
      Agreement and to sell, transfer, assign and deliver the Shares to be sold
      by such Selling Stockholder hereunder. Upon the delivery of and payment
      for the Shares as contemplated in this Agreement, each of the Underwriters
      will receive valid and marketable title to the Shares purchased by it from
      such Selling Stockholder, free and clear of any pledge, lien, security
      interest, encumbrance, claim or equitable interest. In rendering such
      opinion, such counsel may assume that the Under- 


                                       32
   33
      writers are without notice of any defect in the title of the Shares being
      purchased from the Selling Stockholders.

                  (xv)  The power of attorney signed by each Selling Stockholder
      appointing Noam Lotan, Zeev Rav-Noy and Edmund Glazer, or any of them, as
      such Selling Stockholder's attorney-in-fact, to the extent set forth
      therein with regard to the transactions contemplated hereby and by the
      Registration Statement, has been duly authorized, executed and delivered
      by such Selling Stockholder and is the valid and binding instrument of
      such Selling Stockholder enforceable in accordance with its terms.

                  (xvi) In addition, such opinion shall also contain a statement
      that such counsel has participated in conferences with officers and
      representatives of the Company, representatives of the independent public
      accountants for the Company and the Underwriters at which the contents of
      the Registration Statement and the Prospectus and related matters were
      discussed and, although such counsel is not passing upon, and does not
      assume any responsibility for, the accuracy, completeness or fairness of
      the statements contained in the Registration Statement or Prospectus, on
      the basis of the foregoing no facts have come to the attention of such
      counsel which would lead such counsel to believe that either the
      Registration Statement at the time it became effective (including the
      information deemed to be part of the Registration Statement at the time of
      effectiveness pursuant to Rule 430A(b) or Rule 434, if applicable), or any
      amendment thereof made prior to the Closing Date as of 


                                       33
   34
      the date of such amendment, contained an untrue statement of a material
      fact or omitted to state any material fact required to be stated therein
      or necessary to make the statements therein not misleading or that the
      Prospectus as of its date (or any amendment thereof or supplement thereto
      made prior to the Closing Date as of the date of such amendment or
      supplement) and as of the Closing Date contained or contains an untrue
      statement of a material fact or omitted or omits to state any material
      fact required to be stated therein or necessary to make the statements
      therein, in the light of the circumstances under which they were made, not
      misleading (it being understood that such counsel need express no belief
      or opinion with respect to the financial statements and schedules and
      other financial data included or incorporated by reference therein).

            In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance reasonably satisfactory to Underwriters'
Counsel) of other counsel reasonably acceptable to Underwriters' Counsel,
familiar with the applicable laws; (B) as to matters of fact, to the extent they
deem proper, on certificates of responsible officers of the Company and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company, provided that copies of any such statements or
certificates shall be delivered to Underwriters' Counsel. The opinion of such
counsel for the Company shall state that the opinion of any such 


                                       34
   35
other counsel is in form satisfactory to such counsel and, in their opinion, you
and they are justified in relying thereon.

            (d)   At the Closing Date, you shall have received the opinion of
Eckhouse, Talmor, Shilo & Dichno, counsel for NBase Communications, Ltd. and
NBase Fibronics, Ltd., each an Israeli corporation (collectively, the "Israeli
Subsidiaries"), dated the Closing Date, addressed to the Underwriters and in
form and substance reasonably satisfactory to Underwriters' Counsel, to the
effect that:

                  (i)   Each of the Israeli Subsidiaries has been duly organized
      and is validly existing as a corporation in good standing under the laws
      of Israel. Each of the Israel Subsidiaries is duly qualified and in good
      standing as a foreign corporation in each jurisdiction in which the
      character or location of its properties (owned, leased or licensed) or the
      nature or conduct of its business makes such qualification necessary,
      except for those failures to be so qualified or in good standing which
      will not in the aggregate have a material adverse effect on the Company
      and its subsidiaries taken as a whole. Each of the Israel Subsidiaries has
      all requisite corporate authority to own, lease and license its properties
      and conduct its business as now being conducted. All of the outstanding
      shares of capital stock of each of the Israel Subsidiaries have been duly
      and validly issued, are fully paid and nonassessable and are owned
      directly or indirectly by the Company, free and clear of any lien,
      encumbrance, claim, security interest, restriction on transfer,
      stockholders' agreement, voting trust or other defect or title whatso-


                                       35
   36
      ever, and none of such shares was issued in violation of or is now subject
      to any preemptive or similar rights.

                  (ii)  There is no litigation or governmental or other action,
      suit, proceeding or investigation before any court or before or by any
      public, regulatory or governmental agency or body pending or, to the best
      of such counsel's knowledge, threatened against, or involving the
      properties or businesses of the Israel Subsidiaries, which is of a
      character required to be disclosed in the Registration Statement and the
      Prospectus which has not been properly disclosed therein.

                  (iii) The execution, delivery, and performance of the
      Underwriting Agreement and the consummation of the transactions
      contemplated in the Underwriting Agreement by the Company do not and will
      not (A) conflict with or result in a breach of any of the terms and
      provisions of, or constitute a default (or an event which with notice or
      lapse of time, or both, would constitute a default) under, or result in
      the creation or imposition of any lien, charge or encumbrance upon any
      property or assets of the Israel Subsidiaries pursuant to, any agreement,
      instrument, franchise, license or permit known to such counsel to which
      either of the Israel Subsidiaries is a party or by either of the Israel
      Subsidiaries or its properties or assets may be bound or (B) violate or
      conflict with any provision of the charter or by-laws of either of the
      Israel Subsidiaries, to the best knowledge of such counsel, any judgment,
      decree, order, statute, rule or regulation of any court or any public,
      governmental or regulatory agency or body hav-


                                       36
   37
      ing jurisdiction over the Israel Subsidiaries, or any of its properties or
      assets. No consent, approval, authorization, order, registration, filing,
      qualification, license or permit of or with any court or any public,
      governmental, or regulatory agency or body having jurisdiction over the
      Israel Subsidiaries or any of its properties or assets is required for the
      execution, delivery and performance of the Underwriting Agreement or the
      consummation of the transactions contemplated thereby, including the
      issuance, sale and delivery of the Shares, except (1) such consents,
      approvals, authorizations, orders, registrations, filings, qualifications,
      licenses and permits as may be required under state securities or Blue Sky
      laws in connection with the purchase and distribution of the Shares by the
      Underwriters (as to which such counsel need express no opinion) and (2)
      such as have been made or obtained under the Act.

            (e)   All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as hereby contemplated shall be reasonably
satisfactory in form and substance to you and to Underwriters' Counsel, and the
Underwriters shall have received from said Underwriters' Counsel a favorable
opinion, dated as of the Closing Date, with respect to the issuance and sale of
the Shares, the Registration Statement and the Prospectus and such other related
matters as you may reasonably require, and the Company and the Selling
Stockholders shall have furnished to Underwriters' Counsel such documents as
they may reasonably request for the purpose of enabling them to pass upon such
matters.

            (f)   At the Closing Date you shall have received a certificate of
the Chief Executive Officer 


                                       37
   38
and Chief Financial Officer of the Company, dated the Closing Date, to the
effect that (i) the condition set forth in subsection (a) of this Section 7 has
been satisfied, (ii) as of the date hereof and as of the Closing Date, the
representations and warranties of the Company set forth in Section 1 hereof are
accurate, (iii) as of the Closing Date, the obligations of the Company to be
performed hereunder on or prior thereto have been duly performed and (iv)
subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus, the Company and its subsidiaries have
not sustained any material loss or interference with their respective businesses
or properties from fire, flood, hurricane, accident or other calamity, whether
or not covered by insurance, or from any labor dispute or any legal or
governmental proceeding, and there has not been any material adverse change, or
any development involving a material adverse change, in the business prospects,
properties, operations, condition (financial or otherwise), or results of
operations of the Company and its subsidiaries taken as a whole, except in each
case as described in or contemplated by the Prospectus.

            (g)   At the time this Agreement is executed and at the Closing
Date, you shall have received a letter from Arthur Andersen LLP, independent
public accountants for the Company, dated, respectively, as of the date of this
Agreement and as of the Closing Date addressed to the Underwriters and in form
and substance satisfactory to you, stating that: (i) they are independent
certified public accountants with respect to the Company within the meaning of
the Act and the Regulations and that the answer to Item 10 of the Registration
Statement is correct insofar as it relates to them; (ii) in their opinion, the
financial statements and schedules of the Company included in and incorporated
by reference in the Registration Statement and the Prospectus and covered by
their opinion therein comply as to form in 


                                       38
   39
all material respects with the applicable accounting requirements of the Act and
the Exchange Act and the applicable published rules and regulations of the
Commission thereunder; (iii) on the basis of procedures consisting of a reading
of the latest available unaudited interim consolidated financial statements of
the Company and its subsidiaries, a reading of the minutes of meetings and
consents of the stockholders and boards of directors of the Company and its
subsidiaries and the committees of such boards subsequent to December 31, 1996,
inquiries of officers and other employees of the Company and its subsidiaries
who have responsibility for financial and accounting matters of the Company and
its subsidiaries with respect to transactions and events subsequent to December
31, 1996 and other specified procedures and inquiries to a date not more than
five days prior to the date of such letter, nothing has come to their attention
that would cause them to believe that: (A) the unaudited consolidated financial
statements and schedules of the Company presented in the Registration Statement
and the Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Act and, if applicable, the Exchange
Act and the applicable published rules and regulations of the Commission
thereunder or that such unaudited consolidated financial statements are not
fairly presented in conformity with generally accepted accounting principles,
except to the extent certain footnote disclosures have been omitted in
accordance with applicable rules of the Commission under the Exchange Act,
applied on a basis substantially consistent with that of the audited
consolidated financial statements incorporated by reference in the Registration
Statement and the Prospectus; (B) with respect to the period subsequent to
December 31, 1996, there were, as of the date of the most recent available
monthly consolidated financial statements of the Company and its subsidiaries,
if any, and as of a specified date not more than five days prior to the date of
such letter, any changes in the capital 


                                       39
   40
stock or long-term indebtedness of the Company or any decrease in the net
current assets or stockholders' equity of the Company, in each case as compared
with the amounts shown in the most recent balance sheet presented in the
Registration Statement and the Prospectus, except for changes or decreases which
the Registration Statement and the Prospectus disclose have occurred or may
occur or which are set forth in such letter; or (C) that during the period from
January 1, 1997 to the date of the most recent available monthly consolidated
financial statements of the Company and its subsidiaries, if any, and to a
specified date not more than five days prior to the date of such letter, there
was any decrease, as compared with the corresponding period in the prior fiscal
year, in total revenues, or total or per share net income, except for decreases
which the Registration Statement and the Prospectus disclose have occurred or
may occur or which are set forth in such letter; and (iv) they have compared
specific dollar amounts, numbers of shares, percentages of revenues and
earnings, and other financial information pertaining to the Company and its
subsidiaries set forth in the Registration Statement and the Prospectus, which
have been specified by you prior to the date of this Agreement, to the extent
that such amounts, numbers, percentages and information may be derived from the
general accounting and financial records of the Company and its subsidiaries or
from schedules furnished by the Company, and excluding any questions requiring
an interpretation by legal counsel, with the results obtained from the
application of specified readings, inquiries, and other appropriate procedures
specified by you set forth in such letter, and found them to be in agreement.

            (h)   At the Closing Date you shall have received a certificate of
each Selling Stockholder who is not a U.S. Person to the effect that such
Selling Stockholder is not a U.S. Person (as defined under applicable U.S.
federal tax legislation), which certifi-


                                       40
   41
cate may be in the form of a properly completed and executed United States
Treasury Department Form W-8 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).

            (i)   Prior to the Closing Date, the Company and the Selling
Stockholders shall have furnished to you such further information, certificates
and documents as you may reasonably request.

            (j)   You shall have received from each person who is a director or
Executive Officer of the Company (excluding Selling Stockholders) an agreement
to the effect that such person will not, without the prior written consent of
Bear, Stearns & Co. Inc., directly or indirectly, sell, offer or agree to sell,
grant any option for the sale of, or otherwise dispose of or transfer, whether
directly or synthetically, any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for Common Stock (or any
options or rights to purchase or acquire, shares of Common Stock or shares of
Common Stock issuable upon the exercise of options) for a period of 90 days
after the date of the Prospectus.

            (k)   At the Closing Date, the Shares shall have been approved for
listing on the Nasdaq National Market.

      If any of the conditions specified in this Section 7 shall not have been
fulfilled when and as required by this Agreement, or if any of the certificates,
opinions, written statements or letters furnished to you or to Underwriters'
Counsel pursuant to this Section 7 shall not be in all material respects
reasonably satisfactory in form and substance to you and to Underwriters'
Counsel, all obligations of the 


                                       41
   42
Underwriters hereunder may be cancelled by you on, or at any time prior to, the
Closing Date and the obligations of the Underwriters to purchase the Additional
Shares may be cancelled by you on, or at any time prior to, the Additional
Closing Date. Notice of such cancellation shall be given to the Company in
writing or by telephone, facsimile, telex or telegraph, confirmed in writing.

      8.    Indemnification.

            (a)   The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act against
any and all losses, liabilities, claims, damages and expenses whatsoever as
incurred (including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any supplement thereto or
amendment thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
the Company will not be liable in any such case to the extent but only to the
extent that any such loss, liability, claim, damage or expense arises out of or
is based upon any such untrue statement or alleged untrue statement or omission
or alleged omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Under-


                                       42
   43
writer through you expressly for use therein; and, provided further, that the
indemnity agreement provided in this Section 8(a) with respect to any
preliminary prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any losses, claims, damages, liabilities or actions
based upon any untrue statement or alleged untrue statement of material fact or
omission or alleged omission to state therein a material fact purchased Shares,
if a copy of the corrected Prospectus in which such untrue statement or alleged
untrue statement or omission or alleged omission was corrected, as previously
filed with the Commission, had not been sent or given to such person within the
time required by the Act and the Regulations, unless such failure is the result
of noncompliance by the Company with Section 5(b) hereof. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have, including under this Agreement.

            (b)   Each Selling Stockholder, severally and not jointly, agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act against any and all losses, liabilities, claims,
damages and expenses whatsoever as incurred (including but not limited to
attorneys' fees and any and all expenses whatsoever incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or any
claim whatsoever, and any and all amounts paid in settlement of any claim or
litigation), joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, as originally filed or
any amendment thereof, or any related preliminary prospectus or the Prospectus,
or in 


                                       43
   44
any supplement thereto or amendment thereof, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company or such Underwriter
by such Selling Stockholder, directly or through such Selling Stockholder's
representatives, specifically for use in the preparation thereof; provided,
however, that the indemnity agreement provided in this Section 8(b) with respect
to any preliminary prospectus shall not inure to the benefit of any Underwriter
from whom the person asserting any losses, claims, damages, liabilities or
actions based upon any untrue statement or alleged untrue statement of a
material fact or omission or alleged omission to state therein a material fact
purchased Shares, if a copy of the corrected Prospectus in which such untrue
statement or alleged untrue statement or omission or alleged omission was
corrected, as previously filed with the Commission, had not been sent or given
to such person within the time required by the Act and the Regulations, unless
such failure is the result of noncompliance by the Company with Section 5(b)
hereof. This indemnity agreement will be in addition to any liability which the
Selling Stockholders may otherwise have, including under this Agreement.

            (c)   Each Underwriter severally, and not jointly, agrees to
indemnify and hold harmless the Company, each of the directors of the Company,
each of the officers of the Company who shall have signed the Registration
Statement, each Selling Stockholder, and each other person, if any, who controls
the Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act against any losses, liabilities, claims, damages and expenses
whatsoever as incurred 


                                       44
   45
(including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through you expressly for use therein; provided,
however, that in no case shall any Underwriter be liable or responsible for any
amount in excess of the underwriting discount applicable to the Shares purchased
by such Underwriter hereunder. This indemnity will be in addition to any
liability which any Underwriter may otherwise have, including under this
Agreement. The Company acknowledges that the statements set forth in the last
paragraph of the outside cover page, the last two paragraphs on the inside front
cover page and the first three and last paragraphs under the caption
"Underwriting" in the Prospectus constitute the only information furnished in
writing by or on behalf of any Underwriter expressly for use in the Registration
Statement or in any amendment thereof, any related prelimi-


                                       45
   46
nary prospectus or the Prospectus or in any amendment thereof or supplement
thereto, as the case may be.

            (d)   Promptly after receipt by an indemnified party under
subsection (a), (b) or (c) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify each party against
whom indemnification is to be sought in writing of the commencement of such
action (but the failure so to notify an indemnifying party shall not relieve it
from any liability which it may have under this Section 8). In case any such
action is brought against any indemnified party, and it notifies an indemnifying
party of the commencement thereof, the indemnifying party will be entitled to
participate therein, and to the extent it may elect by written notice delivered
to the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) the
defendants in any such action include both the indemnified party and the
indemnifying party and such indemnified party or parties shall have reasonably
concluded that there may be defenses available to it or them which are different
from or additional to those available to one or all of the indemnifying parties
(in which case the indemnifying parties shall not have the right to direct the
defense of such action 


                                       46
   47
on behalf of the indemnified party or parties), in any of which events such fees
and expenses shall be borne by the indemnifying parties. Anything in this
subsection to the contrary notwithstanding, an indemnifying party shall not be
liable for any settlement of any claim or action effected without its written
consent; provided, however, that such consent was not unreasonably withheld.

      9.    Contribution. In order to provide for contribution in circumstances
in which the indemnification provided for in Section 8 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, the Company, the Selling Stockholders
and the Underwriters shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provision (including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claims asserted, but after deducting, in the case of losses,
claims, damages, liabilities and expenses suffered by the Company or any Selling
Stockholder, any contribution received by the Company or such Selling
Stockholder from persons, other than the Underwriters, who may also be liable
for contribution, including persons who control the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the
Company who signed the Registration Statement and directors of the Company) as
incurred to which the Company and the Selling Stockholders and one or more of
the Underwriters may be subject, in such proportions as is appropriate to
reflect the relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other hand from the
offering of the Shares or, if such allocation is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to above 


                                       47
   48
but also the relative fault of the Company, the Selling Stockholders and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the Company
and the Selling Stockholders and the Underwriters shall be deemed to be in the
same proportion as (x) the total proceeds from the offering (net of underwriting
discounts and commissions but before deducting expenses) received by the Company
and the Selling Stockholders and (y) the underwriting discounts and commissions
received by the Underwriters, respectively, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault of the Company and
the Selling Stockholders and of the Underwriters shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the Selling Stockholders or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company,
the Selling Stockholders and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 9 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this Section 9, (i) in no case shall any Underwriter be liable or responsible
for any amount in excess of the underwriting discount applicable to the Shares
purchased by such Underwriter hereunder, and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this Section 9 and the
preceding sentence, no Under-


                                       48
   49
writer shall be required to contribute any amount in excess of the amount by
which the total price at which the Shares underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages that
such Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. For purposes of this
Section 9, each person, if any, who controls an Underwriter within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the
same rights to contribution as such Underwriter, each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to clauses (i) and
(ii) of this Section 9. Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim for contribution may be made against another
party or parties, notify each party or parties from whom contribution may be
sought, but the omission to so notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have under this Section 9 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent;
provided, however, that such consent was not unreasonably withheld.

      10.   Default by an Underwriter.

            (a)   If any Underwriter or Underwriters shall default in its or
their obligation to purchase Firm Shares or Additional Shares hereunder, and if
the Firm Shares or Additional Shares to which such default relates do not (after
giving effect to arrangements, if 


                                       49
   50
any, made by you pursuant to subsection (b) below) exceed in the aggregate 10%
of the total number of Firm Shares or Additional Shares, as the case may be, the
Firm Shares or Additional Shares to which such default relates shall be
purchased by the non-defaulting Underwriters in proportion to the respective
proportions which the numbers of Firm Shares set forth opposite their respective
names in Schedule II hereto bear to the aggregate number of Firm Shares set
forth opposite the names of the non-defaulting Underwriters.

            (b)   In the event that such default relates to more than 10% of the
total number of Firm Shares or Additional Shares, as the case may be, you may in
your discretion arrange for yourself or for another party or parties (including
any non-defaulting Underwriter or Underwriters who so agree) to purchase the
Firm Shares or Additional Shares to which such default relates on the terms
contained herein. In the event that within five calendar days after such default
you do not arrange for the purchase of the Firm Shares or Additional Shares to
which such default relates as provided in this Section 10, this Agreement or, in
the case of a default with respect to Additional Shares, the obligations of the
Underwriters to purchase, and of the Company to sell, the Additional Shares
shall thereupon terminate without liability on the part of the Company, the
Selling Stockholders (except, in each case, as provided in Section 6, 8(a) and 9
hereof) or the Underwriters with respect thereto, but nothing in this Agreement
shall relieve a defaulting Underwriter or Underwriters of its or their
liability, if any, to the other Underwriters and to the Company and the Selling
Stockholders for damages occasioned by its or their default hereunder.

            (c)   In the event that the Firm Shares or Additional Shares to
which such default relates are to be purchased by the non-defaulting
Underwriters or are 


                                       50
   51
to be purchased by another party or parties as aforesaid, either you on the one
hand or the Company and the Selling Stockholders on the other hand shall have
the right to postpone the Closing Date or Additional Closing Date, as the case
may be, for a period not exceeding five Business Days, in order to effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus or in any other documents and arrangements, and the Company
agrees to file promptly any amendment or supplement to the Registration
Statement or the Prospectus which, in the opinion of Underwriters' Counsel, may
thereby be made necessary or advisable. The term "Underwriter" as used in this
Agreement shall include any party substituted under this Section 10 with like
effect as if it had originally been a party to this Agreement with respect to
such Firm Shares or Additional Shares, as the case may be.

      11.   Survival of Representations and Agreements. All representations and
warranties, covenants and agreements of the Underwriters, the Company and the
Selling Stockholders contained in this Agreement, including the agreements
contained in Section 6 hereof, the indemnity agreements contained in Section 8
hereof and the contribution agreements contained in Section 9 hereof, shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any Underwriter or any controlling person thereof, by or
on behalf of the Company, any of its officers and directors or any controlling
person thereof or by or on behalf of any of the Selling Stockholders, and shall
survive delivery of and payment for the Shares to and by the Underwriters. The
representations contained in Section 1 and Section 2 hereof and the agreements
contained in Sections 6, 8, 9 and 12(d) hereof shall survive the termination of
this Agreement, including termination pursuant to Section 10 or 12 hereof.

      12.   Effective Date of Agreement; Termination.


                                       51
   52
            (a)   This Agreement shall become effective upon the later of (i)
such time as you and the Company shall have received notification of the
effectiveness of the Registration Statement and (ii) the execution of this
Agreement. If either the public offering price or the purchase price per Share
has not been agreed upon prior to 5:00 P.M., New York City time, on the fifth
full Business Day after the Registration Statement shall have become effective,
this Agreement shall thereupon terminate without liability to the Company, the
Selling Stockholders or the Underwriters except as herein expressly provided.
Until this Agreement becomes effective as aforesaid, it may be terminated by the
Company by notifying you or by you notifying the Company. Notwithstanding the
foregoing, the provisions of this Section 12 and of Sections 1, 2, 6, 8 and 9
hereof shall at all times be in full force and effect.

            (b)   You shall have the right to terminate this Agreement at any
time prior to the Closing Date or the obligations of the Underwriters to
purchase the Additional Shares at any time prior to the Additional Closing Date,
as the case may be, if (i) any domestic or international event or act or
occurrence has materially disrupted, or in your opinion will in the immediate
future materially disrupt, the market for the Company's securities or securities
in general, (ii) if trading on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market has been suspended, or minimum or maximum
prices for trading have been fixed, or maximum ranges for prices for securities
have been required, on the New York Stock Exchange, the American Stock Exchange
or the Nasdaq National Market by the New York Stock Exchange, the American Stock
Exchange or The Nasdaq Stock Market or by order of the Commission or any other
governmental authority having jurisdiction, (iii) if a banking moratorium has
been declared by a state or federal authority or if any new restriction
materially adversely affecting the distribution of the Firm Shares 


                                       52
   53
or the Additional Shares has become effective or (iv) (A) if the United States
becomes engaged in hostilities or there is an escalation of hostilities
involving the United States or there is a declaration of a national emergency or
war by the United States or (B) if there has been a change in political,
financial or economic conditions and the effect of any such event in (A) or (B),
in your reasonable judgment, makes it impracticable or inadvisable to proceed
with the offering, sale and delivery of the Firm Shares or the Additional
Shares, as the case may be, on the terms contemplated by the Prospectus.

            (c)   Any notice of termination pursuant to this Section 12 shall be
by telephone, facsimile, telex, or telegraph, confirmed in writing by letter.

            (d)   If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 12(a) hereof or (ii) Section 10(b) or 12(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company or the Selling Stockholders to perform any agreement herein or comply
with any provision hereof, the Company agrees to reimburse the Underwriters,
subject to demand by you, for all their reasonable out-of-pocket expenses
(including the reasonable fees and expenses of their counsel) incurred by the
Underwriters in connection herewith.

      13.   Notice. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed or delivered, or sent by facsimile, telex or
telegraph and confirmed in writing by letter, to such Underwriter c/o Bear,
Stearns & Co. Inc., 245 


                                       53
   54
Park Avenue, New York, New York 10167, Attention: Stephen M. Parish, Facsimile
No. 212-272-2074; if sent to the Company, shall be mailed or delivered, or sent
by facsimile, telex or telegraph and confirmed in writing by letter, to the
Company, 8943 Fullbright Avenue, Chatsworth, California 91311, Attention: Noam
Lotan, Facsimile No. 818-407-5656; and if sent to any Selling Stockholder, shall
be mailed or delivered, or sent by facsimile, telex or telegraph and confirmed
in writing by letter, to Noam Lotan, Zeev Rav-Noy and Edmund Glazer, 8943
Fullbright Avenue, Chatsworth, California 91311, Facsimile No. 818-407-5656.

      14.   Agreements of the Selling Stockholders. Each Selling Stockholder
severally covenants and agrees with the Underwriters and the Company:

            (a)   To pay or to cause to be paid all transfer taxes with respect
to the Shares to be sold by such Selling Stockholder; and

            (b)   To take all reasonable actions in cooperation with the Company
and the Underwriters to cause the Registration Statement to become effective at
the earliest possible time, to do and perform all things to be done and
performed under this Agreement prior to the Closing Date and to satisfy all
conditions precedent to the delivery of the Shares pursuant to this Agreement.

      15.   Parties. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Underwriters, the Company and the Selling
Stockholders and the controlling persons, directors, officers, employees and
agents referred to in Sections 8 and 9 hereof, and their respective successors
and assigns, and no other person shall have or be construed to have any legal or
equitable right, remedy or claim under or in respect of or by virtue of this
Agreement or any provi-


                                       54
   55
sion contained herein. The term "successors and assigns" shall not include a
purchaser, in its capacity as such, of Shares from any of the Underwriters.

      16.   Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.

      17.   Counterparts. This Agreement may be executed in counterparts, each
of which shall be an original and all of which together shall constitute one and
the same instrument.


                                       55
   56
      If the foregoing correctly sets forth the understanding between you, the
Company and the Selling Stockholders, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among us.

                                    Very truly yours,

                                    MRV COMMUNICATIONS, INC.


                                    By:  /s/ Noam Lotan
                                         ---------------------------------------
                                    Name: Noam Lotan
                                    Title: President and CEO


                                    THE SELLING STOCKHOLDERS NAMED
                                     IN SCHEDULE I HERETO


                                    By:  /s/ Noam Lotan
                                         ---------------------------------------
                                    Name: Noam Lotan
                                    Title: Attorney-in-Fact



Accepted as of the date first above written:

BEAR, STEARNS & CO. INC.
VOLPE BROWN WHELAN & COMPANY, LLC

By: Bear, Stearns & Co. Inc.


By:  /s/ Stephen M. Parish
     ------------------------------
Name: Stephen M. Parish
Title: Senior Managing Director


                                       56
   57
On behalf of themselves and the other Underwriters named in Schedule II hereto.


                                       57
   58
                                                                      SCHEDULE I




                                                                    Number of Firm
Name                                                             Shares to Be Sold
- ----                                                             -----------------
                                                                    

Company................................................................. 2,350,000
Shlomo Margalit.........................................................   200,000
Zeev Rav-Noy............................................................   200,000
Noam Lotan..............................................................   100,000
Khalid Ahmad............................................................    25,000
Ofer Iny................................................................    13,000
Edmund Glazer...........................................................    12,000
                                                                        ----------
                             Total                                       2,900,000
                                                                        ==========



                                       58
   59
                                                                     SCHEDULE II



                                                       Number of Firm
Name of Underwriter                                         Shares to Be Purchased
- -------------------                                         ----------------------
                                                               

Bear, Stearns & Co. Inc................................................. 1,833,000
Volpe Brown Whelan & Company, LLC ......................................   611,000
Furman Selz LLC.........................................................   114,000
Merrill Lynch, Pierce,
        Fenner & Smith Incorporated.....................................   114,000
Preferred Technology, Inc...............................................   114,000
Hampshire Securities Corporation........................................    57,000
Pennsylvania Merchant Group Ltd.........................................    57,000
                                                                        ----------
                             Total                                       2,900,000
                                                                        ==========



                                       59

EX-21

   1
                                                                      EXHIBIT 21




                                  SUBSIDIARIES


      The Company's active subsidiaries at March 23, 1998 were as follows:

      1.   NBase Communications, Inc., a Maryland corporation.
      2.   NBase Communications, Ltd., an Israeli corporation.
      3.   NBase UK Ltd., a United Kingdom corporation.
      4.   NBase Europe, GMBH, a German corporation.
      5.   NBase Fibronics, Limited, an Israeli corporation.
      6.   EDSLANSRL, an Italian corporation.
      7.   NBase Xyplex, Inc., a Delaware corporation.
      8.   Xyplex, Inc., a Massachusetts corporation (d/b/a Xyplex Networks).
      9.   Netsoft Solutions Ltd., a French corporation.

EX-23

   1
                                                                      EXHIBIT 23




                    CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS


        As independent public accountants, we hereby consent to the
incorporation by reference into the Registration Statement on Form S-8 of MRV
Communications, Inc. (File No. 33-96458) and into the Registration Statement on
Form S-3 of MRV Communications, Inc. (File No. 333-17537) of our report
dated February 20, 1998 included in the Form 10-K of MRV Communications, Inc. 
for the year ended December 31, 1997.


                                          /s/ ARTHUR ANDERSEN LLP

                                              ARTHUR ANDERSEN LLP


Los Angeles, California
April 14, 1998.

EX-27

 

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<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1997
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