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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
  þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
 For
the transition period from
 to
 Commission file number 0-25678
 
 
 MRV COMMUNICATIONS, INC.
  Delaware
    
    06-1340090(State or other jurisdiction
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 20415 Nordhoff Street, Chatsworth, CA 91311
 (818) 773-0900
  Title of each class
    
    Name of each exchange on which registeredCommon stock, $0.0017 par value
    
    Nasdaq Global Market
  o þ
 o þ
 þ o
 þ
 o þ
  o þ o




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##### 



MRV Communications, Inc.
 Annual Report on Form 10-K
 For the fiscal year ended December 31, 2006
 Table of Contents
  
 PageNumberINTRODUCTION
    
    
    3USE OF FORWARD-LOOKING STATATEMENTS
    
    
    3PART I
    
    
    
    
    4ITEM 1. BUSINESS
    
    
    4ITEM 1A. RISK FACTORS
    
    
    12ITEM 1B. UNRESOLVED STAFF COMMENTS
    
    
    29ITEM 2. PROPERTIES
    
    
    30ITEM 3. LEGAL PROCEEDINGS
    
    
    30ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
    
    
    31PART II
    
    
    
    
    32ITEM 5. MARKET FOR THE REGISTRANTS COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
    
    
    32ITEM 6. SELECTED FINANCIAL DATA
    
    
    34ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
    
    
    35ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISKS
    
    
    54ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
    
    
    57ITEM 9. CHANGES IN OR DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
    
    
    85ITEM 9A. CONTROLS AND PROCEDURES
    
    
    85ITEM 9B. OTHER INFORMATION
    
    
    88PART III
    
    
    
    
    89ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT
    
    
    89ITEM 11. EXECUTIVE COMPENSATION
    
    
    89ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
    
    
    89ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
    
    
    89ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
    
    
    89PART IV
    
    
    
    
    90ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
    
    
    90SIGNATURES
    
    
    93EXHIBIT 10.18EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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INTRODUCTION
        
 USE OF FORWARD-LOOKING STATEMENTS
   3




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PART I
 
 ITEM 1. BUSINESS
 Overview
     Industry Background
  4




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Markets Served
  Telecommunications Service Providers.
 Cable Operators / Multiservice Operators (MSOs).
 Enterprise.
 Government
 5




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Products and Services
  
    
    Optical networking products
    
    Out-of-band networking products
    
    Fiber optic components and subsystems
    
    Networking integration and services
    
    Other networking products
 Optical Networking Products
 
    
    Fiber Driver Product Family
    
    Lambda Driver Product Family
    
    Opti-Switch / Opti-Switch Master Product Family
 Out-of-Band Networking Products
  
    
    LX Series Console Server Series
    
    5250 Series Power Control Series
    
    Media Cross Connect Product Family
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Fiber Optic Components and Subsystems
 Network Integration and Services
 Other Networking Products
 
    
    ground test systems as well as protocol analyzers and network performance-testing
equipment;
    
    networking data test equipment and a multi-service computing platform for wireless
cellular telephony; and
    
    a network management system with comprehensive management and control for our
products as well as third-party products we sell through our network integration and
distribution offices.
  Worldwide Sales and Marketing
  7




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Competition
    
    
    Product performance, features, quality and price;
    
    A comprehensive range of complementary products and services;
    
    Customer service and technical support;
    
    Lead and delivery times;
    
    Timeliness of new products introductions;
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
    
    Global presence, including distribution network;
    
    Conformance to standards; and
    
    Brand name recognition.
  Product Development and Engineering
   For the year ended December 31:
    
    2006
    
    
    2005
    
    
    2004Networking group (1)
    
    $
    18,733
    
    
    $
    17,754
    
    
    $
    16,226Optical components group (2)
    
    
    8,233
    
    
    
    7,040
    
    
    
    7,191Development stage enterprise group
    
    
    1,221
    
    
    
    1,257
    
    
    
    1,532Total
    
    $
    28,187
    
    
    $
    26,051
    
    
    $
    24,949
 
 (1)
    
    Includes share-based compensation expense of $468,000 in 2006 and amortization of
deferred stock compensation of $79,000 in 2004. No share-based compensation expense was
recognized in 2005.(2)
    
    Includes share-based compensation expense of $307,000 in 2006. No share-based
compensation expense was recognized in 2005 or 2004. Manufacturing
  9




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Components
  Intellectual Property
  10




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Employees
  11




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ITEM 1A. RISK FACTORS
 You should carefully consider and evaluate all of the information in this Form 10-K, including the
risk factors listed below. The risks described below are not the only ones facing our company.
Additional risks not now known to us or that we currently deem immaterial may also impair our
business operations.
 If any circumstances discussed in these risks actually occur or occur again, our business could be
materially harmed. If our business is harmed, the trading price of our common stock could decline.
 This Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these forward looking statements
as a result of certain factors, including the risks faced by us described below and elsewhere in
this Form 10-K. We undertake no duty to update any of the forward-looking statements after the
date of this Form 10-K.
 Our Operating Results Could Fluctuate Significantly from Quarter to Quarter.
  
    
    the cancellation or postponement of orders;
    
    the timing and amount of significant orders;
    
    our success in developing, introducing and shipping product enhancements and new products;
    
    the mix of products we sell;
    
    software, hardware or other errors in the products we sell requiring replacements or
increased warranty reserves;
    
    our annual reviews of goodwill and other intangibles that lead to impairment charges;
    
    new product introductions by our competitors;
    
    the timing of delivery and availability of components from suppliers;
    
    readiness of customer sites for installation;
    
    political stability in the areas of the world in which we operate in;
    
    changes in material costs;
    
    currency fluctuations;
    
    changes in accounting rules; and
    
    general economic conditions as well as changes in such conditions specific to our
market segments.
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Our Gross Margin May Fluctuate from Period to Period and Our Gross Margins for Optical Components
and/or Networking Equipment May Be Adversely Affected by a Number Of Factors.
  For the year ended December 31:
    
    2006
    
    2005
    
    2004Networking group
    
    
    35
    %
    
    
    36
    %
    
    
    38
    %Optical components group
    
    
    19
    %
    
    
    11
    %
    
    
    14
    %Total
    
    
    31
    %
    
    
    32
    %
    
    
    34
    %
  
    
    increased price competition, including competition from low-cost producers in Asia;
    
    price reductions that we make, such as marketing decisions that we have made in the
past to reduce the price for our optical components to certain customers in an effort
to secure long-term leadership in the market for FTTP components;
    
    decreases in average selling prices of our products which, in addition to
competitive factors and pressures from, or accommodations made to, significant
customers, result from factors such as overcapacity and the introduction of new and
more technologically advanced products in the case of optical components and excess
inventories, increased sales discounts and new product introductions in the case of
networking equipment;
    
    the mix in any period or year of higher and lower margin products and services;
    
    sales volume during a particular period or year;
    
    charges for excess or obsolete inventory;
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
    
    changes in the prices or the availability of components needed to manufacture our products;
    
    the relative success of our efforts to reduce product manufacturing costs, such as
the transition of our optical component manufacturing to our Taiwan facility or to
low-cost third party manufacturers in China;
    
    our introduction of new products, with initial sales at relatively small volumes
with resulting higher production costs; and
    
    increased warranty or repair costs.
  One Customer Accounted for over 10 percent of Our Sales During the Three and Twelve Months Ended
December 31, 2006, Increasing Both Our Dependence on a Single Revenue Source and the Risk that Our
Operations Will Suffer Materially If the Customer Stopped Ordering from Us or Substantially Reduced
Its Business With Us.
  Our Markets Are Subject to Rapid Technological Change, and to Compete Effectively, We Must
Continually Introduce New Products That Achieve Market Acceptance.
  
    
    changing product specifications and customer requirements;
    
    difficulties in hiring and retaining necessary technical personnel;
    
    difficulties in reallocating engineering resources and overcoming resource limitations;
    
    difficulties with contract manufacturers;
    
    changing market or competitive product requirements; and
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
    
    unanticipated engineering complexities.
  Defects In Our Products Resulting from Their Complexity Or Otherwise Could Hurt Our Financial
Performance.
  The Long Sales Cycles for Our Products May Cause Revenues and Operating Results to Vary from
Quarter to Quarter, Which Could Cause Volatility In Our Stock Price.
  Our Business Has Been Adversely Impacted By the Worldwide Economic Slowdown and Related
Uncertainties.
  
    
    reduced demand for our products, particularly fiber optic components;
    
    increased risk of excess and obsolete inventories;
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
    
    increased price competition for our products;
    
    excess manufacturing capacity under current market conditions; and
    
    higher overhead costs, as a percentage of revenues.
  Cost Containment Is Critical to Achieving Positive Cash Flow from Operations and Profitability
Consistently.
  Our Business and Future Operating Results Are Subject to a Wide Range of Uncertainties Arising Out
of the Continuing Threat of Terrorist Attacks and Ongoing Military Action In the Middle East.
  
    
    increased risks related to the operations of our manufacturing facilities in China;
    
    greater risks of disruption in the operations of our Asian contract manufacturers
and more frequent instances of shipping delays; and
    
    the risk that future tightening of immigration controls may adversely affect the
residence status of non-U.S. engineers and other key technical and other employees in
our U.S. facilities or our ability to hire new non-U.S. employees in such facilities.
 We Face Risks in Reselling the Products of Other Companies.
  16




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Our 2003 Notes Provide for Various Events of Default That Would Entitle the Holder to Require Us to
Repay Upon its Demand the Outstanding Principal Amount, Plus Accrued and Unpaid Interest. If We
Complete the Acquisition of Fiberxon Without Waivers from the Holder We Will be in Default.
  
    
    our default in payment of any principal amount of, interest on or other amount due
under the 2003 Notes when and as due;
    
    the effectiveness of the registration statement, which registered for resale the shares of our common stock
issuable upon conversion of the 2003 Notes, lapses for any reason or is unavailable to the holder of the 2003
Notes for resale of all of the shares issuable upon conversion, other than during allowable grace periods, for a
period of five consecutive trading days or for more than an aggregate of ten trading
days in any 365-day period;
    
    the suspension from trading or failure of our common stock to be listed on the Nasdaq Stock Market for a period
of five consecutive trading days or for more than an aggregate of ten trading days in any 365-day period;
    
    we or our transfer agent notify any holder of our intention not to issue shares of
our common stock to the holder upon receipt of any conversion notice delivered in
respect of a Note by the holder;
    
    we fail to deliver shares of our common stock to the holder within twelve business
days of the conversion date specified in any conversion notice delivered in respect of
a Note by the holder;
    
    we breach any material representation, warranty, covenant or other term or condition
of the 2003 Notes or the Securities Purchase Agreement, or the Registration Rights
Agreement relating to 2003 Notes and the breach, if curable, is not cured by us within
ten days;
    
    failure by us for ten days after notice to comply with any other provision of the
2003 Notes in all material respects, which include abiding by our covenants not to:
 O
    
    incur any form of unsecured indebtedness in excess of $17.0
million, plus obligations arising from accounts receivable financing
transactions with recourse through our foreign offices, in the ordinary course
of business and consistent with past practices;O
    
    repurchase our common stock for an aggregate amount in excess
of $5.0 million; pursuant to a stock purchase program that was approved by our
Board of Directors and publicly announced on June 13, 2002; orO
    
    declare or pay any dividend on any of our capital stock, other
than dividends of common stock with respect to our common stock;
 
    
    we breach provisions of the 2003 Notes prohibiting us from either issuing:
 O
    
    our common stock or securities that are convertible into or
exchangeable or exercisable for shares of our common at a per share price less
than the conversion price per share of the 2003 Notes then in effect, except in
certain limited cases; orO
    
    securities that are convertible into or exchangeable or
exercisable for shares of our common stock at a price that varies or may vary
with the market price of our common stock;
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
    
    we breach any of our obligations under any other debt or credit agreements involving
an amount exceeding $3,000,000; or
    
    we become bankrupt or insolvent.
    In the Event of a Change of Control, Holders of the 2003 Notes Have the Option to Require Immediate
Repayment of the 2003 Notes At a Premium and This Right Could Prevent a Takeover Otherwise Favored
By Stockholders.
  Sales Of Substantial Amounts Of Our Shares By Selling Stockholders Could Cause The Market Price Of
Our Shares To Decline.
  18




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Our Ability to Utilize Our NOLs and Certain Other Tax Attributes May Be Limited.
  19




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The Price of Our Shares May Continue to Be Highly Volatile.
  
    
    actual or anticipated fluctuations in our operating results;
    
    announcements of technological innovations or new product introductions by us or our
competitors;
    
    the progress or lack thereof of our closing of the acquisition of Fiberxon;
    
    changes of estimates of our future operating results by securities analysts;
    
    developments with respect to patents, copyrights or proprietary rights;
    
    sales of substantial numbers of our shares by stockholders covered by our existing
shelf registration statements or by stockholders receiving our shares if our
acquisition of Fiberxon is successfully consummated; or
    
    general market conditions and other factors.
  We Face Risks from Our International Operations.
  Year Ended December 31,2006
    
    2005
    
    2004Percentage of total revenue from foreign sales
    
    
    67
    %
    
    
    74
    %
    
    
    77
    %
  
    
    greater difficulty in accounts receivable collection and longer collection periods;
    
    the impact of recessions in economies outside the United States;
    
    unexpected changes in regulatory requirements;
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
    
    seasonal reductions in business activities in some parts of the world, such as
during the summer months in Europe or in the winter months in Asia when the Chinese New
Year is celebrated;
    
    difficulties in managing operations across disparate geographic areas;
    
    difficulties associated with enforcing agreements through foreign legal systems;
    
    the payment of operating expenses in local currencies, which exposes us to risks of
currency fluctuations;
    
    higher credit risks requiring cash in advance or letters of credit;
    
    potentially adverse tax consequences;
    
    unanticipated cost increases;
    
    unavailability or late delivery of equipment;
    
    trade restrictions;
    
    limited protection of intellectual property rights;
    
    unforeseen environmental or engineering problems; and
    
    personnel recruitment delays.
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We Have Been Transitioning Volume Manufacturing of Our Optical Components to Taiwan and China and
We Expect This to Increase, Especially If Our Acquisition of Fiberxon is Successfully Consummated,
Which Exposes Us, and Will Expose Us Even More, to Risks Inherent in Doing Business in China.
    
    
    difficulties in obtaining domestic and foreign export, import and other governmental
approvals, permits and licenses;
    
    compliance with PRC laws, including employment laws;
    
    difficulties in staffing and managing foreign operations, including cultural
differences in the conduct of business, labor and other workforce requirements and
inadequate local infrastructure;
    
    the need to successfully migrate the PRC locations to the financial reporting system
used by us in the United States, including the need to implement and maintain financial
controls that comply with the Sarbanes-Oxley Act;
    
    trade restrictions or higher tariffs;
    
    transportation delays and difficulties of managing international distribution channels;
    
    longer payment cycles for, and greater difficulty collecting, accounts receivable;
    
    difficulties in collecting payments from PRC customers to whom we or Fiberxon have
extended significant amounts of credit if those customers do not pay on the payment
terms extended to them;
    
    currency exchange rate fluctuations of the RMB, which has been appreciating in
relation to the U.S. dollar since July 2005 when the Peoples Bank of China announced
that the yuan would no longer be pegged to the U.S. dollar; that may increase our
manufacturing and labor costs in the PRC when translated to U.S. dollars and render
prices on our products manufactured in China uncompetitive, adversely affecting our
sales or gross margins, or both, and
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
    
    unexpected changes in regulatory requirements, royalties and withholding taxes that
restrict or make more costly the repatriation of earnings generated by Fiberxons
operations in the PRC or influence the effective income tax rate attributable to
profits generated or lost in the PRC.
  Our Manufacturing Capacity May be Interrupted, Limited or Delayed If We Cannot Maintain Sufficient
Sources of Electricity in China, or If There is a Natural Disaster or Other Catastrophic Event in
China.
   Chinas Legal System Embodies Uncertainties That Could Harm Our Business Operations.
   We May Not Address Successfully Problems Encountered in Connection With Our Acquisition of
Fiberxon, If Successfully Consummated, or Any Other Acquisition on Which We May Embark.
  23




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
    
    problems assimilating the purchased technologies, products or business operations,
including the timely integration of financial reporting systems particularly if, like
in the case of Fiberxon if our acquisition is successfully completed, we acquire
companies in countries where English is not widely spoken, the culture and political,
economic, financial or monetary systems, principles or controls are different from
those of the U.S., Taiwan, Israel or countries in Europe where we currently have
offices or significant operations;
    
    problems maintaining uniform standards, procedures, controls and policies;
    
    unanticipated costs associated with the acquisition;
    
    start-up costs associated with any new business or product line we may acquire;
    
    possible charges to operations for purchased technology and restructuring;
    
    incurrence of amortization expenses and impairment charges related to goodwill and
other intangible assets and deferred stock expense;
    
    incurrence of debt and contingent liabilities;
    
    problems, and adverse effects on our existing businesses of, providing funds or
financing to support the operations of the acquired business;
    
    adverse effects on existing business relationships with suppliers and customers or
on relations with our existing employees;
    
    risks associated with entering new markets, such as those in China, in which we have
no or limited prior experience;
    
    potential loss of key employees of acquired businesses and difficulties recruiting
adequate replacements;
    
    the need to hire additional employees to operate the acquired business effectively,
including employees with specialized knowledge or language skills; and
    
    potential litigation risks associated with acquisitions, whether completed or not;
    
    dilutive issuances of our equity securities; and
    
    increased legal and accounting costs as a result of the Sarbanes-Oxley Act.
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We Currently Depend On Third-Party Contract Manufacturers and Therefore Could Face Delays Harming
Our Sales.
  We May Lose Sales If Suppliers of Other Critical Components Fail to Meet Our Needs.
  We May Suffer Losses as a Result of Entering into Fixed Price Contracts.
  Our Inability to Achieve Adequate Production Yields for Certain Components We Manufacture
Internally Could Result In a Loss of Sales and Customers.
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If We Fail to Protect Our Intellectual Property, We May Not Be Able to Compete.
  We Could In the Future Become Subject to Litigation Regarding Intellectual Property Rights, Which
Could Be Costly and Subject Us to Significant Liability.
  In the Future, We May Initiate Claims Or Litigation Against Third Parties for Infringement of Our
Proprietary Rights to Protect These Rights Or to Determine the Scope and Validity of Our
Proprietary Rights Or the Proprietary Rights Of Competitors. These Claims Could Result In Costly
Litigation and the Diversion of Our Technical and Management Personnel.
  We Are Dependent On Certain Members of Our Senior Management.
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Our Business Requires Us to Attract and Retain Qualified Personnel.
  Environmental Regulations Applicable to Our Manufacturing Operations Could Limit Our Ability to
Expand Or Subject Us to Substantial Costs.
  Our Headquarters Are Located In Southern California, and Certain of Our Manufacturing Facilities
Are Located In Southern California and Taiwan, Where Disasters May Occur That Could Disrupt Our
Operations and Harm Our Business.
   If We Fail to Forecast Component and Material Requirements for Our Manufacturing Facilities
Accurately, We Could Incur Additional Costs or Experience Manufacturing Delays.
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Legislative Actions, Higher Insurance Costs and Potential New Accounting Pronouncements Are Likely
to Impact Our Future Financial Position and Results of Operations and In the Case of FASBs New
Pronouncement Regarding the Expensing of Stock Options Will Adversely Impact Our Financial Results.
  We Are At Risk of Securities Class Action Or Other Litigation That Could Result In Substantial
Costs and Divert Managements Attention and Resources.
  If Our Cash Flow Significantly Deteriorates In the Future, Our Liquidity and Ability to Operate Our
Business Could Be Adversely Affected.
  The Prevailing Market Price of Our Common Stock May Limit Our Ability to Raise Equity Capital.
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It Is an Event of Default Under Our Notes If Our Common Stock Were Delisted from the Nasdaq Stock
Market.
  Delaware Law and Our Ability to Issue Preferred Stock May Have Anti-Takeover Effects That Could
Prevent a Change In Control, Which May Cause Our Stock Price to Decline.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  29




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ITEM 2. PROPERTIES
  Location
    
    Square Feet
    
    Lease Expiration
    
    PurposeChatsworth, CA
    
    USA
    
    
    13,300
    
    
    3/31/2017
    
    AdministrationChatsworth, CA
    
    USA
    
    
    22,200
    
    
    12/31/2015
    
    Manufacturing and product
developmentChatsworth, CA
    
    USA
    
    
    49,920
    
    
    7/13/2014
    
    Administration, product
development, manufacturing and
salesLittleton, MA
    
    USA
    
    
    54,411
    
    
    2/28/2015
    
    Administration, product
development, manufacturing and
salesHsinchu
    
    Taiwan
    
    
    81,861
    
    
    12/31/2007
    
    Administration, product
development, manufacturing and
salesGeneva
    
    Switzerland
    
    
    29,428
    
    
    12/31/2010
    
    Administration, product
development, manufacturing and
salesZurich
    
    Switzerland
    
    
    4,510
    
    
    3/31/2013
    
    Administration and salesStockholm
    
    Sweden
    
    
    48,825
    
    
    9/30/2009
    
    Administration and salesOslo
    
    Norway
    
    
    6,986
    
    
    6/30/2010
    
    Administration and distributionMilan
    
    Italy
    
    
    7,535
    
    
    Owned
    
    Administration and distributionMilan
    
    Italy
    
    
    9,688
    
    
    Owned
    
    Administration and distributionMilan
    
    Italy
    
    
    9,688
    
    
    12/12/2011
    
    Administration and distributionMilan
    
    Italy
    
    
    5,382
    
    
    Owned
    
    Administration and distributionMilan
    
    Italy
    
    
    8,611
    
    
    Owned
    
    Administration and distributionRome
    
    Italy
    
    
    6,510
    
    
    1/31/2009
    
    Administration and distributionYokneam
    
    Israel
    
    
    19,526
    
    
    12/31/2007
    
    Administration, product
development, manufacturing and
salesYokneam
    
    Israel
    
    
    12,917
    
    
    12/31/2007
    
    Administration, product
development, manufacturing and
salesFrankfurt
    
    Germany
    
    
    6,398
    
    
    7/31/2011
    
    Administration and salesGif Sur Yvette
    
    France
    
    
    17,222
    
    
    Owned
    
    Administration and distribution
  
 ITEM 3. LEGAL PROCEEDINGS
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 Submission of Matters to a Vote of Security Holders
  Executive Officers of The Registrant
  Noam Lotan
 Dr. Shlomo Margalit
 Kevin Rubin
 Near Margalit
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PART II
 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 Market Information and Holders
  High
    
    
    LowFiscal Year Ended December 31, 2006First Quarter
    
    $
    4.71
    
    
    $
    2.00Second Quarter
    
    $
    4.23
    
    
    $
    2.58Third Quarter
    
    $
    3.10
    
    
    $
    2.00Fourth Quarter
    
    $
    3.77
    
    
    $
    2.59Fiscal Year Ended December 31, 2005First Quarter
    
    $
    4.10
    
    
    $
    2.83Second Quarter
    
    $
    3.45
    
    
    $
    1.60Third Quarter
    
    $
    2.44
    
    
    $
    1.93Fourth Quarter
    
    $
    2.23
    
    
    $
    1.81
  Dividends
  Equity Compensation Plan Information
  Number of Securities RemainingNumber of Securities to
    
    
    
    
    
    
    Available for Future Issuance Underbe Issued Upon
    
    
    Weighted Average Exercise
    
    
    Equity Compensation PlansExercise of Outstanding
    
    
    Price of Outstanding
    
    
    (excluding securities reflected inPlan Category
    
    Options and Warrants
    
    
    Options and Warrants
    
    
    column (a))(a)
    
    
    
    (b)
    
    
    
    (c)Stock option and
warrant plans
approved by
security holders
(1)
    
    
    2,936,600
    
    
    $
    3.04
    
    
    
    417,983Stock option and
warrant plans not
approved by
security holders
(2)
    
    
    8,779,830
    
    
    $
    3.11
    
    
    
    1,517,073Total
    
    
    11,716,430
    
    
    $
    3.09
    
    
    
    1,935,056
 (1)
    
    Includes shares underlying options granted under the 1997 Incentive and Nonstatutory
Stock Option Plan.
 32




---



##### Table of Contents



(2)
    
    Includes shares underlying options or awards granted or reserved for future
grant under the Non-Director and Non-Executive Officer Consolidated Long-Term Stock
Incentive Plan (the Consolidated Plan) and shares underlying options or warrants
granted under the following plans prior to the adoption in January 2003 of the
Consolidated Plan:
 
    
    1998 Nonstatutory Stock Option Plan;
    
    2001 MRV Communications, Inc. Stock Option Plan for Employees of Appointech, Inc.;
    
    2000 MRV Communications, Inc. Stock Option Plan for Employees of AstroTerra Corporation;
    
    MRV Communications, Inc. 2002 International Stock Option Plan;
    
    Warrants provided to Nathan Shilo as trustee for employees and designated
consultants of NBase Communications, Ltd. exercisable on July 19, 1996, July 13, 1997,
July 13, 1998, January 2, 1998 and January 4, 1999;
    
    Italian Employees Warrant Program;
    
    Stock options issued and outstanding on the effective date of the merger of Luminent
under the Luminent Amended and Restated 2000 Stock Option Plan that were assumed by MRV
and are exercisable for 0.43 shares of Common Stock for each share of Luminent held
under the relevant option;
    
    MRV Communications, Inc. 2002 Nonstatutory Stock Option Plan for Employees of
Luminent, Inc.; and
    
    2000 MRV Communications, Inc. Stock Option Plan for Employees of Optronics
International Corp.
  33




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA
  For the year ended December 31:
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Statements of Operations Data:Revenue
    
    $
    356,489
    
    
    $
    283,698
    
    
    $
    271,658
    
    
    $
    238,983
    
    
    $
    252,532Cost of goods sold
    
    
    244,207
    
    
    
    193,979
    
    
    
    179,852
    
    
    
    164,893
    
    
    
    169,566Gross profit
    
    
    112,282
    
    
    
    89,719
    
    
    
    91,806
    
    
    
    74,090
    
    
    
    82,966Operating costs and expenses:Product development and
engineering
    
    
    28,187
    
    
    
    26,051
    
    
    
    24,949
    
    
    
    30,972
    
    
    
    49,358Selling, general and
administrative
    
    
    87,539
    
    
    
    72,402
    
    
    
    74,045
    
    
    
    62,901
    
    
    
    90,187Impairment of goodwill and other
intangibles
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    356
    
    
    
    72,697Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,038Total operating costs and expenses
    
    
    115,778
    
    
    
    98,453
    
    
    
    98,994
    
    
    
    94,229
    
    
    
    229,280Operating loss
    
    
    (3,496
    )
    
    
    (8,734
    )
    
    
    (7,188
    )
    
    
    (20,139
    )
    
    
    (146,314
    )Other income (expense), net
    
    
    1,846
    
    
    
    (1,791
    )
    
    
    (456
    )
    
    
    (6,438
    )
    
    
    (23,695
    )Loss before provision for income
taxes, extraordinary gain and
cumulative effect of an accounting
change
    
    
    (1,650
    )
    
    
    (10,525
    )
    
    
    (7,644
    )
    
    
    (26,577
    )
    
    
    (170,009
    )Provision for income taxes
    
    
    3,865
    
    
    
    5,774
    
    
    
    3,036
    
    
    
    2,361
    
    
    
    13,395Loss before extraordinary gain and
cumulative effect of an accounting
change
    
    
    (5,515
    )
    
    
    (16,299
    )
    
    
    (10,680
    )
    
    
    (28,938
    )
    
    
    (183,404
    )Extraordinary gain, net of
income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,950
    
    
    
    Cumulative effect of an
accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (296,355
    )Net loss
    
    $
    (5,515
    )
    
    $
    (16,299
    )
    
    $
    (10,680
    )
    
    $
    (26,988
    )
    
    $
    (479,759
    )Basic and diluted loss per share
    
    $
    (0.05
    )
    
    $
    (0.16
    )
    
    $
    (0.10
    )
    
    $
    (0.26
    )
    
    $
    (5.25
    )Basic and diluted weighted average
shares outstanding
    
    
    120,902
    
    
    
    104,350
    
    
    
    104,793
    
    
    
    102,022
    
    
    
    91,421
 At December 31:
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Balance Sheets Data:Cash and cash equivalents
    
    $
    91,722
    
    
    $
    67,984
    
    
    $
    77,226
    
    
    $
    87,602
    
    
    $
    99,445Working capital
    
    
    172,587
    
    
    
    99,514
    
    
    
    113,995
    
    
    
    108,051
    
    
    
    91,188Total assets
    
    
    346,222
    
    
    
    265,177
    
    
    
    279,860
    
    
    
    278,050
    
    
    
    304,866Total long-term liabilities
    
    
    30,295
    
    
    
    29,694
    
    
    
    28,663
    
    
    
    27,415
    
    
    
    4,056Stockholders equity
    
    
    193,752
    
    
    
    117,004
    
    
    
    143,341
    
    
    
    145,494
    
    
    
    156,362
 34




---



##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with Consolidated Financial Statements and Notes thereto included elsewhere
in this Form 10-K. In addition to historical information, the discussion in this Form 10-K
contains certain forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated by these forward-looking statements due to
factors, including but not limited to, those set forth in the following and elsewhere in this Form
10-K. We assume no obligation to update any of the forward-looking statements after the date of
this Form 10-K.
 Overview
     35




---



##### Table of Contents



Critical Accounting Policies
    Revenue Recognition.
 Allowance for Doubtful Accounts.
 36




---



##### Table of Contents



Inventory Reserves.
 Goodwill and Other Intangibles.
 Income Taxes
  Share-Based Compensation
 Currency Rate Fluctuations
  37




---



##### Table of Contents



Management Discussion Snapshot
  2006
    
    
    2005
    
    
    2004For the year ended December 31,
    
    $
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %Revenue(1)
    
    $
    356,489
    
    
    
    100
    %
    
    $
    283,698
    
    
    
    100
    %
    
    $
    271,658
    
    
    
    100
    %Networking group
    
    
    268,074
    
    
    
    75
    
    
    
    236,782
    
    
    
    83
    
    
    
    227,192
    
    
    
    84Optical components group
    
    
    93,381
    
    
    
    26
    
    
    
    50,446
    
    
    
    18
    
    
    
    46,431
    
    
    
    17Gross margin(2)
    
    
    112,282
    
    
    
    31
    
    
    
    89,719
    
    
    
    32
    
    
    
    91,806
    
    
    
    34Networking group
    
    
    94,602
    
    
    
    35
    
    
    
    84,122
    
    
    
    36
    
    
    
    85,333
    
    
    
    38Optical components group
    
    
    17,797
    
    
    
    19
    
    
    
    5,597
    
    
    
    11
    
    
    
    6,473
    
    
    
    14Operating costs and expenses(2)
    
    
    115,778
    
    
    
    32
    
    
    
    98,453
    
    
    
    35
    
    
    
    98,994
    
    
    
    36Networking group
    
    
    95,718
    
    
    
    36
    
    
    
    81,822
    
    
    
    35
    
    
    
    80,587
    
    
    
    35Optical components group
    
    
    18,502
    
    
    
    20
    
    
    
    14,910
    
    
    
    30
    
    
    
    16,313
    
    
    
    35Development stage enterprise group
    
    
    1,558
    
    
    NM
    

    
    
    1,721
    
    
    NM
    

    
    
    2,094
    
    
    NMOperating income (loss)(2)
    
    
    (3,496
    )
    
    
    (1
    )
    
    
    (8,734
    )
    
    
    (3
    )
    
    
    (7,188
    )
    
    
    (3
    )Networking group
    
    
    (1,116
    )
    
    
    
    
    
    
    2,300
    
    
    
    1
    
    
    
    4,746
    
    
    
    2Optical components group
    
    
    (705
    )
    
    
    (1
    )
    
    
    (9,313
    )
    
    
    (18
    )
    
    
    (9,840
    )
    
    
    (21
    )Development stage enterprise group
    
    
    (1,558
    )
    
    NM
    

    
    
    (1,721
    )
    
    NM
    

    
    
    (2,094
    )
    
    NM
 NM not meaningful
 
 (1)
    
    Revenue information by segment includes intersegment revenue, primarily reflecting
sales of fiber optic components to the networking group. No revenues were generated by the
development stage enterprise group for the periods presented.(2)
    
    Statements of Operations data express percentages as a percentage of revenue.
Statements of Operations data by segment express percentages as a percentage of applicable
segment revenue. No revenues or corresponding gross profit were generated by the
development stage enterprise group for the periods presented.  38




---



##### Table of Contents



Year Ended December 31, 2006 (2006) Compared  to Year Ended December 31, 2005 (2005)
 Revenue
  % Change$
    
    
    %
    
    
    ConstantFor the year ended December 31:
    
    2006
    
    
    2005
    
    
    Change
    
    
    Change
    
    
    Currency (2)Networking group
    
    $
    268,074
    
    
    $
    236,782
    
    
    $
    31,292
    
    
    
    13
    %
    
    
    15
    %Optical components group
    
    
    93,381
    
    
    
    50,446
    
    
    
    42,935
    
    
    
    85
    
    
    
    88Development stage enterprise group
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    361,455
    
    
    
    287,228
    
    
    
    74,227
    
    
    
    26
    
    
    
    28Adjustments (1)
    
    
    (4,966
    )
    
    
    (3,530
    )
    
    
    (1,436
    )
    
    NM
    
    
    NMTotal
    
    $
    356,489
    
    
    $
    283,698
    
    
    $
    72,791
    
    
    
    26
    %
    
    
    27
    %
 NM not meaningful
 
 (1)
    
    Adjustments represent the elimination of intersegment revenue in order to reconcile to
consolidated revenues.(2)
    
    Percentage information in constant currencies in the table above and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results were calculated by translating the current year results at prior year average
exchange rates.  For the year ended December 31:
    
    2006
    
    
    2005
    
    
    $ Change
    
    
    % Change| | | |Network equipment (1):Americas
    
    $
    42,677
    
    
    $
    38,499
    
    
    $
    4,178
    
    
    
    11
    %Europe
    
    
    47,428
    
    
    
    43,146
    
    
    
    4,282
    
    
    
    10Asia Pacific
    
    
    10,369
    
    
    
    4,151
    
    
    
    6,218
    
    
    
    150Other regions
    
    
    199
    
    
    
    295
    
    
    
    (96
    )
    
    
    (33
    )Total network equipment
    
    
    100,673
    
    
    
    86,091
    
    
    
    14,582
    
    
    
    17Network integration (2):Europe
    
    
    167,394
    
    
    
    150,687
    
    
    
    16,707
    
    
    
    11Total network integration
    
    
    167,394
    
    
    
    150,687
    
    
    
    16,707
    
    
    
    11Fiber optic components (3):Americas
    
    
    73,889
    
    
    
    34,824
    
    
    
    39,065
    
    
    
    112Europe
    
    
    4,288
    
    
    
    4,296
    
    
    
    (8
    )
    
    
    Asia Pacific
    
    
    10,202
    
    
    
    7,518
    
    
    
    2,684
    
    
    
    36Other regions
    
    
    43
    
    
    
    282
    
    
    
    (239
    )
    
    
    (85
    )Total fiber optic components
    
    
    88,422
    
    
    
    46,920
    
    
    
    41,502
    
    
    
    88Total
    
    $
    356,489
    
    
    $
    283,698
    
    
    $
    72,791
    
    
    
    26
    %
 
 (1)
    
    Network equipment revenue primarily consists of MRVs internally developed
products, such as Metro Ethernet equipment, optical transport equipment, out-of-band network
equipment, defense and aerospace network applications, the related service revenue and fiber
optic components sold as part of the system solution. 39




---



##### Table of Contents



(2)
    
    Network integration revenue primarily consists of value-added integration and support
service revenue, related third-party product sales (including third-party product sales
through distribution) and fiber optic components sold as part of the system solution.(3)
    
    Fiber optic components revenue primarily consists of fiber optic components,
such as components for FTTP applications, fiber optic transceivers, discrete lasers and
LEDs, that are not sold as part of MRVs network equipment or network integration solutions.  Networking Group
 Optical Components Group.
 Development Stage Enterprise Group
 40




---



##### Table of Contents



Gross Profit
  % Change$
    
    
    %
    
    
    ConstantFor the year ended December 31:
    
    2006
    
    
    2005
    
    
    Change
    
    
    Change
    
    
    Currency (2)Networking group
    
    $
    94,602
    
    
    $
    84,122
    
    
    $
    10,480
    
    
    
    12
    %
    
    
    14
    %Optical components group
    
    
    17,797
    
    
    
    5,597
    
    
    
    12,200
    
    
    
    218
    
    
    
    223Development stage enterprise group
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112,399
    
    
    
    89,719
    
    
    
    22,680
    
    
    
    25
    
    
    
    27Adjustments (1)
    
    
    (117
    )
    
    
    
    
    
    
    (117
    )
    
    NM
    

    
    NMTotal
    
    $
    112,282
    
    
    $
    89,719
    
    
    $
    22,563
    
    
    
    25
    %
    
    
    27
    %
 NM not meaningful
 
 (1)
    
    Adjustments represent the elimination of intersegment revenue in order to reconcile to
consolidated gross profit.(2)
    
    Percentage information in constant currencies in the table above and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results were calculated by translating the current year results at prior year average
exchange rates.  Networking Group
 Optical Components Group
 41




---



##### Table of Contents



Development Stage Enterprise Group
 Operating Costs and Expenses
  % Change$
    
    
    %
    
    
    ConstantFor the year ended December 31:
    
    2006
    
    
    2005
    
    
    Change
    
    
    Change
    
    
    Currency (1)Networking group
    
    $
    95,718
    
    
    $
    81,822
    
    
    $
    13,896
    
    
    
    17
    %
    
    
    18
    %Optical components group
    
    
    18,502
    
    
    
    14,910
    
    
    
    3,592
    
    
    
    24
    
    
    
    25Development stage enterprise group
    
    
    1,558
    
    
    
    1,721
    
    
    
    (163
    )
    
    
    (9
    )
    
    
    (9
    )Total
    
    $
    115,778
    
    
    $
    98,453
    
    
    $
    17,325
    
    
    
    18
    %
    
    
    19
    %
 
 (1)
    
    Percentage information in constant currencies in the table above and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results were calculated by translating the current year results at prior year average
exchange rates.  Networking Group
 Optical Components Group
 42




---



##### Table of Contents



Development Stage Enterprise Group
 Operating Income (Loss)
  % Change$
    
    
    %
    
    
    ConstantFor the year ended December 31:
    
    2006
    
    
    2005
    
    
    Change
    
    
    Change
    
    
    Currency (2)Networking group
    
    $
    (1,116
    )
    
    $
    2,300
    
    
    $
    (3,416
    )
    
    
    (149
    )%
    
    
    (137
    )%Optical components group
    
    
    (705
    )
    
    
    (9,313
    )
    
    
    8,608
    
    
    
    (92
    )
    
    
    (94
    )Development stage enterprise group
    
    
    (1,558
    )
    
    
    (1,721
    )
    
    
    163
    
    
    
    (9
    )
    
    
    (9
    )(3,379
    )
    
    
    (8,734
    )
    
    
    5,355
    
    
    
    (61
    )
    
    
    (66
    )Adjustments (1)
    
    
    (117
    )
    
    
    
    
    
    
    (117
    )
    
    NM
    

    
    NMTotal
    
    $
    (3,496
    )
    
    $
    (8,734
    )
    
    $
    5,238
    
    
    
    (60
    )%
    
    
    (65
    )%
 NM not meaningful
 
 (1)
    
    Adjustments represent the elimination of intersegment revenue in order to reconcile
to consolidated operating income (loss).(2)
    
    Percentage information in constant currencies in the table above and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results were calculated by translating the current year results at prior year average
exchange rates.  Networking Group
 Optical Components Group
 43




---



##### Table of Contents



Development Stage Enterprise Group
 Interest Expense and Other Income, Net
  Provision for Income Taxes
  Tax Loss Carryforwards
  44




---



##### Table of Contents



Year Ended December 31, 2005 (2005) Compared  to Year Ended December 31, 2004 (2004)
 Revenue
  % Change$
    
    
    %
    
    
    ConstantFor the year ended December 31:
    
    2005
    
    
    2004
    
    
    Change
    
    
    Change
    
    
    Currency (2)| | | | |Networking group
    
    $
    236,782
    
    
    $
    227,192
    
    
    $
    9,590
    
    
    
    4
    %
    
    
    4
    %Optical components group
    
    
    50,446
    
    
    
    46,431
    
    
    
    4,015
    
    
    
    9
    
    
    
    6Development stage enterprise group
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    287,228
    
    
    
    273,623
    
    
    
    13,605
    
    
    
    5
    
    
    
    5Adjustments (1)
    
    
    (3,530
    )
    
    
    (1,965
    )
    
    
    (1,565
    )
    
    NM
    

    
    NMTotal
    
    $
    283,698
    
    
    $
    271,658
    
    
    $
    12,040
    
    
    
    4
    %
    
    
    4
    %
 NM not meaningful
 
 (1)
    
    Adjustments represent the elimination of intersegment revenue in order to reconcile to
consolidated revenues.(2)
    
    Percentage information in constant currencies in the table above and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results were calculated by translating the current year results at prior year average
exchange rates.  For the year ended December 31:
    
    2005
    
    
    2004
    
    
    $ Change
    
    
    % ChangeNetwork equipment (1):Americas
    
    $
    38,499
    
    
    $
    34,547
    
    
    $
    3,952
    
    
    
    11
    %Europe
    
    
    43,146
    
    
    
    43,608
    
    
    
    (462
    )
    
    
    (1
    )Asia Pacific
    
    
    4,151
    
    
    
    3,901
    
    
    
    250
    
    
    
    6Other regions
    
    
    295
    
    
    
    2,589
    
    
    
    (2,294
    )
    
    
    (89
    )Total network equipment
    
    
    86,091
    
    
    
    84,645
    
    
    
    1,446
    
    
    
    2Network integration (2):Europe
    
    
    150,687
    
    
    
    142,541
    
    
    
    8,146
    
    
    
    6Total network integration
    
    
    150,687
    
    
    
    142,541
    
    
    
    8,146
    
    
    
    6Fiber optic components (3):Americas
    
    
    34,824
    
    
    
    29,189
    
    
    
    5,635
    
    
    
    19Europe
    
    
    4,296
    
    
    
    5,872
    
    
    
    (1,576
    )
    
    
    (27
    )Asia Pacific
    
    
    7,518
    
    
    
    9,271
    
    
    
    (1,753
    )
    
    
    (19
    )Other regions
    
    
    282
    
    
    
    140
    
    
    
    142
    
    
    
    101Total fiber optic components
    
    
    46,920
    
    
    
    44,472
    
    
    
    2,448
    
    
    
    6Total
    
    $
    283,698
    
    
    $
    271,658
    
    
    $
    12,040
    
    
    
    4
    %
 
 (1)
    
    Network equipment revenue primarily consists of MRVs internally developed
products, such as Metro Ethernet equipment, optical transport equipment, out-of-band network
equipment, defense and aerospace network applications, the related service revenue and fiber
optic components sold as part of the system solution. 45




---



##### Table of Contents



(2)
    
    Network integration revenue primarily consists of value-added integration and support
service revenue, related third-party product sales (including third-party product sales
through distribution) and fiber optic components sold as part of the system solution.(3)
    
    Fiber optic components revenue primarily consists of fiber optic components,
such as components for FTTP applications, fiber optic transceivers, discrete lasers and
LEDs, that are not sold as part of MRVs network equipment or network integration solutions.  Networking Group
 Optical Components Group.
 Development Stage Enterprise Group
 46




---



##### Table of Contents



Gross Profit
  % Change$
    
    
    %
    
    
    ConstantFor the year ended December 31:
    
    2005
    
    
    2004
    
    
    Change
    
    
    Change
    
    
    Currency (1)Networking group
    
    $
    84,122
    
    
    $
    85,333
    
    
    $
    (1,211
    )
    
    
    (1
    )%
    
    
    (1
    )%Optical components group
    
    
    5,597
    
    
    
    6,473
    
    
    
    (876
    )
    
    
    (14
    )
    
    
    (17
    )Development stage enterprise group
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    89,719
    
    
    $
    91,806
    
    
    $
    (2,087
    )
    
    
    (2
    )%
    
    
    (2
    )%
 
 (1)
    
    Percentage information in constant currencies in the table above and in the text
below excludes the effect of foreign currency translation on reported results. Constant
currency results were calculated by translating the current year results at prior year
average exchange rates.  Networking Group
 Optical Components Group
 Development Stage Enterprise Group
 47




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##### Table of Contents



Operating Costs and Expenses
  % Change$
    
    
    %
    
    
    ConstantFor the year ended December 31:
    
    2005
    
    
    2004
    
    
    Change
    
    
    Change
    
    
    Currency (1)| | | | |Networking group
    
    $
    81,822
    
    
    $
    80,587
    
    
    $
    1,235
    
    
    
    2
    %
    
    
    2
    %Optical components group
    
    
    14,910
    
    
    
    16,313
    
    
    
    (1,403
    )
    
    
    (9
    )
    
    
    (10
    )Development stage enterprise group
    
    
    1,721
    
    
    
    2,094
    
    
    
    (373
    )
    
    
    (18
    )
    
    
    (18
    )Total
    
    $
    98,453
    
    
    $
    98,994
    
    
    $
    (541
    )
    
    
    (1
    )%
    
    
    (1
    )%
 
 (1)
    
    Percentage information in constant currencies in the table above and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results were calculated by translating the current year results at prior year average
exchange rates.  Networking Group
 Optical Components Group
 Development Stage Enterprise Group
 48




---



##### Table of Contents



Operating Income (Loss)
  % Change$
    
    
    %
    
    
    ConstantFor the year ended December 31:
    
    2005
    
    
    2004
    
    
    Change
    
    
    Change
    
    
    Currency (1)| | | | |Networking group
    
    $
    2,300
    
    
    $
    4,746
    
    
    $
    (2,446
    )
    
    
    (52
    )%
    
    
    (51
    )%Optical components group
    
    
    (9,313
    )
    
    
    (9,840
    )
    
    
    527
    
    
    
    (5
    )
    
    
    (5
    )Development stage enterprise group
    
    
    (1,721
    )
    
    
    (2,094
    )
    
    
    373
    
    
    
    (18
    )
    
    
    (18
    )Total
    
    $
    (8,734
    )
    
    $
    (7,188
    )
    
    $
    (1,546
    )
    
    
    22
    %
    
    
    22
    %
 
 (1)
    
    Percentage information in constant currencies in the table above and in the text
below excludes the effect of foreign currency translation on reported results. Constant
currency results were calculated by translating the current year results at prior year
average exchange rates.  Networking Group
 Optical Components Group
 Development Stage Enterprise Group
 Interest Expense and Other Income, Net
  49




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##### Table of Contents



Provision for Income Taxes
  Recently Issued Accounting Standards
  Liquidity and Capital Resources
  December 31,
    
    December 31,At:
    
    2006
    
    2005CashCash and cash equivalents
    
    $
    91,722
    
    
    $
    67,984Short-term marketable securities
    
    
    25,864
    
    
    
    Time deposits
    
    
    821
    
    
    
    1,475118,407
    
    
    
    69,459Debt5% convertible notes due 2008
    
    
    23,000
    
    
    
    23,000Short-term obligations (1)
    
    
    26,289
    
    
    
    30,378Long-term debt
    
    
    88
    
    
    
    28449,377
    
    
    
    53,662Excess cash versus debt
    
    $
    69,030
    
    
    $
    15,797Ratio of cash versus debt(2)
    
    
    2.4:1
    
    
    
    1.3:1
 
 (1)
    
    Includes current maturities of long-term debt.(2)
    
    Determined by dividing total cash by total debt, in each case as reflected in the
table. 50




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##### Table of Contents



Working Capital
  December 31,
    
    December 31,At:
    
    2006
    
    2005Current assets
    
    $
    289,514
    
    
    $
    212,842Current liabilities
    
    
    116,927
    
    
    
    113,328Working capital
    
    $
    172,587
    
    
    $
    99,514Current ratio(1)
    
    
    2.5:1
    
    
    
    1.9:1
 
 (1)
    
    Determined by dividing total current assets by total current liabilities, in each case
as reflected in the table.   Cash Flow
  For the year ended December 31:
    
    2006
    
    2005Net cash provided by (used in):Operating activities
    
    $
    (11,722
    )
    
    $
    (20,307
    )Investing activities
    
    
    (30,695
    )
    
    
    1,712Financing activities
    
    
    65,484
    
    
    
    10,933Effect of exchange rate changes on cash and cash equivalents
    
    
    671
    
    
    
    (1,580
    )Net change in cash and cash equivalents
    
    $
    23,738
    
    
    $
    (9,242
    )
 51




---



##### Table of Contents



Cash Flows Related to Operating Activities
 Cash Flows Related to Investing Activities
 Cash Flows Related to Financing Activities
  Off-Balance Sheet Arrangements
  52




---



##### Table of Contents



Contractual Cash Obligations
  Less than 1
    
    
    
    
    
    After 5Cash
Obligations
    
    Total
    
    Year
    
    1  3 Years
    
    3  5 Years
    
    YearsShort-term obligations
    
    $
    26,090
    
    
    $
    26,090
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term debt
    
    
    287
    
    
    
    199
    
    
    
    88
    
    
    
    
    
    
    
    5% convertible notes
due June 2008
    
    
    23,000
    
    
    
    
    
    
    
    23,000
    
    
    
    
    
    
    
    Unconditional
purchase obligations
    
    
    9,177
    
    
    
    9,155
    
    
    
    
    
    
    
    
    
    
    
    22Operating leases
    
    
    25,977
    
    
    
    6,076
    
    
    
    8,559
    
    
    
    5,318
    
    
    
    6,024Total contractual
cash obligations
    
    $
    84,531
    
    
    $
    41,520
    
    
    $
    31,647
    
    
    $
    5,318
    
    
    $
    6,046
    53




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##### Table of Contents



Internet Access to Our Financial Documents
 www.sec.gov
 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
 Market Risks
  54




---



##### Table of Contents



Interest Rates
 Foreign Exchange Rates
    
    
    $24.9 million of operating expenses that were settled in the euro;
    
    $11.4 million of operating expenses that were settled in Swiss francs;
    
    $7.3 million of operating expenses that were settled in Swedish krona; and
    
    $5.7 million of operating expenses settled in the Taiwan dollar.
  
    
    $2.5 million related to expenses settled in euros;
    
    $1.1 million related to expenses settled in Swiss francs;
    
    $729,000 in expenses settled in Swedish kronas; and
    
    $567,000 in expenses settled in the Taiwan dollar.
 55




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##### Table of Contents



For the year ended December 31:
    
    2006
    
    2005U.S. dollars
    
    $
    77,442
    
    
    $
    57,900Euros
    
    
    4,304
    
    
    
    3,894Swiss francs
    
    
    5,787
    
    
    
    2,987Swedish kronas
    
    
    2,172
    
    
    
    2,511Taiwan dollars
    
    
    2,017
    
    
    
    692Total cash and cash equivalents
    
    $
    91,722
    
    
    $
    67,984
  Inflation
 56




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
        
 57




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##### Table of Contents



MRV Communications, Inc.
 Statements of Operations
 (In thousands, except per share data)
 For the year ended December 31:
    
    2006
    
    2005
    
    2004Revenue
    
    $
    356,489
    
    
    $
    283,698
    
    
    $
    271,658Cost of goods sold
    
    
    244,207
    
    
    
    193,979
    
    
    
    179,852Gross profit
    
    
    112,282
    
    
    
    89,719
    
    
    
    91,806Operating costs and expenses:Product development and engineering
    
    
    28,187
    
    
    
    26,051
    
    
    
    24,949Selling, general and administrative
    
    
    87,539
    
    
    
    72,402
    
    
    
    74,045Impairment of goodwill and other intangibles
    
    
    52
    
    
    
    
    
    
    
    Total operating costs and expenses
    
    
    115,778
    
    
    
    98,453
    
    
    
    98,994Operating loss
    
    
    (3,496
    )
    
    
    (8,734
    )
    
    
    (7,188
    )Interest expense
    
    
    (3,540
    )
    
    
    (4,207
    )
    
    
    (3,141
    )Other income (expense), net
    
    
    5,386
    
    
    
    2,416
    
    
    
    2,685Loss before income taxes
    
    
    (1,650
    )
    
    
    (10,525
    )
    
    
    (7,644
    )Provision for income taxes
    
    
    3,865
    
    
    
    5,774
    
    
    
    3,036Net loss
    
    $
    (5,515
    )
    
    $
    (16,299
    )
    
    $
    (10,680
    )Net loss per share:Basic and diluted
    
    $
    (0.05
    )
    
    $
    (0.16
    )
    
    $
    (0.10
    )Weighted average number of shares:Basic and diluted
    
    
    120,902
    
    
    
    104,350
    
    
    
    104,793
  58




---



##### Table of Contents



MRV Communications, Inc.
 Balance Sheets
 (In thousands, except par values)
 At December 31:
    
    2006
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    91,722
    
    
    $
    67,984Short-term marketable securities
    
    
    25,864
    
    
    
    Time deposits
    
    
    821
    
    
    
    1,475Accounts receivable, net
    
    
    95,244
    
    
    
    92,466Inventories
    
    
    61,361
    
    
    
    42,216Deferred income taxes
    
    
    895
    
    
    
    873Other current assets
    
    
    13,607
    
    
    
    7,828Total current assets
    
    
    289,514
    
    
    
    212,842Property and equipment, net
    
    
    14,172
    
    
    
    14,065Goodwill
    
    
    36,348
    
    
    
    33,656Deferred income taxes
    
    
    1,460
    
    
    
    136Other assets
    
    
    4,728
    
    
    
    4,478$
    346,222
    
    
    $
    265,177Liabilities and stockholders equityCurrent liabilities:Short-term obligations
    
    $
    26,289
    
    
    $
    30,378Accounts payable
    
    
    47,384
    
    
    
    45,372Accrued liabilities
    
    
    29,704
    
    
    
    29,272Deferred revenue
    
    
    7,624
    
    
    
    6,076Other current liabilities
    
    
    5,926
    
    
    
    2,230Total current liabilities
    
    
    116,927
    
    
    
    113,328Convertible notes
    
    
    23,000
    
    
    
    23,000Other long-term liabilities
    
    
    7,295
    
    
    
    6,694Minority interest
    
    
    5,248
    
    
    
    5,151Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value:Authorized  1,000 shares; no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $0.0017 par value:Authorized  160,000 sharesIssued  126,860 shares in 2006 and 105,849 shares in 2005Outstanding  125,507 shares in 2006 and 104,496 shares in 2005
    
    
    213
    
    
    
    177Additional paid-in capital
    
    
    1,231,941
    
    
    
    1,156,209Accumulated deficit
    
    
    (1,036,924
    )
    
    
    (1,031,409
    )Treasury stock  1,353 shares in 2006 and 2005
    
    
    (1,352
    )
    
    
    (1,352
    )Accumulated other comprehensive loss
    
    
    (126
    )
    
    
    (6,621
    )Total stockholders equity
    
    
    193,752
    
    
    
    117,004$
    346,222
    
    
    $
    265,177
  59




---



##### Table of Contents



MRV Communications, Inc.
 Statements of Stockholders Equity and Comprehensive Income (Loss)
 (In thousands)
 Additional
    
    DeferredCommon Stock
    
    Paid-In
    
    Stock
    
    Accumulated
    
    Treasury
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Expense
    
    Deficit
    
    Stock
    
    Income (Loss)
    
    TotalBalance, Dec. 31, 2003
    
    
    105,441
    
    
    $
    179
    
    
    $
    1,154,869
    
    
    $
    (200
    )
    
    $
    (1,004,430
    )
    
    $
    (1,352
    )
    
    $
    (3,572
    )
    
    $
    145,494Exercise of stock options
and warrants
    
    
    381
    
    
    
    
    
    
    
    614
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    614Retirement of common stock
    
    
    (1,749
    )
    
    
    (3
    )
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited stock options
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Amortization of deferred
stock expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200Comprehensive income
(loss):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,680
    )
    
    
    
    
    
    
    
    
    
    
    (10,680
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,725
    
    
    
    7,725Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,955
    )Balance, Dec. 31, 2004
    
    
    104,073
    
    
    
    176
    
    
    
    1,155,474
    
    
    
    
    
    
    
    (1,015,110
    )
    
    
    (1,352
    )
    
    
    4,153
    
    
    
    143,341Exercise of stock options
and warrants
    
    
    323
    
    
    
    1
    
    
    
    573
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    574Issuance of common stock
    
    
    100
    
    
    
    
    
    
    
    162
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162Comprehensive income
(loss):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,299
    )
    
    
    
    
    
    
    
    
    
    
    (16,299
    )Net unrealized
investment gains
(losses)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,767
    )
    
    
    (10,767
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,073
    )Balance, Dec. 31, 2005
    
    
    104,496
    
    
    
    177
    
    
    
    1,156,209
    
    
    
    
    
    
    
    (1,031,409
    )
    
    
    (1,352
    )
    
    
    (6,621
    )
    
    
    117,004Exercise of stock options
and warrants
    
    
    1,153
    
    
    
    2
    
    
    
    2,459
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,461Issuance of common stock
    
    
    19,858
    
    
    
    34
    
    
    
    69,831
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69,865Share-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    3,442
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,442Comprehensive income
(loss):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,515
    )
    
    
    
    
    
    
    
    
    
    
    (5,515
    )Net unrealized
investment gains
(losses)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,491
    
    
    
    6,491Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    980Balance, Dec. 31, 2006
    
    
    125,507
    
    
    $
    213
    
    
    $
    1,231,941
    
    
    $
    
    
    
    $
    (1,036,924
    )
    
    $
    (1,352
    )
    
    $
    (126
    )
    
    $
    193,752
  60




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MRV Communications, Inc.
 Statements of Cash Flows
 (In thousands)
 For the year ended December 31:
    
    2006
    
    2005
    
    2004Cash flows from operating activities:Net loss
    
    $
    (5,515
    )
    
    $
    (16,299
    )
    
    $
    (10,680
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation, amortization and other noncash items
    
    
    5,446
    
    
    
    7,086
    
    
    
    8,239Share-based compensation expense
    
    
    3,442
    
    
    
    162
    
    
    
    188Provision for doubtful accounts
    
    
    1,225
    
    
    
    748
    
    
    
    1,367Deferred income taxes
    
    
    (1,346
    )
    
    
    1,276
    
    
    
    199(Gain) loss on disposition of property and equipment
    
    
    (467
    )
    
    
    (37
    )
    
    
    235Gain on sale of equity method investment
    
    
    (50
    )
    
    
    
    
    
    
    Minority interests share of income
    
    
    98
    
    
    
    24
    
    
    
    27Impairment of goodwill and other intangibles
    
    
    52
    
    
    
    
    
    
    
    Changes in operating assets and liabilities, net of
effects from acquisitions:Time deposits
    
    
    666
    
    
    
    60
    
    
    
    (148
    )Accounts receivable
    
    
    3,743
    
    
    
    (21,569
    )
    
    
    (9,633
    )Inventories
    
    
    (15,849
    )
    
    
    (3,626
    )
    
    
    (6,465
    )Other assets
    
    
    (5,260
    )
    
    
    (777
    )
    
    
    (3,143
    )Accounts payable
    
    
    (1,518
    )
    
    
    6,437
    
    
    
    (3,602
    )Accrued liabilities
    
    
    (952
    )
    
    
    3,483
    
    
    
    1,486Deferred revenue
    
    
    1,189
    
    
    
    1,873
    
    
    
    802Other current liabilities
    
    
    3,374
    
    
    
    852
    
    
    
    (458
    )Net cash used in operating activities
    
    
    (11,722
    )
    
    
    (20,307
    )
    
    
    (21,586
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (5,454
    )
    
    
    (3,351
    )
    
    
    (2,737
    )Proceeds from sale of property and equipment
    
    
    509
    
    
    
    94
    
    
    
    597Proceeds from sale of equity method investment
    
    
    100
    
    
    
    
    
    
    
    Purchases of investments
    
    
    (43,750
    )
    
    
    (1,218
    )
    
    
    (21,050
    )Proceeds from sale or maturity of investments
    
    
    17,950
    
    
    
    6,277
    
    
    
    22,903Purchase of minority interest
    
    
    (50
    )
    
    
    (90
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    (30,695
    )
    
    
    1,712
    
    
    
    (287
    )Cash flows from financing activities:Net proceeds from issuance of common stock
    
    
    72,326
    
    
    
    574
    
    
    
    614Borrowings on short-term obligations
    
    
    107,331
    
    
    
    46,118
    
    
    
    59,042Payments on short-term obligations
    
    
    (114,162
    )
    
    
    (37,519
    )
    
    
    (54,582
    )Borrowings on long-term obligations
    
    
    
    
    
    
    624
    
    
    
    Payments on long-term obligations
    
    
    (340
    )
    
    
    (121
    )
    
    
    (88
    )Other long-term liabilities
    
    
    329
    
    
    
    1,257
    
    
    
    1,336Net cash provided by financing activities
    
    
    65,484
    
    
    
    10,933
    
    
    
    6,322Effect of exchange rate changes on cash and cash equivalents
    
    
    671
    
    
    
    (1,580
    )
    
    
    5,175Net increase (decrease) in cash and cash equivalents
    
    
    23,738
    
    
    
    (9,242
    )
    
    
    (10,376
    )Cash and cash equivalents, beginning of year
    
    
    67,984
    
    
    
    77,226
    
    
    
    87,602Cash and cash equivalents, end of year
    
    $
    91,722
    
    
    $
    67,984
    
    
    $
    77,226
  61




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MRV Communications, Inc.
 Notes to Financial Statements
 December 31, 2006
 1. Description of Business
  2. Summary of Significant Accounting Policies
 Principles of Consolidation
  Foreign Currency
   62




---



##### Table of Contents



Revenue Recognition
   Cash, Cash Equivalents and Time Deposits
  Marketable Securities
   At December 31:
    
    2006
    
    2005U.S. government issues
    
    $
    8,131
    
    
    $
    State and local government issues
    
    
    1,500
    
    
    
    Corporate issues
    
    
    14,751
    
    
    
    Foreign government issues
    
    
    1,482
    
    
    
    Total
    
    $
    25,864
    
    
    $
    
 Accounts Receivable and Allowance for Doubtful Accounts
  63




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##### Table of Contents



Inventories
   At December 31:
    
    2006
    
    2005Raw materials
    
    $
    10,848
    
    
    $
    8,471Work-in process
    
    
    17,811
    
    
    
    9,682Finished goods
    
    
    32,702
    
    
    
    24,063Total
    
    $
    61,361
    
    
    $
    42,216
 Property and Equipment
  64




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##### Table of Contents



At December 31:
    
    2006
    
    2005Property and equipment, at costLand
    
    $
    60
    
    
    $
    54Building
    
    
    3,892
    
    
    
    3,465Machinery and equipment
    
    
    41,387
    
    
    
    39,630Furniture and fixtures
    
    
    6,232
    
    
    
    5,635Computer hardware and software
    
    
    18,396
    
    
    
    18,321Leasehold improvements
    
    
    5,047
    
    
    
    5,747Construction in progress
    
    
    1,356
    
    
    
    59076,370
    
    
    
    73,442Less  accumulated depreciation and amortization
    
    
    (62,198
    )
    
    
    (59,377
    )Total
    
    $
    14,172
    
    
    $
    14,065
 Goodwill and Other Intangibles
 Goodwill and Other Intangible
Assets
 Investments
 Principles of
Consolidation
  65




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##### Table of Contents



Impairment of Long-Lived Assets
 Goodwill and Other Intangibles Goodwill and Other Intangible Assets
 Fair Value of Financial Instruments
  Liability for Severance Pay
  Cost of Goods Sold
  Product Development and Engineering
  Software Development Costs
   66




---



##### Table of Contents



Sales and Marketing
  Income Taxes
  Net Income (Loss) Per Share
    Share-Based Compensation
  67




---



##### Table of Contents



Recently Issued Accounting Standards
      68




---



##### Table of Contents



69




---



##### Table of Contents



Use of Estimates
  Reclassifications
  3. Goodwill and Other Intangible Assets
   2006
    
    2005
    
    2004Beginning balance (1)
    
    $
    33,656
    
    
    $
    37,747
    
    
    $
    35,331Purchase of Minority Interest
    
    
    39
    
    
    
    90
    
    
    
    Impairment
    
    
    (52
    )
    
    
    
    
    
    
    Foreign currency translation
    
    
    2,705
    
    
    
    (4,181
    )
    
    
    2,416Total
    
    $
    36,348
    
    
    $
    33,656
    
    
    $
    37,747
 (1)
    
    Reclassified to conform with 2006 presentation.  At December 31:
    
    2006
    
    2005Gross carrying amount
    
    $
    108,630
    
    
    $
    104,223Accumulated amortization
    
    
    (72,282
    )
    
    
    (70,567
    )Total
    
    $
    36,348
    
    
    $
    33,656
 4. Restructuring Costs
  70




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##### Table of Contents



5. Accrued Liabilities
  At December 31:
    
    2006
    
    2005Payroll and related
    
    $
    12,010
    
    
    $
    12,327Product warranty
    
    
    2,291
    
    
    
    2,328Other
    
    
    15,403
    
    
    
    14,617Total
    
    $
    29,704
    
    
    $
    29,272
 6. Income Taxes
  For the year ended December 31:
    
    2006
    
    2005
    
    2004Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    151Foreign
    
    
    5,211
    
    
    
    4,498
    
    
    
    3,0845,211
    
    
    
    4,498
    
    
    
    3,235Deferred:Federal
    
    
    
    
    
    
    
    
    
    
    State
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    (1,346
    )
    
    
    1,276
    
    
    
    (199
    )(1,346
    )
    
    
    1,276
    
    
    
    (199
    )Total
    
    $
    3,865
    
    
    $
    5,774
    
    
    $
    3,036
  For the year ended December 31:
    
    2006
    
    2005
    
    2004Income tax provision (benefit,
at statutory federal rate)
    
    
    (34
    )%
    
    
    (34
    )%
    
    
    (34
    )%State and local income taxes,
net of federal income taxes
effect
    
    
    (2
    )%
    
    
    (1
    )%
    
    
    (6
    )%Credits
    
    
    (57
    )%
    
    
    (9
    )%
    
    
    (14
    )%Permanent differences
    
    
    5
    %
    
    
    0
    %
    
    
    1
    %Foreign taxes at rates
different than domestic rates
    
    
    42
    %
    
    
    (6
    )%
    
    
    (10
    )%Change in valuation allowance
    
    
    280
    %
    
    
    101
    %
    
    
    103
    %Total
    
    
    234
    %
    
    
    51
    %
    
    
    40
    %
 71




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##### Table of Contents



At December 31:
    
    2006
    
    2005Allowance for doubtful accounts
    
    $
    1,548
    
    
    $
    1,520Inventory reserve
    
    
    6,763
    
    
    
    6,962Accrued liabilities
    
    
    3,002
    
    
    
    2,828Other
    
    
    4,091
    
    
    
    3,18515,404
    
    
    
    14,495Valuation allowance
    
    
    (14,509
    )
    
    
    (13,622
    )Net short-term deferred income tax assets
    
    
    895
    
    
    
    873Net operating losses
    
    
    102,380
    
    
    
    103,232Tax credits
    
    
    9,688
    
    
    
    9,071Depreciation and amortization
    
    
    3,108
    
    
    
    3,776Investments
    
    
    174
    
    
    
    58Capital loss carryforwards
    
    
    99,477
    
    
    
    96,755Other
    
    
    2,011
    
    
    
    2,163216,838
    
    
    
    215,055Valuation allowance
    
    
    (215,378
    )
    
    
    (214,919
    )Net long-term deferred income tax assets
    
    
    1,460
    
    
    
    136Total
    
    $
    2,355
    
    
    $
    1,009
   72




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##### Table of Contents



7. Short-Term and Long-Term Obligations
   8. Derivative Financial Instruments
  Foreign Exchange Contracts
 73




---



##### Table of Contents



Interest Rate Swaps
 9. Convertible Debt
  10. Commitments and Contingencies
 Lease Commitments
  Year Ending December 31,2007
    
    $
    6,0762008
    
    
    4,5072009
    
    
    4,0522010
    
    
    3,2582011
    
    
    2,060Thereafter
    
    
    6,024Total
    
    $
    25,977
  74




---



##### Table of Contents



Royalty Commitment
  Litigation
   11. Product Warranty and Indemnification
   For the years ended December 31:
    
    2006
    
    2005Beginning balance
    
    $
    2,328
    
    
    $
    2,537Cost of warranty claims
    
    
    (1,491
    )
    
    
    (1,222
    )Accruals for product warranties
    
    
    1,454
    
    
    
    1,013Total
    
    $
    2,291
    
    
    $
    2,328
  75




---



##### Table of Contents



12. Stockholders Equity
 Authorized Shares
   Stock Repurchase Program
  Stock Options
 Share-Based Compensation
 76




---



##### Table of Contents



13. Share-Based Compensation
  Pro forma Information for Periods Prior to the Adoption of SFAS No. 123(R)
   2005
    
    2004Net loss, as reported
    
    $
    (16,299
    )
    
    $
    (10,680
    )Add: SFAS No. 123 based compensation expense
included in reported net loss
    
    
    162
    
    
    
    188Deduct: Total SFAS No. 123 based compensation
expense determined under fair value method for all
awards
    
    
    (6,172
    )
    
    
    (17,593
    )Net loss, pro forma
    
    $
    (22,309
    )
    
    $
    (28,085
    )Earnings per share:Basic and diluted net loss per share  as reported
    
    $
    (0.16
    )
    
    $
    (0.10
    )Basic and diluted net loss per share  pro forma
    
    $
    (0.21
    )
    
    $
    (0.27
    )
 77




---



##### Table of Contents



Impact of the Adoption of SFAS No. 123(R)
  2006Cost of goods sold
    
    $
    311Product development and engineering
    
    
    775Selling, general and administrative
    
    
    2,356Total share-based compensation expense
    
    $
    3,442Impact on:Income (loss) before income taxes
    
    $
    (3,442
    )Net income (loss)
    
    
    (3,442
    )Basic and diluted net income (loss) per share
    
    $
    (0.03
    )
  Valuation Assumptions
  2006
    
    2005
    
    2004Risk-free interest rate
    
    
    4.8
    %
    
    
    4.1
    %
    
    
    3.4
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    80.8
    %
    
    
    67.1
    %
    
    
    75.7
    %Expected life
    
    3.3
    yrs
    
    4.0
    yrs
    
    4.0
    yrs
 78




---



##### Table of Contents



Share-Based Payment Award Activity
  Wtd. Avg.Wtd. Avg.
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term
    
    Value(in 000s)
    
    
    
    
    
    (in years)
    
    (in 000s)Outstanding, beginning of period
    
    
    11,433
    
    
    $
    3.18Granted
    
    
    2,653
    
    
    $
    3.03Exercised
    
    
    (1,153
    )
    
    $
    2.14Cancelled and forfeited
    
    
    (1,217
    )
    
    $
    4.67Outstanding, end of period
    
    
    11,716
    
    
    $
    3.09
    
    
    
    7.0
    
    
    $
    12,377Vested & Expected to Vest, end
of period
    
    
    11,212
    
    
    $
    3.11
    
    
    
    6.9
    
    
    $
    11,930Exercisable, end of period
    
    
    6,401
    
    
    $
    3.35
    
    
    
    5.6
    
    
    $
    8,142
   2006
    
    2005
    
    2004Total intrinsic value of stock options exercised
    
    $
    1,909
    
    
    $
    401
    
    
    $
    790Cash received from stock options exercised
    
    
    2,461
    
    
    
    574
    
    
    
    614
 14. Segment Reporting and Geographical Information
   79




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##### Table of Contents



For the year ended December 31:
    
    2006
    
    2005
    
    2004Networking group
    
    $
    268,074
    
    
    $
    236,782
    
    
    $
    227,192Optical components group
    
    
    93,381
    
    
    
    50,446
    
    
    
    46,431Development stage enterprise group
    
    
    
    
    
    
    
    
    
    
    361,455
    
    
    
    287,228
    
    
    
    273,623Intersegment adjustment
    
    
    (4,966
    )
    
    
    (3,530
    )
    
    
    (1,965
    )Total
    
    $
    356,489
    
    
    $
    283,698
    
    
    $
    271,658
  For the year ended December 31:
    
    2006
    
    2005
    
    2004Network equipment
    
    $
    100,673
    
    
    $
    86,091
    
    
    $
    84,645Network integration
    
    
    167,394
    
    
    
    150,687
    
    
    
    142,541Fiber optic components
    
    
    88,422
    
    
    
    46,920
    
    
    
    44,472Total
    
    $
    356,489
    
    
    $
    283,698
    
    
    $
    271,658
    For the year ended December 31:
    
    2006
    
    2005
    
    2004Americas
    
    $
    116,566
    
    
    $
    73,323
    
    
    $
    63,736Europe
    
    
    219,110
    
    
    
    198,129
    
    
    
    192,021Asia Pacific
    
    
    20,571
    
    
    
    11,669
    
    
    
    13,172Other regions
    
    
    242
    
    
    
    577
    
    
    
    2,729Total
    
    $
    356,489
    
    
    $
    283,698
    
    
    $
    271,658
 80




---



##### Table of Contents



At December 31:
    
    2006
    
    2005Americas
    
    $
    3,595
    
    
    $
    2,013Europe
    
    
    7,277
    
    
    
    6,639Asia Pacific
    
    
    3,300
    
    
    
    5,413Other regions
    
    
    
    
    
    
    Total
    
    $
    14,172
    
    
    $
    14,065
  For the year ended December 31:
    
    2006
    
    2005
    
    2004Networking group
    
    $
    (1,116
    )
    
    $
    2,300
    
    
    $
    4,746Optical components group
    
    
    (705
    )
    
    
    (9,313
    )
    
    
    (9,840
    )Development stage enterprise group
    
    
    (1,558
    )
    
    
    (1,721
    )
    
    
    (2,094
    )(3,379
    )
    
    
    (8,734
    )
    
    
    (7,188
    )Intersegment adjustment
    
    
    (117
    )
    
    
    
    
    
    
    Total
    
    $
    (3,496
    )
    
    $
    (8,734
    )
    
    $
    (7,188
    )
  For the year ended December 31:
    
    2006
    
    2005
    
    2004Domestic
    
    $
    (17,190
    )
    
    $
    (17,654
    )
    
    $
    (9,344
    )Foreign
    
    
    15,540
    
    
    
    7,129
    
    
    
    1,700Total
    
    $
    (1,650
    )
    
    $
    (10,525
    )
    
    $
    (7,644
    )
 15. Other Income (Expense), Net
  For the year ended December 31:
    
    2006
    
    2005
    
    2004Interest income
    
    $
    4,972
    
    
    $
    2,024
    
    
    $
    1,084Gain on sale of investment
    
    
    
    
    
    
    
    
    
    
    2,000Gain (loss) on disposition of assets
    
    
    467
    
    
    
    37
    
    
    
    (235
    )Other, net
    
    
    (53
    )
    
    
    355
    
    
    
    (164
    )Total
    
    $
    5,386
    
    
    $
    2,416
    
    
    $
    2,685
 81




---



##### Table of Contents



16. Supplemental Statements of Cash Flow Information
  For the year ended December 31:
    
    2006
    
    2005
    
    2004Supplemental disclosure of cash flow information:Cash paid during year for interest
    
    $
    3,936
    
    
    $
    3,221
    
    
    $
    2,736Cash paid during year for income taxes
    
    $
    3,153
    
    
    $
    4,209
    
    
    $
    3,380
  17. Subsequent Events
  82




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##### Table of Contents



18. Quarterly Financial Data (Unaudited)
 Mar. 31,
    
    June 30,
    
    Sept. 30,
    
    Dec. 31,For the three months ended:
    
    2006
    
    2006
    
    2006
    
    2006Revenue
    
    $
    77,262
    
    
    $
    86,965
    
    
    $
    89,616
    
    
    $
    102,646Cost of goods sold (1)
    
    
    51,517
    
    
    
    60,256
    
    
    
    61,092
    
    
    
    71,342Gross profit
    
    
    25,745
    
    
    
    26,709
    
    
    
    28,524
    
    
    
    31,304Operating costs and expenses:Product development and engineering (2)
    
    
    6,980
    
    
    
    6,672
    
    
    
    7,331
    
    
    
    7,204Selling, general and administrative (3)
    
    
    20,674
    
    
    
    21,823
    
    
    
    20,861
    
    
    
    24,181Impairment of goodwill and other intangibles
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    Total operating costs and expenses
    
    
    27,654
    
    
    
    28,547
    
    
    
    28,192
    
    
    
    31,385Operating income (loss)
    
    
    (1,909
    )
    
    
    (1,838
    )
    
    
    332
    
    
    
    (81
    )Interest expense
    
    
    (1,056
    )
    
    
    (733
    )
    
    
    (819
    )
    
    
    (932
    )Other income, net
    
    
    616
    
    
    
    1,050
    
    
    
    1,646
    
    
    
    2,074Income (loss) before income taxes
    
    
    (2,349
    )
    
    
    (1,521
    )
    
    
    1,159
    
    
    
    1,061Provision for income taxes
    
    
    1,332
    
    
    
    1,122
    
    
    
    943
    
    
    
    468Net income (loss)(4)
    
    $
    (3,681
    )
    
    $
    (2,643
    )
    
    $
    216
    
    
    $
    593Net income (loss) per share:Basic
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    0.00
    
    
    $
    0.00Diluted
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    0.00
    
    
    $
    0.00Weighted average number of shares:Basic
    
    
    107,714
    
    
    
    125,073
    
    
    
    125,202
    
    
    
    125,376Diluted
    
    
    107,714
    
    
    
    125,073
    
    
    
    126,365
    
    
    
    128,551
 Mar. 31,
    
    June 30,
    
    Sept. 30,
    
    Dec. 31,For the three months ended:
    
    2005
    
    2005
    
    2005
    
    2005Revenue
    
    $
    62,007
    
    
    $
    64,647
    
    
    $
    65,875
    
    
    $
    91,169Cost of goods sold (1)
    
    
    40,992
    
    
    
    42,321
    
    
    
    46,300
    
    
    
    64,366Gross profit
    
    
    21,015
    
    
    
    22,326
    
    
    
    19,575
    
    
    
    26,803Operating costs and expenses:Product development and engineering (2)
    
    
    6,531
    
    
    
    6,287
    
    
    
    6,133
    
    
    
    7,100Selling, general and administrative (3)
    
    
    18,251
    
    
    
    18,273
    
    
    
    15,619
    
    
    
    20,259Total operating costs and expenses
    
    
    24,782
    
    
    
    24,560
    
    
    
    21,752
    
    
    
    27,359Operating loss
    
    
    (3,767
    )
    
    
    (2,234
    )
    
    
    (2,177
    )
    
    
    (556
    )Interest expense
    
    
    (786
    )
    
    
    (1,715
    )
    
    
    (767
    )
    
    
    (939
    )Other income, net
    
    
    485
    
    
    
    231
    
    
    
    1,117
    
    
    
    583Loss before income taxes
    
    
    (4,068
    )
    
    
    (3,718
    )
    
    
    (1,827
    )
    
    
    (912
    )Provision for income taxes
    
    
    2,369
    
    
    
    425
    
    
    
    1,317
    
    
    
    1,663Net loss(4)
    
    $
    (6,437
    )
    
    $
    (4,143
    )
    
    $
    (3,144
    )
    
    $
    (2,575
    )Net loss per share:Basic and diluted
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    (0.03
    )
    
    $
    (0.02
    )Weighted average number of shares:Basic and diluted
    
    
    104,144
    
    
    
    104,350
    
    
    
    104,437
    
    
    
    104,464
 
 (1)
    
    Cost of goods sold included share-based compensation expense under SFAS No. 123(R) of
$72,000, $76,000, $83,000 and $80,000 for the three months ended March 31, June 30,
September 30, and December 31, 2006, respectively. There was no share-based compensation
expense related to employee stock options under SFAS No. 123 in 2005 because the Company did
not adopt the recognition provisions of SFAS No. 123.(2)
    
    Product development and engineering expense included share-based compensation expense
under SFAS No. 123(R) of $205,000, $184,000, $190,000 and $196,000 for the three months
ended March 31, June 30, September 30, and December 31, 2006, respectively There was no
share-based compensation expense related to employee stock options under SFAS No. 123 in
2005 because the Company did not adopt the recognition provisions of SFAS No. 123. 83




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(3)
    
    Selling, general and administrative expense included share-based compensation expense
under SFAS 123(R) of $462,000, $615,000, $589,000 and $690,000 for the three months ended
March 31, June 30, September 30, and December 31, 2006, respectively. Selling, general and
administrative expense included share-based compensation expense under SFAS No. 123 of
$162,000 for the three months ended June 30, 2005 for the issuance of 100,000 shares to
certain employees. There was no other share-based compensation expense related to employee
stock options under SFAS No. 123 in 2005 because the Company did not adopt the recognition
provisions of SFAS No. 123.(4)
    
    Net income (loss) included share-based compensation expense, net of income tax, under
SFAS 123(R) of $739,000, $875,000, $862,000 and $966,000 for the three months ended March
31, June 30, September 30, and December 31, 2006, respectively. Net loss included
share-based compensation expense, net of income tax, under SFAS No. 123 of $162,000 for the
three months ended June 30, 2005 for the issuance of 100,000 shares to certain employees.
There was no other share-based compensation expense related to employee stock options under
SFAS No. 123 in 2005 because the Company did not adopt the recognition provisions of SFAS
No. 123. 84




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ITEM 9. CHANGES IN OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Managements Report on Internal Control Over Financial Reporting
  
    
    Pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets;
    
    Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles generally
accepted in the United States, and that our receipts and expenditures are being made
only in accordance with authorization of our management and directors; and
    
    Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material
effect on the financial statements.
 85




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##### Table of Contents



Internal Control 
Integrated Framework
 Changes in Internal Control Over Financial Reporting
   86




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Report of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting
       87




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ITEM 9B. OTHER INFORMATION
  88




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PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  Code of Business Conduct and Corporate Governance
   
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  89




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PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
  Form 10-KPage No.Consolidated Financial Statements:Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
    
    
    57Statements of Operations for the years ended December 31, 2006, 2005 and 2004
    
    
    58Balance Sheets as of December 31, 2006 and 2005
    
    
    59Statements of Stockholders Equity and Comprehensive Income (Loss) for the
years ended December 31, 2006, 2005 and 2004
    
    
    60Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
    
    
    61Notes to Financial Statements
    
    
    62Report of Independent Registered Public Accounting Firm on Internal Control
Over Financial Reporting
    
    
    86
   ExhibitNo.
    
    Description2.1
    
    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)).2.3
    
    Certificate of Merger Merging LuminentOIC, Inc. into MRV Sub
Corp. (incorporated by reference to Exhibit 4.1 of MRVs 8-K
filed with the SEC on January 8, 2002).3.1
    
    Certificate of Incorporation, as amended (incorporated by
referenced to Exhibit 3a filed as part of Registrants
Registration Statement on Form S-1 (File No. 33-48003)).3.2
    
    Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on March 20, 1996
(incorporated by reference to Exhibit 3.2 of MRVs Form 10-Q
for the quarter ended June 30, 1998 filed August 14, 1998).3.3
    
    Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on July 29, 1996
(incorporated by reference to Exhibit 3.3 of MRVs Form 10-Q
for the quarter ended June 30, 1998 filed August 14, 1998).3.4
    
    Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on November 19, 1998
(incorporated by reference to Exhibit 3.4 of MRVs Form 10-K
for the year ended December 31, 1998 filed March 31, 1999).
 90




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##### Table of Contents



ExhibitNo.
    
    Description3.5
    
    Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on May 11, 2000
(incorporated by reference to Exhibit 3.5 of MRVs Form 10-K
for the year ended December 31, 2000 filed April 17, 2001).3.6
    
    Bylaws (incorporated by reference to Exhibit 3b filed as part
of Registrants Registration Statement on Form S-1 (File No.
33-48003)).4.1
    
    Specimen certificate of common stock (incorporated by
reference to Exhibit 4.5 filed as part of Registrants
Registration Statement on Form S-3 (File No. 333-64017).10.1
    
    Key Employee Agreement between MRV and Noam Lotan dated March
23, 1993 (incorporated by reference to Exhibit 10b(1) filed as
part of Registrants Registration Statement on Form S-1 (File
No. 33-48003)).10.2
    
    Letter amending Key Employee Agreement between MRV and Noam
Lotan (incorporated by reference to Exhibit 10b(1)1 filed as
part of Registrants Registration Statement on Form S-1 (File
No. 33-48003)).10.3
    
    Letter amending Key Employee Agreement between MRV and Noam
Lotan (incorporated by reference to Exhibit 10b(1)2 filed as
part of Registrants Registration Statement on Form S-1 (File
No. 33-86516)).10.4
    
    Key Employee Agreement between MRV and Shlomo Margalit
(incorporated by reference to Exhibit 10b(3) filed as part of
Registrants Registration Statement on Form S-1 (File No.
33-48003)).10.5
    
    Letter amending Key Employee Agreement between MRV and Shlomo
Margalit (incorporated by reference to Exhibit 10b(3)1 filed
as part of Registrants Registration Statement on Form S-1
(File No. 33-48003)).10.6
    
    Form of Letter amending Key Employee Agreement between MRV and
Shlomo Margalit (incorporated by reference to Exhibit 10b(3)2
filed as part of Registrants Registration Statement on Form
S-1 (File No. 33-86516)).10.7
    
    Standard Industrial/Commercial Single-Tenant Lease dated
October 8, 1996 between MRV and Nordhoff Development relating
to the premises located at 20415 Nordhoff Street, Chatsworth,
California (incorporated by reference to Exhibit No. 10.23 of
Registrants Annual Report on Form 10-K for the year ended
December 31, 1996 filed April 15, 1997).10.7.1
    
    Amendment to Lease between Nordhoff Industrial and the
Registrant dated December 14, 2001 relating to premises
located at 20415 Nordhoff Street (incorporated by reference to
Exhibit 10.65 of MRVs Form 10-K filed with the SEC on March
21, 2002).10.8
    
    1997 Incentive and Nonstatutory Stock Option Plan, as amended
(incorporated by reference to Appendix A to the Registrants
Definitive Proxy Statement filed with the SEC on November 14,
2001).10.9
    
    Form of Stock Option Agreement under the 1997 Incentive and
Nonstatutory Stock Option Plan (incorporated by reference to
Exhibit 4.2 to the Registrants Registration Statement on Form
S-8 filed with the SEC on September 24, 1999 (file no.
333-87735)).
 91




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##### Table of Contents



ExhibitNo.
    
    Description10.10
    
    Securities Purchase Agreement dated as of June 1, 2003 between MRV
Communications, Inc. and Deutsche Bank AG, London Branch, with form of
Convertible Note attached as Exhibit A thereto (incorporated by reference
to Exhibit 4.1 of registrants Current Report on Form 8-K filed June 3,
2003).10.11
    
    Amendment #1 to Convertible Note dated as of June 13, 2003 (incorporated by
reference to Exhibit 4.3 of the Registration Statement on Form S-3 filed
with the SEC on June 16, 2003 (file no. 333-106169)).10.12
    
    Registration Rights Agreement dated as of June 1, 2003 (incorporated by
reference to Exhibit 4.2 of registrants Current Report on Form 8-K filed
June 3, 2003).10.13
    
    Non-Director and Non-Executive Officer Consolidated Long-Term Stock
Incentive Plan (incorporated by reference to Exhibit 4.1 of the
Registration Statement on Form S-8 filed with the SEC on July 17, 2003
(file no. 333-107109)).10.14
    
    Form of Stock Option Agreement for the Non-Director and Non-Executive
Officer Consolidated Long-Term Stock Incentive Plan Stock Option Agreement
(incorporated by reference to Exhibit 4.2 of the Registration Statement on
Form S-8 filed with the SEC on July 17, 2003 (file no. 333-107109)).10.15
    
    Settlement Agreement and Waiver of Rights dated January 9, 2006 between MRV
Communications, Inc. and Mr. Shay Gonen (incorporated by reference to
Exhibit 10.15 of MRVs Form 10-K for the year ended December 31, 2005 filed
on March 6, 2006)10.16
    
    Framework Agreement by and among Huagong Tech Company Limited, registrant,
Wuhan Huagong Genuine Optics Technology Co., Ltd. and Luminent, Inc. dated
as of May 23, 2006 (incorporated by reference to Exhibit 10.1 of MRVs Form
10-Q for the quarter ended June 30, 2006 filed on August 2, 2006).10.17
    
    Letter Agreement dated July 18, 2006 by and among Huagong Tech Company
Limited, registrant, Wuhan Huagong Genuine Optics Technology Co., Ltd. (HG
Genuine) and Luminent, Inc. mutually terminating Framework Agreement
(incorporated by reference to Exhibit 10.2 of MRVs Form 10-Q for the
quarter ended June 30, 2006 filed on August 2, 2006).10.18
    
    Extension Addendum between Bud H. Harris successor Lessor to Nordhoff
Development, a General Partnership and the Registrant dated September 26,
2006 relating to premises located at 20415 Nordhoff Street.21.1
    
    Subsidiaries of Registrant.23.1
    
    Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.24.1
    
    Power of Attorney (included following signature page).31.1
    
    Certification of the Chief Executive Officer required by Rule 13a-14(a) of
the Exchange Act.31.2
    
    Certification of the Chief Financial Officer required by Rule 13a-14(a) of
the Exchange Act.32.1
    
    Certification pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.
 92




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SIGNATURES
  MRV COMMUNICATIONS, INCBy:
    
    /s/ Noam LotanNoam LotanPresident and Chief Executive OfficerBy:
    
    /s/ Kevin RubinKevin RubinChief Financial Officer
and Corporate Compliance Officer
 93




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##### Table of Contents



POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ Noam Lotan

(Noam Lotan)
    
    President and Chief Executive Officer (Principal
Executive Officer)
    
    March 2, 2007/s/ Shlomo Margalit

(Shlomo Margalit)
    
    Chairman of the Board, Chief Technology
Officer, and Secretary
    
    March 2, 2007/s/ Kevin Rubin

(Kevin Rubin)
    
    Chief Financial Officer and Corporate Compliance
Officer (Principal Finance and Accounting Officer)
    
    March 2, 2007/s/ Igal Shidlovsky

(Igal Shidlovsky)
    
    Director
    
    March 2, 2007/s/ Guenter Jaensch

(Guenter Jaensch)
    
    Director
    
    March 2, 2007/s/ Daniel Tsui

(Daniel Tsui)
    
    Director
    
    March 5, 2007/s/ Baruch Fischer

(Baruch Fischer)
    
    Director
    
    March 5, 2007/s/ Harold W. Furchtgott-Roth

(Harold W. Furchtgott-Roth)
    
    Director
    
    March 2, 2007
 94