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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, 2005
 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
  Name of each exchange on whichTitle of each class
    
    registeredNone
    
    None
   
  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, 2005
 Table of Contents
 Page NumberPART I3Item 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    9Item 1B. Unresolved Staff Comments
    
    
    22Item 2: Properties
    
    
    23Item 3. Legal Proceedings
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24PART II
    
    
    
    
    26Item 5. Market for the Registrants Common Equity and Related Stockholder Matters
    
    
    26Item 6. Selected Financial Data
    
    
    28Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    29Item 7A. Quantitative and Qualitative Disclosures About Market Risks
    
    
    46Item 8. Financial Statements and Supplementary Data
    
    
    48Item 9. Changes in or Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    72Item 9A. Controls and Procedures
    
    
    72Item 9B. Other Information
    
    
    74PART III
    
    
    
    
    75Item 10. Directors and Executive Officers of the Registrant
    
    
    75Item 11. Executive Compensation
    
    
    75Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    75Item 13. Certain Relationships and Related Transactions
    
    
    75Item 14. Principal Accountant Fees and Services
    
    
    75PART IV
    
    
    
    
    76Item 15. Exhibits and Financial Statement Schedules
    
    
    76SIGNATURES
    
    
    
    
    79Exhibit 10.15Exhibit 21.1Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1
   2




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PART I
   
 ITEM 1. BUSINESS
 Overview
    3




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Industry Background
   Products and Services
   4




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Physical Layer Products  Optical Connectivity
  Switches and Routers  Ethernet Connectivity. .
 Console Management.
  Other Networking Products
 Services
 5




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Optical Components
 Sales and Marketing
  Worldwide Sales
    Markets Served
  Enterprise Market
 6




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Telecommunication Carrier and Service Provider Markets
 Vertical and Regional Markets
 Optical Components
 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;
    
    Global presence, including distribution network;
    
    Conformance to standards; and
    
    Brand name recognition.
  7




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Product Development and Engineering
   Networking Group
 Optical Components Group
 Development Stage Enterprise Group
 Manufacturing
   8




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Components
  Intellectual Property
  Employees
  
 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;
 9




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
    
    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.
    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.
  
    
    increased price competition, including competition from low-cost producers in
Asia;
 10




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
    
    price reductions that we make, such as our recent marketing decision 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;
    
    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.
  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
    
    unanticipated engineering complexities.
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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;
    
    increased price competition for our products;
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
    
    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.
  The Price Of Our Shares May Continue To Be Highly Volatile.
  13




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
    
    actual or anticipated fluctuations in our operating results;
    
    announcements of technological innovations or new product introductions by us
or our competitors;
    
    changes of estimates of our future operating results by securities analysts;
    
    developments with respect to patents, copyrights or proprietary rights; and
    
    general market conditions and other factors.
  Our 2003 Notes Provide For Various Events Of Default That Would Entitle The Holders To Require Us
To Repay Upon a Holders Demand The Outstanding Principal Amount, Plus Accrued And Unpaid Interest.
  
    
    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
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°
    
    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;°
    
    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; or°
    
    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
 °
    
    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; or°
    
    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;
 
    
    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.
  15




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Sales Of Substantial Amounts Of Our Shares By Selling Stockholders Could Cause The Market Price Of
Our Shares To Decline.
  Our Business Is Intensely Competitive And The Evident Trend Of Consolidations In Our Industry Could
Make It More So.
   
    
    intense price competition in sales of new equipment, resulting in lower profit
margins;
    
    discounting resulting from sales of used equipment or inventory that a
competitor has written down or written off;
    
    early announcements of competing products and other extensive marketing efforts;
    
    competitors offering to repurchase our equipment from existing customers;
    
    customer financing assistance;
    
    marketing and advertising assistance; and
    
    intellectual property assertions and disputes.
  16




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We Face Risks From Our International Operations.
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Percentage of total revenue from foreign sales
    
    
    74
    %
    
    
    77
    %
    
    
    78
    %
  
    
    greater difficulty in accounts receivable collection and longer collection periods;
    
    the impact of recessions in economies outside the United States;
    
    unexpected changes in regulatory requirements;
    
    seasonal reductions in business activities in some parts of the world, such as
during the summer months in Europe or in the winter months in Asia when the Chinese New
Year is celebrated;
    
    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
 17




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
    
    personnel recruitment delays.
   We 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.
  18




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Our Inability To Achieve Adequate Production Yields For Certain Components We Manufacture
Internally Could Result In A Loss Of Sales And Customers.
  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.
  19




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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.
  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.
  20




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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.
  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.
  21




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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.
  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
  22




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ITEM 2. PROPERTIES
  Location
    
    Square Feet
    
    Lease Expiration
    
    PurposeChatsworth, CA
    
    USA
    
    
    13,300
    
    
    3/31/2007
    
    AdministrationChatsworth, CA
    
    USA
    
    
    22,200
    
    
    12/31/2015
    
    Manufacturing and product
developmentChatsworth, CA
    
    USA
    
    
    49,920
    
    
    7/13/2014
    
    Administration, product
development, manufacturing and
salesChatsworth, CA
    
    USA
    
    
    17,710
    
    
    2/28/2006
    
    Manufacturing and product
developmentLittleton, MA
    
    USA
    
    
    54,411
    
    
    2/28/2015
    
    Administration, product
development, manufacturing and
salesHsinchu
    
    Taiwan
    
    
    81,861
    
    
    12/31/2006
    
    Administration, product
development, manufacturing and
salesGeneva
    
    Switzerland
    
    
    29,428
    
    
    12/31/2010
    
    Administration, product
development, manufacturing and
salesZurich
    
    Switzerland
    
    
    9,343
    
    
    3/31/2013
    
    Administration and salesStockholm
    
    Sweden
    
    
    48,825
    
    
    9/30/2006
    
    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
    
    
    6/30/2010
    
    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 distributionRome
    
    Italy
    
    
    6,026
    
    
    1/31/2008
    
    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
  23




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ITEM 3. LEGAL PROCEEDINGS
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 Submission Of Matters To A Vote Of Security Holders
  Against orNumber of Votes:
    
    For
    
    WithheldNoam Lotan
    
    
    90,127,047
    
    
    
    1,557,990Shlomo Margalit
    
    
    90,140,656
    
    
    
    1,544,381Igal Shidlovsky
    
    
    90,493,198
    
    
    
    1,191,839Guenter Jaensch
    
    
    90,477,698
    
    
    
    1,207,339Daniel Tsui
    
    
    90,713,975
    
    
    
    971,062Baruch Fischer
    
    
    90,496,681
    
    
    
    1,188,356Harold W. Furchtgott-Roth
    
    
    91,050,881
    
    
    
    634,156
  Number of VotesProposal
    
    For
    
    Against
    
    AbstainedTo ratify the selection of Ernst &
Young LLP as independent auditors
for the Company for the fiscal year
ending December 31, 2005.
    
    
    91,360,739
    
    
    
    246,592
    
    
    
    77,706
 Executive Officers Of The Registrant
  24




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Noam Lotan
 Dr. Shlomo Margalit
 Kevin Rubin
 Near Margalit
 25




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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, 2005First Quarter
    
    $
    4.10
    
    
    $
    2.83Second Quarter
    
    $
    3.45
    
    
    $
    1.60Third Quarter
    
    $
    2.44
    
    
    $
    1.93Fourth Quarter
    
    $
    2.23
    
    
    $
    1.81Fiscal Year Ended December 31, 2004First Quarter
    
    $
    5.01
    
    
    $
    2.72Second Quarter
    
    $
    3.57
    
    
    $
    1.99Third Quarter
    
    $
    3.10
    
    
    $
    2.15Fourth Quarter
    
    $
    4.15
    
    
    $
    2.47
  Dividends
  Equity Compensation Plan Information
  Number of Securities RemainingNumber of Securities
    
    
    
    
    
    Available for Future Issuance Underto be 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)
    
    
    2,855,650
    
    
    $
    3.29
    
    
    
    805,258Stock option and
warrant plans not
approved by
security holders
(2)
    
    
    8,577,539
    
    
    $
    3.14
    
    
    
    3,220,014Total
    
    
    11,433,189
    
    
    $
    3.18
    
    
    
    4,025,272
 (1)
    
    Includes shares underlying options granted under the:
 
    
    1992 Stock Option Plan (no securities available for future issuance); and
 26




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
    
    1997 Incentive and Nonstatutory Stock Option Plan.
 (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.
  27




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ITEM 6. SELECTED FINANCIAL DATA
  For the year ended December 31:
    
    2005
    
    2004
    
    2003
    
    2002
    
    2001Statement of Operations Data:Revenue
    
    $
    283,698
    
    
    $
    271,658
    
    
    $
    238,983
    
    
    $
    252,532
    
    
    $
    332,844Cost of goods sold
    
    
    193,746
    
    
    
    179,780
    
    
    
    164,893
    
    
    
    169,566
    
    
    
    267,389Gross profit
    
    
    89,952
    
    
    
    91,878
    
    
    
    74,090
    
    
    
    82,966
    
    
    
    65,455Operating costs and expenses:Product development and engineering
    
    
    26,051
    
    
    
    24,949
    
    
    
    30,972
    
    
    
    49,358
    
    
    
    94,813Selling, general and administrative
    
    
    72,632
    
    
    
    74,083
    
    
    
    62,868
    
    
    
    90,047
    
    
    
    164,785Amortization of intangibles
    
    
    3
    
    
    
    34
    
    
    
    33
    
    
    
    140
    
    
    
    126,484Impairment of goodwill and other
intangibles
    
    
    
    
    
    
    
    
    
    
    356
    
    
    
    72,697
    
    
    
    Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,038
    
    
    
    Total operating costs and expenses
    
    
    98,686
    
    
    
    99,066
    
    
    
    94,229
    
    
    
    229,280
    
    
    
    386,082Operating loss
    
    
    (8,734
    )
    
    
    (7,188
    )
    
    
    (20,139
    )
    
    
    (146,314
    )
    
    
    (320,627
    )Other expense, net
    
    
    1,791
    
    
    
    456
    
    
    
    6,438
    
    
    
    23,695
    
    
    
    11,200Loss before provision for taxes,
extraordinary gain and cumulative effect of
an accounting change
    
    
    (10,525
    )
    
    
    (7,644
    )
    
    
    (26,577
    )
    
    
    (170,009
    )
    
    
    (331,827
    )Provision for taxes
    
    
    5,774
    
    
    
    3,036
    
    
    
    2,361
    
    
    
    13,395
    
    
    
    4,475Loss before extraordinary gain and
cumulative effect of an accounting change
    
    
    (16,299
    )
    
    
    (10,680
    )
    
    
    (28,938
    )
    
    
    (183,404
    )
    
    
    (336,302
    )Extraordinary gain, net of tax
    
    
    
    
    
    
    
    
    
    
    1,950
    
    
    
    
    
    
    
    9,949Cumulative effect of an accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (296,355
    )
    
    
    Net loss
    
    $
    (16,299
    )
    
    $
    (10,680
    )
    
    $
    (26,988
    )
    
    $
    (479,759
    )
    
    $
    (326,353
    )Basic and diluted loss per share
    
    $
    (0.16
    )
    
    $
    (0.10
    )
    
    $
    (0.26
    )
    
    $
    (5.25
    )
    
    $
    (4.27
    )Basic and diluted weighted average shares
outstanding
    
    
    104,350
    
    
    
    104,793
    
    
    
    102,022
    
    
    
    91,421
    
    
    
    76,369
 At December 31:
    
    2005
    
    2004
    
    2003
    
    2002
    
    2001Balance Sheet Data:Cash and cash equivalents
    
    $
    67,984
    
    
    $
    77,226
    
    
    $
    87,602
    
    
    $
    99,445
    
    
    $
    164,676Working capital
    
    
    99,514
    
    
    
    113,995
    
    
    
    108,051
    
    
    
    91,188
    
    
    
    175,966Total assets
    
    
    261,486
    
    
    
    272,078
    
    
    
    272,684
    
    
    
    302,980
    
    
    
    887,260Total long-term liabilities
    
    
    29,694
    
    
    
    28,663
    
    
    
    27,415
    
    
    
    4,056
    
    
    
    102,254Stockholders equity
    
    
    113,313
    
    
    
    135,559
    
    
    
    140,128
    
    
    
    154,476
    
    
    
    584,676
 28




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##### 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 Condensed Financial Statements and Notes thereto included
elsewhere in this Form 10-K. In addition to historical information, the discussion in this Form
10-K contains certain forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated by these forward-looking statements due to
factors, including but not limited to, those set forth in the following and elsewhere in this Form
10-K. We assume no obligation to update any of the forward-looking statements after the date of
this Form 10-K.
 Overview
     29




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##### Table of Contents



Critical Accounting Policies
    Revenue Recognition.
 30




---



##### Table of Contents



Allowance for Doubtful Accounts.
 Inventory Reserves.
 Goodwill and Other Intangibles.
 Income Taxes
  Currency Rate Fluctuations
  31




---



##### Table of Contents



Management Discussion Snapshot
  For the year ended December 31,
    
    2005
    
    2004
    
    2003$
    
    %
    
    $
    
    %
    
    $
    
    %Revenue(1)
    
    $
    283,698
    
    
    
    100
    %
    
    $
    271,658
    
    
    
    100
    %
    
    $
    238,983
    
    
    
    100
    %Networking group
    
    
    236,782
    
    
    
    83
    
    
    
    227,192
    
    
    
    84
    
    
    
    202,399
    
    
    
    85Optical components group
    
    
    50,446
    
    
    
    18
    
    
    
    46,431
    
    
    
    17
    
    
    
    38,790
    
    
    
    16Gross margin(2)
    
    
    89,952
    
    
    
    32
    
    
    
    91,878
    
    
    
    34
    
    
    
    74,090
    
    
    
    31Networking group
    
    
    84,355
    
    
    
    36
    
    
    
    85,405
    
    
    
    38
    
    
    
    70,839
    
    
    
    35Optical components group
    
    
    5,597
    
    
    
    11
    
    
    
    6,473
    
    
    
    14
    
    
    
    3,251
    
    
    
    8Operating costs and expenses(2)
    
    
    98,686
    
    
    
    35
    
    
    
    99,066
    
    
    
    36
    
    
    
    94,229
    
    
    
    39Networking group
    
    
    82,055
    
    
    
    35
    
    
    
    80,659
    
    
    
    36
    
    
    
    73,046
    
    
    
    36Optical components group
    
    
    14,910
    
    
    
    30
    
    
    
    16,313
    
    
    
    35
    
    
    
    14,363
    
    
    
    37Development stage enterprise group
    
    
    1,721
    
    
    NM
    
    
    2,094
    
    
    NM
    
    
    6,820
    
    
    NMOperating income (loss)(2)
    
    
    (8,734
    )
    
    
    (3
    )
    
    
    (7,188
    )
    
    
    (3
    )
    
    
    (20,139
    )
    
    
    (8
    )Networking group
    
    
    2,300
    
    
    
    1
    
    
    
    4,746
    
    
    
    2
    
    
    
    (2,207
    )
    
    
    (1
    )Optical components group
    
    
    (9,313
    )
    
    
    (18
    )
    
    
    (9,840
    )
    
    
    (21
    )
    
    
    (11,112
    )
    
    
    (29
    )Development stage enterprise group
    
    
    (1,721
    )
    
    NM
    
    
    (2,094
    )
    
    NM
    
    
    (6,820
    )
    
    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)
    
    Statement of Operations data express percentages as a percentage of revenue. Statement
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 in 2004 or 2003.
  32




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##### Table of Contents



Year Ended December 31, 2005 (2005) Compared
To Year Ended December 31, 2004 (2004)
 Revenue
  % ChangeConstantFor 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 and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results are calculated by translating the current year results at prior year average
exchange rates.
  Networking Group
 33




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##### Table of Contents



Optical Components Group.
 Development Stage Enterprise Group
 Gross Profit
  % ChangeConstantFor the year ended December 31:
    
    2005
    
    2004
    
    $ Change
    
    % Change
    
    Currency (1)Networking group
    
    $
    84,355
    
    
    $
    85,405
    
    
    $
    (1,050
    )
    
    
    (1
    )%
    
    
    (1
    )%Optical components group
    
    
    5,597
    
    
    
    6,473
    
    
    
    (876
    )
    
    
    (14
    )
    
    
    (17
    )Development stage enterprise group
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    89,952
    
    
    $
    91,878
    
    
    $
    (1,926
    )
    
    
    (2
    )
    
    
    (2
    )
 (1)
    
    Percentage information in constant currencies in the table and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results are calculated by translating the current year results at prior year average
exchange rates.
  34




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##### Table of Contents



Networking Group
 Optical Components Group
 Development Stage Enterprise Group
 Operating Costs and Expenses
  % ChangeConstantFor the year ended December 31:
    
    2005
    
    2004
    
    $ Change
    
    % Change
    
    Currency (1)Networking group
    
    $
    82,055
    
    
    $
    80,659
    
    
    $
    1,396
    
    
    
    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
    
    $
    98,686
    
    
    $
    99,066
    
    
    $
    (380
    )
    
    
    
    
    
    
    
 (1)
    
    Percentage information in constant currencies in the table and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results are calculated by translating the current year results at prior year average
exchange rates.
  Networking Group
 35




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##### Table of Contents



Optical Components Group
 Development Stage Enterprise Group
 Operating Income (Loss)
  % ChangeConstantFor 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 and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results are calculated by translating the current year results at prior year average
exchange rates.
  Networking Group
 Optical Components Group
 Development Stage Enterprise Group
 36




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##### Table of Contents



Interest Expense And Other Income, Net
  Provision For Taxes
  37




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##### Table of Contents



Year Ended December 31, 2004 (2004) Compared
To Year Ended December 31, 2003 (2003)
 Revenue
  % ChangeConstantFor the year ended December 31:
    
    2004
    
    2003
    
    $ Change
    
    % Change
    
    Currency (2)Networking group
    
    $
    227,192
    
    
    $
    202,399
    
    
    $
    24,793
    
    
    
    12
    %
    
    
    5
    %Optical components group
    
    
    46,431
    
    
    
    38,790
    
    
    
    7,641
    
    
    
    20
    
    
    
    18Development stage enterprise group
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    0273,623
    
    
    
    241,189
    
    
    
    32,434
    
    
    
    13
    
    
    
    7Adjustments (1)
    
    
    (1,965
    )
    
    
    (2,206
    )
    
    
    241
    
    
    
    (11
    )
    
    
    (11
    )Total
    
    $
    271,658
    
    
    $
    238,983
    
    
    $
    32,675
    
    
    
    14
    
    
    
    7
 (1)
    
    Adjustments represent the elimination of intersegment revenue in order to reconcile to
consolidated revenues.(2)
    
    Percentage information in constant currencies in the table and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results are calculated by translating the current year results at prior year average
exchange rates.
   Networking Group
 38




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##### Table of Contents



Optical Components Group.
 Development Stage Enterprise Group
 Gross Profit
  % ChangeConstantFor the year ended December 31:
    
    2004
    
    2003
    
    $ Change
    
    % Change
    
    Currency (1)Networking group
    
    $
    85,405
    
    
    $
    70,839
    
    
    $
    14,566
    
    
    
    21
    %
    
    
    15
    %Optical components group
    
    
    6,473
    
    
    
    3,251
    
    
    
    3,222
    
    
    
    99
    
    
    
    93Development stage enterprise group
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    91,878
    
    
    $
    74,090
    
    
    $
    17,788
    
    
    
    24
    
    
    
    18
 (1)
    
    Percentage information in constant currencies in the table and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results are calculated by translating the current year results at prior year average
exchange rates.
  Networking Group
 Optical Components Group
 39




---



##### Table of Contents



Development Stage Enterprise Group
 Operating Costs and Expenses
  % ChangeConstantFor the year ended December 31:
    
    2004
    
    2003
    
    $ Change
    
    % Change
    
    Currency (1)Networking group
    
    $
    80,659
    
    
    $
    73,046
    
    
    $
    7,613
    
    
    
    10
    %
    
    
    7
    %Optical components group
    
    
    16,313
    
    
    
    14,363
    
    
    
    1,950
    
    
    
    14
    
    
    
    12Development stage enterprise group
    
    
    2,094
    
    
    
    6,820
    
    
    
    (4,726
    )
    
    
    (69
    )
    
    
    (69
    )Total
    
    $
    99,066
    
    
    $
    94,229
    
    
    $
    4,837
    
    
    
    5
    
    
    
    2
 (1)
    
    Percentage information in constant currencies in the table and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results are calculated by translating the current year results at prior year average
exchange rates.
  Networking Group
 Optical Components Group
 40




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##### Table of Contents



Development Stage Enterprise Group
 Operating Income (Loss)
  % ChangeConstantFor the year ended December 31:
    
    2004
    
    2003
    
    $ Change
    
    % Change
    
    Currency (1)Networking group
    
    $
    4,746
    
    
    $
    (2,207
    )
    
    $
    6,953
    
    
    
    (315
    )%
    
    
    (251
    )%Optical components group
    
    
    (9,840
    )
    
    
    (11,112
    )
    
    
    1,272
    
    
    
    (11
    )
    
    
    (11
    )Development stage enterprise group
    
    
    (2,094
    )
    
    
    (6,820
    )
    
    
    4,726
    
    
    
    (69
    )
    
    
    (69
    )Total
    
    $
    (7,188
    )
    
    $
    (20,139
    )
    
    $
    12,951
    
    
    
    (64
    )
    
    
    (57
    )
 (1)
    
    Percentage information in constant currencies in the table and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results are calculated by translating the current year results at prior year average
exchange rates.
  Networking Group
 Optical Components Group
 Development Stage Enterprise Group
 41




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##### Table of Contents



Interest Expense And Other Income (Expense), Net
  Provision For Taxes
  Recently Issued Accounting Standards
    Summary of Significant
Accounting Policies  Stock-Based Compensation
 42




---



##### Table of Contents



Liquidity and Capital Resources
  At December 31:
    
    2005
    
    2004CashCash and cash equivalents
    
    $
    67,984
    
    
    $
    77,226Short-term marketable securities
    
    
    
    
    
    
    3,395Time deposits
    
    
    1,475
    
    
    
    1,559Long-term marketable securities
    
    
    
    
    
    
    1,83969,459
    
    
    
    84,019Debt5% convertible notes due 2008
    
    
    23,000
    
    
    
    23,000Short-term obligations
    
    
    30,378
    
    
    
    25,286Long-term debt
    
    
    284
    
    
    
    11253,662
    
    
    
    48,398Excess cash versus debt
    
    $
    15,797
    
    
    $
    35,621Ratio of cash versus debt(1)
    
    
    1.3:1
    
    
    
    1.7:1
 
 (1)
    
    Determined by dividing total cash by total debt, in each case as reflected in the
table. Working Capital
  At December 31:
    
    2005
    
    2004Current assets
    
    $
    212,842
    
    
    $
    216,533Current liabilities
    
    
    113,328
    
    
    
    102,538Working capital
    
    $
    99,514
    
    
    $
    113,995Current ratio(1)
    
    
    1.9:1
    
    
    
    2.1:1
 
 (1)
    
    Determined by dividing current assets by current liabilities, in each case as reflected in
the table.  43




---



##### Table of Contents



Cash Flow
  For the year ended December 31:
    
    2005
    
    2004Net cash provided by (used in):Operating activities
    
    $
    (20,573
    )
    
    $
    (21,559
    )Investing activities
    
    
    1,816
    
    
    
    (448
    )Financing activities
    
    
    11,095
    
    
    
    6,322Effect of exchange rate changes on cash and cash equivalents
    
    
    (1,580
    )
    
    
    5,309Net change in cash and cash equivalents
    
    $
    (9,242
    )
    
    $
    (10,376
    )
 Cash Flows Related to Operating Activities
 Cash Flows Related to Investing Activities
 Cash Flows Related to Financing Activities
 44




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Contractual Cash Obligations
  Less than 1
    
    
    
    
    
    
    
    
    
    After 5Cash Obligations
    
    Total
    
    Year
    
    1  3 Years
    
    3  5 Years
    
    YearsShort-term obligations
    
    $
    30,041
    
    
    $
    30,041
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term debt
    
    
    621
    
    
    
    337
    
    
    
    284
    
    
    
    
    
    
    
    5% convertible notes
due June 2008
    
    
    23,000
    
    
    
    
    
    
    
    23,000
    
    
    
    
    
    
    
    Unconditional
purchase obligations
    
    
    10,087
    
    
    
    8,417
    
    
    
    972
    
    
    
    3
    
    
    
    695Operating leases
    
    
    25,996
    
    
    
    5,950
    
    
    
    7,492
    
    
    
    5,809
    
    
    
    6,745Total contractual
cash obligations
    
    $
    89,745
    
    
    $
    44,745
    
    
    $
    31,748
    
    
    $
    5,812
    
    
    $
    7,440
   45




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##### Table of Contents



Internet Access to Our Financial Documents
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
 Market Risks
  Interest Rates
 Foreign Exchange Rates
   46




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##### Table of Contents



For the year ended December 31:
    
    2005
    
    2004U.S. dollars
    
    $
    57,900
    
    
    $
    61,153Euros
    
    
    3,894
    
    
    
    3,731Swiss Francs
    
    
    2,987
    
    
    
    4,033Swedish Kronas
    
    
    2,511
    
    
    
    7,391Taiwan dollars
    
    
    692
    
    
    
    918Total cash and cash equivalents
    
    $
    67,984
    
    
    $
    77,226
  Inflation
 47




---



##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
       
 48




---



##### Table of Contents



MRV Communications, Inc.
 
 Statement of Operations
 (In thousands, except per share data)
 For the year ended December 31:
    
    2005
    
    2004
    
    2003Revenue
    
    $
    283,698
    
    
    $
    271,658
    
    
    $
    238,983Cost of goods sold
    
    
    193,746
    
    
    
    179,780
    
    
    
    164,893Gross profit
    
    
    89,952
    
    
    
    91,878
    
    
    
    74,090Operating costs and expenses:Product development and engineering
    
    
    26,051
    
    
    
    24,949
    
    
    
    30,972Selling, general and administrative
    
    
    72,635
    
    
    
    74,117
    
    
    
    62,901Impairment of goodwill and other intangibles
    
    
    
    
    
    
    
    
    
    
    356Total operating costs and expenses
    
    
    98,686
    
    
    
    99,066
    
    
    
    94,229Operating loss
    
    
    (8,734
    )
    
    
    (7,188
    )
    
    
    (20,139
    )Interest expense
    
    
    (4,207
    )
    
    
    (3,141
    )
    
    
    (3,170
    )Other income (expense), net
    
    
    2,416
    
    
    
    2,685
    
    
    
    (3,268
    )Loss before taxes and extraordinary gain
    
    
    (10,525
    )
    
    
    (7,644
    )
    
    
    (26,577
    )Provision for taxes
    
    
    5,774
    
    
    
    3,036
    
    
    
    2,361Loss before extraordinary gain
    
    
    (16,299
    )
    
    
    (10,680
    )
    
    
    (28,938
    )Extraordinary gain, net of tax
    
    
    
    
    
    
    
    
    
    
    1,950Net loss
    
    $
    (16,299
    )
    
    $
    (10,680
    )
    
    $
    (26,988
    )Earnings per share:Basic and diluted loss per share:Loss before extraordinary gain
    
    $
    (0.16
    )
    
    $
    (0.10
    )
    
    $
    (0.28
    )Extraordinary gain
    
    $
    
    
    
    $
    
    
    
    $
    0.02Net loss
    
    $
    (0.16
    )
    
    $
    (0.10
    )
    
    $
    (0.26
    )Weighted average number of shares:Basic and diluted
    
    
    104,350
    
    
    
    104,793
    
    
    
    102,022
  49




---



##### Table of Contents



MRV Communications, Inc.
 
 Balance Sheets
 (In thousands, except par values)
 At December 31:
    
    2005
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    67,984
    
    
    $
    77,226Short-term marketable securities
    
    
    
    
    
    
    3,395Time deposits
    
    
    1,475
    
    
    
    1,559Accounts receivable, net
    
    
    92,466
    
    
    
    80,755Inventories
    
    
    42,216
    
    
    
    42,264Deferred income taxes
    
    
    873
    
    
    
    2,395Other current assets
    
    
    7,828
    
    
    
    8,939Total current assets
    
    
    212,842
    
    
    
    216,533Property and equipment, net
    
    
    14,065
    
    
    
    19,089Goodwill
    
    
    29,965
    
    
    
    29,965Long-term marketable securities
    
    
    
    
    
    
    1,839Deferred income taxes
    
    
    136
    
    
    
    Investments
    
    
    3,063
    
    
    
    3,063Other assets
    
    
    1,415
    
    
    
    1,589$
    261,486
    
    
    $
    272,078Liabilities and stockholders equityCurrent liabilities:Short-term obligations
    
    $
    30,378
    
    
    $
    25,286Accounts payable
    
    
    45,372
    
    
    
    43,209Accrued liabilities
    
    
    29,272
    
    
    
    26,915Deferred revenue
    
    
    6,076
    
    
    
    4,556Other current liabilities
    
    
    2,230
    
    
    
    2,572Total current liabilities
    
    
    113,328
    
    
    
    102,538Convertible notes
    
    
    23,000
    
    
    
    23,000Other long-term liabilities
    
    
    6,694
    
    
    
    5,663Minority interest
    
    
    5,151
    
    
    
    5,318Commitments and contingencies
Stockholders equity:Preferred stock, $0.01 par value:Authorized  1,000 shares; no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $0.0017 par value:Authorized  160,000 sharesIssued  105,849 shares in 2005 and 105,426 shares in 2004Outstanding  104,496 shares in 2005 and 104,073 shares in 2004
    
    
    177
    
    
    
    176Additional paid-in capital
    
    
    1,156,209
    
    
    
    1,155,474Accumulated deficit
    
    
    (1,031,409
    )
    
    
    (1,015,110
    )Treasury stock  1,353 shares in 2005 and 2004
    
    
    (1,352
    )
    
    
    (1,352
    )Accumulated other comprehensive loss
    
    
    (10,312
    )
    
    
    (3,629
    )Total stockholders equity
    
    
    113,313
    
    
    
    135,559$
    261,486
    
    
    $
    272,078
  50




---



##### 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, 2002
    
    
    98,917
    
    
    $
    168
    
    
    $
    1,149,635
    
    
    $
    (5,047
    )
    
    $
    (977,442
    )
    
    $
    (1,207
    )
    
    $
    (11,631
    )
    
    $
    154,476Exercise of stock options
and warrants
    
    
    758
    
    
    
    1
    
    
    
    1,752
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,753Issuance of common stock
in connection with
private placement
    
    
    1,667
    
    
    
    3
    
    
    
    4,982
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,985Issuance of common stock
in exchange for
convertible subordinated
notes
    
    
    4,237
    
    
    
    7
    
    
    
    11,445
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,452Purchase of treasury stock
    
    
    (138
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (145
    )
    
    
    
    
    
    
    (145
    )Forfeited stock options
    
    
    
    
    
    
    
    
    
    
    (12,945
    )
    
    
    1,369
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,576
    )Amortization of deferred
stock expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,478
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,478Comprehensive income
(loss):
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,988
    )
    
    
    
    
    
    
    
    
    
    
    (26,988
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,693
    
    
    
    2,693Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,295
    )Balance, Dec. 31, 2003
    
    
    105,411
    
    
    
    179
    
    
    
    1,154,869
    
    
    
    (200
    )
    
    
    (1,004,430
    )
    
    
    (1,352
    )
    
    
    (8,938
    )
    
    
    140,128Exercise 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,309
    
    
    
    5,309Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,371
    )Balance, Dec. 31, 2004
    
    
    104,073
    
    
    
    176
    
    
    
    1,155,474
    
    
    
    
    
    
    
    (1,015,110
    )
    
    
    (1,352
    )
    
    
    (3,629
    )
    
    
    135,559Exercise of stock options
and warrants
    
    
    323
    
    
    
    1
    
    
    
    573
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    574Issuance of common stock
    
    
    100
    
    
    
    
    
    
    
    162
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162Comprehensive income
(loss):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,299
    )
    
    
    
    
    
    
    
    
    
    
    (16,299
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,683
    )
    
    
    (6,683
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,982
    )Balance, Dec. 31, 2005
    
    
    104,496
    
    
    $
    177
    
    
    $
    1,156,209
    
    
    $
    
    
    
    $
    (1,031,409
    )
    
    $
    (1,352
    )
    
    $
    (10,312
    )
    
    $
    113,313
  51




---



##### Table of Contents



MRV Communications, Inc.
 
 Statement of Cash Flows
 (In thousands)
 For the year ended December 31:
    
    2005
    
    2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (16,299
    )
    
    $
    (10,680
    )
    
    $
    (26,988
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    7,072
    
    
    
    8,266
    
    
    
    11,411Amortization of deferred stock expense, net of forfeited options
    
    
    
    
    
    
    188
    
    
    
    (8,098
    )Provision for doubtful accounts
    
    
    748
    
    
    
    1,367
    
    
    
    1,829Deferred income taxes
    
    
    1,276
    
    
    
    199
    
    
    
    43Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    5,438Impairment of goodwill and other intangibles
    
    
    
    
    
    
    
    
    
    
    356Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    (1,950
    )(Gain) loss on disposition of property and equipment
    
    
    (37
    )
    
    
    235
    
    
    
    306Minority interests share of income
    
    
    24
    
    
    
    27
    
    
    
    (80
    )Changes in operating assets and liabilities, net of effects from
acquisitions:Time deposits
    
    
    60
    
    
    
    (148
    )
    
    
    1,378Accounts receivable
    
    
    (21,569
    )
    
    
    (9,633
    )
    
    
    (4,003
    )Inventories
    
    
    (3,626
    )
    
    
    (6,465
    )
    
    
    (3,104
    )Other assets
    
    
    (867
    )
    
    
    (3,143
    )
    
    
    6,540Accounts payable
    
    
    6,437
    
    
    
    (3,602
    )
    
    
    5,503Accrued liabilities
    
    
    3,483
    
    
    
    1,486
    
    
    
    (4,136
    )Deferred revenue
    
    
    1,873
    
    
    
    802
    
    
    
    (196
    )Other current liabilities
    
    
    852
    
    
    
    (458
    )
    
    
    (1,236
    )Net cash used in operating activities
    
    
    (20,573
    )
    
    
    (21,559
    )
    
    
    (16,987
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (3,351
    )
    
    
    (2,737
    )
    
    
    (2,380
    )Proceeds from sale of property and equipment
    
    
    94
    
    
    
    597
    
    
    
    449Proceeds from maturity of investments
    
    
    5,073
    
    
    
    1,692
    
    
    
    6,259Investment in subsidiaries
    
    
    
    
    
    
    
    
    
    
    (631
    )Net cash provided by (used in) investing activities
    
    
    1,816
    
    
    
    (448
    )
    
    
    3,697Cash flows from financing activities:Net proceeds from issuance of convertible notes
    
    
    
    
    
    
    
    
    
    
    22,950Net proceeds from issuance of common stock
    
    
    736
    
    
    
    614
    
    
    
    6,738Borrowings on short-term obligations
    
    
    46,118
    
    
    
    59,042
    
    
    
    50,198Payments on short-term obligations
    
    
    (37,519
    )
    
    
    (54,582
    )
    
    
    (54,431
    )Borrowings on long-term obligations
    
    
    624
    
    
    
    
    
    
    
    Payments on long-term obligations
    
    
    (121
    )
    
    
    (88
    )
    
    
    (583
    )Repurchase of convertible subordinated notes
    
    
    
    
    
    
    
    
    
    
    (26,522
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (145
    )Other long-term liabilities
    
    
    1,257
    
    
    
    1,336
    
    
    
    549Net cash provided by (used in) financing activities
    
    
    11,095
    
    
    
    6,322
    
    
    
    (1,246
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (1,580
    )
    
    
    5,309
    
    
    
    2,693Net decrease in cash and cash equivalents
    
    
    (9,242
    )
    
    
    (10,376
    )
    
    
    (11,843
    )Cash and cash equivalents, beginning of year
    
    
    77,226
    
    
    
    87,602
    
    
    
    99,445Cash and cash equivalents, end of year
    
    $
    67,984
    
    
    $
    77,226
    
    
    $
    87,602
  52




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##### Table of Contents



MRV Communications, Inc.
 
 Notes To Financial Statements
 December 31, 2005
 1. Description of Business
  2. Summary of Significant Accounting Policies
 Principles of Consolidation
  Foreign Currency
   53




---



##### Table of Contents



Revenue Recognition
   Cash, Cash Equivalents and Time Deposits
  Marketable Securities
  Accounts Receivable and Allowance for Doubtful Accounts
   54




---



##### Table of Contents



Inventories
   At December 31 :
    
    2005
    
    2004Raw materials
    
    $
    8,471
    
    
    $
    7,272Work-in process
    
    
    9,682
    
    
    
    10,055Finished goods
    
    
    24,063
    
    
    
    24,937Total
    
    $
    42,216
    
    
    $
    42,264
 Property and Equipment
   At December 31:
    
    2005
    
    2004Property and equipment, at costLand
    
    $
    54
    
    
    $
    62Building
    
    
    3,465
    
    
    
    3,975Machinery and equipment
    
    
    39,630
    
    
    
    43,804Furniture and fixtures
    
    
    5,635
    
    
    
    6,507Computer hardware and software
    
    
    18,321
    
    
    
    18,219Leasehold improvements
    
    
    5,747
    
    
    
    6,178Construction in progress
    
    
    590
    
    
    
    7673,442
    
    
    
    78,821Less  accumulated depreciation and amortization
    
    
    (59,377
    )
    
    
    (59,732
    )Total
    
    $
    14,065
    
    
    $
    19,089
 Goodwill and Other Intangibles
 Goodwill and Other Intangible
Assets
 55




---



##### Table of Contents



Investments
 Principles of
Consolidation
  Impairment of Long-Lived Assets
  Fair Value of Financial Instruments
  Cost of Goods Sold
  Product Development and Engineering
  56




---



##### Table of Contents



Software Development Costs
   Sales and Marketing
  Income Taxes
  Earnings (Loss) Per Share
  Stock-Based Compensation
  57




---



##### Table of Contents



For the year ended December 31:
    
    2005
    
    2004
    
    2003Net loss, as reported
    
    $
    (16,299
    )
    
    $
    (10,680
    )
    
    $
    (26,988
    )Add: Stock-based employee compensation expense
(income) included in reported net loss
    
    
    
    
    
    
    188
    
    
    
    (8,098
    )Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards
    
    
    (6,010
    )
    
    
    (17,593
    )
    
    
    (23,520
    )Pro forma net loss
    
    $
    (22,309
    )
    
    $
    (28,085
    )
    
    $
    (58,606
    )Earnings per share:Basic and diluted net loss per share  as reported
    
    $
    (0.16
    )
    
    $
    (0.10
    )
    
    $
    (0.26
    )Basic and diluted net loss per share  pro forma
    
    $
    (0.21
    )
    
    $
    (0.27
    )
    
    $
    (0.57
    )
    58




---



##### Table of Contents



For the year ended December 31:
    
    2005
    
    2004
    
    2003Amortization of deferred stock expense
    
    $
    
    
    
    $
    200
    
    
    $
    3,478Income from recapturing accelerated
deferred stock expense due to
terminations
    
    
    
    
    
    
    (12
    )
    
    
    (11,576
    )Total
    
    $
    
    
    
    $
    188
    
    
    $
    (8,098
    )
  Transactions with Stock of a Subsidiary
  Recently Issued Accounting Standards
   59




---



##### Table of Contents



Use of Estimates
  Reclassifications
  3. Goodwill and Other Intangible Assets
  At December 31:
    
    2005
    
    2004Gross carrying amount
    
    $
    195,869
    
    
    $
    195,869Accumulated amortization
    
    
    (165,904
    )
    
    
    (165,904
    )Total
    
    $
    29,965
    
    
    $
    29,965
 4. Restructuring costs
  60




---



##### Table of Contents



5. Accrued Liabilities
  At December 31:
    
    2005
    
    2004Payroll and related
    
    $
    12,327
    
    
    $
    11,582Product warranty
    
    
    2,328
    
    
    
    2,537Other
    
    
    14,617
    
    
    
    12,796Total
    
    $
    29,272
    
    
    $
    26,915
 6. Income Taxes
  For the year ended December 31:
    
    2005
    
    2004
    
    2003Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    151
    
    
    
    (10
    )Foreign
    
    
    4,498
    
    
    
    3,084
    
    
    
    2,4144,498
    
    
    
    3,235
    
    
    
    2,404Deferred:Federal
    
    
    
    
    
    
    
    
    
    
    State
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    1,276
    
    
    
    (199
    )
    
    
    (43
    )1,276
    
    
    
    (199
    )
    
    
    (43
    )Total
    
    $
    5,774
    
    
    $
    3,036
    
    
    $
    2,361
  For the year ended December 31:
    
    2005
    
    2004
    
    2003Income tax provision
(benefit, at statutory
federal rate)
    
    
    (34
    )%
    
    
    (34
    )%
    
    
    (34
    )%State and local income
taxes, net of federal income
taxes effect
    
    
    (6
    )%
    
    
    (6
    )%
    
    
    (6
    )%Permanent differences
    
    
    1
    %
    
    
    1
    %
    
    
    24
    %Foreign taxes at rates
different than domestic
rates
    
    
    (6
    )%
    
    
    (10
    )%
    
    
    25
    %Change in valuation allowance
    
    
    96
    %
    
    
    89
    %
    
    
    
    %Total
    
    
    51
    %
    
    
    40
    %
    
    
    9
    %
  61




---



##### Table of Contents



At December 31:
    
    2005
    
    2004Allowance for doubtful accounts
    
    $
    1,520
    
    
    $
    1,537Inventory reserve
    
    
    6,962
    
    
    
    11,256Accrued liabilities
    
    
    2,828
    
    
    
    4,322Other
    
    
    3,185
    
    
    
    1,23614,495
    
    
    
    18,351Valuation allowance
    
    
    (13,622
    )
    
    
    (15,956
    )Net short-term deferred income tax assets
    
    
    873
    
    
    
    2,395Net operating losses
    
    
    103,232
    
    
    
    62,150Tax credits
    
    
    9,071
    
    
    
    6,538Depreciation and amortization
    
    
    3,776
    
    
    
    5,008Investments
    
    
    58
    
    
    
    67Capital loss carryforwards
    
    
    96,755
    
    
    
    104,188Other
    
    
    2,163
    
    
    
    215,055
    
    
    
    177,951Valuation allowance
    
    
    (214,919
    )
    
    
    (177,951
    )Net long-term deferred income tax assets
    
    
    136
    
    
    
    Total
    
    $
    1,009
    
    
    $
    2,395
     62




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##### Table of Contents



7. Short-Term and Long-Term Obligations
   8. Derivative Financial Instruments
  Foreign Exchange Contracts
 Interest Rate Swaps
 63




---



##### Table of Contents



9. Convertible Debt
   10. Commitments and Contingencies
 Lease Commitments
  Year Ending December 31,2006
    
    $
    5,9502007
    
    
    4,2942008
    
    
    3,1982009
    
    
    2,9092010
    
    
    2,900Thereafter
    
    
    6,745Total
    
    $
    25,996
  64




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##### Table of Contents



Royalty Commitment
  Litigation
   11. Product Warranty and Indemnification
   For the years ended December 31:
    
    2005
    
    2004Beginning balance
    
    $
    2,537
    
    
    $
    2,617Cost of warranty claims
    
    
    (1,222
    )
    
    
    (1,876
    )Accruals for product warranties
    
    
    1,013
    
    
    
    1,796Total
    
    $
    2,328
    
    
    $
    2,537
  65




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##### Table of Contents



12. Stockholders Equity
 Authorized Shares
   Stock Repurchase Program
  Stock Options
  66




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##### Table of Contents



2005
    
    2004
    
    2003Wtd. Avg.
    
    
    
    
    
    Wtd. Avg.
    
    
    
    
    
    Wtd. Avg.Shares
    
    Ex. Price
    
    Shares
    
    Ex. Price
    
    Shares
    
    Ex. PriceOutstanding, beginning of
year
    
    
    10,963
    
    
    $
    3.58
    
    
    
    10,029
    
    
    $
    3.58
    
    
    
    12,626
    
    
    $
    6.90Granted
    
    
    2,189
    
    
    $
    2.50
    
    
    
    2,438
    
    
    $
    3.08
    
    
    
    2,543
    
    
    $
    2.00Exercised
    
    
    (323
    )
    
    $
    1.77
    
    
    
    (381
    )
    
    $
    1.61
    
    
    
    (758
    )
    
    $
    2.31Cancelled and forfeited
    
    
    (1,396
    )
    
    $
    5.64
    
    
    
    (1,123
    )
    
    $
    7.58
    
    
    
    (4,382
    )
    
    $
    12.44Outstanding, end of year
    
    
    11,433
    
    
    $
    3.18
    
    
    
    10,963
    
    
    $
    3.66
    
    
    
    10,029
    
    
    $
    3.58Exercisable, end of year
    
    
    6,044
    
    
    $
    3.81
    
    
    
    5,363
    
    
    $
    4.91
    
    
    
    4,483
    
    
    $
    6.00Weighted average fair
value of options granted
during year
    
    
    
    
    
    $
    1.32
    
    
    
    
    
    
    $
    1.77
    
    
    
    
    
    
    $
    1.58
  Number
    
    
    
    
    
    Wtd. Avg.
    
    NumberOutstanding
    
    Wtd. Avg.
    
    Remaining
    
    Exercisable
    
    Wtd. Avg.Exercise Prices Per Share
    
    as of 2005
    
    Ex. Price
    
    Contract Life
    
    as of 2005
    
    Ex. Price$0.67 - $1.10
    
    
    2,818
    
    
    $
    0.96
    
    
    6.76 Years
    
    
    1,870
    
    
    $
    0.94$1.11 - $2.63
    
    
    2,751
    
    
    $
    2.11
    
    
    7.58 Years
    
    
    948
    
    
    $
    2.36$2.66 - $3.00
    
    
    2,896
    
    
    $
    2.88
    
    
    5.69 Years
    
    
    1,837
    
    
    $
    2.91$3.02 - $6.10
    
    
    2,480
    
    
    $
    4.01
    
    
    8.00 Years
    
    
    929
    
    
    $
    4.86$6.98 - $50.38
    
    
    488
    
    
    $
    19.48
    
    
    2.92 Years
    
    
    460
    
    
    $
    19.93$0.67 - $50.38
    
    
    11,433
    
    
    $
    3.18
    
    
    6.79 Years
    
    
    6,044
    
    
    $
    3.81
 13. Segment Reporting and Geographical Information
   67




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##### Table of Contents



For the year ended December 31:
    
    2005
    
    2004
    
    2003Networking group
    
    $
    236,782
    
    
    $
    227,192
    
    
    $
    202,399Optical components group
    
    
    50,446
    
    
    
    46,431
    
    
    
    38,790Development stage enterprise group
    
    
    
    
    
    
    
    
    
    
    287,228
    
    
    
    273,623
    
    
    
    241,189Intersegment adjustment
    
    
    (3,530
    )
    
    
    (1,965
    )
    
    
    (2,206
    )Total
    
    $
    283,698
    
    
    $
    271,658
    
    
    $
    238,983
  For the year ended December 31:
    
    2005
    
    2004
    
    2003Fiber optic components
    
    $
    48,802
    
    
    $
    48,466
    
    
    $
    39,037Switches and routers
    
    
    70,456
    
    
    
    72,179
    
    
    
    64,028Console management products
    
    
    18,414
    
    
    
    20,561
    
    
    
    16,626Physical layer products
    
    
    75,056
    
    
    
    67,349
    
    
    
    65,349Services
    
    
    29,283
    
    
    
    24,375
    
    
    
    21,612Other networking products
    
    
    41,687
    
    
    
    38,728
    
    
    
    32,331Total
    
    $
    283,698
    
    
    $
    271,658
    
    
    $
    238,983
   For the year ended December 31:
    
    2005
    
    2004
    
    2003Americas
    
    $
    73,323
    
    
    $
    63,736
    
    
    $
    51,505Europe
    
    
    198,129
    
    
    
    192,021
    
    
    
    171,957Asia Pacific
    
    
    11,669
    
    
    
    13,172
    
    
    
    14,277Other regions
    
    
    577
    
    
    
    2,729
    
    
    
    1,244Total
    
    $
    283,698
    
    
    $
    271,658
    
    
    $
    238,983
 68




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##### Table of Contents



At December 31:
    
    2005
    
    2004Americas
    
    $
    2,013
    
    
    $
    1,955Europe
    
    
    6,639
    
    
    
    8,136Asia Pacific
    
    
    5,413
    
    
    
    8,998Other regions
    
    
    
    
    
    
    Total
    
    $
    14,065
    
    
    $
    19,089
  For the year ended December 31:
    
    2005
    
    2004
    
    2003Networking group
    
    $
    2,300
    
    
    $
    4,746
    
    
    $
    (2,207
    )Optical components group
    
    
    (9,313
    )
    
    
    (9,840
    )
    
    
    (11,112
    )Development stage enterprise group
    
    
    (1,721
    )
    
    
    (2,094
    )
    
    
    (6,820
    )(8,734
    )
    
    
    (7,188
    )
    
    
    (20,139
    )Intersegment adjustment
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    (8,734
    )
    
    $
    (7,188
    )
    
    $
    (20,139
    )
  For the year ended December 31:
    
    2005
    
    2004
    
    2003Domestic
    
    $
    (17,654
    )
    
    $
    (9,344
    )
    
    $
    (12,917
    )Foreign
    
    
    7,129
    
    
    
    1,700
    
    
    
    (11,710
    )Total
    
    $
    (10,525
    )
    
    $
    (7,644
    )
    
    $
    (24,627
    )
 14. Other Income (Expense), Net
  For the year ended December 31:
    
    2005
    
    2004
    
    2003Interest income
    
    $
    2,024
    
    
    $
    1,084
    
    
    $
    1,079Gain on sale of investment
    
    
    
    
    
    
    2,000
    
    
    
    Gain (loss) on disposition of assets
    
    
    37
    
    
    
    (235
    )
    
    
    (306
    )Loss on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (5,438
    )Other, net
    
    
    355
    
    
    
    (164
    )
    
    
    1,397Total
    
    $
    2,416
    
    
    $
    2,685
    
    
    $
    (3,268
    )
 69




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##### Table of Contents



15. Supplemental Statements of Cash Flow Information
  For the year ended December 31:
    
    2005
    
    2004
    
    2003Supplemental disclosure of cash flow information:Cash paid during year for interest
    
    $
    3,221
    
    
    $
    2,736
    
    
    $
    2,464Cash paid during year for income taxes
    
    $
    4,209
    
    
    $
    3,380
    
    
    $
    3,098Supplemental schedule of non-cash investing and
financing activities:Common stock issued in connection with
exchange of 1998 Notes
    
    $
    
    
    
    $
    
    
    
    $
    6,014Non-cash deferred stock expense
    
    $
    
    
    
    $
    
    
    
    $
    1,369
  70




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##### Table of Contents



16. Quarterly Financial Data (Unaudited)
 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
    
    
    40,963
    
    
    
    42,294
    
    
    
    46,157
    
    
    
    64,332Gross profit
    
    
    21,044
    
    
    
    22,353
    
    
    
    19,718
    
    
    
    26,837Operating costs and expenses:Product development and engineering
    
    
    6,531
    
    
    
    6,287
    
    
    
    6,133
    
    
    
    7,100Selling, general and administrative
    
    
    18,280
    
    
    
    18,300
    
    
    
    15,762
    
    
    
    20,293Total operating costs and expenses
    
    
    24,811
    
    
    
    24,587
    
    
    
    21,895
    
    
    
    27,393Operating loss
    
    
    (3,767
    )
    
    
    (2,234
    )
    
    
    (2,177
    )
    
    
    (556
    )Interest expense
    
    
    (786
    )
    
    
    (1,715
    )
    
    
    (767
    )
    
    
    (939
    )Other income (expense), net
    
    
    485
    
    
    
    231
    
    
    
    1,117
    
    
    
    583Loss before taxes
    
    
    (4,068
    )
    
    
    (3,718
    )
    
    
    (1,827
    )
    
    
    (912
    )Provision for taxes
    
    
    2,369
    
    
    
    425
    
    
    
    1,317
    
    
    
    1,663Net loss
    
    $
    (6,437
    )
    
    $
    (4,143
    )
    
    $
    (3,144
    )
    
    $
    (2,575
    )Earnings 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
 Mar. 31,
    
    June 30,
    
    Sept. 30,
    
    Dec. 31,For the three months ended:
    
    2004
    
    2004
    
    2004
    
    2004Revenue
    
    $
    59,614
    
    
    $
    67,231
    
    
    $
    62,941
    
    
    $
    81,872Cost of goods sold
    
    
    39,189
    
    
    
    43,669
    
    
    
    42,807
    
    
    
    54,115Gross profit
    
    
    20,425
    
    
    
    23,562
    
    
    
    20,134
    
    
    
    27,757Operating costs and expenses:Product development and engineering
    
    
    6,338
    
    
    
    5,805
    
    
    
    6,373
    
    
    
    6,433Selling, general and administrative
    
    
    18,150
    
    
    
    18,676
    
    
    
    16,855
    
    
    
    20,436Total operating costs and expenses
    
    
    24,488
    
    
    
    24,481
    
    
    
    23,228
    
    
    
    26,869Operating income (loss)
    
    
    (4,063
    )
    
    
    (919
    )
    
    
    (3,094
    )
    
    
    888Interest expense
    
    
    (593
    )
    
    
    (707
    )
    
    
    (720
    )
    
    
    (1,121
    )Other income (expense), net
    
    
    418
    
    
    
    (333
    )
    
    
    801
    
    
    
    1,799Income (loss) before taxes
    
    
    (4,238
    )
    
    
    (1,959
    )
    
    
    (3,013
    )
    
    
    1,566Provision for taxes
    
    
    539
    
    
    
    1,110
    
    
    
    739
    
    
    
    648Net income (loss)
    
    $
    (4,777
    )
    
    $
    (3,069
    )
    
    $
    (3,752
    )
    
    $
    918Earnings per share:Basic
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    (0.04
    )
    
    $
    0.01Diluted
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    (0.04
    )
    
    $
    0.01Weighted average number of shares:Basic
    
    
    105,504
    
    
    
    105,596
    
    
    
    104,114
    
    
    
    103,973Diluted
    
    
    105,504
    
    
    
    105,596
    
    
    
    104,114
    
    
    
    107,582
 71




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##### Table of Contents



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.
 72




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##### Table of Contents



Internal Control 
Integrated Framework
 Changes in Internal Control Over Financial Reporting
  
 Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
    73




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##### Table of Contents



ITEM 9B. OTHER INFORMATION
  74




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##### Table of Contents



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
  75




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##### Table of Contents



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
    
    
    48Statement of Operations for the years ended December 31, 2005, 2004 and 2003
    
    
    49Balance Sheets as of December 31, 2005 and 2004
    
    
    50Statements of Stockholders Equity and Comprehensive Income (Loss) for the
years ended December 31, 2005, 2004 and 2003
    
    
    51Statement of Cash Flows for the years ended December 31, 2005, 2004 and 2003
    
    
    52Notes to Financial Statements
    
    
    53Report of Independent Registered Public Accounting Firm on Internal Control
Over Financial Reporting
    
    
    73
   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)).
 76




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##### Table of Contents



ExhibitNo.
    
    Description3.2
    
    Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on March 20, 1996
(incorporated by reference to Exhibit 3.2 of MRVs Form 10-Q
for the quarter ended June 30, 1998 filed August 14, 1998).3.3
    
    Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on July 29, 1996
(incorporated by reference to Exhibit 3.3 of MRVs Form 10-Q
for the quarter ended June 30, 1998 filed August 14, 1998).3.4
    
    Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on November 19, 1998
(incorporated by reference to Exhibit 3.4 of MRVs Form 10-K
for the year ended December 31, 1998 filed March 31, 1999).3.5
    
    Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on May 11, 2000
(incorporated by reference to Exhibit 3.5 of MRVs Form 10-K
for the year ended December 31, 2000 filed April 17, 2001).3.6
    
    Bylaws (incorporated by reference to Exhibit 3b filed as part
of Registrants Registration Statement on Form S-1 (File No.
33-48003)).4.1
    
    Specimen certificate of common stock (incorporated by
reference to Exhibit 4.5 filed as part of Registrants
Registration Statement on Form S-3 (File No. 333-64017).10.1
    
    Key Employee Agreement between MRV and Noam Lotan dated March
23, 1993 (incorporated by reference to Exhibit 10b(1) filed as
part of Registrants Registration Statement on Form S-1 (File
No. 33-48003)).10.2
    
    Letter amending Key Employee Agreement between MRV and Noam
Lotan (incorporated by reference to Exhibit 10b(1)1 filed as
part of Registrants Registration Statement on Form S-1 (File
No. 33-48003)).10.3
    
    Letter amending Key Employee Agreement between MRV and Noam
Lotan (incorporated by reference to Exhibit 10b(1)2 filed as
part of Registrants Registration Statement on Form S-1 (File
No. 33-86516)).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).
 77




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##### Table of Contents



ExhibitNo.
    
    Description10.7.1
    
    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)).10.10
    
    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 Gonen21.1
    
    Subsidiaries of Registrant.23.1
    
    Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.25.1
    
    Power of Attorney (included on 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.
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##### Table of Contents



SIGNATURES
  MRV COMMUNICATIONS, INCBy: /s/ Noam LotanNoam LotanPresident and Chief Executive OfficerBy: /s/ Kevin RubinKevin RubinChief Financial Officer
and Corporate Compliance Officer
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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 3, 2006/s/ Shlomo Margalit

(Shlomo Margalit)
    
    Chairman of the Board, Chief
Technology Officer, and Secretary
    
    March 3, 2006/s/ Kevin Rubin

(Kevin Rubin)
    
    Chief Financial Officer and Corporate
Compliance Officer (Principal
Finance and Accounting Officer)
    
    March 3, 2006/s/ Igal Shidlovsky

(Igal Shidlovsky)
    
    Director
    
    March 3, 2006/s/ Guenter Jaensch

(Guenter Jaensch)
    
    Director
    
    March 3, 2006/s/ Daniel Tsui

(Daniel Tsui)
    
    Director
    
    March 3, 2006/s/ Baruch Fischer

(Baruch Fischer)
    
    Director
    
    March 3, 2006/s/ Harold W. Furchtgott-Roth

(Harold W. Furchtgott-Roth)
    
    Director
    
    March 3, 2006
 80