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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-K

(Mark One)ý

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended December 31, 2009ORo

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange ActFor the transition period
from                                         t
o


Commission file number 001-11174



GRAPHIC

MRV COMMUNICATIONS, INC.(Exact name of Registrant as specified in its charter)

Delaware

06-1340090(State or other jurisdiction of
incorporation or organization)

(I.R.S. employer
identification no.)


20415 Nordhoff Street, Chatsworth, CA 91311(Address of principal executive offices and zip code)

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

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

Securities
registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.0017 par value

Indicate
by check mark whether the Registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act of
1934. Yes o    No ý

Indicate by check mark, whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ý    No o

Indicate by check mark, whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the Registrant was required to submit and post such files.) Yes o    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405) is not contained
herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ý

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a
smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o    No ý

The aggregate market value of registrant's Common Stock held by non-affiliates based upon the closing price of a share of the registrant's Common
Stock on June 30, 2009 as reported on the Pink Sheets was $68,770,000. The number of shares of Common Stock, $0.0017 par value, outstanding as of March 10, 2010 
157,634,909.

DOCUMENTS
INCORPORATED BY REFERENCE

Portions
of the registrant's definitive Proxy Statement relating to its 2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on
Form 10-K where indicated. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this
report relates.



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MRV Communications, Inc.        Annual Report on Form 10-K        For the fiscal year ended December 31, 2009        Table of Contents



Page
NumberPART I

1Item 1.

Business

1Item 1A.

Risk Factors

12Item 1B.

Unresolved Staff Comments

29Item 2.

Properties

29Item 3.

Legal Proceedings

29Item 4.

Reserved

31PART II

32Item 5.

Market for the Company's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities

32Item 6.

Selected Financial Data

35Item 7.

Management's Discussion and Analysis of Financial Condition and
Results of Operations

36Item 7A.

Quantitative and Qualitative Disclosures About Market
Risk

60Item 8.

Financial Statements and Supplemental
Data

62Item 9.

Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

101Item 9A.

Controls and Procedures

101Item 9B.

Other Information

104PART III

104Item 10.

Directors, Executive Officers and Corporate
Governance

104Item 11.

Executive Compensation

104Item 12.

Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

104Item 13.

Certain Relationships and Related Transactions, and Director
Independence

104Item 14.

Principal Accounting Fees and Services

104PART IV

104Item 15.

Exhibits and Financial Statement
Schedules

104SIGNATURES

109


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FORWARD LOOKING STATEMENTS AND FACTORS THAT MIGHT AFFECT FUTURE RESULTS

This Annual Report on Form 10-K for the year ended December 31, 2009 ("Form 10-K"),
contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange
Act of 1934, as amended ("Exchange Act"). Forward-looking statements are statements other than statements of historical fact and may be identified by use of such terms as "expects," "anticipates,"
"intends," "potential," "estimates," "believes," "should," "will," "would" and words of similar import.

Forward-looking
statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from those projected. These forward-looking statements
relate to plans, objectives and expectations for future operations or events. In light of the risks and uncertainties inherent whenever matters or events expected to occur or not occur in the future
are discussed, there can be no assurance that the forward-looking information contained in this Form 10-K will in fact transpire or prove to be accurate. All subsequent written and
oral forward-looking statements attributable to MRV Communications, Inc. ("MRV" or the
"Company") or persons acting on our behalf are expressly qualified in their entirety by this introduction.

In
light of the risks and uncertainties in all such projected operational matters, the inclusion of forward-looking statements in this Form 10-K should not be regarded
as a representation by MRV or any other person that the objectives or plans of the Company will be achieved or that any of MRV's operating expectations will be realized. Revenues and results of
operations are difficult to forecast and could differ materially from those projected in the forward-looking statements contained in this Form 10-K for the reasons detailed in
Item 1A "Risk Factors" of this Form 10-K. Readers should not place undue reliance on forward-looking statements, which reflect management's view only as of the date of this
Form 10-K. MRV undertakes no obligation to amend this Form 10-K or revise publicly these forward-looking statements (other than pursuant to requirements imposed
on registrants pursuant to Item 1A under Part II of Form 10-Q) to reflect subsequent events or circumstances. Readers should also carefully review the risk factors
described in other documents MRV files from time to time with the Securities and Exchange Commission ("SEC"), and the cautionary statements contained in our press releases when we provide
forward-looking information.

Except
where the context otherwise requires, for purposes of this Form 10-K, "we," "us," and "our," refer to MRV Communications, Inc. and its consolidated
subsidiaries; and "shares" refers to our Common Stock, $0.0017 par value.

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PART I

Item 1.    Business.

Company Background

MRV is a global supplier of communications solutions to telecommunications service providers, enterprises and governments throughout
the world. Our products enable customers to provide high-bandwidth data and video services and mobile communications services more efficiently and cost effectively. We market and sell our
products worldwide, through a variety of channels, which include a dedicated direct sales force, manufacturers' representatives, value-added-resellers, distributors and systems integrators. MRV
conducts its business along three principal segments: the Network Equipment group, the Network Integration group, and the Optical Components group.

The
Network Equipment group designs, develops and manufactures communications infrastructure solutions that enable the access, transport, aggregation and management of all types of
communications traffic for fixed-line and mobile communications networks. Our solutions are purchased by telecommunications service providers, mobile communications service providers,
cable service providers, enterprises and governments worldwide. These solutions include switches, routers, physical layer products and console management products. Through a wholly-owned subsidiary
headquartered in Switzerland, we also design, develop and sell specialized networking products for aerospace and defense applications.

The
Network Integration group operates through four subsidiaries in France, Italy, Switzerland and Scandinavia. A fifth subsidiary, EDSLan, S.p.A., was part of the Network
Integration group until the business was sold in January 2010. Collectively, we service international and regional telecommunications service providers, large enterprises, and government institutions.
The Network Integration group provides network system architecture and integration services, and procurement and distribution services for products that are manufactured by MRV's Network Equipment
group as well as products developed and manufactured by third-party vendors.

The
Optical Components group is substantially composed of our subsidiary Source Photonics, Inc, and it designs, manufactures and sells optical components and subassemblies used in
telecommunications systems and data communications networks. These products include passive optical network, or PON, subsystems, optical transceivers used in enterprise, access and metropolitan
applications, and other optical components, modules and subsystems. Source Photonics is the leading provider of optical subsystems used in Fiber-to-the-Premises
("FTTP") and Fiber-to-the-Home ("FTTH") deployments which many telecommunications service providers are using to deliver video, voice and data services. In July
2007, we completed the acquisition of Fiberxon, Inc., a People's Republic of China ("PRC") -based supplier of transceivers for applications in metropolitan networks, access networks and PONs.
Fiberxon's results of operations are included in the Consolidated Financial Statements beginning July 1, 2007, and the acquired entity has been fully integrated into Source Photonics.

MRV
was organized in July 1988 as MRV Technologies, Inc., a California corporation. In April 1992, MRV reincorporated in Delaware and changed the company name to MRV
Communications, Inc.

Industry Background

Telecommunications networks are evolving to support the demand for mobile and high-bandwidth applications such as mobile
video services, Internet Protocol video services, or IP-video, peer-to-peer networking, and content-rich, transactional websites. The growth in these
applications and services is driving the need for additional bandwidth capacity in many portions of the world's networks. To meet this demand, our customers are upgrading their networks with new
optical communications systems and products to increase capacity and increase efficiency with an increased focus on lower total cost of transport.

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Our
products and services address the Carrier Ethernet and wavelength division multiplexing, or WDM, Optical Transport markets, which could provide new opportunities for growth as
businesses migrate to Ethernet from legacy technologies such as frame relay, and Digital Subscriber Line, or DSL. Ethernet is the predominant technology in Local Area Networks, or LANs. Metro Ethernet
refers to a network based on the Ethernet standard which covers a metropolitan area and is a common way for telecommunications service providers to connect subscribers and businesses to the Internet.
Ethernet networks are deployed by telecommunications service providers because of the lower cost of ownership and the ability to offer high bandwidth with solid reliability. We are building upon over
20 years of optical innovation and 10 years of experience in carrier-class Metro Ethernet as we participate in the next phase of Ethernet services growth.

We
believe the long-term growth of Metro Ethernet and the demand for our optical products will be fueled by the ever-increasing demand for more bandwidth capacity
and higher connection speeds. We also believe that growth will occur as telecommunication service providers strive to increase the efficiency and performance of their networks while reducing overall
costs. There are several factors driving this growth:



On
February 5, 2010, market research firm ComScore, Inc. reported that a record 33.2 billion videos were viewed online in the United States during the month of December
2009, compared to 14.3 billion videos viewed in December 2008, an increase exceeding 130 percent year over year. ComScore also noted that over 86 percent of the U.S. audience viewed
online video. In a June 2009 report, the Cisco Visual Networking Index projects that IP traffic will increase at a combined annual growth rate of 40 percent from 2008 to 2013. In order to keep
up with increased traffic and video demand, service providers will have to continue to improve and expand their Carrier Ethernet network infrastructures. In a September 28, 2009 report,
Infonetics Research, Inc. forecasts global Carrier Ethernet Equipment manufacturer revenue to grow from $19 billion in 2008 to over $34 billion in 2013.

Traditional
telecommunications service providers continue to generate the majority of their revenue from selling traditional voice communications services to consumers and businesses
although their revenues may be declining due to competition. Telecommunications service providers are trying to offset any declines in voice revenues by increasing the number of services offered
through their networks, such as video applications and other bandwidth intensive data applications. Cable multiple system operators utilizing hybrid fiber coaxial networks offer voice and data
services as competitive alternatives to telecommunications service providers' offerings. Emerging carriers, both regional and those trying to build a national footprint, are offering advanced services
based on new and more advanced network infrastructures than the telecommunications service providers' networks.

To
offer new services, telecommunications service providers are investing in increasing the capacity and functionality of their access and metro networks. They are building
high-capacity optical networks closer to consumers' homes and business customers to increase the bandwidth capacity between the service provider's central office and individual consumers.
These access networks have the ability to

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deliver
a range of advanced services, such as on-demand high-definition video services, and high-bandwidth Internet services.

In
addition to investing in access networks, telecommunications service providers need to increase the data capacity of their metro networks and enhance the intelligence, flexibility and
efficiency of their networks. As a result, they are investing in optical transport to maximize network utilization as user needs and service offerings change over time. According to Heavy Reading, a
market research firm, sales of wavelength division multiplexing, or WDM, modules are expected to grow from $2.5 billion in 2007 to $3.8 billion in 2013. WDM uses multiple optical
wavelength channels on the same fiber to offer increased data capacity. The WDM multi-channel architecture supports the flexibility to manage, upgrade, and enhance the network on a
per-channel basis as requirements change.

Generally,
weaker economic conditions worldwide resulted in reduced demand throughout 2009. The downturn in global markets has affected our revenues and operating results, particularly
in the Network Equipment group. In general, our customers took a more cautious approach in their capital expenditures, resulting in order delays, slowing deployments and lengthening sales cycles.
Despite the downturn, we believe that our customers need to continue investing in their networks to meet the growth in consumer and enterprise use of high-bandwidth communications
services. We believe in our long-term market opportunities, but we are uncertain how long the downturn in economic conditions will continue, or if any recovery will be more than temporary,
and how our customers will interpret and react to market conditions. Although 2009 was a challenging year for the industry and our markets, we believe that the end markets are strong and will recover
as general global economic conditions stabilize.

Markets Served

MRV primarily serves the following markets:

Telecommunications Service Providers.

Our telecommunications service provider customer base includes international, national and regional telecommunications carriers, both
wireline and wireless. Telecommunications service providers are under increasing competitive pressure, primarily from emerging competitors that offer similar services at competitive prices. Our
products and services enable both established and emerging telecommunications service providers to transition their existing network infrastructures to deliver a broader mix of higher bandwidth
services to consumers and enterprises. We provide products that enable telecommunications service providers to support consumer demand for video delivery, broadband data and video and wireless
broadband services. We also offer optical components and subassemblies that allow telecommunications service providers to provide FTTH and FTTP services. Our optical components enable
telecommunications providers, both domestic and international, to offer "triple-play" services including voice, video and ultra-high speed Internet access to their end
customers.

Cable Operators/Multiple System Operators.

Our customers include leading cable and multiple system operators in the United States and internationally. These customers rely upon
us for a wide range of products including carrier-grade, optical Ethernet transport and switching equipment. Our networking products allow our cable operator customers to integrate voice, video and
data applications over a converged IP infrastructure. This enables our customers to grow bandwidth capacity and lower the operational expense of supporting disparate networks. By enabling this network
convergence, cable operators can expand their end user offerings to include high-value service bundles. Our products support key cable applications including broadcast video, VoIP, video
on demand, broadband data services and services for enterprises.

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Network Equipment Manufacturers.

Our network equipment manufacturer customers incorporate our optical component products into systems that they will sell to their
customers. Their customers
consist of telecommunications service providers and large enterprises that deploy their systems on a large-scale basis.

Enterprise.

Our enterprise customers include small to large commercial organizations from every industry with information technology ("IT")
requirements, including end users in the healthcare, financial, retail, industrial and technology industries, as well as schools and universities. We offer equipment and services focused on key
enterprise applications including data center connectivity, local area network consolidation, and storage extension for business continuance and disaster recovery. Our products enable
inter-site connectivity between data centers, sales offices, manufacturing plants, and research and development centers, using private fiber infrastructure or external service provider
networks. We also enable our enterprise customers to meet increasing demand for high availability, globalization, and the spread of IT to distributed branches, by preventing unexpected downtime and
improving the safety, security and availability of their IT infrastructure.

Government.

Our government customers include federal, state and local agencies in the United States and internationally. Our customers include
domestic and international defense agencies, public administrations and municipalities. In addition, we offer networking products specifically designed for aerospace and defense networks, which enable
these customers to apply real-time data acquisition and allow high-speed transaction processing for flight test validation and simulation systems. These products allow these
customers to provide in-flight parameter recording systems in military and commercial aircrafts.

One
Optical Components group customer, Huawei Technologies Co., Ltd., generated $43.1 million revenues, or 10% of total revenues for the year ended
December 31, 2009. No single customer accounted for 10% or more of total revenues for the year ended December 31, 2008. As of December 31, 2009, amounts due from each of Huawei
and Telecom Italia S.p.A., a Network Integration group customer, exceeded 10% of gross accounts receivables, and accounted for 26% of gross trade receivables on a combined basis. No single
customer exceeded 10% of gross accounts receivables at December 31, 2008.

Products and Services

We provide integrated secure network equipment and services connecting analog and digital data, voice, and video within buildings and
across private networks located in multiple buildings such as college and corporate environments, and in metropolitan and regional areas. Our products and services include:



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Optical Transport Products.

The LambdaDriver and Fiber Driver product families include PON subsystems and optical transceivers utilized
in the enterprise, access and metropolitan segments of telecommunications networks, as well as other optical components, modules and subsystems. Optical transport networks enable
high-bandwidth video, voice and data services by providing efficient fiber optimization, redundancy, distance extension, media conversion and security. Optical transport refers to the
transmission of data signals as light pulses, driven by either a laser or light emitting diode, through a fiber optic cable. One of the more common techniques utilized for fiber optimization is WDM,
in which each signal or channel is carried over a different wavelength. Each wavelength is multiplexed and passed through a single optical fiber to the receiving end, where the signals are then
separated by wavelength.

The
LambdaDriver product family consists of multifunctional, compact and modular WDM systems designed for campus, metropolitan and regional fiber optic networks. The LambdaDriver Series
has the ability to carry over 160 wavelengths to distances of hundreds of miles in different network topologies such as ring, star, point-to-point, add / drop configurations
and mesh networks. The systems use a modular architecture comprised of three different chassis: LD 400, LD 800 and LD 1600, and a variety of plug-in modules supporting multiple data, voice
and video protocols, up to speeds of 10Gbps per channel. The advantage of a modular architecture is that product engineering efforts can be leveraged over hundreds of possible configurations to create
additional functionality and meet customers' specific needs.

The
Fiber Driver Series provides a full range of solutions for media conversion from copper to fiber, signal restoration, signal boosting and fiber optimization, including WDM
capabilities. The Fiber Driver Series includes over a hundred modules providing a managed fiber infrastructure for virtually every protocol used in networking today. Like the LambdaDriver series, the
Fiber Driver product line consists of a modular architecture comprising multiple chassis, from a single slot up to 16 slots, with plug-in modules and several management options.

Metro Ethernet Products.

Today's telecommunication networks continue to evolve to support growing network traffic arising from the demand for
high-bandwidth applications such as IP-video, streaming video, VoIP, peer-to-peer networking, and content-rich websites. To meet the demand
for additional capacity, telecommunication service providers are upgrading their networks with new optical and Metro Ethernet communication systems. Our Metro Ethernet product line enables
telecommunication service providers to upgrade their infrastructure and provide high-bandwidth video, voice and data services at a reasonable cost. The OptiSwitch® product line
provides
network access, transport and aggregation from the end user customer to the provider's point-of-presence and further upstream, towards the core of the network. The OptiSwitch
is also used in wireless backhaul applications to connect cell towers to the service providers. By providing reliable, high-bandwidth connectivity with end-to-end
traffic management, the OptiSwitch family enables premium revenue generation services. The OptiSwitch product family consists of two main lines  the OptiSwitch 900 series
and the OptiSwitch 9000 series.



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Out-of-Band Networking Products.

Our out-of-band-network products provide secure, remote service port access, remote power
management and environmental monitoring to devices in networks and in networks infrastructure, such as data centers and test labs. Secure, remote access nearly eliminates the need for physical
presence to correct problems or manage everyday operations. Normally, a network device such as a server is connected and managed through switches and routers in an organization's production network.
But when the server becomes disconnected due to an error, it frequently requires physical presence to restore it to normal operation. This can be eliminated by using an
out-of-band-network to remotely power cycle the server
and manage it back into the production network. Access to the out-of-band-network itself can be through the production network or through a separate modem. Using an
out-of-band-network can cut costs, increase security, lower risks and increase service levels. MRV offers the following
out-of-band-network solutions:



Fiber Optic Components and Subsystems.

The Optical Components group, which consists primarily of our wholly-owned subsidiary Source Photonics, manufactures optical
communication products used in telecommunication systems and data communication networks. We design, manufacture and sell a broad portfolio of optical communication products, including PON subsystems,
optical transceivers used in enterprise, access and metropolitan markets, as well as other optical components, modules and subsystems. Our products work across a variety of networking environments
with a wide range of bandwidth and reach specifications.

The
Optical Components products are grouped into PON Solutions and Metro and Access Transceivers. We are one of the largest global providers of optical components and subsystem products
used in FTTP PONs to deliver advanced broadband video, voice and data services to service providers' customer premises. A PON subsystem is based on a single head-end optical line terminal
at the central office of a telecommunication service provider. Optical line terminals transmit and receive information to and from multiple customer-side optical network terminals sharing
the same fiber optic PON. Our PON solutions are subsystems which perform core transmit and receive functions for the overall optical line terminal and optical network terminals systems.

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There
are three primary standards for PON subsystems developed by the ITU and the Institute of Electrical and Electronics Engineers, or IEEE, in conjunction with service providers and
vendors of optical communication systems. We offer products which address all three of these standards:



We
offer a broad range of Metro and Access Transceivers used in both telecommunication systems and data communication networks. The product line covers the requirements of key industry
standards, such as SONET, Ethernet, and Fibre Channel. We also offer products for specific market segments or customer-specific requirements. Our product line includes coarse wavelength division
multiplexing ("CWDM") and dense wavelength division multiplexing ("DWDM") interfaces, primarily in pluggable versions. The pluggable versions offer benefits to system vendors and service providers by
providing inventory management and ease of configurability in an efficient and timely manner. These benefits are particularly significant for DWDM interfaces and contribute to the general market trend
towards pluggable interfaces.

With
the introduction of 10 gigabit small form-factor pluggable, or XFP, and small form-factor pluggable plus, or SFP+ products, MRV addresses the 10 gigabit per
second market segment. We believe that system manufacturers and service providers increasingly will adopt these pluggable form factors in their optical systems. We are investing heavily in development
of next-generation XFP products and we expect to introduce several additional XFP-based products over the next few years. The SFP+ form factor is targeted for another 10
gigabit per second product segment, and is expected to find wide use in enterprise and data communication networks. It is smaller than the XFP form factor, allowing for higher port density. We have
introduced first-generation short-reach products in this form factor and are developing additional interfaces to cover all the anticipated market requirements for our SFP+ product line.

Also
included in the product line is a broad range of single-fiber transceivers. Applications include Enterprise networks and Active Ethernet FTTH deployments. The market for
single-fiber point-to-point transceivers is expected to experience substantial growth over the next several years. The growth is anticipated in both FTTx applications as well
as in enterprise and access networks.

We
are continuing to develop innovative transceiver products and are focusing significant effort in developing our 10 gigabit pluggable portfolio including the XFP and SFP+ products.
SFP+ products offer the same throughput as an XFP module, but are approximately half the size and consume

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approximately
one-third of the power. In addition, our product line offers solutions for a variety of SONET, Ethernet and Fibre Channel applications. These broad product offerings allow us
to satisfy a wide array of customer demands, which is increasingly important as our customers attempt to reduce the number of suppliers with which they directly work.

Network Integration and Services.

Our products perform critical networking tasks and are typically used in conjunction with network equipment manufactured by other
vendors. We believe that pre- and post-sales services help reduce cost of ownership, support business goals and promote customer loyalty. Accordingly, we provide a broad range
of service offerings including pre-sale network design, consultation, site-surveys, on-site installation, and network integration. Post-sales support
includes in-warranty as well as out-of-warranty repair and on-site maintenance. Our services include a choice of technical support services including
around-the-clock response. In certain European countries, we provide network system design, integration and distribution services that include products manufactured by
third-party vendors, as well as products developed and manufactured by us.

Other Networking Products.

We provide networking products for aerospace, defense and other applications such as voice and cellular communication. Our aerospace
and defense network products apply real-time data acquisition technology allowing high-speed transaction processing for flight test validation and simulation systems. These
products provide in-flight parameter recording systems in military and commercial aircraft. In addition, we provide:



Our
network management system combines complete end-to-end network viewing and performance monitoring with network configuration and fault management including
automatic detection and monitoring of devices from other vendors.

Worldwide Sales and Marketing

As of December 31, 2009, our worldwide sales and marketing organization consisted of 281 employees, including sales
representatives, technical support and management. We have field sales offices in more than 20 countries involved in the sales and distribution of our products, providing system installation,
technical support, and follow-up services to end users of our products. Through the field sales offices, we sell our products and services both directly and through channel partners with
support from their sales forces. Our channel partners include distributors, value-added resellers and system integrators. Outside the United States, we conduct operations in: Argentina, Australia,
Belgium, Canada, PRC, Finland, France, Germany, Hungary, Israel, Italy, Mexico, the Netherlands, Norway, Russia, Singapore, Sweden, Switzerland, Taiwan and the United Kingdom.

Additionally,
our offices in Denmark, Finland, France, Italy, Norway, Sweden and Switzerland sell and market our products along with other products manufactured by third-party vendors,
supplied as part of our network integration and distribution services. These operations provide system design, network integration and post-sales support. These services enhance our
ability to penetrate targeted vertical and regional markets. We believe that collaborating with successful third-party vendors in certain areas helps to provide growth opportunities beyond the
targeted applications of our product lines.

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We
employ various methods, such as public relations, advertising, and trade shows in an effort to build awareness of our products and to establish our brand names MRV and Source
Photonics. We conduct our public relations activities both internally and through relationships with outside agencies. We focus on major public relations activities concentrated around new product
introductions, corporate partnerships and other events of interest to the market. We supplement our public relations through media advertising programs, including electronic media and attendance at
various trade shows worldwide throughout the year.

Competition

The communications equipment and optical component industries are intensely competitive. We compete directly with a number of
established and emerging networking and optical components companies.

Our
competitors in networking products, switches and routers include: ADVA Optical Networks, Alcatel-Lucent, Allied Telesis Holdings KK, Brocade Communications Systems, Ciena
Corporation, Cisco Systems, Inc., Extreme Networks, Huawei Technologies Inc., Nortel Networks and Raritan, Inc. Our competitors in fiber optic components include: Avago
Technologies Limited, Delta Electronics, Inc., EMCORE Corporation, ExceLight Communications, Inc., Finisar Corporation, JDS Uniphase Corporation, Ligent Photonics, Inc., NEC
Corporation, NeoPhotonics Corporation, Nokia Siemens Networks, Oplink Communications, Inc., Opnext Inc. and Wuhan Telecommunication Devices Co., Ltd. Our main competitor in
the out-of-band networking business is Avocent Corporation. Among the competitors for the console servers business are Digi International, Lantronix, Inc. and Cisco
Systems, Inc. Many of our larger competitors offer customers a broader product line, which provides a more comprehensive networking solution than we provide. Accordingly, in certain regional
markets we have collaborated with other vendors in an effort to enhance our overall capability in providing products and services.

We
believe the principal competitive factors in the markets in which we compete include:



Product Development and Engineering

We believe that in order to maintain our technological competitiveness and to serve our customers better, we must enhance our existing
products and continue to develop new products. Accordingly, we focus a significant amount of resources on product development and engineering.

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The following table summarizes product development and engineering expenses by our principal segments and in total (in thousands):

For the year ended December 31:

2009

2008

2007Network Equipment group (1)

$
21,370

$
21,089

$
19,778Network Integration group








Optical Components group (2)


14,089


15,967


12,113All others


1,196


1,371


1,169Corporate unallocated (3)


80


319


327Total

$
36,735

$
38,746

$
33,387


(1)Includes
share-based compensation expense of $298,000 in 2009, $400,000 in 2008, and $537,000 in 2007.(2)Includes
share-based compensation expense of $160,000 in 2009, $843,000 in 2008, and $728,000 in 2007.(3)Includes
share-based compensation expense of $37,000 in 2009, $61,000 in 2008, and $51,000 in 2007.


Financial
information for each of the three principal segments for revenues from external customers, measures of profit or loss and total assets, and breakdown by geographic regions are
included in Items 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and 8 "Financial Statements and Supplemental Data" of this
Form 10-K.

Manufacturing and Components

We outsource our board-level assembly and on some occasions, complete turnkey production, to independent contract manufacturers for our
networking products, which include switches and routers, remote device management products and networking physical infrastructure equipment. We believe outsourcing allows us to react more quickly to
market demand, avoid the significant capital investment required to establish automated manufacturing and assembly facilities and concentrate resources on product design and development. Our
in-house manufacturing operations for networking products primarily perform the functions of materials management, quality assurance, as well as inspection and final testing. Our
manufacturing processes and procedures are generally ISO 9001 certified and so are those of our electronic manufacturing service providers, however, we have decreased our reliance on these
contract manufacturers significantly.

Our
Optical Components group has invested significantly in a low-cost, vertically-integrated manufacturing model, which we believe provides us an important competitive
advantage. Beginning in late 2008, we began consolidating in-house manufacturing into new manufacturing facilities in Chengdu, PRC, along with bringing a significant portion of third party
contract manufacturing services in-house. We have two primary in-house manufacturing locations: Chengdu, PRC, and Hsinchu, Taiwan. Our facility in Hsinchu, Taiwan is primarily
used for manufacturing optical laser and receiver chips and assemblies. Our Chengdu facilities integrate optical subassemblies with advanced electronics, and
test optical transceivers. For each of these in-house facilities we have parallel contract manufacturers in PRC manufacturing such products on our behalf.

For
our transceiver products, we control the manufacturing technology, equipment and processes that we and our contract manufacturers use to build the products. Our design process seeks
to optimize our products for high volume manufacturability, cost, performance and reliability. A significant amount of our research and product development expense is dedicated to development of our
manufacturing infrastructure to enable us to handle increasingly complex products in a high volume environment. We

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utilize
advanced planning techniques across our extended global supply chain to optimize material purchases as well as factory resource utilization both at our in-house facilities and at
our contract manufacturer facilities. The consolidation of our manufacturing operations is intended to reduce cost, to simplify operations and supply chain management, and to ensure optimum
utilization of the extended engineering team.

We
utilize a wide variety of components, supplies and products which we source from a substantial number of vendors around the world, but the number of suppliers that make a certain
component or are qualified by any particular customer is often limited. Our customers generally restrict our ability to change the component parts in our modules without their approval, which for less
critical components may require as little as a specification comparison. For more critical components, such as lasers, photo detectors, and key integrated circuits, we may be required to repeat the
entire qualification process. We typically have not entered into long-term agreements with our suppliers and, therefore, our suppliers could stop supplying materials and equipment at any
time or fail to supply adequate quantities of component parts on a timely basis. Thus, although we seek to locate alternative sources as the need arises, when we have only a sole source or limited
number of suppliers for a key component, any disruption in that supplier's ability to deliver such components can create costly delays in the manufacturing process.

Intellectual Property

To date, we have relied principally on a combination of patents, copyrights and trade secrets to protect proprietary technology.
Generally, we enter into confidentiality agreements with our employees and key suppliers and otherwise seek to limit access to and distribution of the source code to software and other proprietary
information. These steps may not be adequate to prevent misappropriation of our technologies, or a third party may independently develop technologies similar or superior to any that we possess.

Employees

As of December 31, 2009, MRV employed 3,756 full-time employees. Of these employees, 2,794 were in manufacturing,
413 in product development and engineering, and 549 in sales, marketing and general administration. Of these employees, 3,472 work in locations outside the United States. In addition, there were 86
employees in EDSLan, our Italian Network Integration subsidiary which was sold in January 2010, and is presented in discontinued operations in the financial statements set forth in Item 8
"Financial Statements and Supplemental Data" of this Form 10-K. None of our employees are represented by a union or governed by a collective bargaining agreement, except for
employees in a Chinese subsidiary of Source Photonics. Employees of the Source Photonics' subsidiary participate in collective agreements with their trade unions. The collective agreements usually set
out the minimum standard for wages, working hours and other benefits of these workers.

We
believe our employee relationships are satisfactory. We believe that our long-term success depends in part on our continued ability to recruit and retain qualified
personnel. The risks associated with dependence on qualified personnel are more fully discussed under the heading "The loss of key management could negatively affect our business" in the "Risk
Factors" section contained in Item 1A of this Form 10-K.

Internet Access to Our Financial Documents

We maintain a website atwww.mrv.com. We make available, free of charge, either by
direct access or a link to the SEC website, reports that we electronically file with or furnish to the SEC. We make the reports available on our website as soon as reasonably practicable after filing
or furnishing such reports to the SEC. These reports include Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,

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Current
Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. These reports are available on a real
time basis directly through the SEC's website atwww.sec.gov.

Item 1A.    Risk Factors.

The following risk factors and other information included in this Form 10-K should be carefully considered. The
risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or which we currently deem immaterial also may impair our business
operations. If any of the following risks occur, our business, financial condition, operating results, and cash flows could be materially adversely affected and the trading price of our Common Stock
could decline.

Our operating results may be adversely impacted by worldwide political and economic uncertainties and specific conditions in the markets we address, including the cyclical
nature of and volatility in the communications and optical components industries.

We operate in the communications and optical component industries. These industries are cyclical and subject to rapid change and
evolving industry standards. From time to time, these industries and the markets in which we operate have experienced significant downturns, such as the most recent global downturn. These downturns
are characterized by decreases in product demand, excess customer inventories, accelerated erosion of prices, and may be interspersed with or followed by significant and temporary increased demand in
products. These factors could cause substantial fluctuations in our revenue, gross margins and results of operations, and may cause difficulty in predicting demand and short-term
production needs. In addition, during these downturns some competitors become more aggressive in their pricing practices, which may adversely impact our product gross margins. Any downturns in the
communications and optical component industries may be severe and prolonged or intermittent, and any failure of these industries or the markets in which we operate to fully recover from downturns
could seriously impact our revenue and harm our business, financial condition and results of operations. The communications and optical component industries also periodically experience increased
demand and production capacity constraints, which may affect our ability to ship products in a timely manner and may cause delivery time penalties. Accordingly, our operating results may vary
significantly as a result of the general conditions in the communications and optical component industries, which could cause large fluctuations in our stock price.

Many
other factors have the potential to significantly impact our business, such as concerns about inflation and deflation, deterioration in credit availability due to the recent
financial crisis, volatility in energy costs, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns in the communications
markets, reduced availability of insurance coverage or reduced ability to pay claims by insurance carriers, recent international conflicts and terrorist and military activity, and the impact of
natural disasters and public health emergencies. These conditions may make it extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and
they could cause U.S. and foreign businesses to reduce spending on our products and services, which would delay and lengthen sales cycles. Furthermore, during challenging economic times our customers
may face issues gaining timely access to sufficient credit or could even need to file for bankruptcy. Either of these circumstances could result in an impairment of their ability to make timely
payments to us. If these circumstances were to occur, we may be required to increase our allowance for doubtful accounts. Historically, our business does not come from the end-customer
directly, and we have experienced growth patterns that are different than what the end demand might be, particularly during periods of high volatility. This can manifest itself in periods of growth in
excess of our customers' growth followed by periods of under-shipment before the volatility abates as our customers adjust their inventory levels. Given recent

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economic
conditions it is possible that any correlation will continue to be less predictable and will result in increased volatility in our operating results and stock price. We cannot predict the
timing, strength or duration of any economic slowdown or subsequent economic recovery, worldwide, in the communications or optical component industries or in the markets in which we operate. If the
economy or markets in which we operate deviate from present levels or deteriorate, we may record additional charges related to restructuring costs and the impairment of goodwill and
long-lived assets, and our business, financial condition and results of operations may be materially and adversely affected. Additionally, the combination of our lengthy sales cycle
coupled with challenging macroeconomic conditions could have a synergistic negative impact on the results of our operations. The impact of market volatility is not limited to revenue but may also
affect our product gross margins and other financial metrics. Such impact could be manifested in, but not limited to, factors such as fixed cost overhead absorption.

Our quarterly operating results are subject to significant fluctuations, and you should not rely on them as an indication of our future performance. Our operating results
could fluctuate significantly from quarter to quarter and year to year.

Our operating results for a particular quarter are difficult to predict. Our revenue, gross margins and operating results could
fluctuate substantially from quarter to quarter and from year to year as a whole, and within our three business segments. This could result from any one or a combination of factors such
as:



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Moreover,
the volume and timing of orders we receive during a quarter are difficult to forecast. Customers often view the purchase of our products as a significant and strategic
decision. As a result, customers typically expend significant effort in evaluating, testing and qualifying our products and our manufacturing process. This customer evaluation and qualification
process frequently results in a lengthy initial sales cycle of up to one year or more. We may also expend significant management effort, increase manufacturing capacity and order long
lead-time components or materials prior to receiving an order. Further, our customers encounter uncertain and changing demand for their products. Customers generally order based on their
forecasts. If demand falls below these forecasts or if customers do not control inventories effectively, they may cancel or reschedule shipments previously ordered from us even after acceptance of
orders. We do not recognize revenue until a product has been shipped to a customer, all significant vendor obligations have been performed and collection is considered reasonably assured. Our expense
levels during any particular period are based, in part, on expectations of future sales. If sales in a particular quarter do not meet expectations, our operating results could be materially adversely
affected.

We
expect revenue and gross margins generally and for specific products to continue to fluctuate from quarter to quarter and year to year, and it is possible that, in future periods, our
results of operations will be below the expectations of public market analysts and investors. This failure to meet expectations could cause the trading price of our Common Stock to decline. Similarly,
the failure by our competitors or customers to meet or exceed the results expected by their analysts or investors could, by association, cause our stock price to decline.

Competition, especially in the networking equipment and optical components markets, is ever increasing, which could reduce our revenue and gross margins or cause us to lose
market share.

The communications industry, especially in the networking equipment and optical component areas, is intensely competitive, and we must
continually provide new products while dealing with increased price competition from low-cost producers in Asia. We compete directly with a number of established and emerging networking
and optical components companies. Our direct competitors in networking products, switches and routers generally include: ADVA Optical Networks, Compagnie Financière Alcatel-Lucent,
Allied Telesis Holdings KK, Brocade Communications Systems, Ciena Corporation, Cisco Systems, Inc., Extreme Networks, Huawei Technologies Inc. Nortel Networks Corporation and
Raritan, Inc. Our competitors in fiber optic components include: Avago Technologies Limited, Delta Electronics, Inc., EMCORE Corporation, ExceLight Communications, Inc., Finisar
Corporation, JDS Uniphase Corporation, Ligent Photonics, Inc., NEC Corporation, NeoPhotonics Corporation, Nokia Siemens Networks, Oplink Communications, Inc., Opnext, Inc., and
Wuhan Telecommunication Devices Co., Ltd.

Many
of our competitors have significantly greater financial, technical, marketing, distribution, sales and customer support organizations and other resources and larger installed
customer bases than we have. Our competitors continually introduce new competitive products, and may be able to devote greater resources to the development, promotion, sale and support of their
products. Many of our larger

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competitors
offer customers broader product lines, which provide a more comprehensive networking solution than we provide. These companies can leverage their customer bases and broader product
offerings and adopt aggressive pricing policies to gain market share. In addition, several of our competitors have large market capitalizations, substantially larger cash reserves, and are much better
positioned than we are to acquire other companies in order to gain new technologies or products that may displace our product lines and give them a strategic advantage. Accordingly, in certain
regional markets we have collaborated with other vendors in an effort to enhance our overall capability in providing products and services.

Additional
competitors may enter the market, and we are likely to compete with new companies in the future. Companies competing with us may introduce products that are more competitively
priced, have increased performance or functionality, or incorporate technological advances that we have not yet developed or implemented, and may be able to react more quickly to changing customer
requirements and expectations. There is also the risk that other network system vendors may enter or re-enter the subsystem market and begin to manufacture in-house the optical
and networking subsystems incorporated into their network systems. We also expect to encounter potential customers that, because of existing relationships with our competitors, are committed to the
products offered by these competitors. As a result of the foregoing factors, we expect that competitive pressures may result in price reductions, reduced margins or loss of market share in our
markets.

Our markets are subject to rapid technological change, and to compete effectively, we must continually introduce new products that achieve market acceptance.

The markets for our products are characterized by rapid technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. We expect that new technologies will emerge as competition and the need for higher and more cost effective transmission capacity, or bandwidth, increases.
Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address these changes as well as current and potential customer
requirements. The introduction of new and enhanced products may cause our customers to defer or cancel orders for existing products. We have in the past experienced delays in product development and
these delays may occur in the future. Therefore, to the extent that customers defer or cancel orders in the expectation of a new product release or there is any delay in development or introduction of
our new products or enhancements of our products, our operating results would suffer.

During
the years ended December 31, 2009 and 2008, research and development expenses accounted for eight percent of revenues. Introduction of new products and product enhancements
will require that we effectively transfer production processes from research and development to manufacturing and coordinate our efforts with those of our suppliers to achieve volume production
rapidly. If we fail to transfer production processes effectively, develop product enhancements or introduce new products in sufficient quantities to meet the needs of our customers as scheduled, our
net sales may be reduced and our business may be harmed. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements, or to license these
technologies from third parties. Product development delays may result from numerous factors, including:



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

Our products are deployed in large and complex systems and may contain defects that are not detected until after our products have been installed, which may cause us to
incur significant costs, divert our attention from product development efforts or damage our reputation and cause us to lose customers.

Our products are complex and undergo internal quality testing and qualification as well as formal qualification by our customers.
However, defects may be found from time to time. Our customers' testing procedures are limited to evaluating our products under likely and foreseeable failure scenarios and over varying amounts of
time. For various reasons, including among others, the occurrence of performance problems that are unforeseeable in testing or that are detected only when products age or are operated under peak
stress conditions, our products may
fail to perform as expected long after customer acceptance. Failures could result from faulty components or design, problems in manufacturing or other unforeseen reasons. As a result, we could incur
significant costs to repair and/or replace defective products under warranty, particularly when such failures occur in installed systems. We have experienced such failures in the past and will
continue to face this risk going forward, as our products are widely deployed throughout the world in multiple demanding environments and applications. In addition, we may in certain circumstances
honor warranty claims after the warranty period has expired or for problems not covered by warranty in order to maintain customer relationships. Although we have limited by contract the types of
damages customers may seek in conjunction with a warranty claim, we acquired a company called Fiberxon, Inc. in 2007, and it did not contractually limit its liabilities prior to its acquisition
by us, and as a result we currently bear increased exposure to damages upon claims related to historical Fiberxon products. We believe that our warranty reserves adequately address our potential
exposure to liability for warranty claims. Our warranty reserves are based on historical return rates, our average material costs incurred to repair items, including labor costs, and, with respect to
the former Fiberxon entity, the lack of contractual limitations on such claims in some instances. The warranty reserves are evaluated and adjusted based on updated actual experience.

In
addition, our optical component products and certain of our data networking products are typically embedded in, or deployed in conjunction with, our customers' products, which
incorporate a variety of components and may be expected to interoperate with modules produced by third parties. As a result, not all defects are immediately detectable and when problems occur, it may
be difficult to identify the source of the problem. These problems may cause us to incur significant damages or warranty and repair costs, divert the attention of our engineering personnel from our
product development efforts, cause significant customer relation problems or loss of customers, and harm our reputation and brand, any of which could materially and adversely affect our business.

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Although we were profitable on a consolidated basis in the fourth quarter of 2009, we have not achieved profitability on a consolidated basis for a full year since 2004 and
may not achieve profitability in the future.

Although we were profitable on a consolidated basis in the fourth quarter of 2009, we reported net losses for 2005 through 2009. We
anticipate continuing to incur significant product development, sales and marketing and general and administrative expenses and, as a result, we will need to continue our efforts to contain expense
levels and increase revenue levels in an effort to achieve profitability in future fiscal quarters and years. In 2009, we incurred additional significant charges related to the investigation and
restatement of our financial statements, as well as expenses related to a proxy contest for the 2009 election of directors. We may not be successful in our efforts to contain expense levels and
increase revenue levels and we may not attain profitability on a sustained basis or at all.

Our customers may adopt alternate technologies for which we do not produce products or for which our products are not adaptable.

The market for our products is characterized by rapidly changing technology, evolving industry standards and new product introductions,
which may minimize the demand for our existing products or render them obsolete. Our future success will depend in part upon our ability to enhance existing products and to develop and introduce new
products that address such changes in technology and standards and respond to our customers' potential desire to adopt such technologies in place of those supported by our current product offerings.
The development of new or enhanced products is a complex and uncertain process requiring the accurate anticipation of technological and market trends as well as precise technological execution.
Further, the development cycle for products integrating new technologies or technologies with which we are not as familiar may be longer and more costly than our current product development process.
We may experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products, and the new products may not be successfully commercialized.
These costs and delays may prevent us from being able to establish a market position with respect to such new technologies and industry standards or be as responsive as we would like to be in meeting
our customers' demands for such products, thus adversely affecting our results of operations and our customer relationships.

If our customers do not qualify our products or if their customers do not qualify their products, our results of operations may suffer.

Some of our customers purchase our products prior to qualification and satisfactory completion of factory audits and vendor evaluation.
Our existing products, as well as each new product, must pass through varying levels of qualification with our customers. In addition, because of rapid technological changes in our market, a customer
may cancel or modify a design project before we begin large-scale manufacture of the product and receive revenue from the customer. It is unlikely that we would be able to recover the expenses for
cancelled or unutilized custom design projects. It is difficult to predict with any certainty whether our customers will delay or terminate product qualification or the frequency with which customers
will cancel or modify their projects, but any such delay, cancellation or modification could have a negative effect on our results of operations.

Further,
if network service providers that purchase equipment or systems from our customers fail to qualify or delay qualifications of our customers' equipment or systems that contain
our products, our business could be harmed. Qualification and field-testing of our customers' systems by network service providers is long and unpredictable. This process is not under our control,
and, as a result, timing of our sales is unpredictable. Any unanticipated delay in qualification of one of our customers' network systems could result in the delay or cancellation of orders from our
customers for components and systems included in the applicable network system and could harm our results of operations.

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We do not have long-term volume purchase contracts with our customers, so our customers may increase, decrease, cancel or delay their purchasing levels at any
time with minimal advance notice to us, which may significantly harm our business.

Our customers typically purchase our products pursuant to individual purchase orders. While our customers generally provide us with
their demand forecasts, in most cases they are not contractually committed to buy any quantity of products beyond firm purchase orders. Our customers may increase, decrease, cancel or delay purchase
orders already in place. If any of our major customers decrease, stop or delay purchasing our products for any reason, our business and results of operations would be harmed. Cancellation or delays of
such orders may cause us to fail to achieve our short- and long-term financial and operating goals. Lead times for components and materials that we order vary significantly and depend on
factors including the specific supplier requirements, the size of the order, contract terms and current market demand for components. For substantial increases in our sales levels, some of our
suppliers may need significant lead time. In the past, during periods of market downturns, certain of our largest customers canceled or delayed significant orders with us and with our competitors,
which resulted
in losses of sales and excess and obsolete inventory. Similarly, decreases or deferrals of purchases by our customers may significantly harm our industry and specifically our business in these and in
additional unforeseen ways, particularly if they are not anticipated.

We may suffer losses as a result of entering into fixed price contracts.

From time to time we enter into contracts with certain customers in which the price we charge for particular products is fixed.
Although our estimated production costs for these products are used to compute fixed sales prices, if actual production costs exceed the estimated production costs because of our inability to obtain
needed components timely, or at all, or we cannot continue to cut costs in production and have incrementally decreased future fixed prices, or for other reasons, we may incur a loss on the sale. Sales
of material amounts of products on a fixed price basis, for which we have not accurately forecasted the production costs, could have a material adverse affect on our results of operations.

A few customers account for a substantial portion of our sales, increasing both our dependence on a few revenue sources and the risk that our operations will suffer
materially if a significant customer stops ordering from us or substantially reduces its business with us.

One customer generated 10% of total revenues for the year ended December 31, 2009. Another customer generated 10% of total
revenues for the year ended December 31, 2007. Both customers contributed to our Optical Components group revenues for the respective periods. No single customer accounted for 10% or more of
total revenues for the year ended December 31, 2008. As of December 31, 2009, amounts due from each of two customers, one from each of our Optical Components and Network Integration
groups, exceeded 10% of gross accounts receivables, and accounted for 26% of gross trade receivables on a combined basis. No single customer exceeded 10% of gross accounts receivables at
December 31, 2008. While our financial performance benefited from substantial sales to these customers, because of the magnitude of sales to them, our results would suffer if we were to lose
their business. Additionally, if that customer made a substantial reduction in orders, or if its significant customers switched OEMs to a company that were not our customer, our results of
operations would suffer unless we were able to replace the customer or orders with one or more customers of comparable size.

Our ability to utilize our NOLs and certain other tax attributes may be limited.

As of December 31, 2009, MRV had federal, state and foreign net operating losses, or NOLs, of $228.6 million,
$142.8 million and $96.7 million, respectively. Under Section 382 of the Internal Revenue Code, if a corporation undergoes an "ownership change," the corporation's ability to use
its pre-change

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NOLs,
capital loss carry forwards and other pre-change tax attributes to offset its post-change income, may be limited. An ownership change is generally defined as a greater
than 50% change in its equity ownership by value over a three-year period. We may experience an ownership change in the future as a result of subsequent shifts in our stock ownership. If
we were to trigger an ownership change in the future, our ability to use any NOLs and capital loss carry forwards existing at that time could be limited.

We face risks in reselling the products of other companies.

We distribute products manufactured by other companies. To the extent we succeed in reselling the products of these companies, or
products of other vendors with which we may enter into similar arrangements, we may be required by customers to assume warranty and service obligations. While these suppliers have agreed to support us
with respect to those obligations, if they should be unable, for any reason, to provide the required support, we may have to expend our own resources on doing so. We are unable to evaluate fully the
potential magnitude of these warranty claims as the equipment has been designed and manufactured by others.

There are a limited number of potential source suppliers for certain components, which makes us susceptible to supply shortages.

We currently purchase several key components from single or limited sources. Moreover, we depend on the quality of the products
supplied to us, over which we have limited control. We have encountered shortages and delays in obtaining components in the past and expect to encounter shortages and delays in the future. Sudden
significant increases in demand for products which we purchase may cause delays in delivery of subcomponents, which may cause delay in delivery of our products. Larger competitors may be able to
demand more rapid delivery of components parts in comparison to us. If we cannot supply products due to a lack
of certain components or are unable to redesign products with other components in a timely manner, our business will be significantly harmed.

In
our fiber optic components business, customers generally restrict our ability to change the component parts in our modules without their approval. For less critical components, this
may require as little as a specification comparison. For more critical components, such as lasers, photodetectors and key integrated circuits, this may result in repeating the entire qualification
process. We depend on a limited number of suppliers for key components that we have qualified to use in the manufacture of certain of our products. Some of these components are available only from a
sole source or have been qualified only from a single supplier. We typically have not entered into long-term agreements with our suppliers and, therefore, our suppliers could stop
supplying materials and equipment at any time or fail to supply adequate quantities of component parts on a timely basis. It is difficult, costly, time consuming and, on short notice, sometimes
impossible for us to identify and qualify new component suppliers. The reliance on a sole supplier, single qualified vendor or limited number of suppliers could result in delivery and quality
problems, reduced control over product pricing, reliability and performance and an inability to identify and qualify another supplier in a timely manner. We have in the past had to change suppliers,
which, in some instances, has resulted in delays in product development and manufacturing until another supplier was found and qualified. Any such delays in the future may limit our ability to respond
to changes in customer and market demands. During the last several years, the number of suppliers of components has decreased significantly and, more recently, demand for components has increased. Any
supply deficiencies relating to the quality or quantities of components we use to manufacture our products could adversely affect our ability to fulfill customer orders and our results of operations.

Our inability to achieve adequate production yields for certain components could result in a loss of sales and customers or higher than expected costs.

We rely heavily on our own production capability for critical semiconductor lasers and light-emitting diodes used in our products.
Because we manufacture these and other key components at our own

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facilities
and these components are not readily available from other sources, any interruption of our manufacturing processes could have a material adverse effect on our operations. Furthermore, we
have a limited number of employees dedicated to the operation and maintenance of our wafer fabrication equipment, the loss of whom could result in our inability to effectively operate and service this
equipment. Wafer fabrication is sensitive to many factors, including variations and impurities in the raw materials, the fabrication process, performance of the manufacturing equipment, defects in the
masks used to print circuits on the wafer, and the level of contaminants in the manufacturing environment. We may not be able to maintain acceptable production yields or avoid product shipment delays.

Manufacturing
yields depend on a number of factors, including the stability and manufacturability of the product design, manufacturing improvements gained over cumulative production
volumes, the quality and consistency of component parts, and the nature and extent of customization requirements by customers. Higher volume demand for more mature designs requiring less customization
generally results in higher manufacturing yields than products with lower volumes, less mature designs and extensive customization. Capacity constraints, component shortages, logistics issues, the
introduction of new product lines and changes in our customer requirements, manufacturing facilities or processes, or those of our third party contract manufacturers and component suppliers, have
historically caused, and may in the future cause, significantly reduced manufacturing yields. Our ability to maintain sufficient manufacturing yields is particularly important with respect to certain
products we manufacture such as lasers and photodetectors as a consequence of the long manufacturing process. Moreover, an increase in the rejection and rework rate of products during the quality
control process before, during or after manufacture would result in lower yields, gross margins and production capacity. Finally, manufacturing yields and margins can also be lower if we receive and
inadvertently use defective or contaminated materials from our suppliers. Because a significant portion of our manufacturing costs is relatively fixed, manufacturing yields may have a significant
effect on our results of operations. Lower than expected manufacturing yields could delay product shipments and our business, operating results and financial condition could be materially adversely
affected.

We rely substantially upon a limited number of contract manufacturing partners, and if these contract manufacturers fail to meet our short- and long-term needs
and contractual obligations, our business may be negatively impacted.

We rely to a significant extent on a limited number of contract manufacturers to assemble, manufacture and test our products. The
qualification and set up of these independent manufacturers under quality assurance standards is an expensive and time-consuming process. Certain of our independent manufacturers have a
limited history of manufacturing optical modules or other components we use in our products and equipment. In the past, we have experienced delays or other problems, such as inferior quality,
insufficient quantity of product and an inability to meet cost targets, which have led to delays in our ability to fulfill customer orders. Additionally, in the past, we have been required to qualify
new contract manufacturing partners and replace contract manufacturers, which led to delays in deliveries. Any future interruption in the operations of these manufacturers, or any deficiency in the
quality, quantity or timely delivery of the components or products built for us by these manufacturers, could impede our ability to meet our scheduled product deliveries to our customers or require us
to contract with and qualify new contract manufacturing partners. As a result, we may lose existing or potential customers or orders and our business may be negatively impacted.

If we fail to forecast component and material requirements accurately for our manufacturing facilities, we could incur additional costs or experience manufacturing delays.

We use rolling forecasts based on anticipated product orders to determine our component requirements. It is very important that we
accurately predict both the demand for our products and the lead times required to obtain the necessary components and materials. Lead times for components and

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materials
that we order vary significantly and depend on factors such as specific supplier requirements, the size of the order, contract terms and current market demand for the components. For
substantial increases in production levels, some suppliers may need six months or more lead time. If we overestimate our component and material requirements, we may have excess or obsolete inventory,
which may not get used or have to be discounted to eliminate. If we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt our manufacturing and
delay delivery of our products to our customers. Any of these occurrences would negatively impact our revenue.

We face increased risks associated with the consolidation of our Taiwan and PRC manufacturing operations in a single location in Chengdu, PRC.

Historically, we manufactured most of our products in Taiwan, with some reliance on contract manufacturers in PRC as well. With the
2007 acquisition of Fiberxon, which manufactured its products principally in Chengdu, PRC, we began the process of consolidating our Taiwan and PRC manufacturing operations at that Chengdu location,
and have substantially completed the consolidation. However, any delays in completion of the consolidation may increase our manufacturing costs and ability to increase our manufacturing capacity,
causing us to lose potential business. In addition, we face increased risk of loss from any disruption of operations in Chengdu affecting our consolidated facility. Damage to our Chengdu manufacturing
facility due to fire, contamination, natural disaster, power loss, unauthorized entry or other events could force us to cease manufacturing our products, resulting in loss of revenue and breached
customer contracts. In addition, if the facility or the equipment in the facility is significantly damaged or destroyed for any reason, we may be unable to reallocate efficiently or replace our
manufacturing capacity for an extended period of time, and our business, financial condition and results of operations would be materially and adversely affected.

Although
all of our manufacturing facilities each have a disaster recovery plan, we cannot assure you that efforts will proceed according to such plans or that the plans adequately
address all potential risks and outcomes. In addition, if the governmental regulations and special incentives pursuant to which we have negotiated use of our facility in Chengdu change, the perceived
benefits
from such consolidation of our Taiwan and PRC manufacturing efforts in Chengdu may not be realized fully or at all.

Our business and future operating results may be adversely affected by events outside of our control. Our insurance coverage for natural disasters is limited.

We use our facilities in Chatsworth, California for major product design and development and customer support, and we manufacture
products at our facilities in Taiwan and PRC. The risk of earthquakes in Southern California and Taiwan is significant because of the proximity of these manufacturing facilities to major earthquake
fault lines. In January 1994, September 1999 and August 2008, major earthquakes near Chatsworth and in Taiwan and Sichuan, PRC, respectively, affected our facilities, causing power and communications
outages and disruptions that impaired production capacity. While our facilities did not suffer material damage and our business was not materially disrupted by these earthquakes, the occurrence of an
earthquake or other natural disaster could result in the disruption of our manufacturing facilities. Any disruption in our manufacturing facilities arising from earthquakes, other natural disasters or
other catastrophic events including wildfires and other fires, excessive rain, terrorist attacks and wars, could disrupt our manufacturing ability, which could harm our operations and financial
results, and could cause significant delays in the production or shipment of our products until we are able to shift production to different facilities or arrange for third parties to manufacture our
products. We may not be able to obtain alternate capacity on favorable terms or at all. The location of our manufacturing facilities in Southern California, Taiwan and PRC subjects us to increased
risk that a natural disaster could disrupt our operations.

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Although
we believe our insurance coverage is adequate to address the variety of potential liabilities we face, our insurance coverage is subject to deductibles and coverage limits. Upon
an occurrence of significant natural disaster, such coverage may not be adequate or continue to be available at commercially reasonable rates and terms. In the event of a major earthquake or other
disaster affecting one or more of our facilities, our operations could be significantly disrupted, delayed or prevented for the time required to transfer production, repair, rebuild or replace the
affected manufacturing facilities. This time frame could be lengthy, and result in significant expenses for repair and related costs. In addition, concerns about terrorism or an outbreak of epidemic
diseases such as avian or swine influenza or severe acute respiratory syndrome, could have a negative effect on travel and our business operations, and result in adverse consequences to our business
and results of operations.

Environmental regulations applicable to our manufacturing operations could limit our ability to expand or subject us to substantial costs. Compliance with current and future
environmental regulations may be costly which could impact our future operating results.

We are subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals
used during our manufacturing processes. Further, we are subject to other safety, labeling and training regulations as required by foreign, local, state and federal law. We believe we are compliant in
all material respects with applicable environmental regulations in the United States, Taiwan and PRC. However, any failure by us to comply with present and future regulations could subject us to
future liabilities or the suspension of production. In addition, such regulations could restrict our ability to expand our facilities and we may need to acquire costly equipment or incur other
significant expenses to comply with environmental regulations. We cannot provide assurance that legal requirements will not be imposed on us that would require additional capital expenditures or the
satisfaction of other requirements. If we fail to obtain required permits or otherwise fail to operate within current or future legal requirements, including those applicable to us in the United
States, Taiwan and PRC, we may be required to pay substantial penalties, suspend our operations, or make costly changes to our manufacturing processes or facilities.

In
addition, we could face significant costs and liabilities in connection with legislation which enables customers to return a product at the end of its useful life and charges us with
financial and other responsibility for environmentally safe collection, recycling, treatment and disposal. We also face increasing complexity in our product design and procurement operations as we
adjust to new and upcoming requirements relating to the materials composition of our products. This includes the restrictions on lead and certain other substances in electronics that apply to
specified electronics products put on the market in the European Union and PRC. Many of our customers have adopted this approach and have required our full compliance. Even though we have devoted a
significant amount of resources and effort planning and executing our compliance program and believe that we are in compliance with such legislation, it is possible that some of our products might be
incompatible with such regulations. In such event, we could experience loss of revenue, damaged reputation, diversion of resources, monetary penalties and legal action. Other environmental regulations
may require us to re-engineer our products to utilize components that are more environmentally compatible. Such re-engineering and component substitution may result in
additional costs to us. Although we currently do not anticipate any material adverse effects based on the nature of our operations and the effect of such laws, there is no assurance that such existing
laws or future laws will not have a material adverse effect on us.

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Our business and future operating results are subject to a wide range of uncertainties arising out of the international nature of our operations and facilities.

International sales are a significant part of our business. The following table summarizes the percentage of total revenues from sales
to customers outside the United States for the last three years:

Years ended
December 31,2009

2008

2007Percentage of revenues from international sales


70
%

63
%

65
%


We
have offices and facilities in, and conduct a significant portion of our operations in and from Israel, PRC and Taiwan. We are, therefore, influenced by the political and economic
conditions affecting these countries. Risks we face from international sales and our use of facilities and suppliers overseas for manufacturing include:



Our
business and operations are also subject to general geopolitical conditions, such as terrorism, political and economic instability, changes in the costs of key resources such as
crude oil and changes in diplomatic or trade relationships. Economic conditions in several countries and markets outside the United States in which we have offices, personnel, facilities or sales
represent significant risks to us. Instability in the Middle East, PRC or the European Union could have a negative impact on our sales and

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operations
in these regions, and unstable conditions could have a material adverse effect on our business and results of operations. In addition to the effect of global economic instability on our
operations or facilities on sales to customers outside the United States, sales to domestic customers could be negatively impacted by these conditions.

Our operating results are impacted by foreign exchange rates and interest rate fluctuations.

The majority of our sales are currently denominated in U.S. dollars. As we conduct business in several different countries, we have
benefited from sales made in currencies other than the U.S. dollar because of the weakness of the U.S. dollar relative to the currencies in which these sales have been made, but recent trends in the
strength of the U.S. dollar are indicating we will be incurring losses in the future. Further, fluctuations in currency exchange rates can and do cause our products to become relatively more expensive
in particular countries, leading to a reduction in sales in that country. We are significantly exposed to foreign currency fluctuations between the Chinese renminbi and the U.S. dollar may affect our
total revenue going forward and could significantly affect our Optical Components group operating results. Approximately 42% of combined revenues for the year ended December 31, 2009 were
denominated in renminbi. Approximately 13% of total operating expenses for the same period were incurred in renminbi.

We
currently do not have any hedging or swap agreements in place. However, where possible, we attempt to denominate sales in countries in which we do business in the local currency,
especially in PRC, which reduces foreign exchange rate exposure to some degree. We could incur losses from our lack of hedging activities in the future. In addition, inflation or fluctuations in
currency exchange or interest rates in any of the countries that we do business could increase our operating expenses and thereby adversely affect our results of operations.

We face risks inherent in doing business in PRC.

As our operations in PRC assume a larger and more important role in our business, the risks inherent in doing business in PRC will
become more acute. Many of these risks specific to doing business in PRC are beyond our control, including:



Any
of these factors could harm our future revenues, gross margins and operations significantly. Moreover, the political tension between Taiwan and PRC that continues to exist could
eventually lead to hostilities, or there may be regulatory issues with either the Taiwan or PRC as a result of our having operations or business interests in both countries.

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Labor shortages or strikes in Southern PRC could adversely affect our gross margins or decrease revenues.

Historically, there has been an abundance of labor in Southern PRC, but over the last few years, factories in Southern PRC,
particularly in Shenzhen and to a lesser extent in Chengdu, where our manufacturing facilities are located, are to varying degrees facing a labor shortage as migrant workers and middle level
management seek better wages and working conditions elsewhere. Further, some of our employees in Chengdu are represented by unions. This trend of labor shortages is expected to continue, fueled by the
effects of the one-child policy imposed by the Chinese government and will likely result in increasing wages as companies seek to keep their existing work forces. Continuing labor
shortages or strikes can be expected to adversely impact our future operating results by, for example, preventing us from manufacturing at peak capacity and forcing us to increase wages and benefits
to attract the diminishing pool of available workers. This could result in lower revenue or increased manufacturing costs, which would adversely affect gross margins.

Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences. We could suffer losses from corrupt or fraudulent
business practices.

We are subject to the U.S. Foreign Corrupt Practices Act ("FCPA") which generally prohibits U.S. companies from engaging in bribery or
other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are required to maintain records that accurately and fairly represent our
transactions and have an adequate system of internal accounting controls. Foreign companies, including some that may compete with us, are not subject to these prohibitions, and therefore may have a
competitive advantage over us. Prior to completion of the acquisition of Fiberxon, its management and employees were not subject to the FCPA. In the past, there have been instances of corruption,
extortion, bribery, pay-offs, theft and other fraudulent practices in PRC. We have implemented and maintained preventative measures, but cannot assure that our employees or other agents
will not engage in such conduct and render us responsible under the FCPA. If our employees or other agents are found to have engaged in these practices, we could suffer severe penalties and other
consequences that may have a material adverse effect on our business, financial condition and results of operations.

If our cash flow deteriorates in the future, our liquidity and ability to operate our business could be adversely affected. We may not be able to obtain capital when desired
on favorable terms, if at all.

We incurred net losses in each of the years ended December 31, 2009 and 2008, and our combined cash and short-term
investments declined in 2008. As of December 31, 2009, our cash, cash equivalents, restricted time deposits, and marketable securities totaled $92.5 million, which was a
$10.9 million, or 13 percent, increase since December 31, 2008. However, this increase was due to an increase of $41.6 million in short-term debt over the prior
year, and our short-term debt outstanding as of December 31, 2009 equaled $ 66.1 million.

We
may not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. If this occurs, we may need additional financing to
execute on our current or future business strategies, including to:



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If
we raise additional funds through the issuance of Common Stock or convertible securities, the percentage ownership of our stockholders could be significantly diluted. In addition, we
restated our financial statements in 2008 and were delinquent in our annual and quarterly filings until the filing of this Form 10-K. This means that we will not be able to register
securities in the next 12 months pursuant to a Form S-3 registration statement, and would need to use the more time-consuming and costly registration statement on
Form S-1.

If
our cash flow significantly deteriorates in the future, our liquidity and ability to operate our business could be adversely affected. For example, our ability to raise financial
capital may be
hindered due to our net losses and the possibility of future negative cash flow. We cannot provide assurance that additional financing will be available on terms favorable to us, or at all. If
adequate funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our
products, or otherwise respond to competitive pressures, could be significantly limited.

If we fail to protect our intellectual property, we may not be able to compete.

We rely on a combination of trade secret laws and restrictions on disclosure and patents, copyrights and trademarks to protect our
intellectual property rights. We cannot assure you that our pending patent and trademark applications will be approved, that any patents or trademarks that may be issued will protect our intellectual
property or that third parties will not challenge any issued patents. Other parties may independently develop similar or competing technology or design around any patents that may be issued to us. We
cannot be certain that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights
as fully as in the United States. Specifically in PRC there is a risk of poor enforcement of intellectual property rights. The validity, enforceability and scope of protection of intellectual property
in PRC is uncertain and still evolving, and Chinese laws may not protect intellectual property rights to the same extent as the laws of some other jurisdictions. Policing unauthorized use of
proprietary technology is difficult and expensive. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable competitors, especially in PRC, to
benefit from our technologies without paying us any royalties. Any of this kind of litigation, regardless of outcome, could be expensive and time consuming, and adverse determinations in any of this
kind of litigation could seriously harm our business.

We are involved in intellectual property disputes for the foreseeable future as part of doing business in the communications and optical components industries, which could
divert management's attention, cause us to incur significant costs, and prevent us from selling or using the challenged technology.

Participants in the communications and optical component markets in which we sell our products have experienced frequent litigation
regarding patent and other intellectual property rights. Numerous patents in these industries are held by others, including our competitors. From time to time, we have become aware of the possibility
or have been notified that we may be infringing certain patents or other intellectual property rights of others. In addition, we may be a party to litigation to protect our intellectual property or as
a result of an alleged infringement of others' intellectual property. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages or invalidation of
our proprietary rights. In January 2010, Finisar Corporation filed a complaint in the U.S. District Court for the Northern District of California against us and two other companies in our industry. In
the complaint,

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Finisar
alleges infringement of certain of its U.S. patents arising from the manufacture and sale of our and the other defendants' optical transceiver products. Finisar seeks to recover unspecified
damages, up to treble the amount of actual damages, together with attorneys' fees, interest and costs. We believe that we have meritorious defenses to the infringement allegations and intend to defend
this lawsuit vigorously along with our co-defendants. However, there can be no assurance that we will be successful in our defense and, even if we are successful, we may incur substantial
legal fees and other costs in defending the lawsuit. The Finisar lawsuit, and any others that we may become party to, regardless of their success, are likely to be time-consuming and
expensive to resolve and divert technical and management time and attention. Accordingly, any infringement claim or litigation against us could significantly harm our business, operating results and
financial condition. In the event of an adverse result in any litigation with respect to intellectual property rights relevant to our products, we could be required to obtain licenses to the
infringing technology, to pay substantial damages under applicable law, to cease the manufacture, use and sale of infringing products, or to expend significant resources to develop
non-infringing technology. Licenses may not be available from third parties either on commercially reasonable terms or at all.

We are involved in various class action securities and derivative litigation due to past stock option practices, and the related restatement of our prior financial results.

In connection with our past stock option grant practices, we have been subjected to a number of ongoing stockholder lawsuits. In
addition, a number of our current and former directors and officers were also named in the lawsuits. A description of the litigation is set forth in Item 3 "Legal Proceedings" of this
Form 10-K. As a result of this litigation, we have been and remain subject to a number of risks, including the following, each of which could
result in a material adverse effect to our business, financial condition and results of operations and/or a negative effect on the market for our stock: (i) private litigation relating to our
restatement or option grant practices; (ii) indemnification obligations for our former and current directors, officers and employees related to the litigation; (iii) additional
significant costs in effectuating on-going or additional remediation actions; and (iv) diversion of the time and attention of members of our management and our Board of Directors
from the management of our business.

We are involved in other lawsuits and legal proceedings.

We are involved in various lawsuits, disputes and claims, arising in the ordinary course of business. These suits or actions may raise
complex factual and legal issues and are subject to uncertainties. Actions filed against us could include product liability, commercial, intellectual property, customer, employment and securities
related claims, including class action lawsuits. Plaintiffs (or defendants who counterclaim) may seek unspecified damages or injunctive relief, or both. Although we carry product liability insurance,
and believe such coverage is adequate based on the historical rate and nature of customer product quality claims or complaints, we cannot provide assurance that this insurance would adequately cover
our costs arising from any significant defects in our products. Adverse results to any lawsuits, disputes or claims may harm our business and have material adverse effects on our results of
operations, liquidity or financial position, any or all of which could adversely affect our stock price.

Failure to achieve and maintain internal controls in accordance with Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on
our business and stock price.

We have examined and evaluated our internal control procedures to satisfy the requirements of Section 404 of the Sarbanes-Oxley
Act of 2002, as required for this Form 10-K, and have found no material weaknesses. However, we just recently completed a restatement of our financial statements, and in our Annual
Report of Form 10-K for the year ended December 31, 2008, which we did not file until October 8, 2009, we had reported two material weaknesses for the year then ended,
and another that

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had
been remediated during 2008. If we fail to maintain the internal controls we have recently implemented or fail to implement required new or improved controls, as such control standards are
modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting. Effective internal controls
are necessary for us to produce reliable financial reports and are important in the prevention of financial fraud. If we cannot produce reliable financial reports or prevent fraud, our
business and operating results could be harmed, investors may lose further confidence in our reported financial information, and there could be a material adverse effect on our stock price.

The loss of key management could negatively affect our business.

Our ability to develop, manufacture and market our products, run our operations and our ability to compete with our current and future
competitors depend, and will depend, in large part, on our ability to attract and retain qualified personnel. Competition for executives and qualified personnel in the communications and optical
components areas is intense, and we will be required to compete for those personnel with companies having substantially greater financial and other resources than we do. We are dependent upon Noam
Lotan, our Chief Executive Officer, and other executive officers and general managers of our various global business units. In many positions, we do not have succession plans, and the loss of the
services of these officers could have a material adverse effect on our operations. We have maintained an employment agreement with Mr. Lotan in order to retain him, and we are the beneficiary
of a key person life insurance policy in the amount of $1.0 million on his life. If we do not attract necessary team members to operate our business and provide for adequate retention and
succession planning, our business could be materially adversely affected.

Delaware law and our ability to issue preferred stock may have anti-takeover effects that could prevent a change in control, which may cause our stock price to
decline.

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

There is no assurance of an established public trading market for our Common Stock, which would adversely affect the ability of investors in our Company to sell their Common
Stock in the public markets.

Our Common Stock was suspended from trading on the NASDAQ Global Market on June 17, 2009, and was officially delisted on
August 30, 2009. At present, the OTC "Pink Sheets" is the only public market where investors can trade our Common Stock. The Pink Sheets is an inter-dealer electronic quotation and trading
system that provides significantly less liquidity and daily trading volume than a national securities exchange or automated quotation system. Quotes for stocks included in the Pink

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Sheets
are not listed in the financial sections of newspapers as are those for stocks listed on national securities exchanges or automated quotation systems. In the absence of an active trading
market, investors may have difficulty buying and selling or obtaining market quotations, and the lack of visibility for our Common Stock may have a depressive effect on the market for our Common
Stock.

Because this Form 10-K contains forward-looking statements, it may not prove to be accurate.

This Form 10-K and other Company releases and filings with the SEC may contain forward-looking statements. We
generally identify forward-looking statements using words like "believe," "intend," "expect," "may," "should," "plan," "project," "contemplate," "anticipate," "target," "estimate," "foresee," "goal,"
"likely," "will" or similar statements. Because these statements reflect our current views concerning future events, they involve risks, uncertainties and assumptions, including the risks and
uncertainties identified in this report. Actual results may differ significantly from the results discussed in these forward-looking statements. We do not undertake to update any forward-looking
statements or risk factors to reflect future events or circumstances.

Item 1B.    Unresolved Staff Comments.

There are no unresolved written comments that were received from the SEC's staff 180 days or more before the end of the
Company's fiscal year relating to our periodic or current reports filed under the Exchange Act.

Item 2.    Properties

Our properties consist of leased and owned facilities for product development, manufacturing, sales, support, and administrative
operations. Our Optical Components group conducts the majority of its manufacturing, operations through leased facilities located in PRC, and Taiwan. We believe that our existing properties are in
good condition and suitable for the conduct of our business. Should the need arise, we believe that suitable replacement and additional space will be available in the future on commercially reasonable
terms subject to force majeure conditions. For additional information regarding obligations under operating leases, see Note 11 to the Consolidated Financial Statements located in Item 8
of this Form 10-K.

Item 3.    Legal Proceedings.

We are subject to legal claims and litigation in the ordinary course of business, such as product liability, employment or intellectual
property claims, including, but not limited to, the matters described below. The outcome of any such matters is currently not determinable. Although we do not expect that such legal claims and
litigation will ultimately have a material adverse effect on our consolidated financial position or results of operations, an adverse result in one or more matters could negatively affect our results
in the period in which they occur.

Stock Option Litigation

On June 5, 2008, the Company announced that our Board of Directors, based on information provided by management, and in
consultation with management, concluded that the financial statements and the related reports of our independent public accountants should not be relied upon due to the Company's intention to restate
its financial results from 2002 through 2008 to correct its accounting for option grants and other issues. The Board of Directors appointed a Special Committee of independent directors, along with
independent legal counsel and outside accounting experts, to investigate the issues, and a restatement of the Company's financial statements was filed in its Annual Report on
Form 10-K for the year ended December 31, 2008 on October 8, 2009.

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Between
June 10, 2008 and August 15, 2008, five purported stockholder derivative and securities class action lawsuits were filed in the U.S. District Court in the Central
District of California and one derivative lawsuit was filed in the Superior Court of the State of California against the Company and certain of our current and former officers and directors. The five
lawsuits filed in the Central District of California were consolidated. Claims are asserted under Section 10(b) and 20(a), of the Exchange Act and Rule 10b-5 promulgated
thereunder. The allegations set forth in the complaints are based on facts disclosed in our press release of June 5, 2008, which stated that the Company's financial statements could not be
relied on due to the Company's historical stock option practices and related accounting. The complaints seek to recover from the defendants unspecified compensatory and punitive damages, to require
the Company to undertake reforms to corporate governance and internal control procedures, to obtain an accounting of stock option grants found to be improper, to impose a constructive trust over stock
options and proceeds derived therefrom, to disgorge from any of the defendants who received allegedly improper stock options the profits obtained therefrom, to rescind improperly priced options and to
recover costs of suit, including legal and other professional fees and other equitable relief. The plaintiffs in the securities class action lawsuits have tentatively agreed to a settlement of
$10 million, which we expect to be covered by our director and officer insurance policies. The parties to the securities class action lawsuits are preparing a stipulation of settlement which
they expect to submit to the court on or before March 19, 2010. The Company and plaintiffs in the federal and California state derivative lawsuits have attended two mediations but have not been
successful in reaching a settlement of these claims. The Company has filed a motion to dismiss the federal derivative claims. This motion is fully briefed and set for a hearing in the District Court
on March 15, 2010. The Company also plans to file a demurrer (e.g., motion to dismiss) in the California derivative lawsuit on or before March 22, 2010. There is no hearing
date yet set for this anticipated motion.

Fiberxon Acquisition Litigation

On March 25, 2009, we filed a complaint against former executives, directors and stockholders of Fiberxon, Inc., in the
Superior Court of Los Angeles County, California seeking to recover damages in excess of the $31.5 million of potential deferred consideration to be paid in connection with our purchase of
Fiberxon in July 2007. The complaint alleged breaches of representations and warranties, intentional misrepresentations, breaches of noncompetition agreements and tortious interference with employee
contracts. As disclosed in our Current Report on Form 8-K filed with the SEC on December 24, 2009, we entered into a Settlement Agreement and Release (the "Settlement
Agreement") on December 20, 2009, with Yoram Snir, personally and in his capacity as Stockholders' Agent for the former stockholders of Fiberxon. Pursuant to the Settlement Agreement, the
Company has fully settled any obligation to pay the first $18 million of potential deferred consideration. This amount was reserved for set-off in the original merger agreement, and
the former Fiberxon stockholders, pursuant to the settlement, are entitled their pro rata portion of the $1.5 million settlement amount. Additionally, we agreed to
pay up to $4.5 million to settle claims relating to the remaining $13.5 million of the potential deferred compensation. The second portion of the settlement is with the former
stockholders directly, and to date, stockholders holding 67% of the former shares have elected to participate in this portion of the settlement.

Three
former stockholders who owned approximately 12% of the former Fiberxon did not participate in the second portion of the settlement, and have recently initiated litigation in
Beijing, PRC. Another former stockholder is anticipated to join the litigation. The Company and certain related co-defendants have not yet been served with this complaint, however a review
of its allegations indicates that it sets forth a claim for approximately $1.7 million which is these former stockholders' pro rata amount of the $13.5 million portion of the potential
deferred compensation.

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Finisar Corporation v. Source Photonics, Inc., et al.

On January 5, 2010, Finisar Corporation filed a complaint against MRV, Source Photonics, Oplink Communications, Inc., and
NeoPhotonics Corporation in the U.S. District Court for the Northern District of California alleging that each defendant's optical transceiver products infringe Finisar patents and seeking unspecified
monetary damages, up to treble the amount of actual damages, plus attorneys' fees, costs and interest. The defendants have agreed to joint representation of counsel, and the defendants answered the
complaint on March 12, 2010.

The
results of any litigation are inherently uncertain and there can be no assurance that we will prevail in the litigation matters stated above or otherwise. We plan to pursue our
claims and defenses vigorously and expect that some of the litigation matters discussed above will be protracted and costly.

Item 4.    Reserved.

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PART II

Item 5.    Market for the Company's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information and Holders

Our Common Stock was traded on the NASDAQ Global Market under the symbol "MRVC" until June 16, 2009. On June 17, 2009, we
were suspended from trading on NASDAQ and officially delisted on August 30, 2009. MRV is currently trading on the OTC Pink Sheets. Over-the-counter quotations reflect interdealer prices,
without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions. The following table sets forth the high and low sales prices for the periods indicated:

High

LowYear Ended December 31, 2009First quarter ending March 31

$
0.80

$
0.24Second quarter ending June 30

$
0.70

$
0.31Third quarter ending September 30

$
1.00

$
0.41Fourth quarter ending December 31

$
0.98

$
0.65Year Ended December 31, 2008First quarter ending March 31

$
2.35

$
1.20Second quarter ending June 30

$
1.95

$
1.13Third quarter ending September 30

$
1.53

$
0.96Fourth quarter ending December 31

$
1.19

$
0.21


As
of March 10, 2010, the closing price of our Common Stock was $1.11 per share, and there were approximately 2,674 stockholders of record.

No Dividends or Share Repurchases

The payment of dividends on our Common Stock is within the discretion of our Board of Directors. We have not paid cash dividends on our
Common Stock and the Board of Directors does not expect to declare cash dividends on the Common Stock in the foreseeable future.

We
did not repurchase any shares of our Common Stock in 2009.

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Equity Compensation Plans

The table below sets forth information with respect to shares of Common Stock that may be issued under our stock option and warrant
plans as of December 31, 2009.

Plan Category

Number of securities
issuable upon
exercise of
outstanding options
and warrants

Weighted
average
exercise price
of outstanding
options and
warrants

Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))(a)

(b)

(c)Equity compensation plans approved by security holders (1)


5,761,727

$
2.22


10,724,915Equity compensation plans not approved by security holders (2)


7,198,394

$
3.12


Total (3)


12,960,121

$
2.72


10,724,915


(1)Includes
shares underlying options granted or available for grant under the 2007 Omnibus Incentive Plan (the "Omnibus Plan") and one of its predecessors,
the 1997 Incentive and Nonstatutory Stock Option Plan.(2)Includes
shares underlying options or awards granted under the following plans prior to the adoption of the 2007 Omnibus Incentive
Plan: 
1998 Nonstatutory Stock Option Plan;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;2000 MRV Communications, Inc. Stock Option Plan for Employees of Optronics International;2001 MRV Communications, Inc. Stock Option Plan for Employees of Appointech, Inc.;MRV Communications, Inc. 2002 International Stock Option Plan;Italian Employees Warrant Program;MRV Communications, Inc. 2002 Nonstatutory Stock Option Plan for Employees of Luminent, Inc.; and2003 Non-Director and Non-Executive Officer Consolidated Long-Term Stock Incentive
Plan (the "Consolidated Plan").(3)Excludes
options to purchase shares that MRV assumed that are not pursuant to a plan when MRV acquired Fiberxon effective July 1, 2007. As of
December 31, 2009, there were 550,903 excluded options with a weighted average exercise price of $1.44.


In
2007, MRV's stockholders approved the Omnibus Plan to consolidate MRV's two outstanding equity compensation plans. The first plan was MRV's expiring 1997 Incentive and Nonstatutory
Stock Option Plan, under which all employees, officers, directors and consultants were eligible to participate, and it was submitted to and approved by stockholders. The second plan was the
Consolidated Plan, which consolidated all the other bulleted plans listed in footnote (2), and it was not submitted to or approved by stockholders as neither the NASDAQ qualification standards nor
federal law or regulation required such approval at the time the Consolidated Plan was adopted.

33

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Table of Contents

Upon
adoption of the Omnibus Plan, no further shares were available for future grants of options or warrants under the 1997 Incentive and Nonstatutory Stock Option Plan and the plans set
forth in the bulleted paragraphs above in footnote (2), including shares that became and become available as a consequence of the cancellation or forfeiture of outstanding options or warrants granted
under such plans, and all such available shares were rolled into, and become available for, future grants of options and other awards under the Omnibus Plan.

Performance Graph

The chart below compares the five-year cumulative total return, assuming the reinvestment of dividends, on MRV's Common
Stock with that of the NASDAQ Composite Index, and the RDG SmallCap Technology Index. The graph assumes $100 was invested on December 31, 2004, in our Common Stock and the companies in each of
the NASDAQ Composite Index, and the RDG SmallCap Technology Index. The stock price performance shown in the graph below should not be considered indicative of potential future stock price performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among MRV Communications, Inc., the NASDAQ Composite Index,
and The RDG SmallCap Technology Index

CHART

---

Copyright©
2009 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

Cumulative Total Return2004

2005

2006

2007

2008

2009MRV Communications, Inc.


100.00


55.86


96.46


63.19


20.98


19.35NASDAQ Composite


100.00


101.33


114.01


123.71


73.11


105.61RDG SmallCap Technology


100.00


100.41


114.65


106.05


51.09


76.61


34

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Table of Contents

Item 6.    Selected Financial Data.

The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements of the Company, including the notes thereto, in Items 7 and 8, respectively, of this Form 10-K in order to fully
understand factors that may affect the comparability of the financial data.

The following selected balance sheet data as of December 31, 2009 and 2008 and selected statement of operations data for each of the three years in
the period ended December 31, 2009, are derived from our audited financial statements included in Item 8 of this Form 10-K. The selected balance sheet data as of
December 31, 2007, 2006 and 2005 and selected statement
of operations data for the years ended December 31, 2006 and 2005 are derived from the financial statements contained in MRV's 2008 Annual Report on Form 10-K. On
December 24, 2009, we entered into an agreement to divest our 90% ownership in EDSLan, an Italian subsidiary that was part of our Network Integration group. We have reclassified the historical
financial results of EDSLan as discontinued operations as set forth in this Annual Report to reflect this reclassification. The historical results do not necessarily indicate results expected for any
future period.

Year ended December 31,(in thousands, except per share amounts)

2009

2008

2007 (1)

2006

2005Statements of Operations Data:Revenues

$
448,120

$
466,821

$
380,033

$
296,701

$
228,223Cost of goods sold


322,306


331,753


267,367


198,455


151,242Gross profit


125,814


135,068


112,666


98,246


76,981Operating expenses:Product development and engineering


36,735


38,746


33,387


28,369


25,964Selling, general and administrative


99,622


116,595


90,901


77,571


63,403Impairment of goodwill and other intangibles





100,250





52


Amortization of other intangibles


2,257


2,434


1,906





Total operating expenses


138,614


258,025


126,194


105,992


89,367Operating loss


(12,800
)

(122,957
)

(13,528
)

(7,746
)

(12,386
)Other income (expense), net


22,252


786


(4,629
)

2,175


(855
)Income (loss) from continuing operations before income taxes


9,452


(122,171
)

(18,157
)

(5,571
)

(13,241
)Provision for income taxes


5,345


1,936


2,881


2,388


2,267Income (loss) from continuing operations


4,107


(124,107
)

(21,038
)

(7,959
)

(15,508
)Income (loss) from discontinued operations, net


(5,772
)

1,002


1,519


805


1,412Net loss


(1,665
)

(123,105
)

(19,519
)

(7,154
)

(14,096
)Less:Net income (loss) attributable to noncontrolling interests, continuing operations


1,757


40


(531
)

125


222Net income attributable to noncontrolling interests, discontinued operations


47


59


106


104


121Net loss attributable to MRV

$
(3,469
)
$
(123,204
)
$
(19,094
)
$
(7,383
)
$
(14,439
)Net income (loss) from continuing operations attributable to MRV

$
2,350

$
(124,147
)
$
(20,507
)
$
(8,084
)
$
(15,730
)Net income (loss) from discontinued operations attributable to MRV

$
(5,819
)
$
943

$
1,413

$
701

$
1,291Net income (loss) attributable to MRV per share  basic:From continuing operations

$
0.01

$
(0.79
)
$
(0.15
)
$
(0.07
)
$
(0.15
)From discontinued operations

$
(0.04
)
$
0.01

$
0.01

$
0.01

$
0.01Net loss attributable to MRV per share  basic (2)

$
(0.02
)
$
(0.78
)
$
(0.14
)
$
(0.06
)
$
(0.14
)Net income (loss) attributable to MRV per share  diluted:From continuing operations

$
0.01

$
(0.79
)
$
(0.15
)
$
(0.07
)
$
(0.15
)From discontinued operations

$
(0.04
)
$
0.01

$
0.01

$
0.01

$
0.01Net loss attributable to MRV per share  diluted (2)

$
(0.02
)
$
(0.78
)
$
(0.14
)
$
(0.06
)
$
(0.14
)Basic weighted average shares


157,547


157,323


140,104


120,902


104,350Diluted weighted average shares


157,665


157,323


140,104


120,902


104,350


35

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Table of Contents

December 31,(in thousands)

2009

2008

2007

2006

2005Selected Balance Sheet Data:Cash and cash equivalents

$
55,509

$
67,931

$
72,468

$
91,654

$
67,771Working capital


119,440


111,648


130,243


168,328


96,551Total assets


397,754


392,886


499,400


343,952


264,565Total long-term liabilities


7,322


9,272


7,616


30,295


29,703Additional paid-in capital


1,405,015


1,403,663


1,399,630


1,285,877


1,209,275Accumulated deficit


(1,252,108
)

(1,248,639
)

(1,125,435
)

(1,106,341
)

(1,098,958
)Total stockholders' equity


174,005


171,811


294,716


191,705


117,600


---

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 the
Consolidated Financial Statements and Notes thereto included in Item 8 of 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. We assume no obligation to update any of the forward-looking statements after the date of this Form 10-K. The following discussion and analysis is
organized as follows:



Overview

MRV Communications is a global supplier of communications equipment and services to carriers, governments and enterprise customers,
worldwide. We are also a supplier of optical components, primarily through our wholly-owned subsidiary Source Photonics. We conduct our business along three principal segments: (a) the Network
Equipment group; (b) the Network Integration group; and (c) the Optical Components group. We evaluate segment performance based on the revenues, gross profit and operating expenses of
each segment. We do not evaluate segment performance on additional financial information. As such, there are no separately identifiable Statements of Operations data below operating income (loss). Our
Network Equipment group provides communications equipment that facilitates access, transport, aggregation and management of voice, data and video traffic in networks, data centers and laboratories
used by telecommunications service providers, cable operators, enterprise customers and governments worldwide. Our Network Integration group operates primarily in Italy, France, Switzerland and
Scandinavia, servicing Tier One carriers, regional carriers, large enterprises, and government institutions. The Network Integration group provides network system design,

36

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Table of Contents

integration
and distribution services that include products manufactured by third-party vendors, as well as products developed and manufactured by the Network Equipment group. Our Optical Components
group designs, manufactures and sells optical communications products used in telecommunications systems and data communications networks. These products include passive optical network, or PON,
subsystems, optical transceivers used in enterprise, access and metropolitan applications as well as other optical components, modules and subsystems. We market and sell our products worldwide,
through a variety of channels, which include a dedicated direct sales force, manufacturers' representatives, value-added-resellers, distributors and systems integrators.

On
December 24, 2009, we entered into an agreement to divest our 90% ownership of EDSLan, a communication equipment distribution company located in Milan, Italy. EDSLan was part
of our Network Integration segment and we have reclassified the historical financial results of EDSLan as discontinued operations in this Annual Report on Form 10-K to reflect this
reclassification. Accordingly, the related assets and liabilities of EDSLan have been classified as assets and liabilities from discontinued operations held for sale in the Balance Sheet and we
recognized a loss related to the write down of the assets of EDSLan to their net realizable value in 2009. See Note 3 "Discontinued Operations"
to the Financial Statements in Item 8 of this Form 10-K for further discussion.

On
July 1, 2007, we completed the acquisition of Fiberxon, a PRC-based supplier of transceivers for applications in metropolitan networks, access networks and PONs for
consideration aggregating approximately $130.0 million, excluding $4.9 million in acquisition costs. The results of operations of Fiberxon have been included in our Consolidated
Financial Statements beginning
July 1, 2007. Its operations have been integrated into Source Photonics, which accounts for nearly all of the results of the Optical Components group.

Our
business involves reliance on foreign-based offices. Several of our divisions, outside subcontractors and suppliers are located in foreign countries, including Argentina, Canada,
PRC, Denmark, Finland, France, Germany, Israel, Italy, Japan, Korea, the Netherlands, Norway, Russia, Singapore, South Africa, Switzerland, Sweden, Taiwan and the United Kingdom. For the years ended
December 31, 2009, 2008 and 2007, foreign revenues constituted 70%, 63% and 65%, respectively, of our total revenues. The majority of our foreign sales are to customers located in the European
region, with remaining foreign sales primarily to customers in the Asia Pacific region.

Critical Accounting Policies

Our discussion and analysis of the Company's financial condition and results of operations are based upon the financial statements,
which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). We follow accounting standards set by the Financial Accounting Standards Board ("FASB") to ensure we
consistently report our financial condition, results of operations, and cash flows in conformity with GAAP. References to GAAP issued by the FASB in this Annual Report on Form 10-K
is to the FASB Accounting Standards of Codification ("ASC").

The
preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our
financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in
applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, allowance for doubtful
accounts, inventory reserves and income taxes. These policies require that we make estimates in the preparation of our financial statements as of a given date.

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Table of Contents

Within
the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts
being reported.

Revenue Recognition.

MRV's major revenue-generating products consist of fiber optic components, switches and routers, console management, and physical layer
products. MRV generally recognizes product revenue, net of sales discounts, returns and allowances, in accordance with ASC 605Revenue Recognition, when
persuasive evidence of an arrangement exists, delivery has occurred and all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection is considered
reasonably assured. Products are generally shipped "FOB shipping point," with no right of return and revenue is recognized upon shipment. If revenue is to be recognized upon delivery, such delivery
date is tracked through information provided by the third party shipping company we use to deliver the product to the customer. Sales of services and system support are deferred and recognized ratably
over the contract period in accordance with ASC 605-20Services. Sales to end customers with contingencies, such as rights of return,
rotation rights, conditional acceptance provisions and price protection, are infrequent and insignificant and are deferred until the contingencies have been satisfied or the contingent period has
lapsed. For sales to distributors, we generally recognize revenue when product is sold to the distributor rather than when the product is sold by the distributor to the end user. In certain
circumstances, distributors have limited rights of return, including stock rotation rights, and/or are entitled to price protection, where a rebate credit may be provided to the customer if MRV lowers
its price on products held in the distributor's inventory. MRV estimates and establishes allowances for expected future product returns and credits in accordance with ASC 605. We record a reduction in
revenue for estimated future product returns and future credits to be issued to the customer in the period in which revenues are recognized, and for future credits to be issued in relation to price
protection at the time we make changes to our distributor price book. We monitor product returns and potential price adjustments on an ongoing basis and estimate future returns and credits based on
historical sales returns, analysis of credit memo data, and other factors known at the time of revenue recognition.

Arrangements
with customers may include multiple deliverables involving combinations of equipment, services and software. In accordance with ASC 605-25 Multiple-Element Arrangements, the entire fee from the
arrangement is allocated to each respective element based on its relative fair value and
recognized when revenue recognition criteria for each element is met. Fair value for each element is established based on the sales price charged when the same element is sold separately. If multiple
element arrangements include software or software related elements, we apply the provisions of ASC 985-Softwareto the software and
software related elements, or to the entire arrangement if the software is essential to the functionality of the non-software elements.

MRV
generally warrants its products against defects in materials and workmanship for one to two year periods. The estimated cost of warranty obligations and sales returns and other
allowances are recognized at the time of revenue recognition based on contract terms and prior claims experience.

Allowance for Doubtful Accounts.

We make ongoing estimates relating to the collectability of our accounts receivable and maintain a reserve for estimated losses
resulting from the inability of customers to meet their financial obligations to us. In determining the amount of the reserve, we consider our historical level of credit losses and make judgments
about the creditworthiness of significant customers based on ongoing credit evaluations. Because we cannot precisely predict future changes in the financial stability of our customers, actual future
losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers deteriorate, resulting in their inability to make payments, a larger reserve may be
required. In the event we determine that a change in the allowance is appropriate, we would record a credit or a

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Table of Contents

charge
to selling, general and administrative expense in the period in which we make such a determination.

Concentration of Credit Risk.

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash
equivalents placed with high credit quality institutions and accounts receivable due from customers. We perform ongoing credit evaluations of our customers and maintain reserves for potential credit
losses.

Inventory Reserves.

We make ongoing estimates relating to the market value of inventories, based upon our assumptions about future demand and market
conditions. If we estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record an adjustment to the cost basis equal to the
difference between the cost of the inventory and the estimated net realizable market value. This adjustment is recorded as a charge to cost of goods sold. If changes in market conditions result in
reductions in the estimated market value of our inventory below previous estimates, we would make further adjustments in the period in which we make such a determination and record a charge to cost of
goods sold. The reserve includes estimates for excess quantities and obsolete inventory. This reserve is recorded as a charge to cost of goods sold. If changes in our projections of current demand
indicate that the
reserve should be higher or lower, the change in the reserve is recorded as a charge or credit to cost of goods sold.

Goodwill and Other Intangibles.

Goodwill represents the excess purchase price over amounts assigned to tangible or identifiable intangible assets acquired and
liabilities assumed from our acquisitions. In accordance with ASC 350IntangiblesGoodwill and Other, we do not amortize goodwill and
intangible assets with indefinite lives, but instead measure these assets for impairment at least annually. We also test goodwill for impairment between annual tests if an event occurs or
circumstances change that could potentially reduce the fair value of the reporting unit below its carrying value.

Our
annual assessment considers economic conditions and trends, estimated future operating results, and anticipated future economic conditions. We determine the fair value of each
reporting unit using a discounted cash flow based valuation methodology. To validate reasonableness of the valuation, we reconcile the sum of the fair values across all reporting units to the
Company's market capitalization as of the valuation date. The first step is to compare the fair value of the reporting unit with the unit's carrying amount, including goodwill. If this test indicates
that the fair value is less than the carrying value, then step two is required to compare the implied fair value of the reporting unit's goodwill with the carrying amount of the reporting unit's
goodwill. A non-cash goodwill impairment charge would have the effect of decreasing our earnings or increasing our losses in such period.

Share-Based Compensation.

We determine the fair value of stock options and warrants using the Black-Scholes valuation model as permitted under ASC 718 Compensation  Stock
Compensation. The assumptions used in calculating the fair value of share-based payment awards represent our best
estimates. Our estimates may be impacted by certain variables including stock price volatility, employee stock option exercise behaviors, additional stock option grants, estimates of forfeitures, and
the related income tax impact. See Note 14 "Share-Based Compensation" to the Financial Statements in Item 8 of this Form 10-K for further discussion.

39

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Table of Contents

Income Taxes.

As part of the process of preparing our financial statements, we estimate the income taxes in each of the jurisdictions in which we
operate. This process involves estimating the current income tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for
income tax and accounting purposes. These differences result in deferred income tax assets and liabilities, which are included in our Balance Sheets. We assess the likelihood that our deferred income
tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance
or increase this allowance in a period, we include an expense within the income tax provision in the Statements of Operations.

We
utilize significant management judgment to determine the provision for income taxes, deferred income tax assets and liabilities, including uncertain tax positions, and any valuation
allowance recorded against net deferred income tax assets. Management periodically evaluates the deferred income tax assets as to whether it is likely that the deferred income tax assets will be
realized. We write down the deferred income tax asset at the time we determine the asset is not likely to be realized.

Currency Rate Fluctuations

Changes in the relative values of non-U.S. currencies to the U.S. dollar affect our results. We conduct a significant
portion of our business in foreign currencies, including the euro, the Swiss franc, Swedish krona, Taiwan dollar, Chinese renminbi and the Israeli new shekel. For the year ended December 31,
2009, approximately 70% of revenues and 57% of operating expenses were incurred at subsidiaries with a reporting currency other than the U.S. dollar. In general, these currencies were weaker against
the U.S. dollar for the year ended December 31, 2009 compared to the year ended December 31, 2008, so revenues and expenses in these countries translated into fewer dollars than they
would have in the prior period. Additional discussion of foreign currency risk and other market risks is included in Item 7A "Quantitative and Qualitative Disclosures About Market Risk" of this
Form 10-K.

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Table of Contents

Results of Operations

The following table sets forth, for the periods indicated, certain consolidated and segment Statements of Operations data as a
percentage of revenues (dollars in thousands):

2009

2008

2007Management Discussion Snapshot
Years ended December 31:

$

%

$

%

$

%Revenue(1)

$
448,120


100
%
$
466,821


100
%
$
380,033


100
%Network Equipment group


104,488


23


125,556


27


105,357


28Network Integration group


143,345


32


153,278


33


144,678


38Optical Components group


210,626


47


201,588


43


144,860


38All others


310





241





114


Gross profit(2)


125,814


28


135,068


29


112,666


30Network Equipment group


56,353


54


67,071


53


51,712


49Network Integration group


40,933


29


38,301


25


33,455


23Optical Components group


28,184


13


29,437


15


28,133


19All others


190


61


143


59


68


60Operating expenses(2)


138,614


31


258,025


55


126,194


33Network Equipment group


58,198


56


68,492


55


59,988


57Network Integration group


27,112


19


31,905


21


27,018


19Optical Components group (3)


36,943


18


139,899


69


29,681


20All others


1,643


530


1,920


797


1,597


1,401Operating income (loss)(2)


(12,800
)

(3
)

(122,957
)

(26
)

(13,528
)

(4
)Network Equipment group


(1,845
)

(2
)

(1,421
)

(1
)

(8,276
)

(8
)Network Integration group


13,821


10


6,396


4


6,437


4Optical Components group (3)


(8,759
)

(4
)

(110,462
)

(55
)

(1,548
)

(1
)All others


(1,453
)

(469
)

(1,777
)

(737
)

(1,529
)

(1,341
)


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Table of Contents

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Revenue

The following table sets forth, for the periods indicated, revenue by segment, including intersegment sales (dollars in thousands):

Years ended December 31:

2009

2008

$ Change

% Change

% Change
constant
currency (2)Network Equipment group

$
104,488

$
125,556

$
(21,068
)

(17
)%

(17
)%Network Integration group


143,345


153,278


(9,933
)

(6
)

(1
)Optical Components group


210,626


201,588


9,038


4


5All others


310


241


69


29


29458,769


480,663


(21,894
)

(5
)

(3
)Adjustments (1)


(10,649
)

(13,842
)

3,193


(23
)

(23
)Total

$
448,120

$
466,821

$
(18,701
)

(4
)%

(2
)%


---

42

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Table of Contents

The following table summarizes segment revenues, excluding intersegment sales, by geographical region (dollars in thousands):

Years ended December 31:

2009

2008

$ Change

% ChangeNetwork Equipment group:United States

$
49,383

$
57,979

$
(8,596
)

(15
)%Americas, excluding the United States.


697


653


44


7Europe


39,500


46,055


(6,555
)

(14
)Asia Pacific


7,594


11,244


(3,650
)

(32
)Other regions


283


1,048


(765
)

(73
)Total Network Equipment


97,457


116,979


(19,522
)

(17
)Network Integration group:Europe


143,345


153,278


(9,933
)

(6
)Total Network Integration


143,345


153,278


(9,933
)

(6
)Optical Components group:United States.


83,594


114,581


(30,987
)

(27
)Americas, excluding the United States


2,289


1,175


1,114


95Europe


13,131


17,148


(4,017
)

(23
)Asia Pacific


108,253


63,642


44,611


70Other regions


11


8


3


38Total Optical Components


207,278


196,554


10,724


5All others:


40


10


30


300Total

$
448,120

$
466,821

$
(18,701
)

(4
)%


Revenues
for 2009 decreased $18.7 million, or 4%, due primarily to a $21.1 million decrease in Network Equipment, and a $9.9 million, or 6%, decrease in Network
Integration, partially offset by a $9.0 million, or 4%, increase in Optical Components and a $3.2 million decline in intersegment revenues. Revenue would have been $9.8 million
higher in 2009 had foreign currency exchange rates remained the same as they were in 2008, primarily in the Network Integration group. The decline in intersegment revenues consisted of a
$1.5 million decline in sales from the Network Equipment group to the Network Integration group and a $1.7 million decline in sales from the Optical Components group to the Network
Equipment group.

Network Equipment Group.We experienced a decline in the market for our Network Equipment group's products during 2009 compared to
2008. The decline
in the group's revenues, including intersegment revenues, of $21.1 million, or 17%, was experienced in all four quarters, across all regions and in most product categories. The exception was in
our aerospace and defense subsidiary, which had a 10% increase in revenues. Our most significant declines were in our LambdaDriver and out-of-band networking product lines. Our
Fiber Driver and OptiSwitch product lines performed relatively well. Revenue would have been $0.2 million lower in 2009 had foreign currency exchange rates remained the same as they were in
2008.

Network Integration Group.The Network Integration group's revenues, including intersegment revenues, decreased $9.9 million, or
6%, primarily
due to the impact of changes in foreign currency exchange rates. Revenue would have been $8.8 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.
On a local currency basis, we experienced declines in revenues in our Scandinavian and Swiss businesses which were partially offset by gains at Tecnonet, our Italian subsidiary.

43

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Optical Components Group.The Optical Components group's revenues, including intersegment revenues, increased $9.0 million
primarily due to a
$44.6 million increase in external revenues in the Asia Pacific region, partially offset by a $29.9 million decrease in external revenues in the Americas Region, a $4.0 million
decrease in external revenues in Europe, and the $1.7 million decrease in sales to the Network Equipment group. Revenues from sales of PON for applications in
Fiber-to-the-Premises ("FTTP") deployments, increased from $117.5 million in 2008 to $122.3 million in 2009. Revenues from sales of datacom/telecom,
or D/T, transceivers increased $4.2 million from $82.7 million in 2008 to $86.9 million in 2009. Revenue would have been $1.2 million higher in 2009 had foreign currency
exchange rates remained the same as they were in 2008.

Gross Profit

The following table sets forth, for the periods indicated, certain gross profit data from our Statements of Operations (dollars in
thousands):

Years ended December 31:

2009

2008

$
Change

%
Change

% Change
constant
currency (2)Network Equipment group

$
56,353

$
67,071

$
(10,718
)

(16
)%

(16
)%Network Integration group


40,933


38,301


2,632


7


15Optical Components group


28,184


29,437


(1,253
)

(4
)

(3
)All others


190


143


47


33


33125,660


134,952


(9,292
)

(7
)

(4
)Corporate unallocated and intersegment adjustments (1)


154


116


38


33


33Total

$
125,814

$
135,068

$
(9,254
)

(7
)%

(4
)%


---

Gross
profit declined $9.3 million due to the $18.7 million decline in revenues and decline in average gross margin from 29% to 28%. The $9.3 million decrease was
primarily due to a $10.7 million decrease in the Network Equipment group and to a lesser extent to a $1.3 million decrease in the Optical Components group, partially offset by an
improvement of $2.6 million in the Network Integration group. Gross profit would have been $3.3 million higher in 2009 had foreign currency exchange rates remained the same as they were
in 2008. Gross profit reflects share-based compensation in cost of goods sold of $207,000 and $370,000 in 2009 and 2008, respectively.

Network Equipment Group.The $10.7 million, or 16% decrease, in gross profit for the Network Equipment group was due to a 17%
decrease in
revenue partially offset by an improvement in average gross margin from 53% to 54%. The improvement in average gross margin is due to an increase in the proportion of revenue coming from our Swiss
aerospace and defense business, which has a higher gross margin than the remainder of our Network Equipment business. Gross profit would have been $0.1 million lower in 2009 had foreign
currency exchange rates remained the same as they were in 2008. Gross profit reflects share-based compensation in cost of goods sold of $52,000 and $79,000 in 2009 and 2008, respectively.

44

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Network Integration Group.Gross profit for the Network Integration group increased $2.6 million. The increase was driven by an
improvement in
average gross margins, partially offset by a 6% decline in revenues and unfavorable changes in the exchange rate. Average gross margin increased from 25% to 29%. The increase in gross margins in 2009
was the result of differences in the composition of the products and services sold in each period. Specifically, while gross margins were improved at each subsidiary, the most significant improvements
came from Tecnonet, which has been successful in increasing the portion of its revenue coming from higher margin services. Gross profit would have been $3.1 million higher in 2009 had foreign
currency exchange rates remained the same as they were in 2008. The Network Integration group did not have share-based compensation in cost of goods sold in either year.

Optical Components Group.Beginning in late 2008, consolidation of in-house manufacturing into new manufacturing facilities in Chengdu,
PRC and a significant shift from third-party manufacturing services to in-house manufacturing led to significant increases in production material yield loss and manufacturing inefficiency
during the initial ramp up of production through the first half of 2009. Specifically, the Optical Components group reported negative gross profit of $1.7 million in the first quarter and gross
profit of $6.6 million in the second quarter, which represented a 52% decrease compared to the second quarter of 2008 and a 13% gross margin. We also had an adverse shift in product mix during
2009, with a smaller portion of revenues coming from higher margin metropolitan transceivers and a larger portion of revenue coming from the lower margin GPON product line. As the shift to the
Chengdu facility progressed in 2009, manufacturing efficiencies improved, and gross profit began to recover. In the third quarter, gross profit was $9.6 million, an improvement of
$6.4 million, or 195%, over the same quarter of the prior year, and gross margins rose to 17%. In the fourth quarter, gross margins rose further, to 24%, representing an improvement over the
same quarter of the prior year of $9.8 million, or 258%. On a full year basis, gross profit decreased $1.3 million, or 4%, in 2009 compared to 2008 due to a decline in average gross
margin from 15% to 13%, partially offset by the 4% increase in revenue. Gross profit would have been $0.3 million higher in 2009 had foreign currency exchange rates remained the same as they
were in 2008. Gross profit reflects share-based compensation in cost of goods sold of $155,000 and $232,000 in 2009 and 2008, respectively.

Operating Expenses

The following table sets forth, for the periods indicated, certain operating expenses data from our Statements of Operations (dollars
in thousands):

Years ended December 31:

2009

2008

$
Change

%
Change

% Change
constant
currency (1)Network Equipment group

$
58,198

$
68,492

$
(10,294
)

(15
)%

(15
)%Network Integration group


27,112


31,905


(4,793
)

(15
)

(7
)Optical Components group


36,943


139,899


(102,956
)

(74
)

(73
)All others


1,643


1,920


(277
)

(14
)

(14
)123,896


242,216


(118,320
)

(49
)

(48
)Corporate unallocated operating
expenses


14,718


15,809


(1,091
)

(7
)

(7
)Total

$
138,614

$
258,025

$
(119,411
)

(46
)%

(45
)%


(1)Percentage
information in constant currencies in the table above and in the text below excludes the effect of foreign currency translation on reported
results. Constant currency results were calculated by translating the current year results at prior year average exchange rates.


45

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Table of Contents




Operating
expenses were $138.6 million, or 31% of revenues, in 2009 compared to $258.0 million, or 55% of revenues, in 2008. The 2008 operating expenses include a goodwill
impairment charge of $100.3 million. Excluding this charge, operating expenses in 2008 were $157.8 million, and operating expenses in 2009 were $19.2 million lower than they were
in 2008. This decrease occurred across all operating segments and at corporate. The decrease in Corporate unallocated operating expenses is primarily due to a reduction in restatement related expenses
partially offset by $2.1 million of expenses related to the proxy contest. Operating expenses would have been $2.7 million higher in 2009 had foreign currency exchange rates remained the
same as they were in 2008. Product development and engineering expenses included share-based compensation of $0.5 million and $1.3 million in 2009 and 2008, respectively. Selling,
general and administrative expenses included share-based compensation of $1.5 million and $2.6 million in 2009 and 2008, respectively.

Network Equipment Group.Operating expenses in the Network Equipment group for 2009 were $58.2 million, or 56% of revenues,
compared to
$68.5 million, or 55% of revenues in 2008. The $10.3 million, or 15%, decrease was attributable to a $6.4 million goodwill impairment charge in 2008 and to $2.9 million in
cost reductions made in response to the decline in revenues. We reduced headcount, temporarily reduced pay, and cut back in other discretionary spending to achieve the reduction in expenses. Operating
expenses would have been $0.1 million lower in 2009 had foreign currency exchange rates remained the same as they were in 2008. Product development and
engineering expenses included share-based compensation of $298,000 and $400,000 in 2009 and 2008, respectively. Selling, general and administrative expenses included share-based compensation of
$474,000 and $754,000 in 2009 and 2008, respectively.

Network Integration Group.Operating expenses in the Network Integration group for 2009 were $27.1 million, or 19% of revenues,
compared to
$31.9 million, or 21% of revenues in 2008. The $4.8 million, or 15%, decrease in operating expense came primarily from our Swedish subsidiary ($3.9 million) and our French
subsidiary ($1.0 million). In the prior year, we recorded $1.8 million in additional compensation expense at our Swedish subsidiary to allow its management team to pay the taxes due on
bonuses we paid them from 2002 to 2007. The remaining operating expense reductions were achieved through cost cutting measures in response to the weak economic environment during 2009. Operating
expenses would have been $2.6 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008. The Network Integration group did not have significant
share-based compensation in product development and engineering costs in either year. Selling, general and administrative expenses included share-based compensation of $238,000 and $342,000 in 2009
and 2008, respectively.

Optical Components Group.Operating expenses in the Optical Components group for 2009 were $36.9 million, or 18% of revenues,
compared to
$139.9 million, or 69% of revenues in 2008. Included in operating expenses in 2008 is a $93.9 million impairment of goodwill. Excluding this one-time charge in the prior
year, operating expenses were $9.1 million lower in 2009 than in 2008. The decrease was due to cost reduction efforts in response to the decline in gross profit at the beginning of the year,
and included a $7.0 million decrease in selling, general and administrative expenses, and a $1.9 million decrease in product development and engineering. Operating expenses would have
been $0.2 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008. Product development and engineering expenses included share-based compensation of
$160,000 and $843,000 in 2009 and 2008, respectively. Selling, general and administrative expenses included share-based compensation of $442,000 and $790,000 in 2009 and 2008, respectively.

46

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Table of Contents

Operating Income (Loss)

The following table sets forth, for the periods indicated, certain operating income (loss) data from our Statements of Operations
(dollars in thousands):

Years ended December 31:

2009

2008

$
Change

%
Change

% Change
constant
currency (2)Network Equipment group

$
(1,845
)
$
(1,421
)
$
(424
)

30
%

26
%Network Integration group


13,821


6,396


7,425


116


123Optical Components group


(8,759
)

(110,462
)

101,703


(92
)

(92
)All others


(1,453
)

(1,777
)

324


(18
)

(18
)1,764


(107,264
)

109,028


(102
)

(102
)Corporate unallocated operating loss


(14,718
)

(16,008
)

1,595


(10
)

(10
)Adjustments (1)


154


315


(466
)

(148
)

(148
)Total

$
(12,800
)
$
(122,957
)
$
(110,157
)

(90
)%

(90
)%


---

The
$12.8 million operating loss in 2009 represented 3% of revenues, compared to a $123.0 million operating loss, or 26% of revenues, in 2008. Excluding the goodwill
impairment charges in 2008 of $100.3 million, our operating loss was $9.9 million lower in 2009 than in 2008. Our operating loss would have been $0.6 million less in 2009 had
foreign currency exchange rates remained the same as they were in 2008. Operating loss included share-based compensation expense of $2.2 million and $4.2 million in 2009 and 2008,
respectively.

Network Equipment Group.The Network Equipment group reported an operating loss of $1.8 million for 2009, compared to an operating
loss of
$1.4 million for 2008. The $0.4 million increase in operating loss was due to the $10.7 million decline in gross profits mostly offset by a $10.3 million decrease in
operating expenses. The effect of currency fluctuations did not have a significant impact on the year-over-year change on operating loss. Operating loss included share-based
compensation expense of $824,000 and $1.2 million in 2009 and 2008, respectively.

Network Integration Group.The Network Integration group reported operating income of $13.8 million for 2009, compared to operating
income of
$6.4 million for 2008. The $7.4 million improvement was due to the combination of a $2.6 million improvement in gross margins and a $4.8 million decrease in operating
expenses. Operating income would have been $0.5 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008. Operating income included share-based
compensation expense of $239,000 and $388,000 in 2009 and 2008, respectively.

Optical Components Group.The Optical Components group reported an operating loss of $8.8 million for 2009, compared to an
operating loss of
$110.5 million for 2008. The decrease in operating loss of $101.7 million, or 92%, was due to the $93.9 million goodwill impairment charge in 2008 and the $9.1 reduction in other
operating expenses, partially offset by the $1.3 million reduction in gross profit. The effect of currency fluctuations did not have a significant impact on the
year-over-year change in operating loss Operating loss included share-based compensation expense of $757,000 and $1.9 million in 2009 and 2008, respectively.

47

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Table of Contents

Interest Expense and Other Income, Net

Interest expense was $3.0 million in 2009 compared to $3.5 million in 2008 reflecting a reduction in our average interest
rate partially offset by an increase in debt. Included in non-operating income is a $20.5 million gain realized in the fourth quarter upon the settlement we negotiated with certain
former Fiberxon stockholders of the $30.0 million net deferred consideration payable arising from the 2007 acquisition of Fiberxon. We also realized a $3.5 million gain on the sale of a
cost-basis investment in Dune Networks. In the prior year, we realized a $2.6 million gain on the sale of an investment. Interest income was $0.6 million in 2009,
$1.2 million lower than 2008, due to lower average investment balances and lower interest rates. Foreign currency transactions resulted in losses of $0.5 million in 2009 compared to a
$0.2 million gain in 2008.

Provision for Income Taxes

The provision for income taxes was $5.3 million in 2009 and $1.9 million in 2008. Income tax expense fluctuates based on
the amount of pre-tax income generated in the various jurisdictions where we conduct operations and pay income tax. The increase in provision for income taxes during 2009 is primarily due
to a $1.2 million increase in the Network Integration group, which had a 21% increase in pre-tax income, and to $1.9 million increase in the Optical Components group, which
had a $1.3 million tax benefit in 2008 due to the release of valuation allowances against deferred tax assets.

Tax Loss Carry Forwards

As of December 31, 2009, we had NOLs of $228.6 million, $142.8 million, and $96.7 million for federal,
state, and foreign income tax purposes, respectively. Under the Internal Revenue Code, if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change
NOLs, capital loss carry forwards and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater
than 50% change in its equity ownership by value over a three-year period. We may experience an ownership change in the future as a result of subsequent shifts in our stock ownership. If
we were to trigger an ownership change in the future, our ability to use any NOLs and capital loss carry forwards existing at that time could be limited. As of December 31, 2009, the NOLs had a
full valuation allowance.

Discontinued Operations

On December 24, 2009, we entered into an agreement to divest our 90% ownership of EDSLan, a communication equipment distribution
company located in Milan, Italy. EDSLan was part of our Network Integration segment and we have reclassified the historical financial results of EDSLan as discontinued operations. We recorded a loss
of $5.8 million and $1.0 million of income from discontinued operations, net of income tax expense, for the years ended December 31, 2009 and 2008, respectively. The loss from
discontinued operations in 2009 includes $6.9 million for the impairment of the assets of EDSLan to their net realizable value as of December 31, 2009. Accordingly, the related assets
and liabilities of EDSLan have been classified as held for sale in the Balance Sheet as set forth in the Financial Statements presented in Item 8 of this Form 10-K.

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Table of Contents

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Revenue

The following table sets forth, for the periods indicated, revenue by segment, including intersegment sales (dollars in thousands):

Years ended December 31:

2008

2007

$
Change

%
Change

% Change
constant
currency (2)Network Equipment group

$
125,556

$
105,357

$
20,199


19
%

17
%Network Integration group


153,278


144,678


8,600


6


0Optical Components group


201,588


144,860


56,728


39


36All others


241


114


127


111


111480,663


395,009


85,654


22


18Adjustments (1)


(13,842
)

(14,976
)

1,134


(8
)

(8
)Total

$
466,821

$
380,033

$
86,788


23
%

19
%


---

49

---



Table of Contents

The
following table summarizes segment revenues, excluding intersegment sales, by geographical region (dollars in thousands):

Years ended December 31:

2008

2007

$
Change

%
ChangeNetwork Equipment group:United States

$
57,979

$
45,593

$
12,386


27
%Americas, excluding the United States


653


6,017


(5,364
)

(89
)Europe


46,055


35,130


10,925


31Asia Pacific


11,244


7,914


3,330


42Other regions


1,048


72


976


1,356Total Network Equipment


116,979


94,726


22,253


23Network Integration group:Europe


153,278


144,530


8,748


6Total Network Integration


153,278


144,530


8,748


6Optical Components group:United States


114,581


86,956


27,625


32Americas, excluding the United States


1,175


3,956


(2,781
)

(70
)Europe


17,148


10,661


6,487


61Asia Pacific


63,642


39,174


24,468


62Other regions


8


23


(15
)

(65
)Total Optical Components


196,554


140,770


55,784


40All others:


10


7


3


43Total

$
466,821

$
380,033

$
86,788


23
%


Revenues
for 2008 increased $86.8 million, or 23%, due primarily to growth in Optical Components ($56.7 million, or 39%), Network Equipment ($20.2 million, or 19%)
and Network Integration ($8.6 million, or 6%) segments, partially offset by an increase in intersegment revenues of $1.1 million. All three reporting segments experienced growth in the
first three quarters and declines in the fourth quarter, compared to the same quarters of the prior year. Revenues in the Optical Components group were favorably impacted in 2008 by the acquisition of
Fiberxon which was only included for the latter half of 2007. Revenue in the Network Equipment group increased by $20.2 million due primarily to increased demand for Metro Ethernet and Optical
Transport products, new product introduction and new customer acquisitions. Revenue growth in the Network Integration group was $8.6 million, primarily due to foreign currency movements.
Revenue would have been $14.0 million lower in 2008 had foreign currency exchange rates remained the same as they were in 2007.

Network Equipment Group.Revenues, including intersegment revenues, generated from the Network Equipment group increased
$20.2 million, which
was due primarily to increased sales in the Europe region of $10.9 million, and increased sales in the Americas of $7.0 million. Growth in sales of LambdaDriver, fiber optic components,
Media Cross Connect, Fiber Driver, out-of-band networking and Terescope® products drove the Europe sales increase. Growth in sales of
out-of-band networking products, Media Cross Connect, Fiber Driver, OptiSwitch and services drove the Americas sales increase. Revenue would have been $2.2 million lower
in 2008 had foreign currency exchange rates remained the same as they were in 2007.

Revenue
growth in the Network Equipment group in 2008 was driven by the first quarter, second quarter, and third quarter when the group's revenues grew by 30%, 28%, and 30% compared to
the

50

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Table of Contents

same
quarter of the prior year, respectively. Growth in Network Equipment was driven by increased overall demand for Metro Ethernet and Optical Transport to support high bandwidth telecommunications
applications, including internet access. Growth was also driven by new product
introduction, including the OptiSwitch 900 and new customer acquisitions. The group's fourth quarter was adversely affected by the general economic slowdown, and revenues fell 4% compared to the prior
year.

Network Integration Group.Revenues, including intersegment revenues, generated from the Network Integration group increased
$8.6 million, or
6%, due primarily to the favorable impact of foreign currency movements on revenues and to a 22% increase in local currency revenues (or 33% in U.S. dollars) at our smallest Network Integration
subsidiary located in Switzerland, partially offset by decreases in our French and Scandinavian subsidiaries. Revenue would have been $7.9 million lower in 2008 had foreign currency exchange
rates remained the same as they were in 2007.

Optical Components Group.Revenues, including intersegment revenue, generated from our Optical Components group increased
$56.7 million. Sales
of PON components increased 43% from 2007 to 2008 and sales of datacom/telecom network components increased 34% from 2007 to 2008. Revenues in the Optical Components group were favorably impacted in
2008 by the acquisition of Fiberxon which was only included for the latter half of 2007. Revenue would have been $3.9 million lower in 2008 had foreign currency exchange rates remained the same
as they were in 2007.

Revenue
in our Optical Components group was limited, despite strong demand, in the second half of the year due to capacity issues caused by delays in setting up a new manufacturing
facility in Chengdu, PRC. The general economic slowdown had an adverse impact on the fourth quarter and revenues fell 9% compared to the same quarter of the prior year.

Gross Profit

The following table sets forth, for the periods indicated, certain gross profit data from our Statements of Operations (dollars in
thousands):

Years ended December 31:

2008

2007

$
Change

%
Change

% Change
constant
currency (2)Network Equipment group

$
67,071

$
51,712

$
15,359


30
%

27
%Network Integration group


38,301


33,455


4,846


14


8Optical Components group


29,437


28,133


1,304


5


4All others


143


68


75


110


110134,952


113,368


21,584


19


16Corporate unallocated cost of goods sold


(199
)

(165
)

(34
)

21


21Intersegment adjustments (1)


315


(537
)

852


(159
)

NMTotal

$
135,068

$
112,666

$
22,402


20
%

16
%


---

NM
 not meaningful

51

---





Table of Contents

Gross profit increased $22.4 million due to the $86.8 million increase in revenues, partially offset by a decrease in average gross margins from 30%
to 29%. The increase in gross profit was primarily due to the strong increase in Network Equipment revenue during the first nine months of the year. The gross margins in the Network Equipment and
Network Integration groups increased in 2008, but that impact was offset by an increase in the portion of consolidated revenues from the Optical Components group, which has lower margins than the
other segments. Gross profit would have been $3.8 million lower in 2008 had foreign currency exchange rates remained the same as they were in 2007. Gross profit reflects share-based
compensation in cost of goods sold of $370,000 and $469,000 in 2008 and 2007, respectively.

Network Equipment Group.Gross profit for the Network Equipment group increased $15.4 million. The increase is due to the
$20.2 million
increase in revenues and an increase in gross margins from 49% to 53% resulting primarily from differences in the composition of the products sold in each period. Gross margins were highest in the
second and fourth quarter, which each had gross margins of 56%. Margins were lowest in the first quarter (50%) and in the third quarter (52%). Margins in 2008 improved in each quarter over the same
quarter of the prior year. Gross profit
would have been $1.4 million lower in 2008 had foreign currency exchange rates remained the same as they were in 2007. Gross profit reflects share-based compensation in cost of goods sold of
$79,000 and $113,000 in 2008 and 2007, respectively.

Network Integration Group.Gross profit for the Network Integration group increased $4.8 million. Improved gross margins drove a
currency
adjusted increase of $2.5 million, favorable currency impacts accounted for $2.2 million of the increase, and a slight increase in local currency revenues contributed the remaining
$0.1 million of the improvement. Average gross margin increased from 23% to 25%. The increase in gross margins in 2008 was the result of differences in the composition of the products and
services sold in each period. The margin improvements were led by Tecnonet, our remaining Italian subsidiary and TurnKey Communications, our Swiss network integrator, which both had a significant
shift from product to service revenue during the year. Service revenues have higher profit margins than product revenues. The Network Integration group did not have any share-based compensation in
cost of goods sold in either year.

Optical Components Group.Gross profit for the Optical Components group remained stable, but gross margin as a percentage of revenues
declined from
19% in 2007 to 15% in 2008. The lower gross margin percentage resulted from increases in inventory reserves, fixed asset write-offs, and increased depreciation on assets acquired as part
of the Fiberxon acquisition. The effect of currency fluctuations did not have a significant impact on the year-over-year change in gross profit. The decline in gross margins
came primarily in the second half of the year. Gross margins fell in the third quarter of 2008 from 19% to 7% and in the fourth quarter from 17% to 8% compared to the same quarters of the prior year.
Gross profit reflects share-based compensation in cost of goods sold of $232,000 and $342,000 in 2008 and 2007, respectively.

52

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Table of Contents

Operating Expenses

The following table sets forth, for the periods indicated, certain operating expenses data from our Statements of Operations (dollars
in thousands):

Years ended December 31:

2008

2007

$
Change

%
Change

% Change
constant
currency (1)Network Equipment group

$
68,492

$
59,988

$
8,504


14
%

12
%Network Integration group


31,905


27,018


4,887


18


15Optical Components group


139,899


29,681


110,218


371


371All others


1,920


1,597


323


20


20242,216


118,284


123,932


105


103Corporate unallocated operating expenses (2)


15,809


7,910


7,899


100


100Total

$
258,025

$
126,194

$
131,831


104
%

103
%


---

Operating
expenses were $258.0 million, or 55% of revenues, for 2008, compared to $126.2 million, or 33% of revenues, for 2007. The primary increase in operating expenses
during 2008 was a $100.3 million goodwill impairment charge and inclusion of a full year's worth of Fiberxon's operations, which was acquired on July 1, 2007. Operating expenses would
have been $2.3 million lower in 2008 had foreign currency exchange rates remained the same as they were in 2007. Product development and engineering expenses included share-based compensation
of $1.3 million in 2008 and 2007. Selling, general and administrative expenses included share-based compensation of $2.6 million and $3.3 million in 2008 and 2007, respectively.

Network Equipment Group.Operating expenses in the Network Equipment group for 2008 were $68.5 million, or 55% of revenues,
compared to
$60.0 million, or 57% of revenues, for 2007. The increase in operating costs in absolute dollars was primarily the result of a $6.4 million goodwill impairment charge taken in the fourth
quarter of 2008 related to our U.S. operations, and of increases in labor and related costs, including a $1.3 million increase in product development and engineering. The decrease in operating
expenses as a percentage of revenues reflects various cost cutting and business improvement measures taken in 2008. Operating expenses would have been $1.1 million lower in 2008 had foreign
currency exchange rates remained the same as they were in 2007. The currency impacts occurred primarily in the first, second and third quarters of 2008, when the Swiss franc strengthened against the
dollar by 15%, 19% and 12% respectively on a year-over-year basis. Currency did not have a significant impact on the fourth quarter. Product development and engineering expenses included share-based
compensation of $400,000 and $537,000 in 2008 and 2007, respectively. Selling, general and administrative expenses included share-based compensation of $754,000 and $922,000 in 2008 and 2007,
respectively.

Network Integration Group.Operating expenses in the Network Integration group for 2008 were $31.9 million, or 21% of revenues,
compared to
$27.0 million, or 19% of revenues, for 2007. Selling, general and administrative costs, including foreign currency translation, increased $4.9 million, primarily

53

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due
to labor costs. The increase in operating expenses came primarily in the first and second quarter of 2008, as a result of the considerable strengthening of the euro, Swiss franc, and Swedish
krona. Operating expenses would have been $1.0 million lower in 2008 had foreign currency
exchange rates remained the same as they were in 2007. In the fourth quarter of 2008, we recorded additional compensation expense at our Swedish subsidiary of $1.8 million to allow the
management of our Swedish subsidiary to pay the taxes due on bonus payments made from 2002 to 2007. The fourth quarter impact in U.S. dollars was largely offset by the strengthening of the U.S. dollar
against the Swedish krona by 21% in the fourth quarter compared to the same quarter of the prior year. The Network Integration group did not have share-based compensation in product development and
engineering costs in either year. Selling, general and administrative expenses included share-based compensation of $342,000 and $644,000 in 2008 and 2007, respectively.

Optical Components Group.Operating expenses for 2008 were $139.9 million, or 69% of revenues, compared to $29.7 million, or
20% of
revenues, for 2007. The increase in operating expenses were primarily the result of the $93.9 million goodwill impairment charge recorded in the fourth quarter of 2008 related to the July 2007
Fiberxon acquisition, and increases in the first half of 2008 over the same period of the prior year due to the inclusion of a full year's results of operations of Fiberxon in 2008 compared to 2007 in
which the results of Fiberxon were only included for the second half of the year. Operating costs also included increases in the allowance for doubtful accounts, IPO costs written off, and fixed asset
write-offs. The effect of currency fluctuations did not have a significant impact on the year-over-year change in operating expenses. Product development and
engineering expenses included share-based compensation of $843,000 and $728,000 in 2008 and 2007, respectively. Selling, general and administrative expenses included share-based compensation of
$790,000 and $749,000 in 2008 and 2007, respectively.

Operating Income (Loss)

The following table sets forth, for the periods indicated, certain operating income (loss) data from our Statements of Operations
(dollars in thousands):

Years ended December 31:

2008

2007

$
Change

%
Change

% Change
constant
currency (2)Network Equipment group

$
(1,421
)
$
(8,276
)
$
6,855


(83
)%

(78
)%Network Integration group


6,396


6,437


(41
)

(1
)

(20
)Optical Components group


(110,462
)

(1,548
)

(108,914
)

7,036


7,035All others


(1,777
)

(1,529
)

(248
)

16


16(107,264
)

(4,916
)

(102,348
)

2,082


5,538Corporate unallocated expenses


(16,008
)

(8,075
)

(7,933
)

98


98Adjustments (1)


315


(537
)

852


(159
)

NMTotal

$
(122,957
)
$
(13,528
)
$
(109,429
)

809
%

821
%


---

NM 
not meaningful

The
2008 $123.0 million operating loss represented 26% of revenues, compared to a $13.5 million operating loss, or 4% of revenues, in 2007. The increase in operating loss
arose from the total

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$100.3 million
charge for goodwill impairment, primarily arising from the Fiberxon acquisition. Excluding the goodwill impairment charge, operating loss in 2008 would have been
$22.7 million, or 5% of revenue. Operating loss would have been $1.6 million more in 2008 had foreign currency exchange rates remained the same as they were in 2007. Operating loss
included share-based compensation expense of $4.2 million and $5.1 million in 2008 and 2007, respectively.

Network Equipment Group.The Network Equipment group reported an operating loss of $1.4 million for 2008, compared to an operating
loss of
$8.3 million for 2007. The improvement was primarily the result of higher gross profits and lower operating expenses as a percentage of revenues, partially offset by the $6.4 million
goodwill impairment charge. Operating loss would have been $0.4 million more in 2008 had foreign currency exchange rates remained the same as they were in 2007. Operating loss included
share-based compensation expense of $1.2 million and $1.6 million in 2008 and 2007, respectively.

Network Integration Group.The Network Integration group reported operating income of $6.4 million for 2008, relatively unchanged
from
operating income of $6.4 million for 2007. Operating income was impacted by a $4.8 million increase in gross profit, offset by a $4.9 million increase in operating expenses.
Operating income would have been $1.2 million less in 2008 had foreign currency exchange rates remained the same as they were in 2007. Operating income included share-based compensation expense
of $342,000 and $644,000 in 2008 and 2007, respectively.

Optical Components Group.The Optical Components group reported an operating loss of $110.5 million for 2008, compared to an
operating loss of
$1.5 million for 2007. The increase in operating loss was the primarily the result of the $93.9 million goodwill impairment and inclusion of a full year's worth of Fiberxon's results of
operations. The effect of currency fluctuations did not have a significant impact on the year-over-year change in operating loss. Operating loss included share-based
compensation expense of $1.9 million and $1.8 million in 2008 and 2007, respectively.

Interest Expense, Cost of Debt Conversion and Other Income, Net

Interest expense was $3.5 million in both 2008 and 2007. In 2008, we realized $2.6 million of income as the result of a
gain on the sale of an investment. The $4.9 million of debt conversion costs in 2007 were associated with exchanging the $23.0 million convertible notes into shares of Common Stock.
Interest income decreased $2.7 million from $4.6 million in 2007 to $1.9 million in 2008 due to both lower average cash and investment balances as well as to lower interest rates.
Foreign currency transactions resulted in a net $189,000 gain in 2008 as compared to a $1.4 million loss in 2007.

Provision for Income Taxes

The provision for income taxes was $1.9 million in 2008 and $2.9 million in 2007. Income tax expense fluctuates based on
the amount of income generated in the various jurisdictions where we conduct operations and pay income tax.

Tax Loss Carry Forwards

As of December 31, 2008, we had NOLs of approximately $196.6 million for federal income tax purposes and approximately
$155.1 million for state income tax purposes. We also had capital loss carry forwards totaling $14.5 million as of December 31, 2008, which expired in 2009. As of
December 31, 2008, the NOLs had a full valuation allowance.

Discontinued Operations

On December 24, 2009, we entered into an agreement to divest our 90% ownership of EDSLan, a communication equipment distribution
company located in Milan, Italy. EDSLan was part of our Network

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Integration
segment and we have reclassified the historical financial results of EDSLan as discontinued operations. We recorded $1.0 million and $1.5 of income from discontinued operations, net
of income tax expense, for the years ended December 31, 2008 and 2007, respectively.

Recently Issued Accounting Standards

For a discussion of recently issued accounting standards relevant to our financial performance, see Note 2 to the Financial
Statements included in Item 8 of this Form 10-K.

Liquidity and Capital Resources

Our three primary sources of cash are cash receipts from customers, debt financing, and sales of invested assets. Historically, we have
satisfied short and long-term obligations through cash generated from these sources and we expect that
this trend will continue. We believe that cash on hand and cash flows from operations will be sufficient to satisfy current operating needs, capital expenditures, and product development and
engineering requirements for at least the next 12 months.

We
operate our business through several subsidiaries in our three operating segments. Each subsidiary maintains some level of cash and is able to meet its cash needs primarily through
cash receipts from customers. In recent years we have funded our corporate expenses through a combination of the use cash reserves and short-term investments at corporate, cash remitted
from our subsidiaries, and the sale of investments in unconsolidated entities and subsidiaries. We currently do not have any debt at the corporate level. Two of our subsidiaries, Source Photonics and
Tecnonet, maintain short-term lines of credit primarily secured by accounts receivable to fund their working capital needs. EDSLan, which was sold in January 2010 and is presented as a
discontinued operation, also borrowed under short-term lines of credit and had outstanding balances of $9.6 million and $8.4 million at December 31, 2009 and 2008,
respectively.

The
following table illustrates our contractual obligations as of December 31, 2009 (in thousands):

Contractual Obligations

Total

Less than 1 Year

1 - 3 Years

3 - 5 Years

After 5 YearsShort-term debt

$
66,088

$
66,088

$


$


$
Operating leases


30,882


6,454


9,923


5,837


8,668Purchase commitments with suppliers and contract manufacturers


9,586


9,323


263





Deferred consideration payable


8,012


8,012








Total contractual obligations

$
114,568

$
89,877

$
10,186

$
5,837

$
8,668


We
expect to have sufficient cash and cash flow to meet our short-term and our long-term obligations shown in the table above. Our operating leases consist
primarily of leases for buildings worldwide from which we conduct our business. Purchase commitments consist primarily of purchase orders for components used to build finished goods inventory. The
deferred consideration payable arose from the acquisition agreement for Fiberxon, a company we acquired in July 2007. The accrual amount was $30.0 million at December 31, 2008 and was
substantially reduced to $8.0 million in the fourth quarter of 2009 when we negotiated an agreement with former stockholders of Fiberxon, and paid

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$1.5 million
of the agreed upon settlement in December 2009. The following table summarizes our short-term debt.

Short-term Debt

2009

2008

Increase
(Decrease)

Additional
AvailabilitySource Photonics:Commercial drafts sold with recourse

$
9,726

$


$
9,726


N/ALines of credit secured by restricted time deposits


16,922





16,922

$
Lines of credit secured by accounts receivable


24,581


11,668


12,913


7,710
(1)Total short-term debt at Source Photonics


51,229


11,668


39,561


7,710Tecnonet:Lines of credit secured by accounts receivable


13,985


11,392


2,593


18,157Unsecured short-term debt


860


1,409


(549
)

Total short-term debt at Tecnonet


14,845


12,801


2,044


18,157Other


14


53


(39
)

Total short-term debt

$
66,088

$
24,522

$
41,566

$
25,867


---

The
increase in short-term debt during 2009 includes $9.7 million as a result of the sale with recourse of notes receivable. One of the major customers of Source
Photonics settles its accounts receivable by issuing short-term notes. Source Photonics sells the notes to its bank with or without recourse, depending on the type of the note received.
When the Company sells the notes with recourse, they remain in other current assets, and an equivalent liability is recorded in short-term debt until the customer pays the new note holder
of the note.

The
increase in short-term debt also includes five loans totaling $16.9 million that are secured by restricted deposits which are reflected in the corresponding
increase in restricted time deposits shown below. These loans were initiated by our Source Photonics subsidiary as part of their longer term financing plan in China. When these loans mature in the
third and fourth quarter of 2010, the restricted time deposits will be used to repay the loans. We have classified the increase in restricted time deposits related to this transaction in the financing
section of the Statement of Cash Flows because of the underlying financing transaction.

Cash
and cash equivalents totaled $55.9 million at December 31, 2009, compared to $67.9 million in cash and cash equivalents at December 31, 2008. The
following table summarizes MRV's cash position

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including
cash and cash equivalents, restricted time deposits and short-term marketable securities (thousands):

December 31:

2009

2008

Increase
(Decrease)CashCash and cash equivalents

$
55,909

$
67,931

$
(12,022
)Restricted time deposits


18,680


1,335


17,345Short-term marketable securities


17,879


12,295


5,584Total


92,468


81,561


10,907Short-term debt


66,088


24,522


41,566Cash in excess of debt

$
26,380

$
57,039

$
(30,659
)Ratio of cash to debt(1)


1.4 : 1


3.3 : 1


(1)Determined
by dividing total cash by total debt.


Our
cash flow from operations consists of cash collected from customers and payments made to vendors and employees. Our cash flow in a particular period is determined by our
profitability, adjusted for non-cash items, and changes in working capital. During periods of growth, we require more working capital to fund the cash conversion cycle, which represents
the period of time from when we purchase inventory, and pay for labor and other costs, until that inventory is converted to product, sold, and payments are received from our customers. In addition to
changes in accounts receivable, inventory and accounts payable, our cash flow from operations is impacted from the increase or decrease in other current assets and current liabilities, including
prepaid expenses and accrued liabilities.

The
following table summarizes our working capital position (thousands):

December 31:

2009

2008

Increase
(Decrease)Current assets

$
335,867

$
323,451

$
12,416Less: Current assets of discontinued operations


(39,640
)

(40,009
)

369Current assets from continuing operations


296,227


283,442


12,785Current liabilities


216,427


211,803


4,624Current liabilities from discontinued operations


(27,109
)

(26,138
)

(971
)Current liabilities from continuing operations


189,318


185,665


3,653Working capital from continuing operations

$
106,909

$
97,777

$
9,132Current ratio from continuing operations(1)


1.6 : 1


1.5 : 1


(1)Determined
by dividing total current assets from continuing operations by total current liabilities from continuing operations.


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The
following table summarizes our cash flow from operations from our Statements of Cash Flows (thousands):

Years ended December 31:

2009

2008Net loss

$
(1,665
)
$
(123,105
)Non-cash expenses


20,830


119,168Gain on litigation settlement


(20,524
)

Gains and losses on investing activities


(3,500
)

(2,590
)(Increase) decrease in accounts receivable


(16,307
)

6,896(Increase) decrease in inventory


24,094


(8,034
)Increase (decrease) in accounts payable


(18,272
)

9,694Increase (decrease) in accrued liabilities


(4,828
)

569Changes in certain other working capital accounts


3,603


(4,082
)Net cash (used in) provided by operating activities

$
(16,569
)
$
(1,484
)


Cash Flows Related to Operating Activities.Our net loss includes two non-cash gains that resulted in changes in working capital. The
settlement agreement for the deferred payment obligation discussed above resulted in a gain of $20.5 million, which reduced our accrued liabilities. We also recognized a gain on the sale of an
investment in an unconsolidated entity of $3.5 million, but as of December 31, 2009, the proceeds had not yet been received and we recorded a receivable in other current assets. Our cash
used in operations included an operating loss of $12.8 million, less non-cash expenses included in the loss, cash paid for income taxes of $2.5 million, a reduction in
accounts payable of $18.3 million, and an increase in accounts
receivable of $16.3 million. Our sources of operating cash flow included a decrease in inventory of $24.1 million.

In
December 2009, we signed an agreement to sell EDSLan, and we received the proceeds when the transaction closed in January 2010. We believe this transaction strengthened our cash and
debt position by providing cash proceeds of approximately $11.5 million, by eliminating EDSLan's debt from our balance sheet, and by cancelling a put option that required us to purchase a 3.3%
noncontrolling interest for $0.9 million. EDSLan has never paid any dividends to MRV. EDSLan had cash flow from operations of $3.7 million, $2.2 million, and $2.7 million
in 2009, 2008, and 2007, respectively.

We
may seek to obtain additional debt or equity financing if we believe it appropriate. If we seek financing through issuance of additional equity securities, we may limit our ability to
use available net operating loss and capital loss carryforwards. Under the Internal Revenue Code, if a corporation undergoes an "ownership change," the corporation's ability to use its
pre-change NOLs, capital loss carry forwards and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally
defined as a greater than 50% change in its equity ownership by value over a three-year period. This change in equity ownership includes the issuance of shares made in connection with the
acquisition of Fiberxon. For additional information on the potential limitations on our use of net operating loss and capital loss carry forwards available to us at December 31, 2009, see the
risk factor Item 1A of this Form 10-K under the caption "Our Ability to Utilize Our NOLs and Certain Other Tax Attributes May Be Limited." Our future capital requirements
will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support development of new products and the expansion of sales and marketing efforts, the timing
of new product introductions and enhancements to existing products, and the market acceptance of our products.

Off-Balance Sheet Arrangements

We do not have transactions, arrangements or relationships with unconsolidated entities that are reasonably likely to affect our
liquidity or capital resources. We do not have special purpose or limited purpose entities that provided off-balance sheet financing, liquidity or market or credit risk support, or that
engaged in leasing, hedging, research and development services, or other relationships that expose us to liability that is not reflected on the face of the financials.

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Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

Market risk represents the risk of loss that may impact our Consolidated Financial Statements through adverse changes in financial
market prices and rates and inflation. Our market risk exposure results primarily from fluctuations in foreign exchange and interest rates. We manage our exposure to these market risks through our
regular operating and financing activities and, in certain instances, through the use of derivative financial instruments. These derivative instruments are used to manage risks of volatility in
interest and foreign exchange rate movements on certain assets, liabilities or anticipated transactions and create a relationship in which gains or losses on derivative instruments are expected to
counter-balance the losses or gains on the assets, liabilities or anticipated transactions exposed to such market risks.

Interest Rates.Our investments, short-term borrowings and long-term obligations expose us to interest rate fluctuations. Our
cash and short-term investments are subject to limited interest rate risk, and are primarily maintained in money market funds and bank deposits. Our variable-rate
short-term borrowings are also subject to limited interest rate risk because of their short-term maturities. Our long-term obligations were entered into with fixed
interest rates. Through certain foreign offices, and from time to time, we enter into interest rate swap contracts. As of December 31, 2009, we did not have any interest rate swap contracts
outstanding. The economic purpose of entering into interest rate swap contracts is to protect our variable interest debt from significant interest rate fluctuations. One interest rate swap through the
foreign office matured in June 2008. Unrealized gains on these interest swap contracts were $552,000 for the year ended December 31, 2007, and have been included in interest expense in the
accompanying Statements of Operations.

Foreign Exchange Rates.We operate on an international basis with a significant portion of our revenues and expenses transacted in
currencies other
than the U.S. dollar. Fluctuation in the value of these foreign currencies affects our results and will cause U.S. dollar translation of such currencies to vary from one period to another. We cannot
predict the effect of exchange rate fluctuations upon future operating results. However, because we have revenues and expenses in each of these foreign currencies, the effect on our results of
operations from currency fluctuations is reduced.

Through
certain foreign offices, and from time to time, we enter into foreign exchange contracts in an effort to minimize the currency exchange risk related to purchase commitments
denominated in foreign currencies. These contracts cover periods commensurate with known or expected exposures, generally less than 12 months. As of December 31, 2009, we did not have
any foreign exchange contracts outstanding.

Certain
assets, including certain bank accounts and accounts receivables, exist in non-U.S. dollar-denominated currencies, which are sensitive to foreign currency exchange
rate fluctuations. These principally include the euro, the Swedish krona, the Swiss franc, the Taiwan dollar, the Chinese renminbi, and the Israeli new shekel. Additionally, certain of our current
liabilities and long-term operating leases are denominated in these foreign currencies. When these transactions are settled in a currency other than the reporting currency, we recognize a
foreign currency transaction gain or loss.

When
we translate the financial position and results of operations of subsidiaries with reporting currencies other than the U.S. dollar, we recognize a translation gain or loss in other
comprehensive income. Approximately 75% of our cost of goods sold and operating expenses are reported by these subsidiaries. Translation rate exposure for the Chinese renminbi is currently mitigated
by the Chinese government's decision to tie the renminbi rate to the U.S. dollar. Excluding the renminbi, the remaining currencies were generally weaker against the U.S. dollar for the year
ended December 31, 2009 compared to the same period last year, so revenues and expenses in these countries translated into fewer dollars than they would have in 2008. For 2009, we had
approximately:



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Had
rates of these various foreign currencies been 10% higher relative to the U.S. dollar during 2009, our costs would have increased to approximately:



The
following table indicates cash and cash equivalents held in various currencies and translated into U.S. dollars (in thousands):

December 31:

2009

2008U.S. dollars

$
24,825

$
49,540Euros


17,403


8,531Chinese renminbi


8,265


2,559Swiss francs


2,259


2,319Taiwan dollars


433


1,121Norwegian kroner


688


913Swedish kronor


823


809Israeli new shekels


836


671Other


377


1,468Total cash and cash equivalents

$
55,909

$
67,931


Fluctuations
in currency exchange rates of foreign currencies held have an impact on the U.S. dollar equivalent of such currencies included in cash and cash equivalents reported in our
financial statements.

Recession.We believe that the downturn in global markets has affected our revenues and operating results, particularly in the Network
Integration
group. In general, our customers took a more
cautious approach in their capital expenditures, resulting in order delays, slowing deployments and lengthening sales cycles. Despite the downturn, we believe that our customers need to continue
investing in their networks to meet the growth in consumer and enterprise use of high-bandwidth communications services. We believe in our longer term market opportunities, but we are
uncertain how long the downturn in economic conditions will continue and how our customers will interpret and react to market conditions. We are unable to determine the resulting magnitude of impact,
including timing and length of impact, on our revenues and operating results.

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Item 8.    Financial Statements and Supplemental Data.

Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders of MRV Communications, Inc.

We
have audited the accompanying consolidated balance sheets of MRV Communications, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MRV Communications, Inc. at
December 31, 2009 and 2008, and the consolidated results of their operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S.
generally accepted accounting principles.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), MRV Communications Inc.'s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 16, 2009 expressed an unqualified opinion thereon.



Los
Angeles, California
March 16, 2010

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MRV Communications, Inc.        Statements of Operations        (In thousands, except per share data)

Years ended December 31:

2009

2008

2007Revenue

$
448,120

$
466,821

$
380,033Cost of goods sold


322,306


331,753


267,367Gross profit


125,814


135,068


112,666Operating expenses:Product development and engineering


36,735


38,746


33,387Selling, general and administrative


99,622


116,595


90,901Impairment of goodwill and other intangibles





100,250


Amortization of other intangibles


2,257


2,434


1,906Total operating expenses


138,614


258,025


126,194Operating loss


(12,800
)

(122,957
)

(13,528
)Interest expense


(2,958
)

(3,497
)

(3,521
)Gain from settlement of deferred consideration obligation


20,524





Gain from sales of investments in unconsolidated entities


3,488


2,580


Cost of debt conversion








(4,899
)Other income, net


1,198


1,703


3,791Income (loss) from continuing operations before income taxes


9,452


(122,171
)

(18,157
)Provision for income taxes


5,345


1,936


2,881Net income (loss) from continuing operations


4,107


(124,107
)

(21,038
)Income (loss) from discontinued operations, net of income taxes of $927, $1,215, and $1,343, respectively


(5,772
)

1,002


1,519Net loss


(1,665
)

(123,105
)

(19,519
)Less:Net income (loss) from continuing operations attributable to noncontrolling interests


1,757


40


(531
)Net income from discontinued operations attributable to noncontrolling interests


47


59


106Net loss attributable to MRV

$
(3,469
)
$
(123,204
)
$
(19,094
)Net income (loss) from continuing operations attributable to MRV

$
2,350

$
(124,147
)
$
(20,507
)Net income (loss) from discontinued operations attributable to MRV

$
(5,819
)
$
943

$
1,413Net income (loss) attributable to MRV per share  basic:From continuing operations

$
0.01

$
(0.79
)
$
(0.15
)From discontinued operations

$
(0.04
)
$
0.01

$
0.01Net loss attributable to MRV per share  basic(1)

$
(0.02
)
$
(0.78
)
$
(0.14
)Net income (loss) attributable to MRV per share  diluted:From continuing operations

$
0.01

$
(0.79
)
$
(0.15
)From discontinued operations

$
(0.04
)
$
0.01

$
0.01Net loss attributable to MRV per share  diluted(1)

$
(0.02
)
$
(0.78
)
$
(0.14
)Weighted average number of shares:Basic


157,547


157,323


140,104Diluted


157,665


157,323


140,104


---

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

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MRV Communications, Inc.        Balance Sheets        (In thousands, except par values)

December 31:

2009

2008AssetsCurrent assets:Cash and cash equivalents

$
55,909

$
67,931Short-term marketable securities


17,879


12,295Restricted time deposits


18,680


1,335Accounts receivable, net


103,247


83,235Inventories


61,803


84,260Deferred income taxes


3,217


2,095Other current assets


35,492


32,291Current assets from discontinued operations held for sale


39,640


40,009Total current assets


335,867


323,451Property and equipment, net


23,723


22,502Goodwill


25,707


24,640Deferred income taxes, net of current portion


185


1,480Intangibles, net


7,303


9,560Other assets


4,969


5,824Non current assets from discontinued operations held for sale





5,429Total assets

$
397,754

$
392,886Liabilities and stockholders' equityCurrent liabilities:Short-term debt

$
66,088

$
24,522Deferred consideration payable


8,012


30,036Accounts payable


60,552


77,162Accrued liabilities


36,003


38,832Deferred revenue


14,048


12,525Other current liabilities


4,615


2,588Current liabilities from discontinued operations held for sale


27,109


26,138Total current liabilities


216,427


211,803Other long-term liabilities


7,322


7,921Long-term liabilities from discontinued operations held for sale





1,351Commitments and contingenciesEquity:MRV stockholders' equity:Preferred Stock, $0.01 par value: Authorized  1,000 shares; no shares issued or outstanding





Common Stock, $0.0017 par value:Authorized  320,000 sharesIssued  158,971 shares in 2009 and 158,800 shares in 2008Outstanding  157,617 shares in 2009 and 157,446 shares in 2008


268


268Additional paid-in capital


1,405,015


1,403,663Accumulated deficit


(1,252,108
)

(1,248,639
)Treasury stock  1,353 shares in 2009 and 2008


(1,352
)

(1,352
)Accumulated other comprehensive income


15,463


12,760Total MRV stockholders' equity


167,286


166,700Noncontrolling interests


6,719


5,111Total equity


174,005


171,811Total liabilities and stockholders' equity

$
397,754

$
392,886


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

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Table of Contents

MRV Communications, Inc.

Statements of Stockholders' Equity (In thousands)

Common Stock







Accumulated
Other
Comprehensive
Income (Loss)

MRV
Stockholders'
Equity
TotalAdditional
Paid-In
Capital

Accumulated
Deficit

Treasury
Stock

Non-
Controlling
Interest

Total
EquityShares

AmountBalance, December 31, 2006


125,507

$
213

$
1,285,877

$
(1,106,341
)
$
(1,352
)
$
8,911

$
187,308

$
4,397

$
191,705Exercise of stock options


1,318


3


2,057











2,060





2,060Issuance of Common Stock for Fiberxon acquisition


18,402


31


72,746











72,777





72,777Issuance of Common Stock for conversion of convertible notes


11,900


20


28,005











28,025





28,025Issuance of stock options for Fiberxon acquisition








6,006











6,006





6,006Share-based compensation expense








4,939











4,939


354


5,293Comprehensive income (loss):Net loss











(19,094
)







(19,094
)

(425
)

(19,519
)Net unrealized investment gains

















3


3





3Translation adjustment

















7,898


7,898


470


8,368Comprehensive loss




















(11,193
)

45


(11,148
)Balance, December 31, 2007


157,127


267


1,399,630


(1,125,435
)

(1,352
)

16,812


289,922


4,796


294,718Exercise of stock options


319


1


156











157





157Share-based compensation expense








3,877











3,877


373


4,250Comprehensive income (loss):Net loss











(123,204
)







(123,204
)

99


(123,105
)Net unrealized investment gains

















57


57





57Translation adjustment

















(4,109
)

(4,109
)

(157
)

(4,266
)Comprehensive loss




















(127,256
)

(58
)

(127,314
)Balance, December 31, 2008


157,446


268


1,403,663


(1,248,639
)

(1,352
)

12,760


166,700


5,111


171,811Exercise of stock options


171





47











47





47Share-based compensation expense








2,256











2,256


68


2,324Purchase of subsidiary shares from noncontrolling interest








(951
)










(951
)

(549
)

(1,500
)Comprehensive income (loss):Net loss











(3,469
)







(3,469
)

1,804


(1,665
)Net unrealized investment losses

















(114
)

(114
)




(114
)Translation adjustment

















2,817


2,817


285


3,102Comprehensive loss




















(766
)

2,089


1,323Balance, December 31, 2009


157,617

$
268

$
1,405,015

$
(1,252,108
)
$
(1,352
)
$
15,463

$
167,286

$
6,719

$
174,005


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

65

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Table of Contents



MRV Communications, Inc.        Statements of Cash Flows        (In thousands)

Years ended December 31:

2009

2008

2007Cash flows from operating activities:Net loss

$
(1,665
)
$
(123,105
)
$
(19,519
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


10,573


10,013


8,335Share-based compensation expense


2,247


4,294


5,271Provision for doubtful accounts


793


3,675


327Deferred income taxes


334


(1,628
)

(1,142
)Gain on disposition of property and equipment


(12
)

(10
)

(37
)Cost of debt conversion








4,899Gain on sale of investments in unconsolidated entities


(3,488
)

(2,580
)

Impairment of goodwill and other intangibles





100,250


Impairment of long-lived assets





2,564


Impairment of goodwill and long lived assets of discontinued operations


6,883





Gain on settlement of deferred consideration litigation


(20,524
)




Changes in operating assets and liabilities, net of effects from acquisitions:Accounts receivable


(16,307
)

6,896


(6,851
)Inventories


24,094


(8,034
)

(4,866
)Other assets


1,858


(7,374
)

(2,082
)Accounts payable


(18,272
)

9,694


11,719Accrued liabilities


(4,828
)

569


3,316Income tax payable


1,042


(782
)

(41
)Deferred revenue


1,365


4,610


1,168Other current liabilities


(662
)

(536
)

(6,051
)Net cash used in operating activities


(16,569
)

(1,484
)

(5,554
)Cash flows from investing activities:Purchases of property and equipment


(9,215
)

(10,942
)

(7,867
)Proceeds from sale of property and equipment


73


242


167Fiberxon acquisition, net of cash acquired








(19,886
)Proceeds from sale of investments in unconsolidated entities





2,580


Investment in restricted time deposits


(486
)

(332
)

(2,929
)Release of restricted time deposits


129


5,163


Purchases of investments


(18,922
)

(13,220
)

(19,050
)Proceeds from sale or maturity of investments


13,200


8,680


37,073Net cash used in investing activities


(15,221
)

(7,829
)

(12,492
)Cash flows from financing activities:Net proceeds from issuance of Common Stock


47


157


2,060Cash restricted to collateralize short-term debt


(16,922
)




Purchase of noncontrolling interest


(1,525
)




Borrowings on short-term debt


153,842


122,414


67,268Payments on short-term debt


(111,544
)

(117,438
)

(70,934
)Borrowings on long-term debt








148Payments on long-term debt


(51
)

(136
)

(282
)Net cash provided by (used in) financing activities


23,847


4,997


(1,740
)Effect of exchange rate changes on cash and cash equivalents


225


(208
)

538Net decrease in cash and cash equivalents


(7,718
)

(4,524
)

(19,248
)Less: Net increase (decrease) in cash and cash equivalents of discontinued operations


4,304


13


(62
)Net decrease in cash and cash equivalents of continuing operations


(12,022
)

(4,537
)

(19,186
)Cash and cash equivalents, beginning of year


67,931


72,468


91,654Cash and cash equivalents, end of year

$
55,909

$
67,931

$
72,468Supplemental disclosure of cash flow information:Cash paid during year for interest  continuing operations

$
2,419

$
3,208

$
3,432Cash paid during year for interest  discontinued operations


107


454


447Cash paid during year for interest  Total

$
2,526

$
3,662

$
3,879Cash paid during year for income taxes  continuing operations

$
2,490

$
3,941

$
5,106Cash paid during year for income taxes  discontinued operations


863


828


2,198Cash paid during year for income taxes  Total

$
3,353

$
4,769

$
7,304Non-cash transactions:Issuance of Common Stock for conversion of debt to equity

$


$


$
28,025Issuance of Common Stock and stock options in connection with acquisition of Fiberxon

$


$


$
78,783Deferred purchase price obligation in connection with acquisition of Fiberxon

$


$


$
31,500


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

66

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Table of Contents

MRV Communications, Inc.        Notes to Financial Statements        December 31, 2009

1. Description of Business and Basis of Presentation

Description of Business

MRV Communications, Inc. ("MRV" or "the Company"), a Delaware corporation, is a global supplier of communications solutions to
telecommunications service providers, enterprises and governments throughout the world. MRV's products enable customers to provide high-bandwidth data and video services and mobile
communications services more efficiently and cost effectively. The Company markets and sells its products worldwide, through a variety of channels, which include a dedicated direct sales force,
manufacturers' representatives, value-added-resellers, distributors and systems integrators. MRV conducts its business along three principal segments: the Network Equipment group; the Network
Integration group; and the Optical Components group. MRV's Network Equipment group designs, manufactures and sells equipment used by commercial customers, governments, aerospace, defense, and
telecommunications service providers. Products include switches, routers, physical layer products and out-of-band management products, specialized networking products and other
applications including voice and cellular communication. The Europe-based Network Integration segment provides network system design, integration and distribution services that include products
manufactured by third-party vendors as well as products developed and manufactured by the Network Equipment group. MRV's Optical Components segment provides optical communications components for
metropolitan, access and Fiber-to-the-Premises applications substantially through our wholly-owned subsidiary Source Photonics.

The
Company has incurred net losses attributable to MRV of $3.5 million, $123.2 million, and $19.1 million in the three years ended December 31, 2009, 2008
and 2007, respectively and has an accumulated deficit of $1.3 billion at December 31, 2009. At December 31, 2009, cash, cash equivalents, restricted time deposits and marketable
securities totaled $92.5 million. Management believes these existing funds will allow the Company to meet its future estimated capital needs. Should the Company fail to generate sufficient cash
flow from operations or otherwise have the capital resources to meet future capital needs, it may seek to raise additional financing. There can be no assurance that any additional financing will be
available on acceptable terms, or at all. Should this be the case, the ability to fund operations, satisfy obligations, take advantage of unanticipated opportunities, develop or enhance our products,
or otherwise respond to competitive pressures, could be significantly limited.

Basis of Presentation

MRV's fiscal year is based on the calendar year ending on December 31. The accompanying financial statements include the
accounts of MRV and its wholly-owned and majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. MRV consolidates the financial results of less than
majority-owned subsidiaries when it has effective control, voting control or has provided the entity's working capital. When others invest in these enterprises reducing its voting control below 50%,
MRV discontinues consolidation and uses the cost or equity method of accounting for these investments, unless otherwise required.

In
June 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") 105Generally Accepted Accounting
Principles("ASC 105") which establishes the ASC as the single source of authoritative U.S. GAAP for non-governmental entities. Rules and interpretive
releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. As of July 1, 2009, the Company adopted ASC 105, which

67

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

1. Description of Business and Basis of Presentation (Continued)

supersedes
all existing non-SEC accounting and reporting standards, and all corresponding references in the Company's notes to the audited financial statements reflect the adoption of this
standard.

The
presentation of prior years' financial statements and disclosures has been conformed to the current presentation proscribed by ASC 810-10 Noncontrolling Interests in Consolidated Financial Statements.See Note 20"Noncontrolling
Interests"for further discussion.

On
December 24, 2009, the Company entered into an agreement to divest its 90% ownership in EDSLan, a communication equipment distribution company located in Milan, Italy, and part
of the Network Integration segment. The historical financial results of EDSLan have been reclassified as discontinued operations for all periods presented as set forth in this
Form 10-K. The related assets and liabilities of EDSLan have been classified as held for sale in the Balance Sheet. Cash flows from discontinued operations are presented combined
with the cash flows from continuing operations in the accompanying statement of Cash Flows. For the fiscal year 2009, the Company recognized a loss related to the write down of the assets of EDSLan to
their net realizable value. See Note 3 "Discontinued Operations" for further discussion.

The
results of Fiberxon, integrated into Source Photonics, have been included in the consolidated financial statements beginning with the acquisition date of July 1, 2007. See
Note 17"Acquisition"for further discussion.

2. Summary of Significant Accounting Policies

Foreign Currency

Transactions originally denominated in other currencies are converted into functional currencies in accordance with ASC
830-10Foreign Currency Translation. Increases or decreases in the expected amount of cash flows upon settlement of the transaction caused
by changes in exchange rates are recorded as foreign currency gains and losses and are included in other income, net.

For
foreign operations with the local currency as the functional currency, assets and liabilities are translated from the local currencies into U.S. dollars at the exchange rate
prevailing at the balance sheet date. Revenues, expenses and cash flows are translated at weighted average exchange rates for the period to approximate translation at the exchange rate prevailing at
the dates those elements are recognized in the financial statements. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are
included in determining comprehensive loss.

Revenue Recognition

MRV's major revenue-generating products consist of fiber optic components, switches and routers, console management, and physical layer
products. MRV generally recognizes product revenue, net of sales discounts, returns and allowances, in accordance with ASC 605Revenue Recognition, when
persuasive evidence of an arrangement exists, delivery has occurred and all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection is considered
reasonably assured. Products are generally shipped "FOB shipping point," with no right of return and revenue is recognized upon shipment. If revenue is to be recognized upon delivery, such delivery
date is tracked through information provided by the third party shipping company the Company uses to deliver the

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

2. Summary of Significant Accounting Policies (Continued)

product
to the customer. Sales of services and system support are deferred and recognized ratably over the contract period in accordance with ASC 605-20 Services. Sales to end customers with contingencies, such
as rights of return, rotation rights, conditional acceptance provisions and price protection,
are infrequent and insignificant and are deferred until the contingencies have been satisfied or the contingent period has lapsed. For sales to distributors, the Company generally recognizes revenue
when product is sold to the distributor rather than when the product is sold by the distributor to the end user. In certain circumstances, distributors have limited rights of return, including stock
rotation rights, and/or are entitled to price protection, where a rebate credit may be provided to the customer if MRV lowers its price on products held in the distributor's inventory. MRV estimates
and establishes allowances for expected future product returns and credits in accordance with ASC 605. The Company records a reduction in revenue for estimated future product returns and future
credits to be issued to the customer in the period in which revenues are recognized, and for future credits to be issued in relation to price protection at the time changes are made to the distributor
price book. The Company monitors product returns and potential price adjustments on an ongoing basis and estimates future returns and credits based on historical sales returns, analysis of credit memo
data, and other factors known at the time of revenue recognition.

Arrangements
with customers may include multiple deliverables involving combinations of equipment, services and software. In accordance with ASC 605-25 Multiple-Element Arrangements, the entire fee from the
arrangement is allocated to each respective element based on its relative fair value and
recognized when revenue recognition criteria for each element is met. Fair value for each element is established based on the sales price charged when the same element is sold separately. If multiple
element arrangements include software or software related elements, the Company applies the provisions of ASC 985Softwareto the software and software
related elements, or to the entire arrangement if the software is essential to the functionality of the non-software elements.

MRV
generally warrants its products against defects in materials and workmanship for one to two year periods. The estimated cost of warranty obligations and sales returns and other
allowances are recognized at the time of revenue recognition based on contract terms and prior claims experience.

Cash and Cash Equivalents

MRV treats highly liquid investments with an original maturity of 90 days or less as cash equivalents. Cash balances and
investments are maintained in qualified financial institutions, and at various times, such amounts are in excess of federal insured limits.

Restricted Time Deposits

Restricted time deposits represent investments that are restricted as to withdrawal or use and are primarily in foreign subsidiaries.
Restricted time deposits generally secure standby letters of credit, bank lines of credit, or bank loans. The Company had bank loans secured by restricted time deposits of $16.9 million at
December 31, 2009 that, pursuant to the loan agreement, will be directly used to repay the loans when the time deposits and underlying bank loans mature. When investments in restricted time
deposits are directly related to an underlying bank loan and the restricted funds will be used to repay the loans, the investment and the subsequent release of the restricted time deposit are treated
as financing activities in the Company's Statement of Cash Flows. The other investments in and releases of

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

2. Summary of Significant Accounting Policies (Continued)

restricted
time deposits in 2009 are included in investing activities because the funds are invested in certificates of deposit. In prior periods, other investments in and releases of restricted time
deposits were included in cash flows from operating activities. The prior period amounts of other investments in and releases of restricted time deposits have been reclassified to investing activities
to conform to the current period presentation.

The
following tables reconcile the amounts previously reported to the current presentation (in thousands):

Cash flows from operating activities:

2008

2007Net cash provided by (used in) operating activities, as previously reported

$
3,347

$
(8,483
)Reclassification


(4,831
)

2,929Net cash used in operating activities

$
(1,484
)
$
(5,554
)




Cash flows from investing activities:

2008

2007Net cash used in investing activities, as previously reported

$
(12,660
)
$
(9,563
)Reclassification


4,831


(2,929
)Net cash used in investing activities

$
(7,829
)
$
(12,492
)


Marketable Securities

MRV accounts for its marketable securities, which are available for sale, under the provisions of ASC 320-10 Accounting for Certain Investments in Debt and Equity
Securities. The original cost of MRV's marketable securities approximated fair market value as of
December 31, 2009 and 2008. Unrealized gains (loss) at December 31, 2009 and 2008 were $(114,000) and $57,000, respectively. Proceeds from sales of marketable securities were
$13.2 million and $8.7 million for the years ended December 31, 2009 and 2008, respectively. Marketable securities mature at various dates through 2010.

Marketable
securities consisted of the following (in thousands):

December 31:

2009

2008U.S. government issues

$
12,081

$
11,296Corporate issues


5,798


999Total

$
17,879

$
12,295


Concentration of Credit Risk, Accounts Receivable and Allowance for Doubtful Accounts

Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and cash
equivalents placed with high credit quality institutions and accounts receivable due from customers. MRV evaluates the collectability of accounts receivable based on a combination of factors. If the
Company becomes aware of a customer's inability to meet its financial obligations after a sale has occurred, the Company records an allowance to reduce the net receivable to the amount which

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

2. Summary of Significant Accounting Policies (Continued)

is
reasonably believed to be collected from the customer. For all other customers, the Company records allowances for doubtful accounts based on the length of time the receivables are past due, the
current business environment, and historical experience. If the financial conditions of MRV's customers were to deteriorate or if economic conditions worsen, additional allowances may be required in
the future.

The
following table summarizes the changes in the allowance for doubtful accounts (in thousands):

Balance at
beginning
of period

Charged to
expense

Other

Deductions

Effect of
foreign
currency
exchange
rates

Balance at
end of
periodDecember 31, 2007

$
5,592


(216
)

1,179


(1,114
)



$
5,441December 31, 2008

$
5,441


3,378





(867
)

(127
)
$
7,825December 31, 2009

$
7,825


77





(2,446
)

52

$
5,508


During
the year ended December 31, 2007, $1.2 million of the increase in allowance was recorded as a result of the opening balance of Fiberxon; see Note 17 "Acquisition"for further discussion.
As of December 31, 2009, amounts due from each of Huawei Technologies Co., Ltd. and Telecom
Italia S.p.A. exceeded 10% of gross accounts receivables, and accounted for 26% of gross trade receivables on a combined basis. Huawei is a customer from the Optical Components group and
Telecom Italia is a customer from the Network Integration group. No customers that exceeded 10% of gross accounts receivables at December 31, 2008.

Inventories

Inventories are stated at the lower of cost or market and consist of material, labor and overhead. Cost is determined by the first in,
first out method. At each balance sheet date, MRV evaluates the ending inventories for excess quantities or obsolescence. This evaluation includes analysis of sales levels and projections of future
demand. Based on this evaluation, the Company maintains reserves for excess and obsolete inventory and the inventory balances are reported net of reserves. If future demand or market conditions are
less favorable than our projections, or if the market value falls below historical cost, a write down of inventory is made and reflected in cost of goods sold in the period the revision is made.

Net
inventories consisted of the following (in thousands):

December 31:

2009

2008Raw materials

$
30,523

$
36,997Work-in process


8,926


19,839Finished goods


22,354


27,424Total

$
61,803

$
84,260


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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

2. Summary of Significant Accounting Policies (Continued)

The
following table summarizes the changes in the inventory reserve (in thousands):

Description

Balance at
beginning
of period

Charged to
expense

Other

Deductions

Effect of
foreign
currency
exchange
rates

Balance at
end of
periodInventory reserveYear ended:December 31, 2007

$
30,086


2,886


2,957
(1)

(7,118
)



$
28,811December 31, 2008

$
28,811


7,577





(3,865
)

191

$
32,714December 31, 2009

$
32,714


1,886





(7,937
)

207

$
26,870


(1)Amounts
represent Fiberxon opening balances. See Note 17 "Acquisition" for further discussion of the
Fiberxon acquisition.


Property and Equipment

Property and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred and the costs of additions and
betterments that increase the useful lives of the assets are capitalized. When property or equipment are disposed of, the cost and related accumulated depreciation and amortization are removed from
the accounts and any gain or loss is included in other income, net, in the accompanying Statements of Operations.

Property
and equipment consisted of the following (in thousands):

December 31:

2009

2008Property and equipment, at cost:Machinery and equipment

$
54,080

$
53,775Computer hardware and software


18,636


18,970Leasehold improvements


8,484


8,671Furniture and fixtures


4,811


5,107Building


1,783


1,753Construction in progress


2,855


4,454Land


352


346Total property and equipment, at cost


91,001


93,076Less  accumulated depreciation and amortization


(67,278
)

(70,574
)Total

$
23,723

$
22,502


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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

2. Summary of Significant Accounting Policies (Continued)

Depreciation
is computed using the straight line method over the estimated useful lives of the related assets, as follows:

Life (years)Asset category

From

ToMachinery and equipment


1


10Computer hardware and software


1


8Leasehold improvements


1


12Furniture and fixtures


1


15Building


33


33


Depreciation
expense for the years ended December 31, 2009, 2008 and 2007 was $7.2 million $7.1 million and $5.8 million, respectively.

Goodwill and Other Intangibles

In accordance with ASC 350Intangibles  Goodwill and Other,goodwill and
intangible assets with indefinite lives are not amortized, but instead are measured for impairment at least annually, or when events indicate that impairment exists. MRV's annual impairment review
date is October 1. Reviews for impairment are performed at MRV's three reporting units: the Network Equipment group, the Network Integration group, and the Optical Components group. Intangible
assets that are determined to have definite lives are amortized over their useful lives; refer to Note 4,"Goodwill and Other Intangible Assets"for further information.

Investments

MRV accounts for investments in unconsolidated entities in accordance with ASC 323 Investments  Equity Method and Joint Ventures.Unconsolidated investments, for which the Company does not have the ability to
exercise significant influence over operating and financial policies, are accounted for under the cost method. The Company accounts for investments for which MRV has the ability to exercise
significant influence in terms of operating and financial policies, under the equity method. All unconsolidated investments in which the Company owns greater than 20% of the voting stock are accounted
for under the equity method. Cost and equity method investments totaled $2.5 million and $3.0 million as of December 31, 2009 and 2008, respectively, and are included in
non-current other assets in the accompanying Balance Sheets.

Under
the cost and equity method, a loss in value of an investment, which is deemed to be other than a temporary decline, is recognized. Evidence of a loss in value might include absence
of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity, which would justify the carrying amount of the investment.

Impairment of Long-Lived Assets

MRV evaluates its long-term tangible assets, such as property and equipment and other long-term assets, for
impairment whenever events or changes in circumstances indicate that the carrying value of

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

2. Summary of Significant Accounting Policies (Continued)

an
asset may be impaired. The Company takes into consideration events or changes such as product discontinuance, plant closures, product dispositions and history of operating losses or other changes
in circumstances to indicate that the carrying amount may not be recoverable. The carrying value of an asset is considered impaired when the anticipated undiscounted cash flow from such asset is less
than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value. Fair market value is determined using the anticipated cash
flows discounted at a rate based on our weighted average cost of capital, which represents the blended after-tax costs of debt and equity. In 2008, the Company recognized a
$2.6 million impairment charge related to fixed assets in its Source Photonics subsidiary included in the Optical Components segment. There was no impairment loss on tangible assets for the
years ended December 31, 2009 or 2007.

Fair Value of Financial Instruments

MRV's financial instruments, including cash and cash equivalents, restricted time deposits, short-term and
long-term marketable securities, accounts receivable, accounts payable, accrued liabilities and short-term debt obligations are carried at cost, which approximates their fair
market value. The fair value of long-term debt obligations is estimated based on current interest rates available for debt instruments with similar terms, degrees of risk and remaining
maturities. The carrying values of these obligations approximate their fair values.

ASC
820-10Fair Value Measurementsdefines fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. ASC 820-10 establishes a three-level hierarchy that prioritizes the use of observable inputs, such as quoted prices in active markets, and
minimizes the use of unobservable inputs, to measure fair value. All of MRV's assets and liabilities that are measured at fair value are measured using the unadjusted quoted prices in active markets
for identical assets or liabilities that are accessible at the measurement date. MRV adopted the provisions of ASC 820-10, effective January 1, 2008, for its financial assets and
liabilities and the adoption did not have a material impact on MRV's consolidated financial statements. In February 2008, the FASB delayed the effective date of ASC 820-10 to
January 1, 2009 with respect to the fair value
measurement requirements for non-financial assets and liabilities that are not re-measured on a recurring basis. Under this standard, fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date.

In
determining the fair value of its financial assets and liabilities, the Company uses various valuation approaches. ASC 820-10 establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available.

The
Company's available-for-sale securities are comprised of U.S. government agencies' obligations and corporate debt securities and are valued using quoted
market prices of recent transactions or are benchmarked to transactions of very similar securities which are considered Level 1 category items. There were no material
re-measurements to fair value during the year ended December 31, 2009 of financial assets and liabilities that are not measured at fair value on a recurring basis.

74

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

2. Summary of Significant Accounting Policies (Continued)

Liability for Severance Pay

Under the laws of certain foreign jurisdictions, MRV is obligated to make severance payments to employees in those foreign
jurisdictions on the basis of factors such as each employee's current salary and length of employment. The liability for severance pay is calculated as the amount that the Company would be required to
pay if every employee were to separate as of the end of the period, and is recorded as part of other long-term liabilities.

Cost of Goods Sold

Cost of goods sold includes material, depreciation on fixed assets used in the manufacturing process, shipping costs, direct labor and
overhead.

Product Development and Engineering

Product development and engineering costs are charged to expense as incurred.

Software Development Costs

In accordance with ASC 985-20Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed, development costs related to software products are expensed as incurred until the technological feasibility of the product has been established.
Technological feasibility occurs when a working model is completed. After technological feasibility is established, additional costs are capitalized.

MRV
believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility, and, accordingly, no software development costs
have been capitalized to date.

Sales and Marketing

Sales and marketing costs are charged to expense as incurred. For the years ended December 31, 2009, 2008 and 2007, advertising
and tradeshow costs were $1.9 million, $2.3 million and $2.2 million, respectively.

Income Taxes

Deferred income tax assets and liabilities are computed based on the temporary differences between the financial statement and income
tax bases of assets and liabilities using the statutory marginal income tax rate in effect for the years in which the differences are expected to reverse. Deferred income tax expenses or credits are
based on the changes in the
deferred income tax assets or liabilities from period to period. Penalties and interest, if imposed, related to income taxes would be included in the tax provision.

Net Income (Loss) Per Share

Basic net income (loss) per share attributable to MRV is computed using the weighted average number of shares of Common Stock
outstanding during the period. Diluted net income (loss) per share

75

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

2. Summary of Significant Accounting Policies (Continued)

attributable
to MRV is computed using the weighted average number of shares of Common Stock and dilutive potential shares of Common Stock outstanding during the period. Dilutive potential shares of
Common Stock primarily consist of employee stock options and warrants.

ASC
260-10Earnings per Share, requires that employee equity share options, nonvested shares and similar equity instruments
granted by MRV, be treated as potential shares of Common Stock outstanding in computing diluted net income per share. Diluted shares outstanding include the dilutive effect of
in-the-money options, calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the amount the employee must
pay for exercising stock options, the amount of compensation cost for future service not yet recognized, and the amount of income tax benefits that would be realized and recorded in additional
paid-in capital if the deduction for the award would reduce income taxes payable are assumed to be used to repurchase shares.

Income
from continuing operations, loss from discontinued operations, and net loss for the year ended December 31, 2009 resulted in the calculation per share amounts using basic
weighted average shares outstanding of 157.5 million and diluted weighted average shares outstanding of 157.7 million, including outstanding stock options of 0.1 million shares.
Income from continuing operations, loss from discontinued operations, and net loss for the years ended December 31, 2008 and 2007, resulted in the calculation of per share amounts using basic
and diluted weighted average shares outstanding of 157.3 million and 140.1 million shares, respectively. Outstanding stock options and warrants to purchase 1.1 million and
2.6 million shares for the years 2008 and 2007, respectively, were not included in the computation of diluted per share amounts because such stock options and warrants were considered
anti-dilutive.

Share-Based Compensation

As discussed in Note 14"Share-Based Compensation", the fair value of stock
options and warrants are determined using the Black-Scholes valuation model. The assumptions used in calculating the fair value of share-based payment awards represent MRV's best estimates. Those
estimates may be impacted by certain variables including stock price volatility, employee stock option exercise behaviors, additional stock option grants, estimates of forfeitures, and the related
income tax impact. See Note 14 for a further discussion on share-based compensation and assumptions used.

Recently Issued Accounting Standards

In June 2009, the FASB issued ASC 810-10 ("ASC 810-10") Consolidationsproviding (a) guidance on identifying variable interest
entities and determining whether such entities should be consolidated;
(b) general consolidation guidance; and (c) guidance on the consolidation of entities controlled by contract. The determination of whether a reporting entity is required to consolidate
another entity is based on, among other things, the other entity's purpose and design and the reporting entity's ability to direct the activities of the other entity that most significantly impacts
the other entity's economic performance. ASC 810-10 became effective for the Company beginning January 1, 2010. The adoption of ASC 810-10 did not have a material impact
on the Company's financial condition, results of operations or liquidity.

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

2. Summary of Significant Accounting Policies (Continued)

ASC
810-10-45Consolidations("ASC 810-10-45") requires entities to report noncontrolling
interests in subsidiaries as equity in the consolidated financial statements. The adoption of ASC 810-10-45 on January 1, 2009 resulted in a change in the presentation
of minority interests in subsidiaries, which were retrospectively reclassified to noncontrolling interests within equity. In addition, the Company reclassified prior period's income attributable to
noncontrolling interests in the Statement of Operations and statement of cash flows to conform to the current period's presentation.

In
May 2009, the FASB issued ASC 855-10Subsequent Events, which establishes general standards of accounting treatment and
disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, the topic focuses on the period after the balance
sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances
under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. MRV adopted ASC 855-10 on July 1, 2009; adoption did not result in a material impact on the Company's financial condition,
results of operations or liquidity.

In
June 2009, the FASB issued ASC 860Transfers and Servicingwhich requires more information about transfers of financial assets,
including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. ASC 860 is effective for interim and annual reporting periods
ending after November 15, 2009 and will be applied prospectively. MRV adopted the provisions of ASC 860 on January 1, 2010; the application of ASC 860 did not have a material impact on
the Company's financial condition, results of operations or liquidity.

In
October 2009, the FASB amended the guidance for ASC 605Revenue Recognition. The amendments establish a hierarchy for determining the
selling price of a deliverable in a multiple-element deliverable revenue arrangement. The selling price used for each deliverable will be based on vendor-specific objective evidence if available,
third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The
amendments also replace the term "fair value" in the revenue allocation guidance with "selling price" to clarify that the allocation of revenue is based on entity-specific assumptions rather than
assumptions of a marketplace participant. The amendments eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all
deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally on the basis of the selling price of each deliverable.
The amendments will become effective for the Company prospectively for revenue arrangements entered into or materially modified beginning January 1, 2011, with earlier adoption permitted. MRV
believes that the adoption of this new standard may have a material effect on its financial position and results of operations. However, the Company is not able to estimate the effect on its financial
position and results of operations.

Use of Estimates

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

77

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

3. Discontinued Operations

On December 24, 2009, the Company entered into an agreement to divest its 90% ownership of
EDSLan, a communication equipment distribution company located in Milan, Italy. The purchase agreement provided for the following: a) the payment from EDSLan to MRV of a dividend of two million
euro, b) the sale of the Company's shares of EDSLan for six million euro, c) payment by the buyers of 250,000 euros of the investment banker's fees, and d) the cancellation
of a put option requiring MRV to pay $917,000 to a member of EDSLan management to acquire 3.33% of EDSLan by December 31, 2009. The sale was completed on January 7, 2010. The Company has
reflected the results of this business as discontinued operations in the consolidated statement of operations for all years presented. EDSLan was historically recorded in the Network Integration
segment. The Company has recorded a loss of $6.9 million in 2009 to write down the assets of EDSLan to their net realizable value, including a goodwill impairment of $2.4 million.

Results
of discontinued operations consisted of (in thousands):

Years ended December 31:

2009

2008

2007Revenue

$
61,560

$
72,569

$
69,593Income before income taxes


2,038


2,217


2,862Provision for income taxes


927


1,215


1,343Income from operations of discontinued operations


1,111


1,002


1,519Write-down to estimated net realizable value


(6,883
)




Net income (loss) from discontinued operations, net of income taxes

$
(5,772
)
$
1,002

$
1,519


The
assets and liabilities of EDSLan are reflected as discontinued operations held for sale in the Consolidated Balance Sheets as of December 31, 2009 and 2008 and
consisted of (in thousands):

December 31:

2009

2008Cash and cash equivalents

$
4,323

$
19Accounts receivable, net


28,946


30,978Inventories


5,326


8,211Deferred income taxes


580


34Other current assets


465


767Total current assets


39,640


40,009Property and equipment, net





2,987Goodwill





2,397Other assets





45Total assets

$
39,640

$
45,438Short-term loans

$
9,583

$
8,371Accounts payable


13,153


14,100Accrued liabilities


2,517


2,355Deferred revenue


144


110Non-current liabilities


1,712


1,202Total liabilities

$
27,109

$
26,138


78

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

3. Discontinued Operations (Continued)

The
Company's Network Equipment group has sold product to EDSLan totaling $0.8 million, $1.3 million, and $1.1 million during 2009, 2008 2007,
respectively. In connection with the sale, the Company entered into a distribution agreement with EDSLan under which EDSLan will purchase a minimum of 2 million euros of the Company's products
over the next three years.

4. Goodwill and Other Intangible Assets

In accordance with ASC 350Intangibles  Goodwill and Other, goodwill and intangible assets with indefinite lives are measured
for impairment at least annually, or when events indicate that impairment exists. Intangible assets that are determined to have definite lives are amortized over their useful lives.

The
following table summarizes the changes in carrying value of goodwill (in thousands):

Gross

Accumulated
Impairment

NetAt January 1, 2008

$
423,706

$
(297,620
)
$
126,086Impairment





(100,250
)

(100,250
)Currency fluctuation


(1,196
)




(1,196
)At December 31, 2008


422,510


(397,870
)

24,640Currency fluctuation


1,067





1,067At December 31, 2009

$
423,577

$
(397,870
)
$
25,707


Goodwill
represents the excess of the purchase price of the net assets of acquired entities over the fair value of such assets. MRV performs an annual impairment test as of
October 1 each year. A
two-step test is used to identify the potential impairment and to measure the amount of the impairment, if any. The first step is based upon a comparison of the fair value of each of the
Company's reporting units, as defined, and the carrying value of each reporting unit's net assets, including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill is
considered not impaired; otherwise goodwill is impaired and the loss is measured by performing step two of the test. Under step two the fair value of goodwill, calculated as the difference between the
fair value of the reporting unit and the fair value of the assets of the reporting unit, is compared to the carrying value of goodwill. The excess of the carrying value of goodwill over the implied
fair value represents the amount of goodwill which is impaired.

MRV
used an Income Approach  Discounted Cash Flow model to calculate the estimated fair value of the reporting units. Discounted cash flows were compiled using cash
forecasts for each reporting unit, consistent with data obtained from industry analysts and internal consultations. The forecasts used a combination of past results, current and future economic
factors, the Company's strategy for the future, strategic growth by geographic operating units, as well as feedback received as to analysts' expectations and industry reports. Based upon this
two-step process, the Company determined that there was no goodwill impairment as of December 31, 2009.

The
Company determined that its Optical Components group failed the first step as of October 1, 2008. Upon further review and updates as of December 31, 2008, based on
declines in the market, the Networking Equipment and the Optical Components groups failed the first step impairment assessment. Based on the Company's step two analyses for these reporting units,
management determined that

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

4. Goodwill and Other Intangible Assets (Continued)

$93.9 million
and $6.4 million in goodwill impairment should be recorded related to the Optical Components group and the Networking Equipment group, respectively, as of
December 31, 2008.

Other
intangibles assets primarily consists of the intangibles assets identified as a result of the acquisition of Fiberxon on July 1, 2007. The following table summarizes other
intangible asset balances at December 31, 2009 (in thousands):

Gross
carrying
amount

Accumulated
amortization

Net
carrying
amountDeveloped technology

$
8,500

$
(3,864
)
$
4,636Customer backlog


600


(600
)

Customer relationships


4,800


(2,133
)

2,667Total other intangible assets

$
13,900

$
(6,597
)
$
7,303


The
following table summarized other intangible asset balances at December 31, 2008 (in thousands):

Gross
carrying
amount

Accumulated
amortization

Net
carrying
amountDeveloped technology

$
8,500

$
(2,318
)
$
6,182Customer backlog


600


(600
)

Customer relationships


4,800


(1,422
)

3,378Total other intangible assets

$
13,900

$
(4,340
)
$
9,560


Amortization
of other intangibles was $2.3 million, $2.4 million, and $1.9 million for the years ended December 31, 2009, 2008, and 2007, respectively; see
Note 17,"Acquisition"for further discussion. The following table summarizes the estimated amortization for other intangibles over their
remaining lives (in thousands):

Year ending December 31:2010

$
2,0792011


1,9012012


1,9012013


3562014


338Thereafter


728Total

$
7,303


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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

5. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

December 31:

2009

2008Payroll and related

$
18,670

$
20,934Professional fees


2,626


2,416Non-income taxes


3,281


363Product warranty


3,588


2,604Deferred rent


933


1,322Other


6,905


11,193Total

$
36,003

$
38,832


6. Income Taxes

The provision for income taxes consists of the following (in thousands):

Years ended December 31:

2009

2008

2007Current:Federal

$


$


$
State


67


18


Foreign


5,013


3,546


4,023Total current


5,080


3,564


4,023Deferred:Federal








State








Foreign


265


(1,628
)

(1,142
)Total deferred


265


(1,628
)

(1,142
)Total

$
5,345

$
1,936

$
2,881


The
income tax provision differs from the amount computed by applying the federal statutory income tax rate to income before income taxes as follows:

Years ended December 31:

2009

2008

2007Income tax provision (benefit, at statutory federal rate)


34
%

(34
)%

(34
)%State and local income taxes, net of federal income taxes effect


(2
)

1


(2
)Credits


(5
)

0


(7
)Permanent differences


21


30


14Fiberxon settlement


(79
)

0


0Foreign taxes at rates different than domestic rates


(10
)

2


(1
)Expired capital loss carry forwards


49


15


551Change in valuation allowance


48


(12
)

(505
)Total


56
%

2
%

16
%


81

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

6. Income Taxes (Continued)

The
components of deferred income taxes consist of the following (in thousands):

December 31:

2009

2008Allowance for doubtful accounts

$
567

$
937Inventory reserve


2,838


2,899Accrued liabilities


5,716


6,045Other


7,676


7,27816,797


17,159Valuation allowance


(13,580
)

(15,064
)Net current deferred income tax assets


3,217


2,095Net operating losses


101,461


95,977Tax credits


10,407


10,957Depreciation and amortization


(1,585
)

245Investments


(28
)

(28
)Capital loss carry forwards


0


5,776Other


(411
)

(1,335
)109,844


111,592Valuation allowance


(109,659
)

(110,112
)Net long-term deferred income tax asset


185


1,480Total

$
3,402

$
3,575


MRV
records valuation allowances against deferred income tax assets, when necessary, in accordance with ASC 740Accounting for Income
Taxes. Realization of deferred income tax assets, such as net operating loss ("NOL") carry forwards and income tax credits, is dependent on future taxable
earnings and is therefore uncertain. At least quarterly, the Company assesses the likelihood that the deferred income tax asset balance will be recovered from future taxable income. To the extent
management believes that recovery is unlikely, the Company establishes a valuation allowance against the deferred income tax asset, which increases income tax expense in the period such determination
is made. During 2009 the Company released the valuation allowance of $4.5 million related to capital loss carry forwards which expired. During 2009, the Company also released valuation
allowance of $2.3 million related to operations in certain foreign jurisdictions based on an assessment that future benefits will be realized through future expected profits. During 2009 and
2008, the Company recorded an additional valuation allowance totaling $5.0 million and
$4.3 million, respectively, against additional deferred income tax assets, principally domestic net operating losses and unrealized income tax credits due to a history of net losses. Although
realization is not assured, management believes it is more likely than not that the net deferred income tax assets, which relate primarily to profitable foreign subsidiaries, will be realized.

As
of December 31, 2009, MRV had federal, state, and foreign NOL carry forwards available of $228.6 million, $142.8 million and $96.7 million, respectively.
For the year ended December 31, 2009, federal net operating loss carry forwards increased by $32.0 million, and state net operating loss carry forwards decreased by $12.3 million.
For federal and state income tax purposes, the net operating

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

6. Income Taxes (Continued)

losses
are available to offset future taxable income through 2029. Certain foreign net operating loss carry forwards and tax credits are available indefinitely. As of December 31, 2009,
federal, state, and foreign income tax credits amounted to $6.8 million, $5.3 million, and $0.5 million, respectively. If not utilized, the federal and state income tax credits
will begin to expire in 2020 and 2012, respectively.

Under
the provisions of ASC 718Compensation  Stock Compensation, MRV recognizes tax benefits associated with the exercise of
stock options and vesting of restricted share units directly to stockholders' equity only when realized. Accordingly, deferred tax assets are not recognized for NOL carry forwards resulting from tax
benefits occurring from January 1, 2006 onward. A tax benefit occurs when the actual tax benefit realized upon an employee's disposition of a share-based award exceeds the deferred tax asset,
if any, associated with the award. At December 31, 2009, deferred tax assets do not include $0.8 million of loss carryovers from share-based compensation.

MRV
has not recorded U.S. income tax expense for foreign earnings that it has declared as indefinitely reinvested offshore, thus reducing its overall income tax expense. At
December 31, 2009, MRV had approximately $84.7 million of accumulated but undistributed earnings at certain foreign entities. The amount of earnings designated as indefinitely reinvested
offshore is based upon our expectations of the future cash needs of the Company's foreign entities. Income tax considerations are also a factor in determining the amount of foreign earnings to be
repatriated.

In
the event actual cash needs of the Company's U.S. entities exceeds current expectations or the actual cash needs of the Company's foreign entities are less than expected, the Company
may need to repatriate foreign earnings that have been designated as indefinitely reinvested offshore. This would result in recording additional U.S. income tax expense.

With
limited exception, the Company is no longer subject to U.S. federal audits by taxing authorities for years through 2005 and certain state, local and foreign income tax audits
through 2003 to 2005. The Company does not anticipate a significant change to the total amount of unrecognized tax
benefits within the next 12 months. No reserve was needed or recorded under ASC 740, as the topic relates to accounting for uncertainty in income taxes as of December 31, 2009.

The
Company recognized an income tax expense of $0.9 million, $1.2 million, and $1.3 million for the years ended December 31, 2009, 2008 and 2007,
respectively related to discontinued operations. At December 31, 2009 and 2008, net deferred tax assets amounted to $580,000 and $34,000, respectively, which are primarily composed of various
short term accruals and reserves.

7. Short-Term Debt

Short-term debt consists of secured and unsecured lines of credit, short-term loans and notes entered into with certain financial institutions. As of
December 31, 2009 and 2008, short-term debt totaled $66.1 million and $24.5 million, respectively. Certain assets of our subsidiaries including customer accounts
receivables have been pledged as collateral on these borrowings. Short-term debt bears interest ranging from 1.8% to 6.3%, and the weighted average interest rates were approximately 2.1%
and 5.5% as of December 31, 2009 and 2008, respectively. These obligations are incurred and settled in local currencies of the respective subsidiaries.

83

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

7. Short-Term Debt (Continued)

Short-term
debt at December 31, 2009 includes $9.7 million as a result of the sale of notes receivable with recourse. One of the major customers of the
Company's subsidiary Source Photonics settles its accounts receivable by issuing short term notes. Source Photonics sells the notes to its bank with or without recourse, depending on the type of the
note received. When the Company sells the notes with recourse, they are recorded in other current assets, and an
equivalent liability is recorded in short-term debt on the Company's balance sheet until the customer pays the holder of the note.

8. Derivative Financial Instruments

MRV, through certain foreign offices, periodically enters into foreign exchange and interest rate swap contracts. All derivatives are held for purposes other than trading. The fair
values of the derivatives are recorded in other current or non-current assets or liabilities in the accompanying Balance Sheets. No hedging relationship is designated for these derivatives
held and they are marked to market through earnings. The fair value of these derivative instruments is based on quoted market prices. Cash flows from financial instruments are recognized in the
Statements of Cash Flows in a manner consistent with the underlying transactions.

Foreign Exchange Contracts.Certain foreign offices of MRV enter into foreign exchange contracts in an effort to minimize the currency
exchange risk
related to purchase commitments denominated in foreign currencies. These contracts cover periods commensurate with known or expected exposures, generally less than 12 months, and are
principally unsecured foreign exchange contracts with carefully selected banks. The market risk exposure is essentially limited to risk related to currency rate movements. As of December 31,
2009, and 2008, there were no outstanding foreign currency contracts.

Interest Rate Swaps.A foreign office of MRV manages its debt portfolio by utilizing interest rate swaps to achieve an overall desired
position of
fixed and floating rates. As of December 31, 2009 and 2008 this foreign office did not have any interest rate swaps outstanding. One interest rate swap through the foreign office matured in
June 2008. Unrealized gains on these interest rate swaps for the year ended December 31, 2007 was $552,000, which have been recorded in interest expense.

9. 401(k) Plan

MRV sponsors a 401(k) plan (the "Plan") to provide retirement benefits for its U.S. employees. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides for
tax-deferred salary contributions for eligible employees. The Plan allows employees to contribute a portion of their annual compensation to the Plan on a pretax basis. The Company matches
pretax contributions up to 50% of the first 6% of eligible earnings contributed by employees. Matching contributions to the Plan totaled $870,000, $991,000, and $554,000 for the years ended
December 31, 2009, 2008 and 2007, respectively.

10. Convertible Debt

In June 2003, MRV completed the sale of $23.0 million principal amount of 5% convertible notes due in 2008 (the "2003 Notes"), to Deutsche Bank AG, London Branch, in a private
placement. Interest expense related to these 2003 Notes amounted to $751,000 for the year ended December 31, 2007. On August 10, 2007, MRV executed a Securities Exchange Agreement
exchanging the 2003 Notes for

84

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

10. Convertible Debt (Continued)

11.9 million
shares of MRV's Common Stock. As a result of executing the Securities Exchange Agreement, MRV's obligations related to the convertible notes, Securities Purchase Agreement, and the
Registration Rights Agreement terminated effective August 10, 2007.

MRV
recorded the $4.9 million cost of debt conversion in accordance with the guidance provided in ASC 470-20Induced Conversions of Convertible
Debt. The $4.9 million cost of debt conversion arose as a result of issuing 2.0 million additional shares of Common Stock in excess of the terms required by the
2003 Notes. Additional paid in capital of $28.0 million was recorded in the balance sheet and $48,000 in interest was recorded in interest expense for the year ended December 31, 2007.

11. Commitments and Contingencies

Lease Commitments

MRV leases all of its facilities and certain equipment under non-cancelable operating lease agreements expiring in various
years through 2017. Following are the aggregate minimum annual lease payments under leases in effect as of December 31, 2009 (in thousands):

Years ending December 31,2010

$
6,4542011


5,2542012


4,6692013


3,2392014


2,598Thereafter


8,668Total

$
30,882


Annual
rental expense under non-cancelable operating lease agreements for the years ended December 31, 2009, 2008 and 2007, was $7.6 million,
$8.5 million and $6.9 million, respectively.

Royalty Commitment

Through subsidiaries in Israel, MRV is obligated to the Office of the Chief Scientist of the Government of Israel ("Chief Scientist")
with respect to the government's participation in research and development expenses for certain products. The royalty to the Chief Scientist is recorded in cost of goods sold, and is calculated at a
rate of 2% to 5% of sales of such products developed with the participation, up to the cost of such participation. The remaining future obligation as of December 31, 2009 is $335,000, which is
contingent on generating sufficient sales of this selected product line. Amounts received from the participation of the Chief Scientist are offset against the related research and development expenses
incurred. MRV did not receive participation from the Chief Scientist for the years ended December 31, 2009, 2008 or 2007.

85

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

11. Commitments and Contingencies (Continued)

Litigation

MRV has accrued a liability for a potential deferred consideration payment related to the acquisition by MRV of Fiberxon in July 2007.
On March 25, 2009, MRV filed a complaint in the Superior Court of Los Angeles County, California, against former executives, directors and stockholders of Fiberxon seeking to recover damages in
connection with the sale of Fiberxon to MRV in excess of the $31.5 million of potential deferred consideration to be paid in connection with the acquisition of Fiberxon. On December 20,
2009, MRV entered into a Settlement Agreement and Release (the "Settlement Agreement"), with Yoram Snir, personally and in his capacity as Stockholders' Agent for the former stockholders of Fiberxon.
Pursuant to the Settlement Agreement, MRV has fully settled any obligation to pay the first $18 million that was reserved for set-off in the original merger agreement, and the
former Fiberxon stockholders, pursuant to the settlement, are entitled their pro rata portion of the $1.5 million settlement amount. Additionally, MRV agreed to pay up to $4.5 million to
settle claims relating to the remaining $13.5 million of potential deferred compensation. The second portion of the settlement is with the former stockholders directly, and to date,
approximately 33% of the $13.5 million remains in potential dispute. The Company recorded a $20.5 million gain during 2009 for the reduction of the deferred payment obligation resulting
from the settlement. Three former stockholders who owned approximately 12% of the former Fiberxon did not participate in the second portion of the settlement, and recently initiated litigation in
Beijing, PRC. Another former stockholder is anticipated to join the litigation. The Company and certain related co-defendants have not yet been served with this complaint, however a review
of its allegations indicates that it sets forth a claim for approximately $1.7 million which is these former stockholders pro rata amount of the $13.5 million portion of the potential
deferred compensation.

In
connection with the Company's past stock option grant practices, MRV and certain of its current and former directors and officers have been subjected to a number of ongoing
stockholder lawsuits. Between June 10, 2008 and August 15, 2008, five purported stockholder derivative and securities class action lawsuits were filed in the U.S. District Court in the
Central District of California and one derivative lawsuit was filed in the Superior Court of the State of California against the Company and certain of our current and former officers and directors.
The five lawsuits filed in the Central District of California were consolidated. Claims are asserted under Section 10(b) and 20(a), of the Exchange Act and Rule 10b-5
promulgated thereunder. The allegations set forth in the complaints are based on facts disclosed in MRV's press release of June 5, 2008, which stated that the Company's financial statements
could not be relied on due to the Company's historical stock option practices and related accounting. The complaints seek to recover from the defendants unspecified compensatory and punitive damages,
to require the Company to undertake reforms to corporate governance and internal control procedures, to obtain an accounting of stock option grants found to be improper, to impose a constructive trust
over stock options and proceeds derived therefrom, to disgorge from any of the defendants who received allegedly improper stock options the profits obtained therefrom, to rescind improperly priced
options and to recover costs of suit, including legal and other professional fees and other equitable relief. The plaintiffs in the securities class action lawsuits have tentatively agreed to a
settlement of $10 million, which the Company expects to be paid by its director and officer insurance policies. The parties to the securities class action lawsuits are preparing a stipulation
of settlement which they expect to submit to the Court on or before March 19, 2010. The Company and plaintiffs in the federal and California state derivative lawsuits have attended two
mediations but have not been successful in reaching a settlement on these claims. The Company has filed a motion to dismiss the federal derivative claims. This motion is fully

86

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

11. Commitments and Contingencies (Continued)

briefed
and set for a hearing in the District Court on March 15, 2010. The Company also plans to file a demurrer (e.g., motion to dismiss) in the California derivative lawsuit on
or before March 22, 2010. There is no hearing date yet set for this anticipated motion.

From
time to time, MRV has received notices from third parties alleging possible infringement of patents with respect to product features or manufacturing processes. Management believes
such notices are common in the communications industry because of the large number of patents that have been filed on these subjects. Our policy is to discuss these notices with the parties in an
effort to demonstrate that MRV's products and/or processes do not violate any patents. The Company has been involved in such discussions with International Business Machines, Alcatel-Lucent, Ortel
Communications, Ltd., Nortel Networks Corporation, Rockwell Automation, Inc., The Lemelson Foundation, Finisar Corporation and Apcon, Inc. in the past. In addition, Finisar filed
a lawsuit against MRV, Source Photonics and two other competitors in January 2010 alleging that each defendant's optical transceiver products infringe Finisar patents and seeking unspecified monetary
damages, up to treble the amount of actual damages, plus attorneys' fees, costs and interest.

MRV
has been named as a defendant in lawsuits involving matters that the Company considers routine to the nature of its business. Management is of the opinion that the ultimate
resolution of such matters will not have a material adverse effect on our business, operating results and financial condition.

12. Product Warranty and Indemnification

As of December 31, 2009 and 2008, MRV's product warranty liability recorded in accrued liabilities was $3.6 million and $2.6 million, respectively. The following
table summarizes the activity related to the product warranty liability (in thousands):

Balance at
beginning
of period

Charged to
expense

Other

Deductions

Balance at
end of
periodDecember 31, 2007

$
2,291


779


81
(1)

(604
)
$
2,547December 31, 2008

$
2,547


584





(526
)
$
2,605December 31, 2009

$
2,605


1,612





(629
)
$
3,588


(1)Amount
represents Fiberxon's opening balance. See Note 17, "Acquisition" for further discussion of
the Fiberxon acquisition.


MRV
accrues for warranty costs as part of its cost of goods sold based on associated material product costs, technical support labor costs and associated overhead. The products sold are
generally covered by a warranty for periods of one to two years.

In
the normal course of business to facilitate sales of its products, MRV indemnifies other parties, including customers, lessors and parties to other transactions with us, with respect
to certain matters. The Company has agreed to hold the other party harmless against losses arising from a breach of representation or covenants, or out of intellectual property infringement or other
claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim.

87

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

12. Product Warranty and Indemnification (Continued)

In
addition, the Company has indemnification obligations to its current and former officers, directors, employees and agents, as set forth in the Company's bylaws.

MRV
cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these obligations. Over the last decade, the Company has not
incurred any significant expense as a result of obligations of this type that were not otherwise covered by our insurance policies. Accordingly, the Company has not accrued any amounts for such
indemnification obligations. However, there can be no assurances that expenses will not be incurred under these indemnification provisions in the future.

13. Stockholders' Equity

Authorized Shares

On May 29, 2007, MRV stockholders approved an increase in the authorized number of $0.0017 par value Common Stock shares from
160 million to 320 million shares. The Company is authorized to issue up to 1 million shares of its $0.01 par value Preferred Stock.

Stock Repurchase Program

In 2002, MRV's Board of Directors approved a program to repurchase up to 7.0 million shares of MRV Common Stock. Through
December 31, 2009, the Company has repurchased a total of 1.4 million shares at a cost of $1.4 million under this program. The Company has not repurchased any shares during the
years ended December 31, 2009, 2008 or 2007.

Stock Options and Warrants

MRV's stock option and warrant plans provide for granting options and warrants to purchase shares of MRV's Common Stock, to employees,
directors and
non-employees performing consulting or advisory services for us. Under these plans, stock options and warrant exercise prices generally equal the fair market value of MRV's Common Stock at
the date of grant. The options and warrants generally vest over three to five years with expiration dates ranging from six and ten years from the date of grant depending on the plan. The Company's
2007 Omnibus Plan provides for granting nonstatutory options, and is at the discretion of the Board of Directors. As of December 31, 2009, 10.7 million options to purchase shares of
Common Stock were available for future awards under the plan. See Note 14"Share-Based Compensation"for additional discussion.

14. Share-Based Compensation

The Company recognizes compensation expense on awards that are ultimately expected to vest, under ASC 718Compensation  Stock
Compensation, using a straight-line amortization method based on the grant date estimated fair value method under ASC 718, reduced for estimated forfeitures. The

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

14. Share-Based Compensation (Continued)

following
table summarizes the impact on our results of operations of recording share-based compensation (in thousands):

Years ended December 31,

2009

2008

2007Cost of goods sold

$
207

$
370

$
469Product development and engineering


495


1,304


1,316Selling, general and administrative


1,518


2,574


3,347Total share-based compensation expense

$
2,220

$
4,248

$
5,132


The
amount of share-based compensation expense capitalized as part of inventory was insignificant for all periods presented. The weighted average fair values of awards granted during the
years ended December 31, 2009, 2008 and 2007 were $0.57, $0.88 and $1.64 per share, respectively. The total fair value of shares vesting during the years ended December 31, 2009, 2008
and 2007 was $2.5 million, $4.0 million and $3.8 million, respectively. For the years ended December 31, 2009, 2008, and 2007, the income tax benefits realized from
exercised stock options and similar awards was immaterial. As of December 31, 2009, the total unrecorded deferred share-based compensation balance for unvested shares, net of expected
forfeitures, was $2.2 million which is expected to be amortized over a weighted-average period of 1.7 years.

Valuation Assumptions

MRV uses the Black-Scholes option pricing model to estimate the fair value of share-based awards. The Black-Scholes model requires the
use of subjective assumptions, including the option's expected life and the underlying stock price volatility. The Company assumes that future volatility approximates historical volatility. The
following weighted average assumptions were used for estimating the fair value of options granted during each of the following years:

2009

2008

2007Risk-free interest rate


2.2
%

3.2
%

4.8
%Dividend yield


0
%

0
%

0
%Volatility


95.4
%

67.7
%

74.4
%Expected life


5.0 yrs


5.0 yrs


4.9 yrs


89

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

14. Share-Based Compensation (Continued)

Share-Based Payment Award Activity

The following table summarizes option share-based payment award activity for the two-year period ended December 31,
2009 (in thousands, except per share amounts):

Shares
under option

Weighted average
exercise price

Weighted average
remaining contractual term
(in years)

Aggregate
intrinsic valueOutstanding, January 1, 2008


14,722

$
2.74Granted


1,339

$
1.50Exercised


(320
)
$
0.49Cancelled and forfeited


(1,161
)
$
3.02Outstanding, December 31,2008


14,580

$
2.66Granted


235

$
0.78Exercised


(171
)
$
0.28Cancelled and forfeited


(1,133
)
$
2.51Outstanding, December 31, 2009


13,511

$
2.67


5.40

$
88Vested and expected to vest, December 31, 2009


13,511

$
2.67


5.40

$
88Exercisable, December 31, 2009


10,906

$
2.82


4.86

$
88


The
aggregate intrinsic value represents the total pre-tax intrinsic value, based on MRV's closing stock price of $0.71 at December 31, 2009, which would have been
received by award holders had all award holders exercised in-the-money awards as of that date.

The
following table summarizes significant ranges of outstanding and exercisable options at December 31, 2009 (in thousands, except years and per-share amounts):

Range of Exercise prices

Options
outstanding
as of
December 31,
2009

Weighted
average
remaining
contractual
life (years)

Weighted
average
exercise
price

Options
exercisable
as of
December 31,
2009

Weighted
average
exercise
price of
exercisable
options$0.27 - $1.10


2,019


3.73

$
0.86


1,701

$
0.87$1.11 - $1.49


1,573


6.91

$
1.39


735

$
1.28$1.50 - $2.13


1,366


5.45

$
1.93


1,295

$
1.95$2.14 - $2.48


1,445


6.66

$
2.40


1,167

$
2.40$2.49 - $2.63


1,889


7.32

$
2.62


943

$
2.62$2.64 - $2.99


1,746


4.57

$
2.84


1,736

$
2.84$3.00 - $3.43


1,628


4.69

$
3.21


1,523

$
3.20$3.44 - $6.98


1,691


4.66

$
4.07


1,652

$
4.08$6.99 - $10.47


5


1.32

$
10.47


5

$
10.47$10.48 - $27.91


149


0.87

$
26.30


149

$
26.30$0.27 - $27.91


13,511


5.40

$
2.67


10,906

$
2.82


90

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

14. Share-Based Compensation (Continued)

The
following table summarizes certain stock option exercise activity during the periods presented (in thousands):

2009

2008

2007Total intrinsic value of stock options exercised

$
40

$
311

$
2,247Cash received from stock options exercised

$
47

$
157

$
2,059


15. Segment Reporting and Geographical Information

MRV divides and operates its business based on three segments: the Network Equipment group; the Network Integration group; and the Optical Components group. The Network Equipment group
designs, manufactures and distributes optical networking solutions and Internet infrastructure products. The Network Integration group provides value-added integration and support services for
customers' networks. The Optical Components group designs, manufactures and distributes optical components and optical subsystems.

The
accounting policies of the segments are the same as those described in the summary of significant accounting polices in Note 2. MRV evaluates segment performance based on
revenues, gross profit and operating income of each segment. As such, there are no separately identified segment statements of operations data below operating income.

The
following summarizes business segment revenues, including intersegment revenues (in thousands):

Years ended December 31:

2009

2008

2007Network Equipment group

$
104,488

$
125,556

$
105,357Network Integration group


143,345


153,278


144,678Optical Components group


210,626


201,588


144,860All others


310


241


114458,769


480,663


395,009Intersegment adjustment


(10,649
)

(13,842
)

(14,976
)Total

$
448,120

$
466,821

$
380,033


Network
Equipment revenue primarily consists of Metro Ethernet equipment, optical transport equipment, out-of-band network equipment, defense and aerospace
network applications, the related service revenue and fiber optic components sold as part of system solutions. Network Integration revenue primarily consists of value-added integration and support
service revenue, related third-party product sales (including third-party product sales through distribution) and fiber optic components sold as part of system solutions. Optical Components revenue
primarily consists of fiber optic components, such as those used in FTTP applications, fiber optic transceivers, discrete lasers and LEDs, products that are generally not sold as part of our network
equipment or network integration solutions.

One
customer generated $43.1 million revenues, or 10% of total revenues for the year ended December 31, 2009. Another customer generated $38.8 million revenues, or
10% of total revenues for the year ended December 31, 2007. Both customers contributed to the Optical Components group

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

15. Segment Reporting and Geographical Information (Continued)

revenues
for the respective periods. No single customer accounted for 10% or more of total revenues for the year ended December 31, 2008.

As
of December 31, 2009, amounts due from two customers exceeded 10% of gross accounts receivables, and accounted for 26% of gross trade receivables on a combined basis; one
customer from the Optical Components group and the other customer from the Network Integration group. There were no single customers that exceeded 10% of gross accounts receivables at
December 31, 2008.

The
following table summarizes segment revenues, excluding intersegment sales, by geographical region (in thousands):

Years ended December 31:

2009

2008

2007Network Equipment group:United States.

$
49,383

$
57,979

$
45,593Americas, excluding the United States.


697


653


6,017Europe


39,500


46,055


35,130Asia Pacific


7,594


11,244


7,914Other regions


283


1,048


72Total Network Equipment


97,457


116,979


94,726Network Integration group:Europe


143,345


153,278


144,530Total Network Integration


143,345


153,278


144,530Optical Components group:United States.


83,594


114,581


86,956Americas, excluding the United States


2,289


1,175


3,956Europe


13,131


17,148


10,661Asia Pacific


108,253


63,642


39,174Other regions


11


8


23Total Optical Components


207,278


196,554


140,770All others:


40


10


7Total

$
448,120

$
466,821

$
380,033


The
following table is a summary of long-lived assets, consisting of property and equipment, be geographic region (in thousands):

December 31:

2009

2008Americas

$
5,079

$
6,212Europe


5,961


5,293Asia Pacific


12,683


10,997Total

$
23,723

$
22,502


92

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

15. Segment Reporting and Geographical Information (Continued)

The
following table provides selected Statements of Operations information by business segment (in thousands):

Years ended December 31:

2009

2008

2007Gross profitNetwork Equipment group

$
56,353

$
67,071

$
51,712Network Integration group


40,933


38,301


33,455Optical Components group


28,184


29,437


28,133All others


190


143


68125,660


134,952


113,368Corporate unallocated and intersegment adjustments(1)


154


116


(702
)Total

$
125,814

$
135,068

$
112,666Depreciation expenseNetwork Equipment group

$
1,681

$
1,653

$
1,490Network Integration group


284


286


257Optical Components group


5,184


5,088


3,994All others


11


12


22Corporate


51


44


37Total

$
7,211

$
7,083

$
5,800Operating income (loss)Network Equipment group

$
(1,845
)
$
(1,421
)
$
(8,276
)Network Integration group


13,821


6,396


6,437Optical Components group


(8,759
)

(110,462
)

(1,548
)All others


(1,453
)

(1,777
)

(1,529
)1,764


(107,264
)

(4,916
)Corporate unallocated operating loss and adjustments(1)


(14,564
)

(15,693
)

(8,612
)Total

$
(12,800
)
$
(122,957
)
$
(13,528
)


(1)Adjustments
represent the elimination of intersegment revenue and profit in inventory


93

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

15. Segment Reporting and Geographical Information (Continued)




The
following table provides selected balance sheet information by business segment (in thousands):

December 31:

2009

2008Additions to fixed assetsNetwork Equipment group

$
1,332

$
1,416Network Integration group


1,323


714Optical Components group


5,983


8,080Corporate


241


381Discontinued operations


336


351Total

$
9,215

$
10,942Total assetsNetwork Equipment group

$
71,893

$
78,411Network Integration group


100,308


94,490Optical Components group


155,578


133,176All others


796


17,541Corporate and intersegment eliminations


29,539


23,830Discontinued operations held for sale


39,640


45,438Total

$
397,754

$
392,886GoodwillNetwork Equipment

$
11,628

$
11,428Network Integration


14,079


13,212Total

$
25,707

$
24,640


16. Other Income, Net

Following is a summary of other income, net (in thousands):

Years ended December 31:

2009

2008

2007Interest income

$
633

$
1,872

$
4,619Gain (loss) on foreign currency transactions


(489
)

189


(1,389
)Other, net


1,054


(358
)

561Total

$
1,198

$
1,703

$
3,791


94

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

17. Acquisition

On July 1, 2007, MRV acquired Fiberxon Inc., a privately-held Delaware corporation. Fiberxon
developed and manufactured modular optical link interfaces for telecommunication systems and networks, with principal manufacturing operations in PRC. MRV acquired Fiberxon to add an established,
vertically integrated manufacturing, sales and distribution model in PRC and strengthen the Company's Optical Component group's positioning in Asia-Pacific, Europe and North America.
Source Photonics is a wholly-owned subsidiary of MRV, and MRV combined Fiberxon's business with that of Source Photonics. In exchange for the outstanding capital stock of Fiberxon, MRV agreed to pay
consideration composed of (i) approximately $17.7 million in cash, (ii) approximately 18.4 million shares of MRV's Common Stock (excluding 2.8 million shares of
MRV's Common Stock underlying the assumption of Fiberxon outstanding stock options), and (iii) an obligation to pay an additional amount of approximately $31.5 million in cash or shares
of MRV's Common Stock, or a combination thereof, if Source Photonics did not complete an initial public offering ("IPO") of its Common Stock by March 27, 2009. In such event and in lieu of
$31.5 million, the merger agreement called for payment of an amount equal to 9.0% of the product obtained by multiplying (x) the price per share to the public in a Source Photonics IPO,
less the discount provided to the underwriters, by (y) the total number of shares of Source Photonics common stock outstanding immediately prior to the effectiveness of the agreement between
Source Photonics and the underwriters of a Source Photonics IPO. The merger agreement also allowed for set-off rights against the deferred consideration payment, and an amendment to the
merger agreement entered into prior to closing, among other things, increased to $18.0 million the set-off rights available against payment of the deferred consideration payment.
Source Photonics did not complete an IPO within the 18-month period which was extended by the amendment and the disputed deferred consideration payment matured in March 2009. In December
2009, MRV entered into a Settlement Agreement regarding the potential deferred consideration which resolved a majority of the outstanding potential liability. The Company has recorded a gain of
$20.5 million as a result of the settlement representing the difference between the settlement amount, and the previously accrued estimated potential deferred consideration. As of
December 31, 2009, $8.0 million of accrued potential deferred consideration remained, which consisted of payments yet to be made under the Settlement Agreement and unresolved liability
with non-settling former stockholders. See Note 11 "Litigation"for additional discussion.

MRV
accounted for the acquisition as a purchase in accordance with the guidance in ASC 805-10Business Combinations, and the
net tangible assets acquired were recorded at fair value on the acquisition date.

The
total purchase price of $134.9 million was composed of (in thousands):

Cash

$
17,651MRV Common Stock issued


72,777MRV stock options exchanged for Fiberxon stock options


7,604Less: fair value of unvested MRV stock options exchanged for Fiberxon stock options


(1,598
)Bonus payment to close


3,000Deferred consideration


31,500Less: recoverable costs


(939
)Legal, professional and banker's fees related to acquisition cost


4,926Total

$
134,921


95

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

17. Acquisition (Continued)

MRV
and Fiberxon's stockholders agreed to share the costs incurred following the closing to reconstruct Fiberxon's prior years' financial statements, and compilation and audit services
incurred to produce audited financial statements in the form and content required under SEC rules. MRV paid for all of the costs on behalf of both entities and deducted the $939,000 portion
attributable to the Fiberxon stockholders' responsibility, from the purchase price per the amendment to the merger agreement on June 26, 2007.

The
Company believes the methodology and estimates used to value the net tangible assets and intangible assets are reasonable. The following table shows the allocation of purchase price
(in thousands):

Net tangible assets acquired

$
27,142Intangible assets acquired:Developed technology


8,500Customer backlog


600Customer relationships


4,800Goodwill


93,879Total purchase price

$
134,921


The
following summarizes the changes in assets and liabilities resulting from the purchase price allocation in connection with the acquisition of Fiberxon, for which adjustment was made
in the Consolidated Statements of Cash Flows (in thousands):

2007Tangible assets

$
61,252Intangible assets


13,900Goodwill


93,879Assumed liabilities


(34,110
)Total purchase price

$
134,921


The
following table summarizes the components of the net tangible assets acquired at fair value (in thousands):

Accounts receivable

$
19,410Inventories


17,896Property and equipment


9,033Other assets and liabilities, net


(19,197
)Net tangible assets acquired

$
27,142


A
portion of the purchase price was allocated to developed product technology. This was identified and valued through an analysis of data provided by Fiberxon concerning existing
products, target markets, expected income generating ability and associated risks. Developed product technology represents proprietary know-how that is technologically feasible. The
primary valuation technique employed was the income approach, which is based on the premise that the value of an asset is based on the present value of future cash flows.

96

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

17. Acquisition (Continued)

The
acquired intangible assets are amortized over their estimated useful lives using the methods presented below:

Developed technology

Straight line method

5.5 yearsCustomer relationships

Accelerated method

10 yearsCustomer backlog

Straight line method

6 months


Goodwill,
which represents the excess of the purchase price over the fair value of tangible and identified intangible assets acquired, reflects the competitive advantages that MRV
expects to realize primarily from Fiberxon's standing in the Chinese telecom industry market. Goodwill has been assigned to the Optical Components segment.

In
connection with the purchase price allocation, the Company recorded a $2.2 million net deferred tax liability. The deferred tax liability arose as a result of the
$13.9 million value assigned to identifiable intangible assets, offset by deferred tax assets related to accruals and reserves.

The
following unaudited pro forma condensed combined financial data below is based on current and historical unaudited financial statements of MRV and Fiberxon after giving effect to
MRV's acquisition of Fiberxon and the assumptions and adjustments described in this note. For the year ended December 31, 2007, Fiberxon's unaudited statement of operations data reflects its
results of operations for the six months period ended June 30, 2007. Fiberxon's results of operations for the six months ended December 31, 2007 are included in MRV's consolidated
financial statements subsequent to the acquisition date of July 1, 2007. The unaudited pro forma condensed combined financial data of MRV and Fiberxon reflect results of operations as though
the companies had been combined as of the beginning of the period presented (in thousands, except per share data):

Year ended December 31:

2007Pro forma net revenue

$
487,701Pro forma net loss

$
(20,487
)Pro forma net loss per share (basic)

$
(0.15
)Pro forma net loss per share (diluted)

$
(0.15
)


The
unaudited pro forma condensed combined financial data is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if
the merger had taken place at the beginning of the period presented.

18. Sale of Investments in Unconsolidated Entities

On December 14, 2009, Broadcom Corporation completed the acquisition of Dune Networks, a privately held company in which MRV held a $0.5 million cost based investment. MRV
recorded a $3.5 million gain on sale of the investment for the year ended December 31, 2009. A $4.0 million receivable for the cash proceeds is reflected in other current assets
at December 31, 2009. MRV received the cash proceeds from the sale, less amounts retained in escrow, in the first quarter of 2010.

97

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

19. Quarterly Financial Data (Unaudited)

The following tables summarize MRV's Statements of Operations (in thousands):

Three months ended:

March 31,
2009

June 30,
2009

September 30,
2009

December 31,
2009Revenue

$
103,600

$
104,943

$
115,131

$
124,446Cost of goods sold


83,021


74,927


80,568


83,790Gross profit


20,579


30,016


34,563


40,656Operating expenses:Product development and engineering


9,145


8,433


9,261


9,896Selling, general and administrative


25,410


22,874


22,598


28,740Amortization of intangibles


564


564


564


565Total operating expenses


35,119


31,871


32,423


39,201Operating income (loss)


(14,540
)

(1,855
)

2,140


1,455Interest expense


(851
)

(746
)

(671
)

(690
)Gain from settlement of deferred consideration obligation











20,524Gain from sales of investments in unconsolidated entities











3,488Other income, net


2,396


(1,260
)

(203
)

265Income (loss) from continuing operations before income taxes


(12,995
)

(3,861
)

1,266


25,042Provision for income taxes


1,867


1,557


1,867


54Net income (loss) from continuing operations


(14,862
)

(5,418
)

(601
)

24,988Gain (loss) from discontinued operations


71


267


402


(6,512
)Net income (loss)

$
(14,791
)
$
(5,151
)
$
(199
)
$
18,476Less:Net income (loss) from continuing operations attributable to noncontrolling interests


549


569


316


323Net income (loss) from discontinued operations attributable to noncontrolling interests


(2
)

12


22


15Net income (loss) attributable to MRV

$
(15,338
)
$
(5,732
)
$
(537
)
$
18,138Net income (loss) from continuing operations attributable to MRV

$
(15,411
)
$
(5,987
)
$
(917
)
$
24,665Net income (loss) from discontinued operations attributable to MRV

$
73

$
255

$
380

$
(6,527
)Net income (loss) attributable to MRV per share  basic:From continuing operations

$
(0.10
)
$
(0.04
)
$
(0.01
)
$
0.16From discontinued operations










$
(0.04
)Net income (loss) attributable to MRV per share  basic(1)

$
(0.10
)
$
(0.04
)



$
0.12Net income (loss) attributable to MRV per share  diluted:From continuing operations

$
(0.10
)
$
(0.04
)
$
(0.01
)
$
0.16From discontinued operations










$
(0.04
)Net income (loss) attributable to MRV per share  diluted(1)

$
(0.10
)
$
(0.04
)



$
0.11Basic weighted average shares


157,447


157,530


157,584


157,608Diluted weighted average shares


157,447


157,530


157,584


157,987


98

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

19. Quarterly Financial Data (Unaudited) (Continued)

Three months ended:

March 31,
2008

June 30,
2008

September 30,
2008

December 31,
2008Revenue

$
107,376

$
127,848

$
113,515

$
118,082Cost of goods sold


75,564


84,286


83,778


88,125Gross profit


31,812


43,562


29,737


29,957Operating expenses:Product development and engineering


10,587


9,903


9,616


8,640Selling, general and administrative


25,258


28,373


32,194


30,770Impairment of goodwill and other intangibles











100,250Amortization of intangibles


653


653


564


564Total operating expenses


36,498


38,929


42,374


140,224Operating income (loss)


(4,686
)

4,633


(12,637
)

(110,267
)Interest expense


(779
)

(894
)

(998
)

(826
)Gain from sales of investments in unconsolidated entities











2,580Other income, net


789


533


2,076


(1,695
)Income (loss) from continuing operations before income taxes


(4,676
)

4,272


(11,559
)

(110,208
)Provision for income taxes


1,151


1,862


(1,503
)

426Net income (loss) from continuing operations


(5,827
)

2,410


(10,056
)

(110,634
)Gain (loss) from discontinued operations


149


208


308


337Net income (loss)

$
(5,678
)
$
2,618

$
(9,748
)
$
(110,297
)Less:Net income (loss) from continuing operations attributable to noncontrolling interests


(491
)

384


84


63Net income (loss) from discontinued operations attributable to noncontrolling interests


(9
)

13


25


30Net income (loss) attributable to MRV

$
(5,178
)
$
2,221

$
(9,857
)
$
(110,390
)Net income (loss) from continuing operations attributable to MRV

$
(5,336
)
$
2,026

$
(10,140
)
$
(110,697
)Net income (loss) from discontinued operations attributable to MRV

$
158

$
195

$
283

$
307Net income (loss) attributable to MRV per share  basic:From continuing operations

$
(0.03
)
$
0.01

$
(0.06
)
$
(0.70
)From discontinued operations











Net income (loss) attributable to MRV per share  basic(1)

$
(0.03
)
$
0.01

$
(0.06
)
$
(0.70
)Net income (loss) attributable to MRV per share  diluted:From continuing operations

$
(0.03
)
$
0.01

$
(0.06
)
$
(0.70
)From discontinued operations











Net income (loss) attributable to MRV per share  diluted(1)

$
(0.03
)
$
0.01

$
(0.06
)
$
(0.70
)Basic weighted average shares


157,152


157,281


157,418


157,438Diluted weighted average shares


157,152


160,037


157,418


157,438


---

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2009

20. Noncontrolling Interests

ASC Topic 810-10-45Consolidation("ASC 810") requires entities to report noncontrolling interests in subsidiaries
as equity in the consolidated financial statements. The adoption of ASC 810 by the Company on January 1, 2009 resulted in a change in the presentation of minority interests in subsidiaries,
which were retrospectively reclassified to "noncontrolling interests" within equity. In addition, the Company reclassified prior period's income attributable to noncontrolling interests in the
Statement of Operations and statement of Cash Flows to conform to the current presentation.

In
June 2009, the Company completed the purchase of 833,333 shares of Series A Preferred Stock and 12.8 million shares of common stock of its majority-owned subsidiary
Charlotte's Networks, Inc. The total purchase price was $1.5 million. After the purchase, MRV owned all of the preferred stock and 99.7% of the common stock of Charlotte's Networks. On
August 4, 2009 the subsidiary was merged into MRV. The $1.0 million difference between the purchase price and the carrying amount of the noncontrolling interest was recognized as a
reduction of MRV equity.

100

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Table of Contents

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.    Controls and Procedures.

Disclosure Controls and Procedures

We evaluated the design and operation of the effectiveness of our disclosure controls and procedures as of December 31, 2009,
under the supervision and with the participation of our management, pursuant to Rule 13a-15(b) of the Exchange Act. Based on the remedial steps taken in mitigating risks relating to
the 2008 identified material weaknesses, and the ability to sustain improvements relating to disclosure and financial reporting management concluded that our disclosure controls and procedures as
defined in Rule 13a-15(e) as of December 31, 2009 were effective.

To
further address any remaining risks identified in our internal control over financial reporting, the Company performed additional manual procedures and analysis and other
post-closing procedures in order to prepare the audited consolidated financial statements included in this Annual Report. Notwithstanding the remaining remedial efforts to improve
deficiencies in our internal control over financial reporting as of December 31, 2009, we believe that the audited consolidated financial statements contained in this Annual Report present our
financial condition, results of operations, and cash flows as of the dates, and for the periods, presented, in conformity with generally accepted accounting principles in the United States ("GAAP").

Management's
Report on Internal Control over Financial Reporting

Management
is responsible for establishing and maintaining adequate internal control over financial reporting, pursuant to Rule 13a-15(c) of the Exchange Act. This
system is intended to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

A
company's internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of the company's assets that could have a material affect on the financial statements.

In
accordance with the internal control reporting requirements of the SEC, our management completed an assessment of the effectiveness of our internal control over financial reporting as
of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The COSO framework
summarizes each of the components of a company's internal control system, including the: (i) control environment; (ii) risk assessment; (iii) information and communication; and
(iv) monitoring, as well as a company's control activities. Based on this assessment, our management has determined that our internal control over financial reporting as of December 31,
2009 was effective.

Management's
continual efforts to improve the design and operating effectiveness of our internal controls over financial reporting have led to the conclusion that deficiencies and
significant deficiencies identified that aggregated and resulted in 2008 material weaknesses in the control environment have been remediated and remaining deficiencies do not rise to the level of a
material weakness. Management has not identified any material weaknesses resulting from design and/or operating effectiveness in the internal control system. A "material weakness" is defined as a
significant deficiency,

101

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Table of Contents

or
combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

The
effectiveness of our internal control over financial reporting as of December 31, 2009, has been audited by Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report which is included herein.

Changes
in Internal Control over Financial Reporting and Remediation of the Material Weaknesses

Based
on the additional procedures performed as part of the Company's ongoing remediation of its financial controls, management has concluded that effective improvements were made to the
internal control system to mitigate the material weaknesses identified in 2008. Since December 31, 2008, we have implemented the following remediation measures to address the material
weaknesses that existed as of that date:



Inherent Limitation on the Effectiveness of Internal Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and
procedures or our internal controls will prevent all errors and all misconduct. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of misconduct, if any, within
the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the individual acts of a single person, by collusion of two or more people, or by management override of the control. The design
of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because
of the inherent limitations in a cost-effective control system, misstatements due to error or misconduct may occur and not be detected.

102

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Table of Contents

Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders of MRV Communications, Inc.

We
have audited MRV Communications, Inc.'s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control
 Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). MRV Communications Inc.'s management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of
Management on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, MRV Communications, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009 based on the COSO
criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of MRV
Communications, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 2009, and our report dated March 16, 2010, expressed an unqualified opinion thereon.



Los
Angeles, California
March 16, 2010

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Table of Contents

Item 9B.    Other Information.

None.

PART III

Item 10.    Directors, Executive Officers and Corporate Governance.

The information required by this Item under the heading "Directors, Executive Officers and Corporate Governance" is incorporated herein
by reference from information to be contained in the Company's 2010 Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year to which this report relates.

Item 11.    Executive Compensation.

The information required by this Item under the heading "Executive Compensation" is incorporated herein by reference from information
to be contained in the Company's 2010 Proxy Statement.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this Item under the heading "Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters" is incorporated herein by reference from information to be contained in the Company's 2010 Proxy Statement.

Item 13.    Certain Relationships and Related Transactions, and Director Independence.

The information required by this Item under the heading "Certain Relationships and Related Transactions, and Director Independence" is
incorporated herein by
reference from information to be contained in the Company's 2010 Proxy Statement.

Item 14.    Principal Accounting Fees and Services.

The information required by this Item under the heading "Principal Accounting Fees and Services" is incorporated herein by reference
from information to be contained in the Company's 2010 Proxy Statement.

PART IV

Item 15.    Exhibits and Financial Statement Schedules.



Form 10-K
Page No.Report of Ernst & Young LLP, Independent Registered Public Accounting
Firm

62Consolidated Financial Statements:Statements of Operations for the years ended December 31, 2009, 2008 and 2007

63Balance Sheets as of December 31, 2009 and 2008

64Statements of Stockholders' Equity for the years ended December 31, 2009, 2008 and 2007

65Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007

66Notes to Financial Statements

67


104

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Table of Contents



Information
required to be set forth herein is shown in the financial statements or notes thereto.

Exhibit
No.

Description3.1

Amended and Restated Certificate of Incorporation of MRV Communications, Inc. (incorporated by reference from Exhibit 4.1 of Form 10-Q for the quarter ended June 30, 2007)3.2

Bylaws of MRV Communications, Inc., as amended through October 5, 2009 (incorporated by reference from Exhibit 3.1 of Form 8-K filed on October 6, 2009)4.1

Specimen certificate of Common Stock (incorporated by reference to Exhibit 4.5 of Form S-3 (File No. 333-64017) filed on September 9, 1998)10.1

Key Employee Agreement between MRV and Noam Lotan, dated as of March 23, 1992 (incorporated by reference from Exhibit 10b(1) of Form S-1 (File No. 33-48003) filed on May 27,
1992)10.2

Letter dated August 10, 1992, amending Key Employee Agreement between MRV and Noam Lotan (incorporated by reference from Exhibit 10b(1)1 Form S-1 (File No. 33-48003) filed on
August 14, 1992)10.3

Letter dated November 16, 1994, amending Key Employee Agreement between MRV and Noam Lotan (incorporated by reference from Exhibit 10b(1)2 of Form S-1 (File No. 33-86516) filed on
November 18, 1994)10.4

Key Employee Agreement between MRV and Shlomo Margalit, dated as of March 23, 1992 (incorporated by reference from Exhibit 10b(3) of Form S-1 (File No. 33-48003))10.5

Letter dated August 10, 1992, amending Key Employee Agreement between MRV and Shlomo Margalit (incorporated by reference from Exhibit 10b(3)1 of Form S-1 (File No. 33-48003) filed
on August 14, 1992)10.6

Form of Letter dated November 16, 1994, amending Key Employee Agreement between MRV and Shlomo Margalit (incorporated by reference from Exhibit 10b(3)2 of Form S-1 (File
No. 33-86516) filed on November 18, 1994)10.7

Employment Agreement, July 21, 2009, between MRV Communications, Inc. and Christiaan King (incorporated by reference from Exhibit 10.2 of Form 8-K filed on July 27,
2009)10.8

Secondment Agreement, dated as of July 21, 2009, by and between MRV Communications (Networks), Ltd., MRV Communications, Inc. and Guy Avidan (incorporated by reference from
Exhibit 10.1 of Form 8-K filed on July 27, 2009)10.9

2007 Omnibus Incentive Plan (incorporated by reference from Appendix A of Schedule 14A filed on April 27, 2007)10.10

Form of Notice of Grant and Agreement for Non-Qualified Stock Option Awards for employees under the 2007 Omnibus Incentive Plan (incorporated by reference from Exhibit 10.8 of Form 10-K filed
on October 8, 2009)10.11

Form of Notice of Grant and Agreement for Non-Qualified Stock Option Awards for directors under the 2007 Omnibus Incentive Plan (incorporated by reference from Exhibit 10.9 of Form 10-K filed
on October 8, 2009)


105

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Table of Contents

Exhibit
No.

Description10.12

Non-Director and Non-Executive Officer Consolidated Long-Term Stock Incentive Plan (incorporated by reference from Exhibit 4.1 of Form S-8 (file no. 333-107109) filed on July 17,
2003)10.13

Form of Non-Director and Non-Executive Officer Consolidated Long-Term Stock Incentive Plan Award Agreement (incorporated by reference to Exhibit 4.2 of Form S-8 (file no. 333-107109)
filed on July 17, 2003)10.14

Form of Warrant for Swedish Employees under the Non-Director and Non-Executive Officer Consolidated Long-Term Incentive Plan (filed herewith)10.15

MRV 2002 Nonstatutory Stock Option Plan for Employees of Luminent, Inc. (incorporated by reference to Exhibit 4.1 of Form S-8 (file no. 333-81958) filed on February 1,
2002)10.16

Form of MRV 2002 Nonstatutory Stock Option Plan for Employees of Luminent, Inc. Stock Option Agreement (incorporated by reference from Exhibit 4.2 of Form S-8 (file no. 333-81958)
filed on February 1, 2002)10.17

Form of Warrant for Italian Employee Warrant Program (incorporated by reference to Exhibit 4.1 of Form S-8 (file no. 333-87743) filed on September 24, 1999)10.18

MRV 2002 International Stock Option Plan (incorporated by reference to Exhibit 4.1 of Form S-8 (file no. 333-81954) filed on February 1, 2002)10.19

Form of MRV 2002 International Stock Option Plan Stock Option Agreement (incorporated by reference from Exhibit 4.1 of Form S-8 (file no. 333-81954) filed on February 1,
2002)10.20

2001 MRV Stock Option Plan for Employees of Appointech, Inc. (incorporated by reference from Exhibit 4.1 of Form S-8 (file no. 333-71180) filed on October 9, 2001)10.21

Form of 2001 MRV Stock Option Plan for Employees of Appointech, Inc. Stock Option Agreement (incorporated by reference from Exhibit 4.2 of Form S-8 (file no. 333-71180) filed on
October 9, 2001)10.22

2000 MRV Stock Option Plan for Employees of Optronics International Corp. (incorporated by reference from Exhibit 4.1 of Form S-8 (file no. 333-47898) filed on October 13,
2000)10.23

Form of 2000 MRV Stock Option Plan for Employees of Optronics International Corp. Stock Option Agreement (incorporated by reference from Exhibit 4.2 of Form S-8 (file no. 333-47898)
filed on October 13, 2000)10.24

Luminent Amended and Restated 2000 Stock Option Plan (incorporated by reference from Exhibit 4.1 of Form S-8 (file no. 333-81950) filed on February 1, 2002)10.25

Form of Luminent Amended and Restated 2000 Stock Option Plan Stock Option Agreement (incorporated by reference from Exhibit 4.3 of Form S-8 (file no. 333-81950) filed on February 1,
2002)10.26

2000 MRV Stock Option Plan for Employees of AstroTerra Corporation (incorporated by reference from Exhibit 4.1 of Form S-8 (file no. 333-47900) filed on October 13, 2000)10.27

Form of 2000 MRV Stock Option Plan for Employees of AstroTerra Corporation Stock Option Agreement (incorporated by reference from Exhibit 4.2 of Form S-8 (file no. 333-47900) filed on
October 13, 2000)10.28

1998 Nonstatutory Stock Option Plan (incorporated by reference from Exhibit 4.1 of Form S-8 (file no. 333-87739) filed on September 24, 1999)


106

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Exhibit
No.

Description10.29

Form of 1998 Nonstatutory Stock Option Plan Stock Option Agreement (incorporated by reference from Exhibit 4.2 of Form S-8 (file no. 333-87739) filed on September 24, 1999)10.30

1997 Incentive and Nonstatutory Stock Option Plan, as amended (incorporated by reference from Exhibit 10.8 of Form 10-K filed on October 8, 2009)10.31

Form of Stock Option Agreement under the 1997 Incentive and Nonstatutory Stock Option Plan (incorporated by reference from Exhibit 4.2 of Form S-8 (file no. 333-87735) filed on
September 24, 1999)10.32

Stock Option Agreement effective as of October 29, 2002 under the 1997 Incentive and Nonstatutory Stock Option Plan, as amended, by and between MRV and Noam Lotan (incorporated by reference from
Exhibit 10.29 of Form 10-K filed on October 8, 2009)10.33

Workshop Lease of the Science Park Administration, dated January 1, 2009, between Science Park Administration, dated January 1, 2009, between Science Park Administration and Optronics
International Corp. for the manufacturing facility located on the first floor at No. 40, 2nd Road, Hsin Chu Science Park, Taiwan (incorporated by reference from Exhibit 10.30 of Form 10-K filed on October 8, 2009)10.34

Lease Contract on Standard Factory Buildings in Sichuan Chengdu Export Processing Zone, dated January 15, 2008, among Chengdu Gaoxin Construction Development Co., Ltd., Fiberxon
(Chengdu) Technology Co., Ltd. and Administration Office of Sichuan Chengdu Export Processing Zone for workshops located in Buildings No. 2 and 5 in the Standard Factory Building Area, Sichuan Chengdu Export Processing Zone (West Side),
 PRC (incorporated by reference from Exhibit 10.31 of Form 10-K filed on October 8, 2009)10.35

Workshop Lease of the Science Park Administration, dated January 1, 2009, between Science Park Administration and Optronics International for the manufacturing facility located on the first floor
at No. 44, 2nd Road, Hsin Chu Science Park, Taiwan (incorporated by reference from Exhibit 10.32 of Form 10-K filed on October 8, 2009)10.36

Workshop Lease of the Science Park Administration, dated January 1, 2009, between Science Park Administration and Optronics International Corp., for the manufacturing facility located on the first
floor at No. 46, 2nd Road, Hsin Chu Science Park, Taiwan (incorporated by reference from Exhibit 10.33 of Form 10-K filed on October 8, 2009)10.37

Workshop Lease of the Science Park Administration, dated January 1, 2009, between Science Park Administration and Optronics International Corp., for the manufacturing facility located on the
second floor at No. 46, 2nd Road, Hsin Chu Science Park, Taiwan (incorporated by reference from Exhibit 10.34 of Form 10-K filed on October 8, 2009)10.38

Lease Contract on Standard Factory Buildings, dated April 1, 2009, between Chengdu Gaoxin Construction Development Co., Ltd., Source Photonics (Chengdu) Technology Co., Ltd.
and Administration Office of Sichuan Chengdu Export Processing Zone, for workshops located in Building No. 4 in the Standard Factory Building Area of Sichuan Chengdu Export Processing Zone (West Side), PRC (incorporated by reference from
Exhibit 10.35 of Form 10-K filed on October 8, 2009)10.39

Land Lease of the Science Park Administration, dated January 1, 2009, between Science Park Administration and Optronics International Corp., for the land located at No. 117 of Science Park
Administration Section of Hsin Chu Science Park, Taiwan (incorporated by reference from Exhibit 10.36 of Form 10-K filed on October 8, 2009)


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Exhibit
No.

Description10.40

Tenancy Agreement, dated January 1, 2009, between Midelan Corporation and Optronics International Corporation for various rooms at No. 81, Shueili Road, Hsinchu City, Taiwan (incorporated by
reference from Exhibit 10.37 of Form 10-K filed on October 8, 2009)10.41

Lease of Warehouse in Chengdu Bonded and Logistics Center, commencing August 6, 2009 between Source Photonics Company Limited and Chengdu Bonded & Logistics Investment Company Limited, for
the 339 meter space located at No. 8, Shuangbo Road, Hi-tech Zone, West, Chengdu, PRC (filed herewith)10.42

Loan and Security Agreement, dated April 7, 2008, by and among Source Photonics, Inc., Fiberxon, Inc., LuminentOIC, Inc. and Silicon Valley Bank (incorporated by reference from
Exhibit 10.1 of Form 8-K filed on April 11, 2008)10.43

First Amendment, dated July 24, 2008, to Loan and Security Agreement, dated April 7, 2008, by and among Source Photonics, Inc., Fiberxon, Inc., LuminentOIC, Inc. and Silicon Valley
Bank (incorporated by reference from Exhibit 10.8 of Form 10-K filed on October 8, 2009)10.44

Second Amendment, dated March 27, 2009, to Loan and Security Agreement, dated April 7, 2008, by and among Source Photonics, Inc., Fiberxon, Inc., LuminentOIC, Inc. and Silicon
Valley Bank (incorporated by reference from Exhibit 10.1 of Form 8-K filed on April 2, 2009)10.45

Agreement, by and among Spencer Capital Management, LLC, Spencer Capital Partners, LLC, Value Fund Advisors, LLC, Boston Avenue Capital, LLC, Yorktown Avenue Capital, LLC and
Spencer Capital Opportunity Fund, LP, Charles M. Gillman, Michael J. McConnell, Kenneth H. Shubin Stein and the Company, dated as of October 8, 2009 (incorporated by reference from Exhibit 10.1 of Form 8-K filed on Oct 14,
2009)10.46

Settlement Agreement and Release, effective as of December 20, 2009, by and among the Company, Yoram Snir and Fully-Settling Stockholders and Partially-Settling Stockholders, each as defined therein
(incorporated by reference from Exhibit 10.1 of Form 8-K filed on December 24, 2009)10.47

Share Purchase Agreement, dated December 24, 2009, by and among the Company, EDSLan Finance S.r.l., Elio Bianchi, Rodolfo Casieri, Cristina Ciambellini, Sergio Ciambellini and Barbara Pedrazzani
(incorporated by reference from Exhibit 10.1 of Form 8-K filed on December 31, 2009)21.1

Subsidiaries of the Registrant23.1

Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm24.1

Power of Attorney (included following signature page)31.1

Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)31.2

Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)32.1

Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)32.2

Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)


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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

MRV Communications, Inc.By:Date: March 16, 2010

/s/ NOAM LOTAN Noam Lotan Chief Executive Officer


Pursuant
to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Principal Executive Officer:Date: March 16, 2010

/s/ NOAM LOTAN Noam Lotan Chief Executive OfficerPrincipal Financial and Accounting Officer:Date: March 16, 2010

/s/ CHRIS KING Chris King Chief Financial Officer


A
majority of the Board of Directors: Joan Herman, Noam Lotan, Charles Gillman, Michael Keane, Shlomo Margalit, Michael McConnell, Igal Shidlovsky, Kenneth Shubin Stein and Philippe
Tartavull.

By:Date: March 16, 2010

/s/ JENNIFER HANKES PAINTER Jennifer Hankes Painter As Attorney-in-fact


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POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Noam Lotan and
Jennifer Hankes Painter, the true and lawful attorneys-in-fact and agents with full power and authority in said attorneys-in-fact and agents to sign for
the undersigned, in their respective names as directors of MRV Communications, Inc., the Annual Report on Form 10-K for the year ended December 31, 2009, and to file
any and all amendments to the Annual Report, and to file the same, with all exhibits thereto, and all documents in connection therewith, with Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises.

Signature

Title

Date/s/ JOAN HERMAN Joan Herman

Chair of the Board

March 15, 2010/s/ NOAM LOTAN Noam Lotan

Chief Executive Officer and Director

March 15, 2010Baruch Fischer

Director/s/ CHARLES GILLMAN Charles Gillman

Director

March 16, 2010/s/ MICHAEL KEANE Michael Keane

Director

March 15, 2010/s/ SHLOMO MARGALIT Shlomo Margalit

Chief Technology Officer and Director

March 15, 2010/s/ MICHAEL MCCONNELL Michael McConnell

Director

March 16, 2010/s/ KENNETH SHUBIN STEIN Kenneth Shubin Stein

Director

March 15, 2010/s/ IGAL SHIDLOVSKY Igal Shidlovsky

Director

March 14, 2010/s/ PHILIPPE TARTAVULL Philippe Tartavull

Director

March 15, 2010


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