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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, 2008ORo

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


Commission file number 0-01-11174



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 o    No ý

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

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

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.

Number
of shares of Common Stock, $0.0017 par value, outstanding as of October 5, 2009  157,607,118.

DOCUMENTS
INCORPORATED BY REFERENCE

None.



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MRV Communications, Inc.        Annual Report on Form 10-K        For the fiscal year ended December 31, 2008        Table of Contents



Page
NumberPART I

1Item 1.

Business

1Item 1A.

Risk Factors

12Item 1B.

Unresolved Staff Comments

31Item 2.

Properties

31Item 3.

Legal Proceedings

32Item 4.

Submission of Matters to a Vote of Security Holders

33PART II

34Item 5.

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

34Item 6.

Selected Financial Data

37Item 7.

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

46Item 7A.

Quantitative and Qualitative Disclosures About Market
Risk

87Item 8.

Financial Statements and Supplemental
Data

89Item 9.

Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

160Item 9A.

Controls and Procedures

160Item 9B.

Other Information

167PART III

167Item 10.

Directors, Executive Officers and Corporate
Governance

167Item 11.

Executive Compensation

175Item 12.

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

184Item 13.

Certain Relationships and Related Transactions, and Director
Independence

186Item 14.

Principal Accounting Fees and Services

186PART IV

188Item 15.

Exhibits and Financial Statement
Schedules

188SIGNATURES

193


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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, 2008 ("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.

Explanatory Note Regarding Restatement

In this comprehensive Annual Report on Form 10-K for our fiscal year ended December 31, 2008, we are
restating our: (a) financial statements as of and for the years ended December 31, 2007 and December 31, 2006, and related disclosures; (b) selected financial data as of
and for the years ended December 31, 2007, December 31, 2006, December 31, 2005, and December 31, 2004; (c) management's discussion and analysis of financial
condition and results of operations as of and for the years ended December 31, 2007 and December 31, 2006; and (d) unaudited quarterly financial data for the quarter ended
March 31, 2008 and for each of the quarters in the year ended December 31, 2007.

We
are restating our financial statements and related disclosures to reflect adjustments that correct errors in our previously filed financial statements. These errors related to three
general categories of transactions: (a) stock based compensation and related tax effects; (b) non-stock compensation matters, and; (c) acquisition-related accounting
treatment and other accounting matters. The adjustments are more fully described in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations  Restatements of Financial Statements and Special Committee and Company Findings, and Note 3, "Restatement of Financial Statements" to the Consolidated Financial
Statements in Item 8 of this Form 10-K.

Except
as described above and as amended in this Form 10-K, we have not amended and do not intend to amend any of our previously filed annual reports on
Form 10-K or previously filed quarterly

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reports
on Form 10-Q. Financial information included in the reports on Form 10-K, Form 10-Q and Form 8-K filed by the
Company prior to June 5, 2008, and the related opinions of its independent registered public accounting firm, and all earnings press releases and similar communications issued by the Company
prior to June 5, 2008, should not be relied upon and are superseded in their entirety by this Form 10-K and other reports on Form 10-Q and
Form 8-K filed by the Company with the SEC on or after June 5, 2008.

As
a result of our failure to file this Form 10-K and our Quarterly Reports on Form 10-Q for the second and third quarters of 2008 and first and second quarters
of 2009 on a timely basis, we will not be eligible to use Form S-3 to register our securities with the SEC until all reports required under the Exchange Act have been timely filed
for at least 12 months and other conditions are met.

For
a description of the material weaknesses in the Company's internal control over financial reporting identified by management as a result of the investigation and management's related
review, and management's plan to remediate those material weaknesses, see Item 9A. "Controls and Procedures" of this Form 10-K. We have already implemented several measures
in order to remediate these material weaknesses and are in the process of implementing others.

Significant
events occurring through the date of this filing are described in Note 18, "Subsequent Events," which are included in the Notes to the Consolidated Financial
Statements in Item 8 of this Form 10-K.

Additional
information on the restatement can be found in this report in:



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PART I

Item 1.    Business.

Overview

MRV is a global supplier of unique communications solutions to telecommunications service providers, enterprises and governments
throughout the world. Our products enable our customers to provide high-bandwidth data and video services and mobile communications services more efficiently and cost effectively. Today's
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. Service providers and enterprises alike are attempting to differentiate
their offerings in an effort to generate additional revenue for many of these services. 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 for additional capacity, our customers are upgrading their networks with new optical communications systems and products.

MRV
conducts its business along three principal segments: (a) the Network Equipment group; (b) the Network Integration group; and (c) the Optical Components group.
Our 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.

Our
Network Integration group operates through six subsidiaries in Italy, France, Switzerland and Scandinavia. 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.

Source
Photonics, our Optical Components group, 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, as well as other optical components, modules and
subsystems. Source Photonics is the leading provider of optical subsystems used in Fiber-to-the-Premises and fiber-to-the-home
deployments which many telecommunications service providers are using to deliver video, voice and data services.

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.

In
July 2007, we completed the acquisition of Fiberxon, Inc. ("Fiberxon"), a PRC-based supplier of transceivers for applications in metropolitan networks, access
networks and passive optical networks for consideration aggregating approximately $130.9 million excluding $4.0 million in acquisition costs. Fiberxon has been fully integrated into
MRV's Optical Components group, and the resultant entity is now known as Source Photonics Santa Clara, Inc. Their results of operations are included in our Consolidated Financial Statements
from July 1, 2007. The acquisition of Fiberxon is discussed further in Note 17 of our Consolidated Financial Statements included in Item 8 of this Form 10-K.

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We
were organized in July 1988 as MRV Technologies, Inc., a California corporation and reincorporated in Delaware in April 1992, at which time we changed our name to MRV
Communications, Inc.

Industry Background

Weaker economics worldwide, particularly in the United States and Europe, have resulted in reduced near-term demand for our
products and reduced visibility from our customers. Although telecommunications service providers have publicly indicated that they will reduce their capital spending in 2009 due to economic
uncertainty, they continue to budget for their long-term investments in their networks. As a result, we have had lower demand for our products for the first half of fiscal 2009, which may
carry over to the second half of 2009 and into 2010.

Although
we expect a decrease in near-term demand, we believe that our end markets are strong. We believe telecommunication networks will continue to evolve to support
growing network traffic as a result of the proliferation of high-bandwidth applications, such as IP-video, on-demand video services, VoIP, peer-to-peer networking,
and content-rich websites. 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 DSL. 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. We are building upon 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.
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 they have a lower cost of
ownership and offer high bandwidth with solid reliability. In addition, these Metro Ethernet networks can easily be connected to customer networks because Ethernet is the predominant corporate LAN and
residential network technology. Despite macroeconomic challenges, 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. There are several factors driving this growth:



On
August 29, 2009, market research firm, ComScore, reported that a record 21.4 billion videos were viewed online in the United States during the month of July 2009, a
50 percent increase from 14.3 billion videos viewed in December 2008. Comscore also noted that 81 percent of the total 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

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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.
These revenues are rapidly declining because they are under immense competitive pressure. In particular, these providers are experiencing substantial competition from cable multiple system operators,
or MSOs, who own and operate hybrid fiber coaxial, or HFC, networks. The MSOs now offer voice and data services as a competitive alternative to traditional telephony providers. Traditional telephony
providers are trying to better compete with cable MSOs and to offset the decline in voice revenues by increasing the number of services that they can offer through their networks, such as video
applications and other bandwidth intensive data applications. In addition, emerging carriers, both regional and those who are trying to build a national footprint, are offering advanced services based
on new, more advanced network infrastructure.

To
offer new services, telecommunications service providers are investing in two primary areas. First, they are increasing the capacity and functionality in their access networks in
order to increase the bandwidth capacity between the service provider's central office and individual consumers. To accomplish this, many service providers are building high-capacity
optical networks closer to, or directly into, consumers' homes and business customers. These access networks have the ability to deliver a range of advanced services, such as on-demand
high-definition video services, and high-bandwidth Internet services.

In
addition to investing in their access networks, telecommunications service providers not only need to increase the data capacity of their metro networks but also need to enhance the
intelligence, flexibility and efficiency of their networks. As a result, they are investing in optical transport networks. This will allow the service providers to maximize network utilization even 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.

In
summary, the communications equipment and optical components industries remain extremely competitive. In order to effectively compete, both communications infrastructure and optical
component vendors must be able to offer:



Markets Served

We primarily serve 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 legacy or existing network infrastructures to deliver a
broader mix of higher bandwidth services to consumers and

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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 Fiber-to-the-Home ("FTTH") and
Fiber-to-the-Premise ("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 Internet Protocol, or 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.

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 who 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 over 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
also 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.

Products and Services

We provide integrated, secure network equipment and services that connect data, voice and/or video (both analog and digital), within
single buildings, across private networks located in multiple buildings such as college or campus environments (campus area networks or campus networks) and in metropolitan and regional areas (metro
networks). Our products and services include:



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Optical
Transport Products. 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.
Our optical communication products include PON subsystems and optical transceivers used 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. One of the more common techniques utilized for fiber optimization is WDM. In WDM, each signal or channel is carried over a different wavelength. The different
wavelengths are multiplexed and passed through a single optical fiber. On the receiving end, the signals are separated by wavelength. Included in the optical transport networking products we offer are
those we brand under our LambdaDriver product family and our Fiber Driver product family.

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 meet the specific demands of a customer without the unwanted expense of extra functionality.

The
Fiber Driver Series provides a full range of solutions for media conversion, signal restoration, distance 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. The principal functions of the Fiber Driver series are:
media conversion (i.e., from copper to fiber), wavelength conversion, distance extension and fiber optimization. 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 continuously evolve to support growing network traffic due to the demand
for
high-bandwidth applications such as IP-video, streaming video, VoIP, peer-to-peer networking, and content-rich websites. Wireline carriers, wireless
operators, and cable service providers offer network connectivity services to their residential or enterprise end-user customers. These service providers are attempting to differentiate
their service offerings from their competitors and expect to generate additional revenue from the provision of many of these services. However, the growth in these applications and services is driving
the need for additional bandwidth capacity in many portions of service providers' networks. To meet this demand for additional capacity, telecommunication service providers are upgrading their
networks with new optical and Metro Ethernet communication systems. Our Metro Ethernet products enable telecommunication service providers to transition their infrastructure and provide
high-bandwidth video, voice and data services at a reasonable cost. Specifically, our 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. By providing reliable, high-bandwidth connectivity with
end-to-end traffic management, the OptiSwitch family enables premium revenue generation services, based on specific Service Level Agreements, or SLAs. 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.Out-of-band-networks 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 cost, increase security, lower risks and, in many cases, increase service levels. MRV offers the following out-of-band-network
solutions:



Fiber Optic Components and Subsystems.Our Optical Components group, which consists primarily of our wholly-owned subsidiary Source
Photonics, Inc.
("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 the enterprise, access and metropolitan segments of the market, 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.

We
classify our Optical Components products in two groups: 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 system is based on a single head-end optical line
terminal at the central

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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 the core transmit and receive functions of the overall optical line terminal and optical network terminals systems.

There
are three primary standards for PON networks. These standards have been developed by organizations such as the International Telecommunications Union, or 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 that are not based on standards, 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 version offers benefits to system
vendors and service providers in the areas of time-to-market, inventory management and ease of configurability. These benefits are particularly significant for DWDM and
contribute to the general market trend towards pluggable interfaces.

With
the introduction of our XFP and SFP+ form factor transceivers, 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 SFP+.

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.

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We are continuing to develop innovative transceiver products and are focusing significant effort in developing our 10 gigabit pluggable portfolio including 10
gigabit small form-factor pluggable, or XFP, and small form-factor pluggable plus, or SFP+, products. SFP+ products offer the same throughput as an XFP module, but are
approximately half the size and consume 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 and site-surveys. We also provide network integration and on-site installation.
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, 2008, our worldwide sales and marketing organization consisted of approximately 610 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, China,
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.

For
the years ended December 31, 2008 and 2007, no single customer accounted for 10% or more of our revenue or accounts receivable. For the year ended 2006, one customer,
Tellabs Inc. an original equipment manufacturer for Verizon Communications, Inc., accounted for 13% of our revenue.

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, Raritan, Inc. Our competitors in fiber optic components include: 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:

2008

2007
(Restated)

2006
(Restated)Network Equipment group (1)

$
21,089

$
19,778

$
18,326Network Integration group (2)








Optical Components group (3)


15,967


12,113


8,279All others (2)


1,371


1,169


1,221Corporate unallocated (4)


319


327


543Total

$
38,746

$
33,387

$
28,369






Manufacturing

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. Outsourcing, we believe, 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 our networking products primarily perform the functions of materials management, and, in an effort to ensure quality and reliability, quality
assurance, equipment burn-in (testing new equipment by turning the power on), 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.

Our
Optical Components group has invested significantly in a low-cost, vertically-integrated manufacturing model, which we believe provides us an important competitive
advantage. We employ both in-house internal manufacturing as well as contract manufacturers, primarily in China. We have two primary in-house manufacturing locations: Chengdu,
PRC, and Hsinchu, Taiwan. Our facility in Hsinchu, Taiwan is primarily used for manufacturing of optical laser and receiver chips and assemblies. The assemblies use our internally designed and
manufactured optoelectronic chips packaged into hermetically sealed packages. 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 China manufacturing such products on our behalf.

For
our transceiver products, we maintain full control over the manufacturing technology, equipment and processes that 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 also utilize advanced planning techniques across our extended
global supply chain that electronically optimizes our purchasing of material as well as factory resource utilization both at our

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in-house
facilities and at our contract manufacturer facilities. We intend to significantly expand and consolidate our manufacturing capacity in Chengdu, PRC during the next fiscal year.
The consolidation of our manufacturing operations into a single, expanded in-house facility is intended to reduce cost, simplify operations and supply chain management, and 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 usually 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.

During
the last several years, the number of suppliers of components has decreased significantly and, more recently, demand for components has increased rapidly. 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.

Components

For a discussion of the risks associated with suppliers, please see Item 1A. of this Form 10-K entitled "Risk
Factors," including but not limited to the risk factor entitled, "There is a limited number of potential source suppliers for certain components, which makes us susceptible to supply shortages."

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, 2008, we employed 3,477 full-time employees. Of these employees, 2,439 are in manufacturing, 428
in product development and engineering, and 610 in sales, marketing and general administration. Approximately 3,140 employees are in locations outside the United States. 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 that operate our equipment. 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 also 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 "Our business

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requires
us to attract and retain qualified personnel" in the "Risk Factors" section contained in Item 1A. of this Form 10-K.

Item 1A.    Risk Factors.

You should carefully consider and evaluate all of the information in this Form 10-K, including the risk factors
listed below. The risks described below are not the only ones facing our Company. Additional risks not now known to us or that we currently deem immaterial may also impair our business operations.

If
any circumstances discussed in these risks actually occur or occur again, our business could be materially harmed. If our business is harmed, the trading price of our Common Stock
could decline.

This
Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including the risks faced by us described
below and elsewhere in this Form 10-K. We undertake no duty to update any of the forward-looking statements after the date of this Form 10-K.

Our business could be negatively affected as a result of a proxy fight and other actions of activist stockholders.

An activist stockholder group has nominated a slate of eight individuals for election to replace our Board of Directors at the 2009
annual stockholders' meeting. Our business could be adversely affected because:



There are risks related to the investigation of past stock option practices and other accounting issues, and the related restatement of our prior financial results.

In connection with our past stock option grant practices and other accounting issues requiring restatement, we have been subjected to a
number of ongoing stockholder lawsuits, unable to file periodic reports with the SEC on a timely basis, and delisted from the Nasdaq Global Market. In addition, a number of our current and former
directors and officers were also named in the lawsuits. We were also subject to an informal investigation by the SEC into our historical option grants and practices, which has subsequently been
completed with the Staff of the SEC stating that it does not intend to recommend enforcement action. A description of the litigation and SEC inquiry is set forth in Item 3. "Legal Proceedings"
of this Form 10-K. As a result of these events, 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, including the pending or

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new
stockholder litigation; (ii) indemnification obligations for our current and former directors, officers and employees related to the litigation; (iii) currently unanticipated issues
with respect to our restatement or our ability to become current in our periodic SEC reports that could materially delay our ability to achieve relisting on Nasdaq or another national securities
exchange, which would likely have a material adverse effect on the liquidity of our Common Stock; (iv) additional significant costs in effectuating on-going or additional
remediation actions or in dealing with any further litigation or unanticipated problems in attaining relisting of our shares on Nasdaq or another national securities exchange; and (v) diversion
of the time and attention of members of our management and our Board of Directors from the management of our business.

The matters relating to the independent investigation of our historical stock option granting practices and other accounting matters and the restatement of our financial
statements have required, and may continue to require, a significant amount of management time and accounting, financial and legal resources, which could adversely affect our business, financial
condition and results of operations.

On June 5, 2008, we announced the commencement of an internal investigation by the Special Committee of the Board of Directors
into the Company's historical stock option practices and related accounting as well as other issues. The Special Committee determined that a significant number of our historical stock option grants
were not correctly dated and our previous accounting should be adjusted. We have also adjusted our accounting to reflect the proper treatment of acquisitions of some of our European subsidiaries and
how we account for the compensation of their management, as well as making adjustments for other accounting issues. As
a result of the Special Committee's investigation and our own review of our historical financial statements, we concluded that our previously filed financial statements should no longer be relied
upon. We have restated our financial results for previous periods by filing this Form 10-K, which includes restatements of the various previously filed financial statements as
detailed herein. For a discussion of the investigation, its findings and the effects of this restatement on our previously filed financial statements, see Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 3 of the Consolidated Financial Statements included in Item 8 of this Form 10-K. Addressing all the
matters related to the Special Committee's investigation and the financial restatement has required and will continue to require significant management and financial resources which could otherwise be
devoted to the operation of our business. Further, considerable legal and accounting expenses in becoming current with our periodic reports and any settlements, payment of claims, fines, taxes and
other costs of the investigation as detailed throughout these risk factors and this report have been incurred to date and significant expenditures may continue to be incurred in the future. In
addition, the recent restatement of our financial results could impact our reputation, including our relationships with our suppliers, customers and stockholders, our ability to hire and retain
qualified personnel, our ability to enter into strategic transactions regarding our various businesses and, ultimately, our ability to generate revenue.

We may suffer adverse tax consequences in connection with our historical stock option practices, which could have a negative impact on our results of operations and
financial condition.

As a result of our investigation into historical stock option practices, we have determined that certain options that had formerly been
classified as incentive stock option ("ISO") grants did not qualify for such ISO tax treatment because the grants had an exercise price below the fair market value of our Common Stock on the actual
measurement date. In addition, we could face penalties, certain payment obligations for our employees or other costs in connection with the treatment of certain stock options impacted by the deferred
compensation rules under Section 409A of the Internal Revenue Code (and other similar provisions of California and other state tax laws). These and other tax consequences related to our
historical stock option practices could give rise to monetary liabilities for us and/or our current and former employees which may have to be satisfied in a future period. There can be no assurance
that regulatory inquiries or actions will not be commenced by the IRS or other state or foreign regulatory

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taxation
authorities regarding the tax implications of our historical stock option practices. The unfavorable resolution of any potential tax regulatory proceeding or action could require us to make
payments of overdue taxes, penalties and fines or otherwise record charges (or reduce tax assets) that may adversely affect our results of operations and financial condition.

We have not been in compliance with SEC reporting requirements and have been delisted from the Nasdaq Global Market, and we may continue to face compliance issues. If we are
unable to return to or remain in compliance with SEC reporting requirements, there may be a material adverse effect on the Company and our stockholders.

Due to the stock option investigation and resulting restatements, we have not been able to file all of our periodic reports with the
SEC on a timely basis, and have not been able to hold an annual stockholders' meeting for 2008 or 2009, and our stock was delisted from the Nasdaq Global Market. The filing of this
Form 10-K and the quarterly information contained herein covers certain information that would otherwise be presented in Quarterly Reports on Form 10-Q for the
quarters ended June 30 and September 30, 2008. However, we have not yet filed our delinquent Quarterly Reports on Form 10-Q for the quarters ended March 31 and
June 30, 2009. Further, if we choose to seek relisting with the Nasdaq Global Market or another national securities exchange, we will need to meet additional listing requirements, such as the
Nasdaq Global Market's minimum price per share of $4.00. Even after filing all required reports with the SEC and holding a stockholders meeting, we may still face comments from the SEC that may
require us to file amended reports.

As
a result of our failure to file this Form 10-K and our Quarterly Reports on Form 10-Q for the second and third quarters of 2008 and first and second quarters of 2009 on
a timely basis, we will not be eligible to use Form S-3 to register our securities with the SEC until all reports required under the Exchange Act have been timely filed for at least
12 months and other conditions are met. Our inability to use Form S-3 could increase the cost of raising capital through the issuance and sale of our equity or debt and the terms of any
offering transaction may not be as favorable as they would have been if were eligible to use Form S-3.

We have litigation outstanding related to the acquisition of Fiberxon, Inc.

On March 25, 2009, we filed a complaint in the Superior Court of Los Angeles County, California, against former executives,
directors and stockholders of Fiberxon, a subsidiary of MRV acquired in July 2007. The complaint seeks to recover damages in connection with the sale of Fiberxon to MRV and contains claims for
breaches of representations and warranties made by Fiberxon's former stockholders and others under the acquisition agreement, and intentional misrepresentation in connection with the sale.

MRV
acquired Fiberxon using a combination of cash and shares of our Common Stock totaling approximately $99.4 million which the Company paid to Fiberxon's former stockholders at
the closing of the acquisition. In addition, MRV agreed to pay up to $31.5 million in cash or shares of the Company's Common Stock, or a combination thereof (the "deferred consideration
payment"), within 18 months of the receipt by us of Fiberxon's audited financial statements if Source Photonics did not complete an initial public offering of its common stock within such
18-month
period. Source Photonics did not complete the initial public offering within such period which ended March 2009. MRV has not made any deferred consideration payment.

The
complaint alleges that we have incurred damages in excess of $31.5 million (in an amount to be finally determined through appropriate proceedings) as a result of the claims we
allege in the complaint. The claims alleged in the complaint include, among other things, claims against former members of Fiberxon's management for breach of non-competition agreements
and tortious interference with employee contracts. MRV believes that it complied with the contractual terms of the acquisition agreement by providing, within the time specified, requisite information
regarding offsets against the deferred consideration payment, and its lawsuit seeks to recover damages in addition to those amounts.

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We
are currently in the process of negotiating in good faith with the seller's representative pursuant to the terms of the merger agreement that require such negotiation. The outcome of such
discussions cannot be reliably predicted at this time.

The
results of any litigation are inherently uncertain and there can be no assurance that we will prevail in this litigation. Further, the defendants may deny our claims and assert
claims seeking affirmative relief against the Company, including relief that seeks recovery of the deferred consideration payment. We plan to pursue our claims vigorously and expect the litigation
potentially to be protracted and costly. If we lose this litigation, payment of the deferred consideration payment and other litigation costs would have a material adverse affect upon our financial
condition and results of operations.

Material weaknesses existed in our internal controls over financial reporting related to our not maintaining effective approval and review controls over
non-routine transactions at the entity level and over the recording of transactions and the financial statement close process at our Source Photonics subsidiary.

Section 404 of the Sarbanes-Oxley Act of 2002 and related SEC regulations require us to evaluate the effectiveness of our
internal control over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual
Report on Form 10-K. Section 404 also requires our independent registered public accounting firm to attest to, and report on, management's assessment of the Company's
internal control over financial reporting.

In
assessing the findings of the voluntary review as well as the restatement of our previously reported financial statements, our management concluded that there were material
weaknesses, as defined in the Public Company Accounting Oversight Board's Auditing Standard No. 5, in our
internal control over financial reporting as of December 31, 2007. We have implemented certain controls, and are in the process of implementing additional controls, to remediate the material
weaknesses identified. However, management believes these material weaknesses were not fully remediated as of December 31, 2008. See the discussion included in Item 9A. "Controls and
Procedures" of this Form 10-K for additional information regarding our internal control over financial reporting.

Our
management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all error and all
fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be 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. Controls can be circumvented by the individual acts
of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree
of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be
detected.

As
a result, we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure
to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail
to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management
evaluations and annual auditor attestation reports regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the
Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial
statements, cause us to fail to timely meet our reporting obligations, and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

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We are exposed to risks associated with worldwide economic conditions and related uncertainties.

Economic conditions, increased concerns about credit markets and consumer confidence, volatile corporate profits and reduced capital
spending could negatively impact demand for our products. In particular, it is difficult to develop and implement strategy and sustainable business models, maintain efficient operations, and
effectively manage supply chain relationships, in the face of such conditions. Our ability to successfully offer our products and implement our business plan requires an effective planning and
management process. In an economic downturn, we must effectively manage our spending and operations to ensure our position during the downturn to be able to capitalize for future opportunities when
the economy improves. The failure to effectively manage our spending and operations could disrupt our business and harm our operating results.

Our
business could also be impacted by international conflicts, terrorist and military activity, civil unrest and pandemic illness which could cause a slowdown in customer orders or
cause customer order cancellations. In addition, political and social turmoil related to international conflicts and terrorist acts may put further pressure on economic conditions in the United States
and abroad. Unstable economic, political and social conditions make it difficult for our customers, our suppliers and us to accurately forecast and plan future business activities. If such conditions
persist, our business, financial condition and results of operations could suffer.

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 probable. 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. Because of these and other factors, you should
not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. It is possible that, in future periods, our results of
operations 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 network infrastructure and optical components markets, is ever increasing, which could reduce our revenue and gross margins or cause us to
lose market share.

The communications equipment and optical component industries are 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, 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: Delta
Electronics, Inc., EMCORE Corporation, ExceLight Communications, Inc., Finisar Corporation, JDS Uniphase Corporation, Ligent Photonics, Inc., NEC Corporation, NeoPhotonics Corp.,
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 and other resources and larger installed customer bases than we do.

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Many
of our larger competitors offer customers a broader product line, which provides a more comprehensive networking solution than we provide.

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 or announce their intentions to 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 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, 2008, 2007 and 2006, research and development expenses accounted for 7%, 7% and 8% of revenues, respectively. 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 its existing
equipment, lower the customer's 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, Fiberxon, a subsidiary we acquired in 2007, did not do so 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 Fiberxon, the lack of
contractual limitations on such claims in some instances. The warranty reserves are evaluated and adjusted based on updated 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 second quarter of 2008, 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 second quarter of 2008, we reported net losses for the years ended
December 31, 2008, 2007 and 2006, and have not achieved profitability on a consolidated basis for a full year since 2004. 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. To date in 2009, we have incurred additional significant charges related to the investigation and restatement of our financial statements, related
expenses, and expect to incur significant expenses in the proxy contest for the election of directors in the 2009 annual meeting due to the running of a competing slate of directors by activist
stockholders. 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.

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 the control of our
company or our customers, 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

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components
and systems included in the applicable network system and could harm our results of operations.

Our customers may elect to in-source production of certain components they traditionally have purchased from us, resulting in decreases in our revenue.

Our revenue may decrease if certain of our direct and indirect significant customers, such as Tellabs and Verizon, respectively, or a
substantial number of our customers overall, chose to in-source production of the various types of components they currently purchase from us. If we cannot find alternate customers to
purchase such components going forward, we may suffer not only a reduction in revenue, but may also have excess capacity in our production facilities and underutilized employees, undermining the
overall efficiency and productivity of our operations.

We do not have long-term volume purchase contracts with our customers, so our customers may increase, decrease, cancel or delay their buying 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 severe market downturns, certain of our largest customers canceled significant orders with us and with our competitors, which
resulted in losses of sales and excess and obsolete inventory, that led to inventory and asset disposals throughout the industry. 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 single revenue source and the risk that our operations will suffer
materially if a significant customer stops ordering from us or substantially reduces its business with us.

For the years ended December 31, 2008 and 2007, no customer accounted for 10 percent or more of our revenue. For the year
ended December 31, 2006, we had one customer, Tellabs, Inc., an original equipment manufacturer for Verizon Communications, Inc., which accounted for 13% of our total revenues.
While our financial performance for 2008, 2007 and 2006 benefited from substantial sales to Tellabs, because of the magnitude of sales to that customer, our results would suffer if we were to lose
their business. Additionally, if Tellabs made a substantial reduction in orders, or Verizon switched

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OEMs to
a company that was 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
sales are made on credit and our results of operations would be adversely affected if a significant customer were to experience unexpected financial reversals resulting in it being unable to pay for
our products.

The
market for network infrastructure fiber optic products is dominated by a small number of large companies. Through consolidation with other equipment and component suppliers, some of
these companies are growing larger with greater resources than we have to devote to development, promotion, sale and support of their products. Consolidation is also affecting customers in the network
infrastructure fiber optic products market. Consolidation reduces the number of existing and potential customers and may increase our dependence on certain customers.

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

As of December 31, 2008, we had net operating losses, or 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 begin to
expire in 2009. Under Section 382 of 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.

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 is 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. 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 particularly, 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

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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 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. In the event adequate production yields are not achieved, resulting in product shipment delays, our business, operating
results and financial condition could be materially adversely affected.

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, raw materials 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.
This would negatively impact the gross margins on such products and negatively impact our production capacity for those products. 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 decrease our revenue and gross margins.

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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 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 PRC-based manufacturing operations in a single location in Chengdu, PRC.

Historically, we have manufactured most of our products in Taiwan, with some reliance on contract manufacturers in China as well, and
Fiberxon manufactured its products in China. We are in the process of consolidating our PRC-based manufacturing operations at a single location in Chengdu, PRC. We believe that the
consolidation process should be completed during the first half of 2010. We could experience delays if we are not able to transition our staff and equipment to our new facilities efficiently, and such
delays could result in short-term reductions in our production capabilities or an inability to increase production consistent with our long-term plans. In addition, we may
experience higher manufacturing losses and lower gross margins due to the need to maintain older production lines while at the same time incurring expenses related to the consolidation process. Once
the consolidation effort is complete, we will 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.

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Although
our current manufacturing facilities each have a disaster recovery plan, and we adopted a similar plan for the consolidated Chengdu facility, 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 PRC-based 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 China. 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 and September 1999, major earthquakes near Chatsworth and in Taiwan, 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 China subjects us to increased risk that a natural disaster could disrupt our operations.

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 China. 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

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current
or future legal requirements, including those applicable to us in the United States, Taiwan and China where we maintain facilities, 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. The labeling provisions of similar legislation in China went into effect on March 1, 2007. 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.

We may be faced with product liability claims.

Despite quality assurance measures, there remains a risk that defects may occur in our products. The occurrence of any defects in our
products could give rise to liability for damages caused by such defects. Defects could, moreover, impair the market's acceptance of our products. Both could have a material adverse effect on our
business and financial condition. 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.

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 31,2008

2007

2006Percentage of revenues from international sales


68
%

68
%

67
%


We
have offices and facilities in, and conduct a significant portion of our operations in and from Israel, China and Taiwan, and outsource substantial manufacturing to third-party
contract manufacturers in China. 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:



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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, China or the European Union could have a negative impact on our sales and operations in these regions, and unstable conditions could have a material adverse effect on our business and
results of operations. The wars in Afghanistan and Iraq and other turmoil in the Middle East and the global war on terror also may have negative effects on our business operations, including our U.S.
operations. For example, heightened U.S. security concerns on domestic and international travel and commerce may result in increased immigration controls that could impact the residency status of our
non-U.S. engineers and other key employees working in our U.S. facilities. 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.

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

Historically, there has been an abundance of labor in Southern China, but over the last few years, factories in Southern China,
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 over the past

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three
decades 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.

Our operating results have been impacted by foreign exchange rates and our activities seeking to hedge against currency exchange 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. 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. In addition, inflation or fluctuations in
currency exchange or interest rates in these countries could increase our expenses and thereby adversely affect our operating results.

Related
to our Optical Components business, foreign currency fluctuations between the Chinese RMB and the U.S. dollar may affect our total revenue going forward and, if present trends
continue in China, could significantly affect our operating results. Approximately 19% of combined revenues for the year ended December 31, 2008 were denominated in RMB. Approximately 46% of
total operating costs and expenses for the same period were incurred in RMB.

Through
one of our foreign subsidiaries, we periodically enter into foreign exchange and interest rate swap contracts to protect against currency exchange risks related to purchase
commitments denominated in foreign currencies other than their functional currency, primarily the U.S. dollar, and to hedge exposure to interest rate fluctuations. Net unrealized gains from these
activities during the year ended December 31, 2007 amounted to $552,000. We could incur losses from these or other hedging activities in the future.

We face risks inherent in doing business in China.

As our operations in China assume a larger and more important role in our business, the risks inherent in doing business in China will
become more acute. Many of these risks specific to doing business in China 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 the PRC that continues to exist could
eventually lead

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to
hostilities, or there may be regulatory issues with either the PRC or Taiwan as a result of our having operations or business interests in both countries.

Failure to comply with the United States 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 United States Foreign Corrupt Practices Act, or 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 the completion of the acquisition, Fiberxon's management and employees were not subject to the FCPA. Corruption, extortion, bribery, pay-offs, theft
and other fraudulent practices are common in the 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, 2008, 2007 and 2006, and our combined cash and
short-term investments declined in 2007 and 2008. Excluding the private placement of approximately 19.9 million shares of our Common
Stock we issued to a group of institutional investors in 2006, which resulted in proceeds of $69.9 million, our combined cash, cash equivalents, time deposits and short-term and
long-term marketable securities would have declined during the year ended December 31, 2006. As of December 31, 2008, our cash, cash equivalents, time deposits and marketable
securities totaled $81.6 million and declined by approximately $4.8 million, or six percent, since December 31, 2007.

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:



If
we raise additional funds through the issuance of our Common Stock or convertible securities, or if we elect to satisfy our potential deferred consideration obligation to Fiberxon's
former stockholders

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using
shares of our Common Stock, the percentage ownership of our stockholders could be significantly diluted.

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, satisfy our deferred consideration obligation, 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 applications will be approved, that any patents that may be issued will protect our intellectual property or that third
parties will not challenge any issued patents. Other parties may independently develop similar or competing technology or design around any patents that may be issued to us. We cannot be certain that
the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the
United States. Specifically in the PRC there is a risk of poor enforcement of intellectual property rights. The validity, enforceability and scope of protection of intellectual property in China is
uncertain and still evolving, and PRC 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 the 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 could in the future become subject to litigation regarding intellectual property rights, or we could initiate claims or litigation against third parties for infringement
of our proprietary rights to protect these rights.

From time to time, third parties, including our competitors, may assert patent, copyright and other intellectual property rights to
technologies that are important to us. Over the years, we have received notices from third parties alleging possible infringement of patents with respect to certain features of our products or our
manufacturing processes and in connection with these notices have been involved in discussions with the claimants. To date, our aggregate revenues potentially subject to the foregoing claims have not
been material. However, these or other companies may pursue litigation with respect to these or other claims. The results of any litigation are inherently uncertain. In the event of an adverse result
in any litigation with respect to intellectual property rights relevant to our products that could arise in the future, we could be required to obtain licenses to the infringing technology, to pay
substantial damages under applicable law, to cease the manufacture, use and sale of infringing products or to expend significant resources to develop non-infringing technology. Licenses
may not be available from third parties either on commercially reasonable terms or at all.

In
the future, 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. These lawsuits, regardless of their success, would likely be
time-consuming and expensive to resolve and would divert management time and attention. In addition, litigation frequently involves substantial expenditures and can require significant
management attention, even if we ultimately prevail. Accordingly, any infringement claim or litigation against us could significantly harm our business,

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operating
results and financial condition. Such claims or litigation could be costly, subject us to significant liability, and divert our technical and management personnel. We do not have insurance
to cover potential claims of this type.

Our business requires us to attract and retain qualified personnel.

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 networking and fiber optics
industries 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 Shlomo Margalit, our Chairman of the Board of Directors and Chief Technical Officer. The loss of the services of either of these officers could have a material adverse
effect on us. To retain these officers, we have entered into employment agreements with them, and we are the beneficiary of a key person life insurance policy in the amount of $1.0 million on
Mr. Lotan's life. We give no assurances that the employment agreements will retain these officers or that the proceeds from the insurance policy will be sufficient to compensate us in the event
of Mr. Lotan's death. Further, the policy is not applicable in the event that Mr. Lotan becomes disabled or is otherwise unable to render services to us. We may enter into similar
arrangements in the future to attract and retain qualified executives. If we should be unable to attract and retain qualified personnel, 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.

Item 1B.    Unresolved Staff Comments.

None.

Item 2.    Properties

Our properties consist of leased and owned facilities for product development, manufacturing, sales, support, and administrative
operations. Our headquarters facility is located in Chatsworth, California. 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. For additional information regarding

31

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Table of Contents

obligations
under operating leases, see Note 11 to the Consolidated Financial Statements, in Item 8 of this Form 10-K. Listed below are the facility locations for our
primary business segments:



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, 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 as a consequence of the pending restatement of our historical financial
statements. A description of the facts regarding the appointment of a Special Committee of independent directors to investigate the issues and the completion of the restatement is set forth in
Item 7. and in Note 3 to the Consolidated Financial Statements in Item 8 of this Form 10-K.

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 was included as Exhibit 99.1 to our Current Report on
Form 8-K filed with the SEC on June 6, 2008. 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 consolidated lawsuits and the defendants have stipulated to a postponement of further
action until after the issuance by MRV of its restated financial statements, and have further agreed to mediation of the litigations.

SEC Inquiry

On June 5, 2008, we notified the SEC that we were conducting a voluntary stock option and accounting review and informed the SEC
as to our expectations regarding the restatement of our financial statements. We were notified by the SEC that it was conducting an inquiry into the matter. On

32

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Table of Contents

August 26,
2009, we were formally notified by the SEC's Los Angeles Regional Office that its investigation had been completed and that it was not intending to recommend any enforcement action.

Fiberxon Acquisition Litigation

On March 25, 2009, we filed a complaint in the Superior Court of Los Angeles County, California, against former executives,
directors and stockholders of Fiberxon, a subsidiary of the Company acquired in July 2007 for consideration aggregating approximately $130.9 million, excluding $4.0 million in
acquisition costs. The complaint seeks to recover damages in connection with the sale of Fiberxon to the Company and contains claims for breaches of representations and warranties made by the seller
and others under the acquisition agreement, and intentional misrepresentation in connection with the sale.

MRV
acquired Fiberxon using a combination of cash and shares of the Company's Common Stock totaling approximately $99.4 million which the Company paid to Fiberxon's former
stockholders at the closing of the acquisition. In addition, MRV agreed to pay up to $31.5 million in cash or shares of the Company's Common Stock, or a combination thereof (the "deferred
consideration payment"), within 18 months of receipt by us of Fiberxon's audited financial statements if Source Photonics did not complete an initial public offering of its common stock within
such 18-month period. Source Photonics did not complete the initial public offering within the 18-month period and the deferred consideration payment matured in March 2009.

The
complaint alleges that we have incurred damages in excess of $31.5 million (in an amount to be finally determined through appropriate proceedings) as a result of the claims we
allege in the complaint. The claims alleged in the complaint include, among other things, breach of non-competition agreements and tortious interference with employee contracts
against former members of Fiberxon's management. MRV believes that it complied with the contractual terms of the acquisition agreement by providing, within the time specified, requisite information
regarding offsets against the deferred consideration payment, and its lawsuit seeks to recover damages in addition to those amounts. We are currently in the process of negotiating in good faith with
the seller's representative pursuant to the terms of the merger agreement that require such negotiation. The outcome of such discussions cannot be reliably predicted at this time. To date, MRV has not
paid any portion of the deferred consideration payable.

The
results of any litigation are inherently uncertain and there can be no assurance that we will prevail in this litigation. Further, the defendants may deny our claims and assert
claims seeking affirmative relief against us, including relief that seeks recovery of the deferred consideration payment. We plan to pursue our claims vigorously and expect the litigation potentially
to be protracted and costly.

Item 4.    Submission of Matters to a Vote of Security Holders.

None.

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Table of Contents

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" in 2008. In June 2009, MRV was delisted from Nasdaq and
is currently trading on the Pink Sheets. The following table sets forth the high and low sales prices for the periods indicated:

High

LowYear 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

$
0.21Year Ended December 31, 2007First quarter ending March 31

$
4.50

$
3.34Second quarter ending June 30

$
4.06

$
3.00Third quarter ending September 30

$
3.20

$
2.15Fourth quarter ending December 31

$
3.38

$
2.01


As
of September 25, 2009, the closing price of our Common Stock was $0.98 per share, and there were approximately 2,684 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 2008.

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, 2008.

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)


5,707,427

$
2.29


8,318,300Equity compensation plans not approved by security holders (2)


7,473,398

$
3.11


0Total (3)


13,180,825

$
2.76


8,318,300


---

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Table of Contents

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 required such approval at the time the Consolidated Plan was adopted.

Upon
adoption of the Omnibus Plan, the 1997 Incentive and Nonstatutory Stock Option Plan and the plans set forth in the bulleted paragraphs above in footnote (2) were terminated
and shares available for future grants of options or warrants under these plans, including shares that became and become available as a consequence of the lapse, expiration or forfeiture of
outstanding options or warrants granted under such terminated plans, are 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, the RDG SmallCap Technology Index and the S&P Small Cap Information Technology Index. We transitioned from the Nasdaq Stock Market (U.S. Companies) Index
to the Nasdaq Composite index because the Nasdaq Stock Market (U.S. Companies) Index no longer exists and the Nasdaq Composite Index is its equivalent. We are adding the RDG SmallCap Technology Index
prepared by Research Data Group as we are transitioning this year from the S&P SmallCap 600 Information Technology Index, and in future years will not be providing that index as a comparison metric.

35

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Table of Contents

The
graph assumes $100 was invested on December 31, 2003, in our Common Stock and the companies in each of the Nasdaq Composite Index, the RDG SmallCap Technology Index and the
S&P SmallCap Information 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,
The RDG SmallCap Technology Index And The S&P SmallCap 600 Information Technology Index

CHART

---

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

Cumulative Total ReturnPrice as of December 31 for

2003

2004

2005

2006

2007

2008MRV Communications, Inc.


100.00


97.61


54.52


94.15


61.68


20.48NASDAQ Composite


100.00


110.10


113.12


127.05


136.81


79.93RDG SmallCap Technology


100.00


95.54


95.86


109.69


103.57


51.16S&P SmallCap 600 Information Technology


100.00


99.32


102.99


114.84


120.74


70.33


36

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Table of Contents

Item 6.    Selected Financial Data.

The following information as of and for the years ended December 31, 2007, 2006, 2005 and 2004 has been restated to reflect
adjustments to our previously issued financial statements as more fully discussed in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in
Note 3, "Restatement of Previously-Issued Financial Statements" to the Consolidated Financial Statements included in Item 8 of this Form 10-K. This financial data has
been restated to correct our previous accounting for share-based compensation and other items. 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 financial data as of December 31, 2008 and 2007 and for each of the three years in the period ended December 31, 2008, are derived from our audited
financial statements included in Item 8 of this Form 10-K. The financial data as of December 31, 2006, 2005 and 2004 and for the years ended December 31, 2005
and 2004 are derived from our restated financial statements not contained herein. The historical results do not necessarily indicate results expected for any future period.

We
have not amended our previously-filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by the restatement.
The financial information that has been previously filed or otherwise reported for these periods is superseded by the information in this Form 10-K, and the financial statements and
related financial information contained in such previously-filed reports should no longer be relied upon.

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

2008

2007
(Restated(1)(2))

2006
(Restated(1))

2005
(Restated(1))

2004
(Restated(1))Statements of Operations Data:Revenues

$
538,022

$
448,237

$
356,489

$
283,698

$
271,658Cost of goods sold


388,021


320,750


244,385


193,887


179,497Gross profit


150,001


127,487


112,104


89,811


92,161Operating costs and expenses:Product development and engineering


38,746


33,387


28,369


25,964


13,086Selling, general and administrative


129,019


102,694


88,542


72,965


53,306Impairment of goodwill and other intangibles


100,250





52





Amortization of other intangibles


2,434


1,906








Total operating costs and expenses


270,449


137,987


116,963


98,929


66,392Operating income (loss)


(120,448
)

(10,500
)

(4,859
)

(9,118
)

25,769Other income (expense), net


(246
)

(4,688
)

926


(1,911
)

(637
)Income (loss) before provision for Income taxes


(120,694
)

(15,188
)

(3,933
)

(11,029
)

25,132Provision for income taxes


2,510


3,906


3,450


3,410


2,571Net income (loss)

$
(123,204
)
$
(19,094
)
$
(7,383
)
$
(14,439
)
$
22,561Basic and diluted loss per share:Basic income (loss) per share

$
(0.78
)
$
(0.14
)
$
(0.06
)
$
(0.14
)
$
0.22Basic weighted average shares outstanding


157,323


140,104


120,902


104,350


104,793Diluted income (loss) per share

$
(0.78
)
$
(0.14
)
$
(0.06
)
$
(0.14
)
$
0.19Diluted weighted average shares outstanding


157,323


140,104


120,902


104,350


121,234


37

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Table of Contents



December 31,(in thousands)

2008

2007
Restated(1)

2006
Restated(1)

2005
Restated(1)

2004
Restated(1)Selected Balance Sheet Data:Cash and cash equivalents

$
67,950

$
72,474

$
91,722

$
67,984

$
77,226Working capital


111,649


130,244


168,328


96,554


110,594Total assets


392,519


498,965


343,455


264,154


279,412Total long-term liabilities


9,274


7,616


30,295


29,694


30,978Additional paid-in capital


1,403,663


1,399,630


1,285,877


1,209,275


1,209,196Accumulated deficit


(1,248,639
)

(1,125,435
)

(1,106,341
)

(1,098,958
)

(1,084,518
)Total stockholders' equity


166,700


289,922


187,308


113,894


138,280


---

See
Item 7. "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and Note 3, "Restatement of Previously-Issued Financial Statements" to
the Consolidated Financial Statements set forth in Item 8 of this Form 10-K for the tables that reflect the impact of the restatement adjustments on the 2007 and 2006
statements of operations data and the year end 2007 balance sheet data. The tables below reflect the impact of the restatement adjustments on the 2005 and 2004 statements of operations and the
December 31, 2004, 2005 and 2006 balance sheet data (in thousands):

For the year ended December 31, 2005

As previously reported

Adjustments

As restatedRevenue

$
283,698

$


$
283,698Cost of goods sold


193,979


(92
)

193,887Gross profit


89,719


92


89,811Operating costs and expenses:Product development and engineering


26,051


(87
)

25,964Selling, general and administrative


72,402


563


72,965Total operating costs and expenses


98,453


476


98,929Operating loss


(8,734
)

(384
)

(9,118
)Other income (expense), net


(1,791
)

(120
)

(1,911
)Loss before income taxes


(10,525
)

(504
)

(11,029
)Provision for income taxes


5,774


(2,364
)

3,410Net loss

$
(16,299
)
$
1,860

$
(14,439
)Net loss per share:Basic and diluted

$
(0.16
)
$
0.02

$
(0.14
)Weighted average number of shares:Basic and diluted


104,350





104,350


38

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Table of Contents



For the year ended December 31, 2004

As previously
reported

Adjustments

As restatedRevenue

$
271,658

$


$
271,658Cost of goods sold


179,852


(355
)

179,497Gross profit


91,806


355


92,161Operating costs and expenses:Product development and engineering


24,949


(11,863
)

13,086Selling, general and administrative


74,045


(20,739
)

53,306Total operating costs and expenses


98,994


(32,602
)

66,392Operating loss


(7,188
)

32,957


25,769Interest expenseCost of debt conversionOther income (expense), net


(456
)

(181
)

(637
)Gain (loss) before income taxes


(7,644
)

32,776


25,132Provision for income taxes


3,036


(465
)

2,571Net loss

$
(10,680
)
$
33,241

$
22,561Net loss per share:Basic

$
(0.10
)
$
0.32

$
0.22Diluted

$
(0.10
)
$
0.29

$
0.19Weighted average number of shares:Basic


104,793





104,793Diluted


104,793


16,450


121,243


Prior
to the adoption of Statement of Financial Accounting Standards No. 123(R),Share Based Payments("SFAS No. 123R"), MRV
accounted for share-based compensation under the intrinsic value method of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to
Employees("APB 25") as allowed for the fiscal years ending December 31, 2005 and 2004. The financial statement disclosure impact of the restatement on previously
reported share-based compensation expense by functional line item, including income tax impact by year, for 2005 and 2004, is as follows (in thousands):

2005

2004Years ended December 31:

(As previously
reported)

Adjustments

Restated

(As previously
reported)

Adjustments

RestatedCost of goods sold

$


$
35

$
35

$


$
(348
)
$
(348
)Product development and engineering





(86
)

(86
)




(11,868
)

(11,868
)Selling, general and administrative


162


(288
)

(126
)




(20,747
)

(20,747
)Total share-based compensation expense

$
162

$
(339
)
$
(177
)
$


$
(32,963
)
$
(32,963
)


39

---





Table of Contents

The financial statement impact of the restatement on previously reported selected balance sheet data for 2006, 2005 and 2004, is as follows (in thousands):

December 31, 2006

2006
(As previously
reported)

Adjustments

RestatedAssetsCurrent assets:Cash and cash equivalents

$
91,722

$


$
91,722Short-term marketable securities


25,864





25,864Time deposits


821





821Accounts receivable, net


95,244





95,244Inventories


61,361


24


61,385Deferred income taxes


895


83


978Other current assets


13,607


162


13,769Total current assets


289,514


269


289,783Property and equipment, net


14,172





14,172Goodwill


36,348


(3,836
)

32,512Deferred income taxes


1,460


414


1,874Other assets


4,728


386


5,114Total assets

$
346,222

$
(2,767
)
$
343,455Liabilities and stockholders' equityCurrent liabilities:Short-term obligations

$
26,289

$


$
26,289Accounts payable


47,384





47,384Accrued liabilities


29,704


3,886


33,590Deferred revenue


7,624





7,624Other current liabilities


5,926


642


6,568Total current liabilities


116,927


4,528


121,455Convertible notes


23,000





23,000Other long-term liabilities


7,295





7,295Minority interest


5,248


(851
)

4,397Commitments and contingenciesStockholders' equity:Preferred Stock








Common Stock


213





213Additional paid-in capital


1,231,941


53,936


1,285,877Accumulated deficit


(1,036,924
)

(69,417
)

(1,106,341
)Treasury stock


(1,352
)




(1,352
)Accumulated other comprehensive income (loss)


(126
)

9,037


8,911Total stockholders' equity


193,752


(6,444
)

187,308Total liabilities and stockholders' equity

$
346,222

$
(2,767
)
$
343,455


40

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Table of Contents



December 31, 2005

2005
(As previously
reported)

Adjustments

RestatedAssetsCurrent assets:Cash and cash equivalents

$
67,984

$


$
67,984Time deposits


1,475





1,475Accounts receivable, net


92,466


445


92,911Inventories


42,216


100


42,316Deferred income taxes


873


15


888Other current assets


7,828





7,828Total current assets


212,842


560


213,402Property and equipment, net


14,065





14,065Goodwill


33,656


(2,041
)

31,615Deferred income taxes


136


458


594Other assets


4,478





4,478Total assets

$
265,177

$
(1,023
)
$
264,154Liabilities and stockholders' equityCurrent liabilities:Short-term obligations

$
30,378

$


$
30,378Accounts payable


45,372





45,372Accrued liabilities


29,272


3,300


32,572Deferred revenue


6,076





6,076Other current liabilities


2,230


220


2,450Total current liabilities


113,328


3,520


116,848Convertible notes


23,000





23,000Other long-term liabilities


6,694





6,694Minority interest


5,151


(1,433
)

3,718Commitments and contingenciesStockholders' equity:Preferred Stock








Common Stock


177





177Additional paid-in capital


1,156,209


53,066


1,209,275Accumulated deficit


(1,031,409
)

(67,549
)

(1,098,958
)Treasury stock


(1,352
)




(1,352
)Deferred compensation





(324
)

(324
)Accumulated other comprehensive income (loss)


(6,621
)

11,697


5,076Total stockholders' equity


117,004


(3,110
)

113,894Total liabilities and stockholders' equity

$
265,177

$
(1,023
)
$
264,154


41

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Table of Contents



December 31, 2004

2004
(As previously
reported)

Adjustments

RestatedAssetsCurrent assets:Cash and cash equivalents

$
77,226

$


$
77,226Short-term marketable securities


3,395





3,395Time deposits


1,559





1,559Accounts receivable, net


80,755





80,755Inventories


42,264





42,264Deferred income taxes


2,395


101


2,496Other current assets


8,939





8,939Total current assets


216,533


101


216,634Property and equipment, net


19,089





19,089Goodwill


29,965


7,233


37,198Long-term marketable securities


1,839





1,839Investments


3,063





3,063Other assets


1,589





1,589Total assets

$
272,078

$
7,334

$
279,412Liabilities and stockholders' equityCurrent liabilities:Short-term obligations

$
25,286

$


$
25,286Accounts payable


43,209





43,209Accrued liabilities


26,915


2,770


29,685Deferred revenue


4,556





4,556Other current liabilities


2,572


732


3,304Total current liabilities


102,538


3,502


106,040Convertible notes


23,000





23,000Deferred income taxes





2,315


2,315Other long-term liabilities


5,663





5,663Minority interest


5,318


(1,204
)

4,114Commitments and contingenciesStockholders' equity:Preferred Stock








Common Stock


176





176Additional paid-in capital


1,155,474


53,722


1,209,196Accumulated deficit


(1,015,110
)

(69,408
)

(1,084,518
)Treasury stock


(1,352
)




(1,352
)Deferred compensation





(1,190
)

(1,190
)Accumulated other comprehensive income (loss)


(3,629
)

19,597


15,968Total stockholders' equity


135,559


2,721


138,280Total liabilities and stockholders' equity

$
272,078

$
7,334

$
279,412


42

---





Table of Contents

The following table shows the adjustments to the December 31, 2006 balance sheet by issue (in thousands):

Share-based
compensation
expense
(including
payroll tax
adjustment)

Compensation
arrangements
with Turnkey

Compensation
arrangements
with EDSLan

Compensation
arrangements
with Interdata

Non payroll
bonuses to
foreign
subsidiaries

Purchase
accounting
for EDSLan

Purchase
accounting
for Tecnonet

Minority
interest

Accumulated
other
comprehensive
income and
other
adjustments

Total
Adjustment
as of
December 31,
2006AssetsCurrent assets:Inventories

$


$


$


$


$


$


$


$


$
24

$
24Deferred income taxes








60

















23


83Other current assets


























162


162Total current assets








60

















209


269Goodwill





(1,515
)




(1,710
)




352


(963
)







(3,836
)Deferred income taxes














642











(228
)

414Other assets














386














386Total assets

$


$
(1,515
)
$
60

$
(1,710
)
$
1,028

$
352

$
(963
)
$


$
(19
)
$
(2,767
)Liabilities and stockholders' equityCurrent liabilities:Accrued liabilities

$
211

$
145

$
776

$


$
1,674

$
918

$


$


$
162

$
3,886Other current liabilities


























642


642Total current liabilities


211


145


776





1,674


918








804


4,528Minority interest

















(1,299
)

2,722


(2,274
)




(851
)Commitments and contingenciesStockholders' equity:Additional paid-in capital


73,632





687








4,665


(4,717
)

(1,299
)

(19,032
)

53,936Accumulated deficit


(73,843
)

(1,660
)

(1,403
)

(1,710
)

(646
)

(3,896
)

2,232


3,655


7,854


(69,417
)Accumulated other comprehensive income (loss)

















(36
)

(1,200
)

(82
)

10,355


9,037Total stockholders' equity


(211
)

(1,660
)

(716
)

(1,710
)

(646
)

733


(3,685
)

2,274


(823
)

(6,444
)Total liabilities and stockholders' equity

$


$
(1,515
)
$
60

$
(1,710
)
$
1,028

$
352

$
(963
)
$


$
(19
)
$
(2,767
)


43

---



Table of Contents

The following table shows the adjustments to the December 31, 2005 balance sheet by issue (in thousands):

Share-based
compensation
expense
(including
payroll tax
adjustment)

Compensation
arrangements
with Turnkey

Compensation
arrangements
with EDSLan

Compensation
arrangements
with Interdata

Non payroll
bonuses
to foreign
subsidiaries

Purchase
accounting
for EDSLan

Purchase
accounting
for Tecnonet

Minority
interest

Accumulated
other
comprehensive
income and
other
adjustments

Total
Adjustment
as of
December 31,
2005AssetsCurrent assets:Accounts receivable, net

$


$


$


$


$


$


$


$


$
445

$
445Inventories


























100


100Deferred income taxes








142

















(127
)

15Total current assets








142

















418


560Goodwill





(1,515
)




(1,710
)




352


(963
)




1,795


(2,041
)Deferred income taxes














548











(90
)

458Total assets

$


$
(1,515
)
$
142

$
(1,710
)
$
548

$
352

$
(963
)
$


$
2,123

$
(1,023
)Liabilities and stockholders' equityCurrent liabilities:Accrued liabilities

$
131

$
(142
)
$
606

$


$
1,242

$
918

$


$


$
545

$
3,300Other current liabilities


























220


220Total current liabilities


131


(142
)

606





1,242


918








765


3,520Minority interest

















(1,299
)

2,722


(2,856
)




(1,433
)Commitments and contingenciesStockholders' equity:Preferred stock





























Common stock





























Additional paid-in capital


73,288





162








4,665


(4,717
)

(1,299
)

(19,033
)

53,066Accumulated deficit


(73,095
)

(1,373
)

(626
)

(1,710
)

(694
)

(3,896
)

2,232


3,786


7,827


(67,549
)Treasury stock





























Deferred compensation


(324
)

























(324
)Accumulated other comprehensive income (loss)

















(36
)

(1,200
)

369


12,564


11,697Total stockholders' equity


(131
)

(1,373
)

(464
)

(1,710
)

(694
)

733


(3,685
)

2,856


1,358


(3,110
)Total liabilities and stockholders' equity

$


$
(1,515
)
$
142

$
(1,710
)
$
548

$
352

$
(963
)
$


$
2,123

$
(1,023
)


44

---



Table of Contents

The following table shows the adjustments to the December 31, 2004 balance sheet by issue (in thousands):

Share-based
compensation
expense
(including
payroll tax
adjustment)

Compensation
arrangements
with Turnkey

Compensation
arrangements
with EDSLan

Compensation
arrangements
with Interdata

Non payroll
bonuses to
foreign
subsidiaries

Purchase
accounting
for EDSLan

Purchase
accounting
for Tecnonet

Minority
interest

Accumulated
other
comprehensive
income and
other
adjustments

Total
Adjustment
as of
December 31,
2004AssetsCurrent assets:Deferred income taxes

$


$


$
101

$


$


$


$


$


$


$
101Total current assets








101




















101Goodwill





(1,515
)




(1,710
)




352


(963
)




11,069


7,233Deferred income taxes














429











(429
)

Total assets

$


$
(1,515
)
$
101

$
(1,710
)
$
429

$
352

$
(963
)
$


$
10,640

$
7,334Liabilities and stockholders' equityCurrent liabilities:Accrued liabilities

$
356

$
168

$
320

$


$
1,008

$
918

$


$


$


$
2,770Other current liabilities


























732


732Total current liabilities


356


168


320





1,008


918








732


3,502Deferred income taxes


























2,315


2,315Minority interest

















(1,299
)

2,722


(2,226
)

(401
)

(1,204
)Commitments and contingenciesStockholders' equity:Additional paid-in capital


74,106














4,665


(4,717
)

(1,299
)

(19,033
)

53,722Accumulated deficit


(73,272
)

(1,683
)

(219
)

(1,710
)

(579
)

(3,896
)

2,232


3,892


5,827


(69,408
)Deferred compensation


(1,190
)

























(1,190
)Accumulated other comprehensive income (loss)

















(36
)

(1,200
)

(367
)

21,200


19,597Total stockholders' equity


(356
)

(1,683
)

(219
)

(1,710
)

(579
)

733


(3,685
)

2,226


7,994


2,721Total liabilities and stockholders' equity

$


$
(1,515
)
$
101

$
(1,710
)
$
429

$
352

$
(963
)
$


$
10,640

$
7,334


45

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Table of Contents

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with 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 due to factors, including but not limited to, those set forth in the following and elsewhere in this Form 10-K. We assume no obligation to update any of
the forward-looking statements after the date of this Form 10-K. The following discussion and analysis is organized as follows:



Restatement of Financial Statements



On May 14, 2008, in the course of reviewing our records for two European subsidiaries, management discovered indications of
possible back-dating of stock options and other accounting errors. Over the following three weeks, management determined that the errors indicated appeared to be material. On
June 5, 2008 the Company's Board of Directors authorized a Special Committee of the Board to review the documentation, practices, and conduct pertaining to the granting of equity compensation
awards at the Company and compensation arrangements at certain foreign subsidiaries. Concurrently, management conducted a detailed review of stock option granting in conjunction with the Special
Committee. The Special Committee consisted of three independent directors who were assisted in the investigation by independent outside legal counsel and forensic accountants.

On
February 2, 2009, the Company announced the principal findings of the Special Committee, which included:



46

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Table of Contents



After
the Special Committee provided documentation compiled during its investigation to management in October 2008, management began a more thorough and detailed analysis of the option
grant procedures and available grant documentation. Our review encompassed every grant made during the period between our first grant on February 23, 1994 and our last grant on May 1,
2008 (the "Review Period") in order to determine the appropriate measurement dates, and therefore, determine the adjustments necessary to correct for errors in accounting for stock options.

As
a result of the review of our stock option practices during the Review Period, we determined that the recorded grant dates for most of the grants made during the Review Period cannot
be supported as the proper measurement dates. The stock option accounting errors corrected in the restatement were primarily caused by inadequate procedures and controls for stock option granting
activity. We concluded that exercise prices were often determined with hindsight and the recorded grant date preceded the completion of the grant approval process. We did not find any indication of
back dated option exercises.

We
also identified errors in accounting for some compensation arrangements that did not involve stock options. In some of these arrangements, we made payments to managers of our foreign
subsidiaries that should have been recorded as compensation expense, but were originally treated as purchases of minority interests in the subsidiaries. In other cases, we did not record the expenses
in the proper period. Additionally, we made payments to the managers of certain foreign subsidiaries outside of the subsidiaries' payroll system, and we failed to withhold payroll tax or pay social
security taxes. We incurred additional expenses of $1.8 million in 2008 and will incur additional expenses of approximately $0.8 million in 2009 related to the tax exposure created by
these payments.

We
found additional errors in our prior accounting for two acquisitions of subsidiaries in 1996 and 1997, and for the subsequent accounting for minority interests in those and other
subsidiaries. We also found and corrected errors in our accumulated other comprehensive income ("AOCI") balances where amounts were improperly included as a component of AOCI instead of included in
the results of operations. In addition, we made adjustments to correct errors that were not previously recorded because in each case, and in the aggregate, the underlying errors were not considered by
management to be material to the consolidated financial statements at the time the original financial statements were filed.

The
Company is restating its previously issued financial statements to correct the errors identified. The corrections for each issue shown in the following table include the related tax
effects, if applicable. These financial statements include the restatement of the balance sheet as of December 31, 2007 and the related statements of operations, stockholders' equity, and cash
flows for each of the fiscal years

47

---



Table of Contents

ended
December 31, 2006 and 2007. The Company is also restating the unaudited quarterly financial information and financial statements for interim periods of 2007 and the unaudited condensed
financial statements for the three months ended March 31, 2008. Our fiscal years 1994 through 2007 and the quarter ended March 31, 2008 are referred to below as the "Restatement Period".

For
a description of the material weaknesses in our internal control over financial reporting identified by management as a result of the investigation and our related review, and
management's plan to remediate any remaining material weaknesses, see Item 9A. "Controls and Procedures" of this Form 10-K. The Company has already implemented several
measures in order to remediate these material weaknesses.

The
following table summarizes the effect of the restatement on the accumulated deficit as of December 31, 2005 and the impact on net income for the years ended
December 31, 2006 and 2007 (in thousands):

Years Ended December 31:

2007

2006

Cumulative amount at
December 31, 2005Share-based compensation expense (including payroll tax adjustment)

$
(579
)
$
(748
)

(73,095
)Compensation arrangements with Turnkey


(274
)

(287
)

(1,373
)Compensation arrangements with EDSLan


(628
)

(777
)

(626
)Compensation arrangements with Interdata








(1,710
)Non payroll bonuses to foreign subsidiaries


54


48


(694
)Purchase accounting for EDSLan








(3,896
)Purchase accounting for Tecnonet








2,232Minority interest


261


(131
)

3,786Accumulated other comprehensive income and other adjustments


700


27


7,827Total

$
(466
)
$
(1,868
)
$
(67,549
)




In order to facilitate the review of all stock options granted during the Review Period, the grants were grouped into the following
three time-phased categories:

Category

Number of
grant dates

Number of
individual grants

Number of
underlying sharesPre-1998 Grants


26


238


6,849,6851998 up to Post-SOX Grants (March 30, 2004)


108


4,485


24,122,291Post SOX Grants (March 31, 2004 and after)


35


2,719


13,393,887Total


169


7,442


44,365,863


Over
the Review Period, we awarded options to employees, officers, directors, and to non-employees that provided services to the Company. We granted most options through
periodic grants to large groups of employees. Our officers and directors generally received annual grants. Other option grants were made to our employees and officers in connection with their hire and
promotion.

Our
process for awarding and documenting option grants changed several times. The most substantial changes occurred in March 2004 when we adopted new procedures in compliance with the

48

---



Table of Contents

Sarbanes-Oxley
Act ("SOX"). The investigation found that the new procedures we implemented for SOX compliance, including the use of predetermined grant dates, eliminated the ability to select grant
dates based on historical prices although certain limited measurement date exceptions still occurred.

Prior
to March 31, 2004, our stock option granting process was informal and poorly documented. Management's review of the available documentation indicated that option grants in
the pre-SOX period were determined through two informal, separate and contemporaneous processes. In one process, we determined the list of recipients and the number of options each would
receive. In the other process, we chose a grant date for the stock options by reviewing the closing stock prices of the preceding quarter and selecting a date on which the stock price was at or near
the quarterly low. We generally completed both processes as part of the quarterly reporting cycle.

Our
review also indicated that the Board of Directors took an active role in the approval of stock option grants from the initial grants in 1994 through the middle of 1995. From the
middle of 1995 until the new processes were implemented for SOX compliance, neither the Board nor any of its committees were directly involved in approving grants to specific employees. During this
period, the Board pre-authorized an annual allotment of stock options and left the allocation to specific recipients to the corporate executive team in consultation with the heads of each
division. The annual allotment practice was initially informal, but beginning in 2001 the allotments were formally approved by the Board.

Under
APB 25, the measurement date for a stock option grant is the first date when both the number of options that an individual employee is entitled to receive and the exercise
price is known with finality. Accordingly, the grant date we used to account for these options was not the measurement date under APB 25 and additional compensation expense equal to the
intrinsic value (the excess of the fair value of the underlying stock over the exercise price of the option) on the measurement date should have been recognized over the vesting period. In our
originally reported financial statements, no compensation expense was recorded under APB 25 when the strike price was equal to the stock price on the date of grant because the grant date was
used as the measurement date. In other cases, we granted stock options with a strike price that was less than the stock price on the original grant date, and we recognized $128.5 million in
deferred stock expense over the period from 2000 to 2004. In order to determine the adjustments needed for the restated financial statements, we gathered and reviewed all available information on a
grant-by-grant basis that might indicate the appropriate measurement date. We did not find relevant documentation for many grants due to several factors including a) we did not maintain careful
stock option records at the time, b) we did not initially retain certain information which we now consider relevant, c) our system for tracking stock option grants prior to August 2002
was not centralized or sophisticated, and d) some of the grants occurred many years ago. As a result, we had to consider a variety of factors in determining the appropriate measurement date in
order to correct the accounting for each option grant in the restatement.

In
addition, for the period prior to late 2000, our stock option administration was decentralized. We had multiple stock option plans and our administration was done by multiple people
at different locations, generally using spreadsheets to track the grants. A portion of the administration was handled by an outside accounting firm. The records of this outside accounting firm had not
been retained at the time the investigation began. The quality of available information is significantly greater for the periods after late 2000, when the process was brought in-house. In August 2002,
the Company implemented an electronic option tracking and administrative software program to replace the manual spreadsheet process and centralize all of the stock option administration.

The
post-SOX period began on March 31, 2004. Generally, with limited exceptions, the procedures implemented for SOX compliance were effective to halt the practice of
selecting grant dates with hindsight. However other measurement date errors did occur, generally related to the finalization of the number of options awarded to particular recipients after the stated
grant date. We continued to make improvements to the granting process and control procedures during this period, and took steps to

49

---



Table of Contents

improve
the quality of documentation to support stock option grants. One of the most significant policy changes occurred in April 2004 when we began granting stock options only on certain
predetermined dates during the year. Beginning in 2004, the Board ratified grant awards after issuance until the policy was modified in November 2006 to require the Board's approval of all grants
prior to issuance.



As a result of the stock option adjustments, we have recorded, as appropriate, additional pre-tax share-based compensation,
net of forfeitures, of $74.1 million for the years 1994 through 2007 under APB 25 and related interpretations and under SFAS No. 123R. In addition to adjustments for revised
measurement dates, the Company also recorded additional adjustments to correct errors in accounting for certain modifications, acquisition grants, and grants made to non-employees, which
are discussed further below. The adjustment to the cumulative compensation expense through December 31, 2007, by type of adjustment, is shown in the following table (in thousands):

Revised measurement dates, excluding acquisition and non-employee grants

$
36,535Repricings and other modifications


25,721Acquisition grants


10,344Non-employee grants


1,545Total adjustment

$
74,145


This
adjustment increased the cumulative restated share-based compensation expense through December 31, 2007 to a total of $210.0 million.



APB 25 defines the measurement date as the first date on which both the number of options that an individual employee is
entitled to receive and the exercise price are known. We adopted SFAS No. 123R on January 1, 2006. Under SFAS No. 123R, compensation expense is recognized for the fair value of
the share-based compensation on the grant date. Under SFAS No. 123R, the grant date is the date on which the employee and employer reach a mutual understanding of the key terms and conditions
of the award and all required approvals have been obtained.

We
reviewed available documentation concerning grants and determined that signed Board minutes or written consents that specifically referenced the approval of grants (including the
recipient, the number of underlying shares and the exercise price) in exhibits when the date of the action could be objectively verified (for example, through email or fax header dates) ("Approval
Documentation") represented the best evidence of the finality of grant approval. Where Approval Documentation was available, we relied on it to confirm the grant date originally recorded by the
Company or to determine the appropriate measurement date for the grant. We were able to rely on Approval Documentation to determine the measurement date for several grants in the pre-1998
time period, and a majority of grants made from April 1, 2004 to the most recent grant date of May 1, 2008; however, Approval Documentation was not available during the intervening
period because the Company's stock option granting practice during this period did not include preparing Board minutes or written consents with a list of grants by recipient on or before the grant
date.

Where
Approval Documentation was not available, we used other evidence of measurement dates including internal memoranda in electronic form documenting options grants, emails, faxes,
handwritten notes and other documentation relevant to determining a measurement date or indicating previously approved grants ("Grant Documentation"). In some cases this Grant Documentation did not
indicate a measurement date with certainty and we applied judgment to determine the appropriate measurement date using the Grant Documentation available.

50

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Table of Contents

In
the absence of Approval Documentation or other Grant Documentation indicating a specific measurement date, we determined the first date at which the number of shares and exercise
price
must have been known with finality (the "Outside Date"). Sometimes documentation was available that, although not instructive to a specific Measurement Date, indicated an Outside Date. For example,
the date a Form 5 was filed for an officer or director after year end would be an Outside Date for the grants listed on that Form 5, or a list known to have been created by a particular
date, such as a list with a fax header or a spreadsheet attached to an email would provide an Outside Date for the grants on that list. For grants after we began using the option tracking and
administrative software program, we were able to use the record added date recorded by the software (the "Record Add Date") as an Outside Date. Finally, we used the quarterly earnings release date
(the "Release Date") as an Outside Date for the options granted during that quarter. We decided that the use of the Release Date was appropriate because information collected during the Investigation
indicated that the processes of finalizing a list of grant recipients and setting the exercise price were part of the quarterly financial reporting process which was substantially complete by the
Release Date. When Grant Documentation indicating the precise measurement date was not available, we used the earliest Outside Date determined for that grant. The table below shows the percentage of
options in each time period that were established by each method:

Outside Dates:



Grant or Approval
Documentation:Time period:

Record Add
Dates

Release Date

Other
Documents

Total Outside
Dates

Revised
Measurement
Date

Original
Grant
Date

TotalPre-1998 period


0
%

69
%

1
%

70
%

2
%

28
%

100
%1998 to Post-SOX period


7
%

19
%

8
%

34
%

30
%

36
%

100
%Post-SOX period


3
%

0
%

4
%

7
%

0
%

93
%

100
%All time periods


5
%

21
%

5
%

31
%

32
%

37
%

100
%


The following table summarizes measurement date adjustments and cumulative pre-tax share-based compensation recognized by the Company, as
adjusted, as a result of the measurement date determination process for the period 1994 to 2007.

Basis for measurement date

Grants

Options

Percent

Cumulative
restated
share-based
compensation
expense
(in 000's)Outside date estimated by:Record Add Dates


596


2,192,711


5
%
$
2,299Release Dates


715


9,353,834


21
%

44,906Other documentation


959


2,335,428


5
%

35,270Subtotal of Outside Dates


2,270


13,881,973


31
%

82,475Revised measurement date established by Grant or Approval Documentation


2,142


14,319,129


32
%

98,783Subtotal of adjusted measurement dates


4,412


28,201,102


63
%

181,258Original grant date supported by Grant or Approval Documentation


3,030


16,164,761


37
%

28,701Total population


7,442


44,365,863


100
%
$
209,959


51

---





Table of Contents



Many modifications to grants that we had made had not been historically accounted for correctly. We identified instances where
modifications to grants effectively renewed or extended the life of the grants, or accelerated the vesting of options in connection with an employee's termination of employment. We recorded
$4.0 million in additional compensation expense related to these types of modifications. Certain grants were modified to alter the grant date exercise price through a direct repricing of the
grant or a cancellation of the grant and issuance of a replacement grant at a lower exercise price. The proper accounting for repriced options requires that the grants be remeasured at each reporting
date from the date of the repricing until they are exercised, forfeited or expired. We did not properly record these repriced grants. Accordingly, we have recorded an additional $21.7 million
in compensation expense, net of forfeitures, for these repricings in the restated financial statements. Together, the adjustments necessary to correct the previously issued financial statements for
repricings and other modifications totaled $25.7 million.



In connection with several of our acquisitions made during 2000 and 2001, we issued 3,768,000 stock options to employees of the newly
acquired companies. The purchase agreements for these acquisitions specified that the number of options that would be granted to the employees would be the number of options needed to provide the
employees with a specified amount of deferred compensation based on the average stock price for a period at or near the execution of the definitive agreement (or in some cases the closing date) and a
specified exercise price. We incorrectly used the deferred compensation specified in the purchase agreements rather than the amount calculated using the actual number of stock options issued and the
closing stock price on the measurement date. In many cases, we did not finalize the list of grant recipients until several months after the closing of the acquisition. In addition, we incorrectly
accounted for stock options issued in connection with two acquisitions as exchanges of awards held by employees of the acquired entities, and included the fair value of such options as part of the
purchase price in both instances. As a result, an aggregate $20.5 million of compensation expense was incorrectly recorded as goodwill at the acquisition dates. This goodwill was subsequently
impaired. We have corrected these errors by recording adjustments to increase compensation expense for two acquisitions by a total of $25.4 million, and to decrease compensation expense for
four acquisitions by a total of $15.1 million, for a net increase of $10.3 million in the restated financial statements.



We made stock option grants to outside consultants under contractual arrangements with us. At the time of grant, these individuals did
not meet the IRS Revenue Ruling 87-41 definition of an employee. These grants have been restated to be accounted for as non-employee grants under the relevant accounting
literature at the time. We should have expensed the fair value of grants to non-employees in the period in which the non-employee provided the related goods or services. In the
restated financial statements, we recorded compensation expense of $1.5 million, net of forfeitures.



Based on measurement date changes resulting from our options review, certain grants of stock options made during the Review Period were
priced below fair market value on the revised measurement date, rather than at fair market value. Consequently, certain grants intended to be classified as incentive stock options ("ISOs"), requiring
pricing at no less than fair market value on the date of grant, should have been classified as nonqualified stock options. We did not withhold federal income taxes, state income taxes, FICA or
Medicare on the options that were issued as ISOs that should have been treated as nonqualified stock options. To reflect correctly these exercises in the restated financial statements, we

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accrued
payroll tax, penalty, and interest expenses related to nonqualified stock options originally classified as ISOs in the periods in which the underlying stock options were exercised. Then, in
periods in which the liabilities were legally extinguished due to statutes of limitations, the expenses were reversed and recognized as a reduction of expense. The statute of limitations has expired
with respect to all exercises prior to December 31, 2005, which represents the vast majority of the exercises of nonqualified stock options originally classified as ISOs. The Company has
maintained a full valuation allowance against its U.S. net operating loss carry forwards ("NOLs"), and accordingly, there was no impact on the Company's provision for income taxes on
share-based compensation expenses.



Measurement Date DeterminationWe have determined revised measurement dates for stock option grants based on the totality of the
information
available to us. Each revised measurement date reflects the date for which there is objective evidence that the required granting actions necessary to approve the grants were completed. For grants
where there was not sufficient documentation to support the determination of the precise date when the number of shares and exercise price were finalized, we used all available relevant information to
form a reasonable conclusion as to the most likely measurement date for such options. In determining the revised measurement dates we placed different levels of reliance on the various types of
documents. "Outside Dates" are dates by which the options must have been granted, but are generally not the actual date the granting actions were completed. Unlike the Outside Dates determined through
reliable documentation, the Release Date does not provide direct evidence that the terms of the grants were known with finality at that date.

In
light of the significant judgments used in establishing these revised measurement dates and the fact that the quality and quantity of available documentation required judgment in
determining the date at which finality was achieved for the majority of the grants, alternative approaches to those used by us could have resulted in different share-based compensation expense than
recorded in the restatement. While we considered various alternative approaches, we believe, based on all relevant factors, that the approach we used was the most appropriate under the circumstances.

Sensitivity Analyses Performed.For those grants where Approval Documentation or other Grant Documentation existed, no judgment of
material
consequence was applied in selecting the measurement date. For the remaining grants we prepared a sensitivity analysis to determine the hypothetical minimum and maximum compensation expense charges
that we might have recorded for these grants had the actual measurement date been known and it occurred on the date when our stock price was the highest or lowest within the possible range of dates.
While we believe the evidence and methodology we have used to determine the revised measurement dates to be the most appropriate, we also believe that illustrating the differences in share-based
compensation expense using these alternative hypothetical date ranges provides incremental insight into the range within which share-based compensation expense could have fluctuated if we chose other
measurement dates. We selected the highest and lowest closing price of our Common Stock for the period from the original stock option grant date until the Outside Date to determine the range of
potential compensation expense. We then compared these aggregate amounts to the share-based compensation expense that we recorded in the restatement. While this methodology does not represent the
charges that would have resulted had we chosen to apply an alternative methodology it does provide the hypothetical high and low range of possible compensation charges for these grants. We performed
sensitivity analyses on the grants for which the measurement date was determined by reference to an Outside Date. This included Record Add Dates, Release Dates, and other Outside Dates.

Grants
where the revised measurement dates were determined by Outside Dates accounted for $82.5 million of the $210.0 million of cumulative share-based compensation expense
recognized in the restated financial statements for the period from 1994 to 2007. The total expense recorded in the restated financial statements for these grants included $12.0 million of
expense for repricings,

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modifications,
non-employee grants, and fair value expense under SFAS No. 123R, which is not shown in the tables below. The amounts below indicate the amount of intrinsic value of
the options under the APB 25 method attributed over the vesting period, and only that portion of the expense which is dependent on the fair value of our stock price on the measurement date. The
intrinsic value of the grants with Outside Dates as the measurement dates was $70.5 million.

Record Add Dates
(in millions of dollars)

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

TOTALHigh Date


























0.3


0.7


0.3


0.1





1.4Measurement Date


























0.3


0.5


0.2


0.1





1.1Low Date














































Release Dates
(in millions of dollars)

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

TOTALHigh Date


0.9


5.8


4.9


3.5


3.7


15.9


10.8





1.3


0.6


(0.1
)







47.3Measurement Date


0.6


4.3


3.1


2.6


2.7


13.2


7.1


0.1


0.6


0.4


(0.1
)







34.6Low Date


0.1


0.3


0.3


0.9


0.9


0.9


0.6


0.1


0.1














4.2




Other Outside Dates
(in millions of dollars)

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

TOTALHigh Date

















26.4


18.2


4.2


2.1


0.1


0.1








51.1Measurement Date

















18.1


12.4


2.9


1.4














34.8Low Date

















15.7


10.8


2.6


1.3














30.4




Aggregate of Outside Dates
(in millions of dollars)

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

TOTALHigh Date


0.9


5.8


4.9


3.5


3.7


42.3


29.0


4.2


3.7


1.4


0.3


0.1





99.8Measurement Date


0.6


4.3


3.1


2.6


2.7


31.3


19.5


3.0


2.3


0.9


0.1


0.1





70.5Low Date


0.1


0.3


0.3


0.9


0.9


16.6


11.4


2.7


1.4














34.6




The adoption of SFAS No. 123R, as previously reported, did not include a cumulative effect of a change in accounting principle
in 2006, the period of adoption. As a consequence of the restatement adjustments, we recorded as a decrease to net loss, a cumulative effect adjustment of $0.2 million, net of tax, as of
December 31, 2005. This adjustment reflects the difference between using actual forfeitures under APB 25 and estimated forfeitures under APB 25 for unvested stock options
outstanding on the adoption date.

Additionally,
upon the adoption of SFAS No. 123R, the unamortized balance of $0.3 million of deferred share-based compensation, as restated, within stockholder's equity was
reclassified to additional paid in capital.



As of January 1, 2006 we adopted SFAS No. 123R which requires that we record as stock compensation expense the fair value
of stock options awarded to employees. We also reviewed the assumptions previously used to calculate stock compensation expense under SFAS No. 123R and concluded that the assumptions used for
expected life of its awards and the assumption used for the volatility of our equity securities were not appropriate given information available at the time. See Note 14 to the Consolidated
Financial Statements in Item 8. of this
Form 10K for the assumptions used to calculate stock compensation expense for the years ended December 31, 2006 and 2007.

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In 1997, we acquired 100% of Interdata, our subsidiary in France. Following the acquisition, we created a holding company between MRV
and Interdata and issued shares representing 30% of the holding company to the managers of Interdata under the terms of a Shareholders' Agreement. The managers had the right to put the shares back to
us at a price determined by a formula based on the revenue growth from 1997. These shares were put back to MRV in 2002 and 2003 and we paid approximately $1.7 million in accordance with the
formula set forth in the Shareholders' Agreement. We originally treated these payments as purchases of a minority interest in Interdata, and no compensation expense was recognized. This arrangement
should have been treated as a stock based compensation arrangement under APB 25, and the $1.7 million payment should have been recorded as an expense in the period from 1997 to 2003. We
corrected this with an adjustment to our December 31, 2003 balance sheet to increase accumulated deficit and decrease goodwill by this amount.

In
1998, we founded a Swiss subsidiary, Turnkey Communications AG ("TurnKey"), and entered into agreements with its key managers whereby the managers were granted rights to receive
shares of TurnKey common stock, and upon exercise of such rights, we were required to repurchase these shares from the managers and the managers were required to sell them to us. The agreements
provided a formula to calculate the repurchase price for the shares based on the revenue of TurnKey during the four quarters preceding the exercise. Since the net result of these transactions was a
cash payment to the managers rather than a change in ownership, we have now determined that the substance of these agreements was a compensation arrangement for the managers and not an equity
transaction. We did not account for these agreements until exercises were made by the option holders. In July 2002, the managers exercised options representing approximately 60% of the total and the
required payment to repurchase such shares was $1.8 million. We paid $240,000 in cash and settled the remaining balance by issuing 1,133,548 shares of MRV Common Stock to the managers. When this
settlement occurred in 2002, we incorrectly recorded this transaction as a purchase of a minority interest and recorded goodwill of $1.5 million and AOCI of $253,000. In September 2007, the managers
exercised their options to purchase another 32% of the total and pursuant to the option agreements our required payment to repurchase these shares was $553,000. We paid $194,000 of this amount in 2008
and the remaining $359,000 was recorded as a liability at December 31, 2008. Under these arrangements, we should have recorded a liability equal to the required payment if the rights had been
exercised as of the balance sheet date until settled, and recorded compensation expense for the changes in the liability between balance sheet dates.

We
had an annual profit-sharing arrangement beginning in 2001 with the managing directors of EDSLan S.r.l. ("EDSLan"), a subsidiary located in Italy, which provided for a cash
bonus payment based on the adjusted net income of EDSLan during the year. In our restated financial statements we have made adjustments to correct several errors in our accounting for the
profit-sharing arrangement. In some years, we did not accrue the expense in the year it was earned, and instead recognized the expense in the year that we made the payments. In several years, we
calculated the bonus amount incorrectly. In 2004 we did not accrue the bonus, and in 2005 we settled the liability through the issuance of 100,000 shares of stock that were restricted for one year. We
recognized expense for the fair value of the stock at the time it was issued. However, we had guaranteed that the value of the shares would be sufficient to cover the liability by the end of the
restriction period, and we did not account for this element of the arrangement properly. In 2005 and 2006, we did not accrue the bonus amounts and we have made correcting adjustments in the restated
financial statements to reflect the expense and liability related to these bonuses. In each of 2006 and 2007, we granted the managing directors 330,000 stock options under an agreement that the stock
options would settle the liability for 2005 and 2006, respectively, to the extent the options resulted in realized gains to the recipients. At December 31, 2007, the options were still
outstanding, the exercise price exceeded the fair value of the stock, and the bonus liability remained outstanding. We expensed the fair value of the stock options over the one-year
vesting period.

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During
the period from 2002 through 2007, we made cash bonus payments in U.S. dollars directly to several employees of three foreign subsidiaries. The bonus payments totaled
$2.7 million and were generally recognized in the proper period. However, these bonus amounts should have been recorded in local currency and paid by the foreign subsidiaries through their
payroll system. In addition, we have restated certain segment data in 2006 and 2007 for these adjustments because the bonus amounts were incorrectly included in the corporate unallocated operating
expenses rather than being included in the applicable segments' results. We failed to withhold payroll taxes or pay social security taxes on these amounts. We have worked with the impacted employees
and foreign subsidiaries to correct the foreign tax deficiencies and have recorded additional expenses to reflect our tax liability in the years the payments were made. In addition, we agreed to make
additional payments in 2008 and 2009 to allow our employees to make the necessary tax payments due for these bonuses. We recorded expenses related to these payments of $1.8 million and
$0.8 million in 2008 and 2009, respectively, according to when we made the decision to make the additional payments.



At December 31, 2003, the AOCI balance included unrealized losses amounting to $3.4 million that should have been
recognized in operations in 2002 as a result of the sale of certain Asian subsidiaries. These amounts related to the cumulative losses on translation of the subsidiary's foreign currency financial
statements, and should have been realized in the statement of operations upon disposition of the subsidiaries. In addition, we noted that prior to 2006, goodwill in our foreign subsidiaries was not
pushed down to the subsidiary, and the balances were not translated along with the other assets and liabilities using the current rate method. Goodwill as of December 31, 2003 should have been
$7.7 million higher than previously reported as a result of converting goodwill to U.S. dollars at the then current translation rate, with an offsetting credit to AOCI. During our review, we
also noted that in some cases, entries to AOCI were posted to eliminate unreconciled intercompany accounts or investments in subsidiaries that were not in proper balance with the underlying equity of
the subsidiary. We have recorded an adjustment of $8.9 million in accumulated losses which had previously been reflected in the balance of AOCI as of December 31, 2003 due to these
unreconciled intercompany balances. We recorded corrections of these errors, including adjustments to properly translate goodwill and other assets related to foreign subsidiaries, the
true-up of certain receivables, inventory and tax reserves, correction to inventory costs, and miscellaneous other adjustments.

We
also identified certain errors that were not previously recorded because we did not consider the underlying errors, in each case and in the aggregate, to be material to the
consolidated financial statements. We recorded corrections of these errors, including adjustments to properly translate goodwill and other assets related to foreign subsidiaries, the
true-up of certain receivables, inventory and tax reserves, correction to inventory costs, and miscellaneous other adjustments. In addition, we adjusted accumulated deficit by
$20.5 million to reverse the impairment of goodwill that was recorded in error related to deferred stock compensation as discussed above under the heading "Acquisition Grants."



On June 5, 2008, we notified the SEC that we were conducting a voluntary stock option and accounting review and informed the SEC
as to our expectations regarding the restatement of our financial statements. We were notified by the SEC that it was conducting an inquiry into the matter. On August 26, 2009, we were formally
notified by the SEC's Los Angeles Regional Office that its investigation had been completed and that it was not intending to recommend any enforcement action.

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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 MRV 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 Sections 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 was included as
Exhibit 99.1 to our Current Report on Form 8-K filed with the SEC on June 6, 2008. The complaints seek to recover from the defendants unspecified compensatory and
punitive damages, to require us 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 consolidated lawsuits and the defendants have
stipulated to a postponement of further action after the issuance by MRV of the restated financial statements, and have further agreed to mediation of the litigations.



We failed to timely file with the SEC our Quarterly Reports on Form 10-Q for the periods ended June 30, 2008,
September 30, 2008, March 31, 2009, and June 30, 2009, and our Form 10-K for the year ended December 31, 2008, as a result of the stock option
investigation and restatement. We announced in August and November 2008 and January, March, and May 2009 that we had received Nasdaq Staff Determination notices stating that we were not in compliance
with Nasdaq's listing requirements as a result of failing to file our Forms 10-Q and Form 10-K with the SEC and did not solicit proxies and hold an annual meeting
for the year ended December 31, 2007 and, therefore, were subject to potential delisting from the Nasdaq Global Market. We met with and submitted appropriate information to the Nasdaq Listing
Qualifications Panel and the Nasdaq Listing and Hearing Review Council throughout 2008 and 2009 in order to maintain continued listing. However, on June 17, 2009, we were suspended from trading
on the Nasdaq Global Market and were officially delisted on August 30, 2009.



We have incurred substantial expenses for legal, accounting, tax and other professional services in connection with the Special
Committee investigations, our internal review and the preparation of the restated filings and related financial statements. These expenses were approximately $8.6 million in aggregate as of
December 31, 2008. We have incurred additional expenses of approximately $3.8 million through September 30, 2009.

Please
refer to Note 3 to the accompanying Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information on the
Special Committee's investigation and the restatement. Please also refer to "Controls and Procedures" included in Item 9A of this Form 10-K for additional information on
remedial measures that we have adopted.

Overview

MRV Communications is a 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. Our Network Equipment group provides communications equipment that

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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, 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.

In
June 2007, we completed our acquisition of Fiberxon, a PRC-based supplier of transceivers for applications in metropolitan networks, access networks and PONs for
consideration aggregating approximately $130.9 million, excluding $4.0 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, our subsidiary accounting for nearly all of the results of the Optical Components group.

We
evaluate segment performance based on the revenues and the operating expenses of each segment. We do not track segment data or evaluate segment performance on additional financial
information. As such, there are no separately identifiable segment assets nor are there any separately identifiable Statements of Operations data below operating income (loss).

Our
business involves reliance on foreign-based offices. Several of our divisions, outside subcontractors and suppliers are located in foreign countries, including Argentina, Canada,
China, 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, 2008, 2007 and 2006, foreign revenues constituted 68%, 68% and 67%, 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 our financial condition and results of operations are based upon our financial statements, which have
been prepared in accordance with U.S. generally accepted accounting principles. 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.

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.

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Restatement of Consolidated Financial Statements.To calculate our stock based compensation expense, we made numerous assumptions and
conclusions
regarding the evidence developed during the investigation. In many cases, we considered alternative conclusions but ultimately decided the alternative treatments were not the best judgments based on
full consideration of the documents and interviews reviewed in the investigation. Some of these alternatives would have led to higher expense amounts and some would have led to lower expense amounts.
The most significant judgmental decisions were related to the use of Outside Dates as discussed above under the heading "Use of Judgment."

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 Staff Accounting Bulletin ("SAB") No. 104,
"Revenue 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 probable. 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 used by us to deliver the product to the customer. Sales of
services and system support are deferred and recognized ratably over the contract period. Sales with contingencies, such as rights of return, rotation rights, conditional acceptance provisions and
price protection, are rare and insignificant and are deferred until the contingencies have been satisfied or the contingent period has lapsed. For sales to distributors, we generally recognize revenue
using the "sell in" method (i.e., when product is sold to the distributor) rather than the "sell through" method (i.e., when the product is sold by the distributor to the end user). In limited
circumstances, certain 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 Statement of Financial
Accounting Standards ("SFAS") No. 48, "Revenue Recognition When Right of Return Exists." 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. The estimate of future returns and credits is based on historical sales returns, analysis of credit memo data, and other factors known at the time of revenue
recognition. We monitor product returns and potential price adjustments on an ongoing basis.

Arrangements
with customers may include multiple deliverables, including any combination of equipment, services and software. In Accordance with Emerging Issues Task Force ("EITF")
No. 00-21,Revenue Arrangements with Multiple Deliverables, 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 are 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 Statement of Position ("SOP") No. 97-2, Software Revenue Recognition,to 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 our 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

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significant
customers based on ongoing credit evaluations. Since we cannot 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 were to deteriorate, resulting in their inability to make payments, a larger reserve may be required. In the event we determined
that a smaller or larger reserve was appropriate, we would record a credit or a charge to selling, general and administrative expense in the period in which we made such a determination.

Inventory Reserves.We also 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 our previous estimate, we would make further adjustments in the period in which we made such a determination and record a charge to cost
of goods sold. In addition, we record a reserve against inventory for estimated excess quantities or 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.In accordance with SFAS No. 142,Goodwill and Other Intangible
Assets, we do not amortize goodwill and intangible assets with indefinite lives, but instead measure these assets for impairment at least annually, or when events indicate that
impairment exists. We amortize intangible assets that have definite lives over their useful lives.

Income Taxes.As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the
jurisdictions
in which we operate. This process involves us estimating our actual 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 must then 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 must establish a valuation allowance. To the extent we establish a valuation allowance or increase
this allowance in a period, we must include an expense within the income tax provision in the Statements of Operations.

Significant
management judgment is required in determining our provision for income taxes, deferred income tax assets and liabilities and any valuation allowance recorded against our net
deferred income tax assets. Management continually evaluates our deferred income tax asset as to whether it is likely that the deferred income tax assets will be realized. If management ever
determined that our deferred income tax asset was not likely to be realized, a write-down of that asset would be required and would be reflected in the provision for income taxes in the
accompanying period.

Share-Based Compensation.As discussed in Note 14, "Share-Based Compensation" to the Consolidated Financial Statements in
Item 8 of
this Form 10-K, 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 our best estimates. Our estimates may be impacted by certain variables including, but not limited to, stock price volatility, employee stock option exercise
behaviors, additional stock option grants, estimates of forfeitures, and related income tax impacts. See Note 14 for a further discussion on share-based compensation and assumptions used.

60

---



Table of Contents

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, and the Taiwan dollar. For the year ended December 31, 2008, approximately 50% of revenues and
44% of operating expenses, excluding $100.3 million in goodwill impairment charges, were incurred at subsidiaries with a reporting currency other than the U.S. dollar. In general, these
currencies were stronger against the U.S. dollar for the year ended December 31, 2008 compared to the year ended December 31, 2007, so revenues and expenses in these countries translated
into more 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.

Management Discussion Snapshot

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

2008

2007
(Restated)

2006
(Restated)Years ended December 31:

$

%

$

%

$

%Revenue(1)

$
538,022


100
%
$
448,237


100
%
$
356,489


100
%Network Equipment group


125,556


23


105,357


24


96,002


27Network Integration group


225,741


42


213,976


48


181,502


51Optical Components group


201,588


37


144,860


32


93,381


26All others


241


NM


114


NM





Gross profit(2)


150,001


28


127,487


28


112,104


31Network Equipment group


67,071


53


51,712


49


49,925


52Network Integration group


53,234


24


48,276


23


44,759


25Optical Components group


29,437


15


28,133


19


17,748


19All others


143


59


68


60





NMOperating costs and expenses(2)


270,449


50


137,987


31


116,963


33Network Equipment group


68,492


55


59,988


57


55,048


57Network Integration group


44,329


20


38,811


18


35,131


19Optical Components group (3)


139,899


69


29,681


20


18,652


20All others


1,920


797


1,597


1,401


1,558


NMOperating income (loss)(2)


(120,448
)

(22
)

(10,500
)

(2
)

(4,859
)

(1
)Network Equipment group


(1,421
)

(1
)

(8,276
)

(8
)

(5,123
)

(5
)Network Integration group


8,905


4


9,465


4


9,628


5Optical Components group (3)


(110,462
)

(55
)

(1,548
)

(1
)

(904
)

(1
)All others


(1,777
)

(737
)

(1,529
)

(1,341
)

(1,558
)

NM


61

---



Table of Contents

The
following tables reconcile the restated numbers in the tables above to the previously reported amounts (dollars in thousands):

As previously
reported

Adjustments

RestatedYear ended December 31, 2007

$

%

$

$

%Revenue(1)

$
448,237


100
%
$


$
448,237


100
%Network Equipment group


105,357


24





105,357


24Network Integration group


213,976


48





213,976


48Optical Components group


144,860


32





144,860


32All others


114


NM





114


NMGross profit(2)


127,973


29


(486
)

127,487


28Network Equipment group


52,133


49


(421
)

51,712


49Network Integration group


48,550


23


(274
)

48,276


23Optical Components group


27,919


19


214


28,133


19All others


69


61


(1
)

68


60Operating costs and expenses(2)


136,860


31


1,127


137,987


31Network Equipment group


60,036


57


(48
)

59,988


57Network Integration group


38,118


18


693


38,811


18Optical Components group


29,333


20


348


29,681


20All others


1,595


1,399


2


1,597


1,401Operating income (loss)(2)


(8,887
)

(2
)

(1,613
)

(10,500
)

(2
)Network Equipment group


(7,903
)

(8
)

(373
)

(8,276
)

(8
)Network Integration group


10,432


5


(967
)

9,465


4Optical Components group


(1,414
)

(1
)

(134
)

(1,548
)

(1
)All others


(1,526
)

(1,339
)

(3
)

(1,529
)

(1,341
)


62

---



Table of Contents



As previously
reported

Adjustments

RestatedYears ended December 31, 2006

$

%

$

$

%Revenue(1)

$
356,489


100
%
$


$
356,489


100
%Network Equipment group


96,002


27





96,002


27Network Integration group


181,502


51





181,502


51Optical Components group


93,381


26





93,381


26All others














Gross profit(2)


112,282


31


(178
)

112,104


31Network Equipment group


49,930


52


(5
)

49,925


52Network Integration group


44,875


25


(116
)

44,759


25Optical Components group


17,797


19


(49
)

17,748


19All others














NMOperating costs and expenses(2)


115,778


32


1,185


116,963


33Network Equipment group


54,844


57


204


55,048


57Network Integration group


33,678


19


1,453


35,131


19Optical Components group


18,502


20


150


18,652


20All others


1,558


NM





1,558


NMOperating income (loss)(2)


(3,496
)

(1
)

(1,363
)

(4,859
)

(1
)Network Equipment group


(4,914
)

(5
)

(209
)

(5,123
)

(5
)Network Integration group


11,197


6


(1,569
)

9,628


5Optical Components group


(705
)

(1
)

(199
)

(904
)

(1
)All others


(1,558
)

NM





(1,558
)

NM


63

---



Table of Contents



As previously
reported

Adjustments

RestatedThree months ended March 31, 2008

$

%

$

$

%Revenue(1)

$
125,586


100
%
$


$
125,586


100
%Network Equipment group


30,649


24





30,649


24Network Integration group


49,087


39





49,087


39Optical Components group


49,999


40





49,999


40All others


31








31


Gross profit(2)


37,134


30


(1,413
)

35,721


28Network Equipment group


14,991


49


244


15,235


50Network Integration group


11,533


23


45


11,578


24Optical Components group


10,181


20


(1,701
)

8,480


17All others


16


NM





16


52Operating costs and expenses(2)


39,967


32


(19
)

39,948


32Network Equipment group


15,432


50


(6
)

15,426


50Network Integration group


11,640


24


(68
)

11,572


24Optical Components group


10,480


21


58


10,538


21All others


474


NM





474


1,529Operating income (loss)(2)


(2,833
)

(2
)

(1,394
)

(4,227
)

(3
)Network Equipment group


(441
)

(1
)

250


(191
)

(1
)Network Integration group


(107
)

NM


113


6


NMOptical Components group


(299
)

(1
)

(1,759
)

(2,058
)

(4
)All others


(458
)

NM





(458
)

(1,477
)


64

---





Table of Contents

As previously
reported

Adjustments

RestatedThree months ended March 31, 2007

$

%

$

$

%Revenue(1)

$
89,679


100
%
$


$
89,679


100
%Network Equipment group


23,569


26





23,569


26Network Integration group


46,951


52





46,951


52Optical Components group


22,918


26





22,918


26All others














Gross profit(2)


28,316


32


(388
)

27,928


31Network Equipment group


11,310


48


(6
)

11,304


48Network Integration group


11,369


24


(31
)

11,338


24Optical Components group


5,564


24


(349
)

5,215


23All others














Operating costs and expenses(2)


30,045


34


321


30,366


34Network Equipment group


14,585


62


74


14,659


62Network Integration group


8,864


19


258


9,122


19Optical Components group


4,226


18


45


4,271


19All others


376


NM





376


NMOperating income (loss)(2)


(1,729
)

(2
)

(709
)

(2,438
)

(3
)Network Equipment group


(3,274
)

(14
)

(82
)

(3,356
)

(14
)Network Integration group


2,504


5


(289
)

2,215


5Optical Components group


1,338


6


(393
)

945


4All others


(376
)

NM





(376
)

NM


65

---



Table of Contents



As previously
reported

Adjustments

RestatedThree months ended June 30, 2007

$

%

$

$

%Revenue(1)

$
101,962


100
%
$


$
101,962


100
%Networking group (4)


76,336


75


(76,336)
(4)




Network Equipment group (4)








26,360
(4)

26,360


26Network Integration group (4)








52,850
(4)

52,850


52Optical Components group


26,505


26





26,505


26All others (4)














Gross profit(2)


29,899


29


641


30,540


30Networking group (4)


24,758


32


(24,758
)




Network Equipment group (4)








12,712


12,712


48Network Integration group (4)








12,161


12,161


23Optical Components group


5,133


19


725


5,858


22All others (4)














Operating costs and expenses(2)


30,881


30


(166
)

30,715


30Networking group (4)


25,813


34


(25,813
)




Network Equipment group (4)








15,201


15,201


58Network Integration group (4)








8,717


8,717


16Optical Components group


4,726


18


29


4,755


18All others (4)


342


NM





342


NMOperating income (loss)(2)


(982
)

(1
)

807


(175
)

Networking group (4)


(1,055
)

(1
)

1,055





Network Equipment group (4)








(2,489
)

(2,489
)

(9
)Network Integration group (4)








3,444


3,444


7Optical Components group


407


2


696


1,103


4All others (4)


(342
)

NM





(342
)

NM


66

---



Table of Contents



As previously
reported

Adjustments

RestatedThree months ended September 30, 2007

$

%

$

$

%Revenue(1)

$
115,700


100
%
$


$
115,700


100
%Networking group(4)


72,449


63


(72,449
)(4)




Network Equipment group(4)








24,255
(4)

24,255


21Network Integration group(4)








51,114
(4)

51,114


44Optical Components group


44,300


38





44,300


38All others(4)








51
(4)

51


Gross profit(2)


30,355


26


954


31,309


27Networking group(4)


21,899


30


(21,899)
(4)




Network Equipment group(4)








11,532
(4)

11,532


48Network Integration group(4)








12,950
(4)

12,950


25Optical Components group


8,470


19


(221
)

8,249


19All others(4)








31


31


61Operating costs and expenses(2)


35,879


31


1,362


37,241


32Networking group(4)


25,357


35


(25,357)
(4)




Network Equipment group(4)








14,559
(4)

14,559


60Network Integration group(4)








10,002
(4)

10,002


20Optical Components group


10,111


23


109


10,220


23All others(4)


411


NM


(1
)

410


NMOperating income (loss)(2)


(5,524
)

(5
)

(408
)

(5,932
)

(5
)Networking group(4)


(3,458
)

(5
)

3,458
(4)




Network Equipment group(4)








(3,027
)(4)

(3,027
)

(12
)Network Integration group(4)








2,948
(4)

2,948


6Optical Components group


(1,641
)

(4
)

(330
)

(1,971
)

(4
)All others(4)


(379
)

NM





(379
)

NM


---

NM 
not meaningful

The
following management discussion and analysis refers to and analyzes the results of operations among our three reporting segments: the Network Equipment group, Network Integration
group, and Optical Components group.

67

---



Table of Contents

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



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


225,741


213,976


11,765


5


(1
)Optical Components group


201,588


144,860


56,728


39


36All others


241


114


127


111


111553,126


464,307


88,819


19


15Adjustments (1)


(15,104
)

(16,070
)

966


(6
)

(6
)Total

$
538,022

$
448,237

$
89,785


20
%

16
%


---

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:Americas

$
58,632

$
51,610

$
7,022


14
%Europe


44,793


34,036


10,757


32Asia Pacific


11,244


7,914


3,330


42Other regions


1,048


72


976


1,356Total network equipment


115,717


93,632


22,085


24Network Integration group:Europe


225,741


213,828


11,913


6Total network integration


225,741


213,828


11,913


6Optical Components group:Americas


115,756


90,912


24,844


27Europe


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

$
538,022

$
448,237

$
89,785


20
%


68

---





Table of Contents

The following table below summarizes consolidated revenues by quarter (dollars in thousands):

Three months ended:

2008

2007

$ Change

% ChangeMarch 31,

$
125,586

$
89,679

$
35,907


40
%June 30,


147,578


101,962


45,616


45September 30,


130,626


115,700


14,926


13December 31,


134,232


140,896


(6,664
)

(5
)Total

$
538,022

$
448,237

$
89,785


20
%


Revenues
for 2008 increased $89.8 million, or 20%, due primarily to growth in Optical Components ($56.7 million, or 39%), Network Equipment ($20.2 million, or 19%)
and Network Integration ($11.8 million, or 5%) segments, partially offset by an increase in intersegment revenues of $1.0 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. Of the $89.8 million in year-over-year revenue growth,
$35.9 million and $45.6 million came in the first and second quarters, respectively. The Optical Components group contributed $27.1 million and $29.7 million of that
growth, respectively. 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 or 19% 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 $11.8 million,
primarily due to foreign currency movements. Revenue would have been $18.9 million lower in 2008 had foreign currency exchange rates remained the same as they were in 2007.

Network Equipment Group.The table below shows the revenues for the Network Equipment group, including intersegment sales, by quarter
(dollars in
thousands):

Three months ended:

2008

2007

$ Change

% ChangeMarch 31,

$
30,649

$
23,569

$
7,080


30
%June 30,


33,618


26,360


7,258


28September 30,


31,462


24,255


7,207


30December 31,


29,827


31,173


(1,346
)

(4
)Total

$
125,556

$
105,357

$
20,199


19
%


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 $10.8 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 management and Terascope products drove the Europe sales increase. Growth in sales of out-of-band management 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 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.

69

---



Table of Contents

Network Integration Group.The table below shows the revenues for the Network Integration group, including intersegment sales, by
quarter (dollars in
thousands):

Three months ended:

2008

2007

$ Change

% ChangeMarch 31,

$
49,087

$
46,951

$
2,136


5
%June 30,


61,630


52,850


8,780


17September 30,


53,573


51,114


2,459


5December 31,


61,451


63,061


(1,610
)

(3
)Total

$
225,741

$
213,976

$
11,765


5
%


Revenues,
including intersegment revenues, generated from the Network Integration group increased $11.8 million, or 5%, 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 $12.9 million lower in 2008 had foreign currency exchange rates remained the same as they were in 2007.

Revenue
growth in the Network Integration group came primarily in the second quarter when revenues grew $8.8 million, or 17%, over the same quarter of the prior year. Revenues for
the second quarter would have been $8.5 million lower had foreign currency exchange rates remained the same as they were in the second quarter of 2007. The group also had year over year revenue
growth in the first and third quarters of 5%. These quarters would have had year over year decreases of 8% and 4%, respectively had foreign currency exchange rates stayed the same as they were in
2007. In the fourth quarter, foreign currency movements went the other direction and revenues fell 3% over the same quarter of the prior year. Fourth quarter revenues would have been 7.2% higher than
the same quarter of the prior year had foreign currency exchange rates stayed the same as they were in 2007.

Optical Components Group.The table below shows the revenues for the Optical Components group, including intersegment sales, by quarter
(dollars in
thousands):

Three months ended:

2008

2007

$ Change

% ChangeMarch 31,

$
49,999

$
22,918

$
27,081


118
%June 30,


56,157


26,505


29,652


112September 30,


49,039


44,300


4,739


11December 31,


46,393


51,137


(4,744
)

(9
)Total

$
201,588

$
144,860

$
56,728


39
%


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. Revenue would have been $3.9 million lower in 2008 had foreign currency exchange rates remained the same as they were in
2007.

The
Optical Components group revenues grew in the first and second quarters of 2008 compared to the same quarters of the prior year by 118% and 112%, respectively, primarily due to the
inclusion of Fiberxon in 2008 which was not included in the 2007 results until the third quarter. Revenues grew by 11% in the third quarter compared to the same quarter of 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.

70

---



Table of Contents



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
(Restated)

$
Change

%
Change

% Change
constant
currency (2)Network Equipment group

$
67,071

$
51,712

$
15,359


30
%

27
%Network Integration group


53,234


48,276


4,958


10


4Optical Components group


29,437


28,133


1,304


5


4All others


143


68


75


110


110149,885


128,189


21,696


17


13Corporate unallocated cost of goods sold


(199
)

(165
)

(34
)

21


21Intersegment adjustments (1)


315


(537
)

852


(159
)

NMTotal

$
150,001

$
127,487

$
22,514


18
%

14
%


---

NM 
not meaningful

The
following table below summarizes consolidated gross profit by quarter (dollars in thousands):

Three months ended:

2008

2007
(Restated)

$ Change

% ChangeMarch 31,

$
35,721

$
27,928

$
7,793


28
%June 30,


47,382


30,540


16,842


55September 30,


33,440


31,309


2,131


7December 31,


33,458


37,710


(4,252
)

(11
)Total

$
150,001

$
127,487

$
22,514


18
%


Gross
profit increased $22.5 million due to the $89.8 million increase in revenues while gross margins remained stable at 28%. 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 were
offset by an increase in the portion of consolidated revenues from the Optical Components group, which has lower margins than the other segments. The Company's growth in gross profits came primarily
in the first and second quarters which grew by 28% and 55%, respectively, compared to the same quarters of the prior year. Gross profit also increased by 7% year-over-year in
the third quarter, but fell 11% in the fourth quarter,
compared to the fourth quarter of 2007. Gross profit would have been $4.8 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 $470,000 in 2008 and 2007, respectively.

71

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Table of Contents

Network Equipment Group.The table below shows gross profit for the Network Equipment group, including intersegment sales, by quarter
(dollars in
thousands):

Three months ended:

2008

2007

$ Change

% ChangeMarch 31,

$
15,235

$
11,304

$
3,931


35
%June 30,


18,666


12,712


5,954


47September 30,


16,462


11,532


4,930


43December 31,


16,708


16,164


544


3Total

$
67,071

$
51,712

$
15,359


30
%


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.The table below shows gross profit for the Network Integration group, including intersegment sales, by
quarter (dollars in
thousands):

Three months ended:

2008

2007

$ Change

% ChangeMarch 31,

$
11,578

$
11,338

$
240


2
%June 30,


15,066


12,161


2,905


24September 30,


13,675


12,950


725


6December 31,


12,915


11,827


1,088


9Total

$
53,234

$
48,276

$
4,958


10
%


Gross
profit for the Network Integration group increased $5.0 million. Favorable currency impacts accounted for $3.2 million of the increase, and improved margins drove a
currency adjusted increase of $2.1 million, partially offset by the $0.6 million impact of the decline in local currency revenues. Average gross margin increased from 22.6% to 23.6%. 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, one of our Italian
subsidiaries 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. Of the $5.0 million increase in gross profit in 2008, $2.9 million and $1.1 million came in the second and fourth quarters, respectively. The increase in
the second quarter was primarily driven by foreign currency effects ($2.1 million) and to a lesser extent ($0.8 million) by an improvement in margins to 24.4% in the second quarter of
2008 compared to 23.0% in the same quarter of the prior year. The fourth quarter gross margin improvement of $1.1 million was due primarily to an increase in margins to 21.0% in the fourth
quarter of 2008 from 18.8% in the same quarter of the prior year ($1.4 million) and to an increase in revenues in local currency ($0.8 million), partially offset by the adverse impact of
foreign currency movements ($1.3 million). The Network Integration group did not have any share-based compensation in cost of goods sold in either year.

72

---



Table of Contents

Optical Components Group.The table below shows gross profit for the Optical Components group, including intersegment sales, by quarter
(dollars in
thousands):

Three months ended:

2008

2007

$ Change

% ChangeMarch 31,

$
8,480

$
5,215

$
3,265


63
%June 30,


13,903


5,858


8,045


137September 30,


3,259


8,249


(4,990
)

(60
)December 31,


3,795


8,811


(5,016
)

(57
)Total

$
29,437

$
28,133

$
1,304


5
%


Gross
profit for the Optical Components group remained stable, but gross margin as a percentage of revenues declined from 19.4% in 2007 to 14.6% 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 from 18.6% to 6.6% and in the fourth quarter from 17.2% to 8.2% 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.



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

Years ended December 31:

2008

2007
(Restated)

$
Change

%
Change

% Change
constant
currency (1)Network Equipment group

$
68,492

$
59,988

$
8,504


14
%

12
%Network Integration group


44,329


38,811


5,518


14


9Optical Components group


139,899


29,681


110,218


371


371All others


1,920


1,597


323


20


20254,640


130,077


124,563


96


93Corporate unallocated operating expenses (2)


15,809


7,910


7,899


100


100Total

$
270,449

$
137,987

$
132,462


96
%

94
%


---

73

---



Table of Contents

The
following table below summarizes Consolidated operating costs and expenses by quarter (dollars in thousands):

Three months ended:

2008

2007
(Restated)

$ Change

% ChangeMarch 31,

$
39,948

$
30,366

$
9,582


32
%June 30,


42,276


30,715


11,561


38September 30,


45,286


37,241


8,045


22December 31,


142,939


39,665


103,274


260Total

$
270,449

$
137,987

$
132,462


96
%


Operating
costs and expenses were $270.4 million, or 50% of revenues, for 2008, compared to $138.0 million, or 31% of revenues, for 2007. The primary increase in operating
costs and expenses during 2008 reflected the total $100.3 million goodwill impairment and inclusion of a full year's worth of Fiberxon's operations, which was acquired on July 1, 2007.
Operating costs and expenses increased 32%, 38%, and 22% in the first, second, and third quarters, respectively, compared to the same quarters of the prior year. The Optical Components group
contributed most of the growth in the first and second quarters. Corporate unallocated expenses represented most of the growth in the third quarter, primarily due to costs related to the investigation
and restatement. In the fourth quarter, operating costs and expenses were relatively flat compared to the same quarter of the prior year, excluding the goodwill impairment charge. Additional costs and
expenses related to the investigation and restatement in the fourth quarter were offset by reductions in costs and expenses in other areas. Operating costs and expenses would have been
$3.1 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 and $1.3 million in 2008 and 2007, respectively. Selling, general and administrative expenses included share-based compensation of $2.6 million and
$3.5 million in 2008 and 2007, respectively.

Network Equipment Group.The table below shows operating costs and expenses for the Network Equipment group, by quarter (dollars in
thousands):

Three months ended:

2008

2007

$ Change

% ChangeMarch 31,

$
15,426

$
14,659

$
767


5
%June 30,


16,449


15,201


1,248


8September 30,


15,381


14,559


822


6December 31,


21,236


15,569


5,667


36Total

$
68,492

$
59,988

$
8,504


14
%


Operating
costs and 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 costs and 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, 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.

74

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Table of Contents

Network Integration Group.The table below shows operating costs and expenses for the Network Integration group, by quarter (dollars in
thousands):

Three months ended:

2008

2007

$ Change

% ChangeMarch 31,

$
11,572

$
9,122

$
2,450


27
%June 30,


11,014


8,717


2,297


26September 30,


10,272


10,002


270


3December 31,


11,471


10,970


501


5Total

$
44,329

$
38,811

$
5,518


14
%


Operating
costs and expenses in the Network Integration group for 2008 were $44.3 million, or 20% of revenues, compared to $38.8 million, or 18% of revenues, for 2007.
Selling, general and administrative costs, including foreign currency translation, increased $5.5 million, primarily due to labor costs ($4.3 million) and other overhead
($1.1 million). The increase in operating expenses came primarily in the first and second quarter which increased by 27% and 26%, respectively, as a result of the considerable strengthening of
the Euro, Swiss franc, and Swedish krona. Operating costs and expenses would have been $1.8 million lower in 2008 had foreign currency exchange rates remained the same as they were in 2007. In
the fourth quarter, 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, as discussed above under the heading "Other Compensation Arrangements" of this Item 7. 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 $388,000 and $783,000 in 2008 and 2007,
respectively.

Optical Components Group.The table below shows operating costs and expenses for the Optical Components group, by quarter (dollars in
thousands):

Three months ended:

2008

2007

$ Change

% ChangeMarch 31,

$
10,538

$
4,271

$
6,267


147
%June 30,


12,030


4,755


7,275


153September 30,


10,928


10,220


708


7December 31,


106,403


10,435


95,968


920Total

$
139,899

$
29,681

$
110,218


371
%


Operating
costs and 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 costs and
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 and second quarter of 2008 of $6.3 and $7.3 million, respectively, over the same periods 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 costs and 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.

75

---



Table of Contents



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
(Restated)

$
Change

%
Change

% Change
constant
currency (2)Network Equipment group

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


(83
)%

(78
)%Network Integration group


8,905


9,465


(560
)

(6
)

(20
)Optical Components group


(110,462
)

(1,548
)

(108,914
)

7,036


7,035All others


(1,777
)

(1,529
)

(248
)

16


16(104,755
)

(1,888
)

(102,867
)

5,448


5,538Corporate unallocated expenses


(16,008
)

(8,075
)

(7,933
)

98


98Adjustments (1)


315


(537
)

852


(159
)

NMTotal

$
(120,448
)
$
(10,500
)
$
(109,948
)

1047
%

1097
%


---

NM 
not meaningful

The
2008 $120.4 million operating loss represented 22% of revenues, compared to a $10.5 million operating loss, or 2% of revenues, in 2007. The increase in operating loss
arose from the total $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 $20.2 million, or 4% of revenue. Operating loss would have been $1.7 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 $4.3 million and $5.3 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 $8.9 million for 2008, compared to operating
income of
$9.5 million for 2007. The decrease was the result of a $5.5 million increase in operating expenses partially offset by an increase in gross profit. Operating income would have been
$1.3 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 $388,000 and $783,000 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

76

---



Table of Contents

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 was $4.0 million in both 2008 and 2007. We realized $2.6 million in other 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 $2.8 million from $4.8 million in 2007 to $2.0 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 $131,000 gain in 2008 as compared to a $1.3 million loss in 2007.



The provision for income taxes was $2.5 million in 2008 and $3.9 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.



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 begin to expire in 2009. 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, 2008, the NOLs had a full valuation allowance.

77

---





Table of Contents

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006



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

Years ended December 31:

2007

2006

$
Change

%
Change

% Change
constant
currency (2)Network Equipment group

$
105,357

$
96,002

$
9,355


10
%

9
%Network Integration group


213,976


181,502


32,474


18


8Optical Components group


144,860


93,381


51,479


55


56All others


114





114


NM


NM464,307


370,885


93,422


25


20Adjustments (1)


(16,070
)

(14,396
)

(1,674
)

12


12Total

$
448,237

$
356,489

$
91,748


26
%

21
%


---

NM 
not meaningful

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

Years ended December 31:

2007

2006

$
Change

%
ChangeNetwork Equipment group:Americas

$
51,610

$
42,677

$
8,933


21
%Europe


34,036


33,319


717


2Asia Pacific


7,914


10,369


(2,455
)

(24
)Other regions


72


199


(127
)

(64
)Total network equipment


93,632


86,564


7,068


8Network Integration group:Europe


213,828


181,503


32,325


18Total network integration


213,828


181,503


32,325


18Optical Components group:Americas


90,912


73,889


17,023


23Europe


10,661


4,288


6,373


149Asia Pacific


39,174


10,202


28,972


284Other regions


23


43


(20
)

(47
)Total fiber optic components


140,770


88,422


52,348


59All others:


7





7


NMTotal

$
448,237

$
356,489

$
91,748


26
%


78

---



Table of Contents

Revenues
for 2007 increased $91.7 million, or 26% due primarily to the growth in Optical Components ($51.5 million, or 55%), Network Integration ($32.5 million, or
18%), and Network Equipment ($9.4 million, or 10%) segments, partially offset by an increase in intersegment revenues of $1.7 million. The acquisition of Fiberxon added an additional
$42.1 million of revenue growth to the Optical Components segment in 2007. Revenue would have been $17.6 million lower in 2007 had foreign currency exchange rates remained the same as
they were in 2006.

Network Equipment Group.Revenues, including intersegment revenues, generated from the Network Equipment group increased
$9.4 million, which
was due primarily to increased sales in the Americas region of $8.9 million, and increased sales in the European region of $0.7 million, offset by a decrease in the Asia Pacific region
of $2.5 million. We attribute the 21% increase in the Americas region to the investment in expanding the U.S. sales force beginning in 2006. Revenue would have been $0.9 million lower in
2007 had foreign currency exchange rates remained the same as they were in 2006.

Network Integration Group.Revenues, including intersegment revenues, generated from the Network Integration group increased
$32.5 million due
to increases in integration and distribution activities throughout Europe and to the favorable impact of foreign currency movements on revenues. Revenue would have been $17.6 million lower in
2007 had foreign currency exchange rates remained the same as they were in 2006.

Optical Components Group.Revenues, including intersegment revenue, generated from the Optical Components group increased
$51.5 million, of
which $42.1 million was attributable to the acquisition of Fiberxon in July 2007. Sales of PON components increased 40% from 2006 to 2007 and sales of datacom/telecom network components
increased 84% from 2006 to 2007. Revenue would have been $0.9 million higher in 2007 had foreign currency exchange rates remained the same as they were in 2006.



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:

2007
(Restated)

2006
(Restated)

$
Change

%
Change

% Change
constant
currency (2)Network Equipment group

$
51,712

$
49,925

$
1,787


4
%

2
%Network Integration group


48,276


44,759


3,517


8


0Optical Components group


28,133


17,748


10,385


59


60All others


68





68


NM


NM128,189


112,432


15,757


14


10Corporate unallocated cost of goods sold


(165
)

(167
)

2


(1
)

(1
)Intersegment adjustments (1)


(537
)

(161
)

(376
)

234


NMTotal

$
127,487

$
112,104

$
15,383


14
%

10
%


---

NM 
not meaningful

79

---



Table of Contents

Gross
profit increased $15.4 million due to the $91.7 million increase in revenues partially offset by a decrease in gross margins from 31% to 28%. The decline in gross
margin was partially attributable to reductions in gross margins in the Network Equipment and Network Integration groups, and to a change in segment mix; the percent of revenues from the Optical
Components group, which has lower margins than the other segments, increased in 2007. Gross profit would have been $4.0 million lower in 2007 had foreign currency exchange rates remained the
same as they were in 2006. Gross profit reflects share-based compensation in cost of goods sold of $470,000 and $396,000 in 2007 and 2006, respectively.

Network Equipment Group.Gross profit for the Network Equipment group increased $1.8 million. The increase is due to the
$9.4 million
increase in external revenues partially offset by a decrease in gross margin from 52% to 49%. The decrease in gross margins in 2007 was the result of differences in the composition of the products
sold in each period. Gross profit would have been $0.6 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. Gross profit reflects share-based
compensation in cost of goods sold of $113,000 and $95,000 in 2007 and 2006, respectively.

Network Integration Group.Gross profit for the Network Integration group increased $3.5 million. The increase is due to the
$32.5 million increase in external revenues partially offset by a decrease in gross margin from 25% to 23%. The decrease in gross margin in 2007 was the result of differences in the composition
of products and services sold in each period. Gross profit would have been $3.7 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. The Network
Integration group did not have share-based compensation in cost of goods sold in either year.

Optical Components Group.Gross profit for the Optical Components group increased $10.4 million. The increase is due to the
$51.5 million increase in external revenues in 2007, while gross margin remained the same at 19% in both years. Gross margin increased despite lower (17%) gross margins at Fiberxon, including
the impact of $2.3 million of charges related to inventory adjustments. Gross profit would have been $0.3 million higher in 2007 had foreign currency exchange rates remained the same as
they were in 2006. Gross profit reflects share-based compensation in cost of goods sold of $342,000 and $288,000 in 2007 and 2006, respectively.



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

Years ended December 31:

2007
(Restated)

2006
(Restated)

$
Change

%
Change

% Change
Constant
Currency (1)Network Equipment group

$
59,988

$
55,048


4,940


9
%

8
%Network Integration group


38,811


35,131


3,680


10


1Optical Components group


29,681


18,652


11,029


59


59All others


1,597


1,558


39


3


3130,077


110,389


19,688


18


14Corporate unallocated operating expenses (2)


7,910


6,574


1,336


20


20Total

$
137,987

$
116,963

$
21,024


18
%

15
%


---

80

---



Table of Contents

Operating
costs and expenses were $138.0 million, or 31% of revenues, for 2007, compared to $117.0 million, or 33% of revenues, for 2006. The increase in operating costs
and expenses was largely the result of the addition of Fiberxon's results from July 1, 2007, and increased operating costs in the Network Equipment and Network Integration groups. Operating
costs and expenses would have been $3.9 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. Product development and engineering expenses included
share-based compensation of $1.3 million and $957,000 in 2007 and 2006, respectively. Selling, general and administrative expenses included share-based compensation of $3.5 million and
$3.7 million in 2007 and 2006, respectively.

Network Equipment Group.Operating costs and expenses for 2007 were $60.0 million, or 57% of revenues, compared to
$55.0 million, or
57% of revenues, for 2006. The increase in operating costs and expenses was primarily the result of increases in labor and related costs, particularly from increased product development and
engineering ($1.4 million) and the additional investment in the North American sales organization beginning in mid-2006, which had a full year impact in 2007 ($2.0 million
increase.) In addition, the Network Equipment group had increased general and administrative costs ($1.4 million) and increases due to foreign currency translation. Operating costs and expenses
would have been $0.7 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. Product development and engineering expenses included share-based
compensation of $537,000 and $509,000 in 2007 and 2006, respectively. Selling, general and administrative expenses included share-based compensation of $922,000 and $824,000 in 2007 and 2006,
respectively.

Network Integration Group.Operating costs and expenses for 2007 were $38.8 million, or 18% of revenues, compared to
$35.1 million, or
19% of revenues, for 2006. The increase in operating costs and expenses was primarily the result of foreign currency exchange rates. Operating costs and expenses would have been $3.2 million
lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. The remaining increase was primarily due to increased labor and related costs. 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 $0.8 million
and $1.4 million in 2007 and 2006, respectively.

Optical Components Group.Operating costs and expenses for 2007 were $29.7 million, or 20% of revenues, compared to
$18.7 million, or
20% of revenues, for 2006. Substantially all of the increased operating costs and expenses are attributable to the addition of Fiberxon's results from July 1, 2007. The effect of currency
fluctuations did not have a significant impact on the year-over-year change in operating costs and expenses. Product development and engineering expenses included share-based compensation of $728,000
and $353,000 in 2007 and 2006, respectively. Selling, general and administrative expenses included share-based compensation of $749,000 and $556,000 in 2007 and 2006, respectively.

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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:

2007
(Restated)

2006
(Restated)

$
Change

%
Change

% Change
constant
currency (2)Network Equipment group

$
(8,276
)
$
(5,123
)
$
(3,153
)

62
%

59
%Network Integration group


9,465


9,628


(163
)

(2
)

(7
)Optical Components group


(1,548
)

(904
)

(644
)

71


48All others


(1,529
)

(1,558
)

29


(2
)

(2
)(1,888
)

2,043


(3,931
)

(192
)

(202
)Corporate unallocated expenses


(8,075
)

(6,741
)

(1,334
)

20


20Adjustments (1)


(537
)

(161
)

(376
)

234


NMTotal

$
(10,500
)
$
(4,859
)
$
(5,641
)

116
%

120
%


---

NM 
not meaningful

The
Company's 2007 $10.5 million operating loss, which was 2% of revenues, increased $5.6 million from the $4.9 million operating loss, or 1% of revenues, in 2006.
The increase was primarily the result of the addition of the Fiberxon acquisition and increased Network Equipment operating expenses. Operating loss would have been $0.1 million more in 2007
had foreign currency exchange rates remained the same as they were in 2006. Operating loss included share-based compensation expense of $5.3 million and $5.0 million in 2007 and 2006,
respectively.

Network Equipment Group.The Network Equipment group reported an operating loss of $8.3 million for 2007, compared to an operating
loss of
$5.1 million for 2006, an increase of $3.2 million. The increase was the result of increased operating expenses partially offset by higher gross profit. Operating loss would have been
$0.1 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. Operating loss included share-based compensation expense of $1.6 million and
$1.4 million in 2007 and 2006, respectively.

Network Integration Group.The Network Integration group reported operating income of $9.5 million for 2007, a $0.2 million
decrease
compared to 2006. The decrease was the result of increased operating expenses of $3.7 million, partially offset by an increase in gross profit of $3.5 million. Operating income would
have been $0.5 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. Operating income included share-based compensation expense of
$0.8 million and $1.4 million in 2007 and 2006, respectively.

Optical Components Group.The Optical Components group reported an operating loss of $1.5 million for 2007, compared to an
operating loss of
$0.9 million for 2006. Operating loss would have been $0.2 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. Operating loss included
share-based compensation expense of $1.8 million and $1.2 million in 2007 and 2006, respectively.

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Interest expense was $4.0 million and $3.5 million for 2007 and 2006, respectively. The $4.9 million of debt
conversion costs in 2007 was associated with our exchange of the $23 million convertible notes into Common Stock. Other income, net, includes interest income on cash, cash equivalents and
investments, and gains or losses on foreign currency transactions. Interest income decreased $0.2 million. Losses on foreign currency transactions increased $1.1 million. Gains on the
disposition of fixed assets were $37,000 and $467,000 in 2007 and 2006, respectively, a decrease of $430,000.



The provision for income taxes was $3.9 million and $3.5 million in 2007 and 2006, respectively. In 2007, we generated
less pre-tax income in the jurisdictions where we pay taxes, especially in the foreign subsidiaries comprising our Network Integration group where higher non-operating
expenses, partially offset by moderately higher operating income, resulted in decreased tax expense of $1.2 million. This impact on the consolidated results compared to 2006 was offset by the
reduction in 2006 of the valuation allowance relating to $1.6 million of deferred income tax assets of a foreign subsidiary for a net increase of $0.4 million compared to 2006. Income
tax expense fluctuates based on the amount of income generated in the various jurisdictions where we conduct operations and pay income tax.



As of December 31, 2007, we had NOLs of approximately $191.4 million for federal income tax purposes and approximately
$197.2 million for state income tax purposes. We also had capital loss carry forwards totaling $47.6 million as of December 31, 2007, which begin to expire in 2009. 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, 2007, the NOLs had a full valuation allowance.

Recently Issued Accounting Standards

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

Liquidity and Capital Resources

We had cash and cash equivalents of $68.0 million as of December 31, 2008, compared to $72.5 million in cash and
cash equivalents as of December 31, 2007. The decrease in cash and cash equivalents was primarily the result of cash used in operations, partially offset by sales and maturities of marketable
equity securities. The following table summarizes our cash position, which includes cash,

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cash
equivalents, time deposits and short-term and long-term marketable securities, and debt position, which includes all short-term and long-term
obligations (thousands):

December 31:

2008

2007CashCash and cash equivalents

$
67,950

$
72,474Short-term marketable securities


12,295


6,402Long-term marketable securities





1,442Time deposits


1,335


6,05581,580


86,373DebtShort-term obligations (1)


32,893


28,93132,893

$
28,931Cash in excess of debt

$
48,687

$
57,442Ratio of cash to debt(2)


2.5 : 1


3.0 : 1






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

December 31:

2008

2007
(Restated)Current assets

$
323,083

$
326,875Current liabilities


211,434


196,631Working capital

$
111,649

$
130,244Current ratio(1)


1.5 : 1


1.7 : 1






Current
assets decreased $3.8 million primarily as a result of a $14.2 million decrease in accounts receivable arising from decreased sales in the fourth quarter of 2008
compared to the same quarter of the prior year, partially offset by a $6.3 million increase in inventory. Fluctuations in current assets result from the timing of shipments of products to
customers, receipts of inventories and related payments to our vendors, cash used for capital expenditures, and the effects of changes in foreign currency translation rates.

Current
liabilities increased $14.8 million primarily as a result of an $8.3 million increase in accounts payable, a $4.8 million increase in accrued liabilities,
and a $4.0 increase in short-term borrowings. Fluctuations in current liabilities result from the timing of payments to vendors for inventory, settlement of accrued liabilities such as
payroll related expenses, borrowings and repayments on short-term obligations, changes in deferred revenue, payments of income tax liabilities, and the effects of changes in foreign
currency translation rates.

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

Years ended December 31:

2008

2007
(Restated)Net cash provided by (used in):Operating activities

$
3,347

$
(8,483
)Investing activities


(12,660
)

(9,563
)Financing activities


4,997


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


(208
)

538Net change in cash and cash equivalents

$
(4,524
)
$
(19,248
)


Cash Flows Related to Operating Activities.The change in cash used in operating activities between years is a result of our net losses
adjusted for
non-cash items such as depreciation and amortization, impairment charges, additional allowances for doubtful accounts, share-based compensation expense, deferred income taxes, gains and
losses on the disposition of fixed assets and investments and changes in working capital. Changes in working capital that generated cash flow in 2008 included decreases in time deposits and accounts
receivable and increases in
accounts payable. Changes in working capital that used cash in 2008 included increases in inventory and prepaids and other current assets and decreases in accrued liabilities and other current
liabilities. Changes in working capital in 2007 were comprised of increases in other liabilities, accounts receivable, and inventories, offset by decreases in accounts payable and accrued liabilities.

Cash Flows Related to Investing Activities.Cash used in investing activities for 2008 was $12.7 million of which
$10.9 million was
capital expenditures. Cash used in investing activities for 2007 included net cash paid to acquire Fiberxon ($19.9 million) and capital expenditures ($7.9 million) offset by the net sale
of marketable securities ($18.0 million). As of December 31, 2008, we had no plans for major capital expenditures.

Cash Flows Related to Financing Activities.Cash provided by financing activities in 2008 was $5.0 million due to net borrowings on
short-term obligations. Cash used in 2007 was the result of net payments on short-term and long-term obligations ($3.8 million), offset by employee stock
option exercises ($2.1 million).



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, 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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The following table illustrates our contractual obligations as of December 31, 2008 (in thousands):

Contractual Obligations

Total

Less than
1 Year

1 - 3 Years

3 - 5 Years

After
5 YearsOperating leases

$
38,797

$
7,230

$
11,120

$
8,814

$
11,633Short-term debt


32,893


32,893








Deferred consideration payable, net of reimbursable acquisition costs


30,036


30,036








Purchase commitments with suppliers and contract manufacturers


6,266


6,072


40


154


Long-term obligations


14





14





Total contractual obligations

$
108,006

$
76,231

$
11,174

$
8,968

$
11,633


Total
contractual obligations as of December 31, 2008 consist of short-term and long-term obligations. Historically, these obligations have been satisfied
through cash generated from our operations or other sources and we expect that this trend will continue. The deferred consideration payable obligation arose from the acquisition agreement for
Fiberxon, a subsidiary MRV acquired in July 2007. MRV has filed a complaint against former stockholders, executives, and directors of Fiberxon to recover acquisition costs and damages in excess of
$31.5 million. This matter is discussed in further detail in Item 3. "Legal Proceedings" of this Form 10-K.

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 may seek to obtain additional debt or equity financing if we believe it appropriate.

We
may limit our ability to use available net operating loss and capital loss carryforwards if we seek financing through issuance of additional equity securities. 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, 2008, see the risk factor under 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.

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, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, 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 as soon as reasonably practicable after such reports are electronically filed with, or
furnished to, the SEC. Our reports filed with, or furnished to, the SEC are also available directly at the SEC's website atwww.sec.gov.

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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, 2008, 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. 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, 2008, 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 and the Israeli new shekel. Additionally, certain of our current and long-term
liabilities 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 44% of our operating expenses, excluding $100.3 million in goodwill impairment charges, are reported by these subsidiaries. In general, these currencies were
stronger against the U.S. dollar for the year ended December 31, 2008 compared to the same period last year, so revenues and expenses in these countries translated into more dollars than
they would have in 2007. For 2008, we had approximately:



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Had
rates of these various foreign currencies been 10% higher relative to the U.S. dollar during 2008, our costs would have increased approximately:



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

December 31:

2008

2007U.S. dollars

$
49,540

$
55,197Euros


8,550


7,051Chinese renminbi


2,559


1,618Swiss francs


2,319


1,213Taiwan dollars


1,121


1,873Norwegian kroner


913


1,916Swedish kronas


809


2,392Israeli new shekel


671


Other


1,468


1,214Total cash and cash equivalents

$
67,950

$
72,474


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 recent downturn in global markets has affected our revenues and operating results, particularly in the
Optical
Components 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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Table of Contents

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. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule
listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements and schedule 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. and
subsidiaries at December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth therein.

As
described in Note 3, "Restatement of Financial Statements", the Company has restated previously issued financial statements as of December 31, 2007 and for each of the
two years in the period ended December 31, 2007 to correct for share-based compensation and other items.

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, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated October 7, 2009 expressed an adverse opinion thereon.

/s/ Ernst & Young LLPLos Angeles, California
October 7, 2009


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

Years ended December 31:

2008

2007
(Restated)

2006
(Restated)Revenue

$
538,022

$
448,237

$
356,489Cost of goods sold


388,021


320,750


244,385Gross profit


150,001


127,487


112,104Operating costs and expenses:Product development and engineering


38,746


33,387


28,369Selling, general and administrative


129,019


102,694


88,542Impairment of goodwill and other intangibles


100,250





52Amortization of other intangibles


2,434


1,906


Total operating costs and expenses


270,449


137,987


116,963Operating loss


(120,448
)

(10,500
)

(4,859
)Interest expense


(3,956
)

(3,968
)

(3,540
)Cost of debt conversion





(4,899
)

Other income, net


3,710


4,179


4,466Loss before income taxes


(120,694
)

(15,188
)

(3,933
)Provision for income taxes


2,510


3,906


3,450Net loss

$
(123,204
)
$
(19,094
)
$
(7,383
)Net loss per share:Basic and diluted

$
(0.78
)
$
(0.14
)
$
(0.06
)Weighted average number of shares:Basic and diluted


157,323


140,104


120,902


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:

2008

2007
(Restated)AssetsCurrent assets:Cash and cash equivalents

$
67,950

$
72,474Short-term marketable securities


12,295


6,402Time deposits


1,335


6,055Accounts receivable, net


114,213


128,368Inventories


92,391


86,588Deferred income taxes


2,130


1,932Other current assets


32,769


25,056Total current assets


323,083


326,875Property and equipment, net


25,489


24,510Goodwill


27,037


128,497Deferred income taxes, net of current portion


1,480


Long term marketable securities





1,442Intangibles, net


9,560


11,994Other assets


5,870


5,647Total assets

$
392,519

$
498,965Liabilities and stockholders' equityCurrent liabilities:Short-term obligations

$
32,893


28,931Deferred consideration payable


30,036


30,561Accounts payable


91,262


82,927Accrued liabilities


42,105


37,284Deferred revenue


12,635


9,203Other current liabilities


2,503


7,725Total current liabilities


211,434


196,631Other long-term liabilities


9,274


7,616Minority interest


5,111


4,796Commitments and contingenciesStockholders' equity:Preferred Stock, $0.01 par value:
Authorized  1,000 shares; no shares issued or outstanding





Common Stock, $0.0017 par value:Authorized  320,000 sharesIssued  158,800 shares in 2008 and 158,480 shares in 2007Outstanding  157,446 shares in 2008 and 157,127 shares in 2007


268


267Additional paid-in capital


1,403,663


1,399,630Accumulated deficit


(1,248,639
)

(1,125,435
)Treasury stock  1,353 shares in 2008 and 2007


(1,352
)

(1,352
)Accumulated other comprehensive income


12,760


16,812Total stockholders' equity


166,700


289,922Total liabilities and stockholders' equity

$
392,519

$
498,965


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

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MRV Communications, Inc.

Statements of Stockholders' Equity

(In thousands)

Common Stock









Accumulated
Other
Comprehensive
Income (Loss)Additional
Paid-In
Capital

Deferred
Stock
Expense

Accumulated
Deficit

Treasury
StockShares

Amount

TotalBalance, Dec. 31, 2005 (As Reported)


104,496

$
177

$
1,156,209

$


$
(1,031,409
)
$
(1,352
)
$
(6,621
)
$
117,004Adjustments








53,066


(324
)

(67,549
)




11,697


(3,110
)Balance, Dec. 31, 2005 (Restated)


104,496


177


1,209,275


(324
)

(1,098,958
)

(1,352
)

5,076


113,894Exercise of stock options and warrants


1,153


2


2,459














2,461Issuance of Common Stock


19,858


34


69,831














69,865Share-based compensation expense








4,636














4,636Reclassification of deferred compensation related to adoption of SFAS No. 123.R








(324
)

324











Comprehensive income (loss):Net loss














(7,383
)







(7,383
)Net unrealized investment gains




















4


4Translation adjustment




















3,831


3,831Comprehensive loss























(3,548
)Balance, Dec. 31, 2006 (Restated)


125,507


213


1,285,877





(1,106,341
)

(1,352
)

8,911


187,308Exercise of stock options


1,318


3


2,057














2,060Issuance of Common Stock for Fiberxon acquisition


18,402


31


72,746














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


11,900


20


28,005














28,025Issuance of stock options for Fiberxon acquisition








6,006














6,006Share-based compensation expense








4,939














4,939Comprehensive income (loss):Net loss














(19,094
)







(19,094
)Net unrealized investment gains




















3


3Translation adjustment




















7,898


7,898Comprehensive loss























(11,193
)Balance, Dec. 31, 2007 (Restated)


157,127


267


1,399,630





(1,125,435
)

(1,352
)

16,812


289,922Exercise of stock options


319


1


156














157Share-based compensation expense








3,877














3,877Comprehensive income (loss):Net loss














(123,204
)







(123,204
)Net unrealized investment gains




















57


57Translation adjustment




















(4,109
)

(4,109
)Comprehensive loss























(127,256
)Balance, Dec. 31, 2008


157,446

$
268

$
1,403,663

$


$
(1,248,639
)
$
(1,352
)
$
12,760

$
166,700


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

92

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Table of Contents

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

Years ended December 31:

2008

2007
(Restated)

2006
(Restated)Cash flows from operating activities:Net loss

$
(123,204
)
$
(19,094
)
$
(7,383
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


10,013


8,335


5,446Share-based compensation expense


4,294


5,271


5,043Provision for doubtful accounts


3,675


327


1,287Deferred income taxes


(1,628
)

(1,142
)

(916
)(Gain) loss on disposition of property and equipment


(10
)

(37
)

(467
)Cost of debt conversion





4,899


Gain on sale of equity method investment


(2,580
)




(50
)Minority interests' share of income (loss)


99


(425
)

230Impairment of goodwill and other intangibles


100,250





52Impairment of long-lived assets


2,564





Changes in operating assets and liabilities, net of effects from acquisitions:Time deposits


4,831


(2,929
)

666Accounts receivable


6,896


(6,851
)

4,126Inventories


(8,034
)

(4,866
)

(15,773
)Other assets


(7,374
)

(2,082
)

(5,808
)Accounts payable


9,694


11,719


(1,518
)Accrued liabilities


569


3,316


(773
)Income tax payable


(782
)

(41
)

642Deferred revenue


4,610


1,168


1,189Other current liabilities


(536
)

(6,051
)

3,703Net cash provided by (used in) operating activities


3,347


(8,483
)

(10,304
)Cash flows from investing activities:Purchases of property and equipment


(10,942
)

(7,867
)

(5,454
)Proceeds from sale of property and equipment


242


167


509Fiberxon acquisition, net of cash acquired





(19,886
)

Proceeds from sale of equity method investment


2,580





100Purchases of investments


(13,220
)

(19,050
)

(43,750
)Proceeds from sale or maturity of investments


8,680


37,073


17,950Purchase of minority interest








(50
)Net cash used in investing activities


(12,660
)

(9,563
)

(30,695
)Cash flows from financing activities:Net proceeds from issuance of common stock


157


2,060


72,326Borrowings on short-term obligations


122,414


67,268


107,331Payments on short-term obligations


(117,438
)

(70,934
)

(114,162
)Borrowings on long-term obligations





148


Payments on long-term obligations


(136
)

(282
)

(340
)Net cash provided by (used in) financing activities


4,997


(1,740
)

65,155Effect of exchange rate changes on cash and cash equivalents


(208
)

538


(418
)Net increase (decrease) in cash and cash equivalents


(4,524
)

(19,248
)

23,738Cash and cash equivalents, beginning of year


72,474


91,722


67,984Cash and cash equivalents, end of year

$
67,950

$
72,474

$
91,722Supplemental disclosure of cash flow information:Cash paid during year for interest

$
3,662

$
3,879

$
3,936Cash paid during year for income taxes

$
4,769

$
7,304

$
3,153Non-cash transactions:Issuance of common stock for conversion of debt to equity

$


$
28,025

$
Issuance of common stock and stock options in connection with acquisition of Fiberxon

$


$
78,783

$
Deferred purchase price obligation in connection with acquisition of Fiberxon

$


$
31,500

$



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

93

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Table of Contents

MRV Communications, Inc.        Notes to Financial Statements        December 31, 2008

1. Description of Business and Basis of Presentation

MRV Communications, Inc. ("MRV" or "the Company") a Delaware corporation, 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 through our wholly-owned subsidiary Source Photonics. MRV markets and sells its products worldwide
through a variety of channels, including a dedicated direct sales force, manufacturers' representatives, value-added-resellers, distributors and systems integrators.

The
Company has incurred net losses of $123.2 million, $19.1 million and $7.4 million in the years ended December 31, 2008, 2007 and 2006, respectively and
has an accumulated deficit of $1.2 billion at December 31, 2008. At December 31, 2008, cash, cash equivalents, time deposits and marketable securities totaled
$81.6 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.

2. Summary of Significant Accounting Policies

Principles of Consolidation

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.

The
results of Fiberxon, now known as Source Photonics, have been included in the consolidated financial statements beginning with the acquisition date of July 1, 2007 (see
Note 17 Acquisition).

Foreign Currency

Transactions originally denominated in other currencies are converted into functional currencies in accordance with Financial
Accounting Standards Board ("FASB") Statements of Financial Accounting Standards ("SFAS") No. 52,Foreign Currency Translation("SFAS
No. 52"). 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 (expense) in determining net income (loss).

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

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

2. Summary of Significant Accounting Policies (Continued)

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 income (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 Staff Accounting Bulletin ("SAB") No. 104.Revenue
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 probable. 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 used by us to deliver the product to the customer. Sales of services and system support
are deferred and recognized ratably over the contract period. Sales with contingencies, such as rights of return, rotation rights, conditional acceptance provisions and price protection, are rare and
insignificant and are deferred until the contingencies have been satisfied or the contingent period has lapsed. For sales to distributors, we generally recognize revenue using the "sell in" method
(i.e. when product is sold to the distributor) rather than the "sell through" method (i.e. when the product is sold by the distributor to the end user). In limited circumstances, certain
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 SFAS No. 48.Revenue Recognition When Right of Return
Exists. 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. The estimate of future returns and credits is based on historical sales
returns, analysis of credit memo data, and other factors known at the time of revenue recognition. We monitor product returns and potential price adjustments on an ongoing basis.

Arrangements
with customers may include multiple deliverables, including any combination of equipment, services and software. In Accordance with Emerging Issues Task Force ("EITF")
No. 00-21,Revenue Arrangements with Multiple Deliverables, 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 are 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 Statement of Position ("SOP") No. 97-2, Software Revenue
Recognitionto 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.

95

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

2. Summary of Significant Accounting Policies (Continued)

Cash, Cash Equivalents, Time Deposits and Restricted Cash

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. Time deposits represent investments, which are restricted as
to withdrawal or use based on maturity terms. Time deposits of $1.3 million and $6.1 million as of December 31, 2008 and 2007, respectively, are restricted by
short-term obligations.

Marketable Securities

MRV accounts for its marketable securities, which are available for sale, under the provisions of SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities("SFAS 115"). The original cost of MRV's marketable securities
approximated fair market value as of December 31, 2008 and 2007. Unrealized gains at December 31, 2008 and 2007 were $64,000 and $7,000, respectively. Proceeds from sales of marketable
securities were $8.7 million and $37.1 million for the years ended December 31, 2008 and 2007, respectively. Marketable securities mature at various dates through 2009.

Marketable
securities consisted of the following (in thousands):

December 31:

2008

2007Corporate issues

$
999

$
6,402U.S. government issues


11,296


Total

$
12,295

$
6,402


Accounts Receivable and Allowance for Doubtful Accounts

MRV evaluates the collectability of accounts receivable based on a combination of factors. If we become aware of a customer's inability
to meet its financial obligations after a sale has occurred, we record an allowance to reduce the net receivable to the amount we believe can be reasonably collected from the customer. For all other
customers, we record 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 our 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
Cost and
Expense

Other

Deductions

Balance at
End of
PeriodDecember 31, 2006

$
6,179

$
1,287

$


$
(897
)
$
6,569December 31, 2007


6,569


327


1,179


(1,424
)

6,651December 31, 2008


6,651


3,675





(1,300
)

9,026


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).

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

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

2. Summary of Significant Accounting Policies (Continued)

inventories
for excess quantities or obsolescence. This evaluation includes analysis of sales levels and projections of future demand. Based on this evaluation, we maintain 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:

2008

2007
(Restated)Raw materials

$
36,997

$
29,775Work-in process


19,839


18,968Finished goods


35,555


37,845Total

$
92,391

$
86,588


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 (expense), net, in the accompanying Statements of Operations.

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

December 31:

2008

2007Property and equipment, at costMachinery and equipment

$
54,613

$
47,494Computer hardware and software


20,049


28,291Leasehold improvements


8,780


7,315Furniture and fixtures


6,870


6,077Building


4,584


4,781Construction in progress


4,454


3,103Land


346


362Total property and equipment, at cost


99,696


97,423Less  accumulated depreciation and amortization


(74,207
)

(72,913
)Total

$
25,489

$
24,510


97

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

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, 2008, 2007, and 2006 was $7.5 million, $6.2 million and $5.1 million, respectively.

Goodwill and Other Intangibles

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 three reporting units: the Network Integration group, the
Optical Components group, and a component of the Network Equipment group comprising the U.S. divisions. Intangible assets that are determined to have definite lives are amortized over their useful
lives (See Note 4, Goodwill and Other Intangible Assets).

Investments

MRV accounts for investments in unconsolidated entities (See Note 2, Principles of Consolidation) under the provisions of
Accounting Principles Board ("APB") Opinion No. 18,The Equity Method of Accounting for Investments in Common Stock, and related interpretations.
Unconsolidated investments, for which we do not have the ability to exercise significant influence over operating and financial policies, are accounted for under the cost method. We account for
investments for which we have the ability to exercise significant influence over in terms of operating and financial policies, under the equity method. In general, all unconsolidated investments in
which we own greater than 20% of the voting stock are accounted for under the equity method. Cost and equity method investments totaled $3.0 million as of both December 31, 2008 and
2007, 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, but
would not necessarily be limited to, 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 an asset may be impaired. We take 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

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

2. Summary of Significant Accounting Policies (Continued)

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. There were no impairment losses on tangible assets for the years ended December 31, 2007 and 2006. In 2008, the Company recognized an impairment
charge related to fixed assets in its Source Photonics subsidiary of $2.6 million.

Fair Value of Financial Instruments

MRV's financial instruments, including cash and cash equivalents, time deposits, restricted cash, 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.

In
September 2006, the FASB issued SFAS No. 157,Fair Value Measurements("SFAS No. 157"), which defines fair value,
establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 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 SFAS No. 157, 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 issued FASB Staff Position 157-2,Effective Date of
FASB Statement No. 157("FSP No. 157-2"). FSP No. 157-2 delays the effective date of SFAS No. 157 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. SFAS No. 157 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. Observable inputs are inputs
that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's
assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The fair value
hierarchy is broken down into three levels based on the source of inputs as follows:



99

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

2. Summary of Significant Accounting Policies (Continued)

The
availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less
observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within
which the fair value measurement is categorized is based on the lowest level input that is significant to the overall fair value measurement.

The
Company's available-for-sale securities comprise obligations of U.S. government agencies, corporate debt securities, mortgage backed and asset backed
securities and other interest bearing securities and are valued using quoted market prices of recent transactions or are benchmarked to transactions of very similar securities. When observable price
quotations are not available, cash flow models are used to incorporate benchmark yields and issuer spreads. Obligations of U.S. government agencies, corporate debt securities and other interest
bearing securities are categorized in Level 1.

The
following fair value hierarchy table presents information about each major category of the Company's financial assets and liabilities measured at fair value on a recurring basis as
of December 31, 2008 (in thousands):

Fair value measurement at reporting date using:Assets:

Quoted prices
in active
markets for
identical assets
(Level 1)

Significant
other
observable
inputs
(Level 2)

Significant
other
unobservable
inputs
(Level 3)

Balance
as of
December 31,
2008Short-term marketable securities

$
12,295

$


$


$
12,295


There
were no material re-measurements to fair value during the year ended December 31, 2008 of financial assets and liabilities that are not measured at fair value on
a recurring basis.

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 we 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 SFAS No. 86,Accounting 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

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

2. Summary of Significant Accounting Policies (Continued)

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, 2008, 2007 and 2006, advertising
and tradeshow costs were $2.4 million, $2.3 million and $2.0 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 is computed using the weighted average number of common shares outstanding during the period. Diluted
net income (loss) per share 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. For the year ended December 31, 2006, dilutive potential shares include the shares associated with MRV's
outstanding 5% Convertible Notes issued in June 2003 ("2003 Notes").

SFAS
No. 128,Earnings 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, which is 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 that we have 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.

Net
losses in the years ended December 31, 2008, 2007 and 2006, resulted in the calculation of net loss per share using basic weighted average shares outstanding of
157.3 million, 140.1 million and 120.9 million shares, respectively. Outstanding stock options and warrants to purchase 34.9 million, 9.6 million, 8.7 million
shares for the years 2008, 2007 and 2006, respectively, were not included in the computation of diluted loss per share because such stock options and warrants were considered
anti-dilutive. Shares associated with the 2003 Convertible Notes were anti-dilutive and excluded from the computation of diluted net loss per share for the year 2006.

101

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

2. Summary of Significant Accounting Policies (Continued)

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, but not limited to, stock price volatility, employee stock option exercise behaviors, additional stock option grants, estimates of forfeitures, and related income tax impacts. See
Note 14. Share-Based Compensation for further discussion on stock-based compensation and assumptions used.

Recently Issued Accounting Standards

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial
Liabilities  Including an Amendment of FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and
certain other items at fair value. Most of the provisions in SFAS No. 159 are elective; however, the amendment to SFAS No. 115,Accounting for Certain Investments
in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. The fair value option established by SFAS
No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments
otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments.
SFAS No. 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. MRV adopted this statement on January 1, 2008 but did not apply
the fair value option to any assets or liabilities upon adoption or during 2008. The adoption of SFAS No. 159 did not have a material impact on the Company's financial condition, results of
operations or liquidity.

In
December 2007, the FASB issued SFAS No. 141(revised 2007) ("SFAS No. 141R"), which revises SFAS No. 141,Business
Combinations, to simplify existing guidance and converge rulemaking under U.S. GAAP with international accounting standards. SFAS No. 141R applies prospectively
to business combinations where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 31, 2008. Earlier adoption is prohibited.
MRV does not expect that the application of SFAS No. 141R will have a material impact on its financial condition, results of operations or liquidity.

In
December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB
No. 51. This standard requires all entities
to report noncontrolling interests in subsidiaries as equity in the consolidated financial statements. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008; earlier adoption is prohibited. The impact of this statement will be a balance sheet reclassification of minority interests to stockholders' equity.

In
March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No.133. SFAS No 161 requires additional disclosures about the objectives of using derivative instruments, the method by which the derivative

102

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

2. Summary of Significant Accounting Policies (Continued)

instruments
and related hedged items are accounted for under FASB Statement No. 133 and its related interpretations, and where the effects of derivative instruments and related hedged items are
reported within the financial statements. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. MRV does not
expect that the application of SFAS No. 161 will have a material impact on its financial condition, results of operations or liquidity.

In
May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162
identifies the sources of accounting principles and the framework for selecting the accounting principles to be used in the preparation of financial statements in conformity with GAAP. In June 2009,
the FASB approved an Exposure Draft, FASB Accounting Standards Codification ("Codification") that will replace SFAS No. 162. The Codification will modify GAAP by establishing only two levels of
GAAP: authoritative and non-authoritative. The Codification will become the single source of authoritative U.S. accounting and reporting standards, except for rules and interpretive
releases of the SEC under authority of federal securities laws. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become
non-authoritative. The Codification is effective for MRV beginning with its third quarter starting July 1, 2009. MRV does not expect that the application of SFAS No. 162 will
have a material impact on its financial condition, results of operations or liquidity.

In
May 2009, the FASB issued SFAS No. 165,Subsequent Events, which establishes general standards of accounting for 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 statement 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. SFAS No. 165 is effective for MRV beginning with its third quarter starting July 1, 2009.

In
November 2008, the SEC issued for comment a proposed roadmap outlining several milestones that could lead to mandatory adoption of International Financial Reporting Standards ("IFRS")
by U.S. issuers in 2014. IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board ("IASB"). The roadmap also contains proposed rule changes that
would permit early adoption of IFRS by a limited number of eligible U.S. issuers beginning with filings in 2010. According to the roadmap, the SEC would make a determination in 2011 regarding the
mandatory adoption of IFRS. We are currently assessing the impact that this potential change would have on our consolidated financial statements, and we will continue to monitor the development of the
potential implementation of IFRS as well as the ongoing convergence efforts of the FASB and the IASB.

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 that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

103

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements

Background of the Restatement

These financial statements include a restated consolidated balance sheet as of December 31, 2007 and restated consolidated
statements of operations, statements of stockholders' equity, and statements of cash flows for the years ended December 31, 2007 and 2006. The restated financial statements reflect the
correction of accounting errors identified during an in-depth internal review and investigation into historical stock option granting practices and related accounting,
non-stock option compensation arrangements, acquisition related accounting treatment and other accounting issues. MRV is also restating the unaudited quarterly financial data for the
interim periods of 2007 and the unaudited quarterly financial data for the three months ended March 31, 2008 in Note 19. Quarterly Financial Data and unaudited condensed financial
statements for the three months ended June 30, 2008 and for the three months ended September 30, 2008, which have not previously been filed with the SEC due to the pending restatement of
historical financial statements, are also included in Note 19.

The
following tables summarize the impact of the restatement on MRV's previously reported financial statements (in thousands, except per share data):

Consolidated Statement of Operations

For the year ended December 31, 2007

As previously
reported

Adjustments

As restatedRevenue

$
448,237

$


$
448,237Cost of goods sold


320,264


486


320,750Gross profit


127,973


(486
)

127,487Operating costs and expenses:Product development and engineering


32,956


431


33,387Selling, general and administrative


101,998


696


102,694Impairment of goodwill and other intangibles








Amortization of other intangibles


1,906





1,906Total operating costs and expenses


136,860


1,127


137,987Operating loss


(8,887
)

(1,613
)

(10,500
)Interest expense


(3,968
)




(3,968
)Cost of debt conversion


(4,899
)




(4,899
)Other income (expense), net


2,979


1,200


4,179Loss before income taxes


(14,775
)

(413
)

(15,188
)Provision for income taxes


3,853


53


3,906Net loss

$
(18,628
)
$
(466
)
$
(19,094
)Net loss per share:Basic and diluted

$
(0.13
)
$
(0.01
)
$
(0.14
)Weighted average number of shares:Basic and diluted


140,104





140,104


104

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

Consolidated Statement of Operations

For the year ended December 31, 2006

As previously
reported

Adjustments

As restatedRevenue

$
356,489

$


$
356,489Cost of goods sold


244,207


178


244,385Gross profit


112,282


(178
)

112,104Operating costs and expenses:Product development and engineering


28,187


182


28,369Selling, general and administrative


87,539


1,003


88,542Impairment of goodwill and other intangibles


52





52Amortization of other intangibles








Total operating costs and expenses


115,778


1,185


116,963Operating loss


(3,496
)

(1,363
)

(4,859
)Interest expense


(3,540
)




(3,540
)Cost of debt conversion








Other income (expense), net


5,386


(920
)

4,466Loss before income taxes


(1,650
)

(2,283
)

(3,933
)Provision for income taxes


3,865


(415
)

3,450Net loss

$
(5,515
)
$
(1,868
)
$
(7,383
)Net loss per share:Basic and diluted

$
(0.05
)
$
(0.01
)
$
(0.06
)Weighted average number of shares:Basic and diluted


120,902





120,902


105

---





Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

Consolidated Balance Sheet

As of December 31, 2007

As previously
reported

Adjustments

As restatedAssetsCurrent assets:Cash and cash equivalents

$
72,474

$


$
72,474Short-term marketable securities


6,402





6,402Time deposits


6,055





6,055Accounts receivable, net


128,368





128,368Inventories


86,676


(88
)

86,588Deferred income taxes


838


1,094


1,932Other current assets


25,370


(314
)

25,056Total current assets


326,183


692


326,875Property and equipment, net


24,510





24,510Goodwill


137,371


(8,874
)

128,497Deferred income taxes


907


(907
)

Long-term marketable securities


1,442





1,442Intangibles, net


11,994





11,994Other assets


5,097


550


5,647Total assets

$
507,504

$
(8,539
)
$
498,965Liabilities and stockholders' equityCurrent liabilities:Short-term obligations

$
28,931

$


$
28,931Deferred consideration payable


30,561





30,561Accounts payable


82,927





82,927Accrued liabilities


38,902


(1,618
)

37,284Deferred revenue


9,203





9,203Other current liabilities


7,766


(41
)

7,725Total current liabilities


198,290


(1,659
)

196,631Convertible notes








Other long-term liabilities


9,322


(1,706
)

7,616Minority interest


5,193


(397
)

4,796Commitments and contingenciesStockholders' equity:Preferred stock








Common stock


267





267Additional paid-in capital


1,344,661


54,969


1,399,630Accumulated deficit


(1,055,552
)

(69,883
)

(1,125,435
)Treasury stock


(1,352
)




(1,352
)Accumulated other comprehensive income (loss)


6,675


10,137


16,812Total stockholders' equity


294,699


(4,777
)

289,922Total liabilities and stockholders' equity

$
507,504

$
(8,539
)
$
498,965


106

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

Consolidated Statement of Cash Flows

For the year ended December 31, 2007

As previously
reported

Adjustments

RestatedCash flows from operating activities:Net loss

$
(18,628
)
$
(466
)
$
(19,094
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


8,335





8,335Share-based compensation expense


3,906


1,365


5,271Provision for doubtful accounts


327





327Deferred income taxes


(1,312
)

170


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


(37
)




(37
)Cost of debt conversion


4,899





4,899Minority interests' share of income


(55
)

(370
)

(425
)Changes in operating assets and liabilities, net of effects from acquisitions:Time deposits


(2,929
)




(2,929
)Accounts receivable


(6,851
)




(6,851
)Inventories


(4,978
)

112


(4,866
)Other assets


(2,394
)

312


(2,082
)Accounts payable


11,719





11,719Accrued liabilities


3,866


(550
)

3,316Income taxes payable





(41
)

(41
)Deferred revenue


1,168





1,168Other current liabilities


(5,657
)

(394
)

(6,051
)Net cash used in operating activities


(8,621
)

138


(8,483
)Cash flows from investing activities:Purchases of property and equipment


(7,867
)




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


167





167Fiberxon acquisition, net of cash acquired


(19,886
)




(19,886
)Proceeds from sale of equity method investment








Purchases of investments


(19,050
)




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


37,073





37,073Purchase of minority interest








Net cash provided by (used in) investing activities


(9,563
)




(9,563
)Cash flows from financing activities:Net proceeds from issuance of common stock


2,060





2,060Borrowings on short-term obligations


67,268





67,268Payments on short-term obligations


(70,934
)




(70,934
)Borrowings on long-term obligations


148





148Payments on long-term obligations


(282
)




(282
)Other long-term liabilities


(294
)

294


Net cash provided by (used in) financing activities


(2,034
)

294


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


970


(432
)

538Net increase (decrease) in cash and cash equivalents


(19,248
)




(19,248
)Cash and cash equivalents, beginning of year


91,722





91,722Cash and cash equivalents, end of year

$
72,474

$


$
72,474


107

---



Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

Consolidated Statement of Cash Flows

For the year ended December 31, 2006

As previously
reported

Adjustments

RestatedCash flows from operating activities:Net loss

$
(5,515
)
$
(1,868
)
$
(7,383
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


5,446





5,446Share-based compensation expense


3,442


1,601


5,043Provision for doubtful accounts


1,225


62


1,287Deferred income taxes


(1,346
)

430


(916
)(Gain) loss on disposition of property and equipment


(467
)




(467
)Gain on sale of equity method investment


(50
)




(50
)Minority interests' share of income


98


132


230Impairment of goodwill and other intangibles


52





52Changes in operating assets and liabilities:Time deposits


666





666Accounts receivable


3,743


383


4,126Inventories


(15,849
)

76


(15,773
)Other assets


(5,260
)

(548
)

(5,808
)Accounts payable


(1,518
)




(1,518
)Accrued liabilities


(952
)

179


(773
)Income tax payable





642


642Deferred revenue


1,189





1,189Other current liabilities


3,374


329


3,703Net cash used in operating activities


(11,722
)

1,418


(10,304
)Cash flows from investing activities:Purchases of property and equipment


(5,454
)




(5,454
)Proceeds from sale of property and equipment


509





509Proceeds from sale of equity method investment


100





100Purchases of investments


(43,750
)




(43,750
)Proceeds from sale or maturity of investments


17,950





17,950Purchase of minority interest


(50
)




(50
)Net cash provided by (used in) investing activities


(30,695
)




(30,695
)Cash flows from financing activities:Net proceeds from issuance of common stock


72,326





72,326Borrowings on short-term obligations


107,331





107,331Payments on short-term obligations


(114,162
)




(114,162
)Borrowings on long-term obligations








Payments on long-term obligations


(340
)




(340
)Other long-term liabilities


329


(329
)

Net cash provided by (used in) financing activities


65,484


(329
)

65,155Effect of exchange rate changes on cash and cash equivalents


671


(1,089
)

(418
)Net increase (decrease) in cash and cash equivalents


23,738





23,738Cash and cash equivalents, beginning of year


67,984





67,984Cash and cash equivalents, end of year

$
91,722

$


$
91,722


108

---



Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

The following tables show the detail of the adjustments to the statements of operations for each line item by restatement issue, each of which is
discussed in more detail below (in thousands):

Years ended December 31:

2007

2006Cost of goods sold:Share-based compensation expense

$
79

$
85Compensation arrangements with TurnKey


274


118Other adjustments


133


(25
)Total adjustment to cost of goods sold


486


178Product development and engineering:Share-based compensation expense


296


182Accumulated other comprehensive income and other adjustments


135


Total adjustment to product development and engineering


431


182Selling, general and administrative:Share-based compensation expense


204


481Compensation arrangements with Turnkey





169Compensation arrangements with EDSLan


678


695Non-payroll bonuses to foreign subsidiaries


98


91Accumulated other comprehensive income and other adjustments


(284
)

(433
)Total adjustment to selling, general and administrative


696


1,003Other income (expense):Non-payroll bonuses to foreign subsidiaries


55


44Minority interest


51


(943
)Accumulated other comprehensive income and other adjustments


1,094


(21
)Total adjustment to other income (expense)


1,200


(920
)Provision for income taxes:Tax effect of compensation arrangements with EDSLan


(50
)

82Tax effect of non-payroll bonuses to foreign subsidiaries


(97
)

(95
)Tax effect of minority interest adjustments


(210
)

(812
)Other adjustments


410


410Total adjustment to provision for income taxes


53


(415
)


109

---





Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

The following table shows the cumulative impact of the adjustments, by issue, on the balance sheet at December 31, 2007 (in
thousands):

Share-based
compensation
expense
(including
payroll tax
adjustment)

Compensation
arrangements
with Turnkey

Compensation
arrangements
with EDSLan

Compensation
arrangements
with Interdata

Non payroll
bonuses to
Foreign
Subsidiaries

Purchase
accounting
for
EDSLan

Purchase
accounting
for
Tecnonet

Minority
interest

Accumulated
other
comprehensive
income and
other
adjustments

Total
Adjustment
as of
December 31,
2007AssetsCurrent assets:Inventories

$


$


$


$


$


$


$


$


$
(88
)
$
(88
)Deferred income taxes








110





636











348


1,094Other current assets


























(314
)

(314
)Total current assets








110





636











(54
)

692Goodwill





(1,515
)




(1,710
)




352


(963
)




(5,038
)

(8,874
)Deferred income taxes














103











(1,010
)

(907
)Other assets














727











(177
)

550Total assets

$


$
(1,515
)
$
110

$
(1,710
)
$
1,466

$
352

$
(963
)
$


$
(6,279
)
$
(8,539
)Liabilities and stockholders' equity Current liabilities:Accrued liabilities

$
295

$
419

$
935

$


$
2,058

$
918

$


$


$
(6,243
)
$
(1,618
)Other current liabilities


























(41
)

(41
)Total current liabilities


295


419


935





2,058


918








(6,284
)

(1,659
)Other long-term liabilities


























(1,706
)

(1,706
)Minority interest

















(1,299
)

2,722


(2,064
)

244


(397
)Commitments and contingencies





























Stockholders' equity:Additional paid-in capital


74,127





1,206








4,665


(4,717
)

(1,299
)

(19,013
)

54,969Accumulated deficit


(74,422
)

(1,934
)

(2,031
)

(1,710
)

(592
)

(3,896
)

2,232


3,916


8,554


(69,883
)Accumulated other comprehensive income (loss)

















(36
)

(1,200
)

(553
)

11,926


10,137Total stockholders' equity


(295
)

(1,934
)

(825
)

(1,710
)

(592
)

733


(3,685
)

2,064


1,467


(4,777
)Total liabilities and stockholders' equity

$


$
(1,515
)
$
110

$
(1,710
)
$
1,466

$
352

$
(963
)
$


$
(6,279
)
$
(8,539
)


110

---





Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

For the year ended December 31, 2007

Share-based
compensation
expense
(including
payroll tax
adjustment)

Compensation
arrangements
with Turnkey

Compensation
arrangements
with EDSLan

Non payroll
bonuses to
Foreign
Subsidiaries

Minority
interest

Accumulated
other
comprehensive
income and
other
adjustments

Total
AdjustmentsCash flows from operating activities:Net loss

$
(579
)
$
(274
)
$
(628
)
$
54

$
261

$
700

$
(466
)Adjustments to reconcile net loss to net cash used in operating activities:Share-based compensation expense


579





519








267


1,365Deferred income taxes








(50
)

(97
)

109


208


170Minority interests' share of income














(370
)




(370
)Changes in operating assets and liabilities:Inventories

















112


112Other assets











(342
)




654


312Accrued liabilities





274


159


385





(1,368
)

(550
)Income tax payable

















(41
)

(41
)Other current liabilities

















(100
)

(100
)Net cash used in operating activities

















432


432Effect of exchange rate changes on cash and cash equivalents

















(432
)

(432
)




For the year ended December 31, 2006

Share-based
compensation
expense
(including
payroll tax
adjustment)

Compensation
arrangements
with Turnkey

Compensation
arrangements
with EDSLan

Non payroll
bonuses to
Foreign
Subsidiaries

Minority
interest

Accumulated
other
comprehensive
income and
other
adjustments

Total
AdjustmentsCash flows from operating activities:Net loss

$
(748
)
$
(287
)
$
(777
)
$
48

$
(131
)
$
27

$
(1,868
)Adjustments to reconcile net loss to net cash used in operating activities:Share-based compensation expense


748





853











1,601Provision for doubtful accounts

















62


62Deferred income taxes








82


(95
)




443


430Minority interests' share of income














131


1


132Changes in operating assets and liabilities:Accounts receivable

















383


383Inventories

















76


76Other assets











(386
)




(162
)

(548
)Accrued liabilities





287


(158
)

433





(383
)

179Income tax payable

















642


642Net cash used in operating activities

















1,089


1,089Effect of exchange rate changes on cash and cash equivalents

















(1,089
)

(1,089
)


111

---



Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

In May 2008, management discovered documentation indicating possible back-dating of stock options and incorrect accounting treatment
for certain historical transactions. Management presented its preliminary findings to MRV's Board of Directors, which established a Special Committee to investigate these concerns. The Special
Committee consisted of three independent members of the Board who engaged independent outside legal counsel and forensic accountants to assist in the investigation. On June 5, 2008, the Company
issued a press release and filed a Form 8-K announcing the formation of the Special Committee and the Company's determination that its financial statements and the related reports
of MRV's independent registered public accountants, earnings releases, and similar communications previously issued by MRV should not be relied upon as a consequence of the pending restatement of its
historical financial statements.

The
Special Committee was assigned to review the Company's historical stock option practices and related accounting as well as other issues. Once documentation obtained by the Special
Committee was made available to the Company, management began a detailed review of the Company's a) historical stock option granting practices and related accounting,
b) non-stock option compensation arrangements, and c) acquisition related accounting treatment and other accounting issues.

Following
is a table showing the restatement effect of each issue discussed below on the Company's accumulated deficit at December 31, 2005 and net income for the years ended
December 31, 2006 and 2007 (in thousands):

Years Ended December 31:

2007

2006

Cumulative Amount at
December 31, 2005Share-based compensation expense (including payroll tax adjustment)

$
(579
)
$
(748
)
$
(73,095
)Compensation arrangements with Turnkey


(274
)

(287
)

(1,373
)Compensation arrangements with EDSLan


(628
)

(777
)

(626
)Compensation arrangements with Interdata








(1,710
)Non payroll bonuses to foreign subsidiaries


54


48


(694
)Purchase accounting for EDSLan








(3,896
)Purchase accounting for Tecnonet








2,232Minority interest


261


(131
)

3,786Accumulated other comprehensive income and other adjustments


700


27


7,827Total

$
(466
)
$
(1,868
)
$
(67,549
)


112

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

Review of Historical Stock Option Granting Practices and Related Accounting

The Company's stock option review covered the Company's entire option granting history from its first grant on February 23, 1994
to its last grant on May 1, 2008 (the "Review Period"), including a detailed review of the Company's option grant procedures and available grant documentation. In order to facilitate the review
of all stock options granted during the Review Period, the grants were grouped into the following three time-based categories:

Category

Number of
grant dates

Number of
individual grants

Number of
underlying sharesPre-1998 Grants


26


238


6,849,6851998 up to Post-SOX Grants (March 30, 2004)


108


4,485


24,122,291Post SOX Grants (March 31, 2004 and after)


35


2,719


13,393,887Total


169


7,442


44,365,863


Over
the Review Period, the Company's process for awarding and documenting option grants changed several times. The most substantial changes occurred in March 2004 when the Company
adopted new procedures in compliance with the Sarbanes-Oxley Act ("SOX"). The investigation found that the new procedures implemented for SOX compliance, including the use of predetermined grant
dates, eliminated the ability to select grant dates based on historical prices.

The
investigation revealed that prior to March 31, 2004, the Company's stock option granting process was informal and poorly documented. Option Grants in the pre-SOX
period were determined through two informal, separate and contemporaneous processes. One process was to determine the list of recipients and the number of options each would receive and the other
process was to determine the grant date. These processes were completed as part of the quarterly reporting cycle. The investigation revealed that grant dates were frequently chosen with the benefit of
hindsight during the pre-SOX period.

Under
Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees ("APB 25"), the measurement date for a stock option grant is the first date when
both the number of options that an individual employee is entitled to receive and the exercise price is known with finality. Accordingly, the grant date used by the Company to account for these
options was not the measurement date under APB 25 and additional compensation expense equal to the intrinsic value (the excess of the fair value of the underlying stock over the exercise price
of the option) on the measurement date should have been recognized over the vesting period. In the originally reported financial statements, no compensation expense was recorded under APB 25
when the strike price was equal to the stock price on the date of grant because the grant date was used as the measurement date. In order to determine the adjustments needed for the restated financial
statements, management gathered and reviewed all available information on a grant by grant basis that might indicate the appropriate measurement date. Relevant documentation for many grants was not
found due to several factors including a) the lack of careful record keeping at the time, b) relevant information was not originally considered important to retain, c) the system
for tracking stock option grants prior to August 2002 was not centralized or sophisticated, and d) some of the grants occurred many years ago. As a result, it was necessary to consider a
variety of factors in determining the appropriate measurement date in order to correct the accounting for each option grant in the restatement.

113

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

For
the period prior to late 2000, the stock option administration was decentralized. The Company had multiple stock option plans and the administration was done by multiple people at
different locations, generally using spreadsheets to track the grants. In August 2002, the Company implemented an electronic option tracking and administrative software program to replace the manual
spreadsheet process and centralize all of the stock option administration.

The
post-SOX period began on March 31, 2004. Generally, with limited exceptions, the procedures implemented for SOX compliance were effective at ending the practice of
selecting grant dates with hindsight. However other measurement date errors did occur, generally related to the finalization of the number of options awarded to particular recipients after the stated
grant date.

Types of Adjustments

As a result of the stock option adjustments, the Company has recorded, as appropriate, additional pre-tax share-based
compensation, net of forfeitures, of $74.1 million for the years 1994 through 2007 under APB 25 and related interpretations and under SFAS No. 123(R), Share Based Payment("SFAS
No. 123R"). In addition to adjustments for revised measurement dates, the Company also recorded additional adjustments
to account properly for certain modifications, acquisition grants, and grants made to non-employees, which are discussed further below. The adjustment to the cumulative compensation
expense through December 31, 2007, by type of adjustment, is shown in the following table (in thousands):

Revised measurement dates, excluding acquisition and non-employee grants

$
36,535Repricings and other modifications


25,721Acquisition grants


10,344Non-employee grants


1,545Total adjustment

$
74,145


As
discussed in the Share-Based Compensation Related Tax Adjustments section below, the Company also recorded net payroll tax, penalties, interest and withholding tax adjustments of
$0.3 million during this period.

Measurement Date Determination

APB 25 defines the Measurement Date as the first date on which are known both the number of options that an individual employee
is entitled to receive and the exercise price. The Company adopted SFAS 123R on January 1, 2006. Under SFAS 123R, compensation expense is recognized for the fair value of the
stock based compensation on the grant date. Under SFAS 123R, the grant date is the date on which the employee and employer reach a mutual understanding of the key terms and conditions of the
award and all required approvals have been obtained. Management reviewed available documentation concerning grants and determined that signed Board minutes or written consents that specifically
referenced the approval of grants (including the recipient, the number of underlying shares and the exercise price) in exhibits when the date of the action could be objectively verified (for example,
through email or fax header dates) ("Approval Documentation") represented the best evidence of the

114

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

finality
of grant approval. Where Approval Documentation was available, the Company relied on it to confirm the grant date originally recorded by the Company or to determine the appropriate
measurement date for the grant. The Company was able to rely on Approval Documentation to determine the measurement date for several grants in the pre-1998 time period, and a majority of
grants made from April 1, 2004 to the most recent grant date of May 1, 2008; however, Approval Documentation was not available during the intervening period because the Company's stock
option granting practice during this period did not include preparing minutes or written consents with a list of grants by recipient on or before the grant date.

Where
Approval Documentation was not available, the Company used other evidence of measurement dates including internal memoranda in electronic form documenting options grants, emails,
faxes, handwritten notes and other documentation relevant to determining a measurement date or indicating previously approved grants ("Grant Documentation"). In some cases this Grant Documentation did
not indicate a measurement date with certainty and the Company applied judgment to determine the appropriate measurement date using the Grant Documentation available. In the absence of Approval
Documentation or other Grant Documentation indicating a specific measurement date, the Company determined the first date at which the number of shares and exercise price must have been known with
finality (the "Outside Date") based on all available evidence.

Sometimes
a document or other information was available that, although not instructive to a specific measurement date, indicated an Outside Date. For example, the date a Form 5
was filed for an
officer or director after year end would be an Outside Date for the grants listed on that Form 5, or a list known to have been created by a particular date, such as a list with a fax header or
a spreadsheet attached to an email would provide an outside date for the grants on that list. For grants after the Company began using the option tracking and administrative software program, the
Company was able to use the record added date recorded by the software as an Outside Date. Finally, the Company used the quarterly earnings release date (the Release Date) as an Outside Date for the
options granted during that quarter. The Company decided that the use of the Release Date was appropriate because information collected during the investigation indicated that the processes of
finalizing a list of grant recipients and setting the exercise price were part of the quarterly financial reporting process which was substantially complete by the Release Date. When Approval
Documentation or Grant Documentation indicating the precise measurement date was not available, the Company used the earliest Outside Date determined for that grant.

Management
performed an analysis of all grants made during the Review Period resulting in the selection of new measurement dates for 4,412 grants representing 28,201,102 shares. In all
such cases the new measurement date occurs after the originally recorded date. Since the company had less Approval Documentation or Grant Documentation available in the earlier time periods, a larger
portion of those measurement dates were determined using Outside Dates. The Company used Outside Dates as the revised measurement dates for 70% of the options granted in the pre-1998 time
period, 34% of options granted in the 1998 to Post-SOX time period, and 7% of grants in the Post-SOX time period. In total, Outside Dates were used to determine
$82.5 million of the total $210.0 cumulative compensation expense recognized in the restated financial statements from 1994 to 2007.

115

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

Repricings and Other Grant Modifications Not Previously Recorded

The Company determined that modifications had been made to certain grants that had not been historically accounted for in accordance
with accounting principles generally accepted in the United States (GAAP). The Company identified instances where modifications to grants effectively renewed or extended the life of the grants or that
accelerated the vesting of options in connection with an individual's termination of employment. The Company has recorded $4.0 million in additional compensation expense related to these types
of modifications. The Company also identified certain grants that were modified to alter the grant date exercise price through a direct repricing of the grant or a cancellation of the grant and
issuance of a replacement grant at a lower exercise price. The proper accounting for repriced options require that the grants be remeasured each reporting date from the date of the repricing until
they are exercised, forfeited, or expired. These repriced grants were not originally recorded properly. Accordingly, the Company has recorded an additional $21.7 million in compensation
expense, net of forfeitures, for these
repricings in the restated financial statements. Together, the adjustments necessary to correct the previously issued financial statements for repricings and other modifications totaled
$25.7 million.

Acquisition Grants

In connection with several acquisitions made during 2000 and 2001, the Company issued 3,768,000 stock options to employees of the newly
acquired companies. The purchase agreements for these acquisitions specified that the number of options that would be granted to the employees would be the number of options needed to provide the
employees with a specified amount of deferred compensation based on the average stock price for a period at or near the execution of the definitive agreement (or in some cases the closing date) and a
specified exercise price. The Company had incorrectly used the deferred compensation specified in the purchase agreements rather than the amount calculated using the actual number of stock options
issued and the closing stock price on the measurement date. In many cases, the list of grant recipients was not finalized until several months after the closing of the acquisition. In addition, the
Company had incorrectly accounted for stock options issued in connection with three acquisitions as exchanges of awards held by employees of the acquired entities, and included the fair value of such
options as part of the purchase price in both instances. As a result, an aggregate of $20.5 million of compensation expense was incorrectly recorded as goodwill at the acquisition dates. The
Company has recorded correcting adjustments to increase compensation expense for two acquisitions by a total of $25.4 million, and to decrease compensation expense for four acquisitions by a
total of $15.1 million, for a net increase of $10.3 million in the restated financial statements.

Grants to Non-Employees

Stock option grants were made to outside consultants under contractual arrangements with MRV. At the time of grant, these individuals
did not meet the IRS Ruling 87-41 definition of an employee. These grants have been restated to be accounted for as non-employee grants under the relevant accounting literature
at the time. The fair value of grants to non-employees is expensed in the period in which the non-employee provides goods or services to the Company. The aggregate restated
compensation expense resulting from the adjustment of measurement dates for these grants is $1.5 million, net of forfeitures, in the restated financial statements.

116

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

Share-Based Compensation Related Tax Adjustments

Based on measurement date changes resulting from our options review, certain grants of stock options made during the Review Period were
priced below fair market value on the revised measurement date, rather than at fair market value. Consequently, certain grants intended to be classified as incentive stock options ("ISOs"), requiring
pricing at no less than fair market value on the date of grant, should have been classified as non-qualified stock options. The Company did not withhold federal income taxes, state income
taxes, FICA or Medicare on the options that were issued as ISOs that should have been treated as non-qualified stock options. To reflect correctly these exercises in the restated financial
statements, the Company accrued payroll tax, penalty, and interest expenses related to non-qualified stock options originally classified as ISOs in the periods in which the underlying
stock options were exercised. Then, in periods in which the liabilities were legally extinguished due to statutes of limitations, the expenses were reversed and recognized as a reduction of expense.
The statute of limitations has expired with respect to all exercises prior to December 31, 2005, which represents the vast majority of the exercises of non-qualified stock options
originally classified as ISOs.

MRV
recorded deferred tax assets as a result of the share-based compensation expense recorded through the restatement based on unexercised and uncanceled nonqualified stock options at
the end of each reporting period. The recognized tax benefit related to affected stock options granted to officers could be limited, in certain instances, due to the potential
non-deductibility of the related expenses under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). This IRS rule limits the amount of executive
compensation that may be deducted for U.S. tax purposes under certain circumstances. This limitation did not have an impact on the Company.

Section 409A
of the Code imposes additional taxes on our employees for stock options granted with an exercise price lower than the fair market value on the date of grant for all
options or portions of options that vest after December 31, 2004. As a result of the change in measurement dates described above, certain stock options granted during the Review Period were
issued at prices below fair market value on the revised measurement date. The Company had a withholding obligation related to the Section 409A compensation from these options, the impact of
which is included in the pre-tax payroll-related tax expense adjustments.

117

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

Following
is the financial statement impact of the restatement on previously reported share-based compensation expense, including income tax impact by year, (in thousands):

Year Ending December 31:

Restated
share-based
compensation
expense

As reported
share-based
compensation
expense

Pre-tax
share-based
compensation
expense
adjustments

Pre-tax
payroll
related tax
expense
(benefit)
adjustments

Total
pre-tax
impact

Related
income
tax expense
(benefit)
adjustments

Net after-tax
adjustments1994

$
18

$


$
18




$
18

$


$
181995


1,021





1,021


51


1,072





1,0721996


5,430





5,430


874


6,304





6,3041997


3,660





3,660


1,428


5,088





5,0881998


5,709





5,709


599


6,308





6,3081999


10,267





10,267


4,226


14,493





14,4932000


110,850


59,941


50,909


27,956


78,865





78,8652001


54,414


69,831


(15,417
)

4,926


(10,491
)




(10,491
)2002


5,684


6,604


(920
)

342


(578
)




(578
)2003


1,900


(8,098
)

9,998


(4,655
)

5,343





5,3432004


2,429


188


2,241


(35,391
)

(33,150
)




(33,150
)2005


48





48


(225
)

(177
)




(177
)Cumulative amount at December 31, 2005


201,430


128,466


72,964


131


73,095





73,0952006


4,110


3,442


668


80


748





7482007


4,419


3,906


513


66


579





579Cumulative amount at December 31, 2007

$
209,959

$
135,814

$
74,145

$
277

$
74,422

$


$
74,422


Review of Non-Stock Option Compensation Arrangements

Adjustments were made to the restated financial statements to correct for errors in accounting for compensation arrangements with
managers and employees of certain foreign subsidiaries.

Compensation Arrangements with Turnkey

In 1998, the Company founded a Swiss subsidiary, Turnkey Communications AG ("TurnKey"), and at that time entered into agreements with
its key managers whereby the managers were granted rights to receive shares of TurnKey common stock, and upon exercise of such rights, the Company was required to repurchase such shares and the
managers were required to sell them to the Company. The agreements provided a formula to calculate the repurchase price for the shares based on the revenue of TurnKey during the four quarters
preceding the exercise. Since the net result of these transactions was a cash payment to the managers rather than a change in ownership, the Company has now determined that the substance of these
agreements was a compensation arrangement for the managers and not an

118

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

equity
transaction. The Company previously did not account for these agreements until exercises were made by the option holders. Under these arrangements, the Company should have recorded a liability
equal to the required payment if the rights had been exercised as of the balance sheet date, and recorded compensation expense for the changes in the liability between balance sheet dates. The Company
recorded adjustments to reflect properly this liability and the related compensation expense for this arrangement in the restated financial statements.

Compensation Arrangements with EDSLan

The Company had an annual profit sharing arrangement beginning in 2001 with the managing directors of EDSLan S.r.l., a
subsidiary located in Italy, which provided for a cash bonus payment based on the adjusted net income of EDSLan during the year. The restated financial statements include adjustments to correct
several errors in the accounting for the profit sharing arrangement. In some years, the expense was not accrued in the year it was earned, and instead was recognized when paid. In several years the
bonus amount was calculated incorrectly. In 2004, the bonus was not accrued at year end, and in 2005 the liability was settled through the issuance of 100,000 shares of the Company's Common Stock that
were restricted for one year. The expense was recognized for the fair value of the stock at the time it was issued. However, the Company had guaranteed that the value of the shares would be sufficient
to cover the liability by the end of the restriction period, and this element of the arrangement was not properly recorded. In 2005 and 2006, the bonus amounts were not accrued at year end and
correcting adjustments were made in restated financial statements to reflect the expense and liability related to these bonuses. In each of 2006 and 2007, the Company granted the managing directors
330,000 stock options under an agreement that the stock options would settle the liability for 2005 and 2006, respectively, to the extent they resulted in realized gains to the recipients. At
December 31, 2007, the options were still outstanding, the exercise price exceeded the fair value of the stock, and the bonus liability remained outstanding. The fair value of the stock options
was expensed over the one year vesting period.

The
Company recorded adjustments to reflect properly this liability and the related compensation expense for this arrangement in the restated financial statements. The related
compensation expense is included in Selling, General, and Administrative expense.

Compensation Arrangements with Interdata

In 1997, MRV acquired 100% of Interdata, a subsidiary in France. Following the acquisition, the Company created a holding company
between MRV and Interdata and issued shares representing 30% of the holding company to the managers of Interdata under the terms of a Shareholders' Agreement. The managers had the right to put the
shares back to MRV at a price determined by a formula based on the revenue growth from 1997. These shares were put back to MRV in 2002 and 2003 and the Company paid approximately $1.7 million
in accordance with the formula set forth in the Shareholders' Agreement. These payments were originally treated as purchases of a minority interest in Interdata, and no compensation expense was
recognized. This arrangement should have been treated as a stock based compensation arrangement under APB 25, and the $1.7 million payment should have been recorded as an expense in the
period from 1997 to 2003. To correct this error, the Company recorded an adjustment to increase accumulated deficit and decrease goodwill by this amount.

119

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

Non-Payroll Bonuses to Foreign Subsidiaries

During the period from 2002 through 2007, the Company made cash bonus payments in U.S. dollars directly to several employees of three
foreign subsidiaries. The bonus payments totaled $2.7 million and were generally recognized in the proper period. However, these bonus amounts should have been recorded in local currency and
paid by the foreign subsidiaries through their payroll system. In addition, the Company has restated certain segment data in 2006 and 2007 for these adjustments because the bonus amounts were
incorrectly included in the corporate unallocated operating expenses rather than being included in the applicable segment's results. The Company did not report such payments to the IRS and did not
withhold or pay foreign taxes on such amounts. The Company has worked with the affected employees and foreign subsidiaries to correct the foreign tax deficiencies and has recorded additional expenses
to reflect the Company's tax liability in the years the payments were made. In addition, the Company recorded $1.8 million in 2008, and will report $0.8 million in 2009, of additional
compensation expense related to bonuses to be paid to the impacted employees to allow them to pay the taxes due on the original bonuses.

Acquisition Related Accounting Treatment and Other Accounting Issues

Adjustments were made to the restated financial statements to correct for errors in accounting for acquisitions of and subsequent
accounting treatment for minority interests in subsidiaries. In addition, adjustments were made to correct for several entries improperly recorded to accumulated other comprehensive income.

Acquisition Accounting for EDSLan

In 1996, the Company acquired a 50% equity interest in EDSLan for cash and warrants totaling $4.7 million. The Company did not
originally account for the value of the warrants, which led to an understatement of the purchase price of approximately $3.7 million. In addition, the Company and the principals of EDSLan
entered into additional agreements in May 1997 to purchase the remaining 50% of EDSLan at certain times in 1997, 1999, 2000 and 2001. The payments due in each installment comprised three elements. The
first element was a fixed payment of $500,000 per 10% interest ($2.5 million total). The second element was a distribution of net income which corresponded to the minority interest
(i.e., 50% of 1996 net income, 40% of 1997 net income, 30% of 1998 net income, 20% of 1999 net income, and 10% of 2000 net income). The third element was determined by a formula based on the
revenues of the year immediately preceding the payment. In accordance with EITF 95-8,Accounting for Contingent Consideration Paid to the Shareholders of an
Acquired Enterprise in a Purchase Business Combination, the Company determined that a) the first element related to additional purchase price, and the Company should
have adjusted the minority interest liability to $2.5 million when the agreement was signed in 1997, b) the second element represented the minority interest share in net income, which
totaled $1.0 million, and should have been treated as minority interest expense, net of taxes, and c) the third element, which totaled $3.9 million, should have been treated as
compensation expense. Subsequent to the original agreements, the parties agreed that the Company would not purchase the final 10% from the EDSLan principals. As part of this agreement, the Company
issued a put option allowing one of the EDSLan principals to sell 3.33% of EDSLan to the Company for $0.9 million. This amount is included in minority interest liability. This agreement has
been extended to December 31,

120

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

2009.
The Company incorrectly accounted for these cash payments and warrants by understating goodwill and related amortization through December 31, 2002 when SFAS No. 142 Goodwill and Other Intangible
Assets("SFAS No. 142") was adopted. The Company adjusted the restated financial statements to reflect correcting
entries to selling, general, and administrative expenses, goodwill, paid-in capital, minority interests, accumulated deficit, and other comprehensive income (loss).

Acquisition Accounting for Tecnonet

In December 1997, the Company acquired a 50% equity interest in Tecnonet for $2.4 million, and in 1999 acquired an additional
10% of the outstanding shares of Tecnonet for $0.6 million. The Company did not properly account for the purchase of Tecnonet, related goodwill and minority interest liability. The accompanying
restated financial statements reflect adjustments to goodwill, minority interest additional paid in capital, accumulated deficit, and
accumulated other comprehensive income ("AOCI") related to correcting the original acquisition accounting of Tecnonet.

Minority Interest

The Company reviewed its historical accounting for minority interests in its subsidiaries and discovered errors in the determination of
the percentage of the subsidiaries' net book value and pre-tax income that was attributable to the minority interest and errors in the method of calculating the minority interest expense.
Adjustments were made to the restated income financial statements to correct these errors.

Accumulated Other Comprehensive Income (Loss) and Other Adjustments

The Company reviewed the accumulated balance in AOCI and identified amounts that had been improperly recorded to AOCI, which should
have been recognized in the statement of operations in prior periods, and adjusted those amounts accordingly. The restated balance in AOCI is comprised of gains and losses resulting from converting
foreign currency subsidiaries to U.S. dollars as required by SFAS No. 52 and unrealized gains and losses on available for sale securities as required by SFAS No. 115. AOCI at
December 31, 2005 as originally reported included unrealized losses amounting to $3.4 million that should have been recognized in operations in 2002 as a result of the sale of certain
Asian subsidiaries. These amounts related to the cumulative losses on translation of the subsidiary's foreign currency financial statements, and should have been realized in the statement of
operations upon disposition of the subsidiary. In addition, prior to 2006, goodwill in our foreign subsidiaries was not pushed down to the subsidiary, and the balances were not translated along with
the other assets and liabilities using the current rate method. Goodwill as of December 31, 2005 should have been $5.5 million higher than previously reported as a result of converting
goodwill to U.S. dollars at the then current translation rate, with an offsetting credit to AOCI. In some cases, entries to AOCI were posted to eliminate unreconciled intercompany accounts or
investments in subsidiaries that were not in proper balance with the underlying equity of the subsidiary. The Company has recorded an adjustment of $8.9 million to correct errors in accumulated
losses which had previously been reflected in the balance of AOCI as of December 31, 2005 due to unreconciled intercompany balances.

The
Company identified certain errors that were not previously recorded because in each case, and in the aggregate, the underlying errors were previously not considered by management to
be material to

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

the
consolidated financial statements. We recorded corrections of these errors, including adjustments to properly translate goodwill and other assets related to foreign subsidiaries, the
true-up of certain receivables, inventory and tax reserves, correction to inventory costs, and miscellaneous other adjustments. In addition, we adjusted accumulated deficit by
$20.5 million to reverse the impairment of goodwill that was recorded in error related to deferred stock compensation as discussed above under the heading "Acquisition Grants".

4. Goodwill and Other Intangible Assets

In accordance with SFAS No. 142 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):

December 31:

2008

2007
(Restated)Beginning balance

$
128,497

$
32,512Purchase of Fiberxon





93,879Purchase of minority Interest





Impairment


(100,250
)

Foreign currency translation


(1,210
)

2,106Total

$
27,037

$
128,497


Goodwill
represents the excess of the purchase price of the net assets of acquired entities over the fair value of such assets. MRV performs the 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 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

122

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

4. Goodwill and Other Intangible Assets (Continued)

units,
management determined that $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, 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


The
following table summarizes other intangible asset balances at December 31, 2007 (in thousands)

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
AmountDeveloped technology

$
8,500

$
(773
)
$
7,727Customer backlog


600


(600
)

Customer relationships


4,800


(533
)

4,267Total other intangible assets

$
13,900

$
(1,906
)
$
11,994


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

Year Ending December 31:2009

$
2,2572010


2,0792011


1,9012012


1,9012013


356Thereafter


1,066Total

$
9,560


123

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

5. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

December 31:

2008

2007
(Restated)Payroll and related

$
22,424

$
22,955Professional fees


2,542


3,634Non-income taxes


473


364Product warranty


2,604


2,547Deferred rent


1,322


1,591Other


12,740


6,193Total

$
42,105

$
37,284


6. Income Taxes

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

Years ended December 31:

2008

2007
(Restated)

2006
(Restated)Current:Federal

$


$


$
State


18





Foreign


4,120


5,048


4,366Total current


4,138


5,048


4,366Deferred:Federal








State








Foreign


(1,628
)

(1,142
)

(916
)Total deferred


(1,628
)

(1,142
)

(916
)Total

$
2,510

$
3,906

$
3,450


124

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

6. Income Taxes (Continued)

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:

2008

2007
(Restated)

2006
(Restated)Income tax provision (benefit, at statutory federal rate)


(34
)%

(34
)%

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


1
%

(2
)%

(1
)%Credits


0
%

(7
)%

(24
)%Permanent differences


30
%

14
%

11
%Foreign taxes at rates different than domestic rates


2
%

10
%

18
%Expired capital loss carry forwards


15
%

551
%

Change in valuation allowance


(12
)%

(505
)%

118
%Total


2
%

27
%

88
%


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

December 31:

2008

2007
(Restated)Allowance for doubtful accounts

$
1,339

$
1,244Inventory reserve


3,122


4,331Accrued liabilities


6,106


3,229Other


6,627


5,21617,194


14,020Valuation allowance


(15,064
)

(12,088
)Net current deferred income tax assets


2,130


1,932Net operating losses


95,977


109,018Tax credits


10,957


10,651Depreciation and amortization


245


2,446Investments


(28
)

176Capital loss carry forwards


5,776


18,944Other


(1,335
)

1,291111,592


142,526Valuation allowance


(110,112
)

(142,526
)Net long-term deferred income tax assets


1,480


Total

$
3,610

$
1,932


MRV
records valuation allowances against deferred income tax assets, when necessary, in accordance with SFAS No. 109,Accounting for Income
Taxes. Realization of deferred income tax assets, such as net operating loss carry forwards and income tax credits, is dependent on future taxable

125

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

6. Income Taxes (Continued)

earnings
and is therefore uncertain. At least quarterly, we assess 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, we establish a valuation allowance against the deferred income tax asset, which increases income tax expense in the period such determination is made. During 2008
we released the valuation allowance of $13.1 million related to capital loss carry forwards which expired or no longer existed. During 2008 and 2007, we recorded an additional valuation
allowance totaling $4.3 million and $5.0 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, 2008, MRV had federal, state, and foreign net operating loss carry forwards available of $196.6 million, $155.1 million and $97.7 million,
respectively. For the year ended December 31, 2008, federal net operating loss carry forwards increased by $5.2 million, and state net operating loss carry forwards decreased by
$42.1 million. For federal and state income tax purposes, the net operating losses are available to offset future taxable income through 2028 and 2029, respectively. Certain foreign net
operating loss carryforwards and tax credits are available
indefinitely. As of December 31, 2008, federal, state, and foreign income tax credits amounted to $6.1 million, $5.0 million, and $0.9 million, respectively. If not
utilized, the federal and state income tax credits will begin to expire in 2019 and 2012, respectively. Capital loss carry forwards totaling $14.5 million as of December 31, 2008, will
begin to expire in 2009.

As
a result of the adoption of SFAS No. 123R, the Company recognizes tax benefits associated with the exercise of stock options and vesting of restricted share units directly to
stockholders' equity (deficiency) only when realized. Accordingly, deferred tax assets are not recognized for net operating loss carryforwards 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, 2008, 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, 2008, MRV had approximately $55.5 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 2004 and certain state, local and foreign income tax audits
through 2002 to 2004. 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
FASB Interpretation No. 48

126

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

6. Income Taxes (Continued)

Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109as of December 31, 2008.

7. Short-Term and Long-Term Obligations

Short-term obligations consist of secured and unsecured lines of credit, short-term loans and notes entered into with certain financial institutions. As of
December 31, 2008 and 2007 short-term obligations totaled $32.9 million and $28.9 million, respectively. Certain assets of our subsidiaries including customer accounts
receivables have been pledged as collateral on these borrowings. Short-term obligations bear interest rates ranging from 4.8% to 7.3%, and the weighted average interest rates were
approximately 5.5% and 5.8% as of December 31, 2008 and 2007, respectively. These obligations are incurred and settled in local currencies of the respective subsidiaries.

Long-term
obligations consist of a financing arrangement bearing interest at 7.6%. Principal and interest is payable in monthly and quarterly installments through February
2010. As of December 31, 2008 and 2007, the long-term portion of the obligation totaled $14,000 and $202,000 respectively. As of December 31, 2008, $52,000 of
long-term obligations due in 2009 was included in short-term obligations in the 2008 balance sheet. As of December 31, 2007, $136,000 of long-term
obligations due in 2008 was included in short-term obligations in the 2007 balance sheet.

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,
2008, there were no outstanding foreign currency contracts and the realized gains and losses recorded were insignificant.

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, 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 (losses) on these interest rate swaps for the year ended December 31, 2007 was $552,000, which have been recorded in interest expense. The fair values and the carrying values
of these interest rate swaps were $190,000 at December 31, 2007, and were recorded in liabilities.

127

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

9. 401K Plan

MRV sponsors a 401(k) plan (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 $839,000, $554,000 and $687,000 for the years ended
December 31, 2008, 2007 and 2006, 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. The 2003 Notes bore interest at 5% per annum and were convertible into shares of MRV's Common Stock at a conversion price of $2.32 per share. The original 9,913,914 shares of MRV Common
Stock issuable upon conversion were subsequently registered for resale by Deutsche Bank pursuant to a related Registration Rights Agreement dated June 1, 2003. Interest expense related to these
2003 Notes amounted to $751,000 and $1.2 million for the years ended December 31, 2007 and 2006, respectively. On August 10, 2007, MRV executed a Securities Exchange Agreement
exchanging the 2003 Notes for 11,900,000 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 SFAS No. 84Induced Conversions of Convertible
Debt (an amendment of APB Opinion No. 26). The $4.9 million cost of debt conversion arose as a result of issuing 1,986,086 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, 2008 (in thousands):

Years Ending December 31,2009

$
7,2302010


5,5122011


5,6082012


4,7762013


4,038Thereafter


11,633Total

$
38,797


128

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

11. Commitments and Contingencies (Continued)

Annual
rental expense under non-cancelable operating lease agreements for the years ended December 31, 2008, 2007 and 2006, was $8.7 million,
$7.1 million and $7.0 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, 2008 is $393,000, 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, 2008, 2007 and 2006.

Litigation

MRV has accrued a liability for a 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 addition to an upfront payment of cash and shares of MRV Common Stock, MRV agreed to pay up to $31.5 million in cash or shares of its Common
Stock, or a combination
thereof, within 18 months of the receipt by MRV of Fiberxon's audited financial statements if Source Photonics did not complete an initial public offering of its common stock within such
18-month period. Source Photonics did not complete the initial public offering within the 18-month period and the deferred consideration payment matured in March 2009.

The
complaint alleges that we have incurred damages in excess of $31.5 million (in an amount to be finally determined through appropriate proceedings). MRV believes that it
complied with the contractual terms of the acquisition agreement by providing, within the time specified, requisite information regarding offsets against the deferred consideration payment, and its
lawsuit seeks to recover damages in addition to those amounts. The Company is currently in the process of negotiating in good faith with the seller's representative pursuant to the terms of the merger
agreement that require such negotiation. The outcome of such discussions cannot be reliably predicted at this time.

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 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 its current and former officers and directors. The complaints seek,
among other things, to recover from the defendants unspecified compensatory and punitive damages and costs of suit, including legal and other professional fees and other equitable relief. In addition
to its own potential liability, MRV has indemnification obligations with its current and former directors and officers. MRV has paid the deductible amount of its directors' and officers' insurance
policy, and the insurance carrier is currently paying costs and expenses related to the litigation. MRV expects that the insurance policy will be

129

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

11. Commitments and Contingencies (Continued)

sufficient
to cover any liability with respect to the litigation, and therefore has not recorded an accrual for this matter. However, there are no assurances that the insurance carrier will continue
to cover such costs and expenses, that the carrier will not seek reimbursement of its payments on behalf of any or all of the defendants, or that the insurance policy will fully cover any future
liability with respect to the litigation.

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. We have been involved in such discussions with IBM, Lucent, Ortel, Nortel, Rockwell, the Lemelson Foundation,
Finisar and Apcon in the past. However, if one or more of these parties was to assert a claim and gain a conclusion unfavorable to us, such claims could materially and adversely affect our business,
operating results and financial condition.

MRV
has been named as a defendant in lawsuits involving matters that we consider routine to the nature of our 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, 2008 and 2007, MRV's product warranty liability recorded in accrued liabilities was $2.6 million and $2.5 million, respectively. The following
table summarizes the activity related to the product warranty liability (in thousands):

Years ended December 31:

2008

2007Beginning balance

$
2,547

$
2,291Opening balance of acquired entities





81Cost of warranty claims


(526
)

(604
)Accruals for product warranties


583


779Total

$
2,604

$
2,547


130

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

12. Product Warranty and Indemnification (Continued)

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.

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.

In
March 2006, MRV completed a private placement with a group of institutional investors, of approximately 19.9 million shares of its Common Stock at $3.75 per share, for gross
proceeds of approximately $74.5 million.

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, 2008, 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, 2008, 2007 or 2006.

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,

131

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

13. Stockholders' Equity (Continued)

and
is at the discretion of the Board of Directors. As of December 31, 2008, 8.3 million shares of Common Stock were available for future awards under the plan (See Note 14,
Share-Based Compensation).

14. Share-Based Compensation

Effective January 1, 2006, MRV adopted the provisions of SFAS No. 123R, using the modified prospective transition method. SFAS No. 123R requires measuring and
recognizing compensation expense, based on estimated fair values, for all share-based payment awards made to MRV's employees and directors. MRV previously applied the provisions of APB 25 and
provided the required pro forma disclosures under SFAS No. 123.

During
the year ended December 31, 2006, MRV recorded share-based compensation expense for awards granted prior to but not yet vested as of January 1, 2006 as if the fair
value method required for pro forma disclosure under SFAS No. 123 was in effect for expense recognition purposes adjusted for estimated forfeitures. For these awards, we have continued to
recognize compensation expense using the straight-line amortization method. For share-based awards granted beginning January 1, 2006, we have recognized compensation expense using a
straight-line amortization method based on the grant date estimated fair value method required under SFAS No. 123R. SFAS No. 123R requires computing share-based compensation
expense on awards that are ultimately expected to vest. Estimated share-based compensation for the years ended December 31, 2008 and 2007 were reduced for estimated forfeitures. The following
table summarizes the impact on our results of operations of recording share-based compensation under SFAS No. 123R (in thousands):

Years ended December 31,

2008

2007
(Restated)

2006
(Restated)Cost of goods sold

$
370

$
469

$
396Product development and engineering


1,304


1,316


956Selling, general and administrative


2,620


3,486


3,691Total share-based compensation expense

$
4,294

$
5,271

$
5,043




Years ended December 31,

2007
(As previously
reported)

Restatement
adjustments

2007
(Restated)Cost of goods sold

$
370

$
99

$
469Product development and engineering


885


431


1,316Selling, general and administrative


2,651


835


3,486Total share-based compensation expense

$
3,906

$
1,365

$
5,271


132

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

14. Share-Based Compensation (Continued)



Years ended December 31,

2006
(As previously
reported)

Restatement
adjustments

2006
(Restated)Cost of goods sold

$
311

$
85

$
396Product development and engineering


775


181


956Selling, general and administrative


2,356


1,335


3,691Total share-based compensation expense

$
3,442

$
1,601

$
5,043


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, 2008, 2007 and 2006 were $0.88, $1.64 and $2.02 per share, respectively. The total fair value of shares vesting during the years ended December 31, 2008, 2007
and 2006 was $4.0 million, $3.8 million and $3.3 million, respectively. For the years ended December 31, 2008 and 2007, the income tax benefits realized from exercised
stock options and similar awards was immaterial. As of December 31, 2008, the total unrecorded deferred share-based compensation balance for unvested shares, net of expected forfeitures, was
$4.0 million which is expected to be amortized over a weighted-average period of 2.4 years.



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 future volatility to approximate historical volatility. As discussed
in Note 3, the restated SFAS No. 123R expense for the years ended December 31, 2007 and 2006 was calculated using different valuation assumptions than were used in calculating the
originally reported expense. In the course of the Company's review of its accounting for share-based compensation expense the Company determined that the original valuation assumptions were not
appropriate given information available at the time. The following weighted average assumptions were used for estimating the fair value of options granted during each of the following years:

2008Risk-free interest rate


3.2%Dividend yield


0%Volatility


67.7%Expected life


5.0 yrs




2007
(As reported)

Restatement
adjustments

2007
(Restated)Risk-free interest rate


4.5%


0.3%


4.8%Dividend yield


0%


%


0%Volatility


65.1%


9.3%


74.4%Expected life


3.4 yrs


1.5 yrs


4.9 yrs


133

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

14. Share-Based Compensation (Continued)



2006
(As reported)

Restatement
adjustments

2006
(Restated)Risk-free interest rate


4.8%


0.1%


4.9%Dividend yield


0%


%


0%Volatility


80.8%


4.8%


85.6%Expected life


3.2 yrs


1.5 yrs


4.7 yrs




The following table summarizes option share-based payment award activity for the two-year period ended December 31,
2008:

Shares under
option (as
restated, in
thousands)

Weighted
average
exercise
price
(restated)

Weighted
average
remaining
contractual
term (in
years)

Aggregate
intrinsic
value (in
thousands)Outstanding, January 1, 2007


11,721

$
3.09Granted


5,285

$
2.09Exercised


(1,318
)
$
1.56Cancelled and forfeited


(966
)
$
4.95Outstanding, December 31,2007


14,722

$
2.74Granted


1,339

$
1.50Exercised


(320
)
$
0.49Cancelled and forfeited


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


14,580

$
2.66


6.32

$
216Vested and expected to vest, December 31, 2008


14,295

$
2.67


6.27

$
216Exercisable, December 31, 2008


10,379

$
2.81


5.54

$
216


The
aggregate intrinsic value represents the total pre-tax intrinsic value, based on MRV's closing stock price of $0.77 at December 31, 2008, 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, 2008 (in thousands, except years and per-share amounts):

Range of Exercise prices

Options
outstanding
as of
December 31,
2008

Weighted
average
remaining
contractual
life (years)

Weighted
average
exercise
price

Options
exercisable
as of
December 31,
2008

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


2,044


4.1

$
0.82


1,944

$
0.81$1.11 - $  1.49


1,618


7.8

$
1.39


488

$
1.16$1.60 - $  2.17


1,504


6.5

$
1.94


1,154

$
1.96$2.18 - $  2.48


2,020


7.4

$
2.43


1,354

$
2.44$2.50 - $  2.625


251


6.5

$
2.56


144

$
2.56$2.63 - $  2.63


1,752


8.6

$
2.63


393

$
2.63$2.66 - $  2.99


1,826


5.5

$
2.85


1,811

$
2.85$3.00 - $  3.436


1,658


5.7

$
3.21


1,421

$
3.19$3.47 - $  3.96


1,458


6.4

$
3.67


1,219

$
3.66$6.10 - $27.91


449


2.1

$
13.08


449

$
13.08$0.27 - $27.91


14,580


6.3

$
2.66


10,377

$
2.81


134

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

14. Share-Based Compensation (Continued)

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

2008

2007

2006Total intrinsic value of stock options exercised

$
311

$
2,247

$
1,909Cash received from stock options exercised

$
157

$
2,059

$
2,461


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. In 2007, MRV disaggregated
its networking reporting segment and began disclosing the Network Equipment group separately from the Network Integration group. Prior year amounts reflect the correction of accounting errors
identified during an in-depth internal review and investigation into historical stock option granting practices and related accounting, non-stock option compensation
arrangements, acquisition related accounting treatment and other accounting issues. See Note 3. for a detailed discussion of the restatement and effects on consolidated results. 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 (Summary of Significant Accounting Policies).
MRV evaluates segment performance based on revenues and operating expenses of each segment. As such, there are no separately identifiable segment assets nor are there any separately identifiable
Statements of Operations data below operating income.

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

Years ended December 31:

2008

2007

2006Network Equipment group

$
125,556

$
105,357

$
96,002Network Integration group


225,741


213,976


181,502Optical Components group


201,588


144,860


93,381All others


241


114


553,126


464,307


370,885Intersegment adjustment


(15,104
)

(16,070
)

(14,396
)Total

$
538,022

$
448,237

$
356,489


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

135

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

15. Segment Reporting and Geographical Information (Continued)

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.

For
the years ended December 31, 2008 and 2007, no single customer accounted for 10% or more of revenues or accounts receivable. For the year ended December 31, 2006, one
customer, Tellabs, Inc., an original equipment manufacturer for Verizon Communications, Inc., accounted for 13% of revenues. We do not track customer revenue by region for each
individual reporting segment.

Following
is a summary of revenue, excluding intersegment revenues, by geographical region (in thousands):

Years ended December 31:

2008

2007

2006Americas

$
174,388

$
142,522

$
116,566Europe


287,682


258,525


219,110Asia Pacific


74,886


47,088


20,571Other regions


1,066


102


242Total

$
538,022

$
448,237

$
356,489


Following
is a summary of long-lived assets, consisting of property and equipment, by geographical region (in thousands):

December 31:

2008

2007Americas

$
6,212

$
5,111Europe


8,280


8,601Asia Pacific


10,997


10,798Total

$
25,489

$
24,510


The
following summarizes business segment operating income (loss) (in thousands):

Year ended December 31:

2008

2007
(Restated)

2006
(Restated)Network Equipment group

$
(1,421
)
$
(8,276
)
$
(5,123
)Network Integration group


8,905


9,465


9,628Optical Components group


(110,462
)

(1,548
)

(904
)All other


(1,777
)

(1,529
)

(1,558
)(104,755
)

(1,888
)

2,043Corporate unallocated operating loss


(16,008
)

(8,075
)

(6,741
)Intersegment adjustments


315


(537
)

(161
)Total

$
(120,448
)
$
(10,500
)
$
(4,859
)


136

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

15. Segment Reporting and Geographical Information (Continued)

Year ended December 31:

2007
(As previously
reported)

Adjustments

2007
(Restated)Network Equipment group

$
(7,903
)
$
(373
)
$
(8,276
)Network Integration group


10,432


(967
)

9,465Optical Components group


(1,414
)

(134
)

(1,548
)All other


(1,526
)

(3
)

(1,529
)(411
)

(1,477
)

(1,888
)Corporate unallocated operating loss


(7,939
)

(136
)

(8,075
)Intersegment adjustments


(537
)




(537
)Total

$
(8,887
)
$
(1,613
)
$
(10,500
)




Year ended December 31:

2006
(As previously
reported)

Adjustments

2006
(Restated)Network Equipment group

$
(4,914
)
$
(209
)
$
(5,123
)Network Integration group


11,197


(1,569
)

9,628Optical Components group


(705
)

(199
)

(904
)All other


(1,558
)




(1,558
)4,020


(1,977
)

2,043Corporate unallocated operating loss


(7,355
)

614


(6,741
)Intersegment adjustments


(161
)




(161
)Total

$
(3,496
)
$
(1,363
)
$
(4,859
)


Following
is a summary of income (loss) before provision for income taxes (in thousands):

Years ended December 31:

2008

2007
(Restated)

2006
(Restated)Domestic

$
(21,725
)
$
(19,695
)
$
(21,276
)Foreign


(98,969
)

4,507


17,343Total

$
(120,694
)
$
(15,188
)
$
(3,933
)


137

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

16. Other Income (Expense), Net

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

Years ended December 31:

2008

2007
(Restated)

2006
(Restated)Interest income

$
2,042

$
4,750

$
4,989Gain (loss) on foreign currency transactions


131


(1,324
)

(245
)Gain on disposition of assets


10


37


467Other, net


1,527


716


(745
)Total

$
3,710

$
4,179

$
4,466


The
Company realized $2.6 million in other income in 2008 as the result of a gain on the sale of an investment. Partially offsetting this was minority interest in a subsidiary's
net loss and other losses totaling $1.1 million. Interest income in 2007 and 2006 reflects the interest earned on higher balance marketable securities portfolios in both years and higher
interest rates in both years as compared to 2008.

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 China. MRV acquired Fiberxon to add an established, vertically integrated manufacturing, sales and distribution model
in China and strengthen the Company's Optical Component group's positioning in Asia-Pacific, Europe and North America. . 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. Source Photonics is a
wholly-owned subsidiary of MRV, and MRV combined Fiberxon's business with that of Source Photonics. 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 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 deferred consideration payment matured in March 2009. MRV has not paid any
portion of the deferred consideration payable.

MRV
accounted for the acquisition as a purchase in accordance with the guidance in Statement of Financial Accounting Standards No. 141Business
Combinations("SFAS No. 141") and the net tangible assets acquired were recorded at fair value on the acquisition date.

138

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

17. Acquisition (Continued)

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


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.

We
believe 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


139

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

17. Acquisition (Continued)

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.

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 China telecom industry market. Goodwill has been assigned to the Optical Components segment.

In
connection with the purchase price allocation, we 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 July 1, 2007 acquisition date. The unaudited pro forma condensed combined financial data of MRV and

140

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

17. Acquisition (Continued)

Fiberxon
reflect results of operations as though the companies had been combined as of the beginning of the period presented:

Year ended December 31:

2007
(Restated)Pro 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. Subsequent Events

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. ('Charlotte's Networks"). 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
Company did not timely file with the SEC its Quarterly Reports on Form 10-Q for the periods ended June 30, 2008, September 30, 2008, March 31,
2009, and June 30, 2009 and its Form 10-K for the year ended December 31, 2008 as a result of the then pending investigation of stock option backdating and other
accounting issues and the related restatement. On June 17, 2009, the Company was suspended from trading on the Nasdaq Global Market and on August 30, 2009, MRV was delisted.

141

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited)

Three months ended:

March 31,
2008
(Restated)

June 30,
2008

September 30,
2008

December 31,
2008Revenue

$
125,586

$
147,578

$
130,626

$
134,232Cost of goods sold(1)


89,865


100,196


97,187


100,773Gross profit


35,721


47,382


33,439


33,459Operating costs and expenses:Product development and engineering (2)


10,587


9,903


9,616


8,640Selling, general and administrative(3)


28,708


31,720


35,106


33,485Goodwill impairment











100,250Amortization of intangibles


653


653


564


564Total operating costs and expenses


39,948


42,276


45,286


142,939Operating income (loss)


(4,227
)

5,106


(11,847
)

(109,480
)Interest expense


(914
)

(1,015
)

(1,118
)

(909
)Other income, net


1,529


(85
)

1,764


502Income (loss) before income taxes


(3,612
)

4,006


(11,201
)

(109,887
)Provision for income taxes


1,566


1,785


(1,344
)

503Net income (loss)

$
(5,178
)
$
2,221

$
(9,857
)
$
(110,390
)Net income (loss) per share:Basic

$
(0.03
)
$
0.01

$
(0.06
)
$
(0.70
)Diluted

$
(0.03
)
$
0.01

$
(0.06
)
$
(0.70
)Weighted average number of shares:Basic


157,152


157,281


157,418


157,438Diluted


157,152


160,037


157,418


157,438


142

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)



Three months ended:

March 31,
2007
(Restated)

June 30,
2007
(Restated)

September 30,
2007
(Restated)

December 31,
2007
(Restated)Revenue

$
89,679

$
101,962

$
115,700

$
140,896Cost of goods sold (1)


61,751


71,422


84,391


103,186Gross profit


27,928


30,540


31,309


37,710Operating costs and expenses:Product development and engineering (2)


7,376


6,895


9,518


9,598Selling, general and administrative (3)


22,990


23,820


26,917


28,967Amortization of intangibles








806


1,100Total operating costs and expenses


30,366


30,715


37,241


39,665Operating income (loss)


(2,438
)

(175
)

(5,932
)

(1,955
)Interest expense


(1,052
)

(964
)

(1,075
)

(877
)Cost of debt conversion








(4,899
)

Other income, net


1,405


1,025


1,091


658Income (loss) before income taxes


(2,085
)

(114
)

(10,815
)

(2,174
)Provision for income taxes


1,190


1,553


1,114


49Net income (loss)

$
(3,275
)
$
(1,667
)
$
(11,929
)
$
(2,223
)Net income (loss) per share:Basic and diluted

$
(0.03
)
$
(0.01
)
$
(0.08
)
$
(0.01
)Weighted average number of shares:Basic and diluted


125,758


126,011


151,183


157,000


---

Three months ended

2008

2007March 31,

$
97

$
108June 30,


121


105September 30,


76


132December 31,


72


125


Three months ended

2008

2007March 31,

$
517

$
258June 30,


210


231September 30,


329


431December 31,


248


395


143

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

Three months ended

2008

2007March 31,

$
864

$
779June 30,


701


736September 30,


572


1,076December 31,


482


895




Three months ended:

March 31,
2008
(As previously
reported)

Adjustments

March 31,
2008
(Restated)Revenue

$
125,586

$


$
125,586Cost of goods sold


88,452


1,413


89,865Gross profit


37,134


(1,413
)

35,721Operating costs and expenses:Product development and engineering


10,530


57


10,587Selling, general and administrative


28,784


(76
)

28,708Amortization of intangibles


653





653Total operating costs and expenses


39,967


(19
)

39,948Operating income (loss)


(2,833
)

(1,394
)

(4,227
)Interest expense


(914
)




(914
)Other income, net


704


825


1,529Loss before income taxes


(3,043
)

(569
)

(3,612
)Provision for income taxes


637


929


1,566Net loss

$
(3,680
)
$
(1,498
)
$
(5,178
)Net loss per share:Basic and diluted

$
(0.02
)
$
(0.01
)
$
(0.03
)Weighted average number of shares:Basic and diluted


157,152





157,152


144

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)



Three months ended:

March 31,
2007
(As previously
reported)

Adjustments

March 31,
2007
(Restated))Revenue

$
89,679

$


$
89,679Cost of goods sold


61,363


388


61,751Gross profit


28,316


(388
)

27,928Operating costs and expenses:Product development and engineering


7,306


70


7,376Selling, general and administrative


22,739


251


22,990Total operating costs and expenses


30,045


321


30,366Operating income (loss)


(1,729
)

(709
)

(2,438
)Interest expense


(1,052
)




(1,052
)Other income, net


1,435


(30
)

1,405Loss before income taxes


(1,346
)

(739
)

(2,085
)Provision for income taxes


870


320


1,190Net loss

$
(2,216
)
$
(1,059
)
$
(3,275
)Net loss per share:Basic and diluted

$
(0.02
)
$
(0.01
)
$
(0.03
)Weighted average number of shares:Basic and diluted


125,758





125,758


145

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)



Three months ended:

June 30,
2007
(As previously
reported)

Adjustments

June 30,
2007
(Restated)Revenue

$
101,962

$


$
101,962Cost of goods sold


72,063


(641
)

71,422Gross profit


29,899


641


30,540Operating costs and expenses:Product development and engineering


6,846


49


6,895Selling, general and administrative


24,035


(215
)

23,820Total operating costs and expenses


30,881


(166
)

30,715Operating income (loss)


(982
)

807


(175
)Interest expense


(964
)




(964
)Other income, net


1,207


(182
)

1,025Loss before income taxes


(739
)

625


(114
)Provision for income taxes


1,721


(168
)

1,553Net loss

$
(2,460
)
$
793

$
(1,667
)Net loss per share:Basic and diluted

$
(0.02
)
$
0.01

$
(0.01
)Weighted average number of shares:Basic and diluted


126,011





126,011


146

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)



Three months ended:

September 30,
2007
(As previously
reported)

Adjustments

September 30,
2007
(Restated)Revenue

$
115,700

$


$
115,700Cost of goods sold


85,345


(954
)

84,391Gross profit


30,355


954


31,309Operating costs and expenses:Product development and engineering


9,314


204


9,518Selling, general and administrative


25,759


1,158


26,917Amortization of intangibles


806





806Total operating costs and expenses


35,879


1,362


37,241Operating income (loss)


(5,524
)

(408
)

5,932Interest expense


(1,075
)




(1,075
)Cost of debt conversion


(4,899
)




(4,899
)Other income, net


201


890


1,091Loss before income taxes


(11,297
)

482


(10,815
)Provision for income taxes


1,274


(160
)

1,114Net loss

$
(12,571
)
$
642

$
(11,929
)Net loss per share:Basic and diluted

$
(0.08
)
$
(0.00
)
$
(0.08
)Weighted average number of shares:Basic and diluted


151,183





151,183


147

---



Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)



Three months ended:

December 31,
2007
(As previously
reported)

Adjustments

December 31,
2007
(Restated)Revenue

$
140,896

$


$
140,896Cost of goods sold


101,493


1,693


103,186Gross profit


39,403


(1,693
)

37,710Operating costs and expenses:Product development and engineering


9,490


108


9,598Selling, general and administrative


29,465


(498
)

28,967Amortization of intangibles


1,100





1,100Total operating costs and expenses


40,055


(390
)

39,665Operating income (loss)


(652
)

(1,303
)

(1,955
)Interest expense


(877
)




(877
)Other income, net


136


522


658Loss before income taxes


(1,393
)

(781
)

(2,174
)Provision for income taxes


(12
)

61


49Net loss

$
(1,381
)
$
(842
)
$
(2,223
)Net loss per share:Basic and diluted

$
(0.01
)
$
(0.00
)
$
(0.01
)Weighted average number of shares:Basic and diluted


157,000





157,000


148

---



Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)



Three months ended:

March 31,
2008

March 31,
2007

June 30,
2007

September 30,
2007

December 31,
2007Cost of goods sold:Share-based compensation expense

$
(11
)
$
24

$
24

$
10

$
21Compensation arrangements with TurnKey


(46
)

31


67


16


160Accumulated other comprehensive income and other adjustments


1,470


333


(732
)

(980
)

1,512Total adjustment to cost of goods sold


1,413


388


(641
)

(954
)

1,693Product development and engineering:Share-based compensation expense


(148
)

70


49


135


42Accumulated other comprehensive income and other adjustments


205








69


66Total adjustment to product development and engineering


57


70


49


204


108Selling, general and administrative:Share-based compensation expense


(147
)

51


23


83


47Compensation arrangements with Turnkey





44


97


23


(164
)Compensation arrangements with EDSLan


95


215


(279
)

1,065


(542
)Non-payroll bonuses to foreign subsidiaries





(59
)

(56
)

(58
)

271Accumulated other comprehensive income and other adjustments


(24
)







45


(110
)Total adjustment to selling, general and administrative


(76
)

251


(215
)

1,158


(498
)Other income (expense):Non-payroll bonuses to foreign subsidiaries


64


6


1


27


21Minority interest


503


(36
)

(183
)

317


(47
)Accumulated other comprehensive income and other adjustments


258








546


548Total adjustment to other income (expense)


825


(30
)

(182
)

890


522Provision for income taxes:Tax effect of compensation arrangements with EDSLan


43


2


146


(187
)

(11
)Tax effect of non-payroll bonuses to foreign subsidiaries





(21
)

(34
)

(21
)

(21
)Tax effect of minority interest adjustments


120


(35
)

(132
)

15


(58
)Tax effect Accumulated other comprehensive income and other adjustments


766


374


(148
)

33


151Total adjustment to provision for income taxes


929


320


(168
)

(160
)

61


149

---



Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)



March 31,
2008
(Restated)

June 30,
2008

September 30,
2008AssetsCurrent assets:Cash and cash equivalents

$
72,591

$
67,004

$
66,840Short-term marketable securities


3,006


5,390


3,484Time deposits


5,113


5,153


922Accounts receivable, net


129,455


139,924


129,190Inventories


97,567


99,931


96,116Deferred income taxes


2,293


1,875


1,330Other current assets


22,924


27,952


26,468Total current assets


332,949


347,229


324,350Property and equipment, net


25,730


26,102


25,558Goodwill


131,429


130,770


127,993Deferred income taxes


1,458


1,093


2,402Long term marketable securities


1,445


1,451


1,450Intangibles, net


11,341


10,688


10,124Other assets


6,092


6,085


5,905Total assets

$
510,444

$
523,418

$
497,782Liabilities and stockholders' equityCurrent liabilities:Short-term obligations

$
29,265

$
37,954

$
33,744Deferred consideration payable


30,561


30,695


30,696Accounts payable


91,506


93,678


91,320Accrued liabilities


35,061


35,492


36,072Deferred revenue


10,413


9,963


9,578Other current liabilities


5,489


3,723


2,466Total current liabilities


202,295


211,505


203,876Other long-term liabilities


9,717


9,582


8,981Minority interest


4,675


5,193


5,044Commitments and contingenciesStockholders' equity:Preferred Stock, $0.01 par value:Authorized  1,000 shares; no shares issued or outstanding








Common Stock, $0.0017 par value:Authorized  320,000 sharesIssued  158,519, 158,755 and 158,777 shares at March 31, June 30 and September 30, 2008, respectivelyOutstanding  157,166, 157,402 and 157,423 shares at March 31, June 30 and September 30, 2008, respectively


267


268


268Additional paid-in capital


1,401,091


1,402,003


1,402,904Accumulated deficit


(1,130,613
)

(1,127,502
)

(1,137,955
)Treasury stock  1,353 shares in all periods


(1,352
)

(1,352
)

(1,352
)Accumulated other comprehensive loss


24,364


23,721


16,016Total stockholders' equity


293,757


297,138


279,881Total liabilities and stockholders' equity

$
510,444

$
523,418

$
497,782


150

---



Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)



March 31,
2007
(Restated)

June 30,
2007
(Restated)

September 30,
2007
(Restated)AssetsCurrent assets:Cash and cash equivalents

$
85,269

$
95,060

$
69,103Short-term marketable securities


26,393


7,500


7,736Time deposits


5,064


4,875


7,949Accounts receivable, net


84,956


98,264


116,231Inventories


64,905


69,223


86,952Deferred income taxes


1,177


909


1,266Other current assets


15,712


15,514


19,528Total current assets


283,476


291,345


308,765Property and equipment, net


14,721


14,609


24,613Goodwill


32,323


32,480


128,578Deferred income taxes


2,391


1,925


2,451Long term marketable securities








1,426Intangibles, net








13,257Other assets


5,327


5,377


5,289Total assets

$
338,238

$
345,736

$
484,379Liabilities and stockholders' equityCurrent liabilities:Short-term obligations

$
21,565

$
22,765

$
34,651Deferred consideration payable








30,656Accounts payable


50,317


58,204


61,549Accrued liabilities


28,349


30,799


36,838Deferred revenue


7,721


7,370


7,672Deferred tax liability  short-term





23,000


4,741Other current liabilities


8,990


5,708


8,416Total current liabilities


116,942


147,846


184,523Convertible notes


23,000





Deferred tax liability  long-term








515Other long-term liabilities


7,904


7,283


7,459Minority interest


4,467


4,583


4,553Commitments and contingenciesStockholders' equity:Preferred Stock, $0.01 par value:Authorized  1,000 shares; no shares issued or outstanding








Common Stock, $0.0017 par value:Authorized  320,000 sharesIssued  127,325, 127,382, and 158,208 shares at March 31, June 30 and September 30, 2007, respectivelyOutstanding  125,972, 126,029, and 156,855 shares at March 31, June 30 and September 30, 2007, respectively


214


214


267Additional paid-in capital


1,287,988


1,289,110


1,398,378Accumulated deficit


(1,109,618
)

(1,111,283
)

(1,123,215
)Treasury stock  1,353 shares in all periods


(1,352
)

(1,352
)

(1,352
)Accumulated other comprehensive loss


8,693


9,335


13,251Total stockholders' equity


185,925


186,024


287,329Total liabilities and stockholders' equity

$
338,238

$
345,736

$
484,379


151

---



Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)



March 31, 2008

(As previously
reported)

Adjustments

RestatedAssetsCurrent assets:Cash and cash equivalents

$
72,591

$


$
72,591Short-term marketable securities


3,006





3,006Time deposits


5,113





5,113Accounts receivable, net


129,455





129,455Inventories


99,118


(1,551
)

97,567Deferred income taxes


360


1,933


2,293Other current assets


22,636


288


22,924Total current assets


332,279


670


332,949Property and equipment, net


25,730





25,730Goodwill


140,303


(8,874
)

131,429Deferred income taxes


1,669


(211
)

1,458Long term marketable securities


1,445





1,445Intangibles, net


11,341





11,341Other assets


5,478


614


6,092Total assets

$
518,245

$
(7,801
)
$
510,444Liabilities and stockholders' equityCurrent liabilities:Short-term obligations

$
29,265

$


$
29,265Deferred consideration payable


30,561





30,561Accounts payable


91,506





91,506Accrued liabilities


37,169


(2,108
)

35,061Deferred revenue


10,413





10,413Other current liabilities


4,038


1,451


5,489Total current liabilities


202,952


(657
)

202,295Other long-term liabilities


9,981


(264
)

9,717Minority interest


5,431


(756
)

4,675Commitments and contingenciesStockholders' equity:Preferred Stock








Common Stock


267





267Additional paid-in capital


1,345,644


55,447


1,401,091Accumulated deficit


(1,059,232
)

(71,381
)

(1,130,613
)Treasury stock


(1,352
)




(1,352
)Accumulated other comprehensive income (loss)


14,554


9,810


24,364Total stockholders' equity


299,881


(6,124
)

293,757Total liabilities and stockholders' equity

$
518,245

$
(7,801
)
$
510,444


152

---



Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)



March 31, 2007

(As previously
reported)

Adjustments

RestatedAssetsCurrent assets:Cash and cash equivalents

$
85,269

$


$
85,269Short-term marketable securities


26,393





26,393Time deposits


5,064





5,064Accounts receivable, net


84,956





84,956Inventories


65,215


(310
)

64,905Deferred income taxes


895


282


1,177Other current assets


15,712





15,712Total current assets


283,504


(28
)

283,476Property and equipment, net


14,721





14,721Goodwill


36,159


(3,836
)

32,323Deferred income taxes


1,460


931


2,391Other assets


4,699


628


5,327Total assets

$
340,543

$
(2,305
)
$
338,238Liabilities and stockholders' equityCurrent liabilities:Short-term obligations

$
21,565

$


$
21,565Accounts payable


50,317





50,317Accrued liabilities


24,355


3,994


28,349Deferred revenue


7,721





7,721Other current liabilities


7,772


1,218


8,990Total current liabilities


111,730


5,212


116,942Convertible notes


23,000





23,000Other long-term liabilities


7,409


495


7,904Minority interest


5,260


(793
)

4,467Commitments and contingenciesStockholders' equity:Preferred Stock








Common Stock


214





214Additional paid-in capital


1,233,710


54,278


1,287,988Accumulated deficit


(1,039,140
)

(70,478
)

(1,109,618
)Treasury stock


(1,352
)




(1,352
)Accumulated other comprehensive income (loss)


(288
)

8,981


8,693Total stockholders' equity


193,144


(7,219
)

185,925Total liabilities and stockholders' equity

$
340,543

$
(2,305
)
$
338,238


153

---



Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)



June 30, 2007

(As previously
reported)

Adjustments

RestatedAssetsCurrent assets:Cash and cash equivalents

$
95,060

$


$
95,060Short-term marketable securities


7,500





7,500Time deposits


4,875





4,875Accounts receivable, net


98,264





98,264Inventories


68,800


423


69,223Deferred income taxes


895


14


909Other current assets


15,514





15,514Total current assets


290,908


437


291,345Property and equipment, net


14,609





14,609Goodwill


36,316


(3,836
)

32,480Deferred income taxes


1,460


465


1,925Other assets


4,697


680


5,377Total assets

$
347,990

$
(2,254
)
$
345,736Liabilities and stockholders' equityCurrent liabilities:Short-term obligations

$
22,765

$


$
22,765Accounts payable


58,204





58,204Accrued liabilities


27,048


3,751


30,799Deferred revenue


7,370





7,370Convertible notes


23,000





23,000Other current liabilities


4,766


942


5,708Total current liabilities


143,153


4,693


147,846Other long-term liabilities


7,283





7,283Minority interest


5,272


(689
)

4,583Commitments and contingenciesStockholders' equity:Preferred Stock








Common Stock


214





214Additional paid-in capital


1,234,613


54,497


1,289,110Accumulated deficit


(1,041,600
)

(69,683
)

(1,111,283
)Treasury stock


(1,352
)




(1,352
)Accumulated other comprehensive income (loss)


407


8,928


9,335Total stockholders' equity


192,282


(6,258
)

186,024Total liabilities and stockholders' equity

$
347,990

$
(2,254
)
$
345,736


154

---



Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)



September 30, 2007

(As previously
reported)

Adjustments

RestatedAssetsCurrent assets:Cash and cash equivalents

$
69,103





69,103Short-term marketable securities


7,736





7,736Time deposits


7,949





7,949Accounts receivable, net


116,231





116,231Inventories


85,539


1,413


86,952Deferred income taxes


895


371


1,266Other current assets


19,528





19,528Total current assets


306,981


1,784


308,765Property and equipment, net


24,613





24,613Goodwill


137,452


(8,874
)

128,578Deferred income taxes


1,460


991


2,451Long term marketable securities


1,426





1,426Intangibles, net


13,257





13,257Other assets


4,581


708


5,289Total assets

$
489,770


(5,391
)

484,379Liabilities and stockholders' equityCurrent liabilities:Short-term obligations

$
34,651





34,651Deferred consideration payable


30,656





30,656Accounts payable


61,549





61,549Accrued liabilities


37,611


(773
)

36,838Deferred revenue


7,672





7,672Deferred tax liability  short term


1,124


3,617


4,741Other current liabilities


7,440


976


8,416Total current liabilities


180,703


3,820


184,523Deferred tax liability  long term


3,617


(3,102
)

515Other long-term liabilities


7,459





7,459Minority interest


5,191


(638
)

4,553Commitments and contingenciesStockholders' equity:Preferred Stock








Common Stock


267





267Additional paid-in capital


1,343,667


54,711


1,398,378Accumulated deficit


(1,054,171
)

(69,044
)

(1,123,215
)Treasury stock


(1,352
)




(1,352
)Accumulated other comprehensive income (loss)


4,389


8,862


13,251Total stockholders' equity


292,800


(5,471
)

287,329Total liabilities and stockholders' equity

$
489,770


(5,391
)

484,379


155

---





Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

Share-based
compensation
expense
(including
payroll tax
adjustment)

Compensation
arrangements
with Turnkey

Compensation
arrangements
with EDSLan

Compensation
arrangements
with Interdata

Non payroll
bonuses to
Foreign
Subsidiaries

Purchase
accounting
for EDSLan

Purchase
accounting
for Tecnonet

Minority
interest

Accumulated
other
comprehensive
income and
other
adjustments

Total
Adjustment
as of
March 31,
2008AssetsCurrent assets:Inventories

$


$


$


$


$


$


$


$


$
(1,551
)
$
(1,551
)Deferred income taxes








67





636











1,230


1,933Other current assets


























288


288Total current assets








67





636











(33
)

670Goodwill





(1,515
)




(1,710
)




352


(963
)




(5,038
)

(8,874
)Deferred income taxes














103











(314
)

(211
)Other assets














792











(178
)

614Total assets

$


$
(1,515
)
$
67

$
(1,710
)
$
1,531

$
352

$
(963
)
$


$
(5,563
)
$
(7,801
)Liabilities and stockholders' equityCurrent liabilities:Accrued liabilities

$
244

$
374

$
798

$


$
2,059

$
918

$


$


$
(6,501
)
$
(2,108
)Other current liabilities


























1,451


1,451Total current liabilities


244


374


798





2,059


918








(5,050
)

(657
)Other long-term liabilities


























(264
)

(264
)Minority interest

















(1,299
)

2,722


(2,179
)




(756
)Commitments and contingenciesStockholders' equity:Additional paid-in capital


74,196





1,119








4,665


(4,717
)

(1,299
)

(18,517
)

55,447Accumulated deficit


(74,440
)

(1,889
)

(1,850
)

(1,710
)

(528
)

(3,896
)

2,232


4,299


6,401


(71,381
)Accumulated other comprehensive income (loss)

















(36
)

(1,200
)

(821
)

11,867


9,810Total stockholders' equity


(244
)

(1,889
)

(731
)

(1,710
)

(528
)

733


(3,685
)

2,179


(249
)

(6,124
)Total liabilities and stockholders' equity

$


$
(1,515
)
$
67

$
(1,710
)
$
1,531

$
352

$
(963
)
$


$
(5,563
)
$
(7,801
)


156

---





Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

Share-based
compensation
expense
(including
payroll tax
adjustment)

Compensation
arrangements
with Turnkey

Compensation
arrangements
with EDSLan

Compensation
arrangements
with Interdata

Non payroll
bonuses to
Foreign
Subsidiaries

Purchase
accounting
for EDSLan

Purchase
accounting
for Tecnonet

Minority
interest

Accumulated
other
comprehensive
income and
other
adjustments

Total
Adjustment
as of
March 31,
2007AssetsCurrent assets:Inventories

$


$


$


$


$


$


$


$


$
(310
)
$
(310
)Deferred income taxes








58

















224


282Total current assets








58

















(86
)

(28
)Goodwill





(1,515
)




(1,710
)




352


(963
)







(3,836
)Deferred income taxes














664











267


931Other assets














628














628Total assets

$


$
(1,515
)
$
58

$
(1,710
)
$
1,292

$
352

$
(963
)
$


$
181

$
(2,305
)Liabilities and stockholders' equityCurrent liabilities:Accrued liabilities

$
237

$
220

$
766

$


$
1,853

$
918

$


$


$


$
3,994Other current liabilities


























1,218


1,218Total current liabilities


237


220


766





1,853


918








1,218


5,212Other long-term liabilities


























495


495Minority interest

















(1,299
)

2,722


(2,216
)




(793
)Commitments and contingenciesStockholders' equity:Additional paid-in capital


73,836





912








4,665


(4,717
)

(1,299
)

(19,119
)

54,278Accumulated deficit


(74,073
)

(1,735
)

(1,620
)

(1,710
)

(561
)

(3,896
)

2,232


3,654


7,231


(70,478
)Accumulated other comprehensive income (loss)

















(36
)

(1,200
)

(139
)

10,356


8,981Total stockholders' equity


(237
)

(1,735
)

(708
)

(1,710
)

(561
)

733


(3,685
)

2,216


(1,532
)

(7,219
)Total liabilities and stockholders' equity

$


$
(1,515
)
$
58

$
(1,710
)
$
1,292

$
352

$
(963
)
$


$
181

$
(2,305
)


157

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

Share-based
compensation
expense
(including
payroll tax
adjustment)

Compensation
arrangements
with Turnkey

Compensation
arrangements
with EDSLan

Compensation
arrangements
with Interdata

Non payroll
bonuses to
Foreign
Subsidiaries

Purchase
accounting
for EDSLan

Purchase
accounting
for Tecnonet

Minority
interest

Accumulated
other
comprehensive
income and
other
adjustments

Total
Adjustment
as of
June 30,
2007AssetsCurrent assets:Inventories

$


$


$


$


$


$


$


$


$
423

$
423Deferred income taxes








(88
)
















102


14Total current assets








(88
)
















525


437Goodwill





(1,515
)




(1,710
)




352


(963
)







(3,836
)Deferred income taxes














698











(233
)

465Other assets














680














680Total assets

$


$
(1,515
)
$
(88
)
$
(1,710
)
$
1,378

$
352

$
(963
)
$


$
292

$
(2,254
)Liabilities and stockholders' equityCurrent liabilities:Accrued liabilities

$
265

$
384

$
337

$


$
1,847

$
918

$


$


$


$
3,751Other current liabilities


























942


942Total current liabilities


265


384


337





1,847


918








942


4,693Minority interest

















(1,299
)

2,722


(2,112
)




(689
)Commitments and contingenciesStockholders' equity:Additional paid-in capital


73,905





1,062








4,665


(4,717
)

(1,299
)

(19,119
)

54,497Accumulated deficit


(74,170
)

(1,899
)

(1,487
)

(1,710
)

(469
)

(3,896
)

2,232


3,603


8,113


(69,683
)Accumulated other comprehensive income (loss)

















(36
)

(1,200
)

(192
)

10,356


8,928Total stockholders' equity


(265
)

(1,899
)

(425
)

(1,710
)

(469
)

733


(3,685
)

2,112


(650
)

(6,258
)Total liabilities and stockholders' equity

$


$
(1,515
)
$
(88
)
$
(1,710
)
$
1,378

$
352

$
(963
)
$


$
292

$
(2,254
)


158

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Table of Contents

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

Share-based
compensation
expense
(including
payroll tax
adjustment)

Compensation
arrangements
with Turnkey

Compensation
arrangements
with EDSLan

Compensation
arrangements
with Interdata

Non payroll
bonuses to
Foreign
Subsidiaries

Purchase
accounting
for EDSLan

Purchase
accounting
for Tecnonet

Minority
interest

Accumulated
other
comprehensive
income and
other
adjustments

Total
Adjustment
as of
September 30,
2007AssetsCurrent assets:Inventories

$


$


$


$


$


$


$


$


$
1,413

$
1,413Deferred income taxes








99

















272


371Total current assets








99

















1,685


1,784Goodwill





(1,515
)




(1,710
)




352


(963
)




(5,038
)

(8,874
)Deferred income taxes














718











273


991Other assets














708














708Total assets

$


$
(1,515
)
$
99

$
(1,710
)
$
1,426

$
352

$
(963
)
$


$
(3,080
)
$
(5,391
)Liabilities and stockholders' equityCurrent liabilities:Accrued liabilities

$
293

$
423

$
1,389

$


$
1,788

$
918

$


$


$
(5,584
)
$
(773
)Deferred tax liability  short term


























3,617


3,617Other current liabilities


























976


976Total current liabilities


293


423


1,389





1,788


918








(991
)

3,820Deferred tax liability  long term


























(3,102
)

(3,102
)Minority interest

















(1,299
)

2,722


(2,187
)

126


(638
)Commitments and contingenciesStockholders' equity:Additional paid-in capital


74,106





1,075








4,665


(4,717
)

(1,299
)

(19,119
)

54,711Accumulated deficit


(74,399
)

(1,938
)

(2,365
)

(1,710
)

(362
)

(3,896
)

2,232


3,906


9,488


(69,044
)Accumulated other comprehensive income (loss)

















(36
)

(1,200
)

(420
)

10,518


8,862Total stockholders' equity


(293
)

(1,938
)

(1,290
)

(1,710
)

(362
)

733


(3,685
)

2,187


887


(5,471
)Total liabilities and stockholders' equity

$


$
(1,515
)
$
99

$
(1,710
)
$
1,426

$
352

$
(963
)
$


$
(3,080
)
$
(5,391
)


159

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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

Under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such terms are defined in Rules 13a-15(e) and 15d-15(e)
promulgated under the Exchange Act, as of December 31, 2008, the end of the period covered by this Form 10-K. Disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and
communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on the evaluation, our CEO and CFO concluded that our disclosure
controls and procedures were not effective because of the material weakness in our internal control over financial reporting discussed below. Notwithstanding the material weaknesses described below,
our current management, based upon the substantial work performed during the restatement process, has concluded that our consolidated financial statements for the periods covered by and included in
this report are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States for each of the periods presented herein.

Internal Control Over Financial Reporting

Management's Consideration of the Restatement and its Underlying Circumstances

As described in the Explanatory Note, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of this Form 10-K and in Note 3 to our Consolidated Financial Statements included in Item 8 of this Form 10-K on June 5, 2008, we
announced that as a result of a discovery and preliminary analysis by management of information relating to our stock option practices during the period from 2002 through the first quarter of 2004,
our Board had established a Special Committee of independent directors to conduct an independent investigation to review our historical stock option practices and related accounting. The Special
Committee was assisted by independent legal counsel and outside investigative accounting experts. The Special Committee was further assigned to review non-stock option compensation
arrangements, acquisition related accounting treatment, and other accounting issues in addition to the review of the historical stock option granting practices. The findings of the investigation
resulted in adjustments to our consolidated financial statements related to three broad categories of transactions: (a) share-based compensation and related tax effects,
(b) non-share-based compensation issues, and (c) acquisition related accounting treatment and other accounting issues. Management then conducted a detailed review of the
historical documentation gathered by the Special Committee to determine the adjustments necessary to correct the accounting errors. As a result of the adjustments, we have restated our historical
results for years prior to 2008.

Assessment of Prior Period Controls

In light of, and in conjunction with, the restatement, we conducted an updated assessment of the Company's internal control over
financial reporting for prior periods. In performing the updated assessment, we considered the testing done to support the conclusion in the previous assessment, the overall result of which was that
no material weaknesses existed. Based on the updated assessment, our management concluded that three material weaknesses existed in our internal control over financial

160

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Table of Contents

reporting
in prior periods: 1) deficiencies relative to review and approval controls around the authorization, granting and recognition of stock option transactions 2) deficiencies
relative to the design effectiveness of review and approval controls around the accounting for business acquisitions and other accounting issues, other compensation arrangements and
non-routine transactions, and 3) deficiencies relative to the review and approval controls over the recording of transactions and our financial statement close process at our Source
Photonics subsidiary.

A
material weakness is a deficiency, or combination of deficiencies, which allow a reasonable possibility that a material misstatement of the annual or interim financial statements will
not be prevented or detected on a timely basis. These material weaknesses resulted in restatement adjustments to the 2006 and 2007 consolidated financial statements, including an adjustment to the
accumulated deficit balance for amounts that should have been recognized in periods prior to 2006. The material weaknesses are described in more detail as follows:

Stock Option Practices and the Related Accounting for Stock Option Transactions

Beginning in mid-2006 through early-2007, our former CFO conducted an informal and voluntary review of our
share-based award practices and concluded that there was no evidence that grant dates of options were designed to occur on dates with more favorable exercise prices (i.e., on dates with lower
market prices). However, based on the information discovered in 2008 during the course of reviewing transactions related to our European subsidiaries, we determined that the conclusions reached from
the earlier review were incorrect. This led to the Special Committee's investigation and the related review by management.

The
scope of management's review was extensive and included our entire stock option granting history from the first grant on February 23, 1994 to the last grant on May 1,
2008. It included a detailed review of our option grant procedures and available grant documentation in order to determine the appropriate measurement dates, and therefore, determine the adjustments
necessary to correct for errors in the accounting for stock options. The review indicated that many pre-2004 option grant dates and prices were retrospectively selected, and the Company
did not recognize the appropriate compensation expense. The Special Committee found no evidence that the option granting practices were carried out for the personal benefit of those awarding the
options.

Our
process for awarding and documenting option grants changed several times between 1994 and 2008. The documentation we reviewed indicated that from mid-1995 until new
procedures were implemented in 2004 for Sarbanes-Oxley Section 404 compliance ("SOX"), the Board of Directors, nor any of its committees were directly involved in approving grants to specific
employees. Prior to March 31, 2004, the Company's stock option granting process was informal and poorly documented. The Board pre-authorized an annual allotment of stock options and
left the allocation to specific recipients to the corporate executive team, in consultation with the heads of each of the Company's divisions.

The
investigation also found that prior to August 2002, the stock option administration was decentralized. The Company had multiple stock option plans and the administration was done by
multiple people at different locations, using spreadsheets to track the grants. In August 2002, the Company implemented an electronic option tracking and administrative software program to replace the
manual spreadsheet process and centralize all of the administration.

Based
on the above discussion, management has concluded that deficiencies in controls over stock option practices and the related accounting for stock option transactions existed
historically and constituted a material weakness. Specifically:



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Table of Contents



In
March 2004 the Company adopted new procedures in response to the SOX requirements. The most significant of these changes was to grant stock options only on certain predetermined dates
during the year. This procedure was effective at ending the practice of selecting grant dates with hindsight, however other limited measurement date errors did occur, primarily related to changes to
approved lists of option grants subsequent to the grant date, or a delay in receiving the approval of grants from the Board. Also beginning in 2004, the Board began ratifying grant awards after
issuance. We further strengthened our controls in November 2006 by making a unanimous written consent signed in advance by the Board a required granting action. These process improvements were
effective at eliminating the occurrence of measurement date errors, mitigated the potential practice of any new backdating and greatly improved the quality and consistency of the Company's records.

We
believe the material weakness related to the stock option granting and related accounting for stock options was remediated prior to December 31, 2008 with the implementation of
the process changes described above and with the investigation and correction of errors related to historical stock option accounting. All option grants must now be reviewed and approved by the full
Compensation Committee and duly recorded in the minutes of the Committee meeting approving the grants. In addition, management has performed a detailed review of the facts and circumstances
surrounding each option grant made for the period from 1994 through 2008, and believes that all accounting issues were identified and have been appropriately adjusted. While we
believe the control deficiencies that led to a material weaknesses related to stock option granting and related accounting were remediated with the new procedures, the restated financial statements
included in this report reflect adjustments that were a result of the material weakness in our internal controls that existed prior to that time.

Control EnvironmentReview and Approval Controls

Through the investigation noted above, other errors were identified in the accounting for certain non-stock compensation
arrangements, acquisitions, and other non-routine transactions. In some of these arrangements, we made payments to managers of our foreign subsidiaries that should have been recorded as
compensation expense, but were originally treated as purchases of minority interests in the subsidiaries. In other cases, we did not record the compensation expenses in the proper period.
Additionally, we made payments to the managers of certain foreign subsidiaries outside of the subsidiaries' payroll system, and we failed to withhold payroll tax or pay social security taxes.

Separate
errors were identified in our prior accounting for two acquisitions of subsidiaries in 1996 and 1997, and for the subsequent accounting for minority interests in those and other
subsidiaries. We also found and corrected errors in our accumulated other comprehensive income balances and made adjustments to correct errors that were not previously recorded because in each case,
and in the aggregate, the underlying errors were not considered by management to be material to the consolidated financial statements at the time the original financial statements were filed.

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Table of Contents

Management
has concluded that deficiencies in controls over non-stock compensation issues and other non-routine transactions existed historically and constituted
a material weakness. Specifically:



As
part of its assessment of our internal control over financial reporting as of December 31, 2008, current management conducted an evaluation of the design and effectiveness of
our control environment as a foundation for all other components of our system of internal control over financial reporting. The results of the independent investigation by the Special Committee of
our non-routine transactions and other accounting items during the period were considered and constituted a significant element of this assessment. Based on the results of this assessment,
management has concluded that the control environment was not effective because of the lack of review and approval controls as it relates to non-routine transactions. At December 31, 2008, the
Company had not yet implemented new controls to remediate the issues that led to the restatement.

Source Photonics Subsidiary

Following our acquisition of Fiberxon in July 2007, now a part of Source Photonics, we implemented additional controls in preparation
for management's annual assessment of internal control over financial reporting. Despite these efforts to improve internal controls at the former Fiberxon entities, personnel at these entities
continue to operate without following established policies and procedures or appropriately applying GAAP. The finance and accounting operations for this subsidiary are decentralized, and we have not
identified effective controls to ensure that accounting policies and procedures are followed consistently and in accordance with GAAP.

For
the year ended December 31, 2008, significant financial statement adjustments were identified related to Source Photonics' goodwill, inventory and accrued liability balances
and have been properly reflected in the December 31, 2008 consolidated financial statements. These adjustments arose due to the misapplication of generally accepting accounting principles as it
relates to accounting for business combinations and inventory valuation.

As
a result, management has concluded that at December 31, 2008 a material weakness existed in internal control over financial reporting with respect to the review and approval
controls over the recording of transactions and our financial statement close process at our Source Photonics subsidiary.

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Table of Contents

Remediation of Material Weaknesses in Internal Control Over Financial Reporting

We have implemented, or are in the process of implementing through the date of the filing of this Form 10-K, changes
to the Company's internal control over financial reporting. Thus far, we have implemented the following remediation measures to address the above material weaknesses:



Report of Management on Internal Control Over Financial Reporting

Management, with the participation of our CEO and CFO, is responsible for establishing and maintaining an adequate system of internal
control over financial reporting, pursuant to Rule 13a-15(c) of the Exchange Act. In order to evaluate the effectiveness of internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in the
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO Framework").

Based
on its assessment, management has concluded that the Company's system of internal control over financial reporting is not adequately 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. Management has therefore
concluded that our internal control over financial reporting was not effective at December 31, 2008 due to material weaknesses that existed due to the effect of not maintaining effective review
and approval controls at the entity level, as it relates to non-routine transactions and not maintaining effective review and approval controls at our Source Photonics subsidiary, based on
criteria in the COSO Framework. 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.

The
effectiveness of our internal control over financial reporting as of December 31, 2008, has been audited by Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report which follows.

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Table of Contents

Inherent Limitation on the Effectiveness of Internal Controls

Our management, including our CEO and CFO, 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 some persons, 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.

Changes in Internal Control Over Financial Reporting

There were no changes in internal control over financial reporting during the quarter ended December 31, 2008, other than the
ongoing remediation efforts discussed above, that materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

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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, 2008, 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.

A
material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the company's annual or interim financial statements will not be prevented or detected in a timely basis. The following material weaknesses have been identified and included in
management's assessment: not maintaining effective review and approval controls at the entity level, as it relates to non-routine transactions, and not maintaining effective review and approval
controls at their Source Photonics subsidiary, based on criteria in the COSO Framework. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in
our audit of the 2008 financial statements and this report does not affect our report dated October 7, 2009 on those financial statements.

In
our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, MRV Communications, Inc. has not maintained
effective internal control over financial reporting as of December 31, 2008 based on the COSO criteria.

/s/ Ernst & Young LLPLos Angeles, California
October 7, 2009


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Table of Contents

Item 9B.    Other Information.

None.

PART III

Item 10.    Directors, Executive Officers and Corporate Governance.

The following table summarizes certain information with respect to each person who is a director or executive officer of MRV as of
September 30, 2009:

Name

Age

PositionShlomo Margalit (4)


68

Chairman of the Board, Chief Technical Officer and SecretaryNoam Lotan (4)


57

Chief Executive Officer and DirectorBaruch Fischer (2),(5)


60

DirectorHarold Furchtgott-Roth (1),(5)


52

DirectorMichael Keane (1)


53

DirectorGuenter Jaensch (1),(2),(3),(5)


70

DirectorIgal Shidlovsky (1),(2),(3)


72

DirectorDaniel Tsui (1),(2),(3)


70

DirectorGuy Avidan


47

Co-President of MRV; President, Network Equipment GroupNear Margalit


36

Co-President of MRV; Chief Executive Officer, Source Photonics, Inc.Chris King


38

Chief Financial OfficerJennifer Hankes Painter


40

Vice President, General Counsel and Chief Compliance Officer


---

Business Experience of Directors and Executive Officers

Shlomo Margalit, Chairman of the Board, Chief Technical Officer and Secretary

Mr. Margalit is a founder, and has served as Chairman of the Board, Chief Technical Officer and Secretary of MRV since its
inception in July 1988. From May 1985 to July 1988, Mr. Margalit served as a founder and Vice President of Research and Development for LaserCom, Inc., a manufacturer of semiconductor
lasers. From 1982 to 1985, he served as a senior research associate at the California Institute of Technology ("CalTech") and from 1976 to 1982, a visiting associate at CalTech. From 1972 to 1982,
Mr. Margalit served as a faculty member and associate professor at the Technion, the Israel Institute of Technology. During his tenure at the Technion, Mr. Margalit was awarded the
Israel Defense prize for his work in developing infrared detectors for heat guided missiles and the David Ben Aharon Award for Novel Applied Research. Mr. Margalit holds a bachelor of science
degree, a master's degree and a Ph.D. in electrical engineering from the Technion.

Noam Lotan, Chief Executive Officer and Director

Mr. Lotan has served as MRV's President, CEO and Director since May 1990 and relinquished the title of President in July 2009 in
conjunction with the naming of Messrs. Avidan and Near Margalit as Co-Presidents. Mr. Lotan also served as CFO from October 1993 through June 1995. From March 1987 to January
1990, he served as Managing Director of Fibronics (UK) Ltd., the United Kingdom subsidiary

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Table of Contents

of
Fibronics International Inc. ("Fibronics"), a manufacturer of fiber optic communication networks. MRV purchased the Fibronics business in September 1996. From January 1985 to March 1987,
Mr. Lotan served as a Director of European Operations for Fibronics. Prior to such time, Mr. Lotan held a variety of sales and marketing positions with Fibronics and Hewlett-Packard.
Mr. Lotan was an officer in the Israeli Defense Forces prior to joining Hewlett Packard. Mr. Lotan holds a bachelor of science degree in electrical engineering from the Technion, and a
master's degree in business administration from INSEAD (the European Institute of Business Administration, Fontainebleau, France). Mr. Lotan has served as a director for Capstone Turbine
Corporation, a Nasdaq-traded public microturbine manufacturing company since June 2005.

Baruch Fischer, Director

Professor Fischer has served as a Director of MRV since 1999. He served as Dean of the Electrical Engineering Facility at the Technion
where he currently serves as a professor and the Head of the Opto-Electonics Center. His current research activities include fiber-optic communications, lasers, WDM technology, fiber
gratings and "all-optical" processing and networks, nonlinear-optics, pulse-optics, and statistical-mechanics and quantum-mechanics based studies in optics and lasers. He has authored or
co-authored approximately 250 journal and conference papers and holds nine patents in the field of photonics. He received a bachelor of science degree in 1973. a master of science degree
in 1975, and a Ph.D. from Bar-Ilan University, Israel. He subsequently became a Post-Doctorate Fellow at CalTech and joined the faculty of the Technion in 1983. Professor
Fischer is a Fellow of the Optical Society of America, was a topical editor for Optics Letters, and is on the Editorial Board of the International Journal of Nonlinear Optical Physics &
Materials.

Harold Furchtgott-Roth, Director

Mr. Furchtgott-Roth has served as a Director of MRV since 2005. He is the President of Furchtgott-Roth
Economic Enterprises, an economic consulting firm, which he founded in 2003. From 2001 to 2003, he was a visiting fellow at the American Enterprise Institute and from 1997 to 2001, he served as a
Commissioner of the Federal Communications Commission ("FCC"). Before his appointment to the FCC, he was Chief Economist for the House Committee on Commerce and a principal staff member on the
Telecommunications Act of 1996. Mr. Furchtgott-Roth is the author of numerous publications and has co-authored three books. He serves as the Chairman of the Board of
Oneida Partners, a privately-held wireless company. Mr. Furchtgott-Roth received a bachelor of science degree in economics from the Massachusetts Institute of Technology
and a Ph.D. in economics from Stanford University.

Guenter Jaensch, Director

Mr. Jaensch has served as a Director of MRV since 1997. He has held executive positions for over 25 years with Siemens or
its subsidiaries in Europe and the United States. Among his assignments were service as President of Siemens Communications Systems, Inc., President and Chairman of Siemens Corporate Research
and Support, Inc., Chairman and CEO at Siemens Pacesetter, Inc. and head of the Cardiac Arrhythmia Division of Siemens AG
Medical Group. Mr. Jaensch holds a master's degree in business administration and a Ph.D. in business and finance from the University of Frankfurt.

Michael Keane, Director

Mr. Keane has served as a Director since July 2009. Since September 2008, he has served as the Senior Vice President and CFO of
Clipper Windpower, Inc. From 2005 to 2008, he served as Corporate Vice President and CFO of Computer Sciences Corporation ("CSC"). Prior to joining CSC, Mr. Keane was Senior Vice
President and CFO of UNOVA, Inc. for eight years following the spin-off of UNOVA from Western Atlas, Inc. He joined Litton, a predecessor to UNOVA, in 1981, was named
Assistant Treasurer in

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1988,
and became Director of Pensions and Insurance in 1991. He was then elected Vice President and Treasurer of Western Atlas when the company was spun off from Litton in 1994, and promoted to Senior
Vice President and CFO in 1996. Prior to his career at Litton, he was a certified public accountant at Price Waterhouse. Mr. Keane currently serves as a director for the City of Hope, a
non-profit cancer charity. He holds a bachelor's degree in accounting from Illinois State University and a master's degree in business administration from the Anderson Graduate School of
Management at the University of California at Los Angeles.

Igal Shidlovsky, Director

Mr. Shidlovsky has served as a Director of MRV since 1997, and is MRV's lead independent director. He is the Managing Director
of Global Technologies, an investment and consulting organization, which he founded in 1994. He has extensive management and consulting experience with international companies and start up technology
companies. He held several executive positions including Vice President, Corporate Development at Siemens Pacesetter, a division of Siemens AG Medical Group, Director of Strategic Planning and
Technology Utilization, and Director of the Microelectronics Department at Siemens Corporate Research. From 1969 to 1982 he was with RCA Laboratories, a leading electronic research and development
organization. Mr. Shidlovsky holds a bachelor of science degree in chemistry from the Technion and master's degree and Ph.D. from the Hebrew University in Israel.

Daniel Tsui, Director

Professor Tsui has served as a Director of MRV since 1999. He is the Arthur Le Grand Doty Professor of Electrical Engineering at
Princeton University. From 1967 to 1980, he served with Bell Laboratories before joining the faculty of Princeton University, where he has remained to present. He was awarded the 1998 Nobel Prize in
Physics for the discovery and explanation of the fractional quantum Hall effect. He was a recipient of the American Physical Society 1984 Buckley Prize, the 1998 Benjamin Franklin Medal and was
elected to the National Academy of Sciences and the National Academy of Engineering. He is a fellow of the American Physical Society and the American Association for the Advancement of Science and the
American Academy of Arts and Sciences. He is currently engaged in research activity relating to properties of thin films and microstructures of semiconductors and solid-state physics. He received a
bachelor of arts degree from Augustana College and a Ph.D. in physics from the University of Chicago.

Guy Avidan, Co-President of MRV; President, Network Equipment Group

Mr. Avidan has served as Co-President of MRV and President of MRV's Network Equipment group since July 2009. Prior
to that, he was MRV's CFO since July 2007 (in an acting capacity until March 2008). Prior to assuming the CFO position, Mr. Avidan served as Vice President and General Manager of MRV's
subsidiary, MRV International, from 2001 to July 2007. From 1995 to 2001, he served MRV in various executive capacities with other MRV subsidiaries. From 1992 to 1995, Mr. Avidan served as Vice
President of Finance and CFO of Ace North Hills, which MRV acquired in 1995. From 1989 to 1992, he practiced accounting with a public accounting firm that became part of Ernst & Young.
Mr. Avidan holds a bachelor of science degree in economics and accounting from Haifa University.

Near Margalit, Co-President of MRV; Chief Executive Officer of Source Photonics, Inc.

Mr. Near Margalit has served as Co-President of MRV since July 2009. He has also served as the CEO of MRV's
subsidiary Source Photonics, Inc. since February 2003. From February 2003 to July 2007 he served as Source Photonics' President. From May 2002 until February 2003, he served MRV as Vice
President of Marketing and Business Development. From 1998 until May 2003, he was founder, Chairman and Chief Technology Officer for Zaffire, Inc., a DWDM Metro Platform company, which was
acquired by Centerpoint in October 2001. Prior to founding Zaffire, he was employed by MRV, both in the

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optical
component and networking divisions. Mr. Near Margalit earned a bachelor of science degree in applied physics from the California Institute of Technology and a Ph.D. in optoelectronics
from the University of California, Santa Barbara.

Chris King, Chief Financial Officer

Mr. King has served as MRV's CFO since July 2009. Prior to that, he was MRV's Vice President of Finance and Chief Compliance
Officer from January 2008. From 2005 through 2007, he served as the Senior Vice President, Finance for Tandberg Television, which was a public company traded on the Oslo exchange until it was acquired
by Ericsson in 2007. In 2005, Tandberg acquired GoldPocket Interactive, Inc. where Mr. King served as CFO, Secretary and Treasurer from the time he joined in 2000. From 1993 through
2000, he practiced accounting with PricewaterhouseCoopers. Mr. King holds a bachelor of arts degree in business economics from the University of California, Santa Barbara, and he is a certified
public accountant.

Jennifer Hankes Painter, Vice President, General Counsel and Chief Compliance Officer

Ms. Painter joined MRV as Vice President, General Counsel in February 2009, and has also served as the Chief Compliance Officer
since July 2009. Prior to joining MRV, from 2004 to 2008 Ms. Painter served as vice president, assistant general counsel for The Ryland Group, Inc., a national homebuilder, where she was
responsible for the company's regulatory compliance, corporate governance, financings, and general corporate and employment law. From
2001 to 2004, Ms. Painter served as vice president, general counsel of Cadiz Inc., a public water and agricultural company previously traded on Nasdaq, where she was responsible for the
company's domestic and international legal and compliance issues. Prior to joining Cadiz, Ms. Painter was an associate with Sullivan & Cromwell, an international law firm, and dealt with
merger and acquisition transactions, securities and other corporate matters; and was an officer in the U.S. Army Corps of Engineers prior to her legal career. She received a bachelor of science degree
in civil engineering from the U.S. Military Academy and a juris doctor degree from Loyola Law School of Los Angeles. Ms. Painter is an active member of the California Bar.

Board of Director Committees and Their Members

The system of governance practices followed by the Company is documented in the MRV Communications, Inc. Corporate Governance
Policies (the "Governance Guidelines") and the charters of the Audit Committee, Compensation Committee and Nomination and Governance Committee, all of which are available on MRV's website at www.mrv.com. The Governance Guidelines and charters are intended to assure that the Board will have the necessary authority and practices in place to
review and evaluate MRV's business operations and to make decisions that are independent of the Company's management. The Governance Guidelines also are intended to align the interests of directors
and management with those of MRV's stockholders. The Governance Guidelines establish the procedures the Board will follow with respect to Board composition and selection, Board meetings and
involvement of senior management, Board committees, director compensation, and the CEO's performance evaluation. Each of the committee charters addresses annual reviews of the committees and the
Nomination and Governance Committee Charter gives authority to that committee to recommend to the Board of Directors the process for an annual self-evaluation of the Board's performance
and the performance of each of the committees. The Governance Guidelines and committee charters are reviewed from time to time and updated as necessary to reflect changes in regulatory requirements
and evolving oversight practices. The committee charters were most recently modified by the Board in 2004, and the Governance Guidelines on October 5, 2009. The Governance Guidelines were
recently amended a) to require directors to provide letters of resignation if they do not receive a majority of votes in an uncontested election and b) to eliminate the need for an
independent lead director for the Board of Directors if the chairperson is independent.

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The
Board has five committees: an Audit Committee, a Compensation Committee, a Nomination and Governance Committee, an Executive Committee and a Special Committee. The Audit Committee,
Compensation Committee and Nomination and Governance Committee hold regularly scheduled meetings, and special meetings may be held from time to time as the Board or its committees deem necessary. At
quarterly Board meetings, time is set aside for the independent directors to meet in an executive session without management or management directors present.
The Special Committee was formed to review MRV's historical stock option practices and related accounting as well as other issues. The Special Committee held meetings from time to time as deemed
necessary but is currently inactive as the restatement of MRV's financial statements has been completed and the Staff of the SEC has informed the Company that it has completed its investigation into
MRV's historical stock option grants and practices and that it does not intend to recommend any enforcement actions by the SEC. The Board of Directors met 12 times during 2008. No directors attended
fewer than 75 percent of the meetings of the Board of Directors and the meetings of the committees on which he served during 2008. All directors attended each of the Board meetings and meetings of the
committees on which they served during 2008 except one member missed an Audit Committee meeting and two others missed a Special Committee meeting. Mr. Shidlovsky has served as the lead
independent director since the last annual meeting of stockholders. The lead independent director is responsible for coordinating the activities of the non-management directors,
coordinating with the Chairman to set the agenda for Board meetings, chairing meetings of the non-management directors, and leading the Board's review of the CEO.

The
following table summarizes the members of the Board of Directors and the committee memberships each director held during 2008 and as of September 30, 2009 unless otherwise
indicated:

Name

Audit

Compensation

Nomination
and
Governance

Executive

Special
CommitteeShlomo Margalit





















XNoam Lotan





















XBaruch Fischer









X

















XHarold Furchtgott-Roth



X























X

(1)Guenter Jaensch



X

(1)



X





X











XMichael Keane



X

(2)Igal Shidlovsky(3)



X





X

(1)



X

(1)Daniel Tsui



X





X





X


---

Board Committees and Director Independence

Below is a description of each committee of the Board of Directors. Each of the committees has authority to engage legal counsel, other
experts or consultants as it deems appropriate to carry out its responsibilities. The Board of Directors has determined that each member of the Board and of each committee (other than
Messrs. Shlomo Margalit and Lotan who are officers and employees of MRV and serve on the Executive Committee) meets the standards of independence under the Governance Guidelines and the rules
of the Nasdaq Stock Market, LLC.

Audit Committee

The Audit Committee assists the Board of Directors in its oversight of the quality and integrity of MRV's accounting, auditing, and
financial reporting practices. The Audit Committee's role includes

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overseeing
MRV's system of internal controls and disclosure controls, accounting and auditing processes and discussing with management the Company's processes to manage business and financial risk,
and compliance with applicable legal, ethical and regulatory requirements. The Audit Committee is responsible for the appointment, compensation, retention and oversight of the independent registered
public accounting firm engaged to issue audit reports on the financial statements of the Company. The Audit Committee relies on the expertise and knowledge of management and the independent registered
public accounting firm in carrying out its oversight responsibilities. The Board of Directors has determined that each Audit Committee member has sufficient knowledge in financial and auditing matters
to serve on the Committee. The Board has further determined that Messrs. Jaensch and Furchtgott-Roth are "audit committee financial experts" as defined in Item 407(d)(5) of
Regulation S-K, promulgated under the Exchange Act.
The Audit Committee met five times during 2008. A current copy of the Audit Committee Charter is available on MRV's website atwww.mrv.com.

Compensation Committee

The primary responsibilities of the Compensation Committee are: (a) to make recommendations to the Board as to the Company's
general compensation philosophy and to oversee the development and implementation of compensation programs; (b) to evaluate the performance of the CEO based on Board-approved goals and
objectives, and based on this evaluation, recommend to the Board the CEO's annual compensation level; (c) to evaluate the performance of other senior management and make recommendations to the
Board regarding annual compensation levels; (d) to review and make recommendations to the Board with respect to the Company's incentive compensation plans and equity-based plans; and
(e) to grant awards under the Company's equity incentive plans to employees, not including executive officers. The Compensation Committee's role includes producing the report on executive
compensation required by SEC rules and regulations. The Compensation Committee has the authority, to the extent it deems necessary or appropriate, to select and retain special counsel or other experts
or consultants, including sole authority to approve the fees and retention terms of such advisors, to assist in the discharge of its duties and responsibilities. The Compensation Committee met three
times during 2008. A current copy of the Compensation Committee Charter is available on MRV's website atwww.mrv.com.

Compensation Committee Interlocks and Insider Participation

No member of the Compensation Committee was, during 2008 or at any other time, an officer or employee of MRV or any of its
subsidiaries; was formerly an officer of MRV or any of its subsidiaries; or had a relationship in 2008 requiring disclosure under applicable SEC regulations. No executive officer of MRV serves or
served as an executive officer, director or member of the compensation committee (or other board committee performing equivalent functions, or in the absence of such committee, the entire board of
directors) of another entity, any of whose executive officers served as a member of the Compensation Committee or as a director of MRV.

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Nomination and Governance Committee

The principal responsibilities of the Nomination and Governance Committee are to: (a) lead the search for qualified director
candidates for election to the Board, ensuring the Board has the appropriate mix of skills and expertise; (b) retain and terminate search firms used to identify director candidates;
(c) solicit the views of the CEO, members of the Company's senior management, and members of the Board regarding the qualifications and suitability of director candidates; (d) establish
policies and procedures for the evaluation of director candidates put forth by the Company's stockholders; (e) review and recommend to the Board a set of corporate governance principles, code
of business conduct and ethics applicable to the Board and the Company, and (f) oversee and evaluate compliance by the Board and senior management with those corporate governance principles,
ethics standards and code of conduct. The Nomination and Governance Committee's role includes periodically reviewing the compensation paid to non-employee directors, and making
recommendations to the Board for any adjustments. The Chair of the Nomination and Governance Committee acts as the lead independent director and is responsible for leading the Board's annual review of
the CEO's
performance. The Nomination and Governance Committee met two times in 2008. A current copy of the Nomination and Governance Committee Charter is available on MRV's website at www.mrv.com.

Nominees
for the Board of Directors should be committed to enhancing long-term stockholder value and must possess a high level of personal and professional ethics, sound
business judgment and integrity. The Nomination and Governance Committee annually reviews with the Board the applicable skills and characteristics required of Board nominees in the context of current
Board composition and Company circumstances. In making its recommendations to the Board, the Nomination and Governance Committee considers, among other things, the qualifications of individual
director candidates. The Nomination and Governance Committee works with the Board to determine the appropriate characteristics, skills and experiences for the Board as a whole and its individual
members with the objective of having a Board with business experience, diversity and personal skills in technology, finance, marketing, international business, financial reporting and other areas that
are expected to contribute to an effective Board. In evaluating the suitability of individual Board members, the Board takes into account many factors, including a general understanding of marketing,
finance, and other disciplines relevant to the success of a publicly traded company in today's business environment; an understanding of the Company's business and technology; educational and
professional background; and personal accomplishment. The Board evaluates each individual in the context of the Board as a whole, with the objective of recommending a group that can best perpetuate
the success of the Company's business and represent stockholder interests through the exercise of sound judgment, using its diversity of experience. In determining whether to recommend a director for
re-election, the Nomination and Governance Committee also considers the director's past attendance at meetings and participation in and contributions to the activities of the Board.

In
November 2008, the Special Committee issued a recommendation to the Board to search for three new independent directors. In accordance with this recommendation, the Nomination and
Governance Committee in 2009 conducted a search for three additional director nominees to add depth and business and financial experience to the Board. In February 2009, the Nomination and Governance
Committee hired Korn Ferry, an executive recruiting firm, to assist in this search and evaluate and identify potential candidates. In addition to the candidates recommended by Korn Ferry, numerous
candidates were identified by various internal and third party sources, which suggestions were forwarded to the Chairman of the Nomination and Governance Committee to review. The committee Chairman
provided certain recommendations to Korn Ferry, who evaluated all recommended candidates along with candidates that it recommended of its own accord. In July 2009, Mr. Keane, a nominee
initially recommended by Korn Ferry, was nominated by the Nomination and Governance Committee to the Board, and was appointed by the Board to serve until the next annual stockholders' meeting.

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The
committee will consider stockholder recommendations for candidates for the Board. All stockholder recommendations must be in writing, addressed to MRV Communications, Inc.,
20415
Nordhoff Street, Chatsworth, California 91311, Attention: Secretary (or if MRV's corporate headquarters have changed, to MRV's new corporate headquarters as publicly announced). Submissions must be
made by certified mail or commercial courier service (i.e., Federal Express). Hand delivered or emailed submissions will not be considered.

Executive Committee

The Executive Committee consists of Messrs. Lotan and Shlomo Margalit. The Executive Committee reviews and makes recommendations
to the Board of Directors with respect to strategy, acquisitions and other opportunities for the Company, and acts on behalf of the Board, to the fullest extent permitted by law, when it is
impractical for the Board to react. In addition, the Executive Committee is a forum to review other significant matters not addressed by the other Board committees and to make appropriate
recommendations to the Board of Directors. The Executive Committee did not meet as a committee during 2008.

Special Committee

The Special Committee was formed to review the Company's historical stock option practices and related accounting as well as other
issues. The Special Committee met 28 times in 2008 and at least 22 times in 2009.

Communications with the Board

The Board maintains a process by which stockholders and other interested parties may communicate with members of the Board of
Directors. Any stockholder or other interested party who desires to communicate with the Board of Directors, individually or as a group, may do so by writing to the intended member or members of the
Board of Directors, c/o Chief Compliance Officer, 20415 Nordhoff Street, Chatsworth, California 91311.

All
communications received in accordance with this procedure will be reviewed initially by the office of our Compliance Officer to determine that the communication is a message to our
directors and will be relayed to the appropriate director or directors unless the officer determines that the communication is an advertisement or otherwise inappropriate material. The director or
directors who receive any such communication will have discretion to determine whether the subject matter
of the communication should be brought to the attention of the full Board of Directors or one or more of its committees and whether any response to the person sending the communication is appropriate.

Code of Business Conduct and Corporate Governance

We have adopted a Code of Business Conduct and Corporate Governance that applies to all of our directors, officers and employees. In
compliance with the applicable rules of the SEC, special ethics obligations of our CEO, CFO, Controller and other employees who perform financial or accounting functions are set forth in the section
of our Code of Business Conduct and Corporate Governance entitled "Special Ethics Obligations of Employees with Financial Reporting Responsibilities." The Code is available through our web site at www.mrv.com. Printed copies are available free of charge and may be requested by contacting our Investor Relations Department either by mail at our
corporate headquarters, by telephone at (818) 886-6782 or by e-mail atir@mrv.com.

We
intend to satisfy the disclosure requirements under the Exchange Act regarding an amendment to, or a waiver from, our Code of Business Conduct and Corporate Governance by posting such
information on our web site atwww.mrv.com.

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Compliance with Section 16(a) Beneficial Ownership Reporting Compliance

Under Section 16(a) of the Exchange Act, MRV directors, executive officers and stockholders who own more than 10% of a
registered class of MRV equity securities are required to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company.
Directors, executive officers and 10% or greater stockholders are required by SEC regulations to furnish MRV with copies of all Section 16(a) forms they file. We believe, based solely on a
review of the copies of such reports furnished to the Company that the reports required of MRV's executive officers, directors and 10% or greater stockholders were duly and timely filed during the
year ended December 31, 2008.

Item 11.    Executive Compensation.

Compensation Discussion and Analysis

The Compensation Committee has responsibility for evaluating, approving and recommending MRV compensation programs. The Compensation
Committee is responsible for reviewing and evaluating executive officers' performances relative to meeting corporate goals and objectives, and determining compensation levels based on this evaluation.

Philosophy

MRV's compensation policies are structured to set base salaries below an industry average, and link corporate performance to additional
compensation of executive officers, including but not limited to the CEO, the Chairman of the Board and Chief Technical Officer, MRV's two Co-Presidents and CFO (together, the
"Executives"). The Compensation Committee uses factors such as MRV's financial results to determine performance-based annual incentive compensation, in an effort to align the financial interests of
the Executives with the results of MRV's performance. This philosophy may cause compensation to fluctuate from year to year, and as a result, the Executives' compensation levels may be above or below
the comparable range of MRV's peers. The Compensation Committee does not attempt to maintain a certain target percentile within a peer group. In general, the compensation package provided to MRV's
Executives consists of base salary, discretionary performance-based cash bonuses, and longer-term equity incentive compensation in the form of stock options.

To
the extent readily determinable, the Compensation Committee considers the anticipated tax treatment to MRV and to the Executives of various types of compensation. Some types of
compensation and associated deductibility for Company tax purposes depend upon the timing of an Executive's vesting or exercise of granted stock options. Interpretations of and changes in the tax laws
also affect the deductibility of compensation. To the extent reasonably practicable and to the extent it is within the Compensation Committee's control, the Committee intends to limit Executive
compensation to that deductible under Section 162(m) of the Internal Revenue Code of 1986, as amended.

Determination of CEO's Compensation

Mr. Lotan's base salary is subject to change at the discretion of the Board of Directors, under the terms of his employment
agreement described below under "Employment Agreements and Change of Control Arrangements". In determining the amount of Mr. Lotan's base salary, discretionary bonus and stock option awards,
the Compensation Committee reviews industry market data, and the total compensation paid to other chief executives in the technology industry. The Compensation Committee also considered factors such
as Mr. Lotan's years of service with MRV, the historical compensation paid to Mr. Lotan and MRV's other Executives, and MRV's financial performance and share-price performance for the
past year particularly.

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Annual Compensation Methodology

In the first quarter of each year, the Compensation Committee meets to review the salary, discretionary bonus and stock option award
compensation given to the Executives and determines whether MRV's financial performance for the preceding year justifies changes in base salaries, awarding discretionary bonuses, or granting
share-based compensation.

The
Compensation Committee takes into consideration achievement of milestones against the current business plan, as well as the amount of comprehensive income received by Executives
during the preceding two fiscal years. Comprehensive income consists of the total of (a) the cash compensation for salary and bonus, paid or payable to the recipient for the two preceding
years, (b) adding the increase or subtracting the decrease of the value of share-based compensation as of the end of each of the two preceding fiscal years, and (c) adding the total cash
contributed by MRV during each of the two to its 401(k) savings plan for the recipient, and MRV-paid insurance premiums on health, dental, vision and life insurance covering the recipient.
These same benefits are also provided by MRV to all of its employees in the United States. The value of share-based compensation is computed for each of the two fiscal years
by:



Each
year, the Compensation Committee reviews and approves proposed grants of awards for all equity incentive plan participants. Common Stock-based awards are viewed as an important
component of total executive pay, aligning compensation with increasing stockholder value and, thus, providing an important benefit to stockholders. Stock options provide a financial reward only in
the event that stockholder values are increased. Generally, within compensation programs, stock options are viewed as a cost-effective method for providing equity-based
long-term incentive compensation.

In
2006, MRV adopted a written stock option policy to supplement the provisions of its equity-compensation plans and to govern the timing of its stock option grants to employees
generally and to its officers and directors in particular. The goal in creating and adopting the policy was to seek to ensure that equity-based awards were made in a manner consistent with the terms
of the governing plans and only at times, and at prices, when all material information had been disseminated to MRV stockholders. This practice allows investors making investment decisions with
respect to MRV's Common Stock to access the same information as that available to participants in MRV equity-award plans.

2008 Compensation Decisions

Base Salary and Annual Cash Bonus.The Compensation Committee used the considerations above to determine recommendations for base
salary for 2009 and
the amount of any bonus for MRV's Executives' for goals attained during 2008. Due to the fact that the Company determined that its financial statements could not be relied upon in 2008 and the
Company's business was also being affected by the global economy's recession, the Compensation Committee determined that the Executives should receive the same base salaries in 2009 as they received
in 2008, and no cash bonuses would be

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awarded
to Executives for 2008 performance. However, Mr. King received a $45,000 bonus for 2008 performance in his position as VP, Finance. Further, in July 2008, Mr. Avidan received a
bonus of $110,114 to compensate him retroactively for the fact that his base salary had not increased in the preceding year to reflect his added responsibilities as CFO.

In
March 2009, the recession was affecting the Company's business significantly, and management recommended a 10% temporary pay cut for certain officers and employees, including
Messrs. Lotan, Shlomo Margalit, Avidan and King. The pay cut is to be reviewed six months after its implementation. The Board of Directors approved of such pay cut and accepted a 10% pay cut of
its own fees until such time as employee pay is restored. Further, in June 2009, in recognition of his efforts to complete the restatement and acknowledgement of his taking on additional duties,
Mr. King's base salary was raised to $210,000, subject to the 10% salary reduction noted above. Mr. Near Margalit received a $10,000 discretionary bonus at the same time in recognition
of his efforts in addressing the impact of the challenging market environment.

Stock Option Grants.Grants to each of the Executives in March 2008 were done under MRV's 2007 Omnibus Incentive Plan. The options vest
pro rata over
four years in annual increments and accelerate upon a change of control as defined in the plan. Discretionary grants to Messrs. Lotan, Avidan and Near Margalit were intended to replace
discretionary annual cash bonuses as well as provide equity incentive in the following amounts:

Options in lieu of
cash bonus

Regular
option grant

TotalNoam Lotan


90,000


80,000


170,000Near Margalit


45,000


75,000


120,000Guy Avidan


22,500


70,000


92,500


Mr. Shlomo
Margalit declined his grant of 170,000 options, and Mr. King received a grant of 50,000 options as part of his offer of employment.

In
the first nine months of 2009, the Company has not granted any equity awards due to the fact that the Company was delinquent in its periodic filings with the SEC, including its annual
and quarterly reports on Forms 10-K and 10Q. It is anticipated that the Compensation Committee will recommend and approve grants of awards to Executives and other officers and
employees upon the Company's becoming current with its filings with the SEC. No such awards have been proposed or awarded as of the date of this Form 10-K.

Employee Benefits

Executives are generally entitled only to benefits consistent with those offered to other employees of the Company. The Company offers
group life, disability, medical, dental and vision insurance and a 401(k) plan.

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Employment Agreements and Change of Control Arrangements

We generally avoid entering into employment agreements with our executives; however, we do have written employment agreements with
Messrs. Lotan and Margalit. In March 1992, we entered into three-year employment agreements with Messrs. Lotan and Margalit, effective upon completion of our initial public
offering in December 1992. Upon expiration, these agreements automatically renew for one-year terms unless either party terminates them by giving the other three months' notice of
non-renewal prior to the expiration of the current term. Accordingly, Messrs. Lotan and Margalit are currently employed under their employment agreements with terms expiring on
March 22, 2010, with automatic renewal for another year unless notice of non-renewal is provided per the agreements. Pursuant to the agreements, Mr. Lotan serves as CEO and a
Director of MRV and Mr. Shlomo Margalit serves as Chairman of the Board of Directors, Chief Technical Officer and Secretary. Each of the agreements contains a one-year
non-compete and non-solicitation provision upon termination of employment. The Compensation Committee of the Board of Directors approved a five percent
increase in base salary to Messrs. Lotan and Shlomo Margalit effective January 2008 which gave them base annual salaries of $273,000 and $115,500, respectively, subject to the 10% temporary pay
cut discussed above in the subsection entitled "Base Salary and Annual Cash Bonus". Each is also entitled to receive a bonus determined and payable at the discretion of MRV's Board of Directors.

The
agreements may be terminated immediately for cause or in the event of the liquidation or bankruptcy of MRV, at any time without cause provided MRV pays one year base salary upon
notice of termination, or on 30 days prior written notice upon death or disability. However, if the termination of employment without cause is due to a change of control of MRV,
Messrs. Lotan and Shlomo Margalit shall be entitled to receive a lump sum severance equal to the lesser of one year base salary or an amount equal to the salary due to them under the terms of
their employment contract at the time of termination. Assuming a termination without cause occurred on December 31, 2008 (with or without a change of control), Messrs. Lotan and Shlomo
Margalit would have received $273,000 and $115,500, respectively.

The
agreements define "cause" as (a) the falseness or material inaccuracy of any of the officers' warranties and representations in the agreements, (b) the willful failure
or refusal of the officers to comply with explicit directives of the Board of Directors or Executive Committee or to render the services required by the agreements, (c) fraud or embezzlement
involving assets of the Company, its customers, suppliers or affiliates or other misappropriation of the Company's assets or funds, (d) the officers' conviction of a criminal felony offense,
(e) breach or habitual neglect of the officers' obligations under their agreements or their duties as employees of the Company, and (f) habitual use of drugs or insanity. "Disability" is
defined as not being able to perform duties for 90 out of 180 days due to mental or physical disability. A "change of control" is defined as the sale of all or substantially all of the assets
of MRV, the merger of MRV with another entity where the other entity survives the merger, or any transaction where the two original founders (including Mr. Shlomo Margalit) cease to hold
positions where they determine policy of the Company. The other original founder left MRV of his own accord in 1999.

MRV
is the beneficiary of a key man life insurance policy in the amount of $1,000,000 on the life of Mr. Lotan.

Executive Compensation Tables

The following table summarizes information regarding compensation paid and the fair value of option grants during each of the past
three fiscal years to MRV's CEO, CFO and the three next highest

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compensated
executive officers (collectively, the Named Executive Officers) serving at December 31, 2008.

Summary Compensation TableYear

Salary

Bonus (1)

Option
awards (2)

All other
compensation (3)

TotalNoam Lotan (5)


2008

$
272,650

$


$
187,791

$
8,294

$
468,735Chief Executive Officer


2007

$
258,853

$


$
142,865
(4)
$
9,079

$
410,7972006

$
224,039

$
40,000

$
149,762

$
6,835

$
420,636Shlomo Margalit


2008

$
115,267

$


$


$
3,572

$
118,839Chairman, Chief Technical


2007

$
110,000

$


$


$
3,414

$
113,414Officer and Secretary


2006

$
110,000

$


$


$
3,414

$
113,414Guy Avidan (6)(7)


2008

$
202,964

$
110,114

$
111,658

$
45,858
(8)
$
470,594Co-President of MRV,


2007

$
146,304

$


$
71,862

$
36,110

$
254,276President,Network BusinessNear Margalit (9)


2008

$
261,971

$


$
166,035

$
8,873

$
436,879Co-President of MRV,


2007

$
248,076

$
30,000

$
130,753

$
8,756

$
417,585CEO, Source


2006

$
199,230

$
40,000

$
116,426

$
6,091

$
361,747Photonics, Inc.Chris King (10)


2008

$
162,265

$
45,000

$
8,886

$
2,658

$
218,809Chief Financial Officer


---

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The
following table summarizes share-based awards to named executive officers during 2008:

Grants of Plan-Based AwardsName

Grant date

Approval
date

Number of
securities
underlying
options (1)

Exercise
price of
option
award
($/share) (2)

Grant date
fair value
of option
award (3)Noam Lotan


3/3/08


2/29/08


170,000

$
1.49

$
133,059Shlomo Margalit (4)


N/A


N/A




$


$
Guy Avidan


3/3/08


2/29/08


92,500

$
1.49

$
72,400Chris King


3/3/08


2/29/08


50,000

$
1.49

$
39,135Near Margalit


3/3/08


2/29/08


120,000

$
1.49

$
93,924


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The following table summarizes the Executives' equity award holdings as of December 31, 2008 and includes unexercised and unvested option awards.

Outstanding Equity Awards at Fiscal Year-EndName

Grant date

Number of
securities
underlying
unexercised
options
exercisable

Number of
securities
underlying
unexercised
options
unexercisable

Option
exercise
price (1)

Option
expiration
dateNoam Lotan


9/21/01
(2)

80,000




$
2.70


9/21/1110/29/02
(3)




100,000

$
0.99


10/29/1210/29/02
(4)

12,000




$
0.99


10/29/1212/29/03
(4)

20,000




$
3.35


12/29/133/22/04
(4)

25,000




$
2.80


3/22/142/28/05
(5)

45,000


15,000

$
3.70


2/28/1512/30/05
(6)

26,250


8,750

$
2.05


12/30/156/1/06
(6)

35,000


35,000

$
3.24


6/1/168/1/07
(6)

40,000


120,000

$
2.63


8/1/173/3/08
(6)




170,000

$
1.49


3/3/18Shlomo Margalit (7)


N/A







$



N/AGuy Avidan


6/11/02
(4)

60,000




$
1.10


6/11/124/9/03
(4)

10,000




$
1.11


4/9/1310/24/03
(4)

20,000




$
2.99


10/24/1312/31/04
(4)

30,000




$
3.67


12/31/1411/30/05
(6)

7,500


2,500

$
1.82


11/30/157/3/06
(6)

5,000


5,000

$
3.07


7/3/169/1/06
(6)

10,000


10,000

$
2.44


9/1/168/1/07
(6)

37,500


112,500

$
2.63


8/1/173/3/08
(6)




92,500

$
1.49


3/3/18Chris King


3/3/08
(6)




50,000

$
1.49


3/3/18Near Margalit


6/11/02
(4)

190,000




$
1.10


6/11/1212/29/03
(4)

20,000




$
3.35


12/29/133/22/04
(4)

18,000




$
2.80


3/22/148/31/04
(4)

18,000




$
2.22


8/31/142/28/05
(5)

35,625


11,875

$
3.70


2/28/1512/30/05
(6)

21,000


7,000

$
2.05


12/30/156/1/06
(6)

35,000


35,000

$
3.24


6/1/168/1/07
(6)

37,500


112,500

$
2.63


8/1/173/3/08
(6)




120,000

$
1.49


3/3/18


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Other Compensation Information

There were no option exercises by Executives during 2008. MRV did not grant, nor did any Executive vest in, any stock appreciation
rights, or similar instruments, restricted stock, restricted stock units, or similar instruments during 2008. MRV generally does not have pension or other retirement plans, except for a 401(k) savings
plan under which it makes employer contributions on behalf of U.S. employees, and a pension plan for its Swiss subsidiary. MRV does not have any nonqualified defined contribution or other nonqualified
deferred compensation plans that provide or provides for the deferral of compensation on a basis that is not tax-qualified.

Compensation of Directors

MRV's compensation program for non-management directors is designed to achieve the following goals: compensation should
fairly pay directors for work required for a company of MRV's size and scope; compensation should align directors' interests with the long-term interest of stockholders; and the structure
of the compensation should be simple, transparent and easy to understand. The table below summarizes non-management directors' compensation during 2008 and includes the following
compensation elements:



Name of Director (1)(2)

Fees earned or
paid in cash

Option
awards (3)

TotalBaruch Fischer

$
48,000

$
75,859

$
123,859Harold Furchtgott-Roth

$
119,000

$
51,007

$
170,007Guenter Jaensch

$
55,000

$
75,859

$
130,859Igal Shidlovsky

$
41,000

$
75,859

$
116,859Daniel Tsui

$
40,000

$
75,859

$
115,859






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Compensation Committee Report

The Compensation Committee of MRV Communications, Inc. has reviewed and discussed with management the Compensation Discussion
and Analysis required by Item 402(b) of Regulation S-K promulgated under the Exchange Act and, based on such review and discussions, the Compensation Committee recommended to
the Board of Directors, that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K for the year ended December 31, 2008.

Compensation Committee of the Board of Directors
Igal Shidlovsky, Chair
Baruch Fischer
Guenter Jaensch
Daniel Tsui


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Table of Contents

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

Security Ownership of Certain Beneficial Owners and Named Executive Officers

The following table sets forth information with respect to each holder known to MRV to be the beneficial owner of 5% or more of the
outstanding shares of MRV's Common Stock as of September 28, 2009.

Name and Address of Beneficial Owner

Amount and
Nature of
Beneficial
Ownership

Percent of
Class (1)Wells Fargo and Company
420 Montgomery Street,
San Francisco, CA 94104


23,016,048
(2)

14.6
%Wells Capital Management Inc.
Wells Fargo Funds Management, LLC
525 Market Street, 10th Floor
San Francisco, CA 94105Manulife Financial Corporation
200 Bloor Street East,
Toronto, Ontario, Canada M4W 1E5


9,759,043
(3)

6.2
%MFC Global Investment Management (U.S.), LLC
101 Huntington Avenue
Boston, MA 02199Sun Life Financial Inc.
150 King Street West,
Toronto, Ontario, Canada, M5H 1J9


9,492,547
(4)

6.0
%RBF Capital, LLC
Richard B. Fullerton
100 Drakes Landing Road, Suite 300
Greenbrae, CA 94904


8,747,192
(5)

5.6
%Prescott Group Capital Management, L.L.C.
Prescott Group Aggressive Small Cap, L.P.
Prescott Group Aggressive Small Cap II, L.P.
Phil Frohlich
1924 South Utica, Suite #1120
Tulsa, OK 74104


8,352,108
(6)

5.3
%


---

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Table of Contents



Security Ownership of Directors and Named Executive Officers

We encourage our directors, officers and employees to own our Common Stock, as we believe that owning our Common Stock aligns their
interest with the interests of our stockholders. The following table summarizes the number of shares of MRV's Common Stock beneficially owned by its named executive officers and directors, and by the
directors and executive officers of MRV as a group as of September 28, 2009.

Name of Beneficial Owner

Amount and
Nature of
Beneficial
Ownership (1)

Percentage
Ownership (2)Named Executive OfficersNoam Lotan


1,876,716
(3)

1.2
%Shlomo Margalit


3,260,660
(4)

2.1
%Guy Avidan


248,125


*Near Margalit


472,000


*Chris King


12,500


*


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Table of Contents

Name of Beneficial Owner

Amount and
Nature of
Beneficial
Ownership (1)

Percentage
Ownership (2)Non-management DirectorsBaruch Fischer


248,000


*Harold Furchtgott-Roth


85,000


*Guenter Jaensch


165,750


*Igal Shidlovsky


215,900


*Daniel Tsui


258,215


*Michael Keane





*Directors and executive officers as a group (12 persons)


6,842,866


4.3
%






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

Mr. Near Margalit, Co-President of MRV and CEO of Source Photonics, is the son of Mr. Shlomo Margalit,
Chairman and Chief Technical Officer of MRV, and Mr. Furchtgott-Roth, a director, is the cousin of the wife of Mr. Lotan, MRV's CEO. None of the other executive officers or
directors are in any way related by blood, marriage or adoption.

There
are no transactions or series of transactions in 2007 or 2008 in excess of $120,000 regarding related persons as defined by the rules and regulations promulgated under the Exchange
Act. If there were any such related party transaction, it is the responsibility of the Audit Committee to review and approve such transaction pursuant to the Audit Committee Charter.

Item 14.    Principal Accounting Fees and Services.

The Audit Committee's policy and procedure is to pre-approve all audit and permissible non-audit related
services provided by the independent registered public accounting firm. These services may

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Table of Contents

include
audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to
the particular service or category of services and generally subject to a specific budget. The policy authorizes the Audit Committee to delegate to one or more of its members pre-approval
authority with respect to permitted services.

The
independent registered public accounting firm and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent
registered public accounting firm in accordance with this pre-approval, and the fees for the services performed through the date of the auditor's periodic report. The Audit Committee may
also pre-approve particular services on a case-by-case basis. The Audit Committee approved 100% of the professional services for the Audit, Audit-Related, Tax and
Other Fees indicated below for the years ended December 31, 2008 and 2007.

Ernst &
Young LLP has been the principal independent registered public accounting firm for the audit of MRV's annual financial statements and review of financial statements
included in our Quarterly
Reports on Form 10-Q. The following is a summary of the fees Ernst & Young billed to MRV for services rendered for the years ended December 31, 2008 and 2007:

Fee Category

2008

2007Audit Fees

$
2,791,117

$
2,080,805Audit-Related Fees


386,351


708,869Tax Fees


229,683


26,024All Other Fees





Total

$
3,407,151

$
2,815,698


Audit Fees.Consists of fees billed for professional services rendered for the audits of MRV's consolidated financial statements and
internal control
over financial reporting and review of the interim consolidated financial statements included in quarterly reports and services normally provided, primarily by Ernst & Young, in connection with
statutory and regulatory filings or engagements. Fees for fiscal year 2008 also included fees of $823,000 for services rendered in connection with the restatement of MRV's financial statements to
correct past accounting for stock options and other issues.

Audit-Related Fees.Consists of fees billed for assurance and related services that are reasonably related to the performance of the
audit or review
of MRV's consolidated financial statements and are not reported under "Audit Fees." These services include consultations in connection with acquisitions, attest services that are not required by
statute or regulation, internal control reviews and consultation concerning financial accounting and reporting matters.

Tax Fees.Consists of fees billed for professional services for tax compliance, tax advice and tax planning.

All Other Fees.Consists of fees for products and services other than those reported in the Audit Fees, Audit-Related Fees, or Tax Fees
categories
above.

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Table of Contents

PART IV

Item 15.    Exhibits and Financial Statement Schedules.

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

89Statements of Operations for the years ended December 31, 2008, 2007 and
2006

90Balance Sheets as of December 31, 2008 and 2007

91Statements of Stockholders' Equity for the years ended December 31, 2008,
2007 and 2006

92Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006

93Notes to Financial Statements

94Report of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting

166




Description

Balance at
beginning of
period

Charged to
cost and
expense

Other

Deductions

Balance at
end of
periodAllowance for Doubtful AccountsYear Ended:December 31, 2006

$
6,179

$
1,287

$


$
(897
)
$
6,569December 31, 2007


6,569


327


1,179


(1,424
)

6,651December 31, 2008


6,651


3,675





(1,300
)

9,026Inventory ReserveYear Ended:December 31, 2006

$
29,292

$
4,653

$


$
(3,458
)
$
30,487December 31, 2007


30,487


2,932


2,957


(7,118
)

29,258December 31, 2008


29,258


7,814





(3,865
)

33,207Warranty ReserveYear Ended:December 31, 2006

$
2,328

$
1,442

$


$
(1,479
)
$
2,291December 31, 2007


2,291


779


81


(604
)

2,547December 31, 2008


2,547


584





(526
)

2,605


---

Schedules
not listed above have been omitted because the information required to be set forth therein is shown in the financial statements or notes thereto.

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Exhibit
No.

Description2.1

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)2.2

Bylaws of MRV Communications, Inc., as amended through January 29, 2009 (incorporated by reference from Exhibit 3.1(ii) of Form 8-K filed on February 3, 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

2007 Omnibus Incentive Plan (incorporated by reference from Appendix A of Schedule 14A filed on April 27, 2007)10.8

Form of Notice of Grant and Agreement for Non-Qualified Stock Option Awards for employees under the 2007 Omnibus Incentive Plan (filed herewith)10.9

Form of Notice of Grant and Agreement for Non-Qualified Stock Option Awards for directors under the 2007 Omnibus Incentive Plan (filed herewith)10.10

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)10.11

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)10.12

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)


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Exhibit
No.

Description10.13

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)10.14

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)10.15

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)10.16

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)10.17

2001 MRV Stock Option Plan for Employees of Appointech, Inc. (incorporated by reference to Exhibit 4.1 from Form S-8 (file no. 333-71180) filed on October 9, 2001)10.18

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)10.19

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)10.20

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)10.21

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)10.22

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)10.23

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)10.24

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)10.25

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)10.26

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)10.27

1997 Incentive and Nonstatutory Stock Option Plan, as amended (filed herewith)10.28

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)10.29

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 (filed herewith)


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Exhibit
No.

Description10.30

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 (filed herewith)10.31

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
(filed herewith)10.32

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 (filed herewith)10.33

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 (filed herewith)10.34

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 (filed herewith)10.35

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 (filed herewith)10.36

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 (filed herewith)10.37

Tenancy Agreement, dated January 1, 2009, between Midelan Corporation and Optronics International Corporation for various rooms at No. 81, Shueili Road, Hsinchu City, Taiwan (filed herewith)10.38

Agreement and Plan of Merger dated January 26, 2007 by and among Fiberxon, Inc., MRV, and MRV's wholly-owned subsidiaries Lighthouse Transition Corporation and Lighthouse Acquisition Corporation, under which
MRV agreed to acquire Fiberxon (incorporated by reference from Exhibit 10.1 of Form 10-Q for the quarter ended March 31, 2007)10.39

Amendment No. 1 to the Agreement and Plan of Merger dated June 26, 2007 by and among Fiberxon, Inc., MRV, and MRV's wholly-owned subsidiaries, Lighthouse Transition Corporation and Lighthouse
Acquisition Corporation (incorporated by reference from Exhibit 99.1 of Form 8-K filed on July 2, 2007)10.40

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)


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Exhibit
No.

Description10.41

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 (filed
herewith)10.42

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)10.43

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)10.44

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)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 the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MRV Communications, Inc.By:Date: October 7, 2009

/s/ NOAM LOTAN Noam Lotan Chief Executive Officer


Pursuant
to the requirements of the Securities Exchange Act of 1934, 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: October 7, 2009

/s/ NOAM LOTAN Noam Lotan Chief Executive OfficerPrincipal Financial and Accounting Officer:Date: October 7, 2009

/s/ CHRIS KING Chris King Chief Financial Officer


A
majority of the Board of Directors: Shlomo Margalit, Noam Lotan, Baruch Fischer, Harold Furchtgott-Roth, Guenter Jaensch, Michael Keane, Igal Shidlovsky and Daniel Tsui

By:Date: October 7, 2009

/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 attorney-in-facts 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, 2008, 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
attorney-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/ SHLOMO MARGALIT Shlomo Margalit

Chairman of the Board, Chief
Technology Officer and Secretary

October 7, 2009/s/ NOAM LOTAN Noam Lotan

Chief Executive Officer

October 7, 2009/s/ BARUCH FISCHER Baruch Fischer

Director

October 6, 2009/s/ HAROLD FURCHTGOTT-ROTH Harold Furchtgott-Roth

Director

October 7, 2009/s/ GUENTER JAENSCH Guenter Jaensch

Director

October 7, 2009/s/ MICHAEL KEANE Michael Keane

Director

October 4, 2009/s/ IGAL SHIDLOVSKY Igal Shidlovsky

Director

October 7, 2009/s/ DANIEL TSUI Daniel Tsui

Director

October 5, 2009


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