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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
  þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2007
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
 For the transition period from  to
 Commission file number 001-11174
 
 
 MRV COMMUNICATIONS, INC.
  Delaware
    
    06-1340090(State or other jurisdiction
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 20415 Nordhoff Street, Chatsworth, CA 91311
 (818) 773-0900
  Title of each class
    
    Name of each exchange on which
registeredCommon stock, $0.0017 par value
    
    NASDAQ Global Market
  o þ
 o þ
 þ o
 þ
  Large accelerated filer
o    
  Accelerated filer þ
       Non-accelerated filer  
o(Do not check if a smaller reporting company)
  
  Smaller reporting company o
 o þ




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##### 



MRV Communications, Inc.
 Annual Report on Form 10-K
 For the fiscal year ended December 31, 2007
 Table of Contents
 Page 
NumberPART I
    
    
    2Item 1. Business.
    
    
    2Item 1A. Risk Factors.
    
    
    13Item 1B. Unresolved Staff Comments.
    
    
    38Item 2. Properties.
    
    
    39Item 3. Legal Proceedings.
    
    
    39Item 4. Submission of Matters to a Vote of
Security Holders.
    
    
    39PART II
    
    
    40Item 5. Market for Registrants Common Equity,
related Stockholder Matters and Issuer Purchases
of Equity Securities.
    
    
    40Item 6. Selected Financial Data.
    
    
    42Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operation.
    
    
    43Item 7A. Quantitative and Qualitative
Disclosures About Market Risk.
    
    
    62Item 8. Financial Statements and Supplementary
Data.
    
    
    64Item 9. Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure.
    
    
    99Item 9A. Controls and Procedures.
    
    
    99Item 9B. Other Information.
    
    
    103PART III
    
    
    104Item 10. Directors, Executive Officers and
Corporate Governance.
    
    
    104Item 11. Executive Compensation.
    
    
    104Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related
Stockholder Matters.
    
    
    104Item 13. Certain relationships and Related
Transactions, and Director Independence.
    
    
    104Item 14. Principal Accounting Fees and Services.
    
    
    104PART IV
    
    
    105Item 15. Exhibits, Financial Statements
Schedules.SIGNATURES
    
    
    110EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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FORWARD LOOKING STATEMENTS AND FACTORS THAT MIGHT AFFECT FUTURE RESULTS
   INTRODUCTION
  
    
    we, us, our company, our, the Company and MRV refer to MRV Communications,
Inc. and its consolidated subsidiaries;
    
    shares or common stock refers to our Common Stock, $0.0017 par value;
    
    China or PRC refers to the Peoples Republic of China, excluding Taiwan, Hong Kong
and Macao;
    
    Taiwan refers to the Republic of China;
    
    Fiberxon refers to Fiberxon, Inc., a Delaware corporation, and its consolidated
subsidiaries, which we acquired on July 1, 2007; and
    
    all references to Renminbi, RMB or Yuan are to the legal currency of China.




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PART I
 
         2




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3




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
    
    Innovative technology which provides industry-leading performance;
    
    Flexibility to design products quickly to meet the needs of a particular
application;
    
    Strong customer support throughout the product lifecycle; and
    
    Cost-effective products which allow the overall system to be economical to service
providers and end users.
   Telecommunications Service Providers.
 Cable Operators/Multiple System Operators.
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Enterprise.
 Government
   
    
    Optical transport products
    
    Metro Ethernet products
    
    Out-of-band networking products
    
    Fiber optic components and subsystems
    
    Networking integration and services
    
    Other networking products
 Optical Transport Products
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
    
    The LambdaDriver product family consists of multifuntional, 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
comprising 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 Lambda Driver 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
 
    
    The Optiswitch 900 is a compact piece of equipment that carriers purchase and place
at the demarcation point of their Ethernet network (i.e., the point at which their
network connects to their customers network), which enables traffic management and
end-to-end control to meet service level standards.
    
    The OptiSwitch 9000 series is a carrier-class Ethernet IP optical switch for Metro
Ethernet aggregation services that supports MultiProtocol Label Switching (MPLS). MPLS
is a routing method whereby a small label containing routing instructions is attached
in the packet header of the first packet of a datastream, and the switches in the core
read only the label, allowing for much faster switching. Carriers purchase this
product to install in their central offices, street cabinets, or in Multi-Tenant Units.
The OptiSwitch 9000 offers a wide range of aggregation models with optical modularity,
including built-in WDM capability. The OptiSwitch 9000 enables a full suite of
carrier-grade Ethernet services with high-availability, managed quality of services,
security and end-to-end Operation, Administration, and Maintenance (OAM) support. The
products are fully interoperable with other leading network equipment vendors and are
certified to key industry standards such as the Metro Ethernet Forum (MEF), the IETF
and the International Telecommunications Union, or ITU.
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Out-of-Band Networking Products
 
    
    Console servers. The LX series of secure console servers provides secure serial
port access from 1 to 48 ports with rich graphical interface, automated event
notification and industry standard command line interface. The LX series is certified
to the highest US and Canadian government security and encryption standard  the
Federal Information Processing Standard (FIPS) 140 -2.
    
    Power management. The 5250 / 4800 power control series provides remote power
management, usage monitoring, and automated trigger action.
    
    Sensor networking. The 7204 / 7304 sensor managers extend the LX to allow it to
support up to 128 sensor points that connect through both analog input or dry contact
input. Our out-of-band networking products include NEBS (Network Equipment Building
Standards)-compliant and certified console/terminal servers, power control devices,
programmable digital patch panels, sensor networking, FIPS 140-2 security, features to
address heightened requirements for physical security and safety and graphical user
interface (GUI) to simplify management of the out-of-band network equipment and
connected devices. FIPS 140-2 is a standard that describes U.S. Federal government
requirements that IT products should meet for Sensitive, but Unclassified (SBU) use.
 Fiber Optic Components and Subsystems
   
    
    BPON. Broadband PON, or BPON, was the first PON technology to be deployed in volume
by service providers. BPON is based on the ITU-T G.983 standard. We were the first
vendor to develop and introduce BPON ONT triplexers, and we believe that we have
achieved over 90% market share in North American BPON ONT deployments.
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
    
    GPON. Gigabit PON, or GPON, is the second-generation standard for PON, which is
based on the ITU-T G.984 standard. Relative to BPON, GPON provides four times greater
downstream bandwidth as well as enhanced features. Service providers are expected to
migrate the technology they are deploying from BPON to GPON over the next couple of
years. We were the first to market with GPON triplexers and are using our leadership
and experienced manufacturing platform in BPON technology to build a strong position in
GPON. Besides being first to market with the GPON triplexer product, we are the first
vendor to introduce a fully standards compliant GPON OLT transceiver.
    
    EPON. Ethernet PON, or EPON, is an alternative standard for deploying PON networks.
It is based on standards adopted by the IEEE 802.3 working group that develops
standards for Ethernet-based networks. Several service providers, particularly in
Asia, have decided to use EPON rather than BPON or GPON as the basis for their
networks. We believe that technology and products developed by Fiberxon have secured
us a position among the market leaders in the EPON market.
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Network Integration and Services
 Other Networking Products
 
    
    ground test systems as well as protocol analyzers and network performance-testing
equipment;
    
    networking data test equipment and a multi-service computing platform for wireless
cellular telephony; and
    
    a network management system with comprehensive management and control for our
products as well as third-party products we sell through our network integration and
distribution offices.
       9




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
    
    Product performance, features, quality and price;
    
    A comprehensive range of complementary products and services;
    
    Customer service and technical support;
    
    Lead and delivery times;
    
    Timeliness of new products introductions;
    
    Global presence, including distribution network;
    
    Conformance to standards; and
    
    Brand name recognition.
    For the year ended December 31:
    
    2007
    
    2006
    
    2005Network equipment group (1)
    
    $
    19,670
    
    
    $
    18,257
    
    
    $
    17,402Network integration group (2)
    
    
    
    
    
    
    
    
    
    
    Optical components group (3)
    
    
    11,825
    
    
    
    8,233
    
    
    
    7,040All others (2)
    
    
    1,169
    
    
    
    1,221
    
    
    
    1,257Corporate unallocated (4)
    
    
    292
    
    
    
    476
    
    
    
    352Total
    
    $
    32,956
    
    
    $
    28,187
    
    
    $
    26,051
 10




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(1)
    
    Includes share-based compensation expense of $429,000 in 2007 and $441,000 in 2006.
We adopted SFAS 123(R) on January 1, 2006, which requires the recognition of share-based
compensation expense. Accordingly, no share-based compensation expense was recognized in
2005.(2)
    
    No share-based compensation expense was recognized in 2007, 2006 or 2005.(3)
    
    Includes share-based compensation expense of $439,000 in 2007 and $307,000 in 2006.
Prior to SFAS 123(R) adoption, no share-based compensation expense was recognized in 2005.(4)
    
    Includes share-based compensation expense of $17,000 in 2007 and $27,000 in 2006. Prior
to SFAS 123(R) adoption, no share-based compensation expense was recognized in 2005.     11




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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 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.
  
    
    the cancellation or postponement of orders;
    
    the timing and amount of significant orders;
    
    our success in developing, introducing and shipping product enhancements and new
products;
    
    the mix of products we sell;
    
    software, hardware or other errors in the products we sell requiring replacements or
increased warranty reserves;
    
    our annual reviews of goodwill and other intangibles that lead to impairment
charges;
    
    new product introductions by our competitors;
    
    the timing of delivery and availability of components from suppliers;
    
    readiness of customer sites for installation;
    
    political stability in the areas of the world in which we operate in;
    
    changes in material costs;
    
    currency fluctuations;
    
    changes in accounting rules; and
    
    general economic conditions as well as changes in such conditions specific to our
market segments.
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Our gross margins may fluctuate from period to period and our gross margins for optical components
and/or networking equipment may be adversely affected by a number of factors.
  Years ended December 31:
    
    2007
    
    2006
    
    2005Network equipment group
    
    
    50
    %
    
    
    52
    %
    
    
    53
    %Network integration group
    
    
    23
    %
    
    
    25
    %
    
    
    25
    %Optical components group
    
    
    19
    %
    
    
    19
    %
    
    
    11
    %Total
    
    
    29
    %
    
    
    31
    %
    
    
    32
    %
  
    
    increased price competition, including competition from low-cost producers in Asia;
    
    price reductions that we make, such as marketing decisions that we have made in the
past to reduce the price for our optical components to certain customers in an effort
to secure long-term leadership in the market for FTTP components;
    
    decreases in average selling prices of our products which, in addition to
competitive factors and pressures from, or accommodations made to, significant
customers, result from factors such as overcapacity and market conditions, the
introduction of new and more technologically advanced products in the case of optical
components and excess inventories, increased sales discounts and new product
introductions;
    
    the mix in any period or year of higher and lower margin products and services;
    
    sales volume during a particular period or year;
    
    charges for excess or obsolete inventory;
    
    changes in the prices or the availability of components needed to manufacture our
products;
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
    
    the relative success of our efforts to reduce product manufacturing costs, such as
the transition of our optical component manufacturing to our Taiwan facility, to
low-cost third party manufacturers in China, or in the future, to our planned
consolidated optical components manufacturing facility in Chengdu, China;
    
    our introduction of new products, with initial sales at relatively small volumes
with resulting higher production costs; and
    
    increased warranty or repair costs.
  Competition 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.
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Our markets are subject to rapid technological change, and to compete effectively, we must
continually introduce new products that achieve market acceptance.
  
    
    changing product specifications and customer requirements;
    
    difficulties in hiring and retaining necessary technical personnel;
    
    difficulties in reallocating engineering resources and overcoming resource
limitations;
    
    difficulties with contract manufacturers;
    
    changing market or competitive product requirements; and
    
    unanticipated engineering complexities.
  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.
  16




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The long and uncertain sales cycles for our products may cause revenues and operating results to
vary from quarter to quarter, which could cause volatility in our stock price.
  Our customers may adopt alternate technologies for which we do not produce products or for which
our products are not adaptable.
  17




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If our customers do not qualify our products or if their customers do not qualify their products,
our results of operations may suffer.
   Our customers may elect to in-source production of certain components they traditionally have
purchased from us, resulting in decreases in our revenue.
  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.
  18




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We may suffer losses as a result of entering into fixed price contracts.
  One customer accounted for a substantial portion of our sales during the years ended December 31,
2007 and 2006, increasing both our dependence on a single revenue source and the risk that our
operations will suffer materially if the customer stopped ordering from us or substantially reduced
its business with us. The evident trend of consolidations in our markets could make us dependent
on a smaller number of customers or force us to compete with even larger competitors.
    Global economic conditions affecting our markets and those of our customers have harmed our
operations and although conditions in our markets have improved, we have not achieved profitably on
a consolidated basis for a full year since 1997 and may never again achieve such profitability.
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We face risks in reselling the products of other companies.
  There is a limited number of potential source suppliers for certain components.
   Our inability to achieve adequate production yields for certain components could result in a loss
of sales and customers or higher than expected costs
  20




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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.
  If we fail to forecast component and material requirements accurately for our manufacturing
facilities, we could incur additional costs or experience manufacturing delays.
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If we are unable to expand our manufacturing capacity in a timely manner, we may have insufficient
capacity to meet demand.
  We face increased risks associated with our consolidation of our PRC-based manufacturing operations
in a single location in Chengdu, China.
  Delays, disruptions or quality control problems in manufacturing could result in delays in product
shipments to customers and could adversely affect our business.
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Our business and future operating results may be adversely affected by events outside of our
control. Our insurance coverage for natural disasters is limited.
   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.
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Our business and our customers are dependent on shipping companies for delivery of our products and
interruptions to shipping or increased shipping costs could materially and adversely affect our
business and operating results.
  We may be faced with product liability claims.
  If we become subject to unfair hiring claims, we could incur substantial defense costs
  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.
  Years Ended December 31,2007
    
    2006
    
    2005Percentage of revenues from international sales
    
    
    68
    %
    
    
    67
    %
    
    
    74
    %
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
    
    greater difficulty in accounts receivable collection and longer collection periods;
    
    the impact of recessions in economies outside the United States;
    
    changes in regulatory requirements;
    
    seasonal reductions in business activities in some parts of the world, such as
during the summer months in Europe or in the winter months in Asia when the Chinese
Lunar New Year is celebrated;
    
    difficulties in managing operations across disparate geographic areas;
    
    difficulties associated with enforcing agreements through foreign legal systems;
    
    the payment of operating expenses in local currencies, which exposes us to risks of
currency exchange rate fluctuations;
    
    higher credit risks requiring cash in advance or letters of credit;
    
    potentially adverse tax consequences, increasing taxes and heightened efforts by
officials of foreign countries to increase revenues from tax collection;
    
    increasing labor costs or other cost increases;
    
    unavailability or delays in delivery of equipment, raw materials or key components;
    
    trade restrictions, tariff increases and increasing import-export duties;
    
    shipping delays;
    
    limited protection of intellectual property rights;
    
    tightening immigration controls that may adversely affect the residency status of
our engineers, other key technical and other employees in our U.S. facilities who are
not permanent U.S. residents or our ability to hire new non-U.S. employees in our U.S.
facilities;
    
    increasing U.S. and foreign environmental regulation or unforeseen environmental or
engineering problems; and
    
    personnel recruitment delays or the inability to obtain skilled technical, financial
and management personnel needed in countries, such as China where we have facilities.
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We are subject to a number of additional business risks as a consequence of our acquisition of
Fiberxon.
  
    
    integration and retention of Fiberxons key management, sales, research and
development and other personnel;
    
    recruiting trained and experienced successor personnel in China, who are in much
demand and limited supply, to fill vacancies in key positions;
    
    incorporation of Fiberxons products and technology that we acquired as part of the
acquisition with our products and technology;
    
    coordinating Fiberxons manufacturing operations with ours;
    
    integrating and supporting Fiberxons pre-existing supplier, distribution and
customer relationships and coordinating sales and marketing efforts to communicate the
capabilities of our combined company effectively;
    
    consolidating duplicate facilities and functions, combining back office accounting,
order processing and support functions and rationalizing information technology and
operational infrastructures;
    
    minimizing the diversion of attention by our management and that of Fiberxon from
ongoing core business concerns;
    
    successfully returning managers to regular business responsibilities from their
integration activities;
    
    operating a much larger company with operations in China, where our senior
management has no operational experience;
    
    managing geographically dispersed operations and personnel with diverse cultural
backgrounds and organizational structures and overcoming the potential incompatibility
of business cultures and/or the loss of key Fiberxon personnel;
    
    efficiently reducing the combined companys sales and marketing and general and
administrative expenses; including expected increases in professional advisor fees
related to the new profile of our combined companies, without associated disruption of
our combined businesses;
 26




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
    
    overcoming expected difficulties in financial forecasting due to our limited
familiarity with Fiberxons operations, customers and markets or their impact on the
overall results of operations of the combined company; and
    
    maintaining the proper level of internal control over financial reporting in a
foreign business environment in which we became aware of allegations of historical
financial and accounting irregularities.
  We may not successfully address problems encountered in connection with future acquisitions on
which we may embark.
  
    
    problems assimilating the purchased technologies, products or business operations,
including the timely integration of financial reporting systems;
    
    problems may arise from acquiring companies in countries where English is not widely
spoken, and the culture, political, economic, financial or monetary systems, principles
or controls are different from those countries where we have maintained offices and
have had facilities for an extended period, and in which we have substantial experience
conducting operations;
    
    problems maintaining uniform standards, procedures, controls and policies;
    
    unanticipated costs associated with the acquisition;
    
    start-up costs associated with any new business or product line we may acquire;
    
    possible charges to operations for purchased technology and restructuring;
    
    impairment charges related to goodwill and amortization expenses of other intangible
assets and deferred stock expense;
    
    incurrence of debt and contingent liabilities;
    
    adverse effects on our existing businesses as a result of providing funds or
financing to support the operations of the acquired business;
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
    
    adverse effects on existing business relationships with suppliers and customers or
on relations with our existing employees;
    
    risks associated with entering new markets, such as those in China, in which we have
limited or no prior experience;
    
    potential loss of key employees of acquired businesses and difficulties recruiting
adequate replacements;
    
    the need to hire additional employees to operate the acquired business effectively,
including employees with specialized knowledge or language skills;
    
    potential litigation risks associated with acquisitions, whether completed or not;
    
    dilutive issuances of our equity securities; and
    
    increased legal and accounting costs as a result of the Sarbanes-Oxley Act.
  The challenges of the integration process may minimize or negate the anticipated benefits from our
acquisition of Fiberxon.
  
    
    incorporating acquired technology and products into a cohesive line of products;
    
    introducing Fiberxons products into existing distribution channels while
maintaining any vital historical Fiberxon distribution channels;
    
    transitioning Fiberxons operations and financial reporting function to our
existing operations and financial reporting systems; and
    
    coordinating the efforts of the resulting larger manufacturing and sales
organizations.
  Our operating results have been impacted by foreign exchange rates and our activities seeking to
hedge against currency exchange and interest rate fluctuations.
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We face risks inherent in doing business in China.
  
    
    potential loss of key employees of acquired businesses and difficulties
recruiting adequate replacements;
    
    the need to hire additional employees to operate the acquired business
effectively, including employees with specialized knowledge or language skills;
    
    potential litigation risks associated with acquisitions, whether completed or
not;
    
    dilutive issuances of our equity securities; and
    
    increased legal and accounting costs as a result of the Sarbanes-Oxley Act.
    
    difficulties in obtaining domestic and foreign export, import and other
governmental approvals, permits and licenses;
    
    compliance with PRC laws, including employment laws; and
    
    difficulties in staffing and managing foreign operations, including cultural
differences in the conduct of business, labor and other workforce requirements and
inadequate local infrastructure.
  Our manufacturing capacity may be interrupted, limited or delayed if we cannot maintain sufficient
sources of electricity in China.
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Prior to our acquisition of Fiberxon, allegations of financial and accounting irregularities were
revealed. If we failed to identify all of the irregularities, we may have to restate Fiberxons
financial statements, as well as MRV financial statements, which could negatively impact the price
of our common stock.
    If we fail to implement and maintain effective internal controls over financial reporting, the
price of our common stock may be adversely affected. Fiberxons internal controls are not included
in managements assessment of internal controls over financial reporting as of December 31, 2007.
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
    
    We have further engaged one of the firms responsible for the reconstruction of
Fiberxons financial statements to assist us in prioritizing and implementing key
internal controls at Fiberxon that are comparable to those underlying our financial
reporting process.
    
    We have implemented a new financial reporting structure under which all financial
and accounting matters are reported directly to our Chief Financial Officer.
    
    We have hired a new vice president of finance based in China with U.S. public
company experience and five additional financial and accounting professionals to
support her.
   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.
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We are subject to increased taxes in China because of the discontinuation of certain preferential
tax treatments that were available to foreign enterprises prior to January 1, 2008.
    Tax Year
    
    
    
    Rate under EIT Law2008
    
    
    
    18%2009
    
    
    
    20%2010
    
    
    
    22%2011
    
    
    
    24%2012
    
    
    
    25%
   Payment of dividends by our subsidiaries in the PRC to us is subject to restrictions and taxes
under PRC law.
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Recent changes in the PRCs labor law restricts our ability to reduce our workforce in China in the
event of an economic downturn and will increase our manufacturing costs and those of the contract
manufacturers we use in China to manufacture our products.
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Labor shortages in Southern China could adversely affect our gross margins or decrease revenues.
  Political or trade controversies between China and the United States could harm our operating
results or depress our stock price.
  If our cash flow significantly deteriorates in the future, our liquidity and ability to operate our
business could be adversely affected. We may not be able to attain capital when desired on
favorable terms, if at all.
   
    
    satisfy our deferred payment obligation, if paid in cash, to the former
stockholders of Fiberxon, which amounts to $31.5 million (excluding applicable
offsets) and is due no later than March 28, 2009;
    
    acquire complementary businesses or technologies;
    
    enhance our operating infrastructure;
    
    hire additional technical, sales and other personnel;
    
    make investments in capital equipment, facilities and technology;
    
    expand our manufacturing facilities;
 34




---



##### Table of Contents




    
    fund our working capital requirements; or
    
    otherwise respond to competitive pressures.
   Our proprietary rights may be inadequately protected and there is a risk of poor enforcement of
intellectual property rights in China.
  If we fail to protect our intellectual property, we may not be able to compete.
  We could in the future become subject to litigation regarding intellectual property rights,
which could be costly and subject us to significant liability.
  35




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##### Table of Contents



In the future, we may initiate claims or litigation against third parties for infringement of our
proprietary rights to protect these rights or to determine the scope and validity of our
proprietary rights or the proprietary rights of competitors. These claims could result in costly
litigation and the diversion of our technical and management personnel.
  We are dependent on certain members of our senior management.
  Our business requires us to attract and retain qualified personnel.
  Our ability to utilize our NOLs and certain other tax attributes may be limited.
  The price of our shares may continue to be highly volatile.
  
    
    actual or anticipated fluctuations in our operating results;
 36




---



##### Table of Contents




    
    announcements of technological innovations or new product introductions by us or
our competitors;
    
    changes of estimates of our future operating results by securities analysts;
    
    developments with respect to patents, copyrights or proprietary rights;
    
    to the extent not already sold, sales, or the potential for sales, of
substantial numbers of our shares by 1) stockholders who acquired our shares in a
private placement we completed in March 2006, by 2) stockholders receiving our
shares in our acquisition of Fiberxon on July 1, 2007, or by 3) Deutsche Bank,
which received our shares in August 2007 in exchange for our outstanding 5%
Convertible Notes issued in June 2003. These shares are held by persons or
entities who we believe are not our affiliates and are therefore eligible for sale
under Rule 144 or Rule 145, as amended effective February 15, 2007, without
restriction; or
    
    general market conditions and other factors.
  Legislative actions, higher insurance costs and new accounting pronouncements are likely to impact
our future financial position and results of operations.
  We are at risk of securities class action or other litigation that could result in substantial
costs and divert managements attention and resources.
  37




---



##### Table of Contents



We were unable to timely file an amendment to our Form 8-K reporting the completion of our
acquisition of Fiberxon containing Fiberxons audited consolidated financial statements and the pro
forma financial information required by item 9.01 of Form 8-K by September 14, 2007. As such, we
were late in complying with our reporting obligations under the Exchange Act, and we are ineligible
until October 1, 2008 to use the SECs short-form registration statement to raise capital.
   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.
  
   38




---



##### Table of Contents




    
    The Network Equipment group conducts product development, manufacturing, sales,
support and administrative operations through facilities located in California,
Massachusetts, China, France, Germany, Israel, Russia, Switzerland, and the United
Kingdom.
    
    The Network Integration group conducts sales, support and administrative operations
through facilities located in Denmark, Finland, France, Italy, Norway, Sweden, and
Switzerland.
    
    The Optical Components group conducts product development, manufacturing, sales,
support and administrative operations through facilities located in California, PRC,
and Taiwan.
 
    
   39




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##### Table of Contents



PART II
 
    High
    
    LowYear Ended December 31, 2007First Quarter
    
    $
    4.45
    
    
    $
    3.50Second Quarter
    
    $
    4.01
    
    
    $
    3.03Third Quarter
    
    $
    3.10
    
    
    $
    2.21Fourth Quarter
    
    $
    3.34
    
    
    $
    2.04Year Ended December 31, 2006First Quarter
    
    $
    4.64
    
    
    $
    2.05Second Quarter
    
    $
    4.10
    
    
    $
    2.66Third Quarter
    
    $
    3.07
    
    
    $
    2.25Fourth Quarter
    
    $
    3.70
    
    
    $
    2.67
    Equity Compensation Plan Information
  Number of Securities RemainingNumber of Securities to
    
    
    
    
    
    Available for Future Issuance Underbe Issued Upon
    
    Weighted Average Exercise
    
    Equity Compensation PlansExercise of Outstanding
    
    Price of Outstanding
    
    (excluding securities reflected inPlan Category
    
    Options and Warrants
    
    Options and Warrants
    
    column (a))(a)
    
    (b)
    
    (c)Stock option plans
approved by
security holders
(1)
    
    
    6,825,745
    
    
    $
    2.26
    
    
    
    9,516,300Stock option and
warrant plans not
approved by
security holders
(2)
    
    
    7,895,932
    
    
    $
    3.17
    
    
    
    1,911,573Total
    
    
    14,721,677
    
    
    $
    2.74
    
    
    
    11,427,873
 40




---



##### Table of Contents



(1)
    
    Includes shares underlying options granted or reserved under the 2007 Omnibus
Incentive Plan (2007 Plan) And shares underlying options granted under MRVs 1997
Incentive and Nonstatutory Stock Option Plan. When MRV stockholders approved adoption
of the 2007 Plan on May 29, 2007, MRVs then existing Non-Director and Non-Executive
Officer Consolidated Long-Term Stock Incentive Plan (the Consolidated Plan) and 2003
Consolidated Plan were frozen and no further grants or awards or warrants have been or
will be made under such plans. MRVs 1997 Incentive and Nonstatutory Stock Option Plan
terminated by its terms in November 2007 on the tenth anniversary of its adoption, and
accordingly, no options may be granted thereunder.(2)
    
    Includes shares underlying options or awards granted under the Consolidated
Plan and shares underlying options or warrants granted under the following plans prior
to the adoption in January 2003 of the Consolidated Plan: 
    
    1998 Nonstatutory Stock Option Plan;
    
    2001 MRV Communications, Inc. Stock Option Plan for Employees of Appointech,
Inc.;
    
    2000 MRV Communications, Inc. Stock Option Plan for Employees of AstroTerra
Corporation;
    
    MRV Communications, Inc. 2002 International Stock Option Plan;
    
    Warrants provided to Nathan Shilo as trustee for employees and designated
consultants of NBase Communications, Ltd. first exercisable on July 13, 1997;
    
    Italian Employees Warrant Program;
    
    Stock options issued and outstanding on the effective date of the merger of
Luminent under the Luminent Amended and Restated 2000 Stock Option Plan that were
assumed by MRV and are exercisable for 0.43 shares of Common Stock for each share
of Luminent held under the relevant option;
    
    MRV Communications, Inc. 2002 Nonstatutory Stock Option Plan for Employees of
Luminent, Inc.; and
    
    2000 MRV Communications, Inc. Stock Option Plan for Employees of Optronics
International Corp.
  41




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##### Table of Contents



Years ended December 31:
    
    2007(1)
    
    2006
    
    2005
    
    2004
    
    2003Statements of Operation Data:Revenue
    
    $
    448,237
    
    
    $
    356,489
    
    
    $
    283,698
    
    
    $
    271,658
    
    
    $
    238,983Cost of goods sold
    
    
    320,264
    
    
    
    244,207
    
    
    
    193,979
    
    
    
    179,852
    
    
    
    164,893Gross profit
    
    
    127,973
    
    
    
    112,282
    
    
    
    89,719
    
    
    
    91,806
    
    
    
    74,090Operating costs and expenses:Product development and engineering
    
    
    32,956
    
    
    
    28,187
    
    
    
    26,051
    
    
    
    24,949
    
    
    
    30,972Selling, general and administrative
    
    
    101,998
    
    
    
    87,539
    
    
    
    72,402
    
    
    
    74,045
    
    
    
    62,901Impairment of goodwill and other
intangibles
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    356Amortization of other intangibles
    
    
    1,906
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating costs and expenses
    
    
    136,860
    
    
    
    115,778
    
    
    
    98,453
    
    
    
    98,994
    
    
    
    94,229Operating loss
    
    
    (8,887
    )
    
    
    (3,496
    )
    
    
    (8,734
    )
    
    
    (7,188
    )
    
    
    (20,139
    )Other income (expense), net
    
    
    (5,888
    )
    
    
    1,846
    
    
    
    (1,791
    )
    
    
    (456
    )
    
    
    (6,438
    )Loss before provision for income taxes
and extraordinary gain
    
    
    (14,775
    )
    
    
    (1,650
    )
    
    
    (10,525
    )
    
    
    (7,644
    )
    
    
    (26,577
    )Provision for income taxes
    
    
    3,853
    
    
    
    3,865
    
    
    
    5,774
    
    
    
    3,036
    
    
    
    2,361Loss before extraordinary gain
    
    
    (18,628
    )
    
    
    (5,515
    )
    
    
    (16,299
    )
    
    
    (10,680
    )
    
    
    (28,938
    )Extraordinary gain, net of income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,950Net loss
    
    $
    (18,628
    )
    
    $
    (5,515
    )
    
    $
    (16,299
    )
    
    $
    (10,680
    )
    
    $
    (26,988
    )Basic and diluted loss per share
    
    $
    (0.13
    )
    
    $
    (0.05
    )
    
    $
    (0.16
    )
    
    $
    (0.10
    )
    
    $
    (0.26
    )Basic and diluted weighted average
shares outstanding
    
    
    140,104
    
    
    
    120,902
    
    
    
    104,350
    
    
    
    104,793
    
    
    
    102,022
 December 31:
    
    2007
    
    2006
    
    2005
    
    2004
    
    2003Balance Sheet Data:Cash and cash equivalents
    
    $
    72,474
    
    
    $
    91,722
    
    
    $
    67,984
    
    
    $
    77,226
    
    
    $
    87,602Working capital
    
    
    127,893
    
    
    
    172,587
    
    
    
    99,514
    
    
    
    113,995
    
    
    
    108,051Total assets
    
    
    507,504
    
    
    
    346,222
    
    
    
    265,177
    
    
    
    279,860
    
    
    
    278,050Total long-term liabilities
    
    
    9,322
    
    
    
    30,295
    
    
    
    29,694
    
    
    
    28,663
    
    
    
    27,415Stockholders equity
    
    
    294,699
    
    
    
    193,752
    
    
    
    117,004
    
    
    
    143,341
    
    
    
    145,494
 (1)
    
    The 2007 Statement of Operations includes the results of Fiberxon from July 1, 2007. 42




---



##### Table of Contents



The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with Consolidated Financial Statements and Notes thereto included elsewhere
in this Form 10-K. In addition to historical information, the discussion in this Form 10-K
contains certain forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated by these forward-looking statements due to
factors, including but not limited to, those set forth in the following and elsewhere in this Form
10-K. We assume no obligation to update any of the forward-looking statements after the date of
this Form 10-K.
 Overview
    43




---



##### Table of Contents



Critical Accounting Policies
    Revenue Recognition.
 Allowance for Doubtful Accounts.
 44




---



##### Table of Contents



Inventory Reserves.
 Goodwill and Other Intangibles. Goodwill and Other Intangible Assets
 Income Taxes
  Share-Based Compensation Share-Based Compensation
   45




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##### Table of Contents



Management Discussion Snapshot
  Years ended December 31,
    
    2007
    
    2006
    
    2005$
    
    %
    
    $
    
    %
    
    $
    
    %Revenue(1)
    
    $
    448,237
    
    
    
    100
    %
    
    $
    356,489
    
    
    
    100
    %
    
    $
    283,698
    
    
    
    100
    %Network equipment group
    
    
    105,357
    
    
    
    24
    
    
    
    96,002
    
    
    
    27
    
    
    
    82,099
    
    
    
    29Network integration group
    
    
    213,976
    
    
    
    48
    
    
    
    181,502
    
    
    
    51
    
    
    
    164,133
    
    
    
    58Optical components group
    
    
    144,860
    
    
    
    32
    
    
    
    93,381
    
    
    
    26
    
    
    
    50,446
    
    
    
    18All others
    
    
    114
    
    
    NM
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gross margin(2)
    
    
    127,973
    
    
    
    29
    
    
    
    112,282
    
    
    
    31
    
    
    
    89,719
    
    
    
    32Network equipment group
    
    
    52,133
    
    
    
    50
    
    
    
    49,930
    
    
    
    52
    
    
    
    43,323
    
    
    
    53Network integration group
    
    
    48,550
    
    
    
    23
    
    
    
    44,875
    
    
    
    25
    
    
    
    40,912
    
    
    
    25Optical components group
    
    
    27,919
    
    
    
    19
    
    
    
    17,797
    
    
    
    19
    
    
    
    5,597
    
    
    
    11All others
    
    
    69
    
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating costs and expenses(2)
    
    136,860
    
    
    31
    
    
    
    115,778
    
    
    
    32
    
    
    
    98,453
    
    
    
    35Network equipment group
    
    
    60,036
    
    
    
    57
    
    
    
    54,844
    
    
    
    57
    
    
    
    44,823
    
    
    
    55Network integration group
    
    
    38,118
    
    
    
    18
    
    
    
    33,678
    
    
    
    19
    
    
    
    30,558
    
    
    
    19Optical components group
    
    
    29,333
    
    
    
    20
    
    
    
    18,502
    
    
    
    20
    
    
    
    14,910
    
    
    
    30All others
    
    
    1,595
    
    
    
    1,399
    
    
    
    1,558
    
    
    NM
    
    
    1,721
    
    
    NMOperating income (loss)(2)
    
    
    (8,887
    )
    
    
    (2
    )
    
    
    (3,496
    )
    
    
    (1
    )
    
    
    (8,734
    )
    
    
    (3
    )Network equipment group
    
    
    (7,903
    )
    
    
    (8
    )
    
    
    (4,914
    )
    
    
    (5
    )
    
    
    (1,500
    )
    
    
    (2
    )Network integration group
    
    
    10,432
    
    
    
    5
    
    
    
    11,197
    
    
    
    6
    
    
    
    10,354
    
    
    
    6Optical components group
    
    
    (1,414
    )
    
    
    (1
    )
    
    
    (705
    )
    
    
    (1
    )
    
    
    (9,313
    )
    
    
    (18
    )All others
    
    
    (1,526
    )
    
    
    (1,339
    )
    
    
    (1,558
    )
    
    NM
    
    
    (1,721
    )
    
    NM
 NM not meaningful(1)
    
    Revenue information by segment includes intersegment revenue, primarily reflecting sales
of fiber optic components to the network equipment group and sales of network equipment to
the network integration group.(2)
    
    Statements of Operations data express percentages as a percentage of revenue.
Statements of Operations data by segment express percentages as a percentage of applicable
segment revenue.  46




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##### Table of Contents



Year Ended December 31, 2007 Compared
to Year Ended December 31, 2006
 Revenue
  % Change$
    
    %
    
    ConstantYears ended December 31:
    
    2007
    
    2006
    
    Change
    
    Change
    
    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
    )
    
    NM
    
    NMTotal
    
    $
    448,237
    
    
    $
    356,489
    
    
    $
    91,748
    
    
    
    26
    %
    
    
    21
    %
 
 NM not meaningful(1)
    
    Adjustments represent the elimination of intersegment revenue in order to reconcile to
consolidated revenues.(2)
    
    Percentage information in constant currencies in the table above and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results were calculated by translating the current year results at prior year average
exchange rates.  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
    
    
    
    18Optic component 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
    %
 47




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##### Table of Contents



Network Equipment Group
 Network Integration Group
 Optical Components Group.
 Gross Profit
  % Change$
    
    %
    
    ConstantYears ended December 31:
    
    2007
    
    2006
    
    Change
    
    Change
    
    Currency (2)Network equipment group
    
    $
    52,133
    
    
    $
    49,930
    
    
    $
    2,203
    
    
    
    4
    %
    
    
    3
    %Network integration group
    
    
    48,550
    
    
    
    44,875
    
    
    
    3,675
    
    
    
    8
    
    
    
    (1
    )Optical components group
    
    
    27,919
    
    
    
    17,797
    
    
    
    10,122
    
    
    
    57
    
    
    
    58All others
    
    
    69
    
    
    
    
    
    
    
    69
    
    
    NM
    
    NM128,671
    
    
    
    112,602
    
    
    
    16,069
    
    
    
    14
    
    
    
    10Corporate unallocated cost of goods sold
    
    
    (161
    )
    
    
    (159
    )
    
    
    (2
    )
    
    
    1
    
    
    
    1Intersegment adjustments (1)
    
    
    (537
    )
    
    
    (161
    )
    
    
    (376
    )
    
    
    234
    
    
    NMTotal
    
    $
    127,973
    
    
    $
    112,282
    
    
    $
    15,691
    
    
    
    14
    %
    
    
    10
    %
 
 NM not meaningful(1)
    
    Adjustments represent the elimination of intersegment revenue in order to reconcile to
consolidated gross profit.(2)
    
    Percentage information in constant currencies in the table above and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results were calculated by translating the current year results at prior year average
exchange rates. 48




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##### Table of Contents



Network Equipment Group
 Network Integration Group
 Optical Components Group
 Operating Costs and Expenses
  % Change$
    
    %
    
    ConstantYears ended December 31:
    
    2007
    
    2006
    
    Change
    
    Change
    
    Currency (1)Network equipment group
    
    $
    60,036
    
    
    $
    54,844
    
    
    $
    5,192
    
    
    
    9
    %
    
    
    9
    %Network integration group
    
    
    38,118
    
    
    
    33,678
    
    
    
    4,440
    
    
    
    13
    
    
    
    4Optical components group
    
    
    29,333
    
    
    
    18,502
    
    
    
    10,831
    
    
    
    59
    
    
    
    59All others
    
    
    1,595
    
    
    
    1,558
    
    
    
    37
    
    
    
    2
    
    
    
    2129,082
    
    
    
    108,582
    
    
    
    20,500
    
    
    
    19
    
    
    
    16Corporate unallocated
operating expenses
(2)
    
    
    7,778
    
    
    
    7,196
    
    
    
    582
    
    
    
    8
    
    
    
    8Total
    
    $
    136,860
    
    
    $
    115,778
    
    
    $
    21,082
    
    
    
    18
    %
    
    
    15
    %
 
 (1)
    
    Percentage information in constant currencies in the table above and in the
text below excludes the effect of foreign currency translation on reported results.
Constant currency results were calculated by translating the current year results at
prior year average exchange rates.(2)
    
    Corporate unallocated operating expenses include unallocated product
development, and selling, general and administrative expenses. 49




---



##### Table of Contents



Network Equipment Group
 Network Integration Group
 Optical Components Group
 Operating Income (Loss)
  % Change$
    
    %
    
    ConstantYears ended December 31:
    
    2007
    
    2006
    
    Change
    
    Change
    
    Currency (2)Network equipment group
    
    $
    (7,903
    )
    
    $
    (4,914
    )
    
    $
    (2,989
    )
    
    
    61
    %
    
    
    63
    %Network integration group
    
    
    10,432
    
    
    
    11,197
    
    
    
    (765
    )
    
    
    (7
    )
    
    
    (14
    )Optical components group
    
    
    (1,414
    )
    
    
    (705
    )
    
    
    (709
    )
    
    
    101
    
    
    
    71All others
    
    
    (1,526
    )
    
    
    (1,558
    )
    
    
    32
    
    
    
    (2
    )
    
    
    (2
    )(411
    )
    
    
    4,020
    
    
    
    (4,431
    )
    
    
    (110
    )
    
    
    (127
    )Corporate unallocated expenses
    
    
    (7,939
    )
    
    
    (7,355
    )
    
    
    (584
    )
    
    
    8
    
    
    
    8Adjustments (1)
    
    
    (537
    )
    
    
    (161
    )
    
    
    (376
    )
    
    NM
    
    NMTotal
    
    $
    (8,887
    )
    
    $
    (3,496
    )
    
    $
    (5,391
    )
    
    
    154
    %
    
    
    174
    %
 50




---



##### Table of Contents



NM not meaningful(1)
    
    Adjustments represent the elimination of intersegment revenue and profit in inventory in
order to reconcile to consolidated operating income (loss).(2)
    
    Percentage information in constant currencies in the table above and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results were calculated by translating the current year results at prior year average
exchange rates.  Network Equipment Group
 Network Integration Group
 Optical Components Group
 Interest Expense, Cost of Debt Conversion and Other Income, Net
  Provision for Income Taxes
  51




---



##### Table of Contents



Tax Loss Carry Forwards
  Year Ended December 31, 2006 Compared
to Year Ended December 31, 2005
 Revenue
  % Change$
    
    %
    
    ConstantYears ended December 31:
    
    2006
    
    2005
    
    Change
    
    Change
    
    Currency (2)Networking equipment group
    
    $
    96,002
    
    
    $
    82,099
    
    
    $
    13,903
    
    
    
    17
    %
    
    
    18
    %Network integration group
    
    
    181,502
    
    
    
    164,133
    
    
    
    17,369
    
    
    
    11
    
    
    
    12Optical components group
    
    
    93,381
    
    
    
    50,446
    
    
    
    42,935
    
    
    
    85
    
    
    
    88All others
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370,885
    
    
    
    296,678
    
    
    
    74,207
    
    
    
    25
    
    
    
    27Adjustments (1)
    
    
    (14,396
    )
    
    
    (12,980
    )
    
    
    (1,416
    )
    
    NM
    
    NMTotal
    
    $
    356,489
    
    
    $
    283,698
    
    
    $
    72,791
    
    
    
    26
    %
    
    
    27
    %
 
 NM not meaningful(1)
    
    Adjustments represent the elimination of intersegment revenue and profit in inventory in
order to reconcile to consolidated revenues.(2)
    
    Percentage information in constant currencies in the table above and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results were calculated by translating the current year results at prior year average
exchange rates.  Years ended December 31:
    
    2006
    
    2005
    
    $ Change
    
    % ChangeNetwork equipment:Americas
    
    $
    42,677
    
    
    $
    38,374
    
    
    $
    4,303
    
    
    
    11
    %Europe
    
    
    33,319
    
    
    
    29,916
    
    
    
    3,403
    
    
    
    11Asia Pacific
    
    
    10,369
    
    
    
    4,151
    
    
    
    6,218
    
    
    
    150Other regions
    
    
    199
    
    
    
    204
    
    
    
    (5
    )
    
    
    (2
    )Total network equipment
    
    
    86,564
    
    
    
    72,645
    
    
    
    13,919
    
    
    
    19Network integration:
 52




---



##### Table of Contents



Years ended December 31:
    
    2006
    
    2005
    
    $ Change
    
    % ChangeEurope
    
    
    181,503
    
    
    
    164,133
    
    
    
    17,370
    
    
    
    11Total network integration
    
    
    181,503
    
    
    
    164,133
    
    
    
    17,370
    
    
    
    11Fiber optic components:Americas
    
    
    73,889
    
    
    
    34,824
    
    
    
    39,065
    
    
    
    112Europe
    
    
    4,288
    
    
    
    4,296
    
    
    
    (8
    )
    
    
    Asia Pacific
    
    
    10,202
    
    
    
    7,518
    
    
    
    2,684
    
    
    
    36Other regions
    
    
    43
    
    
    
    282
    
    
    
    (239
    )
    
    
    (85
    )Total fiber optic components
    
    
    88,422
    
    
    
    46,920
    
    
    
    41,502
    
    
    
    88Total
    
    $
    356,489
    
    
    $
    283,698
    
    
    $
    72,791
    
    
    
    26
    %
  Network Equipment Group
 Network Integration Group
 Optical Components Group.
 53




---



##### Table of Contents



Gross Profit
  % Change$
    
    %
    
    ConstantYears ended December 31:
    
    2006
    
    2005
    
    Change
    
    Change
    
    Currency (2)Network equipment group
    
    $
    49,930
    
    
    $
    43,323
    
    
    $
    6,607
    
    
    
    15
    %
    
    
    16
    %Network integration group
    
    
    44,875
    
    
    
    40,912
    
    
    
    3,963
    
    
    
    10
    
    
    
    11Optical components group
    
    
    17,797
    
    
    
    5,597
    
    
    
    12,200
    
    
    
    218
    
    
    
    223All others
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112,602
    
    
    
    89,832
    
    
    
    22,770
    
    
    
    26
    
    
    
    27Corporate unallocated cost of goods sold
    
    
    (159
    )
    
    
    (113
    )
    
    
    (46
    )
    
    
    41
    
    
    
    41Adjustments (1)
    
    
    (161
    )
    
    
    
    
    
    
    (161
    )
    
    NM
    
    NMTotal
    
    $
    112,282
    
    
    $
    89,719
    
    
    $
    22,563
    
    
    
    25
    %
    
    
    27
    %
 
 NM not meaningful(1)
    
    Adjustments represent the elimination of intersegment revenue and profit in inventory in
order to reconcile to consolidated gross profit.(2)
    
    Percentage information in constant currencies in the table above and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results were calculated by translating the current year results at prior year average
exchange rates.  Network Equipment Group
 Network Integration Group
 Optical Components Group
 54




---



##### Table of Contents



Operating Costs and Expenses
  % Change$
    
    %
    
    ConstantYears ended December 31:
    
    2006
    
    2005
    
    Change
    
    Change
    
    Currency (1)Network equipment group
    
    $
    54,844
    
    
    $
    44,823
    
    
    $
    10,021
    
    
    
    22
    %
    
    
    23
    %Network integration group
    
    
    33,678
    
    
    
    30,558
    
    
    
    3,120
    
    
    
    10
    
    
    
    12Optical components group
    
    
    18,502
    
    
    
    14,910
    
    
    
    3,592
    
    
    
    24
    
    
    
    25All others
    
    
    1,558
    
    
    
    1,721
    
    
    
    (163
    )
    
    
    (9
    )
    
    
    (9
    )108,582
    
    
    
    92,012
    
    
    
    16,570
    
    
    
    18
    
    
    
    19Corporate unallocated
operating expenses
(2)
    
    
    7,196
    
    
    
    6,441
    
    
    
    755
    
    
    
    12
    
    
    
    12Total
    
    $
    115,778
    
    
    $
    98,453
    
    
    $
    17,325
    
    
    
    18
    %
    
    
    19
    %
 
 (1)
    
    Percentage information in constant currencies in the table above and in the
text below excludes the effect of foreign currency translation on reported results.
Constant currency results were calculated by translating the current year results at
prior year average exchange rates.(2)
    
    Corporate unallocated operating expenses include unallocated product
development, and selling general administrative expenses.  Network Equipment Group
 55




---



##### Table of Contents



Network Integration Group
 Optical Components Group
 Operating Income (Loss)
  % Change$
    
    %
    
    ConstantYears ended December 31:
    
    2006
    
    2005
    
    Change
    
    Change
    
    Currency (2)Network equipment group
    
    $
    (4,914
    )
    
    $
    (1,500
    )
    
    $
    (3,414
    )
    
    
    228
    %
    
    
    218
    %Network integration group
    
    
    11,197
    
    
    
    10,354
    
    
    
    843
    
    
    
    8
    
    
    
    9Optical components group
    
    
    (705
    )
    
    
    (9,313
    )
    
    
    8,608
    
    
    
    (92
    )
    
    
    (94
    )All others
    
    
    (1,558
    )
    
    
    (1,721
    )
    
    
    163
    
    
    
    (9
    )
    
    
    (9
    )4,020
    
    
    
    (2,180
    )
    
    
    6,200
    
    
    
    (284
    )
    
    
    (304
    )Corporate unallocated expenses
    
    
    (7,355
    )
    
    
    (6,554
    )
    
    
    (801
    )
    
    
    12
    
    
    
    12Adjustments (1)
    
    
    (161
    )
    
    
    
    
    
    
    (161
    )
    
    NM
    
    NMTotal
    
    $
    (3,496
    )
    
    $
    (8,734
    )
    
    $
    5,238
    
    
    
    (60
    )%
    
    
    (65
    )%
 
 NM not meaningful(1)
    
    Adjustments represent the elimination of intersegment revenue and profit in inventory in
order to reconcile to consolidated operating income (loss).(2)
    
    Percentage information in constant currencies in the table above and in the text below
excludes the effect of foreign currency translation on reported results. Constant currency
results were calculated by translating the current year results at prior year average
exchange rates. 56




---



##### Table of Contents



Network Equipment Group
 Network Integration Group
 Optical Components Group
 Interest Expense and Other Income, Net
  Provision for Income Taxes
  57




---



##### Table of Contents



Recently Issued Accounting Standards
  Liquidity and Capital Resources
  December 31,
    
    December 31,2007
    
    2006CashCash and cash equivalents
    
    $
    72,474
    
    
    $
    91,722Short-term marketable securities
    
    
    6,402
    
    
    
    25,864Long-term marketable securities
    
    
    1,442
    
    
    
    Time deposits
    
    
    6,055
    
    
    
    82186,373
    
    
    
    118,407Debt5% convertible notes due 2008
    
    
    
    
    
    
    23,000Short-term obligations (1)
    
    
    28,931
    
    
    
    26,289Long-term debt
    
    
    66
    
    
    
    8828,997
    
    
    
    49,377Cash in excess of debt
    
    $
    57,376
    
    
    $
    69,030Ratio of cash to debt(2)
    
    
    3.0:1
    
    
    
    2.4:1
 
 (1)
    
    Includes current maturities of long-term debt.(2)
    
    Determined by dividing total cash by total debt. 58




---



##### Table of Contents



Working Capital
  December 31,
    
    December 31,2007
    
    2006Current assets
    
    $
    326,183
    
    
    $
    289,514Current liabilities
    
    
    198,290
    
    
    
    116,927Working capital
    
    $
    127,893
    
    
    $
    172,587Current ratio(1)
    
    
    1.6  :  1
    
    
    
    2.5  :  1
 
 (1)
    
    Determined by dividing total current assets by total current liabilities.   Cash Flow
  Years ended December 31:
    
    2007
    
    2006Net cash provided by (used in):Operating activities
    
    $
    (8,621
    )
    
    $
    (11,722
    )Investing activities
    
    
    (9,563
    )
    
    
    (30,695
    )Financing activities
    
    
    (2,034
    )
    
    
    65,484Effect of exchange rate changes on cash and cash equivalents
    
    
    970
    
    
    
    671Net change in cash and cash equivalents
    
    $
    (19,248
    )
    
    $
    23,738
 Cash Flows Related to Operating Activities
 59




---



##### Table of Contents



Cash Flows Related to Investing Activities
 Cash Flows Related to Financing Activities
  Off-Balance Sheet Arrangements
  60




---



##### Table of Contents



Contractual Obligations
  Less than 1
    
    
    
    
    
    
    
    
    
    After 5Contractual Obligations
    
    Total
    
    Year
    
    1  3 Years
    
    3  5 Years
    
    YearsOperating leases
    
    $
    26,915
    
    
    $
    6,862
    
    
    $
    9,583
    
    
    $
    4,838
    
    
    $
    5,632Deferred
consideration payable
    
    
    30,561
    
    
    
    
    
    
    
    30,561
    
    
    
    
    
    
    
    Purchase commitments with
suppliers and contract
manufacturers
    
    
    4,930
    
    
    
    4,884
    
    
    
    46
    
    
    
    
    
    
    
    Short-term debt
    
    
    28,795
    
    
    
    28,795
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt
    
    
    202
    
    
    
    136
    
    
    
    66
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    91,403
    
    
    $
    40,677
    
    
    $
    40,256
    
    
    $
    4,838
    
    
    $
    5,632
      61




---



##### Table of Contents



Interest Rates
 Foreign Exchange Rates
    
    
    $28.0 million of operating expenses that were reported in euros;
    
    $12.9 million of operating expenses that were reported in Swiss francs;
    
    $8.4 million of operating expenses that were reported in Swedish krona; and
 62




---



##### Table of Contents




    
    $5.3 million of operating expenses reported in the Taiwan dollar.
  
    
    $2.8 million related to expenses settled in euros;
    
    $1.3 million related to expenses settled in Swiss francs;
    
    $0.8 million in expenses settled in Swedish kronas; and
    
    $0.5 million in expenses settled in the Taiwan dollar.
  Years ended December 31:
    
    2007
    
    
    2006U.S. dollars
    
    $
    55,197
    
    
    $
    77,442Euros
    
    
    7,051
    
    
    
    4,304Swedish kronas
    
    
    2,392
    
    
    
    2,172Norwegian krone
    
    
    1,916
    
    
    
    Taiwan dollars
    
    
    1,873
    
    
    
    2,017Renminbi
    
    
    1,618
    
    
    
    Swiss francs
    
    
    1,213
    
    
    
    5,787Other
    
    
    1,214
    
    
    
    Total cash and cash equivalents
    
    $
    72,474
    
    
    $
    91,722
  Inflation
 63




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 The Board of Directors and Stockholders of MRV Communications, Inc.
        
 64




---



##### Table of Contents



MRV Communications, Inc.
 
 Statements of Operations
 (In thousands, except per share data)
 Years ended December 31:
    
    2007
    
    2006
    
    2005Revenue
    
    $
    448,237
    
    
    $
    356,489
    
    
    $
    283,698Cost of goods sold
    
    
    320,264
    
    
    
    244,207
    
    
    
    193,979Gross profit
    
    
    127,973
    
    
    
    112,282
    
    
    
    89,719Operating costs and expenses:Product development and engineering
    
    
    32,956
    
    
    
    28,187
    
    
    
    26,051Selling, general and administrative
    
    
    101,998
    
    
    
    87,539
    
    
    
    72,402Impairment of goodwill and other intangibles
    
    
    
    
    
    
    52
    
    
    
    Amortization of other intangibles
    
    
    1,906
    
    
    
    
    
    
    
    Total operating costs and expenses
    
    
    136,860
    
    
    
    115,778
    
    
    
    98,453Operating loss
    
    
    (8,887
    )
    
    
    (3,496
    )
    
    
    (8,734
    )Interest expense
    
    
    (3,968
    )
    
    
    (3,540
    )
    
    
    (4,207
    )Cost of debt conversion
    
    
    (4,899
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    2,979
    
    
    
    5,386
    
    
    
    2,416Loss before income taxes
    
    
    (14,775
    )
    
    
    (1,650
    )
    
    
    (10,525
    )Provision for income taxes
    
    
    3,853
    
    
    
    3,865
    
    
    
    5,774Net loss
    
    $
    (18,628
    )
    
    $
    (5,515
    )
    
    $
    (16,299
    )Net loss per share:Basic and diluted
    
    $
    (0.13
    )
    
    $
    (0.05
    )
    
    $
    (0.16
    )Weighted average number of shares:Basic and diluted
    
    
    140,104
    
    
    
    120,902
    
    
    
    104,350
  65




---



##### Table of Contents



MRV Communications, Inc.
 
 Balance Sheets
 (In
thousands, except per share and par values)
 December 31:
    
    2007
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    72,474
    
    
    $
    91,722Short-term marketable securities
    
    
    6,402
    
    
    
    25,864Time deposits
    
    
    6,055
    
    
    
    821Accounts receivable, net
    
    
    128,368
    
    
    
    95,244Inventories
    
    
    86,676
    
    
    
    61,361Deferred income taxes
    
    
    838
    
    
    
    895Other current assets
    
    
    25,370
    
    
    
    13,607Total current assets
    
    
    326,183
    
    
    
    289,514Property and equipment, net
    
    
    24,510
    
    
    
    14,172Goodwill
    
    
    137,371
    
    
    
    36,348Deferred income taxes
    
    
    907
    
    
    
    1,460Long term marketable securities
    
    
    1,442
    
    
    
    Intangibles, net
    
    
    11,994
    
    
    
    Other assets
    
    
    5,097
    
    
    
    4,728Total assets
    
    $
    507,504
    
    
    $
    346,222Liabilities and stockholders equityCurrent liabilities:Short-term obligations
    
    $
    28,931
    
    
    $
    26,289Deferred consideration payable
    
    
    30,561
    
    
    
    Accounts payable
    
    
    82,927
    
    
    
    47,384Accrued liabilities
    
    
    38,902
    
    
    
    29,704Deferred revenue
    
    
    9,203
    
    
    
    7,624Other current liabilities
    
    
    7,766
    
    
    
    5,926Total current liabilities
    
    
    198,290
    
    
    
    116,927Convertible notes
    
    
    
    
    
    
    23,000Other long-term liabilities
    
    
    9,322
    
    
    
    7,295Minority interest
    
    
    5,193
    
    
    
    5,248Commitments 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 shares
Issued  158,480 shares in 2007 and 126,860 shares in 2006
Outstanding  157,127 shares in 2007 and 125,507 shares in 2006
    
    
    267
    
    
    
    213Additional paid-in capital
    
    
    1,344,661
    
    
    
    1,231,941Accumulated deficit
    
    
    (1,055,552
    )
    
    
    (1,036,924
    )Treasury stock  1,353 shares in 2007 and 2006
    
    
    (1,352
    )
    
    
    (1,352
    )Accumulated other comprehensive loss
    
    
    6,675
    
    
    
    (126
    )Total stockholders equity
    
    
    294,699
    
    
    
    193,752Total liabilities and stockholders equity
    
    $
    507,504
    
    
    $
    346,222
  66




---



##### Table of Contents



MRV Communications, Inc.
 
 Statements of Stockholders Equity
 (In thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    OtherCommon Stock
    
    Paid-In
    
    Accumulated
    
    Treasury
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Deficit
    
    Stock
    
    Income (Loss)
    
    TotalBalance, Dec. 31, 2004
    
    
    104,073
    
    
    $
    176
    
    
    $
    1,155,474
    
    
    $
    (1,015,110
    )
    
    $
    (1,352
    )
    
    $
    4,153
    
    
    $
    143,341Exercise of stock
options and warrants
    
    
    323
    
    
    
    1
    
    
    
    573
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    574Issuance of common stock
    
    
    100
    
    
    
    
    
    
    
    162
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162Comprehensive income
(loss):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,299
    )
    
    
    
    
    
    
    
    
    
    
    (16,299
    )Net unrealized investment losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,767
    )
    
    
    (10,767
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,073
    )Balance, Dec. 31, 2005
    
    
    104,496
    
    
    
    177
    
    
    
    1,156,209
    
    
    
    (1,031,409
    )
    
    
    (1,352
    )
    
    
    (6,621
    )
    
    
    117,004Exercise of stock
options and warrants
    
    
    1,153
    
    
    
    2
    
    
    
    2,459
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,461Issuance of common stock
    
    
    19,858
    
    
    
    34
    
    
    
    69,831
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69,865Share-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    3,442
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,442Comprehensive income
(loss):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,515
    )
    
    
    
    
    
    
    
    
    
    
    (5,515
    )Net unrealized investment gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,491
    
    
    
    6,491Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    980Balance, Dec. 31, 2006
    
    
    125,507
    
    
    
    213
    
    
    
    1,231,941
    
    
    
    (1,036,924
    )
    
    
    (1,352
    )
    
    
    (126
    )
    
    
    193,752Exercise 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
    
    
    
    
    
    
    
    
    
    
    3,906
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,906Comprehensive income
(loss):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,628
    )
    
    
    
    
    
    
    
    
    
    
    (18,628
    )Net unrealized
investment gains
(losses)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,824
    
    
    
    5,824Defined benefit pension
plans, net of taxes:Initial recognition
of funded status
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,646
    
    
    
    1,646Amortization of
transition obligation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (165
    )
    
    
    (165
    )Net gain arising
during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (501
    )
    
    
    (501
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,801Balance, Dec. 31, 2007
    
    
    157,127
    
    
    $
    267
    
    
    $
    1,344,661
    
    
    $
    (1,055,552
    )
    
    $
    (1,352
    )
    
    $
    6,675
    
    
    $
    294,699
  67




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##### Table of Contents



MRV Communications, Inc.
 
 Statements of Cash Flows
 (In thousands)
 Years ended December 31:
    
    2007
    
    2006
    
    2005Cash flows from operating activities:Net loss
    
    $
    (18,628
    )
    
    $
    (5,515
    )
    
    $
    (16,299
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    8,335
    
    
    
    5,446
    
    
    
    7,086Share-based compensation expense
    
    
    3,906
    
    
    
    3,442
    
    
    
    162Provision for doubtful accounts
    
    
    327
    
    
    
    1,225
    
    
    
    748Deferred income taxes
    
    
    (1,312
    )
    
    
    (1,346
    )
    
    
    1,276(Gain) loss on disposition of property and equipment
    
    
    (37
    )
    
    
    (467
    )
    
    
    (37
    )Cost of debt conversion
    
    
    4,899
    
    
    
    
    
    
    
    Gain on sale of equity method investment
    
    
    
    
    
    
    (50
    )
    
    
    Minority interests share of income
    
    
    (55
    )
    
    
    98
    
    
    
    24Impairment of goodwill and other intangibles
    
    
    
    
    
    
    52
    
    
    
    Changes in operating assets and liabilities, net of
effects from acquisitions:Time deposits
    
    
    (2,929
    )
    
    
    666
    
    
    
    60Accounts receivable
    
    
    (6,851
    )
    
    
    3,743
    
    
    
    (21,569
    )Inventories
    
    
    (4,978
    )
    
    
    (15,849
    )
    
    
    (3,626
    )Other assets
    
    
    (2,394
    )
    
    
    (5,260
    )
    
    
    (777
    )Accounts payable
    
    
    11,719
    
    
    
    (1,518
    )
    
    
    6,437Accrued liabilities
    
    
    3,866
    
    
    
    (952
    )
    
    
    3,483Deferred revenue
    
    
    1,168
    
    
    
    1,189
    
    
    
    1,873Other current liabilities
    
    
    (5,657
    )
    
    
    3,374
    
    
    
    852Net cash used in operating activities
    
    
    (8,621
    )
    
    
    (11,722
    )
    
    
    (20,307
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (7,867
    )
    
    
    (5,454
    )
    
    
    (3,351
    )Proceeds from sale of property and equipment
    
    
    167
    
    
    
    509
    
    
    
    94Fiberxon
acquisition, net of cash acquired
    
    
    (19,886
    )
    
    
    
    
    
    
    Proceeds from sale of equity method investment
    
    
    
    
    
    
    100
    
    
    
    Purchases of investments
    
    
    (19,050
    )
    
    
    (43,750
    )
    
    
    (1,218
    )Proceeds from sale or maturity of investments
    
    
    37,073
    
    
    
    17,950
    
    
    
    6,277Purchase of minority interest
    
    
    
    
    
    
    (50
    )
    
    
    (90
    )Net cash provided by (used in) investing activities
    
    
    (9,563
    )
    
    
    (30,695
    )
    
    
    1,712Cash flows from financing activities:Net proceeds from issuance of common stock
    
    
    2,060
    
    
    
    72,326
    
    
    
    574Borrowings on short-term obligations
    
    
    67,268
    
    
    
    107,331
    
    
    
    46,118Payments on short-term obligations
    
    
    (70,934
    )
    
    
    (114,162
    )
    
    
    (37,519
    )Borrowings on long-term obligations
    
    
    148
    
    
    
    
    
    
    
    624Payments on long-term obligations
    
    
    (282
    )
    
    
    (340
    )
    
    
    (121
    )Other long-term liabilities
    
    
    (294
    )
    
    
    329
    
    
    
    1,257Net cash provided by (used in) financing activities
    
    
    (2,034
    )
    
    
    65,484
    
    
    
    10,933Effect of exchange rate changes on cash and cash equivalents
    
    
    970
    
    
    
    671
    
    
    
    (1,580
    )Net increase (decrease) in cash and cash equivalents
    
    
    (19,248
    )
    
    
    23,738
    
    
    
    (9,242
    )Cash and cash equivalents, beginning of year
    
    
    91,722
    
    
    
    67,984
    
    
    
    77,226Cash and cash equivalents, end of year
    
    $
    72,474
    
    
    $
    91,722
    
    
    $
    67,984
  68




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##### Table of Contents



MRV Communications, Inc.
 
 Notes to Financial Statements
 December 31, 2007
 1. Description of Business
  2. Summary of Significant Accounting Policies
   Acquisition
  Foreign
Currency Translation
  69




---



##### Table of Contents



Revenue Arrangements with Multiple Deliverables Software Revenue Recognition
     Accounting for Certain Investments in Debt and Equity Securities
  December 31:
    
    2007
    
    2006Corporate issues
    
    $
    7,844
    
    
    $
    14,751U.S. government issues
    
    
    
    
    
    
    8,131State and local government issues
    
    
    
    
    
    
    1,500Foreign government issues
    
    
    
    
    
    
    1,482Total
    
    $
    7,844
    
    
    $
    25,864
 70




---



##### Table of Contents



Balance at
    
    Charged to
    
    
    
    
    
    
    
    
    
    Balance atBeginning
    
    Cost and
    
    
    
    
    
    
    
    
    
    End ofof Period
    
    Expense
    
    Other
    
    Deductions
    
    PeriodDecember 31, 2005
    
    $
    9,399
    
    
    $
    748
    
    
    $
    (1,050
    )
    
    $
    (2,918
    )
    
    $
    6,179December 31, 2006
    
    
    6,179
    
    
    
    1,287
    
    
    
    
    
    
    
    (897
    )
    
    
    6,569December 31, 2007
    
    
    6,569
    
    
    
    327
    
    
    
    1,179
    
    
    
    (1,424
    )
    
    
    6,651
 Acquisition
    December 31:
    
    2007
    
    2006Raw materials
    
    $
    29,863
    
    
    $
    10,848Work-in process
    
    
    18,968
    
    
    
    17,811Finished goods
    
    
    37,845
    
    
    
    32,702Total
    
    $
    86,676
    
    
    $
    61,361
   71




---



##### Table of Contents



December 31:
    
    2007
    
    2006Property and equipment, at costMachinery and equipment
    
    $
    47,494
    
    
    $
    41,387Computer hardware and software
    
    
    28,291
    
    
    
    18,396Leasehold improvements
    
    
    7,315
    
    
    
    5,047Furniture and fixtures
    
    
    6,077
    
    
    
    6,232Building
    
    
    4,781
    
    
    
    3,892Construction in progress
    
    
    3,103
    
    
    
    1,356Land
    
    
    362
    
    
    
    60Total property and equipment, at cost
    
    
    97,423
    
    
    
    76,370Less  accumulated depreciation and amortization
    
    
    (72,913
    )
    
    
    (62,198
    )Total
    
    $
    24,510
    
    
    $
    14,172
   Goodwill and Other
Intangible Assets
  Principles of
Consolidation The
Equity Method of Accounting for Investments in Common Stock
  72




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##### Table of Contents



Goodwill and Other Intangibles Goodwill and Other Intangible Assets
      Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No 87, 88, 106, and
132(R)
   73




---



##### Table of Contents



Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed
        Earnings per Share
  74




---



##### Table of Contents



Share-Based Compensation
   Share-Based
Compensation
 Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment Awards FSP FAS
123(R)-3
 75




---



##### Table of Contents



Accounting for Uncertainty in
Income Taxes  An Interpretation of FASB Statement No. 109 Accounting for Income Taxes
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an Amendment of FASB Statement No. 115 Accounting
for Certain Investments in Debt and Equity Securities,
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51.
 Business
Combinations
 76




---



##### Table of Contents



3. Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets
  December 31:
    
    2007
    
    2006
    
    2005Beginning balance
    
    $
    36,348
    
    
    $
    33,656
    
    
    $
    37,747Purchase of Fiberxon
    
    
    98,917
    
    
    
    
    
    
    
    Purchase of minority Interest
    
    
    
    
    
    
    39
    
    
    
    90Impairment
    
    
    
    
    
    
    (52
    )
    
    
    Foreign currency translation
    
    
    2,106
    
    
    
    2,705
    
    
    
    (4,181
    )Total
    
    $
    137,371
    
    
    $
    36,348
    
    
    $
    33,656
  Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    CarryingAmount
    
    Amortization
    
    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
 77




---



##### Table of Contents



Acquisition
 Year Ending December 31,2008
    
    $
    2,4342009
    
    
    2,2572010
    
    
    2,0792011
    
    
    1,9012012
    
    
    1,901Total
    
    $
    10,572
 4. Restructuring Costs
  5. Accrued Liabilities
  December 31:
    
    2007
    
    2006Payroll and related
    
    $
    18,906
    
    
    $
    14,023Professional fees
    
    
    3,634
    
    
    
    1,277Non-income taxes
    
    
    2,947
    
    
    
    3,311Product warranty
    
    
    2,547
    
    
    
    2,291Deferred rent
    
    
    1,591
    
    
    
    1,537Other
    
    
    9,277
    
    
    
    7,265Total
    
    $
    38,902
    
    
    $
    29,704
 78




---



##### Table of Contents



6. Income Taxes
  Years ended December 31:
    
    2007
    
    2006
    
    2005Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    5,165
    
    
    
    5,211
    
    
    
    4,4985,165
    
    
    
    5,211
    
    
    
    4,498Deferred:Federal
    
    
    
    
    
    
    
    
    
    
    State
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    (1,312
    )
    
    
    (1,346
    )
    
    
    1,276(1,312
    )
    
    
    (1,346
    )
    
    
    1,276Total
    
    $
    3,853
    
    
    $
    3,865
    
    
    $
    5,774
  Years ended December 31:
    
    2007
    
    2006
    
    2005Income tax provision (benefit, at statutory federal rate)
    
    
    (34
    )%
    
    
    (34
    )%
    
    
    (34
    )%State and local income taxes, net of federal income
taxes effect
    
    
    (2
    )%
    
    
    (2
    )%
    
    
    (1
    )%Credits
    
    
    (7
    )%
    
    
    (57
    )%
    
    
    (9
    )%Permanent differences
    
    
    13
    %
    
    
    5
    %
    
    
    0
    %Foreign taxes at rates different than domestic rates
    
    
    10
    %
    
    
    42
    %
    
    
    (6
    )%Expired capital loss carry forwards
    
    
    551
    %
    
    
    
    
    
    
    Change in valuation allowance
    
    
    (505
    )%
    
    
    280
    %
    
    
    101
    %Total
    
    
    26
    %
    
    
    234
    %
    
    
    51
    %
 79




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##### Table of Contents



December 31:
    
    2007
    
    2006Allowance for doubtful accounts
    
    $
    1,244
    
    
    $
    1,548Inventory reserve
    
    
    4,331
    
    
    
    6,763Accrued liabilities
    
    
    3,229
    
    
    
    3,002Other
    
    
    4,036
    
    
    
    4,09112,840
    
    
    
    15,404Valuation allowance
    
    
    (12,002
    )
    
    
    (14,509
    )Net short-term deferred income tax assets
    
    
    838
    
    
    
    895Net operating losses
    
    
    109,018
    
    
    
    102,380Tax credits
    
    
    10,651
    
    
    
    9,688Depreciation and amortization
    
    
    2,446
    
    
    
    3,108Investments
    
    
    176
    
    
    
    174Capital loss carry forwards
    
    
    18,944
    
    
    
    99,477Other
    
    
    1,291
    
    
    
    2,011142,526
    
    
    
    216,838Valuation allowance
    
    
    (141,619
    )
    
    
    (215,378
    )Net long-term deferred income tax assets
    
    
    907
    
    
    
    1,460Total
    
    $
    1,745
    
    
    $
    2,355
 Accounting for Income Taxes
  80




---



##### Table of Contents



7. Short-Term and Long-Term Obligations
   8. Derivative Financial Instruments
  Foreign Exchange Contracts
 81




---



##### Table of Contents



Interest Rate Swaps
 9. Pension Plan and 401K Plan
 Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans
 Before
    
    
    
    
    
    AfterApplication
    
    
    
    
    
    Applicationof SFAS
    
    
    
    
    
    of SFAS158
    
    Adjustments
    
    158Liability for pension benefits
    
    $
    
    
    
    $
    2,195
    
    
    $
    2,195Deferred tax assets
    
    
    1,460
    
    
    
    549
    
    
    
    2,009Total assets
    
    
    346,222
    
    
    
    549
    
    
    
    346,771Accumulated other comprehensive income
    
    
    (126
    )
    
    
    1,646
    
    
    
    1,520Total stockholders equity
    
    
    193,752
    
    
    
    1,646
    
    
    
    195,398
 82




---



##### Table of Contents



2007Change in benefit obligation:Benefit obligation at January 1, 2007
    
    $
    6,282Service cost
    
    
    754Interest cost
    
    
    167Actuarial gain
    
    
    (885
    )Benefits paid
    
    
    (399
    )Benefit obligation at December 31, 2007
    
    $
    5,919Change in plan assets:Fair value of plan assets at January 1, 2007
    
    $
    4,087Actual return on plan assets
    
    
    (70
    )Employer contribution
    
    
    350Plan participants contributions
    
    
    245Benefits paid
    
    
    (399
    )Fair value of plan assets at December 31, 2007
    
    $
    4,213Unfunded status at December 31, 2007
    
    $
    (1,706
    )Amounts recognized in the Consolidated Balance Sheets:Noncurrent liabilities
    
    $
    (1,706
    )
  2007Service cost
    
    $
    754Interest cost
    
    
    167Expected return on plan assets
    
    
    (146
    )Plan participants contributions
    
    
    (245
    )Amortization of transition obligation
    
    
    219Net periodic benefit cost
    
    
    749Net actuarial gain included in other comprehensive income
    
    
    (668
    )Total recognized in net periodic benefit cost and other comprehensive income
    
    $
    81
   Asset Category
    
    2007Equity securities
    
    
    47
    %Debt securities
    
    
    21
    %Real estate
    
    
    14
    %Other
    
    
    18
    %Total
    
    
    100
    %
 83




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##### Table of Contents



Year Ending December 31,2008
    
    $
    2372009
    
    
    2202010
    
    
    2072011
    
    
    1952012
    
    
    185Years 2013-2017
    
    
    1,018
 
 401(k) Plan
  10. Convertible Debt
   84




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##### Table of Contents



11. Commitments and Contingencies
   Years Ending December 31,2008
    
    $
    6,8622009
    
    
    5,4632010
    
    
    4,1202011
    
    
    2,5312012
    
    
    2,307Thereafter
    
    
    5,632Total
    
    $
    26,915
    85




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##### Table of Contents



12. Product Warranty and Indemnification
 Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others
  Years ended December 31:
    
    2007
    
    2006Beginning balance
    
    $
    2,291
    
    
    $
    2,328Opening balance of acquired entities
    
    
    81
    
    
    
    Cost of warranty claims
    
    
    (604
    )
    
    
    (1,491
    )Accruals for product warranties
    
    
    779
    
    
    
    1,454Total
    
    $
    2,547
    
    
    $
    2,291
   86




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##### Table of Contents



13. Stockholders Equity
        14. Share-Based Compensation
 Share-Based Payment Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
 87




---



##### Table of Contents



Pro forma Information for Periods Prior to the Adoption of SFAS No. 123(R)
 Accounting for Stock-Based Compensation  Transition and
Disclosures
  2005Net loss, as reported
    
    $
    (16,299
    )Add: SFAS No. 123 share-based compensation expense
included in reported net loss
    
    
    162Deduct: Total SFAS No. 123 share-based compensation
expense determined under fair value method for all
awards
    
    
    (6,172
    )Net loss, pro forma
    
    $
    (22,309
    )Earnings per share:Basic and diluted net loss per share  as reported
    
    $
    (0.16
    )Basic and diluted net loss per share  pro forma
    
    $
    (0.21
    )
 Adoption of SFAS No. 123(R)
  Years ended December 31:
    
    2007
    
    2006Cost of goods sold
    
    $
    370
    
    
    $
    311Product development and engineering
    
    
    885
    
    
    
    775Selling, general and administrative
    
    
    2,651
    
    
    
    2,356Total share-based compensation expense
    
    $
    3,906
    
    
    $
    3,442
 88




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##### Table of Contents



Valuation Assumptions
  2007
    
    2006
    
    2005Risk-free interest rate
    
    
    4.5
    %
    
    
    4.8
    %
    
    
    4.1
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    65.1
    %
    
    
    80.8
    %
    
    
    67.1
    %Expected life
    
    3.4 yrs
    
    3.2 yrs
    
    4.0 yrs
 Share-Based Payment Award Activity
  WeightedAverageWeighted
    
    Remaining
    
    AggregateShares
    
    Average
    
    Contractual
    
    IntrinsicUnder Option
    
    Exercise
    
    Term (in
    
    Value (in(in 000s)
    
    Price
    
    years)
    
    000s)Outstanding, January 1, 2006
    
    
    11,088
    
    
    $
    3.12Granted
    
    
    2,653
    
    
    $
    3.03Exercised
    
    
    (1,152
    )
    
    $
    2.14Cancelled and forfeited
    
    
    (870
    )
    
    $
    4.51Outstanding, December 31, 2006
    
    
    11,719
    
    
    $
    3.09Granted
    
    
    5,285
    
    
    $
    2.09Exercised
    
    
    (1,318
    )
    
    $
    1.56Cancelled and forfeited
    
    
    (964
    )
    
    $
    4.96Outstanding, December 31, 2007
    
    
    14,722
    
    
    $
    2.74
    
    
    
    7.0
    
    
    $
    4,830Vested & Expected to Vest,
December 31, 2007
    
    
    14,104
    
    
    $
    2.75
    
    
    
    6.9
    
    
    $
    4,777Exercisable as of December
31, 2007
    
    
    9,042
    
    
    $
    2.80
    
    
    
    6.0
    
    
    $
    4,425
 89




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##### Table of Contents



WeightedOptions
    
    Weighted
    
    
    
    
    
    Options
    
    AverageOutstanding
    
    Average
    
    Weighted
    
    Exercisable
    
    ExerciseRange of
    
    as of
    
    Remaining
    
    Average
    
    as of
    
    Price ofExercise
    
    December
    
    Contractual
    
    Exercise
    
    December
    
    Exercisableprices
    
    31, 2007
    
    Life (years)
    
    Price
    
    31, 2007
    
    Options$0.27-$1.10
    
    
    2,435
    
    
    
    5.3
    
    
    $
    0.78
    
    
    
    2,286
    
    
    $
    0.77$1.11-$2.33
    
    
    2,317
    
    
    
    7.2
    
    
    $
    1.86
    
    
    
    1,527
    
    
    $
    1.74$2.34-$2.56
    
    
    2,335
    
    
    
    8.2
    
    
    $
    2.47
    
    
    
    1,062
    
    
    $
    2.48$2.57-$2.78
    
    
    2,583
    
    
    
    8.1
    
    
    $
    2.65
    
    
    
    639
    
    
    $
    2.70$2.79-$3.41
    
    
    2,539
    
    
    
    6.5
    
    
    $
    3.01
    
    
    
    1,684
    
    
    $
    3.00$3.42-$27.91
    
    
    2,513
    
    
    
    6.7
    
    
    $
    5.54
    
    
    
    1,844
    
    
    $
    6.23$0.27-$27.91
    
    
    14,722
    
    
    
    7.0
    
    
    $
    2.74
    
    
    
    9,042
    
    
    $
    2.80
  2007
    
    2006
    
    2005Total intrinsic value of stock options exercised
    
    $
    2,247
    
    
    $
    1,909
    
    
    $
    401Cash received from stock options exercised
    
    
    2,059
    
    
    
    2,461
    
    
    
    574
 15. Segment Reporting and Geographical Information
   90




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Years ended December 31:
    
    2007
    
    2006
    
    2005Network equipment group
    
    $
    105,357
    
    
    $
    96,002
    
    
    $
    82,099Network integration group
    
    
    213,976
    
    
    
    181,502
    
    
    
    164,133Optical components group
    
    
    144,860
    
    
    
    93,381
    
    
    
    50,446All others
    
    
    114
    
    
    
    
    
    
    
    464,307
    
    
    
    370,885
    
    
    
    296,678Intersegment adjustment
    
    
    (16,070
    )
    
    
    (14,396
    )
    
    
    (12,980
    )Total
    
    $
    448,237
    
    
    $
    356,489
    
    
    $
    283,698
    Years ended December 31:
    
    2007
    
    2006
    
    2005Americas
    
    $
    142,522
    
    
    $
    116,566
    
    
    $
    73,323Europe
    
    
    258,525
    
    
    
    219,110
    
    
    
    198,129Asia Pacific
    
    
    47,088
    
    
    
    20,571
    
    
    
    11,669Other regions
    
    
    102
    
    
    
    242
    
    
    
    577Total
    
    $
    448,237
    
    
    $
    356,489
    
    
    $
    283,698
  December 31:
    
    2007
    
    2006Americas
    
    $
    5,111
    
    
    $
    3,595Europe
    
    
    8,601
    
    
    
    7,277Asia Pacific
    
    
    10,798
    
    
    
    3,300Other regions
    
    
    
    
    
    
    Total
    
    $
    24,510
    
    
    $
    14,172
 91




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Years ended December 31:
    
    2007
    
    2006
    
    2005Network equipment group
    
    $
    (7,903
    )
    
    $
    (4,914
    )
    
    $
    (1,500
    )Network integration group
    
    
    10,432
    
    
    
    11,197
    
    
    
    10,354Optical components group
    
    
    (1,414
    )
    
    
    (705
    )
    
    
    (9,313
    )All other
    
    
    (1,526
    )
    
    
    (1,558
    )
    
    
    (1,721
    )(411
    )
    
    
    4,020
    
    
    
    (2,180
    )Corporate unallocated operating expenses
    
    
    (7,939
    )
    
    
    (7,355
    )
    
    
    (6,554
    )Intersegment adjustments
    
    
    (537
    )
    
    
    (161
    )
    
    
    Total
    
    $
    (8,887
    )
    
    $
    (3,496
    )
    
    $
    (8,734
    )
  Years ended December 31:
    
    2007
    
    2006
    
    2005Domestic
    
    $
    (19,542
    )
    
    $
    (17,190
    )
    
    $
    (17,654
    )Foreign
    
    
    4,767
    
    
    
    15,540
    
    
    
    7,129Total
    
    $
    (14,775
    )
    
    $
    (1,650
    )
    
    $
    (10,525
    )
 16. Other Income (Expense), Net
  Years ended December 31:
    
    2007
    
    2006
    
    2005Interest income
    
    $
    4,729
    
    
    $
    4,972
    
    
    $
    2,024Loss on foreign currency transactions
    
    
    (1,357
    )
    
    
    (253
    )
    
    
    (170
    )Gain (loss) on disposition of assets
    
    
    37
    
    
    
    467
    
    
    
    37Other, net
    
    
    (430
    )
    
    
    200
    
    
    
    525Total
    
    $
    2,979
    
    
    $
    5,386
    
    
    $
    2,416
 92




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17. Supplemental Statements of Cash Flow Information
  Years ended December 31:
    
    2007
    
    2006
    
    2005Supplemental disclosure of cash flow information:Cash paid during year for interest
    
    $
    3,879
    
    
    $
    3,936
    
    
    $
    3,221Cash paid during year for income taxes
    
    $
    7,304
    
    
    $
    3,153
    
    
    $
    4,209Non-cash transactions:Issuance of common stock for conversion of
debt to equity
    
    $
    28,025Issuance of common stock and stock options in
connection with acquisition of Fiberxon
    
    $
    78,783Deferred purchase price obligation in
connection with acquisition of Fiberxon
    
    $
    31,500
 Acquisition
 2007Tangible assets
    
    $
    61,252Intangible assets
    
    
    13,900Goodwill
    
    
    98,917Assumed liabilities
    
    
    (39,148
    )Total purchase price
    
    $
    134,921
 18. Acquisition
  93




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Business Combinations
  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
  94




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Net tangible assets acquired
    
    $
    22,104Intangible assets acquired:Developed technology
    
    
    8,500Customer backlog
    
    
    600Customer relationships
    
    
    4,800Goodwill
    
    
    98,917Total purchase price
    
    $
    134,921
  Accounts receivable
    
    $
    19,410Inventories
    
    
    17,896Property and equipment
    
    
    9,033Other assets and liabilities, net
    
    
    (24,235
    )Net tangible assets acquired
    
    $
    22,104
   Developed technology
    
    Straight Line Method
    
    5.5 yearsCustomer relationships
    
    Accelerated Method
    
    10 yearsCustomer backlog
    
    Straight Line Method
    
    6 months
    95




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Years ended December 31:
    
    2007
    
    2006Pro forma net revenue
    
    $
    487,701
    
    
    $
    404,583Pro forma net loss
    
    $
    (20,951
    )
    
    $
    (15,666
    )Pro forma net loss per share (basic)
    
    $
    (0.15
    )
    
    $
    (0.13
    )Pro forma net loss per share (diluted)
    
    $
    (0.15
    )
    
    $
    (0.13
    )
  96




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19. Quarterly Financial Data (Unaudited)
 March 31,
    
    June 30,
    
    September 30,
    
    December 31,Three months ended:
    
    2007
    
    2007
    
    2007
    
    2007Revenue
    
    $
    89,679
    
    
    $
    101,962
    
    
    $
    115,700
    
    
    $
    140,896Cost of goods sold (1)
    
    
    61,363
    
    
    
    72,063
    
    
    
    85,345
    
    
    
    101,493Gross profit
    
    
    28,316
    
    
    
    29,899
    
    
    
    30,355
    
    
    
    39,403Operating costs and expenses:Product development and engineering (2)
    
    
    7,306
    
    
    
    6,846
    
    
    
    9,314
    
    
    
    9,490Selling, general and administrative (3)
    
    
    22,739
    
    
    
    24,035
    
    
    
    25,759
    
    
    
    29,465Amortization of intangibles
    
    
    
    
    
    
    
    
    
    
    806
    
    
    
    1100Total operating costs and expenses
    
    
    30,045
    
    
    
    30,881
    
    
    
    35,879
    
    
    
    40,055Operating income (loss)
    
    
    (1,729
    )
    
    
    (982
    )
    
    
    (5,524
    )
    
    
    (652
    )Interest expense
    
    
    (1,052
    )
    
    
    (964
    )
    
    
    (1,075
    )
    
    
    (877
    )Cost of debt conversion
    
    
    
    
    
    
    
    
    
    
    (4,899
    )
    
    
    Other income, net
    
    
    1,435
    
    
    
    1,207
    
    
    
    201
    
    
    
    136Loss before income taxes
    
    
    (1,346
    )
    
    
    (739
    )
    
    
    (11,297
    )
    
    
    (1,393
    )Provision for income taxes
    
    
    870
    
    
    
    1,721
    
    
    
    1,274
    
    
    
    (12
    )Net loss
    
    $
    (2,216
    )
    
    $
    (2,460
    )
    
    $
    (12,571
    )
    
    $
    (1,381
    )Net loss per share:Basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    (0.08
    )
    
    $
    (0.01
    )Weighted average number of shares:Basic and diluted
    
    
    125,758
    
    
    
    126,011
    
    
    
    151,183
    
    
    
    157,000
 March 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,Three months ended:
    
    2006
    
    
    2006
    
    
    2006
    
    
    2006Revenue
    
    $
    77,262
    
    
    $
    86,965
    
    
    $
    89,616
    
    
    $
    102,646Cost of goods sold (1)
    
    
    51,517
    
    
    
    60,256
    
    
    
    60,962
    
    
    
    71,342Gross profit
    
    
    25,745
    
    
    
    26,709
    
    
    
    28,654
    
    
    
    31,304Operating costs and expenses:Product development and engineering (2)
    
    
    6,980
    
    
    
    6,672
    
    
    
    7,331
    
    
    
    7,204Selling, general and administrative (3)
    
    
    20,674
    
    
    
    21,823
    
    
    
    20,991
    
    
    
    24,181Impairment of goodwill and other intangibles
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    Total operating costs and expenses
    
    
    27,654
    
    
    
    28,547
    
    
    
    28,322
    
    
    
    31,385Operating income (loss)
    
    
    (1,909
    )
    
    
    (1,838
    )
    
    
    332
    
    
    
    (81
    )Interest expense
    
    
    (1,056
    )
    
    
    (733
    )
    
    
    (819
    )
    
    
    (932
    )Other income, net
    
    
    616
    
    
    
    1,050
    
    
    
    1,646
    
    
    
    2,074Income (loss) before income taxes
    
    
    (2,349
    )
    
    
    (1,521
    )
    
    
    1,159
    
    
    
    1,061Provision for income taxes
    
    
    1,332
    
    
    
    1,122
    
    
    
    943
    
    
    
    468Net income (loss)
    
    $
    (3,681
    )
    
    $
    (2,643
    )
    
    $
    216
    
    
    $
    593Net income (loss) per share:Basic
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    0.00
    
    
    $
    0.00Diluted
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    0.00
    
    
    $
    0.00Weighted average number of shares:Basic
    
    
    107,714
    
    
    
    125,073
    
    
    
    125,202
    
    
    
    125,376Diluted
    
    
    107,714
    
    
    
    125,073
    
    
    
    126,365
    
    
    
    128,551
 
 (1)
    
    Cost of goods sold included share-based compensation expense under SFAS No. 123(R) of
$85,000, $80,000, $112,000 and $93,000 for the three months ended March 31, June 30,
September 30, and December 31, 2007, respectively. Cost of goods sold included share-based
compensation expense under SFAS No. 123(R) of $72,000, $76,000, $83,000 and $80,000 for the
three months ended March 31, June 30, September 30, and December 31, 2006, respectively. 97




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(2)
    
    Product development and engineering expense included share-based compensation expense
under SFAS No. 123(R) of $190,000, $181,000, $228,000 and $286,000 for the three months
ended March 31, June 30, September 30, and December 31, 2007, respectively Product
development and engineering expense included share-based compensation expense under SFAS No.
123(R) of $205,000, $184,000, $190,000 and $196,000 for the three months ended March 31,
June 30, September 30, and December 31, 2006, respectively.(3)
    
    Selling, general and administrative expense included share-based compensation expense
under SFAS 123(R) of $550,000, $556,000, $892,000 and $653,000 for the three months ended
March 31, June 30, September 30, and December 31, 2007, respectively. Selling, general and
administrative expense included share-based compensation expense under SFAS 123(R) of
$462,000, $615,000, $589,000 and $690,000 for the three months ended March 31, June 30,
September 30, and December 31, 2006, respectively. 98




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
    
    Pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets;
    
    Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that our receipts and expenditures are being made only in
accordance with authorization of our management and directors; and
    
    Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material
effect on the financial statements.
 99




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Internal Control  Integrated Framework
 100




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Report of Independent Registered Public Accounting Firm
 The Board of Directors and Stockholders of MRV Communications, Inc.
        101




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102




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103




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PART III
 
      
   
   
   
   104




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PART IV
 
   Form 10-KPage No.Consolidated Financial Statements:Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
    
    
    64Statements of Operations for the years ended December 31, 2007, 2006 and 2005
    
    
    65Balance Sheets as of December 31, 2007 and 2006
    
    
    66Statements of Stockholders Equity for the years ended December 31, 2007, 2006 and 2005
    
    
    67Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
    
    
    68Notes to Financial Statements
    
    
    69Report of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting
    
    
    100
 (2)  Schedule II-Valuation and Qualifying Accounts 110
   105




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ExhibitNo.
    
    Description2.1
    
    Amended and Restated Certificate of Incorporation of MRV
Communications, Inc., (incorporated by reference to Exhibit
4.1 of MRVs Current Report on Form 8-K filed with the SEC on
August 2, 2007)2.2
    
    Bylaws (incorporated by reference to Exhibit 3b filed as part
of Registrants Registration Statement on Form S-1 (File No.
33-48003))2.3
    
    Bylaws of MRV Communications, Inc., as amended effective
October 17, 2007 (incorporated by reference to Exhibit 3.2 of
MRVs Current Report on Form 8-K filed with the SEC on October
23, 2007)4.1
    
    Specimen certificate of common stock (incorporated by
reference to Exhibit 4.5 filed as part of Registrants
Registration Statement on Form S-3 (File No. 333-64017)10.1
    
    Key Employee Agreement between MRV and Noam Lotan dated March
23, 1993 (incorporated by reference to Exhibit 10b(1) filed as
part of Registrants Registration Statement on Form S-1 (File
No. 33-48003))10.2
    
    Letter amending Key Employee Agreement between MRV and Noam
Lotan (incorporated by reference to Exhibit 10b(1)1 filed as
part of Registrants Registration Statement on Form S-1 (File
No. 33-48003))10.3
    
    Letter amending Key Employee Agreement between MRV and Noam
Lotan (incorporated by reference to Exhibit 10b(1)2 filed as
part of Registrants Registration Statement on Form S-1 (File
No. 33-86516))10.4
    
    Key Employee Agreement between MRV and Shlomo Margalit
(incorporated by reference to Exhibit 10b(3) filed as part of
Registrants Registration Statement on Form S-1 (File No.
33-48003))10.5
    
    Letter amending Key Employee Agreement between MRV and Shlomo
Margalit (incorporated by reference to Exhibit 10b(3)1 filed
as part of Registrants Registration Statement on Form S-1
(File No. 33-48003))10.6
    
    Form of Letter amending Key Employee Agreement between MRV and
Shlomo Margalit (incorporated by reference to Exhibit 10b(3)2
filed as part of Registrants Registration Statement on Form
S-1 (File No. 33-86516))10.7
    
    Standard Industrial/Commercial Single-Tenant Lease dated
October 8, 1996 between MRV and Nordhoff Development relating
to the premises located at 20415 Nordhoff Street, Chatsworth,
California (incorporated by reference to Exhibit No. 10.23 of
Registrants Annual Report on Form 10-K for the year ended
December 31, 1996 filed April 15, 1997)10.8
    
    Amendment to Lease between Nordhoff Industrial and the
Registrant dated December 14, 2001 relating to premises
located at 20415 Nordhoff Street (incorporated by reference to
Exhibit 10.65 of MRVs Form 10-K filed with the SEC on March
21, 2002)10.9
    
    1997 Incentive and Nonstatutory Stock Option Plan, as amended
(incorporated by reference to Appendix A to the Registrants
Definitive Proxy Statement filed with the SEC on November 14,
2001)
 106




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##### Table of Contents



ExhibitNo.
    
    Description10.10
    
    Form of Stock Option Agreement under the 1997 Incentive and
Nonstatutory Stock Option Plan (incorporated by reference to
Exhibit 4.2 to the Registrants Registration Statement on Form
S-8 filed with the SEC on September 24, 1999 (file no.
333-87735))10.11
    
    2007 Omnibus Incentive Plan (incorporated by reference to
Appendix A included in MRVs Definitive Proxy Statement for
its 2007 Annual Meeting of Stockholders filed with the SEC on
May 29, 2007)10.12
    
    Form of Notice of Grant and Agreement for grant of Non
Qualified Stock Option Award 2007 Omnibus Incentive Plan (incorporated by reference to
Appendix A included in MRVs Definitive Proxy Statement for
its 2007 Annual Meeting of Stockholders filed with the SEC on
May 29, 2007)10.13
    
    Non-Director and Non-Executive Officer Consolidated Long-Term
Stock Incentive Plan (incorporated by reference to Exhibit 4.1
of the Registration Statement on Form S-8 filed with the SEC
on July 17, 2003 (file no. 333-107109))10.14
    
    Form of Stock Option Agreement for the Non-Director and
Non-Executive Officer Consolidated Long-Term Stock Incentive
Plan Stock Option Agreement (incorporated by reference to
Exhibit 4.2 of the Registration Statement on Form S-8 filed
with the SEC on July 17, 2003 (file no. 333-107109))10.15
    
    Framework Agreement by and among Huagong Tech Company Limited,
registrant, Wuhan Huagong Genuine Optics Technology Co., Ltd.
and Luminent, Inc. dated as of May 23, 2006 (incorporated by
reference to Exhibit 10.1 of MRVs Form 10-Q for the quarter
ended June 30, 2006 filed with the SEC on August 2, 2006)10.16
    
    Letter Agreement dated July 18, 2006 by and among Huagong Tech
Company Limited, registrant, Wuhan Huagong Genuine Optics
Technology Co., Ltd. (HG Genuine) and Luminent, Inc. mutually
terminating Framework Agreement (incorporated by reference to
Exhibit 10.2 of MRVs Form 10-Q for the quarter ended June 30,
2006 filed with the SEC on August 2, 2006)10.17
    
    Extension Addendum between Bud H. Harris successor Lessor to
Nordhoff Development, a General Partnership and the Registrant
dated September 26, 2006 relating to premises located at 20415
Nordhoff Street (incorporated by reference to MRVs Form 10-K
for the year ended December 31, 2006 filed with the SEC on
March 6, 2007)
 107




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##### Table of Contents



ExhibitNo.
    
    Description10.18
    
    Agreement and Plan of Merger dated January 26, 2007 by and among Fiberxon,
Inc., registrant, and registrants wholly-owned subsidiaries Lighthouse
Transition Corporation and Lighthouse Acquisition Corporation, under which
registrant agreed to acquire Fiberxon (incorporated by reference to
Exhibit 10.1 of MRVs Form 10-Q for the quarter ended March 31, 2007 filed
with the SEC on May 7, 2007)10.19
    
    Consent and Waiver dated
April 17, 2007 from Deutsche Bank AG London
Brabch (incorporated by reference to Exhibit 99.1 of MRVs Current Report
on Form 8-K filed with the SEC on August 2, 2007)10.20
    
    Amendment No. 1 to the Agreement and Plan of Merger dated June 26, 2007 by
and among Fiberxon, Inc., registrant, and registrants wholly-owned
subsidiaries, Lighthouse Transition Corporation and Lighthouse Acquisition
Corporation (incorporated by reference to Exhibit 99.1 of MRVs Current
Report on Form 8-K filed with the SEC on July 2, 2007)10.21
    
    Securities Exchange Agreement dated as of August 10, 2007 between MRV
Communications, Inc. and Deutsche Bank AG, London Branch (incorporated by
reference to Exhibit 99.1 of MRVs Current Report on Form 8-K filed with
the SEC on August 13, 2007)13.1
    
    Those portions of registrants Annual Report to Stockholders for the year
ended December 31, 2007 that have been incorporated by reference into this
Annual Report on Form 10-K.21.1
    
    Subsidiaries of 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 Chief Executive Officer required by Rule 13a-14(a) of
the Exchange Act31.2
    
    Certification of the Chief Financial Officer required by Rule 13a-14(a) of
the Exchange Act32.1
    
    Certification pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350
 108




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Schedule II
  Balance
    
    Chargedat
    
    to Cost
    
    
    
    
    
    
    
    
    
    BalanceBeginning
    
    and
    
    
    
    
    
    
    
    
    
    at End ofDescription
    
    of Period
    
    Expense
    
    Other
    
    Deductions
    
    PeriodAllowance for Doubtful AccountsYear Ended:December 31, 2005
    
    $
    9,399
    
    
    $
    748
    
    
    $
    (1,050
    )      (1)
    
    $
    (2,918
    )
    
    $
    6,179December 31, 2006
    
    
    6,179
    
    
    
    1,287
    
    
    
    
    
    
    
    (897
    )
    
    
    6,569December 31, 2007
    
    
    6,569
    
    
    
    327
    
    
    
    1,179
    (2)
    
    
    (1,424
    )
    
    
    6,651Inventory ReserveYear Ended:December 31, 2005
    
    
    34,538
    
    
    
    1,170
    
    
    
    
    
    
    
    (6,416
    )
    
    
    29,292December 31, 2006
    
    
    29,292
    
    
    
    4,653
    
    
    
    
    
    
    
    (3,458
    )
    
    
    30,487December 31, 2007
    
    
    30,487
    
    
    
    2,932
    
    
    
    2,957
    (2)
    
    
    (7,118
    )
    
    
    29,258Warranty ReserveYear Ended:December 31, 2005
    
    
    2,537
    
    
    
    1,081
    
    
    
    
    
    
    
    (1,290
    )
    
    
    2,328December 31, 2006
    
    
    2,328
    
    
    
    1,442
    
    
    
    
    
    
    
    (1,479
    )
    
    
    2,291December 31, 2007
    
    
    2,291
    
    
    
    779
    
    
    
    81
    (2)
    
    
    (604
    )
    
    
    2,547
 
 1
    
    During 2005, $1.1 million of the allowance for doubtful accounts was reduced based on
period-end assessments of required allowances, and was included in the 2005 Statement of
Operations.2
    
    Amounts represent Fiberxon opening balances. See Note 18 of Notes to Financial
Statements for further discussion of the Fiberxon acquisition. 109




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##### Table of Contents



SIGNATURES
  MRV COMMUNICATIONS, INCBy:  /s/ Noam LotanNoam LotanPresident and Chief Executive OfficerBy:  /s/ Guy AvidanGuy AvidanChief Financial Officer
 110




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##### Table of Contents



POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ Noam Lotan

(Noam Lotan)
    
    President and Chief Executive Officer
(Principal Executive Officer)
    
    March 17, 2008/s/ Shlomo Margalit

(Shlomo Margalit)
    
    Chairman of the Board, Chief
Technology Officer, and Secretary
    
    March 17, 2008/s/ Guy Avidan

(Guy Avidan)
    
    Chief Financial Officer
(Principal Finance and Accounting
Officer)
    
    March 17, 2008/s/ Igal Shidlovsky

(Igal Shidlovsky)
    
    Director
    
    March 17, 2008/s/ Guenter Jaensch
    
    Director
    
    March 17, 2008(Guenter Jaensch)/s/ Daniel Tsui
    
    Director
    
    March 17, 2008(Daniel Tsui)/s/ Baruch Fischer
    
    Director
    
    March 17, 2008(Baruch Fischer)/s/ Harold W. Furchtgott-Roth
    
    Director
    
    March 17, 2008(Harold W. Furchtgott-Roth)
 111