10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
ý	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2008
OR
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
For the transition period from                                   to

Commission file number 0-01-11174

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

Delaware	06-1340090
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification no.)

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

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

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

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

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

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

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

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

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

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

Large accelerated filer o Accelerated filer ý Non-accelerated filer o Smaller reporting company o

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

          Aggregate market value of registrant's Common Stock held by non-affiliates based upon the closing price of a share of the registrant's Common Stock on June 30, 2009 as reported on the Pink Sheets was $68,770,000.

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

DOCUMENTS INCORPORATED BY REFERENCE

          None.

MRV Communications, Inc.

Annual Report on Form 10-K

For the fiscal year ended December 31, 2008

Table of Contents

			Page Number
PART I			1
	Item 1.	Business	1
	Item 1A.	Risk Factors	12
	Item 1B.	Unresolved Staff Comments	31
	Item 2.	Properties	31
	Item 3.	Legal Proceedings	32
	Item 4.	Submission of Matters to a Vote of Security Holders	33
PART II			34
	Item 5.	Market for the Company's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	34
	Item 6.	Selected Financial Data	37
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	46
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	87
	Item 8.	Financial Statements and Supplemental Data	89
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	160
	Item 9A.	Controls and Procedures	160
	Item 9B.	Other Information	167
PART III			167
	Item 10.	Directors, Executive Officers and Corporate Governance	167
	Item 11.	Executive Compensation	175
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	184
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	186
	Item 14.	Principal Accounting Fees and Services	186
PART IV			188
	Item 15.	Exhibits and Financial Statement Schedules	188
SIGNATURES			193

FORWARD LOOKING STATEMENTS AND FACTORS THAT MIGHT AFFECT FUTURE RESULTS

        This Annual Report on Form 10-K for the year ended December 31, 2008 ("Form 10-K"), contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Forward-looking statements are statements other than statements of historical fact and may be identified by use of such terms as "expects," "anticipates," "intends," "potential," "estimates," "believes," "should," "will," "would" and words of similar import.

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

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

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

Explanatory Note Regarding Restatement

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

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

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

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

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

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

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

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

Item 1A. "Risk Factors";

Item 3. "Legal Proceedings";

Item 6. "Selected Financial Data";

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

Item 8. "Financial Statements and Supplementary Data", Note 3, "Restatement of Financial Statements"; and

Item 9A. "Controls and Procedures".

PART I

Item 1.    Business.

Overview

        MRV is a global supplier of unique communications solutions to telecommunications service providers, enterprises and governments throughout the world. Our products enable our customers to provide high-bandwidth data and video services and mobile communications services more efficiently and cost effectively. Today's telecommunications networks are evolving to support the demand for mobile and high-bandwidth applications such as mobile video services, Internet Protocol video services, or IP-video, peer-to-peer networking, and content-rich, transactional websites. Service providers and enterprises alike are attempting to differentiate their offerings in an effort to generate additional revenue for many of these services. The growth in these applications and services is driving the need for additional bandwidth capacity in many portions of the world's networks. To meet this demand for additional capacity, our customers are upgrading their networks with new optical communications systems and products.

        MRV conducts its business along three principal segments: (a) the Network Equipment group; (b) the Network Integration group; and (c) the Optical Components group. Our Network Equipment group designs, develops and manufactures communications infrastructure solutions that enable the access, transport, aggregation and management of all types of communications traffic for fixed-line and mobile communications networks. Our solutions are purchased by telecommunications service providers, mobile communications service providers, cable service providers, enterprises and governments worldwide. These solutions include switches, routers, physical layer products and console management products. Through a wholly-owned subsidiary headquartered in Switzerland, we also design, develop and sell specialized networking products for aerospace and defense applications.

        Our Network Integration group operates through six subsidiaries in Italy, France, Switzerland and Scandinavia. Collectively, we service international and regional telecommunications service providers, large enterprises, and government institutions. The Network Integration group provides network system architecture and integration services and, procurement and distribution services for products that are manufactured by MRV's Network Equipment group as well as products developed and manufactured by third-party vendors.

        Source Photonics, our Optical Components group, designs, manufactures and sells optical components and subassemblies used in telecommunications systems and data communications networks. These products include passive optical network, or PON, subsystems, optical transceivers used in enterprise, access and metropolitan applications, as well as other optical components, modules and subsystems. Source Photonics is the leading provider of optical subsystems used in Fiber-to-the-Premises and fiber-to-the-home deployments which many telecommunications service providers are using to deliver video, voice and data services.

        We market and sell our products worldwide, through a variety of channels, which include a dedicated direct sales force, manufacturers' representatives, value-added-resellers, distributors and systems integrators.

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

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

Industry Background

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

        Although we expect a decrease in near-term demand, we believe that our end markets are strong. We believe telecommunication networks will continue to evolve to support growing network traffic as a result of the proliferation of high-bandwidth applications, such as IP-video, on-demand video services, VoIP, peer-to-peer networking, and content-rich websites. Our products and services address the Carrier Ethernet and wavelength division multiplexing, or WDM, Optical Transport markets, which could provide new opportunities for growth as businesses migrate to Ethernet from legacy technologies such as frame relay, and DSL. We also believe that growth will occur as telecommunication service providers strive to increase the efficiency and performance of their networks while reducing overall costs. We are building upon 20 years of optical innovation and 10 years of experience in carrier-class Metro Ethernet as we participate in the next phase of Ethernet services growth. Ethernet is the predominant technology in Local Area Networks, or LANs. Metro Ethernet refers to a network based on the Ethernet standard which covers a metropolitan area and is a common way for telecommunications service providers to connect subscribers and businesses to the Internet. Ethernet networks are deployed by telecommunications service providers because they have a lower cost of ownership and offer high bandwidth with solid reliability. In addition, these Metro Ethernet networks can easily be connected to customer networks because Ethernet is the predominant corporate LAN and residential network technology. Despite macroeconomic challenges, we believe the long-term growth of Metro Ethernet and the demand for our optical products will be fueled by the ever-increasing demand for more bandwidth capacity and higher connection speeds. There are several factors driving this growth:

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Data intensive applications running over service provider networks require more network capacity.

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Residential consumers are increasingly using data intensive computer applications such as interactive gaming, IPTV, video on demand, video downloads and user-generated content such peer-to-peer file sharing, and social networking.

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Business demand is also growing due to the increase in applications and data shared across the enterprise and the growing adoption of software-as-a-service and IP-based voice and video communications such as video conferencing and VoIP services.

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Mobile communications continues to grow while smart phones and other handheld devices are becoming more advanced with bandwidth intensive applications.

        On August 29, 2009, market research firm, ComScore, reported that a record 21.4 billion videos were viewed online in the United States during the month of July 2009, a 50 percent increase from 14.3 billion videos viewed in December 2008. Comscore also noted that 81 percent of the total U.S. audience viewed online video. In a June 2009 report, the Cisco Visual Networking Index projects that IP traffic will increase at a combined annual growth rate of 40 percent from 2008 to 2013. In order to keep up with increased traffic and video demand, service providers will have to continue to improve and expand their Carrier Ethernet network infrastructures. In a September 28, 2009 report, Infonetics

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forecasts global Carrier Ethernet Equipment manufacturer revenue to grow from $19 billion in 2008 to over $34 billion in 2013.

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

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

        In addition to investing in their access networks, telecommunications service providers not only need to increase the data capacity of their metro networks but also need to enhance the intelligence, flexibility and efficiency of their networks. As a result, they are investing in optical transport networks. This will allow the service providers to maximize network utilization even as user needs and service offerings change over time. According to Heavy Reading, a market research firm, sales of wavelength division multiplexing, or WDM, modules are expected to grow from $2.5 billion in 2007 to $3.8 billion in 2013. WDM uses multiple optical wavelength channels on the same fiber to offer increased data capacity. The WDM multi-channel architecture supports the flexibility to manage, upgrade, and enhance the network on a per-channel basis as requirements change.

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

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Innovative technology which provides industry-leading performance;

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Flexibility to design products quickly to meet the needs of a particular application;

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Strong customer support throughout the product lifecycle; and

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Cost-effective products which allow the overall system to be economical to service providers and end users.

Markets Served

        We primarily serve the following markets:

        Telecommunications Service Providers.    Our telecommunications service provider customer base includes international, national and regional telecommunications carriers, both wireline and wireless. Telecommunications service providers are under increasing competitive pressure, primarily from emerging competitors that offer similar services at competitive prices. Our products and services enable both established and emerging telecommunications service providers to transition their legacy or existing network infrastructures to deliver a broader mix of higher bandwidth services to consumers and

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enterprises. We provide products that enable telecommunications service providers to support consumer demand for video delivery, broadband data and video and wireless broadband services. We also offer optical components and subassemblies that allow telecommunications service providers to provide Fiber-to-the-Home ("FTTH") and Fiber-to-the-Premise ("FTTP") services. Our optical components enable telecommunications providers, both domestic and international, to offer "triple-play" services including voice, video and ultra-high speed Internet access to their end customers.

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

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

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

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

Products and Services

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

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Optical transport products;

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Metro Ethernet products;

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Out-of-band networking products;

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Fiber optic components and subsystems; and

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Networking integration and services.

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        Optical Transport Products. Optical transport refers to the transmission of data signals as light pulses, driven by either a laser or light emitting diode, through a fiber optic cable. Our optical communication products include PON subsystems and optical transceivers used in the enterprise, access and metropolitan segments of telecommunications networks, as well as other optical components, modules and subsystems. Optical transport networks enable high-bandwidth video, voice and data services by providing efficient fiber optimization, redundancy, distance extension, media conversion and security. One of the more common techniques utilized for fiber optimization is WDM. In WDM, each signal or channel is carried over a different wavelength. The different wavelengths are multiplexed and passed through a single optical fiber. On the receiving end, the signals are separated by wavelength. Included in the optical transport networking products we offer are those we brand under our LambdaDriver product family and our Fiber Driver product family.

        The LambdaDriver product family consists of multifunctional, compact and modular WDM systems designed for campus, metropolitan and regional fiber optic networks. The LambdaDriver Series has the ability to carry over 160 wavelengths to distances of hundreds of miles in different network topologies such as ring, star, point-to-point, add / drop configurations and mesh networks. The systems use a modular architecture comprised of three different chassis: LD 400, LD 800 and LD 1600, and a variety of plug-in modules supporting multiple data, voice and video protocols, up to speeds of 10Gbps per channel. The advantage of a modular architecture is that product engineering efforts can be leveraged over hundreds of possible configurations to meet the specific demands of a customer without the unwanted expense of extra functionality.

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

        Metro Ethernet Products.    Today's telecommunication networks continuously evolve to support growing network traffic due to the demand for high-bandwidth applications such as IP-video, streaming video, VoIP, peer-to-peer networking, and content-rich websites. Wireline carriers, wireless operators, and cable service providers offer network connectivity services to their residential or enterprise end-user customers. These service providers are attempting to differentiate their service offerings from their competitors and expect to generate additional revenue from the provision of many of these services. However, the growth in these applications and services is driving the need for additional bandwidth capacity in many portions of service providers' networks. To meet this demand for additional capacity, telecommunication service providers are upgrading their networks with new optical and Metro Ethernet communication systems. Our Metro Ethernet products enable telecommunication service providers to transition their infrastructure and provide high-bandwidth video, voice and data services at a reasonable cost. Specifically, our OptiSwitch product line provides network access, transport and aggregation from the end user customer to the provider's point-of-presence and further upstream, towards the core of the network. By providing reliable, high-bandwidth connectivity with end-to-end traffic management, the OptiSwitch family enables premium revenue generation services, based on specific Service Level Agreements, or SLAs. The OptiSwitch product family consists of two main lines — the OptiSwitch 900 series and the OptiSwitch 9000 series.

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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 advanced service level standards.

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The OptiSwitch 9000 series is a carrier-class Ethernet IP optical switch for Metro Ethernet aggregation services that supports MultiProtocol Label Switching ("MPLS"), a high-speed switching technology. Service providers 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 support. Both OptiSwitch 900 and 9000 series are fully interoperable with other leading network equipment vendors and are certified to key industry standards such as the Metro Ethernet Forum, the Internet Engineering Task Force and the International Telecommunications Union.

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

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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 U.S. and Canadian government security and encryption standard — the Federal Information Processing Standard ("FIPS") 140-2.

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Power management.    The 5250 / 4800 power control series provides remote power management, usage monitoring, and automated trigger action.

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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 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" use.

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

        We classify our Optical Components products in two groups: PON Solutions and Metro and Access Transceivers. We are one of the largest global providers of optical components and subsystem products used in FTTP PONs, to deliver advanced broadband video, voice and data services to service providers' customer premises. A PON system is based on a single head-end optical line terminal at the central

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office of a telecommunication service provider. Optical line terminals transmit and receive information to and from multiple customer-side optical network terminals sharing the same fiber optic PON. Our PON solutions are subsystems which perform the core transmit and receive functions of the overall optical line terminal and optical network terminals systems.

        There are three primary standards for PON networks. These standards have been developed by organizations such as the International Telecommunications Union, or ITU, and the Institute of Electrical and Electronics Engineers, or IEEE, in conjunction with service providers and vendors of optical communication systems. We offer products which address all three of these standards:

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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 Optical Network Terminal ("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 Optical Line Termination ("OLT") transceiver.

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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 Source Photonics have secured us a position among the market leaders in the EPON market.

        We offer a broad range of Metro and Access Transceivers used in both telecommunication systems and data communication networks. The product line covers the requirements of key industry standards, such as SONET, Ethernet, and Fibre Channel. We also offer products that are not based on standards, for specific market segments or customer-specific requirements. Our product line includes coarse wavelength division multiplexing ("CWDM") and dense wavelength division multiplexing ("DWDM") interfaces, primarily in pluggable versions. The pluggable version offers benefits to system vendors and service providers in the areas of time-to-market, inventory management and ease of configurability. These benefits are particularly significant for DWDM and contribute to the general market trend towards pluggable interfaces.

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

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

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        We are continuing to develop innovative transceiver products and are focusing significant effort in developing our 10 gigabit pluggable portfolio including 10 gigabit small form-factor pluggable, or XFP, and small form-factor pluggable plus, or SFP+, products. SFP+ products offer the same throughput as an XFP module, but are approximately half the size and consume approximately one-third of the power. In addition, our product line offers solutions for a variety of SONET, Ethernet and Fibre Channel applications. These broad product offerings allow us to satisfy a wide array of customer demands, which is increasingly important as our customers attempt to reduce the number of suppliers with which they directly work.

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

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

•

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.

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

Worldwide Sales and Marketing

        As of December 31, 2008, our worldwide sales and marketing organization consisted of approximately 610 employees, including sales representatives, technical support and management. We have field sales offices in more than 20 countries involved in the sales and distribution of our products, providing system installation, technical support, and follow-up services to end users of our products. Through the field sales offices, we sell our products and services both directly and through channel partners with support from their sales forces. Our channel partners include distributors, value-added resellers and system integrators. Outside the United States, we conduct operations in: Argentina, Australia, Belgium, Canada, China, Finland, France, Germany, Hungary, Israel, Italy, Mexico, the Netherlands, Norway, Russia, Singapore, Sweden, Switzerland, Taiwan and the United Kingdom.

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

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

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

Competition

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

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

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

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Product performance, features, quality and price;

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A comprehensive range of complementary products and services;

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Customer service and technical support;

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Lead and delivery times;

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Timeliness of new products introductions;

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Global presence, including distribution network;

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Conformance to standards; and

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Brand name recognition.

Product Development and Engineering

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

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

For the year ended December 31:		2008		2007 (Restated)		2006 (Restated)
Network Equipment group (1)		$	21,089	$	19,778	$	18,326
Network Integration group (2)			—		—		—
Optical Components group (3)			15,967		12,113		8,279
All others (2)			1,371		1,169		1,221
Corporate unallocated (4)			319		327		543
	Total	$	38,746	$	33,387	$	28,369

(1)

Includes share-based compensation expense of $400,000 in 2008, $537,000 in 2007 and $509,000 in 2006.



(2)

No share-based compensation expense was recognized in 2008, 2007 or 2006.



(3)

Includes share-based compensation expense of $843,000 in 2008, $728,000 in 2007 and $353,000 in 2006.



(4)

Includes share-based compensation expense of $60,000 in 2008, $51,000 in 2007 and $94,000 in 2006.

Manufacturing

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

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

        For our transceiver products, we maintain full control over the manufacturing technology, equipment and processes that contract manufacturers use to build the products. Our design process seeks to optimize our products for high volume manufacturability, cost, performance, and reliability. A significant amount of our research and product development expense is dedicated to development of our manufacturing infrastructure to enable us to handle increasingly complex products in a high volume environment. We also utilize advanced planning techniques across our extended global supply chain that electronically optimizes our purchasing of material as well as factory resource utilization both at our

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

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

        During the last several years, the number of suppliers of components has decreased significantly and, more recently, demand for components has increased rapidly. Any supply deficiencies relating to the quality or quantities of components we use to manufacture our products could adversely affect our ability to fulfill customer orders and our results of operations.

Components

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

Intellectual Property

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

Employees

        As of December 31, 2008, we employed 3,477 full-time employees. Of these employees, 2,439 are in manufacturing, 428 in product development and engineering, and 610 in sales, marketing and general administration. Approximately 3,140 employees are in locations outside the United States. None of our employees are represented by a union or governed by a collective bargaining agreement, except for employees in a Chinese subsidiary of Source Photonics that operate our equipment. Employees of the Source Photonics' subsidiary participate in collective agreements with their trade unions. The collective agreements usually set out the minimum standard for wages, working hours and other benefits of these workers.

        We believe our employee relationships are satisfactory. We also believe that our long-term success depends in part on our continued ability to recruit and retain qualified personnel. The risks associated with dependence on qualified personnel are more fully discussed under the heading "Our business

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

Item 1A.    Risk Factors.

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

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

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

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

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

•

responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees;

•

if one-third of our Board ceases to be composed of existing directors or those individuals nominated by the existing directors, then a "change in control" in our 2007 Omnibus Incentive Plan will be triggered, potentially eliminating some of the long-term incentive feature of certain existing awards granted to our employees;

•

perceived uncertainties as to our future direction may impact our ability to attract and retain qualified personnel and affect existing and potential collaborations or strategic relationships; and

•

if individuals are elected to our Board of Directors with a specific agenda, it may adversely affect our ability to effectively and timely implement our strategic objectives.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

•

the cancellation or postponement of orders from one period to the next;

•

the timing and amount of significant orders;

•

the mix in any period of higher and lower margin products and services;

•

software, hardware or other errors in the products we sell requiring replacements or increased warranty reserves;

•

charges for excess or obsolete inventory;

•

our annual reviews of goodwill and other intangibles that lead to impairment charges;

•

the ability of our suppliers to produce and deliver components and parts, including sole or limited source components, in a timely manner, in the quantity and quality desired and at the prices we have budgeted;

•

readiness of customer sites for installation;

•

political stability in the areas of the world in which we operate;

•

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;

•

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, and increased sales discounts;

•

the relative success of our efforts to continually reduce product manufacturing costs;

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•

our introduction of new products, with initial sales at relatively small volumes with resulting higher production costs, and the rate of market acceptance of the products;

•

delays or reductions in customer purchases of our products in anticipation of the introduction of new and enhanced products by us or our competitors;

•

the level of capital spending of our customers;

•

currency fluctuations;

•

the ability of our customers to pay for our products;

•

general economic conditions;

•

changes in conditions specific to our business segments; and

•

stockholder litigation related to our internal investigation of our practices related to historical stock option grants and other accounting issues and the related restatement of our financial statements.

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

        We expect revenue and gross margins generally and for specific products to continue to fluctuate from quarter to quarter and year to year. Because of these and other factors, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. It is possible that, in future periods, our results of operations will be below the expectations of public market analysts and investors. This failure to meet expectations could cause the trading price of our Common Stock to decline. Similarly, the failure by our competitors or customers to meet or exceed the results expected by their analysts or investors could, by association, cause our stock price to decline.

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

        The communications equipment and optical component industries are intensely competitive, and we must continually provide new products while dealing with increased price competition from low-cost producers in Asia. We compete directly with a number of established and emerging networking and optical components companies. Our direct competitors in networking products, switches and routers generally include: ADVA Optical Networks, Alcatel-Lucent, Allied Telesis Holdings KK, Brocade Communications Systems, Ciena Corporation, Cisco Systems, Inc., Extreme Networks, Huawei Technologies Inc. Nortel Networks Corporation and Raritan, Inc. Our competitors in fiber optic components include: Delta Electronics, Inc., EMCORE Corporation, ExceLight Communications, Inc., Finisar Corporation, JDS Uniphase Corporation, Ligent Photonics, Inc., NEC Corporation, NeoPhotonics Corp., Nokia Siemens Networks, Oplink Communications, Inc., Opnext, Inc., and Wuhan Telecommunication Devices Co., Ltd. Many of our competitors have significantly greater financial, technical, marketing, distribution and other resources and larger installed customer bases than we do.

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

        Many of our competitors have significantly greater financial, technical, marketing, distribution, sales and customer support organizations and other resources and larger installed customer bases than we have. Our competitors continually introduce or announce their intentions to introduce new competitive products, and may be able to devote greater resources to the development, promotion, sale and support of their products. Many of our larger competitors offer customers broader product lines, which provide a more comprehensive networking solution than we provide. These companies can leverage their customer bases and broader product offerings and adopt aggressive pricing policies to gain market share. In addition, several of our competitors have large market capitalizations, substantially larger cash reserves, and are much better positioned than we are to acquire other companies in order to gain new technologies or products that may displace our product lines and give them a strategic advantage. Accordingly, in certain regional markets we have collaborated with other vendors in an effort to enhance our overall capability in providing products and services.

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

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

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

        During the years ended December 31, 2008, 2007 and 2006, research and development expenses accounted for 7%, 7% and 8% of revenues, respectively. Introduction of new products and product enhancements will require that we effectively transfer production processes from research and development to manufacturing and coordinate our efforts with those of our suppliers to achieve volume production rapidly. If we fail to transfer production processes effectively, develop product enhancements or introduce new products in sufficient quantities to meet the needs of our customers as scheduled, our net sales may be reduced and our business may be harmed. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements, or to license these technologies from third parties. Product development delays may result from numerous factors, including:

•

changing product specifications and customer requirements;

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•

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.

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

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

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

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

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Although we were profitable on a consolidated basis in the second quarter of 2008, we have not achieved profitability on a consolidated basis for a full year since 2004 and may not achieve profitability in the future.

        Although we were profitable on a consolidated basis in the second quarter of 2008, we reported net losses for the years ended December 31, 2008, 2007 and 2006, and have not achieved profitability on a consolidated basis for a full year since 2004. We anticipate continuing to incur significant product development, sales and marketing and general and administrative expenses and, as a result, we will need to continue our efforts to contain expense levels and increase revenue levels in an effort to achieve profitability in future fiscal quarters and years. To date in 2009, we have incurred additional significant charges related to the investigation and restatement of our financial statements, related expenses, and expect to incur significant expenses in the proxy contest for the election of directors in the 2009 annual meeting due to the running of a competing slate of directors by activist stockholders. We may not be successful in our efforts to contain expense levels and increase revenue levels and we may not attain profitability on a sustained basis or at all.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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OEMs to a company that was not our customer, our results of operations would suffer unless we were able to replace the customer or orders with one or more customers of comparable size. Our sales are made on credit and our results of operations would be adversely affected if a significant customer were to experience unexpected financial reversals resulting in it being unable to pay for our products.

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

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

        As of December 31, 2008, we had net operating losses, or NOLs, of approximately $196.6 million for federal income tax purposes and approximately $155.1 million for state income tax purposes. We also had capital loss carry forwards totaling $14.5 million as of December 31, 2008, which begin to expire in 2009. Under Section 382 of the Internal Revenue Code, if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change NOLs, capital loss carry forwards and other pre-change tax attributes to offset its post-change income, may be limited. An ownership change is generally defined as a greater than 50% change in its equity ownership by value over a three-year period. We may experience an ownership change in the future as a result of subsequent shifts in our stock ownership. If we were to trigger an ownership change in the future, our ability to use any NOLs and capital loss carry forwards existing at that time could be limited.

We face risks in reselling the products of other companies.

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

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

        We currently purchase several key components from single or limited sources. Moreover, we depend on the quality of the products supplied to us, over which we have limited control. We have encountered shortages and delays in obtaining components in the past and expect to encounter shortages and delays in the future. If we cannot supply products due to a lack of certain components, or are unable to redesign products with other components, in a timely manner, our business will be significantly harmed.

        In our fiber optic components business particularly, customers generally restrict our ability to change the component parts in our modules without their approval. For less critical components, this may require as little as a specification comparison. For more critical components, such as lasers, photodetectors and key integrated circuits, this may result in repeating the entire qualification process. We depend on a limited number of suppliers for key components that we have qualified to use in the manufacture of certain of our products. Some of these components are available only from a sole source or have been qualified only from a single supplier. We typically have not entered into long-term agreements with our suppliers and, therefore, our suppliers could stop supplying materials and equipment at any time or fail to supply adequate quantities of component parts on a timely basis. It is difficult, costly, time consuming and, on short notice, sometimes impossible for us to identify and qualify

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new component suppliers. The reliance on a sole supplier, single qualified vendor or limited number of suppliers could result in delivery and quality problems, reduced control over product pricing, reliability and performance and an inability to identify and qualify another supplier in a timely manner. We have in the past had to change suppliers, which, in some instances, has resulted in delays in product development and manufacturing until another supplier was found and qualified. Any such delays in the future may limit our ability to respond to changes in customer and market demands. During the last several years, the number of suppliers of components has decreased significantly and, more recently, demand for components has increased. Any supply deficiencies relating to the quality or quantities of components we use to manufacture our products could adversely affect our ability to fulfill customer orders and our results of operations.

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

        We rely heavily on our own production capability for critical semiconductor lasers and light emitting diodes used in our products. Because we manufacture these and other key components at our own facilities and these components are not readily available from other sources, any interruption of our manufacturing processes could have a material adverse effect on our operations. Furthermore, we have a limited number of employees dedicated to the operation and maintenance of our wafer fabrication equipment, the loss of whom could result in our inability to effectively operate and service this equipment. Wafer fabrication is sensitive to many factors, including variations and impurities in the raw materials, the fabrication process, performance of the manufacturing equipment, defects in the masks used to print circuits on the wafer, and the level of contaminants in the manufacturing environment. We may not be able to maintain acceptable production yields or avoid product shipment delays. In the event adequate production yields are not achieved, resulting in product shipment delays, our business, operating results and financial condition could be materially adversely affected.

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

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

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

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

        We use rolling forecasts based on anticipated product orders to determine our component requirements. It is very important that we accurately predict both the demand for our products and the lead times required to obtain the necessary components and materials. Lead times for components and materials that we order vary significantly and depend on factors such as specific supplier requirements, the size of the order, contract terms and current market demand for the components. For substantial increases in production levels, some suppliers may need six months or more lead time. If we overestimate our component and material requirements, we may have excess or obsolete inventory, which may not get used or have to be discounted to eliminate. If we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Any of these occurrences would negatively impact our revenue.

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

        Historically, we have manufactured most of our products in Taiwan, with some reliance on contract manufacturers in China as well, and Fiberxon manufactured its products in China. We are in the process of consolidating our PRC-based manufacturing operations at a single location in Chengdu, PRC. We believe that the consolidation process should be completed during the first half of 2010. We could experience delays if we are not able to transition our staff and equipment to our new facilities efficiently, and such delays could result in short-term reductions in our production capabilities or an inability to increase production consistent with our long-term plans. In addition, we may experience higher manufacturing losses and lower gross margins due to the need to maintain older production lines while at the same time incurring expenses related to the consolidation process. Once the consolidation effort is complete, we will face increased risk of loss from any disruption of operations in Chengdu affecting our consolidated facility. Damage to our Chengdu manufacturing facility due to fire, contamination, natural disaster, power loss, unauthorized entry or other events could force us to cease manufacturing our products, resulting in loss of revenue and breached customer contracts. In addition, if the facility or the equipment in the facility is significantly damaged or destroyed for any reason, we may be unable to reallocate efficiently or replace our manufacturing capacity for an extended period of time, and our business, financial condition and results of operations would be materially and adversely affected.

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

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

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

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

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

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

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current or future legal requirements, including those applicable to us in the United States, Taiwan and China where we maintain facilities, we may be required to pay substantial penalties, suspend our operations, or make costly changes to our manufacturing processes or facilities.

        In addition, we could face significant costs and liabilities in connection with legislation which enables customers to return a product at the end of its useful life and charges us with financial and other responsibility for environmentally safe collection, recycling, treatment and disposal. We also face increasing complexity in our product design and procurement operations as we adjust to new and upcoming requirements relating to the materials composition of our products. This includes the restrictions on lead and certain other substances in electronics that apply to specified electronics products put on the market in the European Union. The labeling provisions of similar legislation in China went into effect on March 1, 2007. Many of our customers have adopted this approach and have required our full compliance. Even though we have devoted a significant amount of resources and effort planning and executing our compliance program and believe that we are in compliance with such legislation, it is possible that some of our products might be incompatible with such regulations. In such event, we could experience loss of revenue, damaged reputation, diversion of resources, monetary penalties and legal action. Other environmental regulations may require us to re-engineer our products to utilize components that are more environmentally compatible. Such re-engineering and component substitution may result in additional costs to us. Although we currently do not anticipate any material adverse effects based on the nature of our operations and the effect of such laws, there is no assurance that such existing laws or future laws will not have a material adverse effect on us.

We may be faced with product liability claims.

        Despite quality assurance measures, there remains a risk that defects may occur in our products. The occurrence of any defects in our products could give rise to liability for damages caused by such defects. Defects could, moreover, impair the market's acceptance of our products. Both could have a material adverse effect on our business and financial condition. Although we carry product liability insurance, and believe such coverage is adequate based on the historical rate and nature of customer product quality claims or complaints, we cannot provide assurance that this insurance would adequately cover our costs arising from any significant defects in our products.

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

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

	Years ended December 31,
	2008			2007			2006
Percentage of revenues from international sales		68	%		68	%		67	%

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

•

greater difficulty in accounts receivable collection and longer collection periods;

•

the impact of recessions in economies outside the United States;

•

changes in regulatory requirements;

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•

seasonal reductions in business activities in some parts of the world, such as during the summer months in Europe or in the winter months in Asia when the Chinese 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 and other key 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 unforseen environmental problems; and

•

personnel recruitment delays or the inability to obtain skilled technical, financial and management personnel needed in countries where we have facilities, such as China.

        Our business and operations are also subject to general geopolitical conditions, such as terrorism, political and economic instability, changes in the costs of key resources such as crude oil and changes in diplomatic or trade relationships.

        Economic conditions in several countries and markets outside the United States. in which we have offices, personnel, facilities or sales represent significant risks to us. Instability in the Middle East, China or the European Union could have a negative impact on our sales and operations in these regions, and unstable conditions could have a material adverse effect on our business and results of operations. The wars in Afghanistan and Iraq and other turmoil in the Middle East and the global war on terror also may have negative effects on our business operations, including our U.S. operations. For example, heightened U.S. security concerns on domestic and international travel and commerce may result in increased immigration controls that could impact the residency status of our non-U.S. engineers and other key employees working in our U.S. facilities. In addition to the effect of global economic instability on our operations or facilities on sales to customers outside the United States, sales to domestic customers could be negatively impacted by these conditions.

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

        Historically, there has been an abundance of labor in Southern China, but over the last few years, factories in Southern China, particularly in Shenzhen and to a lesser extent in Chengdu, where our manufacturing facilities are located, are to varying degrees facing a labor shortage as migrant workers and middle level management seek better wages and working conditions elsewhere. Further, some of our employees in Chengdu are represented by unions. This trend of labor shortages is expected to continue, fueled by the effects of the one-child policy imposed by the Chinese government over the past

27

three decades and will likely result in increasing wages as companies seek to keep their existing work forces. Continuing labor shortages or strikes can be expected to adversely impact our future operating results by, for example, preventing us from manufacturing at peak capacity and forcing us to increase wages and benefits to attract the diminishing pool of available workers. This could result in lower revenue or increased manufacturing costs, which would adversely affect gross margins.

Our operating results have been impacted by foreign exchange rates and our activities seeking to hedge against currency exchange and interest rate fluctuations.

        The majority of our sales are currently denominated in U.S. dollars. As we conduct business in several different countries, we have benefited from sales made in currencies other than the U.S. dollar because of the weakness of the U.S. dollar relative to the currencies in which these sales have been made. Fluctuations in currency exchange rates can and do cause our products to become relatively more expensive in particular countries, leading to a reduction in sales in that country. In addition, inflation or fluctuations in currency exchange or interest rates in these countries could increase our expenses and thereby adversely affect our operating results.

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

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

We face risks inherent in doing business in China.

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

•

difficulties in obtaining domestic and foreign export, import and other governmental approvals, permits and licenses;

•

compliance with PRC laws, including employment laws; such as the changes in the PRC's labor law restricting our ability to reduce our workforce in China as necessary, which could increase our manufacturing costs and those of the contract manufacturers we use in China;

•

difficulties in staffing and managing foreign operations, including cultural differences in the conduct of business, labor and other workforce requirements and inadequate local infrastructure;

•

Restrictions and taxes related to the payment of dividends by our subsidiaries in the PRC to us under PRC law;

•

Political or trade controversies between China and the United States; and

•

Increased taxes in China because of the discontinuation of certain preferential tax treatments that were available to foreign enterprises prior to January 1, 2008.

        Any of these factors could harm our future revenues, gross margins and operations significantly. Moreover, the political tension between Taiwan and the PRC that continues to exist could eventually lead

28

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

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

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

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

        We incurred net losses in each of the years ended December 31, 2008, 2007 and 2006, and our combined cash and short-term investments declined in 2007 and 2008. Excluding the private placement of approximately 19.9 million shares of our Common Stock we issued to a group of institutional investors in 2006, which resulted in proceeds of $69.9 million, our combined cash, cash equivalents, time deposits and short-term and long-term marketable securities would have declined during the year ended December 31, 2006. As of December 31, 2008, our cash, cash equivalents, time deposits and marketable securities totaled $81.6 million and declined by approximately $4.8 million, or six percent, since December 31, 2007.

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

•

satisfy our potential deferred consideration obligation of up to $31.5 million (excluding applicable offsets), to the former stockholders of Fiberxon, which was due 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;

•

fund our working capital requirements; or

•

otherwise respond to competitive pressures.

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

29

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

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

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

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

We could in the future become subject to litigation regarding intellectual property rights, or we could initiate claims or litigation against third parties for infringement of our proprietary rights to protect these rights.

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

        In the future, we may be a party to litigation to protect our intellectual property or as a result of an alleged infringement of others' intellectual property. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages or invalidation of our proprietary rights. These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management time and attention. In addition, litigation frequently involves substantial expenditures and can require significant management attention, even if we ultimately prevail. Accordingly, any infringement claim or litigation against us could significantly harm our business,

30

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

Our business requires us to attract and retain qualified personnel.

        Our ability to develop, manufacture and market our products, run our operations and our ability to compete with our current and future competitors depend, and will depend, in large part, on our ability to attract and retain qualified personnel. Competition for executives and qualified personnel in the networking and fiber optics industries is intense, and we will be required to compete for those personnel with companies having substantially greater financial and other resources than we do. We are dependent upon Noam Lotan, our Chief Executive Officer, and Shlomo Margalit, our Chairman of the Board of Directors and Chief Technical Officer. The loss of the services of either of these officers could have a material adverse effect on us. To retain these officers, we have entered into employment agreements with them, and we are the beneficiary of a key person life insurance policy in the amount of $1.0 million on Mr. Lotan's life. We give no assurances that the employment agreements will retain these officers or that the proceeds from the insurance policy will be sufficient to compensate us in the event of Mr. Lotan's death. Further, the policy is not applicable in the event that Mr. Lotan becomes disabled or is otherwise unable to render services to us. We may enter into similar arrangements in the future to attract and retain qualified executives. If we should be unable to attract and retain qualified personnel, our business could be materially adversely affected.

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

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

Item 1B.    Unresolved Staff Comments.

        None.

Item 2.    Properties

        Our properties consist of leased and owned facilities for product development, manufacturing, sales, support, and administrative operations. Our headquarters facility is located in Chatsworth, California. We believe that our existing properties are in good condition and suitable for the conduct of our business. Should the need arise, we believe that suitable replacement and additional space will be available in the future on commercially reasonable terms. For additional information regarding

31

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

•

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.

Item 3.    Legal Proceedings.

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

Stock Option Litigation

        On June 5, 2008, our Board of Directors, based on information provided by management, and in consultation with management, concluded that the financial statements and the related reports of our independent public accountants should not be relied upon as a consequence of the pending restatement of our historical financial statements. A description of the facts regarding the appointment of a Special Committee of independent directors to investigate the issues and the completion of the restatement is set forth in Item 7. and in Note 3 to the Consolidated Financial Statements in Item 8 of this Form 10-K.

        Between June 10, 2008 and August 15, 2008, five purported stockholder derivative and securities class action lawsuits were filed in the U.S. District Court in the Central District of California and one derivative lawsuit was filed in the Superior Court of the State of California against the Company and certain of our current and former officers and directors. The five lawsuits filed in the Central District of California were consolidated. Claims are asserted under Section 10(b) and 20(a), of the Exchange Act and Rule 10b-5 promulgated thereunder. The allegations set forth in the complaints are based on facts disclosed in our press release of June 5, 2008, which was included as Exhibit 99.1 to our Current Report on Form 8-K filed with the SEC on June 6, 2008. The complaints seek to recover from the defendants unspecified compensatory and punitive damages, to require the Company to undertake reforms to corporate governance and internal control procedures, to obtain an accounting of stock option grants found to be improper, to impose a constructive trust over stock options and proceeds derived therefrom, to disgorge from any of the defendants who received allegedly improper stock options the profits obtained therefrom, to rescind improperly priced options and to recover costs of suit, including legal and other professional fees and other equitable relief. The plaintiffs in the consolidated lawsuits and the defendants have stipulated to a postponement of further action until after the issuance by MRV of its restated financial statements, and have further agreed to mediation of the litigations.

SEC Inquiry

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

32

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

Fiberxon Acquisition Litigation

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

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

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

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

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

        None.

33

PART II

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

Market Information and Holders

        Our Common Stock was traded on the Nasdaq Global Market under the symbol "MRVC" in 2008. In June 2009, MRV was delisted from Nasdaq and is currently trading on the Pink Sheets. The following table sets forth the high and low sales prices for the periods indicated:

		High		Low
Year Ended December 31, 2008
	First quarter ending March 31	$	2.35	$	1.20
	Second quarter ending June 30	$	1.95	$	1.13
	Third quarter ending September 30	$	1.53	$	0.96
	Fourth quarter ending December 31	$	1.19	$	0.21
Year Ended December 31, 2007
	First quarter ending March 31	$	4.50	$	3.34
	Second quarter ending June 30	$	4.06	$	3.00
	Third quarter ending September 30	$	3.20	$	2.15
	Fourth quarter ending December 31	$	3.38	$	2.01

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

No Dividends or Share Repurchases

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

        We did not repurchase any shares of our Common Stock in 2008.

Equity Compensation Plans

        The table below sets forth information with respect to shares of Common Stock that may be issued under our stock option and warrant plans as of December 31, 2008.

Plan Category	Number of securities issuable upon exercise of outstanding options and warrants		Weighted average exercise price of outstanding options and warrants		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders (1)		5,707,427	$	2.29		8,318,300
Equity compensation plans not approved by security holders (2)		7,473,398	$	3.11		0
Total (3)		13,180,825	$	2.76		8,318,300

(1)

Includes shares underlying options granted under the 2007 Omnibus Incentive Plan (the "Omnibus Plan") and one of its predecessors, the 1997 Incentive and Nonstatutory Stock Option Plan.

34

(2)

Includes shares underlying options or awards granted under the following plans prior to the adoption of the 2007 Omnibus Incentive Plan:

•

1998 Nonstatutory Stock Option Plan;

•

2000 MRV Communications, Inc. Stock Option Plan for Employees of AstroTerra Corporation;

•

Stock options issued and outstanding on the effective date of the merger of Luminent under the Luminent Amended and Restated 2000 Stock Option Plan that were assumed by MRV and are exercisable for 0.43 shares of Common Stock for each share of Luminent held under the relevant option;

•

2000 MRV Communications, Inc. Stock Option Plan for Employees of Optronics International;

•

2001 MRV Communications, Inc. Stock Option Plan for Employees of Appointech, Inc.;

•

MRV Communications, Inc. 2002 International Stock Option Plan;

•

Italian Employees Warrant Program;

•

MRV Communications, Inc. 2002 Nonstatutory Stock Option Plan for Employees of Luminent, Inc.; and

•

2003 Non-Director and Non-Executive Officer Consolidated Long-Term Stock Incentive Plan (the "Consolidated Plan").

(3)

Excludes options to purchase shares that MRV assumed that are not pursuant to a plan when MRV acquired Fiberxon effective July 1, 2007. As of December 31, 2008, there were 1,398,562 excluded options with a weighted average exercise price of $1.72.

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

        Upon adoption of the Omnibus Plan, the 1997 Incentive and Nonstatutory Stock Option Plan and the plans set forth in the bulleted paragraphs above in footnote (2) were terminated and shares available for future grants of options or warrants under these plans, including shares that became and become available as a consequence of the lapse, expiration or forfeiture of outstanding options or warrants granted under such terminated plans, are rolled into, and become available for, future grants of options and other awards under the Omnibus Plan.

Performance Graph

        The chart below compares the five-year cumulative total return, assuming the reinvestment of dividends, on MRV's Common Stock with that of the Nasdaq Composite Index, the RDG SmallCap Technology Index and the S&P Small Cap Information Technology Index. We transitioned from the Nasdaq Stock Market (U.S. Companies) Index to the Nasdaq Composite index because the Nasdaq Stock Market (U.S. Companies) Index no longer exists and the Nasdaq Composite Index is its equivalent. We are adding the RDG SmallCap Technology Index prepared by Research Data Group as we are transitioning this year from the S&P SmallCap 600 Information Technology Index, and in future years will not be providing that index as a comparison metric.

35

        The graph assumes $100 was invested on December 31, 2003, in our Common Stock and the companies in each of the Nasdaq Composite Index, the RDG SmallCap Technology Index and the S&P SmallCap Information Technology Index. The stock price performance shown in the graph below should not be considered indicative of potential future stock price performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among MRV Communications, Inc., The NASDAQ Composite Index,
The RDG SmallCap Technology Index And The S&P SmallCap 600 Information Technology Index

*

$100 invested on 12/31/03 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

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

	Cumulative Total Return
Price as of December 31 for	2003		2004		2005		2006		2007		2008
MRV Communications, Inc.		100.00		97.61		54.52		94.15		61.68		20.48
NASDAQ Composite		100.00		110.10		113.12		127.05		136.81		79.93
RDG SmallCap Technology		100.00		95.54		95.86		109.69		103.57		51.16
S&P SmallCap 600 Information Technology		100.00		99.32		102.99		114.84		120.74		70.33

36

Item 6.    Selected Financial Data.

        The following information as of and for the years ended December 31, 2007, 2006, 2005 and 2004 has been restated to reflect adjustments to our previously issued financial statements as more fully discussed in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Note 3, "Restatement of Previously-Issued Financial Statements" to the Consolidated Financial Statements included in Item 8 of this Form 10-K. This financial data has been restated to correct our previous accounting for share-based compensation and other items. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements of the Company, including the notes thereto, in Items 7 and 8, respectively, of this Form 10-K in order to fully understand factors that may affect the comparability of the financial data.

        The following selected financial data as of December 31, 2008 and 2007 and for each of the three years in the period ended December 31, 2008, are derived from our audited financial statements included in Item 8 of this Form 10-K. The financial data as of December 31, 2006, 2005 and 2004 and for the years ended December 31, 2005 and 2004 are derived from our restated financial statements not contained herein. The historical results do not necessarily indicate results expected for any future period.

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

		Year ended December 31,
(in thousands, except per share amounts)		2008			2007 (Restated(1)(2))			2006 (Restated(1))			2005 (Restated(1))			2004 (Restated(1))
Statements of Operations Data:
Revenues		$	538,022		$	448,237		$	356,489		$	283,698		$	271,658
Cost of goods sold			388,021			320,750			244,385			193,887			179,497
Gross profit			150,001			127,487			112,104			89,811			92,161
Operating costs and expenses:
Product development and engineering			38,746			33,387			28,369			25,964			13,086
Selling, general and administrative			129,019			102,694			88,542			72,965			53,306
Impairment of goodwill and other intangibles			100,250			—			52			—			—
Amortization of other intangibles			2,434			1,906			—			—			—
Total operating costs and expenses			270,449			137,987			116,963			98,929			66,392
Operating income (loss)			(120,448	)		(10,500	)		(4,859	)		(9,118	)		25,769
Other income (expense), net			(246	)		(4,688	)		926			(1,911	)		(637	)
Income (loss) before provision for Income taxes			(120,694	)		(15,188	)		(3,933	)		(11,029	)		25,132
Provision for income taxes			2,510			3,906			3,450			3,410			2,571
Net income (loss)		$	(123,204	)	$	(19,094	)	$	(7,383	)	$	(14,439	)	$	22,561
Basic and diluted loss per share:
	Basic income (loss) per share	$	(0.78	)	$	(0.14	)	$	(0.06	)	$	(0.14	)	$	0.22
	Basic weighted average shares outstanding		157,323			140,104			120,902			104,350			104,793
	Diluted income (loss) per share	$	(0.78	)	$	(0.14	)	$	(0.06	)	$	(0.14	)	$	0.19
	Diluted weighted average shares outstanding		157,323			140,104			120,902			104,350			121,234

37

	December 31,
(in thousands)	2008			2007 Restated(1)			2006 Restated(1)			2005 Restated(1)			2004 Restated(1)
Selected Balance Sheet Data:
Cash and cash equivalents	$	67,950		$	72,474		$	91,722		$	67,984		$	77,226
Working capital		111,649			130,244			168,328			96,554			110,594
Total assets		392,519			498,965			343,455			264,154			279,412
Total long-term liabilities		9,274			7,616			30,295			29,694			30,978
Additional paid-in capital		1,403,663			1,399,630			1,285,877			1,209,275			1,209,196
Accumulated deficit		(1,248,639	)		(1,125,435	)		(1,106,341	)		(1,098,958	)		(1,084,518	)
Total stockholders' equity		166,700			289,922			187,308			113,894			138,280

(1)

The selected financial data as of December 31, 2007, 2006, 2005 and 2004 and for the years then ended have been corrected to reflect the restatements described in Item 7. "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and Note 3 to the Consolidated Financial Statements in Item 8 of this Form 10-K. The cumulative after-tax impact of all the restatement adjustments related to years prior to the year ended December 31, 2004 was $102.6 million, which is reflected as an adjustment to accumulated deficit at January 1, 2003.

(2)

The 2007 Statement of Operations includes the results of Fiberxon from July 1, 2007.

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

For the year ended December 31, 2005		As previously reported			Adjustments			As restated
Revenue		$	283,698		$	—		$	283,698
Cost of goods sold			193,979			(92	)		193,887
Gross profit			89,719			92			89,811
Operating costs and expenses:
	Product development and engineering		26,051			(87	)		25,964
	Selling, general and administrative		72,402			563			72,965
Total operating costs and expenses			98,453			476			98,929
Operating loss			(8,734	)		(384	)		(9,118	)
Other income (expense), net			(1,791	)		(120	)		(1,911	)
Loss before income taxes			(10,525	)		(504	)		(11,029	)
Provision for income taxes			5,774			(2,364	)		3,410
Net loss		$	(16,299	)	$	1,860		$	(14,439	)
Net loss per share:
Basic and diluted		$	(0.16	)	$	0.02		$	(0.14	)
Weighted average number of shares:
Basic and diluted			104,350			—			104,350

38

For the year ended December 31, 2004		As previously reported			Adjustments			As restated
Revenue		$	271,658		$	—		$	271,658
Cost of goods sold			179,852			(355	)		179,497
Gross profit			91,806			355			92,161
Operating costs and expenses:
	Product development and engineering		24,949			(11,863	)		13,086
	Selling, general and administrative		74,045			(20,739	)		53,306
Total operating costs and expenses			98,994			(32,602	)		66,392
Operating loss			(7,188	)		32,957			25,769
Interest expense
Cost of debt conversion
Other income (expense), net			(456	)		(181	)		(637	)
Gain (loss) before income taxes			(7,644	)		32,776			25,132
Provision for income taxes			3,036			(465	)		2,571
Net loss		$	(10,680	)	$	33,241		$	22,561
Net loss per share:
Basic		$	(0.10	)	$	0.32		$	0.22
Diluted		$	(0.10	)	$	0.29		$	0.19
Weighted average number of shares:
Basic			104,793			—			104,793
Diluted			104,793			16,450			121,243

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

	2005								2004
Years ended December 31:	(As previously reported)		Adjustments			Restated			(As previously reported)		Adjustments			Restated
Cost of goods sold	$	—	$	35		$	35		$	—	$	(348	)	$	(348	)
Product development and engineering		—		(86	)		(86	)		—		(11,868	)		(11,868	)
Selling, general and administrative		162		(288	)		(126	)		—		(20,747	)		(20,747	)
Total share-based compensation expense	$	162	$	(339	)	$	(177	)	$	—	$	(32,963	)	$	(32,963	)

39

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

December 31, 2006		2006 (As previously reported)			Adjustments			Restated
Assets
Current assets:
	Cash and cash equivalents	$	91,722		$	—		$	91,722
	Short-term marketable securities		25,864			—			25,864
	Time deposits		821			—			821
	Accounts receivable, net		95,244			—			95,244
	Inventories		61,361			24			61,385
	Deferred income taxes		895			83			978
	Other current assets		13,607			162			13,769
Total current assets			289,514			269			289,783
Property and equipment, net			14,172			—			14,172
Goodwill			36,348			(3,836	)		32,512
Deferred income taxes			1,460			414			1,874
Other assets			4,728			386			5,114
Total assets		$	346,222		$	(2,767	)	$	343,455
Liabilities and stockholders' equity
Current liabilities:
	Short-term obligations	$	26,289		$	—		$	26,289
	Accounts payable		47,384			—			47,384
	Accrued liabilities		29,704			3,886			33,590
	Deferred revenue		7,624			—			7,624
	Other current liabilities		5,926			642			6,568
Total current liabilities			116,927			4,528			121,455
Convertible notes			23,000			—			23,000
Other long-term liabilities			7,295			—			7,295
Minority interest			5,248			(851	)		4,397
Commitments and contingencies
Stockholders' equity:
	Preferred Stock		—			—			—
	Common Stock		213			—			213
	Additional paid-in capital		1,231,941			53,936			1,285,877
	Accumulated deficit		(1,036,924	)		(69,417	)		(1,106,341	)
	Treasury stock		(1,352	)		—			(1,352	)
	Accumulated other comprehensive income (loss)		(126	)		9,037			8,911
Total stockholders' equity			193,752			(6,444	)		187,308
Total liabilities and stockholders' equity		$	346,222		$	(2,767	)	$	343,455

40

December 31, 2005		2005 (As previously reported)			Adjustments			Restated
Assets
Current assets:
	Cash and cash equivalents	$	67,984		$	—		$	67,984
	Time deposits		1,475			—			1,475
	Accounts receivable, net		92,466			445			92,911
	Inventories		42,216			100			42,316
	Deferred income taxes		873			15			888
	Other current assets		7,828			—			7,828
Total current assets			212,842			560			213,402
Property and equipment, net			14,065			—			14,065
Goodwill			33,656			(2,041	)		31,615
Deferred income taxes			136			458			594
Other assets			4,478			—			4,478
Total assets		$	265,177		$	(1,023	)	$	264,154
Liabilities and stockholders' equity
Current liabilities:
	Short-term obligations	$	30,378		$	—		$	30,378
	Accounts payable		45,372			—			45,372
	Accrued liabilities		29,272			3,300			32,572
	Deferred revenue		6,076			—			6,076
	Other current liabilities		2,230			220			2,450
Total current liabilities			113,328			3,520			116,848
Convertible notes			23,000			—			23,000
Other long-term liabilities			6,694			—			6,694
Minority interest			5,151			(1,433	)		3,718
Commitments and contingencies
Stockholders' equity:
	Preferred Stock		—			—			—
	Common Stock		177			—			177
	Additional paid-in capital		1,156,209			53,066			1,209,275
	Accumulated deficit		(1,031,409	)		(67,549	)		(1,098,958	)
	Treasury stock		(1,352	)		—			(1,352	)
	Deferred compensation		—			(324	)		(324	)
	Accumulated other comprehensive income (loss)		(6,621	)		11,697			5,076
Total stockholders' equity			117,004			(3,110	)		113,894
Total liabilities and stockholders' equity		$	265,177		$	(1,023	)	$	264,154

41

December 31, 2004		2004 (As previously reported)			Adjustments			Restated
Assets
Current assets:
	Cash and cash equivalents	$	77,226		$	—		$	77,226
	Short-term marketable securities		3,395			—			3,395
	Time deposits		1,559			—			1,559
	Accounts receivable, net		80,755			—			80,755
	Inventories		42,264			—			42,264
	Deferred income taxes		2,395			101			2,496
	Other current assets		8,939			—			8,939
Total current assets			216,533			101			216,634
Property and equipment, net			19,089			—			19,089
Goodwill			29,965			7,233			37,198
Long-term marketable securities			1,839						1,839
Investments			3,063						3,063
Other assets			1,589			—			1,589
Total assets		$	272,078		$	7,334		$	279,412
Liabilities and stockholders' equity
Current liabilities:
	Short-term obligations	$	25,286		$	—		$	25,286
	Accounts payable		43,209			—			43,209
	Accrued liabilities		26,915			2,770			29,685
	Deferred revenue		4,556			—			4,556
	Other current liabilities		2,572			732			3,304
Total current liabilities			102,538			3,502			106,040
Convertible notes			23,000			—			23,000
Deferred income taxes			—			2,315			2,315
Other long-term liabilities			5,663			—			5,663
Minority interest			5,318			(1,204	)		4,114
Commitments and contingencies
Stockholders' equity:
	Preferred Stock		—			—			—
	Common Stock		176			—			176
	Additional paid-in capital		1,155,474			53,722			1,209,196
	Accumulated deficit		(1,015,110	)		(69,408	)		(1,084,518	)
	Treasury stock		(1,352	)		—			(1,352	)
	Deferred compensation		—			(1,190	)		(1,190	)
	Accumulated other comprehensive income (loss)		(3,629	)		19,597			15,968
Total stockholders' equity			135,559			2,721			138,280
Total liabilities and stockholders' equity		$	272,078		$	7,334		$	279,412

42

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

			Share-based compensation expense (including payroll tax adjustment)			Compensation arrangements with Turnkey			Compensation arrangements with EDSLan			Compensation arrangements with Interdata			Non payroll bonuses to foreign subsidiaries			Purchase accounting for EDSLan			Purchase accounting for Tecnonet			Minority interest			Accumulated other comprehensive income and other adjustments			Total Adjustment as of December 31, 2006
Assets
Current assets:
	Inventories		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	24		$	24
	Deferred income taxes			—			—			60			—			—			—			—			—			23			83
	Other current assets			—			—			—			—			—			—			—			—			162			162
Total current assets				—			—			60			—			—			—			—			—			209			269
Goodwill				—			(1,515	)		—			(1,710	)		—			352			(963	)		—			—			(3,836	)
Deferred income taxes				—			—			—			—			642			—			—			—			(228	)		414
Other assets				—			—			—			—			386			—			—			—			—			386
Total assets			$	—		$	(1,515	)	$	60		$	(1,710	)	$	1,028		$	352		$	(963	)	$	—		$	(19	)	$	(2,767	)
Liabilities and stockholders' equity
Current liabilities:
		Accrued liabilities	$	211		$	145		$	776		$	—		$	1,674		$	918		$	—		$	—		$	162		$	3,886
		Other current liabilities		—			—			—			—			—			—			—			—			642			642
Total current liabilities				211			145			776			—			1,674			918			—			—			804			4,528
Minority interest				—			—			—			—			—			(1,299	)		2,722			(2,274	)		—			(851	)
Commitments and contingencies
Stockholders' equity:
		Additional paid-in capital		73,632			—			687			—			—			4,665			(4,717	)		(1,299	)		(19,032	)		53,936
		Accumulated deficit		(73,843	)		(1,660	)		(1,403	)		(1,710	)		(646	)		(3,896	)		2,232			3,655			7,854			(69,417	)
		Accumulated other comprehensive income (loss)		—			—			—			—			—			(36	)		(1,200	)		(82	)		10,355			9,037
Total stockholders' equity				(211	)		(1,660	)		(716	)		(1,710	)		(646	)		733			(3,685	)		2,274			(823	)		(6,444	)
Total liabilities and stockholders' equity			$	—		$	(1,515	)	$	60		$	(1,710	)	$	1,028		$	352		$	(963	)	$	—		$	(19	)	$	(2,767	)

43

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

		Share-based compensation expense (including payroll tax adjustment)			Compensation arrangements with Turnkey			Compensation arrangements with EDSLan			Compensation arrangements with Interdata			Non payroll bonuses to foreign subsidiaries			Purchase accounting for EDSLan			Purchase accounting for Tecnonet			Minority interest			Accumulated other comprehensive income and other adjustments			Total Adjustment as of December 31, 2005
Assets
Current assets:
	Accounts receivable, net	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	445		$	445
	Inventories		—			—			—			—			—			—			—			—			100			100
	Deferred income taxes		—			—			142			—						—			—			—			(127	)		15
Total current assets			—			—			142			—			—			—			—			—			418			560
Goodwill			—			(1,515	)		—			(1,710	)		—			352			(963	)		—			1,795			(2,041	)
Deferred income taxes			—			—			—			—			548			—			—			—			(90	)		458
Total assets		$	—		$	(1,515	)	$	142		$	(1,710	)	$	548		$	352		$	(963	)	$	—		$	2,123		$	(1,023	)
Liabilities and stockholders' equity
Current liabilities:
	Accrued liabilities	$	131		$	(142	)	$	606		$	—		$	1,242		$	918		$	—		$	—		$	545		$	3,300
	Other current liabilities		—			—			—			—			—			—			—			—			220			220
Total current liabilities			131			(142	)		606			—			1,242			918			—			—			765			3,520
Minority interest			—			—			—			—			—			(1,299	)		2,722			(2,856	)		—			(1,433	)
Commitments and contingencies
Stockholders' equity:
	Preferred stock		—			—			—			—			—			—			—			—			—			—
	Common stock		—			—			—			—			—			—			—			—			—			—
	Additional paid-in capital		73,288			—			162			—			—			4,665			(4,717	)		(1,299	)		(19,033	)		53,066
	Accumulated deficit		(73,095	)		(1,373	)		(626	)		(1,710	)		(694	)		(3,896	)		2,232			3,786			7,827			(67,549	)
	Treasury stock		—			—			—			—			—			—			—			—			—			—
	Deferred compensation		(324	)		—			—			—			—			—			—			—			—			(324	)
	Accumulated other comprehensive income (loss)		—			—			—			—			—			(36	)		(1,200	)		369			12,564			11,697
Total stockholders' equity			(131	)		(1,373	)		(464	)		(1,710	)		(694	)		733			(3,685	)		2,856			1,358			(3,110	)
Total liabilities and stockholders' equity		$	—		$	(1,515	)	$	142		$	(1,710	)	$	548		$	352		$	(963	)	$	—		$	2,123		$	(1,023	)

44

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

			Share-based compensation expense (including payroll tax adjustment)			Compensation arrangements with Turnkey			Compensation arrangements with EDSLan			Compensation arrangements with Interdata			Non payroll bonuses to foreign subsidiaries			Purchase accounting for EDSLan			Purchase accounting for Tecnonet			Minority interest			Accumulated other comprehensive income and other adjustments			Total Adjustment as of December 31, 2004
Assets
Current assets:
	Deferred income taxes		$	—		$	—		$	101		$	—		$	—		$	—		$	—		$	—		$	—		$	101
Total current assets				—			—			101			—			—			—			—			—			—			101
Goodwill				—			(1,515	)		—			(1,710	)		—			352			(963	)		—			11,069			7,233
Deferred income taxes				—			—			—			—			429			—			—			—			(429	)		—
Total assets			$	—		$	(1,515	)	$	101		$	(1,710	)	$	429		$	352		$	(963	)	$	—		$	10,640		$	7,334
Liabilities and stockholders' equity
Current liabilities:
		Accrued liabilities	$	356		$	168		$	320		$	—		$	1,008		$	918		$	—		$	—		$	—		$	2,770
		Other current liabilities		—			—			—			—			—			—			—			—			732			732
Total current liabilities				356			168			320			—			1,008			918			—			—			732			3,502
Deferred income taxes				—			—			—			—			—			—			—			—			2,315			2,315
Minority interest				—			—			—			—			—			(1,299	)		2,722			(2,226	)		(401	)		(1,204	)
Commitments and contingencies
Stockholders' equity:
		Additional paid-in capital		74,106			—			—			—			—			4,665			(4,717	)		(1,299	)		(19,033	)		53,722
		Accumulated deficit		(73,272	)		(1,683	)		(219	)		(1,710	)		(579	)		(3,896	)		2,232			3,892			5,827			(69,408	)
		Deferred compensation		(1,190	)																										(1,190	)
		Accumulated other comprehensive income (loss)		—			—			—			—						(36	)		(1,200	)		(367	)		21,200			19,597
Total stockholders' equity				(356	)		(1,683	)		(219	)		(1,710	)		(579	)		733			(3,685	)		2,226			7,994			2,721
Total liabilities and stockholders' equity			$	—		$	(1,515	)	$	101		$	(1,710	)	$	429		$	352		$	(963	)	$	—		$	10,640		$	7,334

45

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

        The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 8 of this Form 10-K. In addition to historical information, the discussion in this Form 10-K contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by these forward-looking statements due to factors, including but not limited to, those set forth in the following and elsewhere in this Form 10-K. We assume no obligation to update any of the forward-looking statements after the date of this Form 10-K. The following discussion and analysis is organized as follows:

•

Restatement of Financial Statements

•

Overview

•

Critical Accounting Policies

•

Management Discussion Snapshot

•

Recently Issued Accounting Standards

•

Liquidity and Capital Resources

•

Working Capital

•

Cash Flow

•

Off Balance Sheet Arrangements

•

Contractual Obligations

Restatement of Financial Statements

Background

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

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

•

With respect to the Company's stock option practices, that:

•

many pre-2004 option grant dates and grant prices were retrospectively selected,

•

such practices were not consistent with relevant provisions of the Company's option plans,

•

the Company did not recognize appropriate compensation expense for options granted in-the-money,

•

no evidence was found that the option granting practices were carried out for the personal benefit of those awarding options, and

46

•

beginning in March 2004, improved controls were imposed by MRV over the Company's option granting practices, including the use of predetermined grant dates, which eliminated the ability to select grant dates based on historical prices;

•

That MRV's prior self-initiated informal review of its share-based award practices, which the Company conducted internally in late 2006 and early 2007 did not determine the earlier erroneous reporting;

•

That the accounting treatment and disclosure of transactions relating to two of MRV's subsidiaries were incorrect, including the failure to recognize compensation expense relating to:

•

incentive compensation arrangements used for employees and co-founders of one of its Swiss subsidiaries, and

•

earn-out formulae and profit sharing arrangements with former owners of one of its Italian subsidiaries; and

•

That taxes were not withheld on bonus payments made to managers of certain European subsidiaries.

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

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

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

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

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

47

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

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

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

Years Ended December 31:		2007			2006			Cumulative amount at December 31, 2005
	Share-based compensation expense (including payroll tax adjustment)	$	(579	)	$	(748	)		(73,095	)
	Compensation arrangements with Turnkey		(274	)		(287	)		(1,373	)
	Compensation arrangements with EDSLan		(628	)		(777	)		(626	)
	Compensation arrangements with Interdata		—			—			(1,710	)
	Non payroll bonuses to foreign subsidiaries		54			48			(694	)
	Purchase accounting for EDSLan		—			—			(3,896	)
	Purchase accounting for Tecnonet		—			—			2,232
	Minority interest		261			(131	)		3,786
	Accumulated other comprehensive income and other adjustments		700			27			7,827
Total		$	(466	)	$	(1,868	)	$	(67,549	)

Investigation and Restatement Related to Share-Based Compensation

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

Category		Number of grant dates		Number of individual grants		Number of underlying shares
Pre-1998 Grants			26		238		6,849,685
1998 up to Post-SOX Grants (March 30, 2004)			108		4,485		24,122,291
Post SOX Grants (March 31, 2004 and after)			35		2,719		13,393,887
	Total		169		7,442		44,365,863

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

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

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

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

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

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

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

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

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

Types of Adjustments

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

Revised measurement dates, excluding acquisition and non-employee grants		$	36,535
Repricings and other modifications			25,721
Acquisition grants			10,344
Non-employee grants			1,545
	Total adjustment	$	74,145

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

Revised Measurement Dates

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

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

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

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

	Outside Dates:												Grant or Approval Documentation:
Time period:	Record Add Dates			Release Date			Other Documents			Total Outside Dates			Revised Measurement Date			Original Grant Date			Total
Pre-1998 period		0	%		69	%		1	%		70	%		2	%		28	%		100	%
1998 to Post-SOX period		7	%		19	%		8	%		34	%		30	%		36	%		100	%
Post-SOX period		3	%		0	%		4	%		7	%		0	%		93	%		100	%
All time periods		5	%		21	%		5	%		31	%		32	%		37	%		100	%

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

Basis for measurement date		Grants		Options		Percent			Cumulative restated share-based compensation expense (in 000's)
Outside date estimated by:
	Record Add Dates		596		2,192,711		5	%	$	2,299
	Release Dates		715		9,353,834		21	%		44,906
	Other documentation		959		2,335,428		5	%		35,270
Subtotal of Outside Dates			2,270		13,881,973		31	%		82,475
Revised measurement date established by Grant or Approval Documentation			2,142		14,319,129		32	%		98,783
Subtotal of adjusted measurement dates			4,412		28,201,102		63	%		181,258
Original grant date supported by Grant or Approval Documentation			3,030		16,164,761		37	%		28,701
Total population			7,442		44,365,863		100	%	$	209,959

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Grant Modifications Not Previously Recorded

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

Acquisition Grants

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

Grants to Non-Employees

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

Share-Based Compensation Related Tax Adjustments

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

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

Use of Judgment

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

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

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

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

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

Record Add Dates (in millions of dollars)	1995		1996		1997		1998		1999		2000		2001		2002		2003		2004		2005		2006		2007		TOTAL
High Date		—		—		—		—		—		—		—		—		0.3		0.7		0.3		0.1		—		1.4
Measurement Date		—		—		—		—		—		—		—		—		0.3		0.5		0.2		0.1		—		1.1
Low Date		—		—		—		—		—		—		—		—		—		—		—		—		—		—

Release Dates (in millions of dollars)	1995		1996		1997		1998		1999		2000		2001		2002		2003		2004		2005			2006		2007		TOTAL
High Date		0.9		5.8		4.9		3.5		3.7		15.9		10.8		—		1.3		0.6		(0.1	)		—		—		47.3
Measurement Date		0.6		4.3		3.1		2.6		2.7		13.2		7.1		0.1		0.6		0.4		(0.1	)		—		—		34.6
Low Date		0.1		0.3		0.3		0.9		0.9		0.9		0.6		0.1		0.1		—		—			—		—		4.2

Other Outside Dates (in millions of dollars)	1995		1996		1997		1998		1999		2000		2001		2002		2003		2004		2005		2006		2007		TOTAL
High Date		—		—		—		—		—		26.4		18.2		4.2		2.1		0.1		0.1		—		—		51.1
Measurement Date		—		—		—		—		—		18.1		12.4		2.9		1.4		—		—		—		—		34.8
Low Date		—		—		—		—		—		15.7		10.8		2.6		1.3		—		—		—		—		30.4

Aggregate of Outside Dates (in millions of dollars)	1995		1996		1997		1998		1999		2000		2001		2002		2003		2004		2005		2006		2007		TOTAL
High Date		0.9		5.8		4.9		3.5		3.7		42.3		29.0		4.2		3.7		1.4		0.3		0.1		—		99.8
Measurement Date		0.6		4.3		3.1		2.6		2.7		31.3		19.5		3.0		2.3		0.9		0.1		0.1		—		70.5
Low Date		0.1		0.3		0.3		0.9		0.9		16.6		11.4		2.7		1.4		—		—		—		—		34.6

Adjustment Due to the Adoption SFAS No. 123R

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

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

Changes to Valuation Assumptions Under SFAS No. 123R

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

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Other Compensation Arrangements

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

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

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

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

Acquisition Related and Other Accounting Adjustments

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

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

Regulatory Proceedings

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

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Legal Proceedings

        Between June 10, 2008 and August 15, 2008, five purported stockholder derivative and securities class action lawsuits were filed in the U.S. District Court in the Central District of California and one derivative lawsuit was filed in the Superior Court of the State of California against MRV and certain of our current and former officers and directors. The five lawsuits filed in the Central District of California were consolidated. Claims are asserted under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The allegations set forth in the complaints are based on facts disclosed in our press release of June 5, 2008, which was included as Exhibit 99.1 to our Current Report on Form 8-K filed with the SEC on June 6, 2008. The complaints seek to recover from the defendants unspecified compensatory and punitive damages, to require us to undertake reforms to corporate governance and internal control procedures, to obtain an accounting of stock option grants found to be improper, to impose a constructive trust over stock options and proceeds derived therefrom, to disgorge from any of the defendants who received allegedly improper stock options the profits obtained therefrom, to rescind improperly priced options and to recover costs of suit, including legal and other professional fees and other equitable relief. The plaintiffs in the consolidated lawsuits and the defendants have stipulated to a postponement of further action after the issuance by MRV of the restated financial statements, and have further agreed to mediation of the litigations.

Late SEC Filings and Nasdaq Delisting Proceedings

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

Cost of Investigation and Restatement Activities

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

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

Overview

        MRV Communications is a supplier of communications equipment and services to carriers, governments and enterprise customers, worldwide. We are also a supplier of optical components, primarily through our wholly-owned subsidiary Source Photonics. We conduct our business along three principal segments: (a) the Network Equipment group; (b) the Network Integration group; and (c) the Optical Components group. Our Network Equipment group provides communications equipment that

57

facilitates access, transport, aggregation and management of voice, data and video traffic in networks, data centers and laboratories used by telecommunications service providers, cable operators, enterprise customers and governments worldwide. Our Network Integration group operates primarily in Italy, France, Switzerland and Scandinavia, servicing Tier One carriers, regional carriers, large enterprises, and government institutions. The Network Integration group provides network system design, integration and distribution services that include products manufactured by third-party vendors, as well as products developed and manufactured by the Network Equipment group. Our Optical Components group designs, manufactures and sells optical communications products used in telecommunications systems and data communications networks. These products include passive optical network, or PON, subsystems, optical transceivers used in enterprise, access and metropolitan applications as well as other optical components, modules and subsystems. We market and sell our products worldwide, through a variety of channels, which include a dedicated direct sales force, manufacturers' representatives, value-added-resellers, distributors and systems integrators.

        In June 2007, we completed our acquisition of Fiberxon, a PRC-based supplier of transceivers for applications in metropolitan networks, access networks and PONs for consideration aggregating approximately $130.9 million, excluding $4.0 million in acquisition costs. The results of operations of Fiberxon have been included in our Consolidated Financial Statements beginning July 1, 2007. Its operations have been integrated into Source Photonics, our subsidiary accounting for nearly all of the results of the Optical Components group.

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

        Our business involves reliance on foreign-based offices. Several of our divisions, outside subcontractors and suppliers are located in foreign countries, including Argentina, Canada, China, Denmark, Finland, France, Germany, Israel, Italy, Japan, Korea, the Netherlands, Norway, Russia, Singapore, South Africa, Switzerland, Sweden, Taiwan and the United Kingdom. For the years ended December 31, 2008, 2007 and 2006, foreign revenues constituted 68%, 68% and 67%, respectively, of our total revenues. The majority of our foreign sales are to customers located in the European region, with remaining foreign sales primarily to customers in the Asia Pacific region.

Critical Accounting Policies

        Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

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

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

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

        Revenue Recognition.    MRV's major revenue-generating products consist of fiber optic components, switches and routers, console management; and physical layer products. MRV generally recognizes product revenue, net of sales discounts, returns and allowances, in accordance with Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," when persuasive evidence of an arrangement exists, delivery has occurred and all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection is considered probable. Products are generally shipped "FOB shipping point," with no right of return and revenue is recognized upon shipment. If revenue is to be recognized upon delivery, such delivery date is tracked through information provided by the third party shipping company used by us to deliver the product to the customer. Sales of services and system support are deferred and recognized ratably over the contract period. Sales with contingencies, such as rights of return, rotation rights, conditional acceptance provisions and price protection, are rare and insignificant and are deferred until the contingencies have been satisfied or the contingent period has lapsed. For sales to distributors, we generally recognize revenue using the "sell in" method (i.e., when product is sold to the distributor) rather than the "sell through" method (i.e., when the product is sold by the distributor to the end user). In limited circumstances, certain distributors have limited rights of return (including stock rotation rights) and/or are entitled to price protection, where a rebate credit may be provided to the customer if MRV lowers its price on products held in the distributor's inventory. MRV estimates and establishes allowances for expected future product returns and credits in accordance with Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition When Right of Return Exists." We record a reduction in revenue for estimated future product returns and future credits to be issued to the customer in the period in which revenues are recognized, and for future credits to be issued in relation to price protection at the time we make changes to our distributor price book. The estimate of future returns and credits is based on historical sales returns, analysis of credit memo data, and other factors known at the time of revenue recognition. We monitor product returns and potential price adjustments on an ongoing basis.

        Arrangements with customers may include multiple deliverables, including any combination of equipment, services and software. In Accordance with Emerging Issues Task Force ("EITF") No. 00-21, Revenue Arrangements with Multiple Deliverables, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when revenue recognition criteria for each element are met. Fair value for each element is established based on the sales price charged when the same element is sold separately. If multiple element arrangements include software or software related elements, we apply the provisions of Statement of Position ("SOP") No. 97-2, Software Revenue Recognition, to the software and software related elements, or to the entire arrangement if the software is essential to the functionality of the non-software elements.

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

        Allowance for Doubtful Accounts.    We make ongoing estimates relating to the collectability of our accounts receivable and maintain a reserve for estimated losses resulting from the inability of our customers to meet their financial obligations to us. In determining the amount of the reserve, we consider our historical level of credit losses and make judgments about the creditworthiness of

59

significant customers based on ongoing credit evaluations. Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger reserve may be required. In the event we determined that a smaller or larger reserve was appropriate, we would record a credit or a charge to selling, general and administrative expense in the period in which we made such a determination.

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

        Goodwill and Other Intangibles.    In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we do not amortize goodwill and intangible assets with indefinite lives, but instead measure these assets for impairment at least annually, or when events indicate that impairment exists. We amortize intangible assets that have definite lives over their useful lives.

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

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

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

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Currency Rate Fluctuations

        Changes in the relative values of non-U.S. currencies to the U.S. dollar affect our results. We conduct a significant portion of our business in foreign currencies, including the euro, the Swiss franc, Swedish krona, and the Taiwan dollar. For the year ended December 31, 2008, approximately 50% of revenues and 44% of operating expenses, excluding $100.3 million in goodwill impairment charges, were incurred at subsidiaries with a reporting currency other than the U.S. dollar. In general, these currencies were stronger against the U.S. dollar for the year ended December 31, 2008 compared to the year ended December 31, 2007, so revenues and expenses in these countries translated into more dollars than they would have in the prior period. Additional discussion of foreign currency risk and other market risks is included in Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" of this Form 10-K.

Management Discussion Snapshot

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

		2008						2007 (Restated)						2006 (Restated)
Years ended December 31:		$			%			$			%			$			%
Revenue (1)		$	538,022			100	%	$	448,237			100	%	$	356,489			100	%
	Network Equipment group		125,556			23			105,357			24			96,002			27
	Network Integration group		225,741			42			213,976			48			181,502			51
	Optical Components group		201,588			37			144,860			32			93,381			26
	All others		241			NM			114			NM			—			—
Gross profit (2)			150,001			28			127,487			28			112,104			31
	Network Equipment group		67,071			53			51,712			49			49,925			52
	Network Integration group		53,234			24			48,276			23			44,759			25
	Optical Components group		29,437			15			28,133			19			17,748			19
	All others		143			59			68			60			—			NM
Operating costs and expenses (2)			270,449			50			137,987			31			116,963			33
	Network Equipment group		68,492			55			59,988			57			55,048			57
	Network Integration group		44,329			20			38,811			18			35,131			19
	Optical Components group (3)		139,899			69			29,681			20			18,652			20
	All others		1,920			797			1,597			1,401			1,558			NM
Operating income (loss) (2)			(120,448	)		(22	)		(10,500	)		(2	)		(4,859	)		(1	)
	Network Equipment group		(1,421	)		(1	)		(8,276	)		(8	)		(5,123	)		(5	)
	Network Integration group		8,905			4			9,465			4			9,628			5
	Optical Components group (3)		(110,462	)		(55	)		(1,548	)		(1	)		(904	)		(1	)
	All others		(1,777	)		(737	)		(1,529	)		(1,341	)		(1,558	)		NM

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

		As previously reported						Adjustments			Restated
Year ended December 31, 2007		$			%			$			$			%
Revenue (1)		$	448,237			100	%	$	—		$	448,237			100	%
	Network Equipment group		105,357			24			—			105,357			24
	Network Integration group		213,976			48			—			213,976			48
	Optical Components group		144,860			32			—			144,860			32
	All others		114			NM			—			114			NM
Gross profit (2)			127,973			29			(486	)		127,487			28
	Network Equipment group		52,133			49			(421	)		51,712			49
	Network Integration group		48,550			23			(274	)		48,276			23
	Optical Components group		27,919			19			214			28,133			19
	All others		69			61			(1	)		68			60
Operating costs and expenses (2)			136,860			31			1,127			137,987			31
	Network Equipment group		60,036			57			(48	)		59,988			57
	Network Integration group		38,118			18			693			38,811			18
	Optical Components group		29,333			20			348			29,681			20
	All others		1,595			1,399			2			1,597			1,401
Operating income (loss) (2)			(8,887	)		(2	)		(1,613	)		(10,500	)		(2	)
	Network Equipment group		(7,903	)		(8	)		(373	)		(8,276	)		(8	)
	Network Integration group		10,432			5			(967	)		9,465			4
	Optical Components group		(1,414	)		(1	)		(134	)		(1,548	)		(1	)
	All others		(1,526	)		(1,339	)		(3	)		(1,529	)		(1,341	)

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		As previously reported						Adjustments			Restated
Years ended December 31, 2006		$			%			$			$			%
Revenue (1)		$	356,489			100	%	$	—		$	356,489			100	%
	Network Equipment group		96,002			27			—			96,002			27
	Network Integration group		181,502			51			—			181,502			51
	Optical Components group		93,381			26			—			93,381			26
	All others		—			—			—			—			—
Gross profit (2)			112,282			31			(178	)		112,104			31
	Network Equipment group		49,930			52			(5	)		49,925			52
	Network Integration group		44,875			25			(116	)		44,759			25
	Optical Components group		17,797			19			(49	)		17,748			19
	All others		—			—			—			—			NM
Operating costs and expenses (2)			115,778			32			1,185			116,963			33
	Network Equipment group		54,844			57			204			55,048			57
	Network Integration group		33,678			19			1,453			35,131			19
	Optical Components group		18,502			20			150			18,652			20
	All others		1,558			NM			—			1,558			NM
Operating income (loss) (2)			(3,496	)		(1	)		(1,363	)		(4,859	)		(1	)
	Network Equipment group		(4,914	)		(5	)		(209	)		(5,123	)		(5	)
	Network Integration group		11,197			6			(1,569	)		9,628			5
	Optical Components group		(705	)		(1	)		(199	)		(904	)		(1	)
	All others		(1,558	)		NM			—			(1,558	)		NM

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		As previously reported						Adjustments			Restated
Three months ended March 31, 2008		$			%			$			$			%
Revenue (1)		$	125,586			100	%	$	—		$	125,586			100	%
	Network Equipment group		30,649			24			—			30,649			24
	Network Integration group		49,087			39			—			49,087			39
	Optical Components group		49,999			40			—			49,999			40
	All others		31			—			—			31			—
Gross profit (2)			37,134			30			(1,413	)		35,721			28
	Network Equipment group		14,991			49			244			15,235			50
	Network Integration group		11,533			23			45			11,578			24
	Optical Components group		10,181			20			(1,701	)		8,480			17
	All others		16			NM			—			16			52
Operating costs and expenses (2)			39,967			32			(19	)		39,948			32
	Network Equipment group		15,432			50			(6	)		15,426			50
	Network Integration group		11,640			24			(68	)		11,572			24
	Optical Components group		10,480			21			58			10,538			21
	All others		474			NM			—			474			1,529
Operating income (loss) (2)			(2,833	)		(2	)		(1,394	)		(4,227	)		(3	)
	Network Equipment group		(441	)		(1	)		250			(191	)		(1	)
	Network Integration group		(107	)		NM			113			6			NM
	Optical Components group		(299	)		(1	)		(1,759	)		(2,058	)		(4	)
	All others		(458	)		NM			—			(458	)		(1,477	)

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		As previously reported						Adjustments			Restated
Three months ended March 31, 2007		$			%			$			$			%
Revenue (1)		$	89,679			100	%	$	—		$	89,679			100	%
	Network Equipment group		23,569			26			—			23,569			26
	Network Integration group		46,951			52			—			46,951			52
	Optical Components group		22,918			26			—			22,918			26
	All others		—			—			—			—			—
Gross profit (2)			28,316			32			(388	)		27,928			31
	Network Equipment group		11,310			48			(6	)		11,304			48
	Network Integration group		11,369			24			(31	)		11,338			24
	Optical Components group		5,564			24			(349	)		5,215			23
	All others		—			—			—			—			—
Operating costs and expenses (2)			30,045			34			321			30,366			34
	Network Equipment group		14,585			62			74			14,659			62
	Network Integration group		8,864			19			258			9,122			19
	Optical Components group		4,226			18			45			4,271			19
	All others		376			NM			—			376			NM
Operating income (loss) (2)			(1,729	)		(2	)		(709	)		(2,438	)		(3	)
	Network Equipment group		(3,274	)		(14	)		(82	)		(3,356	)		(14	)
	Network Integration group		2,504			5			(289	)		2,215			5
	Optical Components group		1,338			6			(393	)		945			4
	All others		(376	)		NM			—			(376	)		NM

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		As previously reported						Adjustments			Restated
Three months ended June 30, 2007		$			%			$			$			%
Revenue (1)		$	101,962			100	%	$	—		$	101,962			100	%
	Networking group (4)		76,336			75			(76,336)	(4)		—			—
	Network Equipment group (4)		—			—			26,360	(4)		26,360			26
	Network Integration group (4)		—			—			52,850	(4)		52,850			52
	Optical Components group		26,505			26			—			26,505			26
	All others (4)		—			—			—			—			—
Gross profit (2)			29,899			29			641			30,540			30
	Networking group (4)		24,758			32			(24,758	)		—			—
	Network Equipment group (4)		—			—			12,712			12,712			48
	Network Integration group (4)		—			—			12,161			12,161			23
	Optical Components group		5,133			19			725			5,858			22
	All others (4)		—			—			—			—			—
Operating costs and expenses (2)			30,881			30			(166	)		30,715			30
	Networking group (4)		25,813			34			(25,813	)		—			—
	Network Equipment group (4)		—			—			15,201			15,201			58
	Network Integration group (4)		—			—			8,717			8,717			16
	Optical Components group		4,726			18			29			4,755			18
	All others (4)		342			NM			—			342			NM
Operating income (loss) (2)			(982	)		(1	)		807			(175	)		—
	Networking group (4)		(1,055	)		(1	)		1,055			—			—
	Network Equipment group (4)		—			—			(2,489	)		(2,489	)		(9	)
	Network Integration group (4)		—			—			3,444			3,444			7
	Optical Components group		407			2			696			1,103			4
	All others (4)		(342	)		NM			—			(342	)		NM

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		As previously reported						Adjustments			Restated
Three months ended September 30, 2007		$			%			$			$			%
Revenue(1)		$	115,700			100	%	$	—		$	115,700			100	%
	Networking group(4)		72,449			63			(72,449	)(4)		—			—
	Network Equipment group(4)		—			—			24,255	(4)		24,255			21
	Network Integration group(4)		—			—			51,114	(4)		51,114			44
	Optical Components group		44,300			38			—			44,300			38
	All others(4)		—			—			51	(4)		51			—
Gross profit(2)			30,355			26			954			31,309			27
	Networking group(4)		21,899			30			(21,899)	(4)		—			—
	Network Equipment group(4)		—			—			11,532	(4)		11,532			48
	Network Integration group(4)		—			—			12,950	(4)		12,950			25
	Optical Components group		8,470			19			(221	)		8,249			19
	All others(4)		—			—			31			31			61
Operating costs and expenses(2)			35,879			31			1,362			37,241			32
	Networking group(4)		25,357			35			(25,357)	(4)		—			—
	Network Equipment group(4)		—			—			14,559	(4)		14,559			60
	Network Integration group(4)		—			—			10,002	(4)		10,002			20
	Optical Components group		10,111			23			109			10,220			23
	All others(4)		411			NM			(1	)		410			NM
Operating income (loss)(2)			(5,524	)		(5	)		(408	)		(5,932	)		(5	)
	Networking group(4)		(3,458	)		(5	)		3,458	(4)		—			—
	Network Equipment group(4)		—			—			(3,027	)(4)		(3,027	)		(12	)
	Network Integration group(4)		—			—			2,948	(4)		2,948			6
	Optical Components group		(1,641	)		(4	)		(330	)		(1,971	)		(4	)
	All others(4)		(379	)		NM			—			(379	)		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 consolidated revenue. Statements of Operations data by segment express percentages as a percentage of applicable segment revenue.

(3)

Operating expenses in the Optical Components group includes the $93.9 million impairment related to goodwill arising from the July 2007 acquisition of Fiberxon.

(4)

Adjustments include the reclassification of amounts previously reported as the Networking group into the two reported segments, Network Equipment group and Network Integration group. The Development Stage enterprise group is now included in the All others category.

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

67

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

Revenue

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

Years ended December 31:		2008			2007			$ Change		% Change			% Change constant currency (2)
Network Equipment group		$	125,556		$	105,357		$	20,199		19	%		17	%
Network Integration group			225,741			213,976			11,765		5			(1	)
Optical Components group			201,588			144,860			56,728		39			36
All others			241			114			127		111			111
			553,126			464,307			88,819		19			15
Adjustments (1)			(15,104	)		(16,070	)		966		(6	)		(6	)
	Total	$	538,022		$	448,237		$	89,785		20	%		16	%

(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.

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

Years ended December 31:				2008		2007		$ Change			% Change
Network Equipment group:
	Americas			$	58,632	$	51,610	$	7,022			14	%
	Europe				44,793		34,036		10,757			32
	Asia Pacific				11,244		7,914		3,330			42
	Other regions				1,048		72		976			1,356
		Total network equipment			115,717		93,632		22,085			24
Network Integration group:
	Europe				225,741		213,828		11,913			6
		Total network integration			225,741		213,828		11,913			6
Optical Components group:
	Americas				115,756		90,912		24,844			27
	Europe				17,148		10,661		6,487			61
	Asia Pacific				63,642		39,174		24,468			62
	Other regions				8		23		(15	)		(65	)
		Total optical components			196,554		140,770		55,784			40
All others:					10		7		3			43
			Total	$	538,022	$	448,237	$	89,785			20	%

68

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

Three months ended:		2008		2007		$ Change			% Change
March 31,		$	125,586	$	89,679	$	35,907			40	%
June 30,			147,578		101,962		45,616			45
September 30,			130,626		115,700		14,926			13
December 31,			134,232		140,896		(6,664	)		(5	)
	Total	$	538,022	$	448,237	$	89,785			20	%

        Revenues for 2008 increased $89.8 million, or 20%, due primarily to growth in Optical Components ($56.7 million, or 39%), Network Equipment ($20.2 million, or 19%) and Network Integration ($11.8 million, or 5%) segments, partially offset by an increase in intersegment revenues of $1.0 million. All three reporting segments experienced growth in the first three quarters and declines in the fourth quarter, compared to the same quarters of the prior year. Of the $89.8 million in year-over-year revenue growth, $35.9 million and $45.6 million came in the first and second quarters, respectively. The Optical Components group contributed $27.1 million and $29.7 million of that growth, respectively. Revenues in the Optical Components group were favorably impacted in 2008 by the acquisition of Fiberxon which was only included for the latter half of 2007. Revenue in the Network Equipment Group increased by $20.2 million or 19% due primarily to increased demand for Metro Ethernet and Optical Transport products, new product introduction and new customer acquisitions. Revenue growth in the Network Integration Group was $11.8 million, primarily due to foreign currency movements. Revenue would have been $18.9 million lower in 2008 had foreign currency exchange rates remained the same as they were in 2007.

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

Three months ended:		2008		2007		$ Change			% Change
March 31,		$	30,649	$	23,569	$	7,080			30	%
June 30,			33,618		26,360		7,258			28
September 30,			31,462		24,255		7,207			30
December 31,			29,827		31,173		(1,346	)		(4	)
	Total	$	125,556	$	105,357	$	20,199			19	%

        Revenues, including intersegment revenues, generated from the Network Equipment group increased $20.2 million, which was due primarily to increased sales in the Europe region of $10.8 million, and increased sales in the Americas of $7.0 million. Growth in sales of LambdaDriver, fiber optic components, Media Cross Connect, Fiber Driver, out-of-band management and Terascope products drove the Europe sales increase. Growth in sales of out-of-band management products, Media Cross Connect, Fiber Driver, Optiswitch and services drove the Americas sales increase. Revenue would have been $2.2 million lower in 2008 had foreign currency exchange rates remained the same as they were in 2007.

        Revenue growth in the Network Equipment group in 2008 was driven by the first quarter, second quarter, and third quarter when the group's revenues grew by 30%, 28%, and 30% compared to the same quarter of the prior year, respectively. Growth in Network Equipment was driven by increased overall demand for Metro Ethernet and Optical Transport to support high bandwidth telecommunications applications, including internet access. Growth was also driven by new product introduction, including the OptiSwitch 900 and new customer acquisitions. The group's fourth quarter was adversely affected by the general economic slowdown, and revenues fell 4% compared to the prior year.

69

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

Three months ended:		2008		2007		$ Change			% Change
March 31,		$	49,087	$	46,951	$	2,136			5	%
June 30,			61,630		52,850		8,780			17
September 30,			53,573		51,114		2,459			5
December 31,			61,451		63,061		(1,610	)		(3	)
	Total	$	225,741	$	213,976	$	11,765			5	%

        Revenues, including intersegment revenues, generated from the Network Integration group increased $11.8 million, or 5%, due primarily to the favorable impact of foreign currency movements on revenues and to a 22% increase in local currency revenues (or 33% in U.S. dollars) at our smallest Network Integration subsidiary located in Switzerland, partially offset by decreases in our French and Scandinavian subsidiaries. Revenue would have been $12.9 million lower in 2008 had foreign currency exchange rates remained the same as they were in 2007.

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

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

Three months ended:		2008		2007		$ Change			% Change
March 31,		$	49,999	$	22,918	$	27,081			118	%
June 30,			56,157		26,505		29,652			112
September 30,			49,039		44,300		4,739			11
December 31,			46,393		51,137		(4,744	)		(9	)
	Total	$	201,588	$	144,860	$	56,728			39	%

        Revenues, including intersegment revenue, generated from our Optical Components group increased $56.7 million. Sales of PON components increased 43% from 2007 to 2008 and sales of datacom/telecom network components increased 34% from 2007 to 2008. Revenue would have been $3.9 million lower in 2008 had foreign currency exchange rates remained the same as they were in 2007.

        The Optical Components group revenues grew in the first and second quarters of 2008 compared to the same quarters of the prior year by 118% and 112%, respectively, primarily due to the inclusion of Fiberxon in 2008 which was not included in the 2007 results until the third quarter. Revenues grew by 11% in the third quarter compared to the same quarter of 2007. Revenue in our Optical Components group was limited, despite strong demand, in the second half of the year due to capacity issues caused by delays in setting up a new manufacturing facility in Chengdu, PRC. The general economic slowdown had an adverse impact on the fourth quarter and revenues fell 9% compared to the same quarter of the prior year.

70

Gross Profit

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

Years ended December 31:		2008			2007 (Restated)			$ Change			% Change			% Change constant currency (2)
Network Equipment group		$	67,071		$	51,712		$	15,359			30	%		27	%
Network Integration group			53,234			48,276			4,958			10			4
Optical Components group			29,437			28,133			1,304			5			4
All others			143			68			75			110			110
			149,885			128,189			21,696			17			13
Corporate unallocated cost of goods sold			(199	)		(165	)		(34	)		21			21
Intersegment adjustments (1)			315			(537	)		852			(159	)		NM
	Total	$	150,001		$	127,487		$	22,514			18	%		14	%

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.

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

Three months ended:		2008		2007 (Restated)		$ Change			% Change
March 31,		$	35,721	$	27,928	$	7,793			28	%
June 30,			47,382		30,540		16,842			55
September 30,			33,440		31,309		2,131			7
December 31,			33,458		37,710		(4,252	)		(11	)
	Total	$	150,001	$	127,487	$	22,514			18	%

        Gross profit increased $22.5 million due to the $89.8 million increase in revenues while gross margins remained stable at 28%. The increase in gross profit was primarily due to the strong increase in Network Equipment revenue during the first nine months of the year. The gross margins in the Network Equipment and Network Integration groups increased in 2008, but were offset by an increase in the portion of consolidated revenues from the Optical Components group, which has lower margins than the other segments. The Company's growth in gross profits came primarily in the first and second quarters which grew by 28% and 55%, respectively, compared to the same quarters of the prior year. Gross profit also increased by 7% year-over-year in the third quarter, but fell 11% in the fourth quarter, compared to the fourth quarter of 2007. Gross profit would have been $4.8 million lower in 2008 had foreign currency exchange rates remained the same as they were in 2007. Gross profit reflects share-based compensation in cost of goods sold of $370,000 and $470,000 in 2008 and 2007, respectively.

71

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

Three months ended:		2008		2007		$ Change		% Change
March 31,		$	15,235	$	11,304	$	3,931		35	%
June 30,			18,666		12,712		5,954		47
September 30,			16,462		11,532		4,930		43
December 31,			16,708		16,164		544		3
	Total	$	67,071	$	51,712	$	15,359		30	%

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

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

Three months ended:		2008		2007		$ Change		% Change
March 31,		$	11,578	$	11,338	$	240		2	%
June 30,			15,066		12,161		2,905		24
September 30,			13,675		12,950		725		6
December 31,			12,915		11,827		1,088		9
	Total	$	53,234	$	48,276	$	4,958		10	%

        Gross profit for the Network Integration group increased $5.0 million. Favorable currency impacts accounted for $3.2 million of the increase, and improved margins drove a currency adjusted increase of $2.1 million, partially offset by the $0.6 million impact of the decline in local currency revenues. Average gross margin increased from 22.6% to 23.6%. The increase in gross margins in 2008 was the result of differences in the composition of the products and services sold in each period. The margin improvements were led by Tecnonet, one of our Italian subsidiaries and TurnKey Communications, our Swiss network integrator, which both had a significant shift from product to service revenue during the year. Service revenues have higher profit margins than product revenues. Of the $5.0 million increase in gross profit in 2008, $2.9 million and $1.1 million came in the second and fourth quarters, respectively. The increase in the second quarter was primarily driven by foreign currency effects ($2.1 million) and to a lesser extent ($0.8 million) by an improvement in margins to 24.4% in the second quarter of 2008 compared to 23.0% in the same quarter of the prior year. The fourth quarter gross margin improvement of $1.1 million was due primarily to an increase in margins to 21.0% in the fourth quarter of 2008 from 18.8% in the same quarter of the prior year ($1.4 million) and to an increase in revenues in local currency ($0.8 million), partially offset by the adverse impact of foreign currency movements ($1.3 million). The Network Integration group did not have any share-based compensation in cost of goods sold in either year.

72

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

Three months ended:		2008		2007		$ Change			% Change
March 31,		$	8,480	$	5,215	$	3,265			63	%
June 30,			13,903		5,858		8,045			137
September 30,			3,259		8,249		(4,990	)		(60	)
December 31,			3,795		8,811		(5,016	)		(57	)
	Total	$	29,437	$	28,133	$	1,304			5	%

        Gross profit for the Optical Components group remained stable, but gross margin as a percentage of revenues declined from 19.4% in 2007 to 14.6% in 2008. The lower gross margin percentage resulted from increases in inventory reserves, fixed asset write-offs, and increased depreciation on assets acquired as part of the Fiberxon acquisition. The effect of currency fluctuations did not have a significant impact on the year-over-year change in gross profit. The decline in gross margins came primarily in the second half of the year. Gross margins fell in the third quarter from 18.6% to 6.6% and in the fourth quarter from 17.2% to 8.2% compared to the same quarters of the prior year. Gross profit reflects share-based compensation in cost of goods sold of $232,000 and $342,000 in 2008 and 2007, respectively.

Operating Costs and Expenses

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

Years ended December 31:		2008		2007 (Restated)		$ Change		% Change			% Change constant currency (1)
Network Equipment group		$	68,492	$	59,988	$	8,504		14	%		12	%
Network Integration group			44,329		38,811		5,518		14			9
Optical Components group			139,899		29,681		110,218		371			371
All others			1,920		1,597		323		20			20
			254,640		130,077		124,563		96			93
Corporate unallocated operating expenses (2)			15,809		7,910		7,899		100			100
	Total	$	270,449	$	137,987	$	132,462		96	%		94	%

(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. Corporate unallocated operating expenses in 2008 include $8.6 million in expenses related to the investigation and restatement.

73

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

Three months ended:		2008		2007 (Restated)		$ Change		% Change
March 31,		$	39,948	$	30,366	$	9,582		32	%
June 30,			42,276		30,715		11,561		38
September 30,			45,286		37,241		8,045		22
December 31,			142,939		39,665		103,274		260
	Total	$	270,449	$	137,987	$	132,462		96	%

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

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

Three months ended:		2008		2007		$ Change		% Change
March 31,		$	15,426	$	14,659	$	767		5	%
June 30,			16,449		15,201		1,248		8
September 30,			15,381		14,559		822		6
December 31,			21,236		15,569		5,667		36
	Total	$	68,492	$	59,988	$	8,504		14	%

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

74

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

Three months ended:		2008		2007		$ Change		% Change
March 31,		$	11,572	$	9,122	$	2,450		27	%
June 30,			11,014		8,717		2,297		26
September 30,			10,272		10,002		270		3
December 31,			11,471		10,970		501		5
	Total	$	44,329	$	38,811	$	5,518		14	%

        Operating costs and expenses in the Network Integration group for 2008 were $44.3 million, or 20% of revenues, compared to $38.8 million, or 18% of revenues, for 2007. Selling, general and administrative costs, including foreign currency translation, increased $5.5 million, primarily due to labor costs ($4.3 million) and other overhead ($1.1 million). The increase in operating expenses came primarily in the first and second quarter which increased by 27% and 26%, respectively, as a result of the considerable strengthening of the Euro, Swiss franc, and Swedish krona. Operating costs and expenses would have been $1.8 million lower in 2008 had foreign currency exchange rates remained the same as they were in 2007. In the fourth quarter, we recorded additional compensation expense at our Swedish subsidiary of $1.8 million to allow the management of our Swedish subsidiary to pay the taxes due on bonus payments made from 2002 to 2007, as discussed above under the heading "Other Compensation Arrangements" of this Item 7. The fourth quarter impact in U.S. dollars was largely offset by the strengthening of the U.S. dollar against the Swedish krona by 21% in the fourth quarter compared to the same quarter of the prior year. The Network Integration group did not have share-based compensation in product development and engineering costs in either year. Selling, general and administrative expenses included share-based compensation of $388,000 and $783,000 in 2008 and 2007, respectively.

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

Three months ended:		2008		2007		$ Change		% Change
March 31,		$	10,538	$	4,271	$	6,267		147	%
June 30,			12,030		4,755		7,275		153
September 30,			10,928		10,220		708		7
December 31,			106,403		10,435		95,968		920
	Total	$	139,899	$	29,681	$	110,218		371	%

        Operating costs and expenses for 2008 were $139.9 million, or 69% of revenues, compared to $29.7 million, or 20% of revenues, for 2007. The increase in operating costs and expenses were primarily the result of the $93.9 million goodwill impairment charge recorded in the fourth quarter of 2008 related to the July 2007 Fiberxon acquisition, and increases in the first and second quarter of 2008 of $6.3 and $7.3 million, respectively, over the same periods of the prior year due to the inclusion of a full year's results of operations of Fiberxon in 2008 compared to 2007 in which the results of Fiberxon were only included for the second half of the year. Operating costs also included increases in the allowance for doubtful accounts, IPO costs written off, and fixed asset write-offs. The effect of currency fluctuations did not have a significant impact on the year-over-year change in operating costs and expenses. Product development and engineering expenses included share-based compensation of $843,000 and $728,000 in 2008 and 2007, respectively. Selling, general and administrative expenses included share-based compensation of $790,000 and $749,000 in 2008 and 2007, respectively.

75

Operating Income (Loss)

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

Years ended December 31:		2008			2007 (Restated)			$ Change			% Change			% Change constant currency (2)
Network Equipment group		$	(1,421	)	$	(8,276	)	$	6,855			(83	)%		(78	)%
Network Integration group			8,905			9,465			(560	)		(6	)		(20	)
Optical Components group			(110,462	)		(1,548	)		(108,914	)		7,036			7,035
All others			(1,777	)		(1,529	)		(248	)		16			16
			(104,755	)		(1,888	)		(102,867	)		5,448			5,538
Corporate unallocated expenses			(16,008	)		(8,075	)		(7,933	)		98			98
Adjustments (1)			315			(537	)		852			(159	)		NM
	Total	$	(120,448	)	$	(10,500	)	$	(109,948	)		1047	%		1097	%

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.

        The 2008 $120.4 million operating loss represented 22% of revenues, compared to a $10.5 million operating loss, or 2% of revenues, in 2007. The increase in operating loss arose from the total $100.3 million charge for goodwill impairment, primarily arising from the Fiberxon acquisition. Excluding the goodwill impairment charge, operating loss in 2008 would have been $20.2 million, or 4% of revenue. Operating loss would have been $1.7 million more in 2008 had foreign currency exchange rates remained the same as they were in 2007. Operating loss included share-based compensation expense of $4.3 million and $5.3 million in 2008 and 2007, respectively.

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

        Network Integration Group.    The Network Integration group reported operating income of $8.9 million for 2008, compared to operating income of $9.5 million for 2007. The decrease was the result of a $5.5 million increase in operating expenses partially offset by an increase in gross profit. Operating income would have been $1.3 million less in 2008 had foreign currency exchange rates remained the same as they were in 2007. Operating income included share-based compensation expense of $388,000 and $783,000 in 2008 and 2007, respectively.

        Optical Components Group.    The Optical Components group reported an operating loss of $110.5 million for 2008, compared to an operating loss of $1.5 million for 2007. The increase in operating loss was the primarily the result of the $93.9 million goodwill impairment and inclusion of a full year's worth of Fiberxon's results of operations. The effect of currency fluctuations did not have a significant

76

impact on the year-over-year change in operating loss Operating loss included share-based compensation expense of $1.9 million and $1.8 million in 2008 and 2007, respectively.

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

        Interest expense was $4.0 million in both 2008 and 2007. We realized $2.6 million in other income as the result of a gain on the sale of an investment. The $4.9 million of debt conversion costs in 2007 were associated with exchanging the $23.0 million convertible notes into shares of Common Stock. Interest income decreased $2.8 million from $4.8 million in 2007 to $2.0 million in 2008 due to both lower average cash and investment balances as well as to lower interest rates. Foreign currency transactions resulted in a net $131,000 gain in 2008 as compared to a $1.3 million loss in 2007.

Provision for Income Taxes

        The provision for income taxes was $2.5 million in 2008 and $3.9 million in 2007. Income tax expense fluctuates based on the amount of income generated in the various jurisdictions where we conduct operations and pay income tax.

Tax Loss Carry Forwards

        As of December 31, 2008, we had NOLs of approximately $196.6 million for federal income tax purposes and approximately $155.1 million for state income tax purposes. We also had capital loss carry forwards totaling $14.5 million as of December 31, 2008, which begin to expire in 2009. Under the Internal Revenue Code, if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change NOLs, capital loss carry forwards and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater than 50% change in its equity ownership by value over a three-year period. We may experience an ownership change in the future as a result of subsequent shifts in our stock ownership. If we were to trigger an ownership change in the future, our ability to use any NOLs and capital loss carry forwards existing at that time could be limited. As of December 31, 2008, the NOLs had a full valuation allowance.

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

Revenue

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

Years ended December 31:		2007			2006			$ Change			% Change			% Change constant currency (2)
Network Equipment group		$	105,357		$	96,002		$	9,355			10	%		9	%
Network Integration group			213,976			181,502			32,474			18			8
Optical Components group			144,860			93,381			51,479			55			56
All others			114			—			114			NM			NM
			464,307			370,885			93,422			25			20
Adjustments (1)			(16,070	)		(14,396	)		(1,674	)		12			12
	Total	$	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.

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

Years ended December 31:				2007		2006		$ Change			% Change
Network Equipment group:
	Americas			$	51,610	$	42,677	$	8,933			21	%
	Europe				34,036		33,319		717			2
	Asia Pacific				7,914		10,369		(2,455	)		(24	)
	Other regions				72		199		(127	)		(64	)
		Total network equipment			93,632		86,564		7,068			8
Network Integration group:
	Europe				213,828		181,503		32,325			18
		Total network integration			213,828		181,503		32,325			18
Optical Components group:
	Americas				90,912		73,889		17,023			23
	Europe				10,661		4,288		6,373			149
	Asia Pacific				39,174		10,202		28,972			284
	Other regions				23		43		(20	)		(47	)
		Total fiber optic components			140,770		88,422		52,348			59
All others:					7		—		7			NM
			Total	$	448,237	$	356,489	$	91,748			26	%

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

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

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

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

Gross Profit

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

Years ended December 31:		2007 (Restated)			2006 (Restated)			$ Change			% Change			% Change constant currency (2)
Network Equipment group		$	51,712		$	49,925		$	1,787			4	%		2	%
Network Integration group			48,276			44,759			3,517			8			0
Optical Components group			28,133			17,748			10,385			59			60
All others			68			—			68			NM			NM
			128,189			112,432			15,757			14			10
Corporate unallocated cost of goods sold			(165	)		(167	)		2			(1	)		(1	)
Intersegment adjustments (1)			(537	)		(161	)		(376	)		234			NM
	Total	$	127,487		$	112,104		$	15,383			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.

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

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

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

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

Operating Costs and Expenses

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

Years ended December 31:		2007 (Restated)		2006 (Restated)		$ Change		% Change			% Change Constant Currency (1)
Network Equipment group		$	59,988	$	55,048		4,940		9	%		8	%
Network Integration group			38,811		35,131		3,680		10			1
Optical Components group			29,681		18,652		11,029		59			59
All others			1,597		1,558		39		3			3
			130,077		110,389		19,688		18			14
Corporate unallocated operating expenses (2)			7,910		6,574		1,336		20			20
	Total	$	137,987	$	116,963	$	21,024		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.

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

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

        Network Integration Group.    Operating costs and expenses for 2007 were $38.8 million, or 18% of revenues, compared to $35.1 million, or 19% of revenues, for 2006. The increase in operating costs and expenses was primarily the result of foreign currency exchange rates. Operating costs and expenses would have been $3.2 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. The remaining increase was primarily due to increased labor and related costs. The Network Integration group did not have share-based compensation in product development and engineering costs in either year. Selling, general and administrative expenses included share-based compensation of $0.8 million and $1.4 million in 2007 and 2006, respectively.

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

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Operating Income (Loss)

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

Years ended December 31:		2007 (Restated)			2006 (Restated)			$ Change			% Change			% Change constant currency (2)
Network Equipment group		$	(8,276	)	$	(5,123	)	$	(3,153	)		62	%		59	%
Network Integration group			9,465			9,628			(163	)		(2	)		(7	)
Optical Components group			(1,548	)		(904	)		(644	)		71			48
All others			(1,529	)		(1,558	)		29			(2	)		(2	)
			(1,888	)		2,043			(3,931	)		(192	)		(202	)
Corporate unallocated expenses			(8,075	)		(6,741	)		(1,334	)		20			20
Adjustments (1)			(537	)		(161	)		(376	)		234			NM
	Total	$	(10,500	)	$	(4,859	)	$	(5,641	)		116	%		120	%

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.

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

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

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

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

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

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

Provision for Income Taxes

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

Tax Loss Carry Forwards

        As of December 31, 2007, we had NOLs of approximately $191.4 million for federal income tax purposes and approximately $197.2 million for state income tax purposes. We also had capital loss carry forwards totaling $47.6 million as of December 31, 2007, which begin to expire in 2009. Under the Internal Revenue Code, if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change NOLs, capital loss carry forwards and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater than 50% change in its equity ownership by value over a three-year period. We may experience an ownership change in the future as a result of subsequent shifts in our stock ownership. If we were to trigger an ownership change in the future, our ability to use any NOLs and capital loss carry forwards existing at that time could be limited. As of December 31, 2007, the NOLs had a full valuation allowance.

Recently Issued Accounting Standards

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

Liquidity and Capital Resources

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

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

December 31:	2008		2007
Cash
Cash and cash equivalents	$	67,950	$	72,474
Short-term marketable securities		12,295		6,402
Long-term marketable securities		—		1,442
Time deposits		1,335		6,055
		81,580		86,373
Debt
Short-term obligations (1)		32,893		28,931
		32,893	$	28,931
Cash in excess of debt	$	48,687	$	57,442
Ratio of cash to debt (2)		2.5 : 1		3.0 : 1

(1)

Includes current maturities of long-term debt.



(2)

Determined by dividing total cash by total debt.

Working Capital

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

December 31:	2008		2007 (Restated)
Current assets	$	323,083	$	326,875
Current liabilities		211,434		196,631
Working capital	$	111,649	$	130,244
Current ratio (1)		1.5 : 1		1.7 : 1

(1)

Determined by dividing total current assets by total current liabilities.

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

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

84

Cash Flow

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

Years ended December 31:	2008			2007 (Restated)
Net cash provided by (used in):
Operating activities	$	3,347		$	(8,483	)
Investing activities		(12,660	)		(9,563	)
Financing activities		4,997			(1,740	)
Effect of exchange rate changes on cash and cash equivalents		(208	)		538
Net change in cash and cash equivalents	$	(4,524	)	$	(19,248	)

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

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

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

Off-Balance Sheet Arrangements

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

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Contractual Obligations

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

Contractual Obligations	Total		Less than 1 Year		1 - 3 Years		3 - 5 Years		After 5 Years
Operating leases	$	38,797	$	7,230	$	11,120	$	8,814	$	11,633
Short-term debt		32,893		32,893		—		—		—
Deferred consideration payable, net of reimbursable acquisition costs		30,036		30,036		—		—		—
Purchase commitments with suppliers and contract manufacturers		6,266		6,072		40		154		—
Long-term obligations		14		—		14		—		—
Total contractual obligations	$	108,006	$	76,231	$	11,174	$	8,968	$	11,633

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

        We believe that cash on hand and cash flows from operations will be sufficient to satisfy current operating needs, capital expenditures, and product development and engineering requirements for at least the next 12 months. We may seek to obtain additional debt or equity financing if we believe it appropriate.

        We may limit our ability to use available net operating loss and capital loss carryforwards if we seek financing through issuance of additional equity securities. Under the Internal Revenue Code, if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change NOLs, capital loss carry forwards and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater than 50% change in its equity ownership by value over a three-year period. This change in equity ownership includes the issuance of shares made in connection with the acquisition of Fiberxon. For additional information on the potential limitations on our use of net operating loss and capital loss carry forwards available to us at December 31, 2008, see the risk factor under Item 1A of this Form 10-K under the caption "Our Ability to Utilize Our NOLs and Certain Other Tax Attributes May Be Limited." Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support development of new products and the expansion of sales and marketing efforts, the timing of new product introductions and enhancements to existing products, and the market acceptance of our products.

Internet Access to Our Financial Documents

        We maintain a website at www.mrv.com. We make available, free of charge, either by direct access or a link to the SEC website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Our reports filed with, or furnished to, the SEC are also available directly at the SEC's website at www.sec.gov.

86

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

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

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

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

        Through certain foreign offices, and from time to time, we enter into foreign exchange contracts in an effort to minimize the currency exchange risk related to purchase commitments denominated in foreign currencies. These contracts cover periods commensurate with known or expected exposures, generally less than 12 months. As of December 31, 2008, we did not have any foreign exchange contracts outstanding.

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

        When we translate the financial position and results of operations of subsidiaries with reporting currencies other than the U.S. dollar, we recognize a translation gain or loss in other comprehensive income. Approximately 44% of our operating expenses, excluding $100.3 million in goodwill impairment charges, are reported by these subsidiaries. In general, these currencies were stronger against the U.S. dollar for the year ended December 31, 2008 compared to the same period last year, so revenues and expenses in these countries translated into more dollars than they would have in 2007. For 2008, we had approximately:

•

$32.2 million related to expenses settled in euros;

•

$12.4 million in expenses settled in Swedish kronas;

87

•

$13.8 million related to expenses settled in Swiss francs; and

•

$4.9 million in expenses settled in Taiwan dollars.

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

•

$35.4 million related to expenses settled in euros;

•

$13.7 million in expenses settled in Swedish kronas;

•

$15.4 million related to expenses settled in Swiss francs; and

•

$5.4 million in expenses settled in Taiwan dollars.

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

December 31:	2008		2007
U.S. dollars	$	49,540	$	55,197
Euros		8,550		7,051
Chinese renminbi		2,559		1,618
Swiss francs		2,319		1,213
Taiwan dollars		1,121		1,873
Norwegian kroner		913		1,916
Swedish kronas		809		2,392
Israeli new shekel		671		—
Other		1,468		1,214
Total cash and cash equivalents	$	67,950	$	72,474

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

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

88

Item 8.    Financial Statements and Supplemental Data.

Report of Independent Registered Public Accounting Firm

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

        We have audited the accompanying consolidated balance sheets of MRV Communications, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MRV Communications, Inc. and subsidiaries at December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

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

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), MRV Communications Inc.'s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 7, 2009 expressed an adverse opinion thereon.

	/s/ Ernst & Young LLP
Los Angeles, California October 7, 2009

89

MRV Communications, Inc.

Statements of Operations

(In thousands, except per share data)

Years ended December 31:		2008			2007 (Restated)			2006 (Restated)
Revenue		$	538,022		$	448,237		$	356,489
Cost of goods sold			388,021			320,750			244,385
Gross profit			150,001			127,487			112,104
Operating costs and expenses:
	Product development and engineering		38,746			33,387			28,369
	Selling, general and administrative		129,019			102,694			88,542
	Impairment of goodwill and other intangibles		100,250			—			52
	Amortization of other intangibles		2,434			1,906			—
Total operating costs and expenses			270,449			137,987			116,963
Operating loss			(120,448	)		(10,500	)		(4,859	)
Interest expense			(3,956	)		(3,968	)		(3,540	)
Cost of debt conversion			—			(4,899	)		—
Other income, net			3,710			4,179			4,466
Loss before income taxes			(120,694	)		(15,188	)		(3,933	)
Provision for income taxes			2,510			3,906			3,450
Net loss		$	(123,204	)	$	(19,094	)	$	(7,383	)
Net loss per share:
Basic and diluted		$	(0.78	)	$	(0.14	)	$	(0.06	)
Weighted average number of shares:
Basic and diluted			157,323			140,104			120,902

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

90

MRV Communications, Inc.

Balance Sheets

(In thousands, except par values)

December 31:			2008			2007 (Restated)
Assets
Current assets:
	Cash and cash equivalents		$	67,950		$	72,474
	Short-term marketable securities			12,295			6,402
	Time deposits			1,335			6,055
	Accounts receivable, net			114,213			128,368
	Inventories			92,391			86,588
	Deferred income taxes			2,130			1,932
	Other current assets			32,769			25,056
Total current assets				323,083			326,875
Property and equipment, net				25,489			24,510
Goodwill				27,037			128,497
Deferred income taxes, net of current portion				1,480			—
Long term marketable securities				—			1,442
Intangibles, net				9,560			11,994
Other assets				5,870			5,647
Total assets			$	392,519		$	498,965
Liabilities and stockholders' equity
Current liabilities:
	Short-term obligations		$	32,893			28,931
	Deferred consideration payable			30,036			30,561
	Accounts payable			91,262			82,927
	Accrued liabilities			42,105			37,284
	Deferred revenue			12,635			9,203
	Other current liabilities			2,503			7,725
Total current liabilities				211,434			196,631
Other long-term liabilities				9,274			7,616
Minority interest				5,111			4,796
Commitments and contingencies
Stockholders' equity:
	Preferred Stock, $0.01 par value: Authorized — 1,000 shares; no shares issued or outstanding			—			—
	Common Stock, $0.0017 par value:
		Authorized — 320,000 shares
		Issued — 158,800 shares in 2008 and 158,480 shares in 2007
		Outstanding — 157,446 shares in 2008 and 157,127 shares in 2007		268			267
	Additional paid-in capital			1,403,663			1,399,630
	Accumulated deficit			(1,248,639	)		(1,125,435	)
Treasury stock — 1,353 shares in 2008 and 2007				(1,352	)		(1,352	)
Accumulated other comprehensive income				12,760			16,812
Total stockholders' equity				166,700			289,922
Total liabilities and stockholders' equity			$	392,519		$	498,965

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

91

MRV Communications, Inc.

Statements of Stockholders' Equity

(In thousands)

	Common Stock																Accumulated Other Comprehensive Income (Loss)
					Additional Paid-In Capital			Deferred Stock Expense			Accumulated Deficit			Treasury Stock
	Shares		Amount																	Total
Balance, Dec. 31, 2005 (As Reported)		104,496	$	177	$	1,156,209		$	—		$	(1,031,409	)	$	(1,352	)	$	(6,621	)	$	117,004
Adjustments		—		—		53,066			(324	)		(67,549	)		—			11,697			(3,110	)
Balance, Dec. 31, 2005 (Restated)		104,496		177		1,209,275			(324	)		(1,098,958	)		(1,352	)		5,076			113,894
Exercise of stock options and warrants		1,153		2		2,459			—			—			—			—			2,461
Issuance of Common Stock		19,858		34		69,831			—			—			—			—			69,865
Share-based compensation expense		—		—		4,636			—			—			—			—			4,636
Reclassification of deferred compensation related to adoption of SFAS No. 123.R						(324	)		324												—
Comprehensive income (loss):
Net loss		—		—		—			—			(7,383	)		—			—			(7,383	)
Net unrealized investment gains		—		—		—			—			—			—			4			4
Translation adjustment		—		—		—			—			—			—			3,831			3,831
Comprehensive loss																					(3,548	)
Balance, Dec. 31, 2006 (Restated)		125,507		213		1,285,877			—			(1,106,341	)		(1,352	)		8,911			187,308
Exercise of stock options		1,318		3		2,057			—			—			—			—			2,060
Issuance of Common Stock for Fiberxon acquisition		18,402		31		72,746			—			—			—			—			72,777
Issuance of Common Stock for conversion of convertible notes		11,900		20		28,005			—			—			—			—			28,025
Issuance of stock options for Fiberxon acquisition		—		—		6,006			—			—			—			—			6,006
Share-based compensation expense		—		—		4,939			—			—			—			—			4,939
Comprehensive income (loss):
Net loss		—		—		—			—			(19,094	)		—			—			(19,094	)
Net unrealized investment gains		—		—		—			—			—			—			3			3
Translation adjustment		—		—		—			—			—			—			7,898			7,898
Comprehensive loss																					(11,193	)
Balance, Dec. 31, 2007 (Restated)		157,127		267		1,399,630			—			(1,125,435	)		(1,352	)		16,812			289,922
Exercise of stock options		319		1		156			—			—			—			—			157
Share-based compensation expense		—		—		3,877			—			—			—			—			3,877
Comprehensive income (loss):
Net loss		—		—		—			—			(123,204	)		—			—			(123,204	)
Net unrealized investment gains		—		—		—			—			—			—			57			57
Translation adjustment		—		—		—			—			—			—			(4,109	)		(4,109	)
Comprehensive loss		—		—		—						—			—			—			(127,256	)
Balance, Dec. 31, 2008		157,446	$	268	$	1,403,663		$	—		$	(1,248,639	)	$	(1,352	)	$	12,760		$	166,700

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

92

MRV Communications, Inc.

Statements of Cash Flows

(In thousands)

Years ended December 31:				2008			2007 (Restated)			2006 (Restated)
Cash flows from operating activities:
	Net loss			$	(123,204	)	$	(19,094	)	$	(7,383	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization			10,013			8,335			5,446
		Share-based compensation expense			4,294			5,271			5,043
		Provision for doubtful accounts			3,675			327			1,287
		Deferred income taxes			(1,628	)		(1,142	)		(916	)
		(Gain) loss on disposition of property and equipment			(10	)		(37	)		(467	)
		Cost of debt conversion			—			4,899			—
		Gain on sale of equity method investment			(2,580	)		—			(50	)
		Minority interests' share of income (loss)			99			(425	)		230
		Impairment of goodwill and other intangibles			100,250			—			52
		Impairment of long-lived assets			2,564			—			—
	Changes in operating assets and liabilities, net of effects from acquisitions:
		Time deposits			4,831			(2,929	)		666
		Accounts receivable			6,896			(6,851	)		4,126
		Inventories			(8,034	)		(4,866	)		(15,773	)
		Other assets			(7,374	)		(2,082	)		(5,808	)
		Accounts payable			9,694			11,719			(1,518	)
		Accrued liabilities			569			3,316			(773	)
		Income tax payable			(782	)		(41	)		642
		Deferred revenue			4,610			1,168			1,189
		Other current liabilities			(536	)		(6,051	)		3,703
			Net cash provided by (used in) operating activities		3,347			(8,483	)		(10,304	)
Cash flows from investing activities:
	Purchases of property and equipment				(10,942	)		(7,867	)		(5,454	)
	Proceeds from sale of property and equipment				242			167			509
	Fiberxon acquisition, net of cash acquired				—			(19,886	)		—
	Proceeds from sale of equity method investment				2,580			—			100
	Purchases of investments				(13,220	)		(19,050	)		(43,750	)
	Proceeds from sale or maturity of investments				8,680			37,073			17,950
	Purchase of minority interest				—			—			(50	)
			Net cash used in investing activities		(12,660	)		(9,563	)		(30,695	)
Cash flows from financing activities:
	Net proceeds from issuance of common stock				157			2,060			72,326
	Borrowings on short-term obligations				122,414			67,268			107,331
	Payments on short-term obligations				(117,438	)		(70,934	)		(114,162	)
	Borrowings on long-term obligations				—			148			—
	Payments on long-term obligations				(136	)		(282	)		(340	)
			Net cash provided by (used in) financing activities		4,997			(1,740	)		65,155
Effect of exchange rate changes on cash and cash equivalents					(208	)		538			(418	)
Net increase (decrease) in cash and cash equivalents					(4,524	)		(19,248	)		23,738
Cash and cash equivalents, beginning of year					72,474			91,722			67,984
Cash and cash equivalents, end of year				$	67,950		$	72,474		$	91,722
Supplemental disclosure of cash flow information:
	Cash paid during year for interest			$	3,662		$	3,879		$	3,936
	Cash paid during year for income taxes			$	4,769		$	7,304		$	3,153
Non-cash transactions:
	Issuance of common stock for conversion of debt to equity			$	—		$	28,025		$	—
	Issuance of common stock and stock options in connection with acquisition of Fiberxon			$	—		$	78,783		$	—
	Deferred purchase price obligation in connection with acquisition of Fiberxon			$	—		$	31,500		$	—

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

93

MRV Communications, Inc.

Notes to Financial Statements

December 31, 2008

1. Description of Business and Basis of Presentation

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

        The Company has incurred net losses of $123.2 million, $19.1 million and $7.4 million in the years ended December 31, 2008, 2007 and 2006, respectively and has an accumulated deficit of $1.2 billion at December 31, 2008. At December 31, 2008, cash, cash equivalents, time deposits and marketable securities totaled $81.6 million. Management believes these existing funds will allow the Company to meet its future estimated capital needs. Should the Company fail to generate sufficient cash flow from operations or otherwise have the capital resources to meet future capital needs, it may seek to raise additional financing. There can be no assurance that any additional financing will be available on acceptable terms, or at all. Should this be the case, the ability to fund operations, satisfy obligations, take advantage of unanticipated opportunities, develop or enhance our products, or otherwise respond to competitive pressures, could be significantly limited.

2. Summary of Significant Accounting Policies

Principles of Consolidation

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

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

Foreign Currency

        Transactions originally denominated in other currencies are converted into functional currencies in accordance with Financial Accounting Standards Board ("FASB") Statements of Financial Accounting Standards ("SFAS") No. 52, Foreign Currency Translation ("SFAS No. 52"). Increases or decreases in the expected amount of cash flows upon settlement of the transaction caused by changes in exchange rates are recorded as foreign currency gains and losses and are included in other income (expense) in determining net income (loss).

        For foreign operations with the local currency as the functional currency, assets and liabilities are translated from the local currencies into U.S. dollars at the exchange rate prevailing at the balance sheet

94

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

2. Summary of Significant Accounting Policies (Continued)

date. Revenues, expenses and cash flows are translated at weighted average exchange rates for the period to approximate translation at the exchange rate prevailing at the dates those elements are recognized in the financial statements. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income (loss).

Revenue Recognition

        MRV's major revenue-generating products consist of fiber optic components; switches and routers; console management; and physical layer products. MRV generally recognizes product revenue, net of sales discounts, returns and allowances, in accordance with Staff Accounting Bulletin ("SAB") No. 104. Revenue Recognition, when persuasive evidence of an arrangement exists, delivery has occurred and all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection is considered probable. Products are generally shipped "FOB shipping point", with no right of return and revenue is recognized upon shipment. If revenue is to be recognized upon delivery, such delivery date is tracked through information provided by the third party shipping company used by us to deliver the product to the customer. Sales of services and system support are deferred and recognized ratably over the contract period. Sales with contingencies, such as rights of return, rotation rights, conditional acceptance provisions and price protection, are rare and insignificant and are deferred until the contingencies have been satisfied or the contingent period has lapsed. For sales to distributors, we generally recognize revenue using the "sell in" method (i.e. when product is sold to the distributor) rather than the "sell through" method (i.e. when the product is sold by the distributor to the end user). In limited circumstances, certain distributors have limited rights of return (including stock rotation rights) and/or are entitled to price protection, where a rebate credit may be provided to the customer if MRV lowers its price on products held in the distributor's inventory. MRV estimates and establishes allowances for expected future product returns and credits in accordance with SFAS No. 48. Revenue Recognition When Right of Return Exists. We record a reduction in revenue for estimated future product returns and future credits to be issued to the customer in the period in which revenues are recognized, and for future credits to be issued in relation to price protection at the time we make changes to our distributor price book. The estimate of future returns and credits is based on historical sales returns, analysis of credit memo data, and other factors known at the time of revenue recognition. We monitor product returns and potential price adjustments on an ongoing basis.

        Arrangements with customers may include multiple deliverables, including any combination of equipment, services and software. In Accordance with Emerging Issues Task Force ("EITF") No. 00-21, Revenue Arrangements with Multiple Deliverables, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when revenue recognition criteria for each element are met. Fair value for each element is established based on the sales price charged when the same element is sold separately. If multiple element arrangements include software or software related elements, we apply the provisions of Statement of Position ("SOP") No. 97-2, Software Revenue Recognition to the software and software related elements, or to the entire arrangement if the software is essential to the functionality of the non-software elements.

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

95

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

2. Summary of Significant Accounting Policies (Continued)

Cash, Cash Equivalents, Time Deposits and Restricted Cash

        MRV treats highly liquid investments with an original maturity of 90 days or less as cash equivalents. Cash balances and investments are maintained in qualified financial institutions, and at various times, such amounts are in excess of federal insured limits. Time deposits represent investments, which are restricted as to withdrawal or use based on maturity terms. Time deposits of $1.3 million and $6.1 million as of December 31, 2008 and 2007, respectively, are restricted by short-term obligations.

Marketable Securities

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

        Marketable securities consisted of the following (in thousands):

December 31:	2008		2007
Corporate issues	$	999	$	6,402
U.S. government issues		11,296		—
Total	$	12,295	$	6,402

Accounts Receivable and Allowance for Doubtful Accounts

        MRV evaluates the collectability of accounts receivable based on a combination of factors. If we become aware of a customer's inability to meet its financial obligations after a sale has occurred, we record an allowance to reduce the net receivable to the amount we believe can be reasonably collected from the customer. For all other customers, we record allowances for doubtful accounts based on the length of time the receivables are past due, the current business environment, and historical experience. If the financial conditions of our customers were to deteriorate or if economic conditions worsen, additional allowances may be required in the future.

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

	Balance at Beginning of Period		Charged to Cost and Expense		Other		Deductions			Balance at End of Period
December 31, 2006	$	6,179	$	1,287	$	—	$	(897	)	$	6,569
December 31, 2007		6,569		327		1,179		(1,424	)		6,651
December 31, 2008		6,651		3,675		—		(1,300	)		9,026

        During the year ended December 31, 2007, $1.2 million of the increase in allowance was recorded as a result of the opening balance of Fiberxon (See Note 17, Acquisition).

Inventories

        Inventories are stated at the lower of cost or market and consist of material, labor and overhead. Cost is determined by the first in, first out method. At each balance sheet date, MRV evaluates the ending

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December 31, 2008

2. Summary of Significant Accounting Policies (Continued)

inventories for excess quantities or obsolescence. This evaluation includes analysis of sales levels and projections of future demand. Based on this evaluation, we maintain reserves for excess and obsolete inventory and the inventory balances are reported net of reserves. If future demand or market conditions are less favorable than our projections, or if the market value falls below historical cost, a write down of inventory is made and reflected in cost of goods sold in the period the revision is made.

        Net inventories consisted of the following (in thousands):

December 31:	2008		2007 (Restated)
Raw materials	$	36,997	$	29,775
Work-in process		19,839		18,968
Finished goods		35,555		37,845
Total	$	92,391	$	86,588

Property and Equipment

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

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

December 31:		2008			2007
Property and equipment, at cost
	Machinery and equipment	$	54,613		$	47,494
	Computer hardware and software		20,049			28,291
	Leasehold improvements		8,780			7,315
	Furniture and fixtures		6,870			6,077
	Building		4,584			4,781
	Construction in progress		4,454			3,103
	Land		346			362
	Total property and equipment, at cost		99,696			97,423
	Less — accumulated depreciation and amortization		(74,207	)		(72,913	)
Total		$	25,489		$	24,510

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Notes to Financial Statements (Continued)

December 31, 2008

2. Summary of Significant Accounting Policies (Continued)

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

	Life (years)
Asset category	From		To
Machinery and equipment		1		10
Computer hardware and software		1		8
Leasehold improvements		1		12
Furniture and fixtures		1		15
Building		33		33

        Depreciation expense for the years ended December 31, 2008, 2007, and 2006 was $7.5 million, $6.2 million and $5.1 million, respectively.

Goodwill and Other Intangibles

        Goodwill and intangible assets with indefinite lives are not amortized, but instead are measured for impairment at least annually, or when events indicate that impairment exists. MRV's annual impairment review date is October 1. Reviews for impairment are performed at three reporting units: the Network Integration group, the Optical Components group, and a component of the Network Equipment group comprising the U.S. divisions. Intangible assets that are determined to have definite lives are amortized over their useful lives (See Note 4, Goodwill and Other Intangible Assets).

Investments

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

        Under the cost and equity method, a loss in value of an investment, which is deemed to be other than a temporary decline, is recognized. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity, which would justify the carrying amount of the investment.

Impairment of Long-Lived Assets

        MRV evaluates its long-term tangible assets, such as property and equipment and other long-term assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may be impaired. We take into consideration events or changes such as product discontinuance, plant closures, product dispositions and history of operating losses or other changes in circumstances to indicate that the carrying amount may not be recoverable. The carrying value of an asset is considered impaired when the anticipated undiscounted cash flow from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value

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December 31, 2008

2. Summary of Significant Accounting Policies (Continued)

exceeds the fair market value. Fair market value is determined using the anticipated cash flows discounted at a rate based on our weighted average cost of capital, which represents the blended after-tax costs of debt and equity. There were no impairment losses on tangible assets for the years ended December 31, 2007 and 2006. In 2008, the Company recognized an impairment charge related to fixed assets in its Source Photonics subsidiary of $2.6 million.

Fair Value of Financial Instruments

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

        In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS No. 157"), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 establishes a three-level hierarchy that prioritizes the use of observable inputs, such as quoted prices in active markets, and minimizes the use of unobservable inputs, to measure fair value. All of MRV's assets and liabilities that are measured at fair value are measured using the unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. MRV adopted the provisions of SFAS No. 157, effective January 1, 2008, for its financial assets and liabilities and the adoption did not have a material impact on MRV's consolidated financial statements. In February 2008, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No. 157 ("FSP No. 157-2"). FSP No. 157-2 delays the effective date of SFAS No. 157 to January 1, 2009 with respect to the fair value measurement requirements for non-financial assets and liabilities that are not re-measured on a recurring basis. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date.

        In determining the fair value of its financial assets and liabilities, the Company uses various valuation approaches. SFAS No. 157 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

        Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

        Level 2 — Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.

        Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

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December 31, 2008

2. Summary of Significant Accounting Policies (Continued)

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

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

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

	Fair value measurement at reporting date using:
Assets:	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant other unobservable inputs (Level 3)		Balance as of December 31, 2008
Short-term marketable securities	$	12,295	$	—	$	—	$	12,295

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

Liability for Severance Pay

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

Cost of Goods Sold

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

Product Development and Engineering

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

Software Development Costs

        In accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, development costs related to software products are expensed as incurred until the technological feasibility of the product has been established. Technological feasibility occurs when a

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December 31, 2008

2. Summary of Significant Accounting Policies (Continued)

working model is completed. After technological feasibility is established, additional costs are capitalized.

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

Sales and Marketing

        Sales and marketing costs are charged to expense as incurred. For the years ended December 31, 2008, 2007 and 2006, advertising and tradeshow costs were $2.4 million, $2.3 million and $2.0 million, respectively.

Income Taxes

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

Net Income (Loss) Per Share

        Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of shares of Common Stock and dilutive potential shares of Common Stock outstanding during the period. Dilutive potential shares of Common Stock primarily consist of employee stock options and warrants. For the year ended December 31, 2006, dilutive potential shares include the shares associated with MRV's outstanding 5% Convertible Notes issued in June 2003 ("2003 Notes").

        SFAS No. 128, Earnings per Share, requires that employee equity share options, nonvested shares and similar equity instruments granted by MRV, be treated as potential shares of Common Stock outstanding in computing diluted net income per share. Diluted shares outstanding include the dilutive effect of in-the-money options, which is calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that we have not yet recognized, and the amount of income tax benefits that would be realized and recorded in additional paid-in capital if the deduction for the award would reduce income taxes payable are assumed to be used to repurchase shares.

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

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December 31, 2008

2. Summary of Significant Accounting Policies (Continued)

Share-Based Compensation

        As discussed in Note 14. Share-Based Compensation, the fair value of stock options and warrants are determined using the Black-Scholes valuation model. The assumptions used in calculating the fair value of share-based payment awards represent MRV's best estimates. Those estimates may be impacted by certain variables including, but not limited to, stock price volatility, employee stock option exercise behaviors, additional stock option grants, estimates of forfeitures, and related income tax impacts. See Note 14. Share-Based Compensation for further discussion on stock-based compensation and assumptions used.

Recently Issued Accounting Standards

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

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

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

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

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Notes to Financial Statements (Continued)

December 31, 2008

2. Summary of Significant Accounting Policies (Continued)

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

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

        In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, the statement focuses on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for MRV beginning with its third quarter starting July 1, 2009.

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

Use of Estimates

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

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Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements

Background of the Restatement

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

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

Consolidated Statement of Operations

For the year ended December 31, 2007

		As previously reported			Adjustments			As restated
Revenue		$	448,237		$	—		$	448,237
Cost of goods sold			320,264			486			320,750
Gross profit			127,973			(486	)		127,487
Operating costs and expenses:
	Product development and engineering		32,956			431			33,387
	Selling, general and administrative		101,998			696			102,694
	Impairment of goodwill and other intangibles		—			—			—
	Amortization of other intangibles		1,906			—			1,906
Total operating costs and expenses			136,860			1,127			137,987
Operating loss			(8,887	)		(1,613	)		(10,500	)
Interest expense			(3,968	)		—			(3,968	)
Cost of debt conversion			(4,899	)		—			(4,899	)
Other income (expense), net			2,979			1,200			4,179
Loss before income taxes			(14,775	)		(413	)		(15,188	)
Provision for income taxes			3,853			53			3,906
Net loss		$	(18,628	)	$	(466	)	$	(19,094	)
Net loss per share:
Basic and diluted		$	(0.13	)	$	(0.01	)	$	(0.14	)
Weighted average number of shares:
Basic and diluted			140,104			—			140,104

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Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

Consolidated Statement of Operations

For the year ended December 31, 2006

		As previously reported			Adjustments			As restated
Revenue		$	356,489		$	—		$	356,489
Cost of goods sold			244,207			178			244,385
Gross profit			112,282			(178	)		112,104
Operating costs and expenses:
	Product development and engineering		28,187			182			28,369
	Selling, general and administrative		87,539			1,003			88,542
	Impairment of goodwill and other intangibles		52			—			52
	Amortization of other intangibles		—			—			—
Total operating costs and expenses			115,778			1,185			116,963
Operating loss			(3,496	)		(1,363	)		(4,859	)
Interest expense			(3,540	)		—			(3,540	)
Cost of debt conversion			—			—			—
Other income (expense), net			5,386			(920	)		4,466
Loss before income taxes			(1,650	)		(2,283	)		(3,933	)
Provision for income taxes			3,865			(415	)		3,450
Net loss		$	(5,515	)	$	(1,868	)	$	(7,383	)
Net loss per share:
Basic and diluted		$	(0.05	)	$	(0.01	)	$	(0.06	)
Weighted average number of shares:
Basic and diluted			120,902			—			120,902

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Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

Consolidated Balance Sheet

As of December 31, 2007

		As previously reported			Adjustments			As restated
Assets
Current assets:
	Cash and cash equivalents	$	72,474		$	—		$	72,474
	Short-term marketable securities		6,402			—			6,402
	Time deposits		6,055			—			6,055
	Accounts receivable, net		128,368			—			128,368
	Inventories		86,676			(88	)		86,588
	Deferred income taxes		838			1,094			1,932
	Other current assets		25,370			(314	)		25,056
Total current assets			326,183			692			326,875
Property and equipment, net			24,510			—			24,510
Goodwill			137,371			(8,874	)		128,497
Deferred income taxes			907			(907	)		—
Long-term marketable securities			1,442			—			1,442
Intangibles, net			11,994			—			11,994
Other assets			5,097			550			5,647
Total assets		$	507,504		$	(8,539	)	$	498,965
Liabilities and stockholders' equity
Current liabilities:
	Short-term obligations	$	28,931		$	—		$	28,931
	Deferred consideration payable		30,561			—			30,561
	Accounts payable		82,927			—			82,927
	Accrued liabilities		38,902			(1,618	)		37,284
	Deferred revenue		9,203			—			9,203
	Other current liabilities		7,766			(41	)		7,725
Total current liabilities			198,290			(1,659	)		196,631
Convertible notes			—			—			—
Other long-term liabilities			9,322			(1,706	)		7,616
Minority interest			5,193			(397	)		4,796
Commitments and contingencies
Stockholders' equity:
	Preferred stock		—			—			—
	Common stock		267			—			267
	Additional paid-in capital		1,344,661			54,969			1,399,630
	Accumulated deficit		(1,055,552	)		(69,883	)		(1,125,435	)
	Treasury stock		(1,352	)		—			(1,352	)
	Accumulated other comprehensive income (loss)		6,675			10,137			16,812
Total stockholders' equity			294,699			(4,777	)		289,922
Total liabilities and stockholders' equity		$	507,504		$	(8,539	)	$	498,965

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Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

Consolidated Statement of Cash Flows

For the year ended December 31, 2007

				As previously reported			Adjustments			Restated
Cash flows from operating activities:
	Net loss			$	(18,628	)	$	(466	)	$	(19,094	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization			8,335			—			8,335
		Share-based compensation expense			3,906			1,365			5,271
		Provision for doubtful accounts			327			—			327
		Deferred income taxes			(1,312	)		170			(1,142	)
		(Gain) loss on disposition of property and equipment			(37	)		—			(37	)
		Cost of debt conversion			4,899			—			4,899
		Minority interests' share of income			(55	)		(370	)		(425	)
	Changes in operating assets and liabilities, net of effects from acquisitions:
		Time deposits			(2,929	)		—			(2,929	)
		Accounts receivable			(6,851	)		—			(6,851	)
		Inventories			(4,978	)		112			(4,866	)
		Other assets			(2,394	)		312			(2,082	)
		Accounts payable			11,719			—			11,719
		Accrued liabilities			3,866			(550	)		3,316
		Income taxes payable			—			(41	)		(41	)
		Deferred revenue			1,168			—			1,168
		Other current liabilities			(5,657	)		(394	)		(6,051	)
			Net cash used in operating activities		(8,621	)		138			(8,483	)
Cash flows from investing activities:
	Purchases of property and equipment				(7,867	)		—			(7,867	)
	Proceeds from sale of property and equipment				167			—			167
	Fiberxon acquisition, net of cash acquired				(19,886	)		—			(19,886	)
	Proceeds from sale of equity method investment				—			—			—
	Purchases of investments				(19,050	)		—			(19,050	)
	Proceeds from sale or maturity of investments				37,073			—			37,073
	Purchase of minority interest				—			—			—
			Net cash provided by (used in) investing activities		(9,563	)		—			(9,563	)
Cash flows from financing activities:
	Net proceeds from issuance of common stock				2,060			—			2,060
	Borrowings on short-term obligations				67,268			—			67,268
	Payments on short-term obligations				(70,934	)		—			(70,934	)
	Borrowings on long-term obligations				148			—			148
	Payments on long-term obligations				(282	)		—			(282	)
	Other long-term liabilities				(294	)		294			—
			Net cash provided by (used in) financing activities		(2,034	)		294			(1,740	)
Effect of exchange rate changes on cash and cash equivalents					970			(432	)		538
Net increase (decrease) in cash and cash equivalents					(19,248	)		—			(19,248	)
Cash and cash equivalents, beginning of year					91,722			—			91,722
Cash and cash equivalents, end of year				$	72,474		$	—		$	72,474

107

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

Consolidated Statement of Cash Flows

For the year ended December 31, 2006

				As previously reported			Adjustments			Restated
Cash flows from operating activities:
	Net loss			$	(5,515	)	$	(1,868	)	$	(7,383	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization			5,446			—			5,446
		Share-based compensation expense			3,442			1,601			5,043
		Provision for doubtful accounts			1,225			62			1,287
		Deferred income taxes			(1,346	)		430			(916	)
		(Gain) loss on disposition of property and equipment			(467	)		—			(467	)
		Gain on sale of equity method investment			(50	)		—			(50	)
		Minority interests' share of income			98			132			230
		Impairment of goodwill and other intangibles			52			—			52
	Changes in operating assets and liabilities:
		Time deposits			666			—			666
		Accounts receivable			3,743			383			4,126
		Inventories			(15,849	)		76			(15,773	)
		Other assets			(5,260	)		(548	)		(5,808	)
		Accounts payable			(1,518	)		—			(1,518	)
		Accrued liabilities			(952	)		179			(773	)
		Income tax payable			—			642			642
		Deferred revenue			1,189			—			1,189
		Other current liabilities			3,374			329			3,703
			Net cash used in operating activities		(11,722	)		1,418			(10,304	)
Cash flows from investing activities:
	Purchases of property and equipment				(5,454	)		—			(5,454	)
	Proceeds from sale of property and equipment				509			—			509
	Proceeds from sale of equity method investment				100			—			100
	Purchases of investments				(43,750	)		—			(43,750	)
	Proceeds from sale or maturity of investments				17,950			—			17,950
	Purchase of minority interest				(50	)		—			(50	)
			Net cash provided by (used in) investing activities		(30,695	)		—			(30,695	)
Cash flows from financing activities:
	Net proceeds from issuance of common stock				72,326			—			72,326
	Borrowings on short-term obligations				107,331			—			107,331
	Payments on short-term obligations				(114,162	)		—			(114,162	)
	Borrowings on long-term obligations				—			—			—
	Payments on long-term obligations				(340	)		—			(340	)
	Other long-term liabilities				329			(329	)		—
			Net cash provided by (used in) financing activities		65,484			(329	)		65,155
Effect of exchange rate changes on cash and cash equivalents					671			(1,089	)		(418	)
Net increase (decrease) in cash and cash equivalents					23,738			—			23,738
Cash and cash equivalents, beginning of year					67,984			—			67,984
Cash and cash equivalents, end of year				$	91,722		$	—		$	91,722

108

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

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

Years ended December 31:		2007			2006
Cost of goods sold:
	Share-based compensation expense	$	79		$	85
	Compensation arrangements with TurnKey		274			118
	Other adjustments		133			(25	)
Total adjustment to cost of goods sold			486			178
Product development and engineering:
	Share-based compensation expense		296			182
	Accumulated other comprehensive income and other adjustments		135			—
Total adjustment to product development and engineering			431			182
Selling, general and administrative:
	Share-based compensation expense		204			481
	Compensation arrangements with Turnkey		—			169
	Compensation arrangements with EDSLan		678			695
	Non-payroll bonuses to foreign subsidiaries		98			91
	Accumulated other comprehensive income and other adjustments		(284	)		(433	)
Total adjustment to selling, general and administrative			696			1,003
Other income (expense):
	Non-payroll bonuses to foreign subsidiaries		55			44
	Minority interest		51			(943	)
	Accumulated other comprehensive income and other adjustments		1,094			(21	)
Total adjustment to other income (expense)			1,200			(920	)
Provision for income taxes:
	Tax effect of compensation arrangements with EDSLan		(50	)		82
	Tax effect of non-payroll bonuses to foreign subsidiaries		(97	)		(95	)
	Tax effect of minority interest adjustments		(210	)		(812	)
	Other adjustments		410			410
Total adjustment to provision for income taxes			53			(415	)

109

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

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

			Share-based compensation expense (including payroll tax adjustment)			Compensation arrangements with Turnkey			Compensation arrangements with EDSLan			Compensation arrangements with Interdata			Non payroll bonuses to Foreign Subsidiaries			Purchase accounting for EDSLan			Purchase accounting for Tecnonet			Minority interest			Accumulated other comprehensive income and other adjustments			Total Adjustment as of December 31, 2007
Assets
Current assets:
		Inventories	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	(88	)	$	(88	)
	Deferred income taxes			—			—			110			—			636			—			—			—			348			1,094
	Other current assets																											(314	)		(314	)
Total current assets				—			—			110			—			636			—			—			—			(54	)		692
Goodwill				—			(1,515	)		—			(1,710	)		—			352			(963	)		—			(5,038	)		(8,874	)
Deferred income taxes				—			—			—			—			103			—			—			—			(1,010	)		(907	)
Other assets				—			—			—			—			727			—			—			—			(177	)		550
Total assets			$	—		$	(1,515	)	$	110		$	(1,710	)	$	1,466		$	352		$	(963	)	$	—		$	(6,279	)	$	(8,539	)
Liabilities and stockholders' equity Current liabilities:
		Accrued liabilities	$	295		$	419		$	935		$	—		$	2,058		$	918		$	—		$	—		$	(6,243	)	$	(1,618	)
		Other current liabilities		—			—			—			—			—			—			—			—			(41	)		(41	)
Total current liabilities				295			419			935			—			2,058			918			—			—			(6,284	)		(1,659	)
Other long-term liabilities																												(1,706	)		(1,706	)
Minority interest				—			—			—			—			—			(1,299	)		2,722			(2,064	)		244			(397	)
Commitments and contingencies																															—
Stockholders' equity:
		Additional paid-in capital		74,127						1,206									4,665			(4,717	)		(1,299	)		(19,013	)		54,969
		Accumulated deficit		(74,422	)		(1,934	)		(2,031	)		(1,710	)		(592	)		(3,896	)		2,232			3,916			8,554			(69,883	)
		Accumulated other comprehensive income (loss)		—			—			—			—						(36	)		(1,200	)		(553	)		11,926			10,137
Total stockholders' equity				(295	)		(1,934	)		(825	)		(1,710	)		(592	)		733			(3,685	)		2,064			1,467			(4,777	)
Total liabilities and stockholders' equity			$	—		$	(1,515	)	$	110		$	(1,710	)	$	1,466		$	352		$	(963	)	$	—		$	(6,279	)	$	(8,539	)

110

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

For the year ended December 31, 2007			Share-based compensation expense (including payroll tax adjustment)			Compensation arrangements with Turnkey			Compensation arrangements with EDSLan			Non payroll bonuses to Foreign Subsidiaries			Minority interest			Accumulated other comprehensive income and other adjustments			Total Adjustments
Cash flows from operating activities:
Net loss			$	(579	)	$	(274	)	$	(628	)	$	54		$	261		$	700		$	(466	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Share-based compensation expense			579			—			519			—			—			267			1,365
	Deferred income taxes			—			—			(50	)		(97	)		109			208			170
	Minority interests' share of income			—			—			—			—			(370	)		—			(370	)
Changes in operating assets and liabilities:
	Inventories			—			—			—			—			—			112			112
	Other assets			—			—			—			(342	)		—			654			312
	Accrued liabilities			—			274			159			385			—			(1,368	)		(550	)
	Income tax payable			—			—			—			—			—			(41	)		(41	)
	Other current liabilities			—			—			—			—			—			(100	)		(100	)
		Net cash used in operating activities		—			—			—			—			—			432			432
Effect of exchange rate changes on cash and cash equivalents				—			—			—			—			—			(432	)		(432	)

For the year ended December 31, 2006			Share-based compensation expense (including payroll tax adjustment)			Compensation arrangements with Turnkey			Compensation arrangements with EDSLan			Non payroll bonuses to Foreign Subsidiaries			Minority interest			Accumulated other comprehensive income and other adjustments			Total Adjustments
Cash flows from operating activities:
Net loss			$	(748	)	$	(287	)	$	(777	)	$	48		$	(131	)	$	27		$	(1,868	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Share-based compensation expense			748			—			853			—			—			—			1,601
	Provision for doubtful accounts			—			—			—			—			—			62			62
	Deferred income taxes			—			—			82			(95	)		—			443			430
	Minority interests' share of income			—			—			—			—			131			1			132
Changes in operating assets and liabilities:
	Accounts receivable			—			—			—			—			—			383			383
	Inventories			—			—			—			—			—			76			76
	Other assets			—			—			—			(386	)		—			(162	)		(548	)
	Accrued liabilities			—			287			(158	)		433			—			(383	)		179
	Income tax payable			—			—			—			—			—			642			642
		Net cash used in operating activities		—			—			—			—			—			1,089			1,089
Effect of exchange rate changes on cash and cash equivalents				—			—			—			—			—			(1,089	)		(1,089	)

111

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

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

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

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

Years Ended December 31:		2007			2006			Cumulative Amount at December 31, 2005
	Share-based compensation expense (including payroll tax adjustment)	$	(579	)	$	(748	)	$	(73,095	)
	Compensation arrangements with Turnkey		(274	)		(287	)		(1,373	)
	Compensation arrangements with EDSLan		(628	)		(777	)		(626	)
	Compensation arrangements with Interdata		—			—			(1,710	)
	Non payroll bonuses to foreign subsidiaries		54			48			(694	)
	Purchase accounting for EDSLan		—			—			(3,896	)
	Purchase accounting for Tecnonet		—			—			2,232
	Minority interest		261			(131	)		3,786
	Accumulated other comprehensive income and other adjustments		700			27			7,827
Total		$	(466	)	$	(1,868	)	$	(67,549	)

112

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

Review of Historical Stock Option Granting Practices and Related Accounting

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

Category	Number of grant dates		Number of individual grants		Number of underlying shares
Pre-1998 Grants		26		238		6,849,685
1998 up to Post-SOX Grants (March 30, 2004)		108		4,485		24,122,291
Post SOX Grants (March 31, 2004 and after)		35		2,719		13,393,887
Total		169		7,442		44,365,863

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

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

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

113

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

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

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

Types of Adjustments

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

Revised measurement dates, excluding acquisition and non-employee grants		$	36,535
Repricings and other modifications			25,721
Acquisition grants			10,344
Non-employee grants			1,545
	Total adjustment	$	74,145

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

Measurement Date Determination

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

114

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

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

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

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

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

115

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

Repricings and Other Grant Modifications Not Previously Recorded

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

Acquisition Grants

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

Grants to Non-Employees

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

116

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

Share-Based Compensation Related Tax Adjustments

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

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

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

117

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

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

Year Ending December 31:	Restated share-based compensation expense		As reported share-based compensation expense			Pre-tax share-based compensation expense adjustments			Pre-tax payroll related tax expense (benefit) adjustments			Total pre-tax impact			Related income tax expense (benefit) adjustments		Net after-tax adjustments
1994	$	18	$	—		$	18			—		$	18		$	—	$	18
1995		1,021		—			1,021			51			1,072			—		1,072
1996		5,430		—			5,430			874			6,304			—		6,304
1997		3,660		—			3,660			1,428			5,088			—		5,088
1998		5,709		—			5,709			599			6,308			—		6,308
1999		10,267					10,267			4,226			14,493			—		14,493
2000		110,850		59,941			50,909			27,956			78,865			—		78,865
2001		54,414		69,831			(15,417	)		4,926			(10,491	)		—		(10,491	)
2002		5,684		6,604			(920	)		342			(578	)		—		(578	)
2003		1,900		(8,098	)		9,998			(4,655	)		5,343			—		5,343
2004		2,429		188			2,241			(35,391	)		(33,150	)		—		(33,150	)
2005		48		—			48			(225	)		(177	)		—		(177	)
Cumulative amount at December 31, 2005		201,430		128,466			72,964			131			73,095			—		73,095
2006		4,110		3,442			668			80			748			—		748
2007		4,419		3,906			513			66			579			—		579
Cumulative amount at December 31, 2007	$	209,959	$	135,814		$	74,145		$	277		$	74,422		$	—	$	74,422

Review of Non-Stock Option Compensation Arrangements

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

Compensation Arrangements with Turnkey

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

118

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

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

Compensation Arrangements with EDSLan

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

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

Compensation Arrangements with Interdata

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

119

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

Non-Payroll Bonuses to Foreign Subsidiaries

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

Acquisition Related Accounting Treatment and Other Accounting Issues

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

Acquisition Accounting for EDSLan

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

120

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

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

Acquisition Accounting for Tecnonet

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

Minority Interest

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

Accumulated Other Comprehensive Income (Loss) and Other Adjustments

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

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

121

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

3. Restatement of Financial Statements (Continued)

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

4. Goodwill and Other Intangible Assets

        In accordance with SFAS No. 142 goodwill and intangible assets with indefinite lives are measured for impairment at least annually, or when events indicate that impairment exists. Intangible assets that are determined to have definite lives are amortized over their useful lives.

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

December 31:	2008			2007 (Restated)
Beginning balance	$	128,497		$	32,512
Purchase of Fiberxon		—			93,879
Purchase of minority Interest		—			—
Impairment		(100,250	)		—
Foreign currency translation		(1,210	)		2,106
Total	$	27,037		$	128,497

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

        MRV used an Income Approach—Discounted Cash Flow model to calculate the estimated fair value of the reporting units. Discounted cash flows were compiled using cash forecasts for each reporting unit, consistent with data obtained from industry analysts and internal consultations. The forecasts used a combination of past results, current and future economic factors, the Company's strategy for the future, strategic growth by geographic operating units, as well as feedback received as to analysts' expectations and industry reports.

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

122

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

4. Goodwill and Other Intangible Assets (Continued)

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

        Other intangibles assets primarily consists of the intangibles assets identified as a result of the acquisition of Fiberxon on July 1, 2007. The following table summarizes other intangible asset balances at December 31, 2008 (in thousands):

	Gross Carrying amount		Accumulated amortization			Net Carrying amount
Developed technology	$	8,500	$	(2,318	)	$	6,182
Customer backlog		600		(600	)		—
Customer relationships		4,800		(1,422	)		3,378
Total other intangible assets	$	13,900	$	(4,340	)	$	9,560

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

	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Developed technology	$	8,500	$	(773	)	$	7,727
Customer backlog		600		(600	)		—
Customer relationships		4,800		(533	)		4,267
Total other intangible assets	$	13,900	$	(1,906	)	$	11,994

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

Year Ending December 31:
2009	$	2,257
2010		2,079
2011		1,901
2012		1,901
2013		356
Thereafter		1,066
Total	$	9,560

123

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

5. Accrued Liabilities

        Accrued liabilities consisted of the following (in thousands):

December 31:	2008		2007 (Restated)
Payroll and related	$	22,424	$	22,955
Professional fees		2,542		3,634
Non-income taxes		473		364
Product warranty		2,604		2,547
Deferred rent		1,322		1,591
Other		12,740		6,193
Total	$	42,105	$	37,284

6. Income Taxes

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

Years ended December 31:		2008			2007 (Restated)			2006 (Restated)
Current:
	Federal	$	—		$	—		$	—
	State		18			—			—
	Foreign		4,120			5,048			4,366
	Total current		4,138			5,048			4,366
Deferred:
	Federal		—			—			—
	State		—			—			—
	Foreign		(1,628	)		(1,142	)		(916	)
	Total deferred		(1,628	)		(1,142	)		(916	)
	Total	$	2,510		$	3,906		$	3,450

124

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

6. Income Taxes (Continued)

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

Years ended December 31:	2008			2007 (Restated)			2006 (Restated)
Income tax provision (benefit, at statutory federal rate)		(34	)%		(34	)%		(34	)%
State and local income taxes, net of federal income taxes effect		1	%		(2	)%		(1	)%
Credits		0	%		(7	)%		(24	)%
Permanent differences		30	%		14	%		11	%
Foreign taxes at rates different than domestic rates		2	%		10	%		18	%
Expired capital loss carry forwards		15	%		551	%		—
Change in valuation allowance		(12	)%		(505	)%		118	%
Total		2	%		27	%		88	%

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

December 31:		2008			2007 (Restated)
Allowance for doubtful accounts		$	1,339		$	1,244
Inventory reserve			3,122			4,331
Accrued liabilities			6,106			3,229
Other			6,627			5,216
			17,194			14,020
	Valuation allowance		(15,064	)		(12,088	)
	Net current deferred income tax assets		2,130			1,932
Net operating losses			95,977			109,018
Tax credits			10,957			10,651
Depreciation and amortization			245			2,446
Investments			(28	)		176
Capital loss carry forwards			5,776			18,944
Other			(1,335	)		1,291
			111,592			142,526
	Valuation allowance		(110,112	)		(142,526	)
	Net long-term deferred income tax assets		1,480			—
Total		$	3,610		$	1,932

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

125

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

6. Income Taxes (Continued)

earnings and is therefore uncertain. At least quarterly, we assess the likelihood that the deferred income tax asset balance will be recovered from future taxable income. To the extent management believes that recovery is unlikely, we establish a valuation allowance against the deferred income tax asset, which increases income tax expense in the period such determination is made. During 2008 we released the valuation allowance of $13.1 million related to capital loss carry forwards which expired or no longer existed. During 2008 and 2007, we recorded an additional valuation allowance totaling $4.3 million and $5.0 million, respectively against additional deferred income tax assets, principally domestic net operating losses and unrealized income tax credits due to a history of net losses. Although realization is not assured, management believes it is more likely than not that the net deferred income tax assets, which relate primarily to profitable foreign subsidiaries, will be realized.

        As of December 31, 2008, MRV had federal, state, and foreign net operating loss carry forwards available of $196.6 million, $155.1 million and $97.7 million, respectively. For the year ended December 31, 2008, federal net operating loss carry forwards increased by $5.2 million, and state net operating loss carry forwards decreased by $42.1 million. For federal and state income tax purposes, the net operating losses are available to offset future taxable income through 2028 and 2029, respectively. Certain foreign net operating loss carryforwards and tax credits are available indefinitely. As of December 31, 2008, federal, state, and foreign income tax credits amounted to $6.1 million, $5.0 million, and $0.9 million, respectively. If not utilized, the federal and state income tax credits will begin to expire in 2019 and 2012, respectively. Capital loss carry forwards totaling $14.5 million as of December 31, 2008, will begin to expire in 2009.

        As a result of the adoption of SFAS No. 123R, the Company recognizes tax benefits associated with the exercise of stock options and vesting of restricted share units directly to stockholders' equity (deficiency) only when realized. Accordingly, deferred tax assets are not recognized for net operating loss carryforwards resulting from tax benefits occurring from January 1, 2006 onward. A tax benefit occurs when the actual tax benefit realized upon an employee's disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award. At December 31, 2008, deferred tax assets do not include $0.8 million of loss carryovers from share-based compensation.

        MRV has not recorded U.S. income tax expense for foreign earnings that it has declared as indefinitely reinvested offshore, thus reducing its overall income tax expense. At December 31, 2008, MRV had approximately $55.5 million of accumulated but undistributed earnings at certain foreign entities. The amount of earnings designated as indefinitely reinvested offshore is based upon our expectations of the future cash needs of the Company's foreign entities. Income tax considerations are also a factor in determining the amount of foreign earnings to be repatriated.

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

        With limited exception, the Company is no longer subject to U.S. federal audits by taxing authorities for years through 2004 and certain state, local and foreign income tax audits through 2002 to 2004. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months. No reserve was needed or recorded under FASB Interpretation No. 48

126

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

6. Income Taxes (Continued)

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

7. Short-Term and Long-Term Obligations

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

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

8. Derivative Financial Instruments

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

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

        Interest Rate Swaps.    A foreign office of MRV manages its debt portfolio by utilizing interest rate swaps to achieve an overall desired position of fixed and floating rates. As of December 31, 2008 this foreign office did not have any interest rate swaps outstanding. One interest rate swap through the foreign office matured in June 2008. Unrealized gains (losses) on these interest rate swaps for the year ended December 31, 2007 was $552,000, which have been recorded in interest expense. The fair values and the carrying values of these interest rate swaps were $190,000 at December 31, 2007, and were recorded in liabilities.

127

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

9. 401K Plan

        MRV sponsors a 401(k) plan (Plan) to provide retirement benefits for its U.S. employees. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides for tax-deferred salary contributions for eligible employees. The Plan allows employees to contribute a portion of their annual compensation to the Plan on a pretax basis. The Company matches pretax contributions up to 50% of the first 6% of eligible earnings contributed by employees. Matching contributions to the Plan totaled $839,000, $554,000 and $687,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

10. Convertible Debt

        In June 2003, MRV completed the sale of $23.0 million principal amount of 5% convertible notes due in 2008 (the "2003 Notes"), to Deutsche Bank AG, London Branch, in a private placement. The 2003 Notes bore interest at 5% per annum and were convertible into shares of MRV's Common Stock at a conversion price of $2.32 per share. The original 9,913,914 shares of MRV Common Stock issuable upon conversion were subsequently registered for resale by Deutsche Bank pursuant to a related Registration Rights Agreement dated June 1, 2003. Interest expense related to these 2003 Notes amounted to $751,000 and $1.2 million for the years ended December 31, 2007 and 2006, respectively. On August 10, 2007, MRV executed a Securities Exchange Agreement exchanging the 2003 Notes for 11,900,000 shares of MRV's Common Stock. As a result of executing the Securities Exchange Agreement, MRV's obligations related to the convertible notes, Securities Purchase Agreement, and the Registration Rights Agreement terminated effective August 10, 2007.

        MRV recorded the $4.9 million cost of debt conversion in accordance with the guidance provided in SFAS No. 84 Induced Conversions of Convertible Debt (an amendment of APB Opinion No. 26). The $4.9 million cost of debt conversion arose as a result of issuing 1,986,086 additional shares of Common Stock in excess of the terms required by the 2003 Notes. Additional paid in capital of $28.0 million was recorded in the balance sheet and $48,000 in interest was recorded in interest expense for the year ended December 31, 2007.

11. Commitments and Contingencies

Lease Commitments

        MRV leases all of its facilities and certain equipment under non-cancelable operating lease agreements expiring in various years through 2017. Following are the aggregate minimum annual lease payments under leases in effect as of December 31, 2008 (in thousands):

Years Ending December 31,
	2009	$	7,230
	2010		5,512
	2011		5,608
	2012		4,776
	2013		4,038
	Thereafter		11,633
Total		$	38,797

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Notes to Financial Statements (Continued)

December 31, 2008

11. Commitments and Contingencies (Continued)

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

Royalty Commitment

        Through subsidiaries in Israel, MRV is obligated to the Office of the Chief Scientist of the Government of Israel (Chief Scientist) with respect to the government's participation in research and development expenses for certain products. The royalty to the Chief Scientist is recorded in cost of goods sold, and is calculated at a rate of 2% to 5% of sales of such products developed with the participation, up to the cost of such participation. The remaining future obligation as of December 31, 2008 is $393,000, which is contingent on generating sufficient sales of this selected product line. Amounts received from the participation of the Chief Scientist are offset against the related research and development expenses incurred. MRV did not receive participation from the Chief Scientist for the years ended December 31, 2008, 2007 and 2006.

Litigation

        MRV has accrued a liability for a deferred consideration payment related to the acquisition by MRV of Fiberxon in July 2007. On March 25, 2009, MRV filed a complaint in the Superior Court of Los Angeles County, California, against former executives, directors and stockholders of Fiberxon seeking to recover damages in connection with the sale of Fiberxon to MRV. In addition to an upfront payment of cash and shares of MRV Common Stock, MRV agreed to pay up to $31.5 million in cash or shares of its Common Stock, or a combination thereof, within 18 months of the receipt by MRV of Fiberxon's audited financial statements if Source Photonics did not complete an initial public offering of its common stock within such 18-month period. Source Photonics did not complete the initial public offering within the 18-month period and the deferred consideration payment matured in March 2009.

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

        In connection with the Company's past stock option grant practices, MRV and certain of its current and former directors and officers have been subjected to a number of ongoing stockholder lawsuits. Between June 10, 2008 and August 15, 2008, five purported stockholder derivative lawsuits were filed in the U.S. District Court in the Central District of California, and one derivative lawsuit was filed in the Superior Court of the State of California against the Company and certain of its current and former officers and directors. The complaints seek, among other things, to recover from the defendants unspecified compensatory and punitive damages and costs of suit, including legal and other professional fees and other equitable relief. In addition to its own potential liability, MRV has indemnification obligations with its current and former directors and officers. MRV has paid the deductible amount of its directors' and officers' insurance policy, and the insurance carrier is currently paying costs and expenses related to the litigation. MRV expects that the insurance policy will be

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Notes to Financial Statements (Continued)

December 31, 2008

11. Commitments and Contingencies (Continued)

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

        From time to time, MRV has received notices from third parties alleging possible infringement of patents with respect to product features or manufacturing processes. Management believes such notices are common in the communications industry because of the large number of patents that have been filed on these subjects. Our policy is to discuss these notices with the parties in an effort to demonstrate that MRV's products and/or processes do not violate any patents. We have been involved in such discussions with IBM, Lucent, Ortel, Nortel, Rockwell, the Lemelson Foundation, Finisar and Apcon in the past. However, if one or more of these parties was to assert a claim and gain a conclusion unfavorable to us, such claims could materially and adversely affect our business, operating results and financial condition.

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

12. Product Warranty and Indemnification

        As of December 31, 2008 and 2007, MRV's product warranty liability recorded in accrued liabilities was $2.6 million and $2.5 million, respectively. The following table summarizes the activity related to the product warranty liability (in thousands):

Years ended December 31:	2008			2007
Beginning balance	$	2,547		$	2,291
Opening balance of acquired entities		—			81
Cost of warranty claims		(526	)		(604	)
Accruals for product warranties		583			779
Total	$	2,604		$	2,547

130

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Notes to Financial Statements (Continued)

December 31, 2008

12. Product Warranty and Indemnification (Continued)

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

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

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

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

13. Stockholders' Equity

Authorized Shares

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

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

Stock Repurchase Program

        In 2002, MRV's Board of Directors approved a program to repurchase up to 7.0 million shares of MRV Common Stock. Through December 31, 2008, The Company has repurchased a total of 1.4 million shares at a cost of $1.4 million under this program. The Company has not repurchased any shares during the years ended December 31, 2008, 2007 or 2006.

Stock Options and Warrants

        MRV's stock option and warrant plans provide for granting options, and warrants to purchase shares of MRV's Common Stock, to employees, directors and non-employees performing consulting or advisory services for us. Under these plans, stock options and warrant exercise prices generally equal the fair market value of MRV's Common Stock at the date of grant. The options and warrants generally vest over three to five years with expiration dates ranging from six and ten years from the date of grant depending on the plan. The Company's 2007 Omnibus Plan provides for granting nonstatutory options,

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Notes to Financial Statements (Continued)

December 31, 2008

13. Stockholders' Equity (Continued)

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

14. Share-Based Compensation

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

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

Years ended December 31,	2008		2007 (Restated)		2006 (Restated)
Cost of goods sold	$	370	$	469	$	396
Product development and engineering		1,304		1,316		956
Selling, general and administrative		2,620		3,486		3,691
Total share-based compensation expense	$	4,294	$	5,271	$	5,043

Years ended December 31,	2007 (As previously reported)		Restatement adjustments		2007 (Restated)
Cost of goods sold	$	370	$	99	$	469
Product development and engineering		885		431		1,316
Selling, general and administrative		2,651		835		3,486
Total share-based compensation expense	$	3,906	$	1,365	$	5,271

132

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

14. Share-Based Compensation (Continued)

Years ended December 31,	2006 (As previously reported)		Restatement adjustments		2006 (Restated)
Cost of goods sold	$	311	$	85	$	396
Product development and engineering		775		181		956
Selling, general and administrative		2,356		1,335		3,691
Total share-based compensation expense	$	3,442	$	1,601	$	5,043

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

Valuation Assumptions

        MRV uses the Black-Scholes option pricing model to estimate the fair value of share-based awards. The Black-Scholes model requires the use of subjective assumptions, including the option's expected life and the underlying stock price volatility. The Company assumes future volatility to approximate historical volatility. As discussed in Note 3, the restated SFAS No. 123R expense for the years ended December 31, 2007 and 2006 was calculated using different valuation assumptions than were used in calculating the originally reported expense. In the course of the Company's review of its accounting for share-based compensation expense the Company determined that the original valuation assumptions were not appropriate given information available at the time. The following weighted average assumptions were used for estimating the fair value of options granted during each of the following years:

	2008
Risk-free interest rate		3.2%
Dividend yield		0%
Volatility		67.7%
Expected life		5.0 yrs

	2007 (As reported)		Restatement adjustments		2007 (Restated)
Risk-free interest rate		4.5%		0.3%		4.8%
Dividend yield		0%		—%		0%
Volatility		65.1%		9.3%		74.4%
Expected life		3.4 yrs		1.5 yrs		4.9 yrs

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Notes to Financial Statements (Continued)

December 31, 2008

14. Share-Based Compensation (Continued)

	2006 (As reported)		Restatement adjustments		2006 (Restated)
Risk-free interest rate		4.8%		0.1%		4.9%
Dividend yield		0%		—%		0%
Volatility		80.8%		4.8%		85.6%
Expected life		3.2 yrs		1.5 yrs		4.7 yrs

Share-Based Payment Award Activity

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

	Shares under option (as restated, in thousands)			Weighted average exercise price (restated)		Weighted average remaining contractual term (in years)		Aggregate intrinsic value (in thousands)
Outstanding, January 1, 2007		11,721		$	3.09
Granted		5,285		$	2.09
Exercised		(1,318	)	$	1.56
Cancelled and forfeited		(966	)	$	4.95
Outstanding, December 31,2007		14,722		$	2.74
Granted		1,339		$	1.50
Exercised		(320	)	$	0.49
Cancelled and forfeited		(1,161	)	$	3.02
Outstanding, December 31, 2008		14,580		$	2.66		6.32	$	216
Vested and expected to vest, December 31, 2008		14,295		$	2.67		6.27	$	216
Exercisable, December 31, 2008		10,379		$	2.81		5.54	$	216

        The aggregate intrinsic value represents the total pre-tax intrinsic value, based on MRV's closing stock price of $0.77 at December 31, 2008, which would have been received by award holders had all award holders exercised in-the-money awards as of that date.

        The following table summarizes significant ranges of outstanding and exercisable options at December 31, 2008 (in thousands, except years and per-share amounts):

Range of Exercise prices	Options outstanding as of December 31, 2008		Weighted average remaining contractual life (years)		Weighted average exercise price		Options exercisable as of December 31, 2008		Weighted average exercise price of exercisable options
$0.27 - $  1.10		2,044		4.1	$	0.82		1,944	$	0.81
$1.11 - $  1.49		1,618		7.8	$	1.39		488	$	1.16
$1.60 - $  2.17		1,504		6.5	$	1.94		1,154	$	1.96
$2.18 - $  2.48		2,020		7.4	$	2.43		1,354	$	2.44
$2.50 - $  2.625		251		6.5	$	2.56		144	$	2.56
$2.63 - $  2.63		1,752		8.6	$	2.63		393	$	2.63
$2.66 - $  2.99		1,826		5.5	$	2.85		1,811	$	2.85
$3.00 - $  3.436		1,658		5.7	$	3.21		1,421	$	3.19
$3.47 - $  3.96		1,458		6.4	$	3.67		1,219	$	3.66
$6.10 - $27.91		449		2.1	$	13.08		449	$	13.08
$0.27 - $27.91		14,580		6.3	$	2.66		10,377	$	2.81

134

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

14. Share-Based Compensation (Continued)

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

	2008		2007		2006
Total intrinsic value of stock options exercised	$	311	$	2,247	$	1,909
Cash received from stock options exercised	$	157	$	2,059	$	2,461

15. Segment Reporting and Geographical Information

        MRV divides and operates its business based on three segments: the Network Equipment group, the Network Integration group, and the Optical Components group. In 2007, MRV disaggregated its networking reporting segment and began disclosing the Network Equipment group separately from the Network Integration group. Prior year amounts reflect the correction of accounting errors identified during an in-depth internal review and investigation into historical stock option granting practices and related accounting, non-stock option compensation arrangements, acquisition related accounting treatment and other accounting issues. See Note 3. for a detailed discussion of the restatement and effects on consolidated results. The Network Equipment group designs, manufactures and distributes optical networking solutions and Internet infrastructure products. The Network Integration group provides value-added integration and support services for customers' networks. The Optical Components group designs, manufactures and distributes optical components and optical subsystems.

        The accounting policies of the segments are the same as those described in the summary of significant accounting polices in Note 2 (Summary of Significant Accounting Policies). MRV evaluates segment performance based on revenues and operating expenses of each segment. As such, there are no separately identifiable segment assets nor are there any separately identifiable Statements of Operations data below operating income.

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

Years ended December 31:	2008			2007			2006
Network Equipment group	$	125,556		$	105,357		$	96,002
Network Integration group		225,741			213,976			181,502
Optical Components group		201,588			144,860			93,381
All others		241			114			—
		553,126			464,307			370,885
Intersegment adjustment		(15,104	)		(16,070	)		(14,396	)
Total	$	538,022		$	448,237		$	356,489

        Network Equipment revenue primarily consists of Metro Ethernet equipment, optical transport equipment, out-of-band network equipment, defense and aerospace network applications, the related service revenue and fiber optic components sold as part of system solutions. Network Integration revenue primarily consists of value-added integration and support service revenue, related third-party product sales (including third-party product sales through distribution) and fiber optic components sold

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Notes to Financial Statements (Continued)

December 31, 2008

15. Segment Reporting and Geographical Information (Continued)

as part of system solutions. Optical Components revenue primarily consists of fiber optic components, such as those used in FTTP applications, fiber optic transceivers, discrete lasers and LEDs, products that are generally not sold as part of our network equipment or network integration solutions.

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

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

Years ended December 31:	2008		2007		2006
Americas	$	174,388	$	142,522	$	116,566
Europe		287,682		258,525		219,110
Asia Pacific		74,886		47,088		20,571
Other regions		1,066		102		242
Total	$	538,022	$	448,237	$	356,489

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

December 31:	2008		2007
Americas	$	6,212	$	5,111
Europe		8,280		8,601
Asia Pacific		10,997		10,798
Total	$	25,489	$	24,510

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

Year ended December 31:	2008			2007 (Restated)			2006 (Restated)
Network Equipment group	$	(1,421	)	$	(8,276	)	$	(5,123	)
Network Integration group		8,905			9,465			9,628
Optical Components group		(110,462	)		(1,548	)		(904	)
All other		(1,777	)		(1,529	)		(1,558	)
		(104,755	)		(1,888	)		2,043
Corporate unallocated operating loss		(16,008	)		(8,075	)		(6,741	)
Intersegment adjustments		315			(537	)		(161	)
Total	$	(120,448	)	$	(10,500	)	$	(4,859	)

136

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

15. Segment Reporting and Geographical Information (Continued)

Year ended December 31:	2007 (As previously reported)			Adjustments			2007 (Restated)
Network Equipment group	$	(7,903	)	$	(373	)	$	(8,276	)
Network Integration group		10,432			(967	)		9,465
Optical Components group		(1,414	)		(134	)		(1,548	)
All other		(1,526	)		(3	)		(1,529	)
		(411	)		(1,477	)		(1,888	)
Corporate unallocated operating loss		(7,939	)		(136	)		(8,075	)
Intersegment adjustments		(537	)		—			(537	)
Total	$	(8,887	)	$	(1,613	)	$	(10,500	)

Year ended December 31:	2006 (As previously reported)			Adjustments			2006 (Restated)
Network Equipment group	$	(4,914	)	$	(209	)	$	(5,123	)
Network Integration group		11,197			(1,569	)		9,628
Optical Components group		(705	)		(199	)		(904	)
All other		(1,558	)		—			(1,558	)
		4,020			(1,977	)		2,043
Corporate unallocated operating loss		(7,355	)		614			(6,741	)
Intersegment adjustments		(161	)		—			(161	)
Total	$	(3,496	)	$	(1,363	)	$	(4,859	)

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

Years ended December 31:	2008			2007 (Restated)			2006 (Restated)
Domestic	$	(21,725	)	$	(19,695	)	$	(21,276	)
Foreign		(98,969	)		4,507			17,343
Total	$	(120,694	)	$	(15,188	)	$	(3,933	)

137

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

16. Other Income (Expense), Net

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

Years ended December 31:	2008		2007 (Restated)			2006 (Restated)
Interest income	$	2,042	$	4,750		$	4,989
Gain (loss) on foreign currency transactions		131		(1,324	)		(245	)
Gain on disposition of assets		10		37			467
Other, net		1,527		716			(745	)
Total	$	3,710	$	4,179		$	4,466

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

17. Acquisition

        On July 1, 2007, MRV acquired Fiberxon, Inc., a privately-held Delaware corporation. Fiberxon developed and manufactured modular optical link interfaces for telecommunication systems and networks, with principal manufacturing operations in China. MRV acquired Fiberxon to add an established, vertically integrated manufacturing, sales and distribution model in China and strengthen the Company's Optical Component group's positioning in Asia-Pacific, Europe and North America. . In exchange for the outstanding capital stock of Fiberxon, MRV agreed to pay consideration composed of (i) approximately $17.7 million in cash, (ii) approximately 18.4 million shares of MRV's Common Stock (excluding 2.8 million shares of MRV's Common Stock underlying the assumption of Fiberxon outstanding stock options), and (iii) an obligation to pay an additional amount of approximately $31.5 million in cash or shares of MRV's Common Stock, or a combination thereof, if Source Photonics did not complete an initial public offering ("IPO") of its Common Stock by March 27, 2009. Source Photonics is a wholly-owned subsidiary of MRV, and MRV combined Fiberxon's business with that of Source Photonics. In such event and in lieu of $31.5 million, the merger agreement called for payment of an amount equal to 9.0% of the product obtained by multiplying (x) the price per share to the public in a Source Photonics IPO, less the discount provided to the underwriters, by (y) the total number of shares of Source Photonics common stock outstanding immediately prior to the effectiveness of the agreement between Source Photonics and the underwriters of a Source Photonics IPO. The merger agreement also allowed for set-off rights against the deferred consideration payment and an amendment to the merger agreement entered into prior to closing, among other things, increased to $18 million the set-off rights available against payment of the deferred consideration payment. Source Photonics did not complete an IPO within the 18-month period which was extended by the amendment and the deferred consideration payment matured in March 2009. MRV has not paid any portion of the deferred consideration payable.

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

138

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Notes to Financial Statements (Continued)

December 31, 2008

17. Acquisition (Continued)

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

Cash		$	17,651
MRV Common Stock issued			72,777
MRV stock options exchanged for Fiberxon stock options			7,604
	Less: fair value of unvested MRV stock options exchanged for Fiberxon stock options		(1,598	)
Bonus payment to close			3,000
Deferred consideration			31,500
	Less: recoverable costs		(939	)
Legal, professional and banker's fees related to acquisition cost			4,926
Total		$	134,921

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

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

Net tangible assets acquired		$	27,142
Intangible assets acquired:
	Developed technology		8,500
	Customer backlog		600
	Customer relationships		4,800
Goodwill			93,879
Total purchase price		$	134,921

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

	2007
Tangible assets	$	61,252
Intangible assets		13,900
Goodwill		93,879
Assumed liabilities		(34,110	)
Total purchase price	$	134,921

139

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

17. Acquisition (Continued)

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

Accounts receivable	$	19,410
Inventories		17,896
Property and equipment		9,033
Other assets and liabilities, net		(19,197	)
Net tangible assets acquired	$	27,142

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

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

Developed technology	Straight line method	5.5 years
Customer relationships	Accelerated method	10 years
Customer backlog	Straight line method	6 months

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

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

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

140

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

17. Acquisition (Continued)

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

Year ended December 31:	2007 (Restated)
Pro forma net revenue	$	487,701
Pro forma net loss	$	(20,487	)
Pro forma net loss per share (basic)	$	(0.15	)
Pro forma net loss per share (diluted)	$	(0.15	)

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

18. Subsequent Events

        In June 2009, the Company completed the purchase of 833,333 shares of Series A Preferred Stock and 12.8 million shares of common stock of its majority-owned subsidiary Charlotte's Networks, Inc. ('Charlotte's Networks"). The total purchase price was $1.5 million. After the purchase, MRV owned all of the preferred stock and 99.7% of the common stock of Charlotte's Networks. On August 4, 2009 the subsidiary was merged into MRV.

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

141

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited)

Three months ended:			March 31, 2008 (Restated)			June 30, 2008			September 30, 2008			December 31, 2008
Revenue			$	125,586		$	147,578		$	130,626		$	134,232
Cost of goods sold(1)				89,865			100,196			97,187			100,773
Gross profit				35,721			47,382			33,439			33,459
Operating costs and expenses:
	Product development and engineering (2)			10,587			9,903			9,616			8,640
	Selling, general and administrative(3)			28,708			31,720			35,106			33,485
		Goodwill impairment		—			—			—			100,250
		Amortization of intangibles		653			653			564			564
Total operating costs and expenses				39,948			42,276			45,286			142,939
Operating income (loss)				(4,227	)		5,106			(11,847	)		(109,480	)
Interest expense				(914	)		(1,015	)		(1,118	)		(909	)
Other income, net				1,529			(85	)		1,764			502
Income (loss) before income taxes				(3,612	)		4,006			(11,201	)		(109,887	)
Provision for income taxes				1,566			1,785			(1,344	)		503
Net income (loss)			$	(5,178	)	$	2,221		$	(9,857	)	$	(110,390	)
Net income (loss) per share:
Basic			$	(0.03	)	$	0.01		$	(0.06	)	$	(0.70	)
Diluted			$	(0.03	)	$	0.01		$	(0.06	)	$	(0.70	)
Weighted average number of shares:
Basic				157,152			157,281			157,418			157,438
Diluted				157,152			160,037			157,418			157,438

142

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

Three months ended:			March 31, 2007 (Restated)			June 30, 2007 (Restated)			September 30, 2007 (Restated)			December 31, 2007 (Restated)
Revenue			$	89,679		$	101,962		$	115,700		$	140,896
Cost of goods sold (1)				61,751			71,422			84,391			103,186
Gross profit				27,928			30,540			31,309			37,710
Operating costs and expenses:
	Product development and engineering (2)			7,376			6,895			9,518			9,598
	Selling, general and administrative (3)			22,990			23,820			26,917			28,967
		Amortization of intangibles		—			—			806			1,100
Total operating costs and expenses				30,366			30,715			37,241			39,665
Operating income (loss)				(2,438	)		(175	)		(5,932	)		(1,955	)
Interest expense				(1,052	)		(964	)		(1,075	)		(877	)
Cost of debt conversion				—			—			(4,899	)		—
Other income, net				1,405			1,025			1,091			658
Income (loss) before income taxes				(2,085	)		(114	)		(10,815	)		(2,174	)
Provision for income taxes				1,190			1,553			1,114			49
Net income (loss)			$	(3,275	)	$	(1,667	)	$	(11,929	)	$	(2,223	)
Net income (loss) per share:
Basic and diluted			$	(0.03	)	$	(0.01	)	$	(0.08	)	$	(0.01	)
Weighted average number of shares:
Basic and diluted				125,758			126,011			151,183			157,000

(1)

Cost of goods sold included share-based compensation expense under SFAS No. 123R (in thousands):

Three months ended	2008		2007
March 31,	$	97	$	108
June 30,		121		105
September 30,		76		132
December 31,		72		125

(2)

Product development and engineering expense included share-based compensation expense under SFAS No. 123R (in thousands):

Three months ended	2008		2007
March 31,	$	517	$	258
June 30,		210		231
September 30,		329		431
December 31,		248		395

143

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

(3)

Selling, general and administrative expense included share-based compensation expense under SFAS No. 123R (in thousands):

Three months ended	2008		2007
March 31,	$	864	$	779
June 30,		701		736
September 30,		572		1,076
December 31,		482		895

Three months ended:			March 31, 2008 (As previously reported)			Adjustments			March 31, 2008 (Restated)
Revenue			$	125,586		$	—		$	125,586
Cost of goods sold				88,452			1,413			89,865
Gross profit				37,134			(1,413	)		35,721
Operating costs and expenses:
	Product development and engineering			10,530			57			10,587
	Selling, general and administrative			28,784			(76	)		28,708
		Amortization of intangibles		653			—			653
Total operating costs and expenses				39,967			(19	)		39,948
Operating income (loss)				(2,833	)		(1,394	)		(4,227	)
Interest expense				(914	)		—			(914	)
Other income, net				704			825			1,529
Loss before income taxes				(3,043	)		(569	)		(3,612	)
Provision for income taxes				637			929			1,566
Net loss			$	(3,680	)	$	(1,498	)	$	(5,178	)
Net loss per share:
Basic and diluted			$	(0.02	)	$	(0.01	)	$	(0.03	)
Weighted average number of shares:
Basic and diluted				157,152			—			157,152

144

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

Three months ended:		March 31, 2007 (As previously reported)			Adjustments			March 31, 2007 (Restated))
Revenue		$	89,679		$	—		$	89,679
Cost of goods sold			61,363			388			61,751
Gross profit			28,316			(388	)		27,928
Operating costs and expenses:
	Product development and engineering		7,306			70			7,376
	Selling, general and administrative		22,739			251			22,990
Total operating costs and expenses			30,045			321			30,366
Operating income (loss)			(1,729	)		(709	)		(2,438	)
Interest expense			(1,052	)		—			(1,052	)
Other income, net			1,435			(30	)		1,405
Loss before income taxes			(1,346	)		(739	)		(2,085	)
Provision for income taxes			870			320			1,190
Net loss		$	(2,216	)	$	(1,059	)	$	(3,275	)
Net loss per share:
Basic and diluted		$	(0.02	)	$	(0.01	)	$	(0.03	)
Weighted average number of shares:
Basic and diluted			125,758			—			125,758

145

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

Three months ended:		June 30, 2007 (As previously reported)			Adjustments			June 30, 2007 (Restated)
Revenue		$	101,962		$	—		$	101,962
Cost of goods sold			72,063			(641	)		71,422
Gross profit			29,899			641			30,540
Operating costs and expenses:
	Product development and engineering		6,846			49			6,895
	Selling, general and administrative		24,035			(215	)		23,820
Total operating costs and expenses			30,881			(166	)		30,715
Operating income (loss)			(982	)		807			(175	)
Interest expense			(964	)		—			(964	)
Other income, net			1,207			(182	)		1,025
Loss before income taxes			(739	)		625			(114	)
Provision for income taxes			1,721			(168	)		1,553
Net loss		$	(2,460	)	$	793		$	(1,667	)
Net loss per share:
Basic and diluted		$	(0.02	)	$	0.01		$	(0.01	)
Weighted average number of shares:
Basic and diluted			126,011			—			126,011

146

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

Three months ended:			September 30, 2007 (As previously reported)			Adjustments			September 30, 2007 (Restated)
Revenue			$	115,700		$	—		$	115,700
Cost of goods sold				85,345			(954	)		84,391
Gross profit				30,355			954			31,309
Operating costs and expenses:
	Product development and engineering			9,314			204			9,518
	Selling, general and administrative			25,759			1,158			26,917
		Amortization of intangibles		806			—			806
Total operating costs and expenses				35,879			1,362			37,241
Operating income (loss)				(5,524	)		(408	)		5,932
Interest expense				(1,075	)		—			(1,075	)
Cost of debt conversion				(4,899	)		—			(4,899	)
Other income, net				201			890			1,091
Loss before income taxes				(11,297	)		482			(10,815	)
Provision for income taxes				1,274			(160	)		1,114
Net loss			$	(12,571	)	$	642		$	(11,929	)
Net loss per share:
Basic and diluted			$	(0.08	)	$	(0.00	)	$	(0.08	)
Weighted average number of shares:
Basic and diluted				151,183			—			151,183

147

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

Three months ended:			December 31, 2007 (As previously reported)			Adjustments			December 31, 2007 (Restated)
Revenue			$	140,896		$	—		$	140,896
Cost of goods sold				101,493			1,693			103,186
Gross profit				39,403			(1,693	)		37,710
Operating costs and expenses:
	Product development and engineering			9,490			108			9,598
	Selling, general and administrative			29,465			(498	)		28,967
		Amortization of intangibles		1,100			—			1,100
Total operating costs and expenses				40,055			(390	)		39,665
Operating income (loss)				(652	)		(1,303	)		(1,955	)
Interest expense				(877	)		—			(877	)
Other income, net				136			522			658
Loss before income taxes				(1,393	)		(781	)		(2,174	)
Provision for income taxes				(12	)		61			49
Net loss			$	(1,381	)	$	(842	)	$	(2,223	)
Net loss per share:
Basic and diluted			$	(0.01	)	$	(0.00	)	$	(0.01	)
Weighted average number of shares:
Basic and diluted				157,000			—			157,000

148

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

Three months ended:		March 31, 2008			March 31, 2007			June 30, 2007			September 30, 2007			December 31, 2007
Cost of goods sold:
	Share-based compensation expense	$	(11	)	$	24		$	24		$	10		$	21
	Compensation arrangements with TurnKey		(46	)		31			67			16			160
	Accumulated other comprehensive income and other adjustments		1,470			333			(732	)		(980	)		1,512
Total adjustment to cost of goods sold			1,413			388			(641	)		(954	)		1,693
Product development and engineering:
	Share-based compensation expense		(148	)		70			49			135			42
	Accumulated other comprehensive income and other adjustments		205			—			—			69			66
Total adjustment to product development and engineering			57			70			49			204			108
Selling, general and administrative:
	Share-based compensation expense		(147	)		51			23			83			47
	Compensation arrangements with Turnkey		—			44			97			23			(164	)
	Compensation arrangements with EDSLan		95			215			(279	)		1,065			(542	)
	Non-payroll bonuses to foreign subsidiaries		—			(59	)		(56	)		(58	)		271
	Accumulated other comprehensive income and other adjustments		(24	)		—			—			45			(110	)
Total adjustment to selling, general and administrative			(76	)		251			(215	)		1,158			(498	)
Other income (expense):
	Non-payroll bonuses to foreign subsidiaries		64			6			1			27			21
	Minority interest		503			(36	)		(183	)		317			(47	)
	Accumulated other comprehensive income and other adjustments		258			—			—			546			548
Total adjustment to other income (expense)			825			(30	)		(182	)		890			522
Provision for income taxes:
	Tax effect of compensation arrangements with EDSLan		43			2			146			(187	)		(11	)
	Tax effect of non-payroll bonuses to foreign subsidiaries		—			(21	)		(34	)		(21	)		(21	)
	Tax effect of minority interest adjustments		120			(35	)		(132	)		15			(58	)
	Tax effect Accumulated other comprehensive income and other adjustments		766			374			(148	)		33			151
Total adjustment to provision for income taxes			929			320			(168	)		(160	)		61

149

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

			March 31, 2008 (Restated)			June 30, 2008			September 30, 2008
Assets
Current assets:
	Cash and cash equivalents		$	72,591		$	67,004		$	66,840
	Short-term marketable securities			3,006			5,390			3,484
	Time deposits			5,113			5,153			922
	Accounts receivable, net			129,455			139,924			129,190
	Inventories			97,567			99,931			96,116
	Deferred income taxes			2,293			1,875			1,330
	Other current assets			22,924			27,952			26,468
Total current assets				332,949			347,229			324,350
Property and equipment, net				25,730			26,102			25,558
Goodwill				131,429			130,770			127,993
Deferred income taxes				1,458			1,093			2,402
Long term marketable securities				1,445			1,451			1,450
Intangibles, net				11,341			10,688			10,124
Other assets				6,092			6,085			5,905
Total assets			$	510,444		$	523,418		$	497,782
Liabilities and stockholders' equity
Current liabilities:
	Short-term obligations		$	29,265		$	37,954		$	33,744
	Deferred consideration payable			30,561			30,695			30,696
	Accounts payable			91,506			93,678			91,320
	Accrued liabilities			35,061			35,492			36,072
	Deferred revenue			10,413			9,963			9,578
	Other current liabilities			5,489			3,723			2,466
Total current liabilities				202,295			211,505			203,876
Other long-term liabilities				9,717			9,582			8,981
Minority interest				4,675			5,193			5,044
Commitments and contingencies
Stockholders' equity:
	Preferred Stock, $0.01 par value:
		Authorized — 1,000 shares; no shares issued or outstanding		—			—			—
	Common Stock, $0.0017 par value:
		Authorized — 320,000 shares
		Issued — 158,519, 158,755 and 158,777 shares at March 31, June 30 and September 30, 2008, respectively
		Outstanding — 157,166, 157,402 and 157,423 shares at March 31, June 30 and September 30, 2008, respectively		267			268			268
	Additional paid-in capital			1,401,091			1,402,003			1,402,904
	Accumulated deficit			(1,130,613	)		(1,127,502	)		(1,137,955	)
	Treasury stock — 1,353 shares in all periods			(1,352	)		(1,352	)		(1,352	)
	Accumulated other comprehensive loss			24,364			23,721			16,016
Total stockholders' equity				293,757			297,138			279,881
Total liabilities and stockholders' equity			$	510,444		$	523,418		$	497,782

150

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

			March 31, 2007 (Restated)			June 30, 2007 (Restated)			September 30, 2007 (Restated)
Assets
Current assets:
	Cash and cash equivalents		$	85,269		$	95,060		$	69,103
	Short-term marketable securities			26,393			7,500			7,736
	Time deposits			5,064			4,875			7,949
	Accounts receivable, net			84,956			98,264			116,231
	Inventories			64,905			69,223			86,952
	Deferred income taxes			1,177			909			1,266
	Other current assets			15,712			15,514			19,528
Total current assets				283,476			291,345			308,765
Property and equipment, net				14,721			14,609			24,613
Goodwill				32,323			32,480			128,578
Deferred income taxes				2,391			1,925			2,451
Long term marketable securities				—			—			1,426
Intangibles, net				—			—			13,257
Other assets				5,327			5,377			5,289
Total assets			$	338,238		$	345,736		$	484,379
Liabilities and stockholders' equity
Current liabilities:
	Short-term obligations		$	21,565		$	22,765		$	34,651
	Deferred consideration payable			—			—			30,656
	Accounts payable			50,317			58,204			61,549
	Accrued liabilities			28,349			30,799			36,838
	Deferred revenue			7,721			7,370			7,672
	Deferred tax liability — short-term			—			23,000			4,741
	Other current liabilities			8,990			5,708			8,416
Total current liabilities				116,942			147,846			184,523
Convertible notes				23,000			—			—
Deferred tax liability — long-term				—			—			515
Other long-term liabilities				7,904			7,283			7,459
Minority interest				4,467			4,583			4,553
Commitments and contingencies
Stockholders' equity:
	Preferred Stock, $0.01 par value:
		Authorized — 1,000 shares; no shares issued or outstanding		—			—			—
	Common Stock, $0.0017 par value:
		Authorized — 320,000 shares
		Issued — 127,325, 127,382, and 158,208 shares at March 31, June 30 and September 30, 2007, respectively
		Outstanding — 125,972, 126,029, and 156,855 shares at March 31, June 30 and September 30, 2007, respectively		214			214			267
	Additional paid-in capital			1,287,988			1,289,110			1,398,378
	Accumulated deficit			(1,109,618	)		(1,111,283	)		(1,123,215	)
	Treasury stock — 1,353 shares in all periods			(1,352	)		(1,352	)		(1,352	)
	Accumulated other comprehensive loss			8,693			9,335			13,251
Total stockholders' equity				185,925			186,024			287,329
Total liabilities and stockholders' equity			$	338,238		$	345,736		$	484,379

151

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

March 31, 2008		(As previously reported)			Adjustments			Restated
Assets
Current assets:
	Cash and cash equivalents	$	72,591		$	—		$	72,591
	Short-term marketable securities		3,006			—			3,006
	Time deposits		5,113			—			5,113
	Accounts receivable, net		129,455			—			129,455
	Inventories		99,118			(1,551	)		97,567
	Deferred income taxes		360			1,933			2,293
	Other current assets		22,636			288			22,924
Total current assets			332,279			670			332,949
Property and equipment, net			25,730			—			25,730
Goodwill			140,303			(8,874	)		131,429
Deferred income taxes			1,669			(211	)		1,458
Long term marketable securities			1,445						1,445
Intangibles, net			11,341						11,341
Other assets			5,478			614			6,092
Total assets		$	518,245		$	(7,801	)	$	510,444
Liabilities and stockholders' equity
Current liabilities:
	Short-term obligations	$	29,265		$	—		$	29,265
	Deferred consideration payable		30,561			—			30,561
	Accounts payable		91,506			—			91,506
	Accrued liabilities		37,169			(2,108	)		35,061
	Deferred revenue		10,413			—			10,413
	Other current liabilities		4,038			1,451			5,489
Total current liabilities			202,952			(657	)		202,295
Other long-term liabilities			9,981			(264	)		9,717
Minority interest			5,431			(756	)		4,675
Commitments and contingencies
Stockholders' equity:
	Preferred Stock		—			—			—
	Common Stock		267			—			267
	Additional paid-in capital		1,345,644			55,447			1,401,091
	Accumulated deficit		(1,059,232	)		(71,381	)		(1,130,613	)
	Treasury stock		(1,352	)		—			(1,352	)
	Accumulated other comprehensive income (loss)		14,554			9,810			24,364
Total stockholders' equity			299,881			(6,124	)		293,757
Total liabilities and stockholders' equity		$	518,245		$	(7,801	)	$	510,444

152

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

March 31, 2007		(As previously reported)			Adjustments			Restated
Assets
Current assets:
	Cash and cash equivalents	$	85,269		$	—		$	85,269
	Short-term marketable securities		26,393			—			26,393
	Time deposits		5,064			—			5,064
	Accounts receivable, net		84,956			—			84,956
	Inventories		65,215			(310	)		64,905
	Deferred income taxes		895			282			1,177
	Other current assets		15,712			—			15,712
Total current assets			283,504			(28	)		283,476
Property and equipment, net			14,721			—			14,721
Goodwill			36,159			(3,836	)		32,323
Deferred income taxes			1,460			931			2,391
Other assets			4,699			628			5,327
Total assets		$	340,543		$	(2,305	)	$	338,238
Liabilities and stockholders' equity
Current liabilities:
	Short-term obligations	$	21,565		$	—		$	21,565
	Accounts payable		50,317			—			50,317
	Accrued liabilities		24,355			3,994			28,349
	Deferred revenue		7,721			—			7,721
	Other current liabilities		7,772			1,218			8,990
Total current liabilities			111,730			5,212			116,942
Convertible notes			23,000			—			23,000
Other long-term liabilities			7,409			495			7,904
Minority interest			5,260			(793	)		4,467
Commitments and contingencies
Stockholders' equity:
	Preferred Stock		—			—			—
	Common Stock		214			—			214
	Additional paid-in capital		1,233,710			54,278			1,287,988
	Accumulated deficit		(1,039,140	)		(70,478	)		(1,109,618	)
	Treasury stock		(1,352	)		—			(1,352	)
	Accumulated other comprehensive income (loss)		(288	)		8,981			8,693
Total stockholders' equity			193,144			(7,219	)		185,925
Total liabilities and stockholders' equity		$	340,543		$	(2,305	)	$	338,238

153

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

June 30, 2007		(As previously reported)			Adjustments			Restated
Assets
Current assets:
	Cash and cash equivalents	$	95,060		$	—		$	95,060
	Short-term marketable securities		7,500			—			7,500
	Time deposits		4,875			—			4,875
	Accounts receivable, net		98,264			—			98,264
	Inventories		68,800			423			69,223
	Deferred income taxes		895			14			909
	Other current assets		15,514			—			15,514
Total current assets			290,908			437			291,345
Property and equipment, net			14,609			—			14,609
Goodwill			36,316			(3,836	)		32,480
Deferred income taxes			1,460			465			1,925
Other assets			4,697			680			5,377
Total assets		$	347,990		$	(2,254	)	$	345,736
Liabilities and stockholders' equity
Current liabilities:
	Short-term obligations	$	22,765		$	—		$	22,765
	Accounts payable		58,204			—			58,204
	Accrued liabilities		27,048			3,751			30,799
	Deferred revenue		7,370			—			7,370
	Convertible notes		23,000			—			23,000
	Other current liabilities		4,766			942			5,708
Total current liabilities			143,153			4,693			147,846
Other long-term liabilities			7,283			—			7,283
Minority interest			5,272			(689	)		4,583
Commitments and contingencies
Stockholders' equity:
	Preferred Stock		—			—			—
	Common Stock		214			—			214
	Additional paid-in capital		1,234,613			54,497			1,289,110
	Accumulated deficit		(1,041,600	)		(69,683	)		(1,111,283	)
	Treasury stock		(1,352	)		—			(1,352	)
	Accumulated other comprehensive income (loss)		407			8,928			9,335
Total stockholders' equity			192,282			(6,258	)		186,024
Total liabilities and stockholders' equity		$	347,990		$	(2,254	)	$	345,736

154

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

September 30, 2007		(As previously reported)			Adjustments			Restated
Assets
Current assets:
	Cash and cash equivalents	$	69,103			—			69,103
	Short-term marketable securities		7,736			—			7,736
	Time deposits		7,949			—			7,949
	Accounts receivable, net		116,231			—			116,231
	Inventories		85,539			1,413			86,952
	Deferred income taxes		895			371			1,266
	Other current assets		19,528			—			19,528
Total current assets			306,981			1,784			308,765
Property and equipment, net			24,613			—			24,613
Goodwill			137,452			(8,874	)		128,578
Deferred income taxes			1,460			991			2,451
Long term marketable securities			1,426						1,426
Intangibles, net			13,257						13,257
Other assets			4,581			708			5,289
Total assets		$	489,770			(5,391	)		484,379
Liabilities and stockholders' equity
Current liabilities:
	Short-term obligations	$	34,651			—			34,651
	Deferred consideration payable		30,656			—			30,656
	Accounts payable		61,549			—			61,549
	Accrued liabilities		37,611			(773	)		36,838
	Deferred revenue		7,672			—			7,672
	Deferred tax liability — short term		1,124			3,617			4,741
	Other current liabilities		7,440			976			8,416
Total current liabilities			180,703			3,820			184,523
	Deferred tax liability — long term		3,617			(3,102	)		515
Other long-term liabilities			7,459			—			7,459
Minority interest			5,191			(638	)		4,553
Commitments and contingencies
Stockholders' equity:
	Preferred Stock		—			—			—
	Common Stock		267			—			267
	Additional paid-in capital		1,343,667			54,711			1,398,378
	Accumulated deficit		(1,054,171	)		(69,044	)		(1,123,215	)
	Treasury stock		(1,352	)		—			(1,352	)
	Accumulated other comprehensive income (loss)		4,389			8,862			13,251
Total stockholders' equity			292,800			(5,471	)		287,329
Total liabilities and stockholders' equity		$	489,770			(5,391	)		484,379

155

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

			Share-based compensation expense (including payroll tax adjustment)			Compensation arrangements with Turnkey			Compensation arrangements with EDSLan			Compensation arrangements with Interdata			Non payroll bonuses to Foreign Subsidiaries			Purchase accounting for EDSLan			Purchase accounting for Tecnonet			Minority interest			Accumulated other comprehensive income and other adjustments			Total Adjustment as of March 31, 2008
Assets
Current assets:
	Inventories		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	(1,551	)	$	(1,551	)
	Deferred income taxes			—			—			67			—			636			—			—			—			1,230			1,933
	Other current assets			—			—			—			—			—			—			—			—			288			288
Total current assets				—			—			67			—			636			—			—			—			(33	)		670
Goodwill				—			(1,515	)		—			(1,710	)		—			352			(963	)		—			(5,038	)		(8,874	)
Deferred income taxes				—			—			—			—			103			—			—			—			(314	)		(211	)
Other assets				—			—			—			—			792			—			—			—			(178	)		614
Total assets			$	—		$	(1,515	)	$	67		$	(1,710	)	$	1,531		$	352		$	(963	)	$	—		$	(5,563	)	$	(7,801	)
Liabilities and stockholders' equity
Current liabilities:
		Accrued liabilities	$	244		$	374		$	798		$	—		$	2,059		$	918		$	—		$	—		$	(6,501	)	$	(2,108	)
		Other current liabilities		—			—			—			—			—			—			—			—			1,451			1,451
Total current liabilities				244			374			798			—			2,059			918			—			—			(5,050	)		(657	)
Other long-term liabilities				—			—			—			—			—			—			—			—			(264	)		(264	)
Minority interest				—			—			—			—			—			(1,299	)		2,722			(2,179	)					(756	)
Commitments and contingencies
Stockholders' equity:
		Additional paid-in capital		74,196			—			1,119			—			—			4,665			(4,717	)		(1,299	)		(18,517	)		55,447
		Accumulated deficit		(74,440	)		(1,889	)		(1,850	)		(1,710	)		(528	)		(3,896	)		2,232			4,299			6,401			(71,381	)
		Accumulated other comprehensive income (loss)		—			—			—			—			—			(36	)		(1,200	)		(821	)		11,867			9,810
Total stockholders' equity				(244	)		(1,889	)		(731	)		(1,710	)		(528	)		733			(3,685	)		2,179			(249	)		(6,124	)
Total liabilities and stockholders' equity			$	—		$	(1,515	)	$	67		$	(1,710	)	$	1,531		$	352		$	(963	)	$	—		$	(5,563	)	$	(7,801	)

156

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

			Share-based compensation expense (including payroll tax adjustment)			Compensation arrangements with Turnkey			Compensation arrangements with EDSLan			Compensation arrangements with Interdata			Non payroll bonuses to Foreign Subsidiaries			Purchase accounting for EDSLan			Purchase accounting for Tecnonet			Minority interest			Accumulated other comprehensive income and other adjustments			Total Adjustment as of March 31, 2007
Assets
Current assets:
	Inventories		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	(310	)	$	(310	)
	Deferred income taxes			—			—			58			—			—			—			—			—			224			282
Total current assets				—			—			58			—			—			—			—			—			(86	)		(28	)
Goodwill				—			(1,515	)		—			(1,710	)		—			352			(963	)		—			—			(3,836	)
Deferred income taxes				—			—			—			—			664			—			—			—			267			931
Other assets				—			—			—			—			628			—			—			—			—			628
Total assets			$	—		$	(1,515	)	$	58		$	(1,710	)	$	1,292		$	352		$	(963	)	$	—		$	181		$	(2,305	)
Liabilities and stockholders' equity
Current liabilities:
		Accrued liabilities	$	237		$	220		$	766		$	—		$	1,853		$	918		$	—		$	—		$	—		$	3,994
		Other current liabilities		—			—			—			—			—			—			—			—			1,218			1,218
Total current liabilities				237			220			766			—			1,853			918			—			—			1,218			5,212
Other long-term liabilities				—			—			—			—			—			—			—			—			495			495
Minority interest				—			—			—			—			—			(1,299	)		2,722			(2,216	)		—			(793	)
Commitments and contingencies
Stockholders' equity:
		Additional paid-in capital		73,836			—			912			—			—			4,665			(4,717	)		(1,299	)		(19,119	)		54,278
		Accumulated deficit		(74,073	)		(1,735	)		(1,620	)		(1,710	)		(561	)		(3,896	)		2,232			3,654			7,231			(70,478	)
		Accumulated other comprehensive income (loss)		—			—			—			—			—			(36	)		(1,200	)		(139	)		10,356			8,981
Total stockholders' equity				(237	)		(1,735	)		(708	)		(1,710	)		(561	)		733			(3,685	)		2,216			(1,532	)		(7,219	)
Total liabilities and stockholders' equity			$	—		$	(1,515	)	$	58		$	(1,710	)	$	1,292		$	352		$	(963	)	$	—		$	181		$	(2,305	)

157

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

			Share-based compensation expense (including payroll tax adjustment)			Compensation arrangements with Turnkey			Compensation arrangements with EDSLan			Compensation arrangements with Interdata			Non payroll bonuses to Foreign Subsidiaries			Purchase accounting for EDSLan			Purchase accounting for Tecnonet			Minority interest			Accumulated other comprehensive income and other adjustments			Total Adjustment as of June 30, 2007
Assets
Current assets:
	Inventories		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	423		$	423
	Deferred income taxes			—			—			(88	)		—			—			—			—			—			102			14
Total current assets				—			—			(88	)		—			—			—			—			—			525			437
Goodwill				—			(1,515	)		—			(1,710	)		—			352			(963	)		—			—			(3,836	)
Deferred income taxes				—			—			—			—			698			—			—			—			(233	)		465
Other assets				—			—			—			—			680			—			—			—			—			680
Total assets			$	—		$	(1,515	)	$	(88	)	$	(1,710	)	$	1,378		$	352		$	(963	)	$	—		$	292		$	(2,254	)
Liabilities and stockholders' equity
Current liabilities:
		Accrued liabilities	$	265		$	384		$	337		$	—		$	1,847		$	918		$	—		$	—		$	—		$	3,751
		Other current liabilities		—			—			—			—			—			—			—			—			942			942
Total current liabilities				265			384			337			—			1,847			918			—			—			942			4,693
Minority interest				—			—			—			—			—			(1,299	)		2,722			(2,112	)		—			(689	)
Commitments and contingencies
Stockholders' equity:
		Additional paid-in capital		73,905			—			1,062			—			—			4,665			(4,717	)		(1,299	)		(19,119	)		54,497
		Accumulated deficit		(74,170	)		(1,899	)		(1,487	)		(1,710	)		(469	)		(3,896	)		2,232			3,603			8,113			(69,683	)
		Accumulated other comprehensive income (loss)		—			—			—			—			—			(36	)		(1,200	)		(192	)		10,356			8,928
Total stockholders' equity				(265	)		(1,899	)		(425	)		(1,710	)		(469	)		733			(3,685	)		2,112			(650	)		(6,258	)
Total liabilities and stockholders' equity			$	—		$	(1,515	)	$	(88	)	$	(1,710	)	$	1,378		$	352		$	(963	)	$	—		$	292		$	(2,254	)

158

MRV Communications, Inc.

Notes to Financial Statements (Continued)

December 31, 2008

19. Quarterly Financial Data (Unaudited) (Continued)

			Share-based compensation expense (including payroll tax adjustment)			Compensation arrangements with Turnkey			Compensation arrangements with EDSLan			Compensation arrangements with Interdata			Non payroll bonuses to Foreign Subsidiaries			Purchase accounting for EDSLan			Purchase accounting for Tecnonet			Minority interest			Accumulated other comprehensive income and other adjustments			Total Adjustment as of September 30, 2007
Assets
Current assets:
	Inventories		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	1,413		$	1,413
	Deferred income taxes			—			—			99			—			—			—			—			—			272			371
Total current assets				—			—			99			—			—			—			—			—			1,685			1,784
Goodwill				—			(1,515	)		—			(1,710	)		—			352			(963	)		—			(5,038	)		(8,874	)
Deferred income taxes				—			—			—			—			718			—			—			—			273			991
Other assets				—			—			—			—			708			—			—			—			—			708
Total assets			$	—		$	(1,515	)	$	99		$	(1,710	)	$	1,426		$	352		$	(963	)	$	—		$	(3,080	)	$	(5,391	)
Liabilities and stockholders' equity
Current liabilities:
		Accrued liabilities	$	293		$	423		$	1,389		$	—		$	1,788		$	918		$	—		$	—		$	(5,584	)	$	(773	)
		Deferred tax liability — short term		—			—			—			—			—			—			—			—			3,617			3,617
		Other current liabilities		—			—			—			—			—			—			—			—			976			976
Total current liabilities				293			423			1,389			—			1,788			918			—			—			(991	)		3,820
Deferred tax liability — long term				—			—			—			—			—			—			—			—			(3,102	)		(3,102	)
Minority interest				—			—			—			—			—			(1,299	)		2,722			(2,187	)		126			(638	)
Commitments and contingencies
Stockholders' equity:
		Additional paid-in capital		74,106			—			1,075			—			—			4,665			(4,717	)		(1,299	)		(19,119	)		54,711
		Accumulated deficit		(74,399	)		(1,938	)		(2,365	)		(1,710	)		(362	)		(3,896	)		2,232			3,906			9,488			(69,044	)
		Accumulated other comprehensive income (loss)		—			—			—			—			—			(36	)		(1,200	)		(420	)		10,518			8,862
Total stockholders' equity				(293	)		(1,938	)		(1,290	)		(1,710	)		(362	)		733			(3,685	)		2,187			887			(5,471	)
Total liabilities and stockholders' equity			$	—		$	(1,515	)	$	99		$	(1,710	)	$	1,426		$	352		$	(963	)	$	—		$	(3,080	)	$	(5,391	)

159

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

        None.

Item 9A.    Controls and Procedures.

Disclosure Controls and Procedures

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

Internal Control Over Financial Reporting

Management's Consideration of the Restatement and its Underlying Circumstances

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

Assessment of Prior Period Controls

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

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

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

Stock Option Practices and the Related Accounting for Stock Option Transactions

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

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

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

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

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

•

The Company failed to design and maintain sufficient procedures and controls to ensure that option grants were made and accounted for in accordance with generally accepted accounting

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principles, including with respect to the identification, proper assessment, and application of the proper accounting treatment of stock option transactions, especially the determination of correct measurement dates for stock option grants and the accounting for modifications of key terms of options.

•

There was a lack of sufficient staffing, accounting knowledge and training among the personnel dealing with stock options and insufficient supervision of stock administration to ensure the proper application of accounting and financial reporting for stock option transactions.

•

There was a lack of complete and consistent documentation for stock option transactions.

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

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

Control Environment—Review and Approval Controls

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

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

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

•

The Company did not maintain at the entity level an oversight process to identify non-routine transactions occurring at corporate or the subsidiary level, to ensure that the transactions were properly accounted for. The Company's decentralized operations have led to a lack of effective controls regarding the identification and processing of non-routine transactions.

•

The Company failed to design and maintain sufficient procedures and controls to ensure that non-routine compensation arrangements were made and accounted for in accordance with Company policies, including with respect to the identification, proper assessment, and application of the proper accounting treatment of the transactions.

•

There was a lack of accounting knowledge and training among the personnel dealing with the items to ensure the proper application of accounting and financial reporting for the items.

•

There was a lack of complete and consistent documentation for the transactions.

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

Source Photonics Subsidiary

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

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

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

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Remediation of Material Weaknesses in Internal Control Over Financial Reporting

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

•

We have hired an experienced Director of Internal Audit reporting directly to the Chairman of the Audit Committee to improve the Company's monitoring of internal controls including those controls in place at our subsidiaries.

•

We have, and are in the process of, adding additional experienced members to our Board of Directors to improve the corporate governance and oversight of the Company.

•

We have hired an in-house general counsel to ensure that non-routine transactions have appropriate legal review and documentation and to improve the Company's legal and regulatory controls.

•

We continue to analyze the issues that gave rise to the restatement to enable management to design and implement controls that will mitigate those risks.

•

We have hired more experienced and knowledgeable staff in our accounting and finance group.

•

We plan on conducting more frequent and more in-depth periodic audits of controls at the subsidiary level.

•

We are reviewing and revising the design of our internal controls over financial reporting, and will continue to implement additional controls that will ensure consistent application of accounting policies and procedures at all of our subsidiaries.

•

We have engaged an outside stock plan administrator to manage the option and other share-based compensation granting process.

Report of Management on Internal Control Over Financial Reporting

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

        Based on its assessment, management has concluded that the Company's system of internal control over financial reporting is not adequately designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management has therefore concluded that our internal control over financial reporting was not effective at December 31, 2008 due to material weaknesses that existed due to the effect of not maintaining effective review and approval controls at the entity level, as it relates to non-routine transactions and not maintaining effective review and approval controls at our Source Photonics subsidiary, based on criteria in the COSO Framework. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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

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Inherent Limitation on the Effectiveness of Internal Controls

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

Changes in Internal Control Over Financial Reporting

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

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Report of Independent Registered Public Accounting Firm

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

        We have audited MRV Communications, Inc.'s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). MRV Communications Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

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

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

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

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

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

	/s/ Ernst & Young LLP
Los Angeles, California October 7, 2009

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Item 9B.    Other Information.

        None.

PART III

Item 10.    Directors, Executive Officers and Corporate Governance.

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

Name	Age		Position
Shlomo Margalit (4)		68	Chairman of the Board, Chief Technical Officer and Secretary
Noam Lotan (4)		57	Chief Executive Officer and Director
Baruch Fischer (2),(5)		60	Director
Harold Furchtgott-Roth (1),(5)		52	Director
Michael Keane (1)		53	Director
Guenter Jaensch (1),(2),(3),(5)		70	Director
Igal Shidlovsky (1),(2),(3)		72	Director
Daniel Tsui (1),(2),(3)		70	Director
Guy Avidan		47	Co-President of MRV; President, Network Equipment Group
Near Margalit		36	Co-President of MRV; Chief Executive Officer, Source Photonics, Inc.
Chris King		38	Chief Financial Officer
Jennifer Hankes Painter		40	Vice President, General Counsel and Chief Compliance Officer

(1)

Member of the Audit Committee

(2)

Member of the Compensation Committee

(3)

Member of the Nomination and Governance Committee

(4)

Member of the Executive Committee

(5)

Member of the Special Committee

Business Experience of Directors and Executive Officers

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

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

Noam Lotan, Chief Executive Officer and Director

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

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

Baruch Fischer, Director

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

Harold Furchtgott-Roth, Director

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

Guenter Jaensch, Director

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

Michael Keane, Director

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

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

Igal Shidlovsky, Director

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

Daniel Tsui, Director

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

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

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

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

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

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

Chris King, Chief Financial Officer

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

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

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

Board of Director Committees and Their Members

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

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

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

Name	Audit			Compensation			Nomination and Governance			Executive		Special Committee
Shlomo Margalit											X
Noam Lotan											X
Baruch Fischer					X								X
Harold Furchtgott-Roth		X											X	(1)
Guenter Jaensch		X	(1)		X			X					X
Michael Keane		X	(2)
Igal Shidlovsky(3)		X			X	(1)		X	(1)
Daniel Tsui		X			X			X

(1)

Committee Chairperson

(2)

Added to the Audit Committee on September 24, 2009

(3)

Lead Independent Director

Board Committees and Director Independence

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

Audit Committee

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

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

Compensation Committee

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

Compensation Committee Interlocks and Insider Participation

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

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Nomination and Governance Committee

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

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

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

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

Executive Committee

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

Special Committee

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

Communications with the Board

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

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

Code of Business Conduct and Corporate Governance

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

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

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Compliance with Section 16(a) Beneficial Ownership Reporting Compliance

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

Item 11.    Executive Compensation.

Compensation Discussion and Analysis

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

Philosophy

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

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

Determination of CEO's Compensation

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

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Annual Compensation Methodology

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

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

(i)

Adding the value at the time of stock options grants to the recipient during that year. The value is determined using the same financial model used to compute the value of all compensatory options granted during the year for purposes of preparing MRV's financial statements under generally accepted accounting principles;



(ii)

Adding the unrealized gain or subtracting the unrealized loss in the intrinsic value of in-the-money stock options previously granted and held by the recipient at the end of the year, regardless of whether the options have vested, from the intrinsic value of in-the-money options held by the recipient at the end of the preceding year; and



(iii)

Adding the unrealized gain or subtracting the unrealized loss at the end of the year on the market value of shares of MRV's stock obtained by the recipient upon exercise of previously granted company options from the value of such shares at the end of the preceding year.

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

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

2008 Compensation Decisions

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

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

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

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

	Options in lieu of cash bonus		Regular option grant		Total
Noam Lotan		90,000		80,000		170,000
Near Margalit		45,000		75,000		120,000
Guy Avidan		22,500		70,000		92,500

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

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

Employee Benefits

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

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Employment Agreements and Change of Control Arrangements

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

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

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

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

Executive Compensation Tables

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

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

Summary Compensation Table
		Year		Salary		Bonus (1)		Option awards (2)			All other compensation (3)			Total
Noam Lotan (5)			2008	$	272,650	$	—	$	187,791		$	8,294		$	468,735
	Chief Executive Officer		2007	$	258,853	$	—	$	142,865	(4)	$	9,079		$	410,797
			2006	$	224,039	$	40,000	$	149,762		$	6,835		$	420,636
Shlomo Margalit			2008	$	115,267	$	—	$	—		$	3,572		$	118,839
	Chairman, Chief Technical		2007	$	110,000	$	—	$	—		$	3,414		$	113,414
	Officer and Secretary		2006	$	110,000	$	—	$	—		$	3,414		$	113,414
Guy Avidan (6)(7)			2008	$	202,964	$	110,114	$	111,658		$	45,858	(8)	$	470,594
	Co-President of MRV,		2007	$	146,304	$	—	$	71,862		$	36,110		$	254,276
	President,
	Network Business
Near Margalit (9)			2008	$	261,971	$	—	$	166,035		$	8,873		$	436,879
	Co-President of MRV,		2007	$	248,076	$	30,000	$	130,753		$	8,756		$	417,585
	CEO, Source		2006	$	199,230	$	40,000	$	116,426		$	6,091		$	361,747
	Photonics, Inc.
Chris King (10)			2008	$	162,265	$	45,000	$	8,886		$	2,658		$	218,809
	Chief Financial Officer

(1)

The annual cash bonus earned in 2008 by Mr. King was paid out in January 2009. The annual cash bonus earned in 2007 by Mr. Near Margalit was paid out in March 2008. The annual cash bonuses earned in 2006 by Messrs. Lotan and Near Margalit were paid out in March 2007. In July 2008, Mr. Avidan received a bonus to compensate him for the fact that his base salary had not increased in the preceding year to reflect his added responsibilities as CFO.

(2)

Amounts reflect the compensation expense determined by MRV for accounting purposes for option awards granted in 2008 and prior years, including the impact of the restatement of share-based compensation on previously reported amounts. The stated amounts do not reflect whether the recipient actually realized a financial benefit from the awards. Amounts shown for option awards exclude estimated forfeitures, and differ for this reason from the expense recognized in accordance with Statements of Financial Accounting Standards No. 123(R) Share-Based Payment ("SFAS No. 123R") for financial statement purposes for the years ended December 31, 2008, 2007 and 2006. For additional information regarding valuation assumptions, refer to Note 15 (Share-Based Compensation) to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

(3)

None of the named executive officers except Mr. Avidan received perquisites in excess of $10,000, and therefore such amounts are not included in the "All other compensation," or "Total" columns. For each named executive officer except Mr. Avidan, "All other compensation" includes life insurance premiums paid and MRV contributions to its 401(k) savings plan on their behalf.

(4)

Includes the incremental increase in fair value for modifying an existing option grant to extend the term.

(5)

Mr. Lotan retained the title of CEO but relinquished the title of President to accommodate the promotion of two Co-Presidents in July 2009.

(6)

Mr. Avidan became the acting CFO in July 2007, and was named CFO in March 2008. In July 2009, he was promoted to the position of Co-President of MRV and President of MRV's Network Business.

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Compensation disclosure is omitted for 2006 because Mr. Avidan was not a named executive officer prior to 2007.

(7)

Mr. Avidan is employed by MRV International, Inc., a wholly-owned subsidiary of MRV, and is an Israeli employee. Therefore, all of his base salary in 2007 and $167,964 of it in 2008, and all amounts under "All other compensation" were paid in Israeli shekels and converted to U.S. dollars for purposes of this table. The conversion rate used (average for calendar year) was $0.2799 per shekel in 2008, and $0.2438 per shekel in 2007.

(8)

In 2008, Mr. Avidan received the benefit of a company-leased car in the amount of $20,630. He also received manager's insurance premiums paid in the amount of $21,271, and received reimbursement for a Study fund in the amount of $3,957. In 2007, the benefit amount for Mr. Avidan's car was $14,135, the manager's insurance premiums paid were $18,528, and the Study fund amount received was $3,447. All of the perquisites set forth above for Mr. Avidan were paid in shekels and converted to U.S. dollars for purposes of this table pursuant to the method described in footnote (5) above.

(9)

Mr. Near Margalit added the title of Co-President of MRV to his existing position of CEO of Source Photonics, Inc. in July 2009.

(10)

Mr. King joined MRV in January 2008 as VP, Finance and Chief Compliance Officer, and was promoted to CFO in July 2009.

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

Grants of Plan-Based Awards
Name	Grant date		Approval date		Number of securities underlying options (1)		Exercise price of option award ($/share) (2)		Grant date fair value of option award (3)
Noam Lotan		3/3/08		2/29/08		170,000	$	1.49	$	133,059
Shlomo Margalit (4)		N/A		N/A		—	$	—	$	—
Guy Avidan		3/3/08		2/29/08		92,500	$	1.49	$	72,400
Chris King		3/3/08		2/29/08		50,000	$	1.49	$	39,135
Near Margalit		3/3/08		2/29/08		120,000	$	1.49	$	93,924

(1)

Each of these non-qualified stock option awards vest pro rata over four years in annual increments from the date of grant, provided the executive officer is employed by the Company on such vesting dates.

(2)

The exercise price for the stock options granted, which was equal to the closing price of MRV stock as reported by the Nasdaq Stock Market on the date of grant.

(3)

Dollar amounts reflect the value of the awards determined using the Black-Scholes model, which is the method MRV uses to report the fair value for option awards in its financial statements in accordance with SFAS No. 123R and do not reflect the actual value that may be realized upon exercise. The grant date fair value per option is $0.89 for each of these awards. The assumptions used to calculate the value of the option awards are set forth under Note 15 (Share-Based Compensation) to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

(4)

Mr. Margalit declined the grant of options in 2008, as he has done in past years.

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

Outstanding Equity Awards at Fiscal Year-End
Name	Grant date			Number of securities underlying unexercised options exercisable		Number of securities underlying unexercised options unexercisable		Option exercise price (1)		Option expiration date
Noam Lotan		9/21/01	(2)		80,000		—	$	2.70		9/21/11
		10/29/02	(3)		—		100,000	$	0.99		10/29/12
		10/29/02	(4)		12,000		—	$	0.99		10/29/12
		12/29/03	(4)		20,000		—	$	3.35		12/29/13
		3/22/04	(4)		25,000		—	$	2.80		3/22/14
		2/28/05	(5)		45,000		15,000	$	3.70		2/28/15
		12/30/05	(6)		26,250		8,750	$	2.05		12/30/15
		6/1/06	(6)		35,000		35,000	$	3.24		6/1/16
		8/1/07	(6)		40,000		120,000	$	2.63		8/1/17
		3/3/08	(6)		—		170,000	$	1.49		3/3/18
Shlomo Margalit (7)		N/A			—		—	$	—		N/A
Guy Avidan		6/11/02	(4)		60,000		—	$	1.10		6/11/12
		4/9/03	(4)		10,000		—	$	1.11		4/9/13
		10/24/03	(4)		20,000		—	$	2.99		10/24/13
		12/31/04	(4)		30,000		—	$	3.67		12/31/14
		11/30/05	(6)		7,500		2,500	$	1.82		11/30/15
		7/3/06	(6)		5,000		5,000	$	3.07		7/3/16
		9/1/06	(6)		10,000		10,000	$	2.44		9/1/16
		8/1/07	(6)		37,500		112,500	$	2.63		8/1/17
		3/3/08	(6)		—		92,500	$	1.49		3/3/18
Chris King		3/3/08	(6)		—		50,000	$	1.49		3/3/18
Near Margalit		6/11/02	(4)		190,000		—	$	1.10		6/11/12
		12/29/03	(4)		20,000		—	$	3.35		12/29/13
		3/22/04	(4)		18,000		—	$	2.80		3/22/14
		8/31/04	(4)		18,000		—	$	2.22		8/31/14
		2/28/05	(5)		35,625		11,875	$	3.70		2/28/15
		12/30/05	(6)		21,000		7,000	$	2.05		12/30/15
		6/1/06	(6)		35,000		35,000	$	3.24		6/1/16
		8/1/07	(6)		37,500		112,500	$	2.63		8/1/17
		3/3/08	(6)		—		120,000	$	1.49		3/3/18

(1)

As of September 28, 2009, all of the option grants have exercise prices that are greater than MRV's closing stock price of $1.00 per share, and therefore have no in-the-money value.

(2)

20% vested each year for five years from the date of grant.

(3)

100% vests 10 years from the date of grant.

(4)

25% vested each year for four years from the date of grant.

(5)

25% vested each year for four years from the date of grant, and the remaining 25% vested on February 28, 2009.

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(6)

25% vests each year for four years from the date of grant, and another 25% of this grant vested in 2009 prior to the filing of this Annual Report.

(7)

Mr. Shlomo Margalit has historically declined all grants of options.

Other Compensation Information

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

Compensation of Directors

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

•

Annual Compensation.    Annual compensation of $18,000 was paid in cash to each non-management director in monthly installments for each month of service.

•

Board and Committee Meeting Participation.    Compensation of $1,000 was paid in cash for each Board and Committee meeting attended for which a non-management director participated in person or telephonically.

•

Option Awards.    All non-management directors were granted 10,000 options pursuant to MRV's 2007 Omnibus Incentive Plan on March 3, 2008 with an exercise price of $1.49 per share, equal to the closing price of MRV's stock on the date of grant, and were fully vested and exercisable on the date of grant.

Name of Director (1)(2)	Fees earned or paid in cash		Option awards (3)		Total
Baruch Fischer	$	48,000	$	75,859	$	123,859
Harold Furchtgott-Roth	$	119,000	$	51,007	$	170,007
Guenter Jaensch	$	55,000	$	75,859	$	130,859
Igal Shidlovsky	$	41,000	$	75,859	$	116,859
Daniel Tsui	$	40,000	$	75,859	$	115,859

(1)

Mr. Shlomo Margalit is the Chairman of the Board of Directors as well as the Chief Technical Officer and Secretary of MRV. Mr. Lotan is a director as well as the CEO of MRV. Their compensation is disclosed in the preceding executive compensation tables. Since they do not receive compensation separately for their duties as directors, they are not included in the Director Compensation table.



(2)

Mr. Keane joined the Board of Directors in July 2009, therefore he did not receive any compensation in 2008 and was not included in this table.



(3)

Dollar amounts reflect the value of the awards determined using the Black-Scholes model, which is the method MRV uses to report the fair value for option awards in its financial

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statements in accordance with SFAS No. 123R and do not reflect the actual value that may be realized upon exercise. The grant date fair value per option is $0.89 for the March 3, 2008 grant of 10,000 options to each non-employee director, and the aggregate fair value for each was $8,910 and was expensed in full in 2008 in accordance with SFAS No. 123R. The additional amounts in the Option Awards column are due to the additional vesting in 2008 of options granted in prior years. The assumptions used to calculate the value of the option awards are set forth under Note 15 (Share-Based Compensation) to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

Compensation Committee Report

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

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

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

Security Ownership of Certain Beneficial Owners and Named Executive Officers

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

Name and Address of Beneficial Owner		Amount and Nature of Beneficial Ownership			Percent of Class (1)
Wells Fargo and Company 420 Montgomery Street, San Francisco, CA 94104			23,016,048	(2)		14.6	%
	Wells Capital Management Inc. Wells Fargo Funds Management, LLC 525 Market Street, 10th Floor San Francisco, CA 94105
Manulife Financial Corporation 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5			9,759,043	(3)		6.2	%
	MFC Global Investment Management (U.S.), LLC 101 Huntington Avenue Boston, MA 02199
Sun Life Financial Inc. 150 King Street West, Toronto, Ontario, Canada, M5H 1J9			9,492,547	(4)		6.0	%
RBF Capital, LLC Richard B. Fullerton 100 Drakes Landing Road, Suite 300 Greenbrae, CA 94904			8,747,192	(5)		5.6	%
Prescott Group Capital Management, L.L.C. Prescott Group Aggressive Small Cap, L.P. Prescott Group Aggressive Small Cap II, L.P. Phil Frohlich 1924 South Utica, Suite #1120 Tulsa, OK 74104			8,352,108	(6)		5.3	%

(1)

For each holder included in the table above, percentage ownership is calculated by dividing the number of shares beneficially owned by such holder by the sum of the 157,607,118 shares of Common Stock outstanding as of September 28, 2009. To the knowledge of MRV, none of the holders listed above had the right to acquire any additional MRV shares on or within 60 days after September 28, 2009.

(2)

Based on information contained in a Schedule 13G/A filed with the SEC on May 1, 2009, Wells Fargo & Company ("Wells Fargo") has reported that it has sole voting power of 22,669,150 shares of MRV's Common Stock, sole dispositive power of 23,003,113 shares, and shared dispositive power over an additional 12,935 shares in its position as parent holding company to (a) Wells Capital Management Inc., an investment advisor reporting sole voting power over 7,891,978 shares of MRV's Common Stock and sole dispositive power over 22,332,202 shares, and (b) Wells Fargo

184

Funds Management, LLC, an investment advisor reporting sole voting power over 14,770,149 shares of MRV's Common Stock and sole dispositive power over 662,099 shares. Wells Fargo also noted in its Schedule 13G/A that it was filing on behalf of various subsidiaries that were classified as registered investment advisors, broker dealers and banks.

(3)

Based on information contained in a Schedule 13G filed with the SEC on February 10, 2009, MFC Global Investment Management (U.S.), LLC ("MFC") has reported that it is an investment adviser and has the sole power to vote and dispose of the shares of Common Stock indicated above. Manulife Financial Corporation ("Manulife") has reported that it is a holding company, and due to its relationship with MFC, its indirect wholly-owned subsidiary, Manulife may be deemed to beneficially own the shares held by MFC.

(4)

Based on information contained in a Form 13F filed with the SEC on August 13, 2009, Sun Life Financial Inc. ("Sun Life") has reported that it has shared power to vote and dispose of the shares of Common Stock indicated above. Sun Life did not explain the nature of its shared power to vote and dispose of the shares of Common Stock.

(5)

Based on information contained in a Schedule 13G filed with the SEC on July 7, 2009, RBF Capital, LLC ("RBF") has reported that it acts as an investment advisor to certain persons, and in such capacity, it has the sole power to vote and dispose of al of the shares of Common Stock indicated above. Mr. Richard B. Fullerton reported that he is deemed to be the beneficial owner of the shares pursuant to his ownership interest in RBF.

(6)

Based on information contained in a Schedule 13D filed with the SEC on July 14, 2009, Phil Frohlich is the managing member of Prescott Group Capital Management, L.L.C., which is the general partner of Prescott Group Aggressive Small Cap, L.P. and Prescott Group Aggressive Small Cap II, L.P. In Mr. Frohlich's role as managing member of the limited liability company, and the role of the limited liability company as the general partner of the two limited partnerships, those parties report that they have sole power to direct the vote and disposition of the shares of Common Stock indicated above, and may be deemed to be the beneficial owners of the shares. The limited partnerships report that they have shared voting and dispositive power as the entities that invested in and hold the shares of Common Stock indicated above.

Security Ownership of Directors and Named Executive Officers

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

Name of Beneficial Owner	Amount and Nature of Beneficial Ownership (1)			Percentage Ownership (2)
Named Executive Officers
Noam Lotan		1,876,716	(3)		1.2	%
Shlomo Margalit		3,260,660	(4)		2.1	%
Guy Avidan		248,125			*
Near Margalit		472,000			*
Chris King		12,500			*

185

Name of Beneficial Owner	Amount and Nature of Beneficial Ownership (1)		Percentage Ownership (2)
Non-management Directors
Baruch Fischer		248,000		*
Harold Furchtgott-Roth		85,000		*
Guenter Jaensch		165,750		*
Igal Shidlovsky		215,900		*
Daniel Tsui		258,215		*
Michael Keane		—		*
Directors and executive officers as a group (12 persons)		6,842,866		4.3	%

*

Less than 1%

(1)

Each holder has sole voting and investment power with respect to these shares, subject to applicable community property laws and except as set forth below. Includes shares subject to stock options which are, or will become, exercisable, within 60 days of September 28, 2009, as follows: Mr. Lotan: 398,250 shares; Mr. Avidan, 248,125 shares; Mr. Near Margalit, 472,000 shares; Mr. King, 12,500 shares; Mr. Fischer, 248,000 shares; Mr. Furchtgott-Roth, 85,000 shares; Mr. Jaensch, 165,750 shares; Mr. Shidlovsky, 207,300 shares; and Mr. Tsui, 258,000 shares.



(2)

For each individual included in the table above, percentage ownership is calculated by dividing the number of shares beneficially owned by the sum of the 157,607,118 shares of MRV Common Stock outstanding as of September 28, 2009 plus the number of shares issuable upon exercise of options that are, or will become, exercisable within 60 days of September 15, 2009 held by such individual (but not giving effect to the exercise of options held by others).



(3)

Total shares owned includes 1,057,426 shares held by the Noam Lotan and Sherry W. Lotan Revocable 1995 Trust, and 105,260 shares to trusts in the names of each of Mr. Lotan's four children.



(4)

Total shares owned include 1,500,000 shares held by Margalit L.P. in which Mr. Shlomo Margalit is a partner.

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

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

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

Item 14.    Principal Accounting Fees and Services.

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

186

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

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

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

Fee Category	2008		2007
Audit Fees	$	2,791,117	$	2,080,805
Audit-Related Fees		386,351		708,869
Tax Fees		229,683		26,024
All Other Fees		—		—
Total	$	3,407,151	$	2,815,698

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

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

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

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

187

PART IV

Item 15.    Exhibits and Financial Statement Schedules.

(a)

(1) The financial statements and the Report of Ernst & Young LLP are included in Item 8 of this Form 10-K on the pages indicated:

	Form 10-K Page No.
Consolidated Financial Statements:
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm	89
Statements of Operations for the years ended December 31, 2008, 2007 and 2006	90
Balance Sheets as of December 31, 2008 and 2007	91
Statements of Stockholders' Equity for the years ended December 31, 2008, 2007 and 2006	92
Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006	93
Notes to Financial Statements	94
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting	166

(2)

Schedule II — Valuation and Qualifying Accounts

Description		Balance at beginning of period		Charged to cost and expense		Other		Deductions			Balance at end of period
Allowance for Doubtful Accounts
Year Ended:
	December 31, 2006	$	6,179	$	1,287	$	—	$	(897	)	$	6,569
	December 31, 2007		6,569		327		1,179		(1,424	)		6,651
	December 31, 2008		6,651		3,675		—		(1,300	)		9,026
Inventory Reserve
Year Ended:
	December 31, 2006	$	29,292	$	4,653	$	—	$	(3,458	)	$	30,487
	December 31, 2007		30,487		2,932		2,957		(7,118	)		29,258
	December 31, 2008		29,258		7,814		—		(3,865	)		33,207
Warranty Reserve
Year Ended:
	December 31, 2006	$	2,328	$	1,442	$	—	$	(1,479	)	$	2,291
	December 31, 2007		2,291		779		81		(604	)		2,547
	December 31, 2008		2,547		584		—		(526	)		2,605

(1)

Amounts represent Fiberxon opening balances. See Note 17 to the Consolidated Financial Statements set forth in Item 8 of this Form 10-K for further discussion of the Fiberxon acquisition.

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

188

(3)

Exhibits

Exhibit No.		Description
	2.1	Amended and Restated Certificate of Incorporation of MRV Communications, Inc., (incorporated by reference from Exhibit 4.1 of Form 10-Q for the quarter ended June 30, 2007)
	2.2	Bylaws of MRV Communications, Inc., as amended through January 29, 2009 (incorporated by reference from Exhibit 3.1(ii) of Form 8-K filed on February 3, 2009)
	4.1	Specimen certificate of Common Stock (incorporated by reference to Exhibit 4.5 of Form S-3 (File No. 333-64017) filed on September 9, 1998)
	10.1	Key Employee Agreement between MRV and Noam Lotan, dated as of March 23, 1992 (incorporated by reference from Exhibit 10b(1) of Form S-1 (File No. 33-48003) filed on May 27, 1992)
	10.2	Letter dated August 10, 1992, amending Key Employee Agreement between MRV and Noam Lotan (incorporated by reference from Exhibit 10b(1)1 Form S-1 (File No. 33-48003) filed on August 14, 1992)
	10.3	Letter dated November 16, 1994, amending Key Employee Agreement between MRV and Noam Lotan (incorporated by reference from Exhibit 10b(1)2 of Form S-1 (File No. 33-86516) filed on November 18, 1994)
	10.4	Key Employee Agreement between MRV and Shlomo Margalit, dated as of March 23, 1992 (incorporated by reference from Exhibit 10b(3) of Form S-1 (File No. 33-48003))
	10.5	Letter dated August 10, 1992, amending Key Employee Agreement between MRV and Shlomo Margalit (incorporated by reference from Exhibit 10b(3)1 of Form S-1 (File No. 33-48003) filed on August 14, 1992)
	10.6	Form of Letter dated November 16, 1994, amending Key Employee Agreement between MRV and Shlomo Margalit (incorporated by reference from Exhibit 10b(3)2 of Form S-1 (File No. 33-86516) filed on November 18, 1994)
	10.7	2007 Omnibus Incentive Plan (incorporated by reference from Appendix A of Schedule 14A filed on April 27, 2007)
	10.8	Form of Notice of Grant and Agreement for Non-Qualified Stock Option Awards for employees under the 2007 Omnibus Incentive Plan (filed herewith)
	10.9	Form of Notice of Grant and Agreement for Non-Qualified Stock Option Awards for directors under the 2007 Omnibus Incentive Plan (filed herewith)
	10.10	Non-Director and Non-Executive Officer Consolidated Long-Term Stock Incentive Plan (incorporated by reference from Exhibit 4.1 of Form S-8 (file no. 333-107109) filed on July 17, 2003)
	10.11	Form of Non-Director and Non-Executive Officer Consolidated Long-Term Stock Incentive Plan Award Agreement (incorporated by reference to Exhibit 4.2 of Form S-8 (file no. 333-107109) filed on July 17, 2003)
	10.12	MRV 2002 Nonstatutory Stock Option Plan for Employees of Luminent, Inc. (incorporated by reference to Exhibit 4.1 of Form S-8 (file no. 333-81958) filed on February 1, 2002)

189

Exhibit No.		Description
	10.13	Form of MRV 2002 Nonstatutory Stock Option Plan for Employees of Luminent, Inc. Stock Option Agreement (incorporated by reference from Exhibit 4.2 of Form S-8 (file no. 333-81958) filed on February 1, 2002)
	10.14	Form of Warrant for Italian Employee Warrant Program (incorporated by reference to Exhibit 4.1 of Form S-8 (file no. 333-87743) filed on September 24, 1999)
	10.15	MRV 2002 International Stock Option Plan (incorporated by reference to Exhibit 4.1 of Form S-8 (file no. 333-81954) filed on February 1, 2002)
	10.16	Form of MRV 2002 International Stock Option Plan Stock Option Agreement (incorporated by reference from Exhibit 4.1 of Form S-8 (file no. 333-81954) filed on February 1, 2002)
	10.17	2001 MRV Stock Option Plan for Employees of Appointech, Inc. (incorporated by reference to Exhibit 4.1 from Form S-8 (file no. 333-71180) filed on October 9, 2001)
	10.18	Form of 2001 MRV Stock Option Plan for Employees of Appointech, Inc. Stock Option Agreement (incorporated by reference from Exhibit 4.2 of Form S-8 (file no. 333-71180) filed on October 9, 2001)
	10.19	2000 MRV Stock Option Plan for Employees of Optronics International Corp. (incorporated by reference from Exhibit 4.1 of Form S-8 (file no. 333-47898) filed on October 13, 2000)
	10.20	Form of 2000 MRV Stock Option Plan for Employees of Optronics International Corp. Stock Option Agreement (incorporated by reference from Exhibit 4.2 of Form S-8 (file no. 333-47898) filed on October 13, 2000)
	10.21	Luminent Amended and Restated 2000 Stock Option Plan (incorporated by reference from Exhibit 4.1 of Form S-8 (file no. 333-81950) filed on February 1, 2002)
	10.22	Form of Luminent Amended and Restated 2000 Stock Option Plan Stock Option Agreement (incorporated by reference from Exhibit 4.3 of Form S-8 (file no. 333-81950) filed on February 1, 2002)
	10.23	2000 MRV Stock Option Plan for Employees of AstroTerra Corporation (incorporated by reference from Exhibit 4.1 of Form S-8 (file no. 333-47900) filed on October 13, 2000)
	10.24	Form of 2000 MRV Stock Option Plan for Employees of AstroTerra Corporation Stock Option Agreement (incorporated by reference from Exhibit 4.2 of Form S-8 (file no. 333-47900) filed on October 13, 2000)
	10.25	1998 Nonstatutory Stock Option Plan (incorporated by reference from Exhibit 4.1 of Form S-8 (file no. 333-87739) filed on September 24, 1999)
	10.26	Form of 1998 Nonstatutory Stock Option Plan Stock Option Agreement (incorporated by reference from Exhibit 4.2 of Form S-8 (file no. 333-87739) filed on September 24, 1999)
	10.27	1997 Incentive and Nonstatutory Stock Option Plan, as amended (filed herewith)
	10.28	Form of Stock Option Agreement under the 1997 Incentive and Nonstatutory Stock Option Plan (incorporated by reference from Exhibit 4.2 of Form S-8 (file no. 333-87735) filed on September 24, 1999)
	10.29	Stock Option Agreement effective as of October 29, 2002 under the 1997 Incentive and Nonstatutory Stock Option Plan, as amended, by and between MRV and Noam Lotan (filed herewith)

190

Exhibit No.		Description
	10.30	Workshop Lease of the Science Park Administration, dated January 1, 2009, between Science Park Administration, dated January 1, 2009, between Science Park Administration and Optronics International Corp. for the manufacturing facility located on the first floor at No. 40, 2nd Road, Hsin Chu Science Park, Taiwan (filed herewith)
	10.31	Lease Contract on Standard Factory Buildings in Sichuan Chengdu Export Processing Zone, dated January 15, 2008, among Chengdu Gaoxin Construction Development Co., Ltd., Fiberxon (Chengdu) Technology Co., Ltd. and Administration Office of Sichuan Chengdu Export Processing Zone for workshops located in Buildings No. 2 and 5 in the Standard Factory Building Area, Sichuan Chengdu Export Processing Zone (West Side), PRC (filed herewith)
	10.32	Workshop Lease of the Science Park Administration, dated January 1, 2009, between Science Park Administration and Optronics International for the manufacturing facility located on the first floor at No. 44, 2nd Road, Hsin Chu Science Park, Taiwan (filed herewith)
	10.33	Workshop Lease of the Science Park Administration, dated January 1, 2009, between Science Park Administration and Optronics International Corp., for the manufacturing facility located on the first floor at No. 46, 2nd Road, Hsin Chu Science Park, Taiwan (filed herewith)
	10.34	Workshop Lease of the Science Park Administration, dated January 1, 2009, between Science Park Administration and Optronics International Corp., for the manufacturing facility located on the second floor at No. 46, 2nd Road, Hsin Chu Science Park, Taiwan (filed herewith)
	10.35	Lease Contract on Standard Factory Buildings, dated April 1, 2009, between Chengdu Gaoxin Construction Development Co., Ltd., Source Photonics (Chengdu) Technology Co., Ltd. and Administration Office of Sichuan Chengdu Export Processing Zone, for workshops located in Building No. 4 in the Standard Factory Building Area of Sichuan Chengdu Export Processing Zone (West Side), PRC (filed herewith)
	10.36	Land Lease of the Science Park Administration, dated January 1, 2009, between Science Park Administration and Optronics International Corp., for the land located at No. 117 of Science Park Administration Section of Hsin Chu Science Park, Taiwan (filed herewith)
	10.37	Tenancy Agreement, dated January 1, 2009, between Midelan Corporation and Optronics International Corporation for various rooms at No. 81, Shueili Road, Hsinchu City, Taiwan (filed herewith)
	10.38	Agreement and Plan of Merger dated January 26, 2007 by and among Fiberxon, Inc., MRV, and MRV's wholly-owned subsidiaries Lighthouse Transition Corporation and Lighthouse Acquisition Corporation, under which MRV agreed to acquire Fiberxon (incorporated by reference from Exhibit 10.1 of Form 10-Q for the quarter ended March 31, 2007)
	10.39	Amendment No. 1 to the Agreement and Plan of Merger dated June 26, 2007 by and among Fiberxon, Inc., MRV, and MRV's wholly-owned subsidiaries, Lighthouse Transition Corporation and Lighthouse Acquisition Corporation (incorporated by reference from Exhibit 99.1 of Form 8-K filed on July 2, 2007)
	10.40	Loan and Security Agreement, dated April 7, 2008, by and among Source Photonics, Inc., Fiberxon, Inc., LuminentOIC, Inc. and Silicon Valley Bank (incorporated by reference from Exhibit 10.1 of Form 8-K filed on April 11, 2008)

191

Exhibit No.		Description
	10.41	First Amendment, dated July 24, 2008, to Loan and Security Agreement, dated April 7, 2008, by and among Source Photonics, Inc., Fiberxon, Inc., LuminentOIC, Inc. and Silicon Valley Bank (filed herewith)
	10.42	Second Amendment, dated March 27, 2009, to Loan and Security Agreement, dated April 7, 2008, by and among Source Photonics, Inc., Fiberxon, Inc., LuminentOIC, Inc. and Silicon Valley Bank (incorporated by reference from Exhibit 10.1 of Form 8-K filed on April 2, 2009)
	10.43	Secondment Agreement, dated as of July 21, 2009, by and between MRV Communications (Networks), Ltd., MRV Communications, Inc. and Guy Avidan (incorporated by reference from Exhibit 10.1 of Form 8-K filed on July 27, 2009)
	10.44	Employment Agreement, July 21, 2009, between MRV Communications, Inc. and Christiaan King (incorporated by reference from Exhibit 10.2 of Form 8-K filed on July 27, 2009)
	21.1	Subsidiaries of the Registrant
	23.1	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
	24.1	Power of Attorney (included following signature page)
	31.1	Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
	31.2	Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
	32.1	Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
	32.2	Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

192

SIGNATURES

        Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	MRV Communications, Inc.
	By:
Date: October 7, 2009	/s/ NOAM LOTAN Noam Lotan Chief Executive Officer

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

	Principal Executive Officer:
Date: October 7, 2009	/s/ NOAM LOTAN Noam Lotan Chief Executive Officer
	Principal Financial and Accounting Officer:
Date: October 7, 2009	/s/ CHRIS KING Chris King Chief Financial Officer

        A majority of the Board of Directors: Shlomo Margalit, Noam Lotan, Baruch Fischer, Harold Furchtgott-Roth, Guenter Jaensch, Michael Keane, Igal Shidlovsky and Daniel Tsui

	By:
Date: October 7, 2009	/s/ JENNIFER HANKES PAINTER Jennifer Hankes Painter As Attorney-in-fact

193

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Noam Lotan and Jennifer Hankes Painter, the true and lawful attorney-in-facts and agents with full power and authority in said attorneys-in-fact and agents to sign for the undersigned, in their respective names as directors of MRV Communications, Inc., the Annual Report on Form 10-K for the year ended December 31, 2008, and to file any and all amendments to the Annual Report, and to file the same, with all exhibits thereto, and all documents in connection therewith, with Securities and Exchange Commission, granting unto said attorney-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises.

Signature	Title	Date
/s/ SHLOMO MARGALIT Shlomo Margalit	Chairman of the Board, Chief Technology Officer and Secretary	October 7, 2009
/s/ NOAM LOTAN Noam Lotan	Chief Executive Officer	October 7, 2009
/s/ BARUCH FISCHER Baruch Fischer	Director	October 6, 2009
/s/ HAROLD FURCHTGOTT-ROTH Harold Furchtgott-Roth	Director	October 7, 2009
/s/ GUENTER JAENSCH Guenter Jaensch	Director	October 7, 2009
/s/ MICHAEL KEANE Michael Keane	Director	October 4, 2009
/s/ IGAL SHIDLOVSKY Igal Shidlovsky	Director	October 7, 2009
/s/ DANIEL TSUI Daniel Tsui	Director	October 5, 2009

194

EX-10.8

Exhibit 10.8

NOTICE OF GRANT OF NON-QUALIFIED STOCK OPTION AWARD

MRV COMMUNICATIONS, INC.
2007 OMNIBUS INCENTIVE PLAN

FOR GOOD AND VALUABLE CONSIDERATION, MRV Communications, Inc. (the “Company”) hereby grants, pursuant to the provisions of the Company’s 2007 Omnibus Incentive Plan (the “Plan”), to the Participant designated in this Notice of Grant of Non-Qualified Stock Option Award (the “Notice”) an option to purchase the number of shares of the common stock of the Company set forth in the Notice (the “Shares”), subject to certain restrictions as outlined below in this Notice and the additional provisions set forth in the attached Terms and Conditions of Stock Option Award (collectively, the “Agreement”).  Also enclosed is a copy of the information statement describing important provisions of the Plan.  Section references herein refer to the attached Terms and Conditions of Stock Option Award.

Optionee:

Date of Grant:	Type of Option: Non-Qualified Stock Option
Exercise Price per Share: $	Expiration Date:
Total Number of Shares Granted:	Total Exercise Price: $

Vesting Schedule:  [1/4 vesting on each of the first, second, third and fourth anniversaries of the date of the grant]

Vesting is accelerated in full upon a Change in Control under Section 2(c).

Exercise After Termination of Employment: Termination of Employment for any reason: any non-vested portion of the Option expires immediately;

Termination of Employment due to death or Disability: vested portion of the Option is exercisable by the Optionee (or, in the event of the Optionee’s death, the Optionee’s Beneficiary) for one (1) year after the Optionee’s Termination;

Termination of Employment for any reason other than death or Disability: vested portion of the Option is exercisable for a period of thirty (30) days following the Optionee’s Termination.

This Option shall not be exercised after the Expiration Date as provided above, unless extended under Section 2(a).

By signing below, the Optionee agrees that this Non-Qualified Stock Option Award is granted under and governed by the terms and conditions of the Company’s 2007 Omnibus Incentive Plan and the attached Terms and Conditions.

Participant	MRV Communications, Inc.
	By:
	Title:
Date:	Date:

1

TERMS AND CONDITIONS OF NON-QUALIFIED STOCK OPTION AWARD

I.AGREEMENT

1.Grant of Option.  The Option granted to the Optionee and described in the Notice of Grant is subject to the terms and conditions of the Plan, which is incorporated by reference in its entirety into these Terms and Conditions of Stock Option Award.

The Board of Directors of the Company has authorized and approved the 2007 Omnibus Incentive Plan (the “Plan”), which has been approved by the Company’s stockholders.  The Committee has approved an award to the Optionee of an option to purchase a number of shares of the Company’s common stock, conditioned upon the Optionee’s acceptance of the provisions set forth in the Notice and these Terms and Conditions within 30 days after the Notice and these Terms and Conditions are presented to the Optionee for review.  For purposes of the Notice and these Terms and Conditions, any reference to the Company shall include a reference to any Subsidiary.

The Company intends that this Option not be considered to provide for the deferral of compensation under Section 409A of the Code and that this Agreement shall be so administered and construed.  Further, the Company may modify the Plan and this Award to the extent necessary to fulfill this intent.

2.Exercise of Option.

(a)Right to Exercise.  This Option shall be exercisable, in whole or in part, during its term in accordance with the Vesting Schedule set out in the Notice of Grant and with the applicable provisions of the Plan and this Option Agreement.  No Shares shall be issued pursuant to the exercise of an Option unless the issuance and exercise comply with applicable laws.  Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares.  The Committee may, in its discretion, (i) accelerate vesting of the Option or (ii) extend the applicable exercise period, to the extent permitted under Section 6.03(c) of the Plan.

(b)Method of Exercise.  The Optionee may exercise the Option by delivering a written exercise notice in a form approved by the Company (or by such other method as the Company may establish from time to time and so instruct the Optionee as to use) (the “Exercise Notice”) which shall state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised, and such other representations and agreements as may be required by the Company.  The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Shares exercised consistent with Section 3.  This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Exercise Price.

(c)Acceleration of Vesting on Change in Control.  Subject to the exception contained in Section 6.05 of the Plan, in the event of a Change in Control, all Options outstanding on the date of the Change in Control that have not previously vested or terminated under the terms of this Agreement shall be immediately and fully vested and exercisable.

3.Method of Payment.  If the Optionee elects to exercise the Option by submitting an Exercise Notice under Section 2(b) of this Agreement, the aggregate Exercise Price (as well as any applicable withholding or other taxes) shall be paid by cash or check; provided, however,

2

that the Committee may consent, in its discretion, to payment in any of the following forms, or a combination of them, when such payment is made consistent with Section 6.04 of the Plan:

(a)cash or check;

(b)consideration received by the Company under a formal cashless exercise program adopted by the Company in connection with the Plan;

(c)surrender of other Shares owned by the Optionee which have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares and any applicable withholding, provided, however, that the Optionee may not transfer any fractional Share in satisfaction of the Exercise Price; or

(d)any other consideration that the Committee deems appropriate and in compliance with applicable law.

4.Restrictions on Exercise.  This Option may not be exercised until such time the issuance of the Shares upon exercise or the method of payment of consideration for those Shares would not constitute a violation of any applicable law or regulation, including until such time as the Shares reserved for issuance under the Plan have been registered by the Company under the Securities Act, unless the Optionee provides an opinion of counsel reasonably satisfactory to the Company that registration under the Securities Act is not required.

5.Non-Transferability of Option.  This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of the Optionee only by the Optionee, and may be exercised by the Optionee’s Beneficiary to the extent provided under the Plan following the death of the Optionee; The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

6.Term of Option.  This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement.

7.Withholding.

(a)The Committee shall determine the amount of any withholding or other tax required by law to be withheld or paid by the Company with respect to any income recognized by the Optionee with respect to the Option Award.

(b)The Optionee shall be required to meet any applicable tax withholding obligation in accordance with the provisions of Section 11.05 of the Plan.

(c)Subject to any rules prescribed by the Committee, the Optionee shall have the right to elect to meet any withholding requirement (i) by having withheld from this Award at the appropriate time that number of whole shares of common stock whose fair market value is equal to the amount of any taxes required to be withheld with respect to such Award, (ii) by direct payment to the Company in cash of the amount of any taxes required to be withheld with respect to such Award or (iii) by a combination of shares and cash.

3

8.Defined Terms.  Capitalized terms used but not defined in the Notice and these Terms and Conditions shall have the meanings set forth in the Plan, unless such term is defined in the Optionee’s Employment Agreement.  Any terms used in the Notice and these Terms and Conditions, but defined in the Optionee’s Employment Agreement are incorporated herein by reference and shall be effective for purposes of the Notice and these Terms and Conditions without regard to the continued effectiveness of the Employment Agreement.

9.Optionee Representations.  The Optionee hereby represents to the Company that the Optionee has read and fully understands the provisions of the Notice, these Terms and Conditions and the Plan and the Optionee’s decision to participate in the Plan is completely voluntary.  Further, the Optionee acknowledges that the Optionee is relying solely on his or her own advisors with respect to the tax consequences of this stock option award.

10.Regulatory Limitations on Exercises.  Notwithstanding the other provisions of this Option Agreement, no option exercise or issuance of Shares pursuant to this Option Agreement shall be effective if (i) the shares of Common Stock reserved under the Plan are not subject to an effective registration statement at the time of such exercise or issuance, or otherwise eligible for an exemption from registration, or (ii) the Company determines in good faith that such exercise or issuance would violate any Company policy or applicable securities or other law or regulation.

11.Miscellaneous.

(a)Notices.  All notices, requests, deliveries, payments, demands and other communications which are required or permitted to be given under these Terms and Conditions shall be in writing and shall be either delivered personally or sent by registered or certified mail, or by private courier, return receipt requested, postage prepaid to the parties at their respective addresses set forth herein, or to such other address as either shall have specified by notice in writing to the other.  Notice shall be deemed duly given hereunder when delivered or mailed as provided herein.

(b)Waiver.  The waiver by any party hereto of a breach of any provision of the Notice or these Terms and Conditions shall not operate or be construed as a waiver of any other or subsequent breach.

(c)Entire Agreement.  These Terms and Conditions, the Notice and the Plan constitute the entire agreement between the parties with respect to the subject matter hereof.

(d)Binding Effect; Successors.  These Terms and Conditions shall inure to the benefit of and be binding upon the parties hereto and to the extent not prohibited herein, their respective heirs, successors, assigns and representatives.  Nothing in these Terms and Conditions, express or implied, is intended to confer on any person other than the parties hereto and as provided above, their respective heirs, successors, assigns and representatives any rights, remedies, obligations or liabilities.

(e)Governing Law.  The Notice and these Terms and Conditions shall be governed by and construed in accordance with the laws of the State of Delaware.

4

(f)Headings.  The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of these Terms and Conditions.

(g)Conflicts; Amendment.  The provisions of the Plan are incorporated in these Terms and Conditions in their entirety.  In the event of any conflict between the provisions of these Terms and Conditions and the Plan, the provisions of the Plan shall control.  The Agreement may be amended at any time by written agreement of the parties hereto.

(h)No Right to Continued Employment.  Nothing in the Notice or these Terms and Conditions shall confer upon the Optionee any right to continue in the employ or service of the Company or affect the right of the Company to terminate the Optionee’s employment or service at any time.

(i)Further Assurances.  The Optionee agrees, upon demand of the Company or the Committee, to do all acts and execute, deliver and perform all additional documents, instruments and agreements which may be reasonably required by the Company or the Committee, as the case may be, to implement the provisions and purposes of the Notice and these Terms and Conditions and the Plan.

5

EX-10.9

Exhibit 10.9

NOTICE OF GRANT OF NON-QUALIFIED STOCK OPTION AWARD

MRV COMMUNICATIONS, INC.
2007 OMNIBUS INCENTIVE PLAN

FOR GOOD AND VALUABLE CONSIDERATION, MRV Communications, Inc. (the “Company”) hereby grants, pursuant to the provisions of the Company’s 2007 Omnibus Incentive Plan (the “Plan”), to the Participant designated in this Notice of Grant of Non-Qualified Stock Option Award (the “Notice”) an option to purchase the number of shares of the common stock of the Company set forth in the Notice (the “Shares”), subject to certain restrictions as outlined below in this Notice and the additional provisions set forth in the attached Terms and Conditions of Stock Option Award (collectively, the “Agreement”).  Also enclosed is a copy of the information statement describing important provisions of the Plan.  Section references herein refer to the attached Terms and Conditions of Stock Option Award.

Optionee:

Date of Grant:	Type of Option: Non-Qualified Stock Option
Exercise Price per Share: $	Expiration Date:
Total Number of Shares Granted:	Total Exercise Price: $

Vesting Schedule:  All Vest immediately.

Exercise After Termination of Service: Termination of Service for any reason: any non-vested portion of the Option expires immediately;

Termination of Service due to death or Disability: vested portion of the Option is exercisable by the Optionee (or, in the event of the Optionee’s death, the Optionee’s Beneficiary) for one (1) year after the Optionee’s Termination;

Termination of Service for any reason other than death or Disability: vested portion of the Option is exercisable for a period of thirty (30) days following the Optionee’s Termination.

This Option shall not be exercised after the Expiration Date as provided above, unless extended under Section 2(a).

By signing below, the Optionee agrees that this Non-Qualified Stock Option Award is granted under and governed by the terms and conditions of the Company’s 2007 Omnibus Incentive Plan and the attached Terms and Conditions.

Participant	MRV Communications, Inc.
	By:
	Title:
Date:	Date:

Non-Qualified Stock Option 

Audit Committee Grants)

Version prepared Dec. 2007

1

TERMS AND CONDITIONS OF NON-QUALIFIED STOCK OPTION AWARD

I.AGREEMENT

1.Grant of Option.  The Option granted to the Optionee and described in the Notice of Grant is subject to the terms and conditions of the Plan, which is incorporated by reference in its entirety into these Terms and Conditions of Stock Option Award.

The Board of Directors of the Company has authorized and approved the 2007 Omnibus Incentive Plan (the “Plan”), which has been approved by the Company’s stockholders.  The Board of Directors has approved an award to the Optionee of an option to purchase a number of shares of the Company’s common stock, conditioned upon the Optionee’s acceptance of the provisions set forth in the Notice and these Terms and Conditions within 30 days after the Notice and these Terms and Conditions are presented to the Optionee for review.  For purposes of the Notice and these Terms and Conditions, any reference to the Company shall include a reference to any Subsidiary.

The Company intends that this Option not be considered to provide for the deferral of compensation under Section 409A of the Code and that this Agreement shall be so administered and construed.  Further, the Company may modify the Plan and this Award to the extent necessary to fulfill this intent.

2.Exercise of Option.

(a)Right to Exercise.  This Option shall be exercisable, in whole or in part, during its term in accordance with the Vesting Schedule set out in the Notice of Grant and with the applicable provisions of the Plan and this Option Agreement.  No Shares shall be issued pursuant to the exercise of an Option unless the issuance and exercise comply with applicable laws.  Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares.  The Board of Directors may, in its discretion, extend the applicable exercise period, to the extent permitted under Section 6.03(c) of the Plan.

(b)Method of Exercise.  The Optionee may exercise the Option by delivering a written exercise notice in a form approved by the Company (or by such other method as the Company may establish from time to time and so instruct the Optionee as to use) (the “Exercise Notice”) which shall state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised, and such other representations and agreements as may be required by the Company.  The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Shares exercised consistent with Section 3.  This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Exercise Price.

3.Method of Payment.  If the Optionee elects to exercise the Option by submitting an Exercise Notice under Section 2(b) of this Agreement, the aggregate Exercise Price (as well as any applicable withholding or other taxes) shall be paid by cash or check; provided, however, that the Board of Directors may consent, in its discretion, to payment in any of the following forms, or a combination of them, when such payment is made consistent with Section 6.04 of the Plan:

(a)cash or check;

2

(b)consideration received by the Company under a formal cashless exercise program adopted by the Company in connection with the Plan;

(c)surrender of other Shares owned by the Optionee which have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares and any applicable withholding, provided, however, that the Optionee may not transfer any fractional Share in satisfaction of the Exercise Price; or

(d)any other consideration that the Board of Directors deems appropriate and in compliance with applicable law.

4.Restrictions on Exercise.  This Option may not be exercised until such time the issuance of the Shares upon exercise or the method of payment of consideration for those Shares would not constitute a violation of any applicable law or regulation, including until such time as the Shares reserved for issuance under the Plan have been registered by the Company under the Securities Act, unless the Optionee provides an opinion of counsel reasonably satisfactory to the Company that registration under the Securities Act is not required.

5.Non-Transferability of Option.  This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of the Optionee only by the Optionee, and may be exercised by the Optionee’s Beneficiary to the extent provided under the Plan following the death of the Optionee; The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

6.Term of Option.  This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement.

7.Withholding.

(a)The Board of Directors shall determine the amount of any withholding or other tax required by law to be withheld or paid by the Company with respect to any income recognized by the Optionee with respect to the Option Award.

(b)The Optionee shall be required to meet any applicable tax withholding obligation in accordance with the provisions of Section 11.05 of the Plan.

(c)Subject to any rules prescribed by the Board of Directors, the Optionee shall have the right to elect to meet any withholding requirement (i) by having withheld from this Award at the appropriate time that number of whole shares of common stock whose fair market value is equal to the amount of any taxes required to be withheld with respect to such Award, (ii) by direct payment to the Company in cash of the amount of any taxes required to be withheld with respect to such Award or (iii) by a combination of shares and cash.

8.Defined Terms.  Capitalized terms used but not defined in the Notice and these Terms and Conditions shall have the meanings set forth in the Plan, unless such term is defined in the Optionee’s .

9.Optionee Representations.  The Optionee hereby represents to the Company that the Optionee has read and fully understands the provisions of the Notice, these Terms and

3

Conditions and the Plan and the Optionee’s decision to participate in the Plan is completely voluntary.  Further, the Optionee acknowledges that the Optionee is relying solely on his or her own advisors with respect to the tax consequences of this stock option award.

10.Regulatory Limitations on Exercises.  Notwithstanding the other provisions of this Option Agreement, no option exercise or issuance of Shares pursuant to this Option Agreement shall be effective if (i) the shares of Common Stock reserved under the Plan are not subject to an effective registration statement at the time of such exercise or issuance, or otherwise eligible for an exemption from registration, or (ii) the Company determines in good faith that such exercise or issuance would violate any Company policy or applicable securities or other law or regulation.

11.Miscellaneous.

(a)Notices.  All notices, requests, deliveries, payments, demands and other communications which are required or permitted to be given under these Terms and Conditions shall be in writing and shall be either delivered personally or sent by registered or certified mail, or by private courier, return receipt requested, postage prepaid to the parties at their respective addresses set forth herein, or to such other address as either shall have specified by notice in writing to the other.  Notice shall be deemed duly given hereunder when delivered or mailed as provided herein.

(b)Waiver.  The waiver by any party hereto of a breach of any provision of the Notice or these Terms and Conditions shall not operate or be construed as a waiver of any other or subsequent breach.

(c)Entire Agreement.  These Terms and Conditions, the Notice and the Plan constitute the entire agreement between the parties with respect to the subject matter hereof.

(d)Binding Effect; Successors.  These Terms and Conditions shall inure to the benefit of and be binding upon the parties hereto and to the extent not prohibited herein, their respective heirs, successors, assigns and representatives.  Nothing in these Terms and Conditions, express or implied, is intended to confer on any person other than the parties hereto and as provided above, their respective heirs, successors, assigns and representatives any rights, remedies, obligations or liabilities.

(e)Governing Law.  The Notice and these Terms and Conditions shall be governed by and construed in accordance with the laws of the State of Delaware.

(f)Headings.  The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of these Terms and Conditions.

(g)Conflicts; Amendment.  The provisions of the Plan are incorporated in these Terms and Conditions in their entirety.  In the event of any conflict between the provisions of these Terms and Conditions and the Plan, the provisions of the Plan shall control.  The Agreement may be amended at any time by written agreement of the parties hereto.

4

(h)No Right to Continued Service.  Nothing in the Notice or these Terms and Conditions shall confer upon the Optionee any right to continue in the employ or service of the Company.

(i)Further Assurances.  The Optionee agrees, upon demand of the Company or the Board of Directors, to do all acts and execute, deliver and perform all additional documents, instruments and agreements which may be reasonably required by the Company or the Board of Directors, as the case may be, to implement the provisions and purposes of the Notice and these Terms and Conditions and the Plan.

5

EX-10.27

Exhibit 10.27

MRV COMMUNICATIONS, INC.

1997

INCENTIVE STOCK OPTION PLAN

AND

NONSTATUTORY STOCK OPTION PLAN

(AS ADOPTED ON NOVEMBER 11, 1997 AND

AMENDED AUGUST 3, 1998, OCTOBER 25, 1999, OCTOBER 31, 2000

AND NOVEMBER 1, 2001 (SUBJECT TO STOCKHOLDER APPROVAL)

(GIVES EFFECT TO TWO-FOR-ONE STOCK SPLIT EFFECTED MAY 11, 2000)

1.  NAME, EFFECTIVE DATE AND PURPOSE.

(a) This Plan document is intended to implement and govern two separate stock option plans of MRV COMMUNICATIONS, INC., a Delaware corporation (the “Company”): the Incentive Stock Option Plan (“Plan A”) and the Nonstatutory Stock Option Plan (“Plan B”).  Plan A provides for the granting of options that are intended to qualify as incentive stock options (“Incentive Stock Options”) within the meaning of Section 422A(b) of the Internal Revenue Code, as amended.  Plan B provides for the granting of options that are not intended to so qualify.  Unless specified otherwise, all the provisions of this Plan relate equally to both Plan A and Plan B and are condensed for convenience into one Plan document.

(b) Plan A and Plan B are each established effective as of November 11, 1997.  The purpose of Plan A and Plan B (sometimes together referred to as the “Plan” or this “Plan”) is to promote the growth and general prosperity of the Company and its Affiliated Companies.  This Plan will permit the Company to grant options (“Options”) to purchase shares of its common stock (“Common Stock”).  The granting of Options will help the Company attract and retain the best available persons for positions of substantial responsibility and will provide certain key employees with an additional incentive to contribute to the success of the Company and its Affiliated Companies.  For purposes of this Plan, the term “Affiliated Companies” shall mean any component member of a controlled group of corporations, as defined under Internal Revenue Code Section 1563, in which the Company is also a component member.

2.  ADMINISTRATION.

(a) The Plan shall be administered by the Board of Directors of the Company (the “Board”).

(b) The Board shall have sole authority, in its absolute discretion, to determine which of the eligible persons of the Company and its Affiliated Companies shall receive Options (“Optionees”), and, subject to the express provisions and restrictions of this Plan, shall have sole authority, in its absolute discretion, to determine the time when Options shall be granted, the terms and conditions of an Option other than those terms and conditions fixed under this Plan, the number of shares which may be issued upon exercise of an Option and shall have authority to do everything necessary or appropriate to administer the Plan.  All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees.

(c) Definitions:

(i) Restricted Stockholder: An individual who, at the time an Option is granted under either Plan A or Plan B, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the employer corporation or of its Parent Corporation or Subsidiary Corporation, with stock ownership to be determined in light of the attribution rules set forth in Section 425(d) of the Internal Revenue Code.

(ii) Parent Corporation: A corporation as defined in Section 425(e) of the Internal Revenue Code.

(iii) Subsidiary Corporation: A corporation as defined in Section 425(f) of the Internal Revenue Code.

(iv) Officer: The chief executive officer, president, chief financial officer, chief accounting officer, any vice president in charge of a principal business function (such as sales, administration, or finance) and any other person who performs similar policy-making functions for the Company.

3.  ELIGIBILITY.

(a) Plan A: The Board (or the Committee, if so authorized by the Board) may, in its discretion, grant one or more Options under Plan A to any key management employee of the Company or its Affiliated Companies, including any employee who is a director of the Company or of any of its Affiliated Companies presently existing or hereinafter organized or acquired.  Such Options may be granted to one or more such employees without being granted to other eligible employees, as the Board may deem fit.

(b) Plan B: The Board (or the Committee, if so authorized by the Board), may, in its discretion, grant one or more Options under Plan B to any key management employee, any employee or non-employee director of the Company or its Affiliated Companies, including any employee who is a Director of the Company or of any of its Affiliated Companies presently existing or hereinafter organized or acquired or any person who performs consulting or other services for the Company or its Affiliated Companies and who is designated by the Board as eligible to participate in Plan B.  Such Options may be granted to one or more such persons without being granted to other eligible persons, as the Board may deem fit.

4.  STOCK TO BE OPTIONED.

(a) The maximum aggregate number of shares which may be optioned and sold under Plan A and Plan B is four million nine hundred thousand (4,900,000) shares of authorized Common Stock of the Company.  The foregoing constitutes an absolute cumulative limitation on the total number of shares that may be optioned under both Plan A and B.  Therefore, at any particular date the maximum aggregate number of shares which may be optioned under Plan A is equal to four million nine hundred thousand (4,900,000) the number of shares previously optioned under both Plan A and Plan B and the maximum aggregate number of shares which may be optioned under Plan B is equal to four million nine hundred thousand (4,900,000) minus the number of shares which have been previously optioned under both Plan A and Plan B.  All shares to be optioned and sold under either Plan A or Plan B may be either authorized but unissued shares or shares held in the treasury.

(b) Shares of Common Stock that: (i) are repurchased by the Company after issuance hereunder pursuant to the exercise of an Option, or (ii) are not purchased by the Optionee prior to the expiration or termination of the applicable Option, shall again become available to be covered by Options to be issued hereunder and shall not, as of the effective date of such repurchase or expiration, be counted as covered by an outstanding Option for purposes of the above-described maximum number of shares which may be optioned hereunder.

5.  OPTION PRICE.

The Option Price for shares of Common Stock to be issued under either Plan A or Plan B shall be 100% of the fair market value of such shares on the date on which the Option covering such shares is granted by the Board (or the Committee, if authorized by the Board), except that if on the date on which such Option is granted the Optionee is a Restricted Stockholder, than such Option Price for Options granted under Plan A shall be 110% of the fair market value of the shares of Common Stock subject to the Option on the date such Option is granted by the Board (or the Committee, if so authorized).  The fair market value of shares of Common Stock for all purposes of this Plan is to be determined by the Board (or the Committee, if so authorized by the Board) in its sole discretion, exercised in good faith.

6.  TERM OF PLAN.

Plan A and Plan B shall become effective on November 11 1997; both Plan A and Plan B shall continue in effect until November 10, 2007 unless terminated earlier by action of the Board.  No Option may be granted hereunder after November 10, 2007.

7.  EXERCISE OF OPTION.

Subject to the actions, conditions and/or limitations set forth in this Plan document and/or any applicable Stock Option Agreement entered into

hereunder, Options granted under this Plan shall be exercisable in accordance with the following rules:

(a) Subject to the specific provisions of this Section 7, Options shall become exercisable at such times and in such installments (which may be cumulative) as the Board shall provide in the terms of each individual Option; provided, however, each Option granted under the Plan shall become exercisable in installments of not less than 20% of the number of shares covered by such Option each year from the Option Grant Date; and provided, further, that by a resolution adopted after an Option is granted the Board may, on such terms and conditions as it may determine to be appropriate and subject to the specific provisions of this Section 7, accelerate the time at which such Option or installment thereof may be exercised.  For purposes of this Plan, any accrued installment of an Option granted hereunder shall be referred to as an “Accrued Installment.”

(b) Subject to the specific restrictions contained in thisSection 7, an Option may be exercised when Accrued Installments accrue, asprovided in the terms under which such Option was granted, for a period of up toten (10) years from the Option Grant Date with respect to Options granted underPlan A and for a period of up to ten (10) years from the Option Grant Date withrespect to Options granted under Plan B.  In no event shall any Option beexercised on or after the expiration of said maximum applicable period,regardless of the circumstances then existing (including but not limited to thedeath or termination of employment of the Optionee).

(c) The Board (or the Committee if so authorized by the Board)shall fix the expiration date of the Option (the “Option Expiration Date”) atthe time the Option grant is authorized.

8.  RULES APPLICABLE TO CERTAIN DISPOSITIONS.

(a) Notwithstanding the foregoing provisions of Section 7, inthe event the Company or the Stockholders of the Company enter into an agreementto dispose of all or substantially all of the assets or capital stock of theCompany by means of a sale, merger, consolidation, reorganization, liquidation,or otherwise, an Option shall become immediately exercisable with respect to thefull number of shares subject to that Option during the period commencing as ofthe date of execution of such agreement and ending as of the earlier of:

(i) the Option Expiration Date; or

(ii) the date on which the disposition of assets orcapital stock contemplated by the agreement is consummated.  The exercise of anyOption that was made exercisable solely by reason of this Subsection 8(a) shallbe conditioned upon the consummation of the disposition of assets or stock underthe above referenced agreement.  Upon the consummation of any such disposition ofassets or stock, this Plan and any unexercised Options issued hereunder (or anyunexercised portion thereof) shall terminate and cease to be effective.

(b) Notwithstanding the foregoing, in the event that any suchagreement shall be terminated without consummating the disposition of said stockor assets:

(i) any unexercised non-vested installments that hadbecome exercisable solely by reason of the provisions of Subsection 8(a) shallagain become non-vested and unexercisable as of said termination of suchagreement, and

(ii) the exercise of any option that had becomeexercisable solely by reason of this Subsection 8(a) shall be deemed ineffectiveand such installments shall again become non-vested and unexercisable as of saidtermination of such agreement.

(c) Notwithstanding the provisions set forth in Subsection 8(a),the Board (or the Committee, if so authorized by the Board) may, at its electionand subject to the approval of the corporation purchasing or acquiring the stockor assets of the Company (the “surviving corporation”), arrange for the Optioneeto receive upon surrender of Optionee’s Option a new option covering shares ofthe surviving corporation in the same proportion, at an equivalent option priceand subject to the same terms and conditions as the old Option.  For purposes of

the preceding sentence, the excess of the aggregate fair market value of the shares subject to such newoption immediately after consummation of such disposition of stock or assetsover the aggregate option price of such shares of the surviving corporationshall not be no more than the excess of the aggregate fair market value of allshares subject to the old Option immediately before consummation of suchdisposition of stock or assets over the aggregate Option Price of such shares ofthe Company, and the new option shall not give the Optionee additional benefitswhich such Optionee did not have under the old Option or deprive the Optionee ofbenefits which the Optionee had under the old Option.  If such substitution ofoptions is effectuated, the Optionee’s rights under the old Option shallthereupon terminate.

9.  MERGERS AND ACQUISITIONS.

(a) If the Company at any time should succeed to the business ofanother corporation through a merger or consolidation, or through theacquisition of stock or assets of such corporation, Options may be granted underthe Plan to option holders of such corporation or its subsidiaries, insubstitution for options or rights to purchase stock of such corporation held bythem at the time of succession.  The Board (or the Committee, if so authorized bythe Board) shall have sole and absolute discretion to determine the extent towhich such substitute Options shall be granted (if at all), the person orpersons within the eligible group to receive such substitute Options (who neednot be all option holders of such corporation), the number of Options to bereceived by each such person, the Option Price of such Option, and the terms andconditions of such substitute Options; provided, however, that the terms andconditions of the substitute Options shall comply with the provisions of Section425 of the Code, such that the excess of the aggregate fair market value of theshares subject to such substitute Option immediately after the substitution orassumption over the aggregate option price of such shares is not more that theexcess of the aggregate fair market value of all shares subject to thesubstitute Option immediately before such substitution or assumption over theaggregate option price of such shares, and the substitute Option or theassumption of the old option does not give the holder thereof additionalbenefits which he or she did not have under such old option.

(b) Notwithstanding anything to the contrary herein, no Optionshall be granted, nor any action taken, permitted or omitted, which could causethe Plan, or any Options granted hereunder as to which Rule 16b-3 under theSecurities Exchange Act of 1934 may apply, not to comply with such Rule.

10.  TERMINATION OF EMPLOYMENT.

(a) In the event that the Optionee’s employment, directorship orconsulting or other arrangement with the Company (or Affiliated Company) isterminated for any reason other than death or disability, any unexercisedAccrued installments of the Option granted hereunder to such terminated Optioneeshall expire and become unexercisable as of the earlier of:

(i) the applicable Option Expiration Date; or

(ii) a date 30 days after such termination occurs,provided however, that the Board (or the Committee if empowered to so act) may,in the exercise of its discretion, extend said date up to and including a datethree months following such termination, with respect to Options granted underPlan A, or up to and including a date two years following such termination withrespect to Options granted under Plan B.

(b) In the event that the Optionee’s employment, directorship orconsulting or other arrangement with the Company is terminated due to the deathor disability of the Optionee, any unexercised Accrued Installments of theOption granted hereunder to such Optionee shall expire and become unexercisableas of the earlier of:

(i) the applicable Option Expiration Date; or

(ii) the first anniversary of the date of death of suchOptionee (if applicable); or

(iii) the first anniversary of the date of the

termination of employment, directorship or consulting or other arrangement byreason of disability (if applicable).  Any such Accrued Installments of adeceased Optionee may be exercised prior to their expiration by (and only by)the person or persons to whom the Optionee’s Option right shall pass by will orby the laws of descent and distribution, if applicable, subject, however, to allof the terms and conditions of this Plan and the applicable Stock OptionAgreement governing the exercise of Options granted hereunder.

(c) For purposes of this Section 10, an Optionee shall be deemedemployed by the Company (or affiliated Company) during any period of leave ofabsence from active employment as authorized by the Company (or AffiliatedCompany).

11.  EXERCISE OF OPTIONS.

(a) An Option shall be deemed exercised when written notice ofsuch exercise has been given to the Company at its principal business office bythe person entitled to exercise the Option and full payment in cash or cashequivalents (or with shares of Common Stock pursuant to Section 14) for theshares with respect to which the Option is exercised has been received by theCompany.

(b) An Option may be exercised in accordance with this Section11 as to all or any portion of the shares covered by any Accrued Installment ofthe Option from time to time during the applicable Option period, but shall notbe exercisable with respect to fractions of a share.

(c) As soon as practicable after any proper exercise of anOption in accordance with the provisions of this Plan, the Company shall,without charging transfer or issue tax to the Optionee, deliver to the Optioneeat the main office of the Company, or such other place as shall be mutuallyacceptable, a certificate or certificates representing the shares of CommonStock as to which the Option has been exercised.  The time of issuance anddelivery of the Common Stock may be postponed by the Company for such period asmay, be required for it with reasonable diligence to comply with any applicablelisting requirements of any national or regional securities exchange and any lawor regulation applicable to the issuance and delivery of such shares.

12.  AUTHORIZATION TO ISSUE OPTIONS AND STOCKHOLDER APPROVAL.

Unless in the judgment of counsel to the Company such permit isnot necessary with respect to particular grants, Options granted under the Planshall be conditioned upon the Company obtaining any required permit from theCalifornia Department of Corporations and/or other appropriate governmentalagencies, free of any conditions not acceptable to the Board, authorizing theCompany to grant such Options, provided, however, such condition shall lapse asof the effective date of issuance of such permit(s) in a form to which theCompany does not object within sixty (60) days.  The grant of Options under thePlan also is conditioned on approval of the Plan by the vote or consent of theholders of a majority of the outstanding shares of the Company’s Common Stockand no Option granted hereunder shall be effective or exercisable unless anduntil the Plan has been so approved.

13.  LIMIT ON VALUE OF OPTIONED SHARES.

The aggregate fair market value (determined as of the OptionGrant Date) of the shares of Common Stock to which Options granted under Plan Aare exercisable for the first time by any employee of the Company during anycalendar year under all incentive stock option plans of the Company and itsAffiliated Companies shall not exceed $100,000.  The limitation imposed by thisSection 13 shall not apply with respect to Options granted under Plan B.

14.  PAYMENT OF EXERCISE PRICE WITH COMPANY STOCK.

The Board (or the Committee, if so authorized) may provide that,upon exercise of the Option, the Optionee may elect to pay for all or some ofthe shares of Common Stock underlying the Option with shares of Common Stock ofthe Company previously acquired and owned at the time of exercise by theOptionee, subject to all restrictions and limitations of applicable laws, rulesand regulations, including Section 425(c)(3) of the Internal Revenue Code, and

provided that the Optionee will make representations and warranties satisfactoryto the Company regarding his or her title to the shares used to effect thepurchase, including without limitation representations and warranties that theOptionee has good and marketable title to such shares free and clear of any andall liens, encumbrances, charges, equities, claims, security interests, optionsor restrictions and has full power to deliver such shares without obtaining theconsent or approval of any person or governmental authority other than thosewhich have already given consent or approval in a form satisfactory to theCompany.  The equivalent dollar value of the shares used to effect the purchaseshall be the fair market value of the shares on the date of the purchase asdetermined by the Board (or the Committee, if so authorized) in its solediscretion, exercised in good faith.

The terms and conditions of Options granted under the Plan shall be evidenced by a Stock Option Agreement (hereinafter referred to as the ‘Agreement’) executed by the Company and the person to whom the Option is granted.  Each agreement shall contain the following provisions:

(a) A provision fixing the number of shares which may be issued upon exercise of the Option;

(b) A provision establishing the Option exercise price per share;

(c) A provision establishing the times and the installments in which Options may be exercised, provided, however, such times and installments shall not be less than 20% of the number of shares covered by such Option each year from the Option Grant Date;

(d) A provision incorporating therein this Plan by reference;

(e) A provision clarifying which Options are intended to be Incentive Stock Options under Plan A and which are intended to be nonstatutory stock options under Plan B;

(f) A provision fixing the maximum duration of the Option as not more than ten (10) years from the Option Grant Date for Options granted under either Plan A or Plan B;

(g) Such representations and warranties by the Optionee as may be required by Section 25 of this Plan or as may be required by the Board (or the Committee) in its discretion;

(h) Any other restriction (in addition to those established under this Plan) as may be established by the Board (or the Committee) with respect to the exercise of the Option, the transfer of the Option, and/or the transfer of the shares purchased by exercise of the Option, provided that such restrictions are not in conflict with this Plan; and

(i) Such other terms and conditions not inconsistent with this Plan as may be established by the Board (or the Committee).

15.  TAXES, FEES AND EXPENSES.

The Company shall pay all original issue and transfer taxes (but not income taxes, if any) with respect to the grant of Options and/or the issueand transfer of shares pursuant to the exercise of such Options, and all otherfees and expenses necessarily incurred by the Company in connection therewith,and will from time to time use its best efforts to comply with all laws andregulations which, in the opinion of counsel for the Company, shall be applicable thereto.

16.  WITHHOLDING OF TAXES.

The grant of Options hereunder and the issuance of Common Stockpursuant to the exercise of such Options is conditioned upon the Company’sreservation of the right to withhold, in accordance with any applicable law,from any compensation payable to the Optionee any taxes required to be withheldby federal, state or local law as a result of the grant or exercise of any suchOption.

17.  AMENDMENT OR TERMINATION OF THE PLAN.

(a) The Board may amend this Plan from time to time in suchrespects as the Board may deem advisable, provided, however, that no suchamendment shall operate to (i) affect adversely an Optionee’s rights under thisPlan with respect to any Option granted hereunder prior to the adoption of suchamendment, except as may be necessary, in the judgment of counsel to theCompany, to comply with any applicable law, (ii) increase the maximum aggregatenumber of shares which may be optioned and sold under the Plan (unlessStockholders approve such increase), (iii) change the manner of determining theOption exercise price, (iv) change the classes of persons eligible to receiveOptions under the Plan, or (v) extend the maximum duration of the Option or thePlan.

(b) The Board may at any time terminate this Plan.  Any suchtermination of the Plan shall not, without the written consent of the Optionee,alter the terms of Options already granted and such Options shall remain in fullforce and effect as if this Plan had not been terminated.

18.  OPTIONS NOT TRANSFERABLE.

Options granted under this Plan may not be sold, pledged,hypothecated, assigned, encumbered, gifted or otherwise transferred or alienatedin any manner, either voluntarily or involuntarily by operation of law,otherwise than by will or the laws of descent of distribution, and may beexercised during the lifetime of an Optionee only by such Optionee.

19.  NO RESTRICTIONS ON TRANSFER OF STOCK.

Common Stock issued pursuant to the exercise of an Optiongranted under this Plan (hereinafter “Optioned Stock”), or any interest in suchOptioned Stock, may be sold, assigned, gifted, pledged, hypothecated, encumberedor otherwise transferred or alienated in any manner by the holder(s) thereof,subject, however, to any representations or warranties requested under Section25 of this Plan and also subject to compliance with any applicable federal,state or other local law, regulation or rule governing the sale or transfer ofstock or securities.

20.  RESERVATION OF SHARES OF COMMON STOCK.

The Company, during the term of this Plan, will at all timesreserve and keep available such number of shares of its Common Stock as shall besufficient to satisfy the requirements of the Plan.

21.  RESTRICTIONS ON ISSUANCE OF SHARES.

The Company, during the term of this Plan, will use its bestefforts to seek to obtain from the appropriate regulatory agencies any requisiteauthorization in order to grant Options or issue and sell such number of sharesof its Common Stock as shall be sufficient to satisfy the requirements of thePlan.  The inability of the Company to obtain from any such regulatory agencyhaving jurisdiction thereof the authorization deemed by the Company’s counsel tobe necessary to the lawful grant of Options or the issuance and sale of anyshares of its stock hereunder or the inability of the Company to confirm to itssatisfaction that any grant of Options or issuance and sale of any shares ofsuch stock will meet applicable legal requirements shall relieve the Company ofany liability in respect of the non-issuance or sale of such stock as to whichsuch authorization or confirmation have not been obtained.

22.  NOTICES.

Any notice to be given to the Company pursuant to the provisionsof this Plan shall be addressed to the Company in care of its Secretary at itsprincipal office, and any notice to be given to a person to whom an Option isgranted hereunder shall be addressed to him or her at the address given beneathhis or her signature on his or her Stock Option Agreement, or at such otheraddress as such person or his or her transferee (upon the transfer of Optioned

Stock) may hereafter designate in writing to the Company.  Any such notice shallbe deemed duly given when enclosed in a properly sealed envelope or wrapperaddressed as aforesaid, registered or certified, and deposited, postage andregistry or certification fee prepaid, in a post office or branch post officeregularly maintained by the United States Postal Service.  It shall be theobligation of each Optionee and each transferee holding Optioned Stock toprovide the Secretary of the Company, by letter mailed as provided hereinabove,with written notice of his or her correct mailing address.

23.  ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.

If the outstanding shares of Common Stock of the Company areincreased, decreased, changed into or exchanged for a different number or kindof shares of the Company through reorganization, recapitalization,reclassification, stock dividend, stock split or reverse stock split, then anappropriate and proportionate adjustment shall be made in the number or kind ofshares which may be issued upon exercise of Options granted under the Plan;provided, however that no such adjustment need be made if, upon the advice ofcounsel, the Board determines that such adjustment may result in the receipt offederally taxable income to holders of Options granted hereunder or the holdersof Common Stock or other classes of the Company’s securities.

24.  REPRESENTATIONS AND WARRANTIES.

As a condition to the grant of any Option hereunder or the exercise of any portion of an Option, the Company may require the person to be granted or exercising such Option to make any representation and/or warranty to the Company as may, in the judgment of counsel to the Company, be required under any applicable law or regulation, including, but not limited to, a representation and warranty that the Option and/or shares issuable or issued upon exercise of such Option are being acquired only for investment, for such person’s own account and without any present intention to sell or distribute such Option or shares, as the case may be, if, in the opinion of counsel for the Company, such representation is required under the Securities Act of 1933, the California Corporate Securities Law of 1968 or any other applicable law, regulation or rule of any governmental agency.

25.  NO ENLARGEMENT OF EMPLOYEE RIGHTS.

This Plan is purely voluntary on the part of the Company, andwhile the Company hopes to continue it indefinitely, the continuance of the Planshall not be deemed to constitute a contract between the Company and anyemployee, or to be consideration for or a condition of the employment of anyemployee.  Nothing contained in the Plan shall be deemed to give any employee theright to be retained in the employ of the Company or its Affiliated Companies,or to interfere with the right of the Company or an Affiliated Company todischarge or retire any employee thereof at any time.  No employee shall have anyright to or interest in Options authorized hereunder prior to the grant of suchan Option to such employee, and upon such grant he or she shall have only suchrights and interests as are expressly provided herein, subject, however, to allapplicable provisions of the Company’s Certificate of Incorporation, as the samemay be amended from time to time.

26.  INFORMATION TO OPTION HOLDERS.

During the period any options granted to employees of theCompany remain outstanding, such employee-option holders shall be entitled toreceive, on an annual or other periodic basis, financial and other informationregarding the Company.  The Board (or the Committee, if so authorized) shallexercise its discretion with regard to the nature and extent of the financialinformation so provided, giving due regard to the size and circumstances of theCompany and, if the Company provides annual reports to its Stockholders, theCompany’s practice in connection with such annual reports.  Notwithstanding theabove, if the issuance of options under either Plan A or Plan B is limited tokey employees whose duties in connection with the Company assure their access toequivalent information, this Section 27 shall not apply to such employees andplan.

27.  LEGENDS ON STOCK CERTIFICATES.

Each certificate representing Common Stock issued under this Plan shall bear whatever legends are required by federal or state law or by anygovernmental agency.  In particular, unless an appropriate registration statementis filed pursuant to the federal Securities Act of 1933, as amended, withrespect to the shares of Common Stock issuable under this Plan, each certificaterepresenting such Common Stock shall be endorsed on its face with the followinglegend or its equivalent:

“Neither the Option pursuant to which the shares represented bythis certificate are issued nor said shares have been registeredunder the Securities Act of 1933, as amended (the “Act”).Transfer or sale of such securities or any interest therein isunlawful except after registration, or pursuant to an exemptionfrom the registration requirements, as provided in the Act andthe regulations thereunder.”

A copy of this Plan shall be delivered to the Secretary of theCompany and shall be shown by him or her to each eligible person makingreasonable inquiry concerning it.  A copy of this Plan also shall be delivered toeach Optionee at the time his or her Options are granted.

28.  INVALID PROVISION.

In the event that any provision of this Plan is found to beinvalid or otherwise unenforceable under any applicable law, such invalidity orunenforceability shall not be construed as rendering any other provisionscontained herein invalid or unenforceable, and all such other provisions shallbe given full force and effect to the same extent as though the invalid orunenforceable provision was not contained herein.

29.  APPLICABLE LAW.

This Plan shall be governed by and construed and enforced inaccordance with the laws of the State of Delaware.

30.  SUCCESSORS AND ASSIGNS.

This Plan shall be binding on and inure to the benefit of theCompany and the employees to whom an Option is granted hereunder, and suchemployees’ heirs, executors, administrators, legatees, personal representatives,assignees and transferees.

IN WITNESS WHEREOF, pursuant to the due authorization and adoption ofthis plan by the Board on November 11, 1997 and amended on August 3, 1998,October 25, 1999, October 31, 2000 and November 1, 2001, the Company has causedthis Plan to be duly executed by its duly authorized officer.

MRV COMMUNICATIONS, INC.
BY	/s/ Noam Lotan
	Noam Lotan
	President and Chief Executive Officer

EX-10.29

Exhibit 10.29

MRV COMMUNICATIONS, INC.

STOCK OPTION AGREEMENT

This AGREEMENT is made effective as of the 29th day of October, 2002 (the “Option Grant Date”), by and between MRV Communications, Inc. (the “Company”) and NOAM LOTAN (“Optionee”).

RECITALS

WHEREAS, the Board of Directors of the Company has established the 1997 Incentive Stock Option Plan and the 1997 Non-Statutory Stock Option Plan (either such Plan the “Plan” unless otherwise specified) effective as of November 11, 1997 and amended on August 3, 1998, October 25, 1999, October 31, 2000, and February 1, 2002 and NOAM LOTAN.

WHEREAS, pursuant to the provisions of said Plan, the Board of Directors of the Company, by action duly taken on OCTOBER 29, 2002, granted to the Optionee an option or options (the “Option(s)”) to purchase shares of the Common Stock of the Company on the terms and conditions set forth herein.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants set forth herein and other good and valuable consideration, the parties hereto agree as follows:

1.     The Option(s). The Optionee may, at his option, purchase all or any part of an aggregate of 100,000 shares of Common Stock (the “Optioned Shares”), at the price of $0.99 per share (the “Option Price”), on the terms and conditions set forth herein.

2.     Plan Type; Exercise Dates and Exercise.  Options intended to qualify as Incentive Stock Options under Plan A are designated by an “A” under the category “Plan.” Options intended as separate Non-Statutory options under Plan B are designated by a “B” under the category “Plan.”  Subject to the conditions set forth in this Agreement, the right to exercise the Optioned Shares shall accrue in accordance with Schedule 1 attached hereto and hereby made a part hereof.

Optionee acknowledges that he understands he has no right whatsoever to exercise the Option(s) granted hereunder with respect to any Optioned Shares covered by any installment until such installment accrues as provided in Schedule 1 and that all unaccrued installments shall cease to accrue on the date of termination of Optionee’s employment, directorship, consulting or other arrangement with the Company. Optionee further understands that the Option(s) granted hereunder shall expire and become non-exercisable as provided in Section 3(c) below.

This Option shall be deemed exercised as to the shares to be purchased when written notice of such exercise has been given to the Company at its principal business office by the Optionee with respect to the Common Stock to be purchased.  Such notice shall be accompanied by (i) full payment in cash or cash equivalents, (ii) with shares of Common Stock pursuant to Section 14 of the Plan, or (iii) by any combination of (i) and (ii) as may be determined by the Board (or Committee if so authorized) with respect to the shares to be purchased.

3.     Governing Plan.  This Agreement hereby incorporates by reference the Plan and all of the terms and conditions of the Plan as heretofore amended and as the same may be amended from time to time hereafter in accordance with the terms thereof, but no such subsequent amendment shall adversely affect the Optionee’s rights under this Agreement and the Plan except as may be required by applicable law.  The Optionee expressly acknowledges and agrees that the provisions of this Agreement are subject to the Plan; the terms of this Agreement shall in no manner limit or modify the controlling provisions of the Plan, and in case of any conflict between the provisions of the Plan and this Agreement, the provisions of the Plan shall be controlling and binding upon the parties hereto.  The Optionee also hereby expressly acknowledges, represents and agrees as follows:

(a)  Acknowledges receipt of a copy of the Plan, a copy of which is attached hereto and by reference incorporated herein, and represents that he is familiar with the terms and provisions of said Plan, and hereby accepts this Agreement subject to all the terms and provisions of said Plan.

(b)  Agrees to accept as binding, conclusive and final all decisions or interpretations of the Board of Directors (or the Committee, if so authorized) upon any questions arising under the Plan.

(c)  Acknowledges that he is familiar with Sections of the Plan regarding the exercise of the Option(s) and represents that he understands that said Option(s) must be exercised on or before the earliest of the following dates, whichever is applicable:  (i) the day prior to the tenth anniversary of the Option(s) Grant Date with respect to Options granted under Plan A and B, in each as provided in Subsection 7(c) of the Plan; (ii) the effective date of a sale or other disposition of all or substantially all of the stock or assets of the Company, as provided in Subsection 8(a) of the Plan; (iii) the date which is 30 days following the Optionee’s termination of employment, directorship or consulting or other arrangement (unless extended) for any reason other than death or disability as provided under Section 10 of the Plan; or (iv) the date that is one year following the Optionee’s termination of employment, directorship or consulting or other arrangement by reason of his death, or the date that is one year following his termination of employment, directorship or consulting or other arrangement by reason of disability, whichever is applicable, as provided in Subsection 10(b) of the Plan.

(d)  Acknowledges, understands and agrees that the existence of the Plan and the execution of this Agreement are not sufficient by themselves to cause any exercise of any Option(s) granted under Plan A to qualify for favorable tax treatment through the application of Section 422(A) of the Internal Revenue Code; that Optionee must, in order to so qualify, individually meet by his own action all applicable requirements of Section 422A, including without limitation the following holding period and employment requirements:

(1)  Holding period requirement:  no disposition of an Optioned Share may be made by Optionee within two (2) years from the date of the granting of the Option(s) nor within one (1) year after the transfer of such Optioned Share to him, and

(2)  Employment requirement:  at all times during the period beginning on the date of the granting of the Option(s) and ending on the three (3) months before the date of exercise, the Optionee must have been an employee of the Company, its parent, or a subsidiary of the Company, or a corporation or a parent or subsidiary of such corporation issuing or assuming the Option(s) in a transaction to which

Section 425(a) of the Internal Revenue Code applies, except where the termination of employment is by means of the

employee’s disability, in which case said 3 month period may be extended to 1 year, as provided under Internal Revenue Code Section 422A.

4.     Representations and Warranties.  As a condition to the exercise of any portion of an Option, the Company may require the person exercising such Option to make any representation and/or warranty to the Company as may, in the judgment of counsel to the Company, be required under any applicable law or regulation, including but not limited to a representation and warranty that the shares are being acquired only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required under the Securities Act of 1933 or any other applicable law, regulation or rule of any governmental agency.  Optionee hereby represents to the Company that each of the Option evidenced hereby and the shares purchasable upon exercise thereof is being acquired only for investment and without any present intention to sell or distribute such securities.

5.     Options Not Transferable.  The Option(s) may be exercised during the lifetime of the Optionee only by the Optionee.  The Optionee’s rights and interests under this Agreement and in and to the Option(s) may not be sold, pledged, hypothecated, assigned, encumbered, gifted or otherwise transferred in any manner, either voluntarily or involuntarily by operation of law, except by will or the laws of descent or distribution.

6.     No Enlargement of Employee Rights.  Nothing in this Agreement shall be construed to confer upon the Optionee (if an employee) any right to continued employment with the Company (or an Affiliated Company), or to restrict in any way the right of the Company (or an Affiliated Company if he is an employee thereof) to terminate his employment.  Optionee acknowledges that in the absence of an express written employment agreement to the contrary, Optionee’s employment with the Company may be terminated by the Company at any time, with or without cause.

7.     Withholding of Taxes.  Optionee authorizes the Company to withhold, in accordance with any applicable law, from any compensation payable to him any taxes required to be withheld by federal, state or local law as a result of the grant of the Option(s) or the issuance of stock pursuant to the exercise of such Option(s).

8.     Laws Applicable to Construction.  This Agreement shall be construed and enforced in accordance with the laws of the State of California.

9.     Agreement Binding on Successors.  The terms of this Agreement shall be binding upon the executors, administrators, heirs, successors, transferees and assignees of the Optionee.

10.   Costs of Litigation.  In any action at law or in equity to enforce any of the provisions or rights under this Agreement or the Plan, the unsuccessful party to such litigation, as determined by the court in a final judgment or decree, shall pay the successful party or parties all costs, expenses and reasonable attorneys’ fees incurred by the successful party or parties (including without limitation costs, expenses end fees on any appeals), and if the successful party recovers judgment in any such action or proceeding such costs, expenses and attorneys’ fees shall be included as part of the judgment.

11.   Necessary Acts.  The Optionee agrees to perform all acts and execute and deliver any documents that may be reasonably necessary to carry out the provisions of this Agreement, including but not limited to all acts and documents related to compliance with federal and/or state securities laws.

12.   Counterparts.  For convenience this Agreement may be executed in any number of identical counterparts, each of which shall be deemed a complete original in itself and may be introduced in evidence or used for any other purpose without the production of any other counterparts.

13.   Invalid Provisions.  In the event that any provision of this Agreement is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid and unenforceable provision was not contained herein.

14.   Limitation on Value of Optioned Shares.  Optionee acknowledged that the Plan provides that the aggregate fair market value (determined as of the date hereof) of the shares of Common Stock to which Options granted under Plan A are exercisable for the first time by Optionee during any calendar year under all incentive stock option plans of the Company and its Affiliated Companies shall not exceed $100,000.  It is understood and agreed that should it be determined that an Option if granted pursuant to Plan A hereunder would exceed such maximum, such Option shall be not be considered granted under Plan A to the extent, but only to the extent of such excess.  This limitation shall not apply to any option granted under Plan B.

IN WITNESS WHEREOF, the Company and the Optionee have executed this Agreement effective as of the date first written herein above.

MRV COMMUNICATIONS, INC.			OPTIONEE
By	/s/ Noam Lotan		By	/s/ Noam Lotan
	NOAM LOTAN			NOAM LOTAN
Title:		PRESIDENT & CEO	[Redacted]
			SOCIAL SECURITY NUMBER

By his or her signature below, the spouse of the Optionee, of such Optionee be legally married as of the date of his execution of this Agreement, acknowledges that he or she has read this Agreement and the Plan and is familiar with the terms and provisions thereof, and agrees to be bound by all the terms and conditions of said Agreement and said Plan document.

Spouse	S.W. Lotan
Dated:	12/5/02

By his or her signature below the Optionee represents that he or she is not legally married as of the date of execution of this Agreement.

Optionee

Dated:

MRV COMMUNICATIONS, INC.

STOCK OPTION AGREEMENT

SCHEDULE 1

RIGHT TO EXERCISE

Subject to the conditions set forth in this agreement, the right to exercise the Optioned Shares shall accrue as follows:

Plan	Number of Shares	Date
B	100,000	October 29, 2012

EX-10.30

Exhibit 10.30

Workshop Lease of

The Science Park Administration (1 Year)

Parties to this lease:

Landlord:Science Park Administration (hereinafter referred to as Party A)

Tenant:Optronics International Corp. (hereinafter referred to as Party B)

Whereas Party B falls into the category of science park enterprises, research institutes, venture incubator centres, branch offices of the administration authorities or commercial or industrial service firms approved by Party A consistent with Article 4 or Article 8 under the Regulation Regarding the Establishment of the Science Park, and Party A and Party B have agreed that Party A will lease a workshop illustrated under Article 1 of this agreement that are located in the Hsin Chu Science Park (hereinafter referred to as the Workshop under this Agreement) for Party B’s use according to the following terms and conditions:

Article 1

The Workshop under this Agreement is located on the 1st Floor No. 40, 2nd Road of Hsin Chu Science Park with an area of 877 square meters.

Article 2

This lease shall remain in force for the period from January 1, 2009 till December 31, 2009. Upon the expiration date, this lease shall be terminated automatically unless Party A and Party B conclude a separate lease under the provisions of Article 4 of this lease. Party B is not allowed to claim the continuation of the lease or lease from time to time under any circumstances.

Article 3

During the conclusion of this lease and its existence, Party B shall at all times maintain its status as a science park enterprise, a research institute, a venture incubator centre, a branch office of the administration authorities or a commercial or industrial service firms approved by Party A consistent with Article 4 or Article 8 under the Regulation Regarding the Establishment of the Science Park. Where Party B fails to meet the above mentioned eligibilities at the time of the signing of the lease, this lease shall be void and null. Where Party B no longer maintains such eligibilities hereafter and both Parties to this agreement agree to the immediate termination of this lease, Party A is not required to notify such termination of such legal forces.

Article 4

Party A shall have the right to mail out copies of lease renewal for the extension of this lease one month before the expiration of this lease.

Party B shall make it clear whether it wishes to extend the lease or not after the expiration of such lease within 15 days after it receives the lease under the preceding paragraph. In case it wishes to extend the lease, Party B shall affix its seal on a copy of the lease renewal and attach related documents to be delivered to Party A within the time limit prescribed above.

Where Party B breaches any terms and conditions of this lease during the term of this lease, Party A shall have the right to ask Party B to fulfill notary procedures for the renewal of lease by Party B at its own expense.

Article 5

Where Party B intends to terminate this lease before its expiration during the term of this lease, it shall notify Party A in writing 2 months in advance. Party B shall continue to pay its rent during this 2 month notification period, regardless if it vacates the Workshop under this Agreement.

Party A shall have the right to terminate this lease by way of notification to Party B in writing 2 months in advance at any time if it is required by any changes in law or government policies.

Article 6

The rent for the Workshop under this Agreement shall be NT$110,502 per month. Party B shall, from the date of the commencement of this lease, download the form for next month rent payment from Party A’s website on its own (website: www.sipa.gov.tw), and shall make the payment of its rent to Party A before the 15th day of every month according to the procedures of rent payment established by Party A while calculating and payment the business tax separately. Party B shall pay its utility bills separately while paying the rent.

Party A shall have the right, consistent with the provisions of related laws and regulations, announced land prices of the location of the Workshop under this Agreement as well as any adjustments in the rent of state-owned land approved by the Executive Yuan, to modify the amount of rent mentioned above. Party B shall pay attention to the announced land prices and adjustments in the rent of state-owned land approved by the Executive Yuan on its own.

Any adjustment of rent mentioned above shall enter into force in the second month after such announced land prices or adjustments in the rent of state-owned land prices. Any differences between the rent already paid and actual adjustments before Party A completes its website updates under paragraph 1 shall be collected or refunded.

[illegible seal]

1

Article 7

Party B shall pay penalties according to the following provisions if it fails to pay its rent and utility bills on time:

1.It shall pay penalties equal to 2% of the total amount due if its rent and utility bills are less than 1 month overdue;

2.It shall pay penalties equal to 5% of the total amount due if its rent and utility bills are more than 1 month but less than 2 months overdue;

3.It shall pay penalties equal to 10% of the total amount due if its rent and utility bills are more than 2 months but less than 3 months overdue;

4.It shall pay penalties equal to 15% of the total amount due if its rent and utility bills are more than 3 month overdue.

Article 8

Party B shall pay a deposit of NT$284,148 to Party A, which is equivalent to 3 months’ rent at the time of the conclusion of the lease, in order to ensure that it will perform all the terms and conditions under this lease. Party B shall pay this lease deposit on the date of the signing of the lease and Party A shall issue a receipt accordingly. The amount of the lease deposit shall not be modified even if the rent is adjusted or this lease is extended or prolonged.

Upon the termination or expiration of this lease and where Party B returns the Workshop under this Agreement without any unpaid rents, utility bills or any breach of contract, Party A shall return the lease deposit without any interest.

Party B is not allowed to compensate its rent with the deposit.

Article 9

The Workshop under this Agreement rented by Party B shall be limited to its own purposes of research, production or operations and is not allowed to be sub-lease, transferred or in any way assigned to any other party for use. It is further not allowed to make use of it against laws and regulations. However, upon prior consent by Party A in writing, Party B shall have the right to sublease part of the Workshop under this Agreement to other enterprises or agencies approved by Party A.

Article 10

Party B shall excise due care to maintain the Workshop under this Agreement and its facilities and shall be responsible for keeping its surroundings clean.

Party B shall not pile any articles in the attics, stair wells, basement of the building of the Workshop under this Agreement or any other public space or engage in any acts that contravene public safety. In case of any pile, Party B shall hire workers to remove the pile at its expense upon notification of time sensitive removal from Party A. In case the pile is not removed within the time limit, Party A will take steps to remove the pile, the cost of which shall be paid by Party B. In case there is no information as to who should be responsible for the pile of the above mentioned articles, the removal fees shall be shared by Party B according to the ratio of its leased area to the entire workshop building.

In case the Workshop under this Agreement or its public facilities are damaged or lost, Party B shall restore them to the original status and compensate the damages or losses except for those caused by Force Majeure.

Where Force Majeure mentioned above or any natural causes are responsible for any damages or losses, Party B shall fill out a Notification for Repair before informing Party A for handling.

Party B shall undertake thorough inspection of the facilities of the Workshop under this Agreement immediately after take over and shall inform Party A of any existing defects, which shall be fixed by Party A. Party B shall have no right to claim any existing defects of the Workshop under this Agreement and ask for reduction of rent 1 month after it takes over the Workshop under this Agreement.

Article 11

Party B shall bear joint responsibilities for restoration to the original state and damages and losses caused to the Workshop under this Agreement and its public facilities as a result of its approval for use by its employees, users and other persons.

Article 12

Party B shall be held responsible for keeping clean the Workshop under this Agreement and shrinkage land, ports and parking lots outside its buildings.

Article 13

Party B is not allowed to conduct any additions or changes to the Workshop under this Agreement without approval, unless otherwise agreed to in writing by Party A beforehand.

Party B shall have the right to install water, electricity, telephone and other renovation facilities inside the Workshop under this Agreement; however, it is not allowed to affect or change the structure of the building or men’s and women’s toilets.

Any renovation conducted by Party B shall be handled in accordance with building codes, fire prevention rules and other laws and regulations.

Article 14

Party A shall have the right to dispatch personal wearing its ID into the Workshop under this Agreement to check how Party B makes use of the Workshop under this Agreement. Party B shall not refuse to grant access and shall provide full assistance.

Article 15

The house tax and property tax of the Workshop under this Agreement shall be paid by Party A.

Party B shall purchase insurance for the [illegible] facilities and other articles placed inside the Workshop under this Agreement according to its own needs and Party A shall be held harmless against any damages thereof.

[illegible seal]

2

Article 16

Party A shall have the right to terminate [illegible] the Workshop under this Agreement by notification to Party B and the rent paid shall not be refunded under the following circumstances:

1.Party B is disqualified to do business or provide services within the Science Park or is asked by Party A on the basis of law to move out of the Science Park;

2.Party B fails to make us of the Workshop under this Agreement more than 2 months after the commence date of this lease, or ceases the use or fails to make use according to the terms of this lease for more than 2 months; and Party B fails to rectify the situation within the time limit set forth by Party A in its written notification to that effect.

3.Party B is behind rent payment schedule for more than 2 months.

4.Party B breaches the provisions of Article 9 or Article 14 of this lease.

5.Party B breaches the provisions of Articles 10, 12, 13, 19, 20, 22 (1), 22 (4), 22 (5), or 23 (2);  and Party B fails to rectify the situation within the time limit set forth by Party A in its written notification to that effect.

Article 17

Upon the expiration or termination of this lease, Party B shall restore the Workshop under this Agreement to its original state and vacate it before handing it over back to Party A.

Party B shall clean up the Workshop under this Agreement at its own expense when it hands it over pursuant to the provisions of the preceding paragraph. In case Party B fails to clean up the Workshop under this Agreement and its public facilities, Party A may clean them up in its stead and the costs shall be paid by deduction from the lease deposit. Where the lease deposit is not sufficient, Party B shall make up for the deficiency.

Anything left over by Party B inside the Workshop under this Agreement after its handover shall be regarded as waste, which shall be subject to the disposal by Party A and Party B shall have no right to claim any compensation. In case Party A needs to dispose of any wastes, the cost shall be deducted from the lease deposit of Party B and Party B shall make up for any deficiency.

Upon the expiration or termination of this lease, Party B shall fulfill the handover procedures for the Workshop under this Agreement back to Party A according to the provisions of this Article. Party B agrees without any pre-conditions that, in case of failure on the part of Party B, Party A shall have the right to open the door or change the lock of the Workshop under this Agreement to gain entry on its own upon its finding that nobody from Party B is still using the Workshop under this Agreement based on 3 consecutive checks within 10 days. Party A shall also have the right to clean up the Workshop under this Agreement, restore it to its original state and treat anything left over in the Workshop under this Agreement as waste.

Party B hereby agrees that it shall pay all the expenses related to Party A’s opening the door, changing the lock, clean-up, restoration to the original state and disposal of waste pursuant to the provisions of paragraphs 2 and 3.

Article 18

Upon the expiration or termination of this lease, where Party B delays the handover of the Workshop under this Agreement back to Party A under the terms and conditions of this lease, it shall pay a daily penalty twice the daily rent to Party A and make up for the losses that Party A sustains as a result.

Article 19

Party B shall file timely applications with regard to the Workshop under this Agreement according to the Inspection Code of Public Buildings, Rules of Application, Regulation regarding Fire Prevention and Inspection and their standards.

Article 20

The designed carrying capacity of the floors of the Workshop under this Agreement is 500 kilograms per square meter. For the purpose of ensuring the safety of the building structure, Party B shall pay attention to the designed carrying capacity of the floors and consult with structural technicians or architectures and shall not exceed the limit of carrying capacity.

Article 21

All the requests and notifications related to this lease shall be made in Chinese in writing and they shall be hand delivered or mailed to the other party according to the addresses listed under this lease.

Both parties shall notify the other party in writing of any changes in their addresses within 7 days after such changes.

Deliveries according to the addresses listed under this lease shall be deemed as lawful deliveries before such notifications.

Article 22

Party B shall absolutely perform its obligations prescribed under the terms and conditions of this lease and shall seek a guarantor of joint responsibilities on its own. The guarantor shall, after thoroughly reading this lease, sign its name and affix its seal in the column reserved for guarantors. A photocopy of its ID shall also be retained as an attachment of this lease. The photocopy of the ID shall be the front side of the ID. Party B and the guarantor of joint responsibilities shall warrant that the photocopy is exactly the same as the original and is free of any fraud or dishonesty.

The guarantor of joint responsibilities shall unconditionally bear joint responsibilities along with Party B in case Party B breaches any of the terms and conditions of this lease. It shall also agree to waive its right of discussion under Article 745 of the Civil Code.

The guarantor of joint responsibilities is not allowed to relieve itself of its responsibilities without prior approval from Party A if it wants to exit from the guarantee midway.

Apart from a guarantor of joint responsibilities, Part B can also fulfil obligations by written joint guarantee of banks, joint guarantee insurance policy of insurance company, time deposit certificate with pledge of financial institutions, or other forms approved by Party A, provided that the guarantee commences prior to or on the execution date of the agreement.

[illegible seal]

3

For written joint guarantee of banks, joint guarantee insurance policy of insurance company, time deposit certificate with pledges of financial institutions, or other forms approved by Party A, the executor of guarantee liabilities shall hold the same responsibilities and guarantee with the guarantor of joint responsibilities. The due time or expiration date to which the written guarantee is kept in registration in light of related authority or financial laws and regulations shall extend over sixty (60) days more than the lease period hereto.

Article 23

Both parties concluding the lease hereto herby make the presentation that they are duly authorized, and are properly empowered to enter into this lease.

The stamp and seal with which Party B uses for lease execution shall be both consistent with the same that Party B deposits with Party A in the corporate registration procedures.

Article 24

Parties agree that any lawsuit arising out of the lease shall be governed by the laws of Republic of China and the Taiwan Hsin Chu District Court shall have jurisdiction as the court of first instance.

Article 25

The lease is made in duplicate copies and each party shall keep one copy for filing.

[illegible seal]

4

Parties to this lease:

Party A: Science Park Administration

Duly authorized representative: Yan Zongming [illegible seals]

Address: No. 2, Xin’an Road, Hsin Chu, Taiwan

Party B: Optronics International Corp

Duly authorized representative: Magnier

Address: No 46 Park Road 2nd, Hsin Chu Science Park, TW.  [illegible seals]

Guarantor of joint responsibilities for Party B: Qiu Mingji  [seal]: Qiu Mingji

ID Number of the guarantor of joint responsibilities: Q120811843

January 1, 2009

5

EX-10.31

Exhibit 10.31

Contract No.: FIBCDDBO8-0012

Administration Department of

Fiberxon (Chengdu) Technology Co., Ltd

Lease Contract on Standard Factory Buildings in

Sichuan Chengdu Export Processing Zone

Contract No.:

Party A (Landlord):	Chengdu Gaoxin Construction Development Co., Ltd.
Party B (Tenant):	Fiberxon (Chengdu) Technology Co., Ltd.
Party C (Administrator):	Administration Office of Sichuan Chengdu Export Processing Zone

In according with the Contract Law of the People’s Republic of China and pertinent rules and regulations, Party A, Party B and Party C have reached an agreement through friendly consultation and shall be bound by the following terms and conditions. Party A hereby appoints Party C to manage its standard factory buildings in Sichuan Chengdu Export Processing Zone (West Side) and lease them to Party B for its use. Party B hereby agrees to rent the standard factory buildings of Party A. Party A and Party C shall exercise their rights and perform their obligations respectively according to the terms and conditions under the Contract on Entrusted Operations of Standard Factory Buildings and Supervised Warehouse signed by them.

1.Location of the Leased Workshops:

The leased workshops are located in the Standard Factory Building Area of Sichuan Chengdu Export Processing Zone (West Side) and include the whole of No.2 Building and the second floor as well as the reception hall on the first floor of No.5 Building.

2. Area of the Leased Workshops:

The area of the leased workshops leased by Party B is 17,571 square meters (among which, No.2 Building covers 13,638 square meters, the second floor and the first floor of No.5 Building occupies 3,852 square meters and 81 square meters respectively. In case of any errors arising from the area of the leased workshops, the actually measured area shall be taken as valid). Plain-view drawings of the leased workshops shall be regarded as the appendix to this Contract.

3.Lease Term:

3.1The lease term shall be 60 months from January 15, 2008 to January 14, 2013.

3.2No party shall change the terms and conditions hereof during the terms of the lease before Parties A, B and C reach unanimity through consultation.

4.Current Status of the Leased Workshops:

Party A and Party C guarantee that Party A has all the rights and powers to lease the foregoing factory buildings and land and has the power to sign this Contract on behalf of any and all of the owners of the buildings (if any) or competent authorities of housing and land administration. Party A and Party C guarantee that there is no existing or potential litigation, arbitration, disputes or other legal proceedings concerning the land and buildings leased and remised by Party A. And there is no mortgage on the land and factory buildings owed to any banks, companies or individuals, nor any lease contract except this one and any rights and interests of any third parties.

5.Purpose of the Leased Workshops:

5.1The leased workshops shall be limited to the purposes of manufacturing, processing, dealing with related business and warehousing which Party B has been approved to undertake.

5.2Party B shall notify Party C in writing 60 days prior to the expiration of this Contract in the event that it intends to extend the lease. Under the same terms Party B shall have the priority to lease the leased workshops. In this case, a new lease shall be concluded between the parties. In case that Party B has already been using the leased workshops before renewing the lease contract, the lease term shall be calculated from the date when the leased workshops was actually put into use by Party B. The rent for the extended lease shall not be higher than the price level estimated by professional organizations mutually recognized by Party A and Party B under the same conditions of the current market.

6.Rent, Property Management Fee and Payment:

Rent and property management fee shall be calculated based on the construction area.

6.1Rent:

6.1.1Party A and Party C shall grant Party B 90 days of rent-free for decoration from January 15, 2008 to April 14, 2008.

6.1.2Monthly rent shall be 10RMB/m² from April 15, 2008 to April 14, 2010.

6.1.3Monthly rent shall be 15RMB/m² from April 15, 2010 to January 14, 2013.

6.2.Party B shall pay 0.5% of the amount overdue as penalties every day in the event that the rent payment is delayed over one working day.

6.3The property management fee shall be 1.5 RMB/m² every month and shall be calculated starting from April 15, 2008.

6.4The rent and property management fee shall be paid on a monthly basis. Party B shall pay rent and property management fee for the current lease month (either in cash or by check and check amount shall have been deposited into the bank account). Payment shall be made before the 10th of every month. Party C shall transfer the non-operating receipts or invoices issued by Party A to Party B within 15 working days after Party A’s receipt of the payment.

Bank Account Number designated by Party A for Party B’s payment: 51001406137050111277

Account Name: Chengdu Gaoxin Construction Development Co., Ltd.

Issuing Bank: Gaoxin Branch of China Construction Bank

6.5Party A or Party C shall not charge any parking fee for motor vehicles of Party B and its employees.

7.Guarantee:

7.1Party B shall pay a lease guarantee of RMB 80,000 (eighty thousand RMB in total) to Party A within 5 days from the date of signing this Contract. The guarantee shall be refunded by Party A to Party B in a lump sum upon the expiration date of this lease provided that Party C confirms, upon inspection and acceptance, that Party B has not damaged the building structure, changed the outside façade images and the interior layout of the factory buildings during the lease term. Party A shall issue a financial receipt for the guarantee.

The bank account number, name of the account and issuing bank designated by Party A for Party B making

payments shall be consistent with the provisions under Article 6.4.

7.2Within 5 working days after the date of the delivery of the workshops, Party B shall pay water and electricity deposit of 5 RMB/square meter to Party C according to the area of the workshop. This deposit shall total RMB 87,855 (RMB eighty-seven thousand eight hundred and fifty-five). The deposit shall be refunded by Party C to Party B in a lump sum on the expiration date of this lease provided that Party C verifies and confirms that Party A has not owed any water and electricity fees and overdue fine during the lease term.

Bank Account Number designated by Party C to Party B for payments: 511610015018001658252

Name of Account: Financial Centralized Receipt and Payment Center of Chengdu Gaoxin District (Export Processing Zone)

Issuing Bank: Gaoxin Branch of Communication Bank of China

8.Status and Delivery Time of the Leased Workshops:

8.1Status of the Workshops at the time of the Delivery:

Within 90 working days from the date of signing this Contract, Party A and Party C shall make sure that the workshops meet the following conditions:

8.1.1The external walls have been re-painted;

8.1.2The waterproof has been repaired and there exists no water leakage;

8.1.3The elevators are in place and ready for use. The elevators are required as follows:

There are two elevators installed in the Building 2 and one elevator installed at the specified position in Building 5 by Party B. All the foresaid elevators shall be freight elevators with a load capacity of no less than 2,800 kilograms.

8.1.4Party A and Party C shall ensure that electricity supply in Building 2 and Building 5 is in good condition. Within 90 working days from Party B’s provision of relevant technical parameters about the transformer to Party A and Party C, Party A and Party C shall complete the configuration of the power and make it available and Party C shall ensure power supply during Party B’s decoration.

The requirements for power specified by Party B are as follows:

Building 2 and Building 5 shall receive power from different transformers.

A specific-purpose transformer shall be installed in Building 2 and a power supply of 2,500 KVA shall be provided by two transformers, each of 1,250 KVA respectively. Party A shall bear the expenses incurred by the transformer and high voltage transmission lines. The area of Building 5 leased by Party B shall be provided with a power supply of 630 KVA. Party A and Party C shall connect the transmissions line into the switchgear of Party B and relevant expenses shall be born by Party A.

8.1.5Party A and Party C shall ensure that the original fire protection system of the leased workshops is in line with national standards.

8.2Delivery Time:

Within 5 working days from the date of signing this Contract, Party C shall deliver the leased workshops to Party B and ensure that the workshops are able to fulfill all the purposes. Party B shall not be admitted into

and decorate the leased workshops until it has checked and confirmed all the facilities attached to the leased workshops one by one and completed handover procedures with Party C.

9.Rights and Obligations of the Three Parties:

9.1Party A and Party C shall undertake confidentiality obligations with respect to Party B’s commercial secrets and other secrets obtained. They are not allowed to disclose the foresaid information to any third party without prior written consent of Party B.

9.2During the lease term, Party A and Party C shall ensure that the leased workshops and attached facilities are in normal operating conditions and safe state. They also shall make sure that the quality of the workshops and environmental monitoring are in line with the national industrial plant construction standards. At the same time, they shall also see to it that their disposal and administrative behavior with respect to the leased workshops shall not prejudice the legal rights and interests of Party B.

9.3In the event that Party A intends to sell the leased workshops, Party B shall have the priority in purchasing the leased workshops under the same conditions of the market price.

9.4Party B is allowed to decorate the leased workshops only after it has sent application and decoration program to Party C and obtained relevant consent. Within 5 working days from the date of receiving the decoration program, Party C shall give a written reply to Party B. Party C’s failure of sending a written reply or sending it after the foresaid term shall mean that Party C has approved Party B’s application. Party C shall not turn down Party B’s decoration application without due causes. In case of Party C’s refusal, Party C shall give relevant reasons. Party B may require the decoration team to pay a deposit of RMB 20,000 (RMB twenty thousand) to Party C, which shall be refunded by Party C in a lump sum provided that Party C has carried out on-site inspection and confirmed that Party B hasn’t damaged the buildings’ structure and the outside façade images of the leased workshops during the construction period. Party B shall pile up the waste created during the decoration at specified locations designated by Party C. It shall clean up and remove all the waste after completing the decoration work, or entrust Party C to clean up and remove all the waste, the cost of which shall be paid by Party B.

9.5Upon the expiration date when Party B returns the leased workshops to Party C, Party B shall restore the leased workshops to their original state upon Party C’s demand. Party B shall not charge for the decoration materials which can not be dismantled from the leased workshops upon Party C’s requirement.

9.6In the event that Party B is required to terminate this contract ahead of schedule by Party A or Party C, it shall not be bound by the provisions of Article 9.5 with the exception that Party B has failed to comply with property management regulations and other management systems of Party C and Party C believes that it’s a serious offense with bad influence on the management over the whole area.

9.7Party B shall not set up billboards and other promotional plates on the leased workshops before it has sent the application to Party C and obtained consent. Within 5 working days from receiving the application, Party C shall reply in writing to Party B. Party C’s failure to make a written reply or make such reply within the above mentioned time limit shall mean that Party C has agreed to Party B’s application. Party C shall lay out relevant reasons if it turns down Party B’s foresaid application.

Party B is not required to pay any expenses to Party A or Party C while making billboards and other promotional plates.

9.8Party B shall not set up mortgages, guarantees and other security interests for any third party on the leased workshops during the lease term.

9.9Party B shall enjoy priority of renting the remaining area of Building 5 under the same conditions.

9.10Party C shall coordinate with Chengdu Customs in an effort to provide facility for Party B to transport materials during Party B’s decoration period.

10.Maintenance and Management of the Leased workshops:

During the lease term, Party C shall be responsible for the maintenance and management of the main structure of the leased workshops, roofs, doors and windows, original facilities and pipelines inside the buildings through combination of management and use. In case of any malfunction, Party B shall notify Party C for maintenance. In the event that Party C fails to start repair within 3 working days after receiving the notice, Party B shall do the repair on its own or entrust others to do the repair, the incurred expenses of which shall be born by Party A. Where damage caused by improper use or deliberate destruction by Party B, Party B shall be responsible for the maintenance and bear the costs incurred.

11.Property Management:

11.1Service Scope of Party C’s Property Management:

(1)Daily management of pipeline’s water supply and external sewage disposal of the leased workshops;

(2)Operation management and maintenance of shared distribution facilities in the workshop area;

(3)Security management outside the leased workshops (internal security of Party B to be taken care of by Party B itself) and security work for the park;

(4)Cleaning and hygiene, greening work for public places;

(5)Disposal and treatment of household waste;

(6)Other special services designated by Party B and charged by the agreed fee.

11.2Party B shall verify the written notice sent from Party C each month and pay Party C for utility bills for the water and electricity actually consumed in a timely manner.

12.Responsibility of Breach of Contract:

12.1Where one party commits any material breaches of this contract, the other party shall have the right to terminate the contract and ask for indemnity.

12.2Party B shall have the right to terminate this Contract in case that Party C fails to perform its obligations under Property Management Regulations and causes great influence upon Party B’s production and operations. It shall also have the right to require Party C to compensate the incurred losses.

12.3Party C shall pay a daily fine at 1% of the rent for half a year in the event that Party C fails to deliver the leased workshops under this Contract.

12.4Party A and Party C shall not terminate the contract unless Party B makes material breaches of the related provisions of this lease. Where Party A and Party C intend to terminate the contract by any reason except the foresaid ones, Party A shall pay Party B the moving expenses that Party B has incurred and those for moving into to another workshop. Where Party B fails to comply with property management regulations and other management systems of Party C and Party C believes that it’s a serious case with bad influence on the management over the whole area, Party A shall not pay Party B the foresaid expense.

13.Termination of This Contract:

In the case of any of the following circumstances, Party B may terminate this contract and the lease after sending notice to Party A three months in advance:

(1)Party B terminates its operations;

(2)Party B no loner needs to rent the leased workshops for there are some changes to its business scope;

(3)The leased workshops are forced to be relocated on account of government planning;

(4)Other conditions not caused by Party B leading to the situations where it is not necessary or impossible for Party B to rent the workshops.

Party B terminating the contract because of the foresaid circumstances shall not be deemed as having breached this contract.

14.Admission:

14.1Representatives designated by Party A and Party C shall be admitted into the leased workshops to carry on their work in the time mutually agreed upon with the prior consent of Party B.

14.2Employees of Party A and Party C shall observe and comply with regulations concerning safety and health while they are admitted and carry on their work. Harmful substances and hazardous substances are not allowed to be brought into the workshop and stored there.

14.3Party A and Party C shall ensure that water-supply and waste emission pipeline will work properly in the adjacent areas. Party A shall bear the expenses and losses incurred by Party B’s failure to fulfilling the foregoing conditions.

15.Complement and Installation:

During the course of performance of this Contract, Party B shall not install and establish auxiliary equipment and facilities without prior consent of Party C after submitting the installation scheme to Party C for approval ahead of schedule. Upon expiration of the contract, Party B shall have the right to disassemble and remove any installation equipment for the leased workshops and shall handover the leased workshops to Party A in its original conditions.

16.Other Terms & Conditions:

Matters not covered under this contract shall be settled in a supplementary agreement between the three parties, which shall have the equal legal force.

Party A, Party B and Party C hereby make the representation that they shall keep the contents contained in this contract strictly confidential. The terms and conditions contained herein are applicable to the standard workshops leased by Party B and shall not be applied to other leased workshop projects within the processing zone.

During the lease term and the period of extended lease, Party A and Party C shall not sell the leased workshops to any other fourth Party.

Management regulations and the other management systems for Party C’s property referred hereto shall be acknowledged and agreed to by Party A in advance.

Current conditions and demands for the leased workshops and attached facilities shall be confirmed by Party A, Party B and Party C hereof in the appendix, which shall be an integral part of this contract

17.Contract Text:

This contract is made in three copies and Party A, Party B and Party C shall hold one copy each, which shall have the same legal force.

18Applicable Laws and Dispute Resolution:

This contract shall be governed by the laws of the People’s Republic of China. In case of any dispute arising out of the interpretation and performance of this Contract, Party A, Party B and Party C shall consult each other for a settlement. Where no settlement can be reached, any party may submit the dispute to Chengdu Arbitration Commission for arbitration.

19.Entry into Force of This Contract:

This contract shall come into force on the date of signing and sealing by the three parties hereto or their authorized representatives.

Party A (stamped and sealed): Chengdu Gaoxin Construction Development Co., Ltd.

Legal Representative (Signature):

Time:

Party B (stamped and sealed): Fiberxon (Chengdu) Technology Co., Ltd.

Legal Representative (Signature):

Time:

Party C (stamped and sealed): Administration Office of Sichuan Chengdu Export Processing Zone

Legal Representative (Signature):

Time:

EX-10.32

Exhibit 10.32

Workshop Lease of

The Science Park Administration (1 Year)

Parties to this lease:

Landlord:	Science Park Administration (hereinafter referred to as Party A)
Tenant:	Optronics International Corp. (hereinafter referred to as Party B) A0327

Whereas Party B falls into the category of science park enterprises, research institutes, venture incubator centers, branch offices of the administration authorities or commercial or industrial service firms approved by Party A consistent with Article 4 or Article 8 under the Regulation Regarding the Establishment of the Science Park, and Party A and Party B have agreed that Party A will lease a workshop illustrated under Article 1 of this agreement that is located in the Hsin Chu Science Park (hereinafter referred to as the Workshop under this Agreement) for Party B’s use according to the following terms and conditions:

Article 1

The Workshop under this Agreement is located on the 1st Floor No. 44, 2nd Road of Hsin Chu Science Park with an area of 877 square meters.

Article 2

This lease shall remain in force for the period from January 1, 2009 till December 31, 2009. Upon the expiry date, this lease shall be terminated automatically unless Party A and Party B conclude a separate lease under the provisions of Article 4 of this lease. Party B is not allowed to ask for the continuation of the lease or lease from time to time under any circumstances.

Article 3

During the conclusion of this lease and its existence, Party B shall at all times maintain its status as a science park enterprise, a research institute, a venture incubator centre, a branch office of the administration authorities or a commercial or industrial service firms approved by Party A consistent with Article 4 or Article 8 under the Regulation Regarding the Establishment of the Science Park. Where Party B fails to meet the above mentioned eligibilities at the time of the signing of the lease, this lease shall be void and null. Where Party B no longer maintains such eligibilities hereafter and both Parties to this agreement agree to the immediate termination of this lease, Party A is not required to notify such termination of such legal forces.

Article 4

Party A shall have the right to mail out copies of lease renewal for the extension of this lease one month before the expiry of this lease.

Party B shall make it clear whether it wishes to extend the lease or not after the expiry of such lease within 15 days after it receives the lease under the preceding paragraph. In case it wishes to extend the lease, Party B shall affix its seal on a copy of the lease renewal and attach related documents to be delivered to Party A within the time limit prescribed above.

Where Party B breaches any terms and conditions of this lease during the term of this lease, Party A shall have the right to ask Party B to fulfill notary procedures for the renewal of lease by Party B at its own expense.

Article 5

Where Party B intends to terminate this lease before its expiry during the term of this lease, it shall notify Party A in writing 2 months in advance. Party B shall continue to pay its rent during this 2 month notification period, regardless if it vacates the Workshop under this Agreement.

Party A shall have the right to terminate this lease by way of notification to Party B in writing 2 months in advance at any time if it is required by any changes in law or government policies.

[illegible seal]

1

Article 6

The rent for the Workshop under this Agreement shall be NT$110,502 per month. Party B shall, from the date of the commencement of this lease, download the form for next month rent payment from Party A’s website on its own (website: www.sipa.gov.tw), and shall make the payment of its rent to Party A before the 15th day of every month according to the procedures of rent payment established by Party A while calculating and payment the business tax separately. Party B shall pay its utility bills separately while paying the rent.

Party A shall have the right to, consistent with the provisions of related laws and regulations, announced land prices of the location of the Workshop under this Agreement as well as any adjustments in the rent of state-owned land approved by the Executive Yuan, modify the amount of rent mentioned above. Party B shall pay attention to the announced land prices and adjustments in the rent of state-owned land approved by the Executive Yuan on its own.

Any adjustment of rent mentioned above shall enter into force in the second month after such announced land prices or adjustments in the rent of state-owned land prices. Any differences between the rent already paid and actual adjustments before Party A completes its website updates under paragraph 1 shall be collected or refunded.

Article 7

Party B shall pay penalties according to the following provisions if it fails to pay its rent and utility bills on time:

1.It shall pay penalties equal to 2% of the total amount due if its rent and utility bills are less than 1 month overdue;

2.It shall pay penalties equal to 5% of the total amount due if its rent and utility bills are more than 1 month but less than 2 months overdue;

3.It shall pay penalties equal to 10% of the total amount due if its rent and utility bills are more than 2 months but less than 3 months overdue;

4.It shall pay penalties equal to 15% of the total amount due if its rent and utility bills are more than 3 month overdue.

Article 8

Party B shall pay a deposit of NT$331,506 to Party A, which is equivalent to 3 months’ rent at the time of the conclusion of the lease, in order to ensure that it will perform all the terms and conditions under this lease. Party B shall pay this lease deposit on the date of the signing of the lease and Party A shall issue a receipt accordingly. The amount of the lease deposit shall not be modified even if the rent is adjusted or this lease is extended or prolonged.

Upon the termination or expiry of this lease and where Party B returns the Workshop under this Agreement without any unpaid rents, utility bills or any breach of contract, Party A shall return the lease deposit without any interest.

Party B is not allowed to compensate its rent with the deposit.

Article 9

The Workshop under this Agreement rented by Party B shall be limited to its own purposes of research, production or operations and is not allowed to be sub-leased, transferred or in any way assigned to any other party for use. It is further not allowed to make use of it against laws and regulations. However, upon prior consent by Party A in writing, Party B shall have the right to sublease part of the Workshop under this Agreement to other enterprises or agencies approved by Party A.

Article 10

Party B shall excise due care to maintain the Workshop under this Agreement and its facilities and shall be responsible for keeping its surroundings clean.

Party B shall not pile any articles in the attics, stair wells, basement of the building of the Workshop under this Agreement or any other public space or engage in any acts that contravene public safety. In case of any pile, Party B shall hire workers to remove the pile at its expense upon notification of time sensitive removal from Party A. In case the pile is not removed within the time limit, Party A will take steps to remove the pile, the cost of which shall be paid by Party B. In case there is no information as to which party should be responsible for the pile of the above mentioned articles, the removal fees shall be shared by Party B according to the ratio of its leased area to the entire workshop building.

[illegible seal]

2

In case the Workshop under this Agreement or its public facilities are damaged or lost, Party B shall restore them to the original status and compensate the damages or losses except for those caused by Force Majeure.

Where Force Majeure mentioned above or any natural causes are responsible for any damages or losses, Party B shall fill out a Notification for Repair before informing Party A for handling.

Party B shall undertake thorough inspection of the facilities of the Workshop under this Agreement immediately after take over and shall inform Party A of any existing defects, which shall be fixed by Party A. Party B shall have no right to claim any existing defects of the Workshop under this Agreement and ask for reduction of rent 1 month after it takes over the Workshop under this Agreement.

Article 11

Party B shall bear joint responsibilities for restoration to the original state and damages and losses caused to the Workshop under this Agreement and its public facilities as a result of its approval for use by its employees, users and other persons.

Article 12

Party B shall be held responsible for keeping clean the Workshop under this Agreement and shrinkage land, ports and parking lots outside its buildings.

Article 13

Party B is not allowed to conduct any additions or changes to the Workshop under this Agreement without approval, unless otherwise agreed to in writing by Party A beforehand.

Party B shall have the right to install water, electricity, telephone and other renovation facilities inside the Workshop under this Agreement; however, it is not allowed to affect or change the structure of the building or men’s and women’s toilets.

Any renovation conducted by Party B shall be handled in accordance with building codes, fire prevention rules and other laws and regulations.

Article 14

Party A shall have the right to dispatch personal wearing its ID into the Workshop under this Agreement to check how Party B makes use of the Workshop under this Agreement. Party B shall not refuse to grant access and shall provide full assistance.

Article 15

The house tax and property tax of the Workshop under this Agreement shall be paid by Party A.

Party B shall purchase insurance for the [illegible] facilities and other articles placed inside the Workshop under this Agreement according to its own needs and Party A shall be held harmless against any damages thereof.

Article 16

Party A shall have the right to terminate [illegible] the Workshop under this Agreement by notification to Party B and the rent paid shall not be refunded under the following circumstances:

1.Party B is disqualified to do business or provide services within the Science Park or is asked by Party A on the basis of law to move out of the Science Park;

2.Party B fails to make us of the Workshop under this Agreement more than 2 months after the commence date of this lease, or ceases the use or fails to make use according to the terms of this lease for more than 2 months; and Party B fails to rectify the situation within the time limit set forth by Party A in its written notification to that effect;

3.Party B is behind rent payment schedule for more than 2 months;

4.Party B breaches the provisions of Article 9 or Article 14 of this lease;

5.Party B breaches the provisions of Articles 10, 12, 13, 19, 20, 22 (1), 22 (4), 22 (5), or 23 (2);  and Party B fails to rectify the situation within the time limit set forth by Party A in its written notification to that effect.

Article 17

Upon the expiry or termination of this lease, Party B shall restore the Workshop under this Agreement to its original state and vacate it before handing it over back to Party A.

[illegible seal]

3

Party B shall clean up the Workshop under this Agreement at its own expense when it hands it over pursuant to the provisions of the preceding paragraph. In case Party B fails to clean up the Workshop under this Agreement and its public facilities, Party A may clean them up in its stead and the costs shall be paid by deduction from the lease deposit. Where the lease deposit is not sufficient, Party B shall make up for the deficiency.

Anything left over by Party B inside the Workshop under this Agreement after its handover shall be regarded as waste, which shall be subject to the disposal by Party A and Party B shall have no right to claim any compensation. In case Party A needs to dispose of any wastes, the cost shall be deducted from the lease deposit of Party B and Party B shall make up for any deficiency.

Upon the expiry or termination of this lease, Party B shall fulfill the handover procedures for the Workshop under this Agreement back to Party A according to the provisions of this Article. Party B agrees without any pre-conditions that, in case of failure on the part of Party B, Party A shall have the right to open the door or change the lock of the Workshop under this Agreement to gain entry on its own upon its finding that nobody from Party B is still using the Workshop under this Agreement based on 3 consecutive checks within 10 days. Party A shall also have the right to clean up the Workshop under this Agreement, restore it to its original state and treat anything left over in the Workshop under this Agreement as waste.

Party B hereby agrees that it shall pay all the expenses related to Party A’s opening the door, changing the lock, clean-up, restoration to the original state and disposal of waste pursuant to the provisions of paragraphs 2 and 3.

Article 18

Upon the expiry or termination of this lease, where Party B delays the handover of the Workshop under this Agreement back to Party A under the terms and conditions of this lease, it shall pay a daily penalty twice the daily rent to Party A and make up for the losses that Party A sustains as a result.

Article 19

Party B shall file timely applications with regard to the Workshop under this Agreement according to the Inspection Code of Public Buildings, Rules of Application, Regulation regarding Fire Prevention and Inspection and their standards.

Article 20

The designed carrying capacity of the floors of the Workshop under this Agreement is 500 kilograms per square meter. For the purpose of ensuring the safety of the building structure, Party B shall pay attention to the designed carrying capacity of the floors and consult with structural technicians or architectures and shall not exceed the limit of carrying capacity.

Article 21

All the requests and notifications related to this lease shall be made in Chinese in writing and they shall be hand delivered or mailed to the other party according to the addresses listed under this lease.

Both parties shall notify the other party in writing of any changes in their addresses within 7 days after such changes.

Deliveries according to the addresses listed under this lease shall be deemed as lawful deliveries before such notifications.

Article 22

Party B shall absolutely perform its obligations prescribed under the terms and conditions of this lease and shall seek a guarantor of joint responsibilities on its own. The guarantor shall, after thoroughly reading this lease, sign its name and affix its seal in the column reserved for guarantors. A photocopy of its ID shall also be retained as an attachment of this lease. The photocopy of the ID shall be the front side of the ID. Party B and the guarantor of joint responsibilities shall warrant that the photocopy is exactly the same as the original and is free of any fraud or dishonesty.

The guarantor of joint responsibilities shall unconditionally bear joint responsibilities along with Party B in case Party B breaches any of the terms and conditions of this lease. It shall also agree to waive its right of discussion under Article 745 of the Civil Code.

The guarantor of joint responsibilities is not allowed to relieve itself of its responsibilities without prior approval from Party A if it wants to exit from the guarantee midway.

[illegible seal]

4

Apart from a guarantor of joint responsibilities, Part B can also fulfill obligations by written joint guarantee of banks, joint guarantee insurance policy of insurance company, time deposit certificate with pledge of financial institutions, or other forms approved by Party A, provided that the guarantee commences prior to or on the execution date of the agreement.

For written joint guarantee of banks, joint guarantee insurance policy of insurance company, time deposit certificate with pledges of financial institutions, or other forms approved by Party A, the executor of guarantee liabilities shall hold the same responsibilities and guarantee with the guarantor of joint responsibilities. The due time or expiry date to which the written guarantee is kept in registration in light of related authority or financial laws and regulations shall extend over sixty (60) days more than the lease period hereto.

Article 23

Both parties concluding the lease hereto herby make the presentation that they are duly authorized, and are properly empowered to enter into this lease.

The stamp and seal with which Party B uses for lease execution shall be both consistent with the same that Party B deposits with Party A in the corporate registration procedures.

Article 24

Parties agree that any lawsuit arising out of the lease shall be governed by the laws of Republic of China and the Taiwan Hsin Chu District Court shall have jurisdiction as the court of first instance.

Article 25

The lease is made in duplicate copies and each party shall keep one copy for filing.

[illegible seal]

5

Parties to this lease:

Party A: Science Park Administration

Duly authorized representative: Yan Zongming [illegible seals]

Address: No. 2, Xin’an Road, Hsin Chu, Taiwan

Party B: Optronics International Corp

Duly authorized representative: Magnier

Address: No 46 Park Road 2nd, Hsin Chu Science Park, Taiwan  [illegible seals]

Guarantor of joint responsibilities for Party B: Qiu Mingji [seal]: Qiu Mingji

ID Number of the guarantor of joint responsibilities: Q120811843

January 1, 2009

[illegible seal]

6

EX-10.33

Exhibit 10.33

Workshop Lease of

The Science Park Administration (1 Year)

Parties to this lease:

Landlord:	Science Park Administration (hereinafter referred to as Party A)
Tenant:	Optronics International Corp. (hereinafter referred to as Party B) A0327

Whereas Party B falls into the category of science park enterprises, research institutes, venture incubator centers, branch offices of the administration authorities or commercial or industrial service firms approved by Party A consistent with Article 4 or Article 8 under the Regulation Regarding the Establishment of the Science Park, and Party A and Party B have agreed that Party A will lease a workshop illustrated under Article 1 of this agreement that is located in the Hsin Chu Science Park (hereinafter referred to as the Workshop under this Agreement) for Party B’s use according to the following terms and conditions:

Article 1

The Workshop under this Agreement is located on the 1st Floor No. 46, 2nd Road of Hsin Chu Science Park with an area of 877 square meters.

Article 2

This lease shall remain in force for the period from January 1, 2009 till December 31, 2009. Upon the expiry date, this lease shall be terminated automatically unless Party A and Party B conclude a separate lease under the provisions of Article 4 of this lease. Party B is not allowed to ask for the continuation of the lease or lease from time to time under any circumstances.

Article 3

During the conclusion of this lease and its existence, Party B shall at all times maintain its status as a science park enterprise, a research institute, a venture incubator centre, a branch office of the administration authorities or a commercial or industrial service firms approved by Party A consistent with Article 4 or Article 8 under the Regulation Regarding the Establishment of the Science Park. Where Party B fails to meet the above mentioned eligibilities at the time of the signing of the lease, this lease shall be void and null. Where Party B no longer maintains such eligibilities hereafter and both Parties to this agreement agree to the immediate termination of this lease, Party A is not required to notify such termination of such legal forces.

Article 4

Party A shall have the right to mail out copies of lease renewal for the extension of this lease one month before the expiry of this lease.

Party B shall make it clear whether it wishes to extend the lease or not after the expiry of such lease within 15 days after it receives the lease under the preceding paragraph. In case it wishes to extend the lease, Party B shall affix its seal on a copy of the lease renewal and attach related documents to be delivered to Party A within the time limit prescribed above.

Where Party B breaches any terms and conditions of this lease during the term of this lease, Party A shall have the right to ask Party B to fulfill notary procedures for the renewal of lease by Party B at its own expense.

Article 5

Where Party B intends to terminate this lease before its expiry during the term of this lease, it shall notify Party A in writing 2 months in advance. Party B shall continue to pay its rent during this 2 month notification period, regardless if it vacates the Workshop under this Agreement.

Party A shall have the right to terminate this lease by way of notification to Party B in writing 2 months in advance at any time if it is required by any changes in law or government policies.

[illegible seal]

1

Article 6

The rent for the Workshop under this Agreement shall be NT$110,502 per month. Party B shall, from the date of the commencement of this lease, download the form for next month rent payment from Party A’s website on its own (website: www.sipa.gov.tw), and shall make the payment of its rent to Party A before the 15th day of every month according to the procedures of rent payment established by Party A while calculating and payment the business tax separately. Party B shall pay its utility bills separately while paying the rent.

Party A shall have the right to, consistent with the provisions of related laws and regulations, announced land prices of the location of the Workshop under this Agreement as well as any adjustments in the rent of state-owned land approved by the Executive Yuan, modify the amount of rent mentioned above. Party B shall pay attention to the announced land prices and adjustments in the rent of state-owned land approved by the Executive Yuan on its own.

Any adjustment of rent mentioned above shall enter into force in the second month after such announced land prices or adjustments in the rent of state-owned land prices. Any differences between the rent already paid and actual adjustments before Party A completes its website updates under paragraph 1 shall be collected or refunded.

Article 7

Party B shall pay penalties according to the following provisions if it fails to pay its rent and utility bills on time:

1.It shall pay penalties equal to 2% of the total amount due if its rent and utility bills are less than 1 month overdue;

2.It shall pay penalties equal to 5% of the total amount due if its rent and utility bills are more than 1 month but less than 2 months overdue;

3.It shall pay penalties equal to 10% of the total amount due if its rent and utility bills are more than 2 months but less than 3 months overdue;

4.It shall pay penalties equal to 15% of the total amount due if its rent and utility bills are more than 3 month overdue.

Article 8

Party B shall pay a deposit of NT$238,106 to Party A, which is equivalent to 3 months’ rent at the time of the conclusion of the lease, in order to ensure that it will perform all the terms and conditions under this lease. Party B shall pay this lease deposit on the date of the signing of the lease and Party A shall issue a receipt accordingly. The amount of the lease deposit shall not be modified even if the rent is adjusted or this lease is extended or prolonged.

Upon the termination or expiry of this lease and where Party B returns the Workshop under this Agreement without any unpaid rents, utility bills or any breach of contract, Party A shall return the lease deposit without any interest.

Party B is not allowed to compensate its rent with the deposit.

Article 9

The Workshop under this Agreement rented by Party B shall be limited to its own purposes of research, production or operations and is not allowed to be sub-leased, transferred or in any way assigned to any other party for use. It is further not allowed to make use of it against laws and regulations. However, upon prior consent by Party A in writing, Party B shall have the right to sublease part of the Workshop under this Agreement to other enterprises or agencies approved by Party A.

Article 10

Party B shall excise due care to maintain the Workshop under this Agreement and its facilities and shall be responsible for keeping its surroundings clean.

Party B shall not pile any articles in the attics, stair wells, basement of the building of the Workshop under this Agreement or any other public space or engage in any acts that contravene public safety. In case of any pile, Party B shall hire workers to remove the pile at its expense upon notification of time sensitive removal from Party A. In case the pile is not removed within the time limit, Party A will take steps to remove the pile, the cost of which shall be paid by Party B. In case there is no information as to which party should be responsible for the pile of the above mentioned articles, the removal fees shall be shared by Party B according to the ratio of its leased area to the entire workshop building.

[illegible seal]

2

In case the Workshop under this Agreement or its public facilities are damaged or lost, Party B shall restore them to the original status and compensate the damages or losses except for those caused by Force Majeure.

Where Force Majeure mentioned above or any natural causes are responsible for any damages or losses, Party B shall fill out a Notification for Repair before informing Party A for handling.

Party B shall undertake thorough inspection of the facilities of the Workshop under this Agreement immediately after take over and shall inform Party A of any existing defects, which shall be fixed by Party A. Party B shall have no right to claim any existing defects of the Workshop under this Agreement and ask for reduction of rent 1 month after it takes over the Workshop under this Agreement.

Article 11

Party B shall bear joint responsibilities for restoration to the original state and damages and losses caused to the Workshop under this Agreement and its public facilities as a result of its approval for use by its employees, users and other persons.

Article 12

Party B shall be held responsible for keeping clean the Workshop under this Agreement and shrinkage land, ports and parking lots outside its buildings.

Article 13

Party B is not allowed to conduct any additions or changes to the Workshop under this Agreement without approval, unless otherwise agreed to in writing by Party A beforehand.

Party B shall have the right to install water, electricity, telephone and other renovation facilities inside the Workshop under this Agreement; however, it is not allowed to affect or change the structure of the building or men’s and women’s toilets.

Any renovation conducted by Party B shall be handled in accordance with building codes, fire prevention rules and other laws and regulations.

Article 14

Party A shall have the right to dispatch personal wearing its ID into the Workshop under this Agreement to check how Party B makes use of the Workshop under this Agreement. Party B shall not refuse to grant access and shall provide full assistance.

Article 15

The house tax and property tax of the Workshop under this Agreement shall be paid by Party A.

Party B shall purchase insurance for the [illegible] facilities and other articles placed inside the Workshop under this Agreement according to its own needs and Party A shall be held harmless against any damages thereof.

Article 16

Party A shall have the right to terminate [illegible] the Workshop under this Agreement by notification to Party B and the rent paid shall not be refunded under the following circumstances:

1.Party B is disqualified to do business or provide services within the Science Park or is asked by Party A on the basis of law to move out of the Science Park;

2.Party B fails to make us of the Workshop under this Agreement more than 2 months after the commence date of this lease, or ceases the use or fails to make use according to the terms of this lease for more than 2 months; and Party B fails to rectify the situation within the time limit set forth by Party A in its written notification to that effect;

3.Party B is behind rent payment schedule for more than 2 months;

4.Party B breaches the provisions of Article 9 or Article 14 of this lease;

5.Party B breaches the provisions of Articles 10, 12, 13, 19, 20, 22 (1), 22 (4), 22 (5), or 23 (2);  and Party B fails to rectify the situation within the time limit set forth by Party A in its written notification to that effect.

[illegible seal]

3

Article 17

Upon the expiry or termination of this lease, Party B shall restore the Workshop under this Agreement to its original state and vacate it before handing it over back to Party A.

Party B shall clean up the Workshop under this Agreement at its own expense when it hands it over pursuant to the provisions of the preceding paragraph. In case Party B fails to clean up the Workshop under this Agreement and its public facilities, Party A may clean them up in its stead and the costs shall be paid by deduction from the lease deposit. Where the lease deposit is not sufficient, Party B shall make up for the deficiency.

Anything left over by Party B inside the Workshop under this Agreement after its handover shall be regarded as waste, which shall be subject to the disposal by Party A and Party B shall have no right to claim any compensation. In case Party A needs to dispose of any wastes, the cost shall be deducted from the lease deposit of Party B and Party B shall make up for any deficiency.

Upon the expiry or termination of this lease, Party B shall fulfill the handover procedures for the Workshop under this Agreement back to Party A according to the provisions of this Article. Party B agrees without any pre-conditions that, in case of failure on the part of Party B, Party A shall have the right to open the door or change the lock of the Workshop under this Agreement to gain entry on its own upon its finding that nobody from Party B is still using the Workshop under this Agreement based on 3 consecutive checks within 10 days. Party A shall also have the right to clean up the Workshop under this Agreement, restore it to its original state and treat anything left over in the Workshop under this Agreement as waste.

Party B hereby agrees that it shall pay all the expenses related to Party A’s opening the door, changing the lock, clean-up, restoration to the original state and disposal of waste pursuant to the provisions of paragraphs 2 and 3.

Article 18

Upon the expiry or termination of this lease, where Party B delays the handover of the Workshop under this Agreement back to Party A under the terms and conditions of this lease, it shall pay a daily penalty twice the daily rent to Party A and make up for the losses that Party A sustains as a result.

Article 19

Party B shall file timely applications with regard to the Workshop under this Agreement according to the Inspection Code of Public Buildings, Rules of Application, Regulation regarding Fire Prevention and Inspection and their standards.

Article 20

The designed carrying capacity of the floors of the Workshop under this Agreement is 500 kilograms per square meter. For the purpose of ensuring the safety of the building structure, Party B shall pay attention to the designed carrying capacity of the floors and consult with structural technicians or architectures and shall not exceed the limit of carrying capacity.

Article 21

All the requests and notifications related to this lease shall be made in Chinese in writing and they shall be hand delivered or mailed to the other party according to the addresses listed under this lease.

Both parties shall notify the other party in writing of any changes in their addresses within 7 days after such changes.

Deliveries according to the addresses listed under this lease shall be deemed as lawful deliveries before such notifications.

Article 22

Party B shall absolutely perform its obligations prescribed under the terms and conditions of this lease and shall seek a guarantor of joint responsibilities on its own. The guarantor shall, after thoroughly reading this lease, sign its name and affix its seal in the column reserved for guarantors. A photocopy of its ID shall also be retained as an attachment of this lease. The photocopy of the ID shall be the front side of the ID. Party B and the guarantor of joint responsibilities shall warrant that the photocopy is exactly the same as the original and is free of any fraud or dishonesty.

The guarantor of joint responsibilities shall unconditionally bear joint responsibilities along with Party B in case Party B breaches any of the terms and conditions of this lease. It shall also agree to waive its right of discussion under Article 745 of the Civil Code.

[illegible seal]

4

The guarantor of joint responsibilities is not allowed to relieve itself of its responsibilities without prior approval from Party A if it wants to exit from the guarantee midway.

Apart from a guarantor of joint responsibilities, Part B can also fulfill obligations by written joint guarantee of banks, joint guarantee insurance policy of insurance company, time deposit certificate with pledge of financial institutions, or other forms approved by Party A, provided that the guarantee commences prior to or on the execution date of the agreement.

For written joint guarantee of banks, joint guarantee insurance policy of insurance company, time deposit certificate with pledges of financial institutions, or other forms approved by Party A, the executor of guarantee liabilities shall hold the same responsibilities and guarantee with the guarantor of joint responsibilities. The due time or expiry date to which the written guarantee is kept in registration in light of related authority or financial laws and regulations shall extend over sixty (60) days more than the lease period hereto.

Article 23

Both parties concluding the lease hereto herby make the presentation that they are duly authorized, and are properly empowered to enter into this lease.

The stamp and seal with which Party B uses for lease execution shall be both consistent with the same that Party B deposits with Party A in the corporate registration procedures.

Article 24

Parties agree that any lawsuit arising out of the lease shall be governed by the laws of Republic of China and the Taiwan Hsin Chu District Court shall have jurisdiction as the court of first instance.

Article 25

The lease is made in duplicate copies and each party shall keep one copy for filing.

[illegible seal]

5

Parties to this lease:

Party A: Science Park Administration

Duly authorized representative: Yan Zongming [illegible seals]

Address: No. 2, Xin’an Road, Hsin Chu, Taiwan

Party B: Optronics International Corp

Duly authorized representative: Magnier

Address: No 46 Park Road 2nd, Hsin Chu Science Park, Taiwan [illegible seals]

Guarantor of joint responsibilities for Party B: Qiu Mingji [seal]: Qiu Mingji

ID Number of the guarantor of joint responsibilities: Q120811843

January 1, 2009

[illegible seal]

6

EX-10.34

Exhibit 10.34

Workshop Lease of

The Science Park Administration (1 Year)

Parties to this lease:

Landlord:	Science Park Administration (hereinafter referred to as Party A)
Tenant:	Optronics International Corp. (hereinafter referred to as Party B) A0327

Whereas Party B falls into the category of science park enterprises, research institutes, venture incubator centers, branch offices of the administration authorities or commercial or industrial service firms approved by Party A consistent with Article 4 or Article 8 under the Regulation Regarding the Establishment of the Science Park, and Party A and Party B have agreed that Party A will lease a workshop illustrated under Article 1 of this agreement that is located in the Hsin Chu Science Park (hereinafter referred to as the Workshop under this Agreement) for Party B’s use according to the following terms and conditions:

Article 1

The Workshop under this Agreement is located on the 2nd Floor No. 46, 2nd Road of Hsin Chu Science Park with an area of 879 square meters.

Article 2

This lease shall remain in force for the period from January 1, 2009 till December 31, 2009. Upon the expiry date, this lease shall be terminated automatically unless Party A and Party B conclude a separate lease under the provisions of Article 4 of this lease. Party B is not allowed to ask for the continuation of the lease or lease from time to time under any circumstances.

Article 3

During the conclusion of this lease and its existence, Party B shall at all times maintain its status as a science park enterprise, a research institute, a venture incubator centre, a branch office of the administration authorities or a commercial or industrial service firms approved by Party A consistent with Article 4 or Article 8 under the Regulation Regarding the Establishment of the Science Park. Where Party B fails to meet the above mentioned eligibilities at the time of the signing of the lease, this lease shall be void and null. Where Party B no longer maintains such eligibilities hereafter and both Parties to this agreement agree to the immediate termination of this lease, Party A is not required to notify such termination of such legal forces.

Article 4

Party A shall have the right to mail out copies of lease renewal for the extension of this lease one month before the expiry of this lease.

Party B shall make it clear whether it wishes to extend the lease or not after the expiry of such lease within 15 days after it receives the lease under the preceding paragraph. In case it wishes to extend the lease, Party B shall affix its seal on a copy of the lease renewal and attach related documents to be delivered to Party A within the time limit prescribed above.

Where Party B breaches any terms and conditions of this lease during the term of this lease, Party A shall have the right to ask Party B to fulfill notary procedures for the renewal of lease by Party B at its own expense.

Article 5

Where Party B intends to terminate this lease before its expiry during the term of this lease, it shall notify Party A in writing 2 months in advance. Party B shall continue to pay its rent during this 2 month notification period, regardless if it vacates the Workshop under this Agreement.

Party A shall have the right to terminate this lease by way of notification to Party B in writing 2 months in advance at any time if it is required by any changes in law or government policies.

[illegible seal]

1

Article 6

The rent for the Workshop under this Agreement shall be NT$104,601 per month. Party B shall, from the date of the commencement of this lease, download the form for next month rent payment from Party A’s website on its own (website: www.sipa.gov.tw), and shall make the payment of its rent to Party A before the 15th day of every month according to the procedures of rent payment established by Party A while calculating and payment the business tax separately. Party B shall pay its utility bills separately while paying the rent.

Party A shall have the right to, consistent with the provisions of related laws and regulations, announced land prices of the location of the Workshop under this Agreement as well as any adjustments in the rent of state-owned land approved by the Executive Yuan, modify the amount of rent mentioned above. Party B shall pay attention to the announced land prices and adjustments in the rent of state-owned land approved by the Executive Yuan on its own.

Any adjustment of rent mentioned above shall enter into force in the second month after such announced land prices or adjustments in the rent of state-owned land prices. Any differences between the rent already paid and actual adjustments before Party A completes its website updates under paragraph 1 shall be collected or refunded.

Article 7

Party B shall pay penalties according to the following provisions if it fails to pay its rent and utility bills on time:

1.It shall pay penalties equal to 2% of the total amount due if its rent and utility bills are less than 1 month overdue;

2.It shall pay penalties equal to 5% of the total amount due if its rent and utility bills are more than 1 month but less than 2 months overdue;

3.It shall pay penalties equal to 10% of the total amount due if its rent and utility bills are more than 2 months but less than 3 months overdue;

4.It shall pay penalties equal to 15% of the total amount due if its rent and utility bills are more than 3 month overdue.

Article 8

Party B shall pay a deposit of NT$220,189 to Party A, which is equivalent to 3 months’ rent at the time of the conclusion of the lease, in order to ensure that it will perform all the terms and conditions under this lease. Party B shall pay this lease deposit on the date of the signing of the lease and Party A shall issue a receipt accordingly. The amount of the lease deposit shall not be modified even if the rent is adjusted or this lease is extended or prolonged.

Upon the termination or expiry of this lease and where Party B returns the Workshop under this Agreement without any unpaid rents, utility bills or any breach of contract, Party A shall return the lease deposit without any interest.

Party B is not allowed to compensate its rent with the deposit.

Article 9

The Workshop under this Agreement rented by Party B shall be limited to its own purposes of research, production or operations and is not allowed to be sub-leased, transferred or in any way assigned to any other party for use. It is further not allowed to make use of it against laws and regulations. However, upon prior consent by Party A in writing, Party B shall have the right to sublease part of the Workshop under this Agreement to other enterprises or agencies approved by Party A.

Article 10

Party B shall excise due care to maintain the Workshop under this Agreement and its facilities and shall be responsible for keeping its surroundings clean.

Party B shall not pile any articles in the attics, stair wells, basement of the building of the Workshop under this Agreement or any other public space or engage in any acts that contravene public safety. In case of any pile, Party B shall hire workers to remove the pile at its expense upon notification of time sensitive removal from Party A. In case the pile is not removed within the time limit, Party A will take steps to remove the pile, the cost of which shall be paid by Party B. In case there is no information as to who should be responsible for the pile of the above mentioned articles, the removal fees shall be shared by Party B according to the ratio of its leased area to the entire workshop building.

[illegible seal]

2

In case the Workshop under this Agreement or its public facilities are damaged or lost, Party B shall restore them to the original status and compensate the damages or losses except for those caused by Force Majeure.

Where Force Majeure mentioned above or any natural causes are responsible for any damages or losses, Party B shall fill out a Notification for Repair before informing Party A for handling.

Party B shall undertake thorough inspection of the facilities of the Workshop under this Agreement immediately after take over and shall inform Party A of any existing defects, which shall be fixed by Party A. Party B shall have no right to claim any existing defects of the Workshop under this Agreement and ask for reduction of rent 1 month after it takes over the Workshop under this Agreement.

Article 11

Party B shall bear joint responsibilities for restoration to the original state and damages and losses caused to the Workshop under this Agreement and its public facilities as a result of its approval for use by its employees, users and other persons.

Article 12

Party B shall be held responsible for keeping clean the Workshop under this Agreement and shrinkage land, ports and parking lots outside its buildings.

Article 13

Party B is not allowed to conduct any additions or changes to the Workshop under this Agreement without approval, unless otherwise agreed to in writing by Party A beforehand.

Party B shall have the right to install water, electricity, telephone and other renovation facilities inside the Workshop under this Agreement; however, it is not allowed to affect or change the structure of the building or men’s and women’s toilets.

Any renovation conducted by Party B shall be handled in accordance with building codes, fire prevention rules and other laws and regulations.

Article 14

Party A shall have the right to dispatch personal wearing its ID into the Workshop under this Agreement to check how Party B makes use of the Workshop under this Agreement. Party B shall not refuse to grant access and shall provide full assistance.

Article 15

The house tax and property tax of the Workshop under this Agreement shall be paid by Party A.

Party B shall purchase insurance for the [illegible] facilities and other articles placed inside the Workshop under this Agreement according to its own needs and Party A shall be held harmless against any damages thereof.

Article 16

Party A shall have the right to terminate [illegible] the Workshop under this Agreement by notification to Party B and the rent paid shall not be refunded under the following circumstances:

1.Party B is disqualified to do business or provide services within the Science Park or is asked by Party A on the basis of law to move out of the Science Park;

2.Party B fails to make us of the Workshop under this Agreement more than 2 months after the commence date of this lease, or ceases the use or fails to make use according to the terms of this lease for more than 2 months; and Party B fails to rectify the situation within the time limit set forth by Party A in its written notification to that effect;

3.Party B is behind rent payment schedule for more than 2 months;

4.Party B breaches the provisions of Article 9 or Article 14 of this lease;

5.Party B breaches the provisions of Articles 10, 12, 13, 19, 20, 22 (1), 22 (4), 22 (5), or 23 (2);  and Party B fails to rectify the situation within the time limit set forth by Party A in its written notification to that effect.

[illegible seal]

3

Article 17

Upon the expiry or termination of this lease, Party B shall restore the Workshop under this Agreement to its original state and vacate it before handing it over back to Party A.

Party B shall clean up the Workshop under this Agreement at its own expense when it hands it over pursuant to the provisions of the preceding paragraph. In case Party B fails to clean up the Workshop under this Agreement and its public facilities, Party A may clean them up in its stead and the costs shall be paid by deduction from the lease deposit. Where the lease deposit is not sufficient, Party B shall make up for the deficiency.

Anything left over by Party B inside the Workshop under this Agreement after its handover shall be regarded as waste, which shall be subject to the disposal by Party A and Party B shall have no right to claim any compensation. In case Party A needs to dispose of any wastes, the cost shall be deducted from the lease deposit of Party B and Party B shall make up for any deficiency.

Upon the expiry or termination of this lease, Party B shall fulfill the handover procedures for the Workshop under this Agreement back to Party A according to the provisions of this Article. Party B agrees without any pre-conditions that, in case of failure on the part of Party B, Party A shall have the right to open the door or change the lock of the Workshop under this Agreement to gain entry on its own upon its finding that nobody from Party B is still using the Workshop under this Agreement based on 3 consecutive checks within 10 days. Party A shall also have the right to clean up the Workshop under this Agreement, restore it to its original state and treat anything left over in the Workshop under this Agreement as waste.

Party B hereby agrees that it shall pay all the expenses related to Party A’s opening the door, changing the lock, clean-up, restoration to the original state and disposal of waste pursuant to the provisions of paragraphs 2 and 3.

Article 18

Upon the expiry or termination of this lease, where Party B delays the handover of the Workshop under this Agreement back to Party A under the terms and conditions of this lease, it shall pay a daily penalty twice the daily rent to Party A and make up for the losses that Party A sustains as a result.

Article 19

Party B shall file timely applications with regard to the Workshop under this Agreement according to the Inspection Code of Public Buildings, Rules of Application, Regulation regarding Fire Prevention and Inspection and their standards.

Article 20

The designed carrying capacity of the floors of the Workshop under this Agreement is 500 kilograms per square meter. For the purpose of ensuring the safety of the building structure, Party B shall pay attention to the designed carrying capacity of the floors and consult with structural technicians or architectures and shall not exceed the limit of carrying capacity.

Article 21

All the requests and notifications related to this lease shall be made in Chinese in writing and they shall be hand delivered or mailed to the other party according to the addresses listed under this lease.

Both parties shall notify the other party in writing of any changes in their addresses within 7 days after such changes.

Deliveries according to the addresses listed under this lease shall be deemed as lawful deliveries before such notifications.

Article 22

Party B shall absolutely perform its obligations prescribed under the terms and conditions of this lease and shall seek a guarantor of joint responsibilities on its own. The guarantor shall, after thoroughly reading this lease, sign its name and affix its seal in the column reserved for guarantors. A photocopy of its ID shall also be retained as an attachment of this lease. The photocopy of the ID shall be the front side of the ID. Party B and the guarantor of joint responsibilities shall warrant that the photocopy is exactly the same as the original and is free of any fraud or dishonesty.

The guarantor of joint responsibilities shall unconditionally bear joint responsibilities along with Party B in case Party B breaches any of the terms and conditions of this lease. It shall also agree to waive its right of discussion under Article 745 of the Civil Code.

[illegible seal]

4

The guarantor of joint responsibilities is not allowed to relieve itself of its responsibilities without prior approval from Party A if it wants to exit from the guarantee midway.

Apart from a guarantor of joint responsibilities, Part B can also fulfill obligations by written joint guarantee of banks, joint guarantee insurance policy of insurance company, time deposit certificate with pledge of financial institutions, or other forms approved by Party A, provided that the guarantee commences prior to or on the execution date of the agreement.

For written joint guarantee of banks, joint guarantee insurance policy of insurance company, time deposit certificate with pledges of financial institutions, or other forms approved by Party A, the executor of guarantee liabilities shall hold the same responsibilities and guarantee with the guarantor of joint responsibilities. The due time or expiry date to which the written guarantee is kept in registration in light of related authority or financial laws and regulations shall extend over sixty (60) days more than the lease period hereto.

Article 23

Both parties concluding the lease hereto herby make the presentation that they are duly authorized, and are properly empowered to enter into this lease.

The stamp and seal with which Party B uses for lease execution shall be both consistent with the same that Party B deposits with Party A in the corporate registration procedures.

Article 24

Parties agree that any lawsuit arising out of the lease shall be governed by the laws of Republic of China and the Taiwan Hsin Chu District Court shall have jurisdiction as the court of first instance.

Article 25

The lease is made in duplicate copies and each party shall keep one copy for filing.

[illegible seal]

5

Parties to this lease:

Party A: Science Park Administration

Duly authorized representative: Yan Zongming [illegible seals]

Address: No. 2, Xin’an Road, Hsin Chu, Taiwan

Party B: Optronics International Corp

Duly authorized representative: Magnier

Address: No 46 Park Road 2nd, Hsin Chu Science Park, Taiwan [illegible seals]

Guarantor of joint responsibilities for Party B: Qiu Mingji [seal]: Qiu Mingji

ID Number of the guarantor of joint responsibilities: Q120811843

January 1, 2009

[illegible seal]

6

EX-10.35

Exhibit 10.35

Contract No.:FIBCD0B09-0012

Administration Department of

Fiberxon Chengdu Technology Co., Ltd

Lease Contract on Standard Factory Buildings in

Sichuan Chengdu Export Processing Zone

Contract No.:  [2009] issued by Administration Office of Sichuan Chengdu

Party A (Landlord):	Chengdu Gaoxin Construction Development Co., Ltd.
Party B (Tenant):	Source Photonics (Chengdu) Technology Co., Ltd. (formerly named Fiberxon (Chengdu) Technology Co., Ltd.)
Party C (Administrator):	Administration Office of Sichuan Chengdu Export Processing Zone

In according with the Contract Law of the People’s Republic of China and pertinent rules and regulations, Party A, Party B and Party C have reached an agreement through friendly consultation and shall be bound by the following terms and conditions. Party A hereby appoints Party C to manage its standard factory buildings in Sichuan Chengdu Export Processing Zone (West Side) and lease them to Party B for its use. Party B hereby agrees to rent the standard factory buildings of Party A. Party A and Party C shall exercise their rights and perform their obligations respectively according to the terms and conditions under the Contract on Entrusted Operations of Standard Factory Buildings and Supervised Warehouse signed by them.

1.Name and area of the Leased Workshops

The leased workshops are located at the first floor of No.4 Building in the Standard Factory Building Area of Sichuan Chengdu Export Processing Zone (West Side) with an area of 3825 square meters. In case of any discrepancy arising between the agreed area and the actual area, the latter shall prevail.

2.Lease Term

The term of the lease shall run 5 years from April 1, 2009 till December 31, 2013.

3.Renewal of This Contract

Party B shall notify Party C in writing 60 days prior to the expiration of this Contract in the event that it intends to extend the lease. Under the same terms Party B shall have the priority to lease the leased workshops. In this case, a new lease shall be concluded between the parties. The rent for the extended lease shall be determined based on the price level under the same conditions of the current market. In the event that both parties can’t reach an agreement on Party B’s renewing this lease, this Contract shall be terminated automatically on the expiration of the lease term.

In case Party B has already been using the leased workshops before renewing the lease contract, the lease term shall be calculated from the date when the leased workshops is actually put into use by Party B.

4.Purpose of the Leased Workshops

The leased workshops shall be limited to the purposes of manufacturing, processing, dealing with related business and warehousing which Party B has been approved to undertake.

5.Rent, Property Management Fee and Payment

The leased workshops shall be limited to the purposes of manufacturing, processing, dealing with related business and warehousing which Party B has been approved to undertake.

5.1Both rent and property management fee shall be calculated based on the actually leased construction area.

Monthly rent shall be 0 RMB/m² and monthly property management fee shall be 1.5 RMB/ m² from April 1, 2009 to June 31, 2009 so that Party B shall have time to move, renovate the workshops, set up and debug facilities.

Monthly rent shall be 10 RMB/m² and monthly property management fee shall be 1.5 RMB/ m² from July 1, 2009 to December 31, 2010 with the monthly fees totaled 11.50 RMB/m².

Monthly rent shall be 15.00 RMB/m² and monthly property management fee shall be 1.5 RMB/ m² from January 1, 2011 to December 31, 2013 with the monthly fees totaled 16.50 RMB/m².

5.2The rent and property management fee shall be paid on a quarterly basis after the signature of this Contract, i.e. Party B shall pay rent and property management fee for the current lease quarter within the first 5 working days of the current quarter.

5.3Every time after the rent and property management fee (either in cash or by check and check amount shall have been deposited into the bank account) are paid. Party C shall transfer invoices for house rent and property management fee issued by Party A to Party B within 15 working days after Party A’s receipt of the payment.

5.4Party B shall pay a lease guarantee of RMB 50,000 (fifty thousand RMB in total) to Party A within 5 days from the date of signing this Contract. The guarantee shall be refunded by Party A to Party B in a lump sum upon the expiration date of this lease provided that Party C confirms, upon inspection and acceptance, that Party B has not damaged the building structure, changed the outside façade images and the interior layout of the factory buildings during the lease term.

Bank Account Number designated by Party A and Party C for Party B’s payment of rent, property management fee and lease guarantee:

51001406137050111277

Account Name: Chengdu Gaoxin Construction Development Co., Ltd.

Issuing Bank: Gaoxin Branch of China Construction Bank

5.5Within 5 working days after Party B’s moving into the workshops, Party B shall pay water and electricity deposit of 40,000 RMB (forty thousand RMB in total). The deposit shall be refunded by Party C to Party B in a lump sum on the expiration date of this lease provided that Party C verifies and confirms that Party A has not owed any water and electricity fees and overdue fine during the lease term.

Bank Account Number designated by Party A and Party C to Party B for water and electricity deposit payments: 511610015018001658252

Name of Account: Financial Centralized Receipt and Payment Center of Chengdu Gaoxin District (Export Processing Zone)

Issuing Bank: Gaoxin Branch of Communication Bank of China

6.Delivery of the Lease Workshops

Within 5 working days from the date of Party B’s payment of deposit, Party C shall deliver the leased workshops (status quo) to Party B and ensure that the workshops are available for Party B to renovate. Party C shall provide delivery list for Party B to verify the attached facilities of the lease premises one by one and deal with handing over procedures.

7.Rights and Obligations of the Three Parties

7.1Party A and Party C shall undertake confidentiality obligations with respect to Party B’s commercial secrets. They are not allowed to disclose the foresaid information to any third party without prior written consent of Party B.

7.2Party B shall use the lease workshops for its own business and shall not sublease it to any other third party without prior consent of Party A and Party C.

7.3Party B is allowed to decorate the leased workshops only after it has sent application and decoration program to Party C and obtained relevant consent.

7.4Before the decoration team enter into the lease workshops, they shall pay a deposit of RMB 50,000 (fifty thousand RMB) to Party C, which shall be refunded by Party C in a lump sum provided that Party C has carried out on-site inspection and confirmed that Party B hasn’t damaged the buildings’ structure and the outside façade images of the leased workshops during the construction period. Party B shall pile up the waste created during the decoration at specified locations designated by Party C. It shall clean up and remove all the waste after completing the decoration work, or entrust Party C to clean up and remove all the waste, the cost of which shall be paid by Party B.

7.5Upon the expiration date when Party B returns the leased workshops to Party C, Party B shall restore the leased workshops to their original state upon Party C’s demand. In case of any damage arising from abnormal use of the leased premises, Party B shall restore them in accordance with relevant standards.

7.6Party B shall not set up billboards and other promotional plates on the leased workshops or establish other facilities in the circumference of the leased workshops before it has sent the application to Party C and obtained consent.

7.7Party B shall not pile up the waste arising from industrial production, industrial and domestic wastes outside the houses. All the motor vehicles and non-motorized vehicles shall be parked at the designated places.

7.8Party B shall carry out its production activities in the processing zone in accordance with relevant demands of national environmental protection and fire control and also obtain approval and consent of relevant functional departments.

7.9Party B shall not set up mortgages, guarantees and other security interests for any third party on the leased workshops during the lease term.

8. Maintenance and Management of the Leased workshops

During the lease term, Party C shall be responsible for the maintenance and management of the main structure of the leased workshops, roofs, doors and windows, original facilities through combination of management and use. In case of any malfunction, Party B shall notify Party C for maintenance. Party C shall guarantee the maintenance personnel to be in place within 12 hours upon receiving the notification with the expenses incurred borne by Party A and Party C through consultation. Where damage caused by improper use or deliberate destruction by Party B, Party B shall be responsible for the maintenance and bear the costs incurred.

Party C’s maintenance scope shall not cover the exchange of vulnerable parts and consumables.

9.Property Management

9.1Service Scope of Party C’s Property Management

(1)Daily management of pipeline’s water supply and external sewage disposal of the leased workshops;

(2)Operation management and maintenance of shared distribution facilities in the workshop area;

(3)Security work for the park and security management outside the leased workshops, internal security of Party B shall be taken care of by Party B itself;

(4)Cleaning and hygiene, greening work for public places;

(5)Disposal and treatment of household waste excluding industrial wastes and litters and construction wastes;

(6)Other special services designated by Party B and charged by the agreed fee.

9.2Party B shall verify the written notice sent from Party C each month and pay Party C for utility bills for the water and electricity actually consumed in a timely manner. In the event that Party B shall sign contracts on supplies of water, electricity and coal gas directly with Tap Water Company, Electric Power-Supply Bureau and Gas Company, it shall settle the fees directly with relevant contracts under pertinent contracts.

10Electricity Power Supply

10.1Party C shall supply temporary electricity upon Party B’s demands within 10 working days after the entry into force of this Contract to ensure Party B will carry out its business normally.

10.2After the signature of this Contract, Party B shall provide System Diagram of Low-voltage Outgoing Line Side of Transformer and Party C shall assist electric power-supply department to set up a set of electric-power instruments with a power supply of 800KVA to Party B in an effort to ensure normal supply of electric power.  Party A shall bear the expenses arising from purchasing the equipment and  the installation activity and Party B shall burden the costs of installing line outgoing from low-voltage side of the transformer and the electric-power instrument as well as fees arising from the increase and decrease of electricity capacity in the future.

10.3After the start-up of the electric-power instruments, Party B shall be responsible for the daily management of using the transformer as well as relevant daily maintenance. Party B shall not increase or reduce outdoor electric-power instruments without prior consent of Party C.

11Responsibility of Breach of Contract

11.1Where one party commits any breaches of this Contract, the other party shall have the right to terminate the contract and ask for indemnity.

11.2Party A and Party C shall pay a daily fine of 1000 RMB in the event that they fail to deliver the leased workshops under this Contract.

11.3Party A, Party B and Party C shall not terminate this Contract in advance with the exception of any event of Force Majeure such as severe natural disasters and social events.

Where Party A and Party C intend to terminate the contract by any reason except the foresaid ones, Party A shall compensate Party B with the rent and property management fee for three months; In the event Party B try to dissolve this Contract for any reason except the abovementioned ones, it shall make a compensation to Party A with the amount as much as rent and property management fee for three months and expenses arising from installing the transformer. Where Party B fails to comply with property management regulations and other management systems of Party C and it’s a serious case or having bad influence on the management over the whole area, Party C shall be entitled to terminate this Contract in advance without bearing any obligations of paying any expenses to Party B.

12Complement and Installation and Use

During the course of performance of this Contract, Party B shall not install any auxiliary equipment and facilities or change the inside layout and structure of the premises without prior consent of Party C after submitting relevant schemes to Party C for approval ahead of schedule.

13.Other Terms & Conditions

Matters not covered under this Contract shall be settled in a supplementary agreement between the three parties, which shall have the equal legal force.

14.Contract Text

This contract is totaled eight pages and made in eight copies and Party A shall hold four, Party B and Party C shall hold two respectively, which shall have the same legal force.

15.Legal Responsibilities

This contract shall be governed by the laws of the People’s Republic of China.

Party A, Party B and Party C hereby promise to keep the contents of this Contract confidential. The listed terms and conditions under this Contract shall be limited to the rent matters concerning Source Photonics (Chengdu) Technology Co., Ltd., and shall not be compared with those regarding rent issues of other standard factory buildings in the Processing Zone. In case of any dispute, it shall be submitted to Chengdu Arbitration Commission for arbitration under agreement.

Party A (stamped and sealed): Chengdu Gaoxin Construction Development Co., Ltd.

Legal Representative (Signature):

Time:

Party B (stamped and sealed): Source Photonics (Chengdu) Technology Co., Ltd

Legal Representative (Signature):

Time:

Party C (stamped and sealed): Administration Office of Sichuan Chengdu Export Processing Zone

Legal Representative (Signature):

Time:

EX-10.36

Exhibit 10.36

Land Lease of

The Science Park Administration (1 Year)

Parties to this lease:

Landlord:Science Park Administration (hereinafter referred to as Party A)

Tenant:Optronics International Corp. (hereinafter referred to as Party B) A0327

Whereas Party B falls into the category of science park enterprises, research institutes, venture incubator centres, branch offices of the administration authorities or commercial or industrial service firms approved by Party A consistent with Article 4 or Article 8 under the Regulation Regarding the Establishment of the Science Park, and Party A and Party B hereby have agreed that Party A will lease land illustrated under Article 1 of this agreement that are located in the Hsin Chu Science Park (hereinafter referred to as the land under this Agreement) for Party B’s use according to the following terms and conditions:

Article 1Indication & Rent under the Agreement

Land Illustration
City	Town	Location	Land No	Area (sqm)	Rent Per Unit NT$ (by sqm/month)	Due Rent Per month (NT$)	Remark
Hsin Chu		Section of Science Park Administration	117 inside	363	52.92	19,210	Only for the Use of Nearby Facilities of Product Process
	Total			363	52.92	19,210

Article 2

This lease term shall run from January 1, 2009 till December 31, 2009.

Upon the expiry date, this lease shall be terminated automatically unless Party A and Party B conclude another lease. Party B is not allowed to ask for the continuation of the lease or lease from time to time under any circumstances.

Article 3

The land under the agreement is solely used for nearby facilities of product process.

Article 4

Party B shall remain as a science park enterprise, a research institute, a venture incubator centre, a branch office of the administration authorities or a commercial or industrial service firms approved by Party A consistent with Article 4 or Article 8 under the Regulation Regarding the Establishment of the Science Park. Where Party B fails to meet the above mentioned eligibilities at the time of the signing of the lease, this lease shall be void and null. Where Party B no longer maintains such eligibilities hereafter and both Parties to this agreement agree to the immediate termination of this lease, Party A is not required to notify such termination of such legal forces.

Article 5

Except otherwise stated in Article 18, Party B shall not either transfer or sublease part or all of leased land hereof to others, or change the use or provide the use in violation of regulations.

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Article 6

As of the day when the lease term begins, Party B shall pay a monthly rental amount equal to that set out in the first [illegible] above of the lease, and shall pay rent to Party A in rent payment procedures determined by Party A. Sales taxes shall be paid separately.

Party B, with the consent of Party A, uses land prior to the lease execution. In this case, Party B’s rent shall be calculated from the day when Party B put the land into use.

Article 7

Party A shall adjust land rent hereof at any time in conformity of provisions of relevant laws and regulations.

For the declared prices of the land hereof, the state land rent rate approved by the ROC Executive Yuan and other reasons, the land rent hereof shall be adjusted automatically in proportion starting from the next month when modification is fixed. Paid rents still require additional payment or refunding during the period.

Article 8

Party B shall pay punitive damages according to the following provisions if it fails to pay its rent and utility bills on time:

1.It shall pay damages equal to 2% of the total amount due if its rent and utility bills are less than 1 month overdue;

2.It shall pay damage equal to 5% of the total amount due if its rent and utility bills are more than 1 month but less than 2 months overdue;

3.It shall pay damages equal to 10% of the total amount due if its rent and utility bills are more than 2 months but less than 3 months overdue;

4.It shall pay damages equal to 15% of the total amount due if its rent and utility bills are more than 3 month overdue.

Article 9

Before the construction of buildings, Party B, on the basis of business nature and applied chemical raw materials, shall take necessary measures against the bad effects that occur (e.g., stingy smell, noise, radiation, contamination, glares, and strong vibration, etc), and shall submit to Party A detected pollution data of leased land soil, underground water. This rule shall also apply when Party B closes or suspends its business operations. Party B shall be held accountable for keeping the environment clean in the premises hereof, subject to Waste Disposal Act, Air Pollution Control Law, Water Pollution Control law, the Soil and Groundwater Pollution Remediation Act, and other regulations and rules concerning pollution prevention.

Article 10

Party B shall present an application form to Party A in case it wishes to draw underground water. Party A shall check and pass it to Water Conservation authorities subject to the Water Conservation Act.

Article 11

Party B shall complete construction at once only, based on the project plan proposed when it applies to Party A for land allocation. However, this rule may not apply if there are legitimate reasons which are also acknowledged by Party A in advance.

Where Party A has recognized the construction plan, and Party B finishes the building construction stage by phases, the first-phase construction lot shall be located by Party A.

Article 12

Party B shall apply for construction licence within three (3) months after the date of execution, subject to the Construction Law or relevant laws and based on the project plan proposed at the time of application for land allocation. It shall complete construction as scheduled in the project plan proposed. Where Party B fails to complete construction on the date originally scheduled for due causes, Party B shall apply to Party A for an extension no greater than six (6) months.

Buildings constructed by Party B on the land hereof shall be in conformity to Rules on Park Land Use Zoning Control.

Article 13

When constructing on the land, in light of green belts and sidewalks, buildings on the land adjoining roads over 30m in width shall be more than 10m far away from the sidewalks; buildings on the land adjoining roads over 20m wide shall be more than 8m far away from the sidewalks; building on the land adjoining roads over 10m shall be more than 6m far away from the sidewalks; building on the land which adjoins no road from back and from the side shall be more than 4m away from the site boundary.

Article 14

Buildings constructed on the land hereof by Party B shall use fireproof materials and structures, and shall be equipped with separate air defence shelters as specified in Building Technical Regulations. The direction of access into the building site shall be decided by Party A. Before the excavation of the building site, Party B shall cover trace in advance the underground pipeline diagram from Party A (construction team), and shall check to attach the document when applying for start-up.

Article 15

In case that buildings constructed on the land hereof require excavation on the park roads, [illegible] drain (feed) pipelines or other public facilities, Party B shall apply to Party A for prior approval and pay restoration deposit. After completion, Party B shall be responsible for the restoration. Otherwise, Party A shall confiscate the paid deposit.

Where Party B modifies or adds under- or above ground public facilities, it shall apply to Party A for prior approval. Since Party A shall plan and cope with the entire project, the expenses generated shall be paid by Party B.

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Article 16

Party B shall excise due care and shall maintain over- or under- ground public facilities on the land. Where any damages occur, Party B shall be held liable for restoration and compensations.

Article 17

Buildings constructed by Party B on the land shall be limited to requirements of its own enterprise, and shall be used for approved purposes. Buildings constructed for Party B’s own use shall not be sub-leased to others or used for other purposes, unless otherwise stated in Article 18.

Article 18

Party B shall report to Party A for prior approval when Party B tends to sub-lease, sub-lend or surrender buildings constructed on land to others. Transference objects shall be limited to Park enterprises established by approval.

In case of sub-lease or transfer as set out in the preceding paragraph, the rent or transfer prices shall be approved by Party B. Further, Party A is entitled to a pre-emption under equal conditions as set out in Article 104 of the Land Law.

Article 19

Under any of the following circumstances, Party A shall have the right to notify Party B of the termination of the lease without returning the paid rent:

1.Party B is disqualified to do business or provide services in the Science Park or is evicted from the Science Park by Party A as regulated in laws or acts;

2.Party B violates the provisions of Articles 3(1) 9,11,13,14,15,16,22(1)(4)(5) or article23(2); and Party B fails to rectify the situation within the time limit set forth by Party A in its written notification to that effect.

3.Party B fails to honour its payment in due time, and exceeds the amount or due time as set out in Land Law or Regulations regarding Administration of Science Industrial Park.

4.Party B fails to apply for construction license within three (3) months of execution date of the lease and still fails to file an application after being notified by Party A with a deadline; or in case of disqualified application, Party B fails to rectify the application within limited period.

5.Party B fails to complete construction as scheduled as per provisions of Article 12.

6.Party B violates the provisions of Article 17 or 18 of the lease.

Article 20

In case that the lease is recognized as being null and void or is terminated, and that construction on the land is ongoing or the land form has been changed, Party B shall be liable for their restoration. But when the construction or land form transformation does not hinder the use of others, Party B is exempt from liability with the consent of Party A.

At lease expiration or within six (6) months of the termination, Party B shall transfer the buildings on the land as set out in Article 18 under the lease. Prior to the transfer, Party B shall pay monthly damages equal to the agreed original rent.

Party B shall be responsible for damages of Party A caused by the failure of transfer in due time.

Where Party A is able to purchase buildings on the land based on the Regulation Regarding the Science Park Workshop and Relevant Buildings, Party B shall not refuse.

Article 21

All the requests and notifications related to this lease shall be made in Chinese in writing and they shall be delivered in person or mailed to the other party according to the addresses of both parties listed under this lease.

Either party shall notify the other party in writing of any changes in their addresses within 7 days of such changes.

Deliveries according to the addresses listed under this lease shall be deemed as lawful deliveries before such notifications.

Article 22

Party B shall absolutely perform its obligations prescribed under the terms and conditions of this lease and shall seek a guarantor of joint responsibilities (Party C) on its own. The guarantor shall, after thoroughly reading this lease, sign its name and affix its seal in the column reserved for guarantors. A photocopy of its ID shall also be retained as an attachment of this lease. The photocopy of the ID shall be the front side of the ID. Party B and the guarantor of joint responsibilities shall warrant that the photocopy is exactly the same as the original and is free of any fraud or dishonesty.

The guarantor of joint responsibilities shall unconditionally bear joint responsibilities along with Party B in case Party B breaches any of the terms and conditions of this lease. Party C shall also agree to waive its right of discussion under Article 745 of the Civil Code.

The guarantor of joint responsibilities is not allowed to be exempt from its liabilities without prior approval from Party A if Party C wants to exit from the guarantee midway.

Apart from a guarantee, Part B can also fulfil obligations by written joint guarantee of banks, joint guarantee insurance policy of insurance company, time deposit certificate with pledge of financial institutions, or other forms approved by Party A, provided that the guarantee commences prior to or on the execution date of the agreement.

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For written joint guarantee of banks, joint guarantee insurance policy of insurance company, time deposit certificate with pledges of financial institutions, or other forms approved by Party A, the executor of guarantee liabilities shall hold the same responsibilities and guarantee with the guarantor of joint responsibilities. The due time or expiry date to which the written guarantee is kept in registration in light of related authority or financial laws and regulations shall extend over sixty (60) days more than the lease period hereto.

Article 23

Both parties concluding the lease hereto herby make the presentation that they are duly authorized, and are properly empowered to enter into this lease.

The stamp and seal with which Party B uses for lease execution shall be both consistent with the same that Party B deposits with Party A in the corporate registration procedures.

Article 24

Parties agree that any lawsuit arising out of the lease shall be governed by the laws of Republic of China and the Taiwan Hsin Chu District Court shall have jurisdiction as the court of first instance.

Article 25

The lease is made in duplicate copies and each party shall keep one copy for filing.

[illegible seal]

Parties to this lease:

Party A: Science Park Administration

Duly authorized representative: Yan Zongming [illegible seals]

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Address: No. 2, Xin’an Road, Hsin Chu, Taiwan

Party B: Optronics International Corp

Duly authorized representative: Magnier

Address: No 46 Park Road 2nd, Hsin Chu Science Park, Taiwan [illegible seals]

Guarantor of joint responsibilities for Party B: Qiu Mingji [seal]: Qiu Mingji

ID Number of the guarantor of joint responsibilities: Q120811843

January 1, 2009

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EX-10.37

Exhibit 10.37

Tenancy Agreement

Classification:

Agreement No.:

Landlord: Midelan Corporation

Tenant: Optronics International Corporation

Parking Space Number:

Room Number: Rooms 8 and 12 of Floor 8, Rooms 1, 2, 3, 5, 6, 7, 8, 9, 10, 11, 12, 13, 15, 16 and 17 of

Floor 9 and Rooms 1, 3 and 5 of Floor 10

Rent Period: From January 1, 2009 to December 31, 2009

Tenancy Agreement

Landlord: Midelan Corporation (seal) (hereinafter referred to as “Party A”)

Legal representative: Wang Qing Ting (seal)

Tenant: Optronics International Corporation (seal) (hereinafter referred to as “Party B”)

Legal representative: Dr. Near (seal)

In faith whereof, it is agreed between the parties hereto as follows:

Article 1Subject matter of rent

Party A shall lease Rooms 8 and 12 of Floor 8, Rooms 1, 2, 3, 5, 6, 7, 8, 9, 10, 11, 12, 13, 15, 16 and 17 of Floor 9 and Rooms 1, 3 and 5 of Floor 10, twenty rooms in total (hereinafter referred to the “Premises”), at No. 81 Shueili Road, Hsinchu City on an as is basis to Party B to be used as office. The total area of the Premises is 1,677.39 Ping including public space. The location of the said premises is shown in Attached Drawing.

Article 2Rent period

The rent period is from January 1, 2009 to December 31, 2009. This agreement shall be terminated automatically upon the expiration date hereof and shall not be extended without written consent of Party A.

Article 3Rent

1.The monthly rent shall be One Million Two Hundred Thousand New Taiwan Dollars (including tax).

2.Party B shall pay the rent for the current month to Party A by check dated the first day of each month. In case Party B becomes delinquent in the payment of any rent, Party B shall pay to Party A interest on the monthly rent at the rate of 1% each day plus a penalty for delay. In case any month rent is ten days overdue, Party A is entitled to terminate this agreement and immediately stop water and power supply to the Premises; Party B should not raise any objection to such action and should vacate the Premises immediately and pay off all the rent, penalty and other charges due or payable.

Article 4Security deposit

1.The security deposit shall be Three Million Three Hundred Eighteen Thousand New Taiwan Dollars, which shall be paid by Party B to Party A on the execution date hereof and returned to Party B without interest after deducting all the charges due and payable by Party B hereunder on the expiration date hereof and after Party B has vacated the Premises, restored the Premises to their former state and changed its registered address.

2.Party B should not request to use the security deposit to offset its rent during the period of this agreement or create any encumbrance on the receipt of the security deposit.

Article 5Public space and facilities

1.Public space and facilities include corridors, elevators, stair hall, toilets, tea room, electric room, air conditioning machine room and etc. Party B is entitled to pass through and use such facilities, but should not stack any articles upon or add any equipment to such facilities without authorization or do any thing that will affect the view or common use of such facilities.

2.Party B shall be held responsible for any damages to public space and facilities due to Party B’s improper use of public space and facilities.

3.Party B is responsible for applying to the Telecommunications Bureau for connecting line from Party A’s pre-laid pipeline and outlets to its telephones within the Premises at its own expenses.

4.Party B shall abide by the Regulations of Xujia Economic & Trade Park in its use of the Premises. Party A is entitled to terminate this agreement in case Party B breaches the foregoing provision and fails to correct such breach after being notified or advised by Party A.

Article 6Water and electricity charges, tax and management fee

1.Party B shall pay water, electricity, telephone and utility charges, business tax and other expenses arising from its use of the Premises during the period of this agreement.

2.Party A shall pay house tax and rental income tax.

3.Party B shall pay management fee to the Building Management Committee. The management fee shall be calculated from the date of fitting-out.

4.The management fund shall be One Hundred New Taiwan Dollars per Ping. Party B shall pay a management fund of One Hundred Sixty Seven Thousand Seven Hundred Thirty Nine New Taiwan Dollars to the Building Management Committee via Party A at the execution hereof as working capital for building management. The said management fund will be returned to Party B without interest after Party B vacates the Premises upon the expiration of this agreement.

Article 7Decoration and fitting-out

1.In case Party B wants to decorate or fit out the Premises, it shall get prior written consent of Party A and bear all expenses arising therefrom. Upon the expiration of this agreement, Party B shall restore the Premises to their former state without any damages to the Premises. In case Party B fails to restore the Premises to their former state within ten days after the expiration of this agreement, Party B agrees that Party A is entitled to restore the Premises to their former state and Party B shall bear the expenses of demolishment, waste disposal, clearing and restoration arising therefrom and pay rent for the days delayed.

2.Definition of former state of the Premises: ceiling: as shown in the Attached Drawing of Layout of Ceiling Light; wall: original materials of fireproof partition wall; floor: polished cement floor.

3.Party B shall ensure that its fitting-out materials comply with the provisions of fire control laws and regulations and obtain fireproof, [illegible], heat resistance and other relevant certificates and nameplate of such fitting-out materials issued by competent authorities from the fitting-out contractor for future reference. Party B shall be held responsible for and hold Party A harmless against any non-compliance of the fitting-out works of Party B found by any competent authorities or any damages and losses arising therefrom.

Article 8Restrictions on the use of the Premises

In its use of the Premises, Party B shall exercise due care of a good administrator and shall not do the following businesses or acts:

1.Not to use the Premises as residence or kitchen or do any thing which will affect the hygiene, security, public order or tranquility.

2.Not to store any prohibited articles or do any illegal business in the Premises.

3.Not to use excessive electric appliances, install high-voltage electric apparatus or neon tubes, or alter originally designed electric equipment and line without authorization.

4.Not to conduct any business of, test or store hazardous goods in the Premises or take any prohibited articles into the Premises.

5.Party B shall not post or hang any advertisement or signboard onto the exterior wall or inner or outer glasses of the Premises, in order to maintain the overall beauty of the building.

6.Unless otherwise agreed by Party A, Party B should not underlet, sublet, transfer, assign or otherwise offer to use the Premises or any part or parts thereof to any third party, except to its subsidiary or affiliate.

Article 9 Compensation

Party B shall keep intact the Premises and public facilities and repair or make compensation for the damages to the Premises or any public facilities caused by Party B or any of Party B’s affiliates intentionally or due to negligence.

Article 10Return of the Premises

1.Upon the expiration or termination of this agreement, Party B shall vacate and restore the Premises to their former state and then return the Premises to Party A after being checked and accepted by Party A. Party B shall not claim any removal expense, fitting-out expense or any other expenses against Party A.

2.After the expiration or termination of this agreement, Party B shall change its registered address.

3.In case Party B’s vehicles still occupy the parking space provided to it hereunder after the expiration or termination of this agreement, Party A is entitled to tow such vehicles out of the parking lot. The expenses arising therefrom shall be deducted from the security deposit and Party A shall not be responsible for any damages or loss of such vehicles during the period that such vehicles are towed out of the parking lot.

Article 11Early termination

In case any party wishes to terminate this agreement prior to the expiration date of this agreement, Party B shall notify Party A in writing two months before the date that this agreement is about to be terminated and unconditionally allow Party A to deduct half of the security deposit as withdrawal penalty. Party B still needs to pay all the charges due and carry out its obligations hereunder before the date that it vacates the Premises. After Party B returns the Premises in good conditions to Party A, Party A shall pay back the monthly rent to Party B after deducting all the charges payable by Party B.

Article 12 Breach of this agreement

1.In case Party B breaches any provisions of this agreement, Party A shall have right to terminate this agreement immediately and confiscate the security deposit; Party B shall return the Premises to Party A according to the provisions of Article 10.

2.In case Party B fails to return the Premises after the expiration or termination of this agreement, Party A is entitled to impose a punitive penalty on Party A at the amount of three times of original rent from the date of the expiration or termination of this agreement to the date that Party B completely vacates the Premises.

Article 13Adjustment of rent

Party B agrees that during the period of this agreement, Party A is entitled to adjust the monthly rent by the end of each year, provided that the range of such adjustment shall not exceed 10% of the previous monthly rent.

Article 14Advance notice of rent period

1.Party B shall notify Party A two months before the expiration date of this agreement whether it wishes to extend this agreement. In case Party B wishes to and Party A also agrees to extend this agreement, both parties shall enter into a new tenancy agreement 15 days before the expiration date of this agreement.

2.Any notice given under this agreement shall be in writing and delivered to the address provided herein.

Article 15Both parties shall strictly adhere to this agreement during the rent period. All disputes arising in connection with this agreement shall be settled amicably through negotiations. The parties elect the Hsinchu Local Court as the court of first instance to decide on any question arising here from.

Article 16This agreement is made in two originals, one copy to be held the parties hereto respectively..

Remark: In case Party A intends to lease the Premises to any third party upon the expiration of this agreement, Party B shall have the priority to lease the Premises under same conditions provided that the provisions of Article 14 have been satisfied.

Party A (Landlord): Midelan Corporation (seal)

Legal representative: Wang Qing Ting (seal)

Unified code: [illegible]

Address: 2 Floor 10, No. 81 Shueili Road, Hsinchu City

Telephone: (03) 5721305

Party B (Tenant): Optronics International Corporation (seal)

Legal representative: Dr. Near (seal)

Unified code: 84149792

Address: No. 81 Second Park Road, Hsinchu Science Park

Telephone: (03) 5169222

January 1, 2009

Attached Drawing: Layout of Lights

[see source for the drawing]

List of Indoor Facilities

Floor: 8F, Room: 8, 12

Note: The amount and position of facilities shall be checked according to this list when the client leases the Premises and terminates lease of the Premises.

1.Items not to be altered:

a)Exterior wall and indoor aluminum windows;

b)Walls and floor of the lobby; and

c)Indoor security control system and intercom.

2.In case of any alteration to any other facilities, the client shall submit the drawing to the management office for review and put down related issues in meeting minutes (which effect shall be equal to the tenancy agreement).

3.Upon the expiration or termination of the tenancy agreement, the client shall restore the following equipment to their former position subject to the finished plan of this project (including internal pipelines of water, electricity, fire control and communications).

4.A water meter is installed at each of Rooms 5, 7, 10 and 12 of each floor.

5.Other regulations on construction shall be subject to the Detailed Rules and Regulations on Fitting-out Works at Xujia Economic & Trade Park.

Five facility points are delivered this time (four pages).

Received by:

Xujia Economic & Trade Park

One. Fitting-out facilities

No.	Description of facility	Specification	Brand	Remark
1	Aluminum & light steel joist ceilings	9*603*603mm (cherry blossom pattern)	Jiabao base gypsum board (GB-L)	If the indoor partition wall cuts the ceiling, the ceiling should be leveled or re-constructed when the tenancy is terminated.
2	Wall paint	Cement paint	Hong 450	One undercoat and one top coat
3	Aluminum windows	BUW100# (green powder coating)	Yali Curtain	Refer to the contract of this project XGH No. 019 for detailed specifications.
4	Aluminum window glass	5mm green half-reflecting tempered glass	Taiwan Glass	Gray Dow Corning silicone
5	Light steel joist gypsum board	4-point Grade A gypsum board	Global gypsum board	Galvanized framework, 7.5cm wide, space 45cm
		R8 sound insulating glass wool	/	Corridor partition wall
6	Stainless steel door	223*180 (cm) 180º double door (top and bottom bolt)	Refer to the remark for details	Stainless steel door: material: stainless steel plate #034, door frame 1.5mm (thickness of steel plate), door leaf 1.5mm (thickness of steel plate), 5mm tempered transparent glass embedded (refer to XGH No. 031 contract for related [illegible])
		Two top hinges	R510
		One set of horizontal lock	WALES 406-26D
		One set of reversible handle (H Type- Copper head)	/

Five facility points are delivered this time (four pages).

Received by:

Xujia Economic & Trade Park

Two. Electrical and water supply & drainage facilities

No.	Description of facility		Specification	Brand	Unit	Quantity	Remark
		NFB (no-fuse breaker)	125 A/3p	Taian	PC	1	Including one set of command control lights for air conditioner
1	Master switch box
	(380V/ 220V)	NFB (no-fuse breaker)	75 A/3p	Taian	PC	1
		NFB (no-fuse breaker)	20 A/3p	Taian	PC	1
		NFB (no-fuse breaker)	20 A/1p	Taian	PC	11
2	Master switch box (190V/ 110V)	NFB (no-fuse breaker) NFB (no-fuse breaker)	40 A/3p 20 A/1p	Taian Taian	PC PC	1 8
3	Transformer		380V converted into 11V (10KVA)	Yudong	PC	1
4	Light switch		Single break switch	International	PC	6
5	Outlet		Duplex receptacle (grounded)	International	PC	22
5	Light		2 chi * 4 chi (220V)	Xuguang	PC	24
6	Temperature control switch for air conditioner		Temperature control three-speed (13*8.5*3.5cm)	Xintai	PC	6
7	Cooling fan (CF)		800 minutes /cubic feet (individual 220V 60HZ)	Tianji SR	Unit	2	Hidden high static pressure (including SUS defrosting tray)
			1000 minutes /cubic feet (individual 220V 60HZ)			4
8	Air outlet for air conditioner		60*60cm	Qunlong	PC	12
9	Air inlet for air conditioner		60*60cm	Qunlong	PC	6
10	Air supply		1 inch	South Asia or Pacific	Set	1	One water meter on the top floor (belonging to the water corporation)
11	Air drainage		2 inches		Set	1

Three. Telecommunication facilities

No.	Description	Specification	Brand	Unit	Quantity	Remark
1	Telecommunication box	10 pairs of terminals	None	Set	1	Box size: 35*40*10
2	Telephone connection box	Duplex receptacle (6-42H)	Pacific	PC	13	Duplex receptacle * 1; single receptacle *12

Five facility points are delivered this time (four pages).

Received by:

Xujia Economic & Trade Park

Four. Fire-fighting facilities

No.	Description of facility	Specification	Brand	Unit	Quantity	Remark
1	Air exhaust gate	220V	Shangde	Set	1	Size of exhaust outlet: 120*30 cm
2	Manual smoke exhausting device (fire alarm)	Indoor embedded type DC240/100mA	Meihua (MH-112T)	Set	1
3	Smoke detector	Local photoelectric type	Changlong (PHOTO)	PC	2
4	Differential detector	Local	Meihua	PC	3
5	Emergency exit indicator light	White lettering on green background 38*14*6cm	EL-615	PC	1	220V/ 0.22A, tube FL-10W*2 Battery: 6V/2.3AH
6	Emergency light	PL-type emergency light	Apollo	PC	2	220V/13*1 fluorescent lamp
7	Dry chemical fire extinguisher	ABC 10 type	ABC 10 type	PC	2	Including direction board and hook
8	Fire alarm speaker	DV-501-5WL grade	Risheng	PC	2	Speaker: 8, 5W/AC, above 100V; volume: above 95Db
9	Slowly descending device	Mechanical brake type (10kg)	Andaxing	Set	None
10	Slowly descending device indicator light	Black lettering on white background 38*14*6cm	EL-615	PC	None	220V/ 0.22A, tube FL-10W*2 Battery: 6V/2.3AH

Five. Security control facilities (the facilities listed under this item should not be altered)

No.	Description of facility	Specification	Brand	Unit	Quantity	Remark
1	Anti-theft imprinter	PG-878M-TFO	PEGASUS	PC	1
2	Indoor intercom	DH-306	Ruiyan	PC	1
3	Indoor security control system	SA-309	Ruiyan	PC	1
4	Ceiling infrared sensor	PA-370 (diameter: 11.5cm)	PUNIX	PC	1
5	Pushbutton and single break switch	/	International	Set	1

Five facility points are delivered this time (four pages).

Received by:

Xujia Economic & Trade Park

List of Indoor Facilities

Floor: 8F, Room: 1, 2, 3, 5, 6, 7, 8, 9, 10, 11, 12, 13, 15, 16, 17

Note: The amount and position of facilities shall be checked according to this list when the client leases the Premises and terminates lease of the Premises.

1.Items not to be altered:

a)Exterior wall and indoor aluminum windows;

b)Walls and floor of the lobby; and

c)Indoor security control system and intercom.

2.In case of any alteration to any other facilities, the client shall submit the drawing to the management office for review and put down related issues in meeting minutes (which effect shall be equal to the tenancy agreement).

3.Upon the expiration or termination of the tenancy agreement, the client shall restore the following equipment to their former position subject to the finished plan of this project (including internal pipelines of water, electricity, fire control and communications).

4.A water meter is installed at each of Rooms 5, 7, 10 and 12 of each floor.

5.Other regulations on construction shall be subject to the Detailed Rules and Regulations on Fitting-out Works at Xujia Economic & Trade Park.

Five facility points are delivered this time (four pages).

Received by:

Xujia Economic & Trade Park

One. Fitting-out facilities

No.	Description of facility	Specification	Brand	Remark
1	Aluminum & light steel joist ceilings	9*603*603mm (cherry blossom pattern)	Jiabao base gypsum board (GB-L)	If the indoor partition wall cuts the ceiling, the ceiling should be leveled or re-constructed when the tenancy is terminated.
2	Wall paint	Cement paint	Hong 450	One undercoat and one top coat
3	Aluminum windows	BUW100# (green powder coating)	Yali Curtain	Refer to the contract of this project XGH No. 019 for detailed specifications.
4	Aluminum window glass	5mm green half-reflecting tempered glass	Taiwan Glass	Gray Dow Corning silicone
5	Indoor skirting board	10cm PVC foam skirting board	/
6	Light steel joist gypsum board	4-point Grade A gypsum board	Global gypsum board	Galvanized framework, 7.5cm wide, space 45cm
		R8 sound insulating glass wool	/	Corridor partition wall
7	Stainless steel door	223*180 (cm) 180° double door (top and bottom bolt)	Refer to the remark for details	Stainless steel door: material: stainless steel plate #034, door frame 1.5mm (thickness of steel plate), door leaf 1.5mm (thickness of steel plate), 5mm tempered transparent glass embedded (refer to XGH No. 031 contract for related [illegible])
		Two top hinges	R510
		One set of horizontal lock	WALES 406-26D
		One set of reversible handle (H Type- Copper head)	/

Five facility points are delivered this time (four pages).

Received by:

Xujia Economic & Trade Park

Two. Electrical and water supply & drainage facilities

No.	Description of facility		Specification	Brand	Unit	Quantity	Remark
1	Master switch box	NFB (no-fuse breaker)	125 A/3p	Taian	PC	1	Including one set of command control lights for air conditioner
	(380V/ 220V)	NFB (no-fuse breaker)	50 A/3p	Taian	PC	1
		NFB (no-fuse breaker)	20 A/3p	Taian	PC	1
		NFB (no-fuse breaker)	20 A/1p	Taian	PC	10
2	Master switch box (190V/ 110V)	NFB (no-fuse breaker) NFB (no-fuse breaker)	40 A/3p 20 A/1p	Taian Taian	PC PC	1 8
3	Transformer		380V converted into 11V (10KVA)	Yudong	PC	1
4	Light switch		Single break switch	International	PC	5
5	Outlet		Duplex receptacle (grounded)	International	PC	17
5	Light		2 chi * 4 chi (220V)	Xuguang	PC	18	Total of E, F, M, N and O
6	Temperature control switch for air conditioner		Temperature control three-speed (13*8.5*3.5cm)	Xintai	PC	4
7	Cooling fan (CF)		1400 minutes /cubic feet (individual 220V 60HZ)	Tianji SR	Unit	2	Hidden high static pressure (including SUS defrosting tray)
			1000 minutes /cubic feet (individual 220V 60HZ)			2
8	Air outlet for air conditioner		60*60cm	Qunlong	PC	10
9	Air inlet for air conditioner		60*60cm	Qunlong	PC	4
10	Air supply		1 inch	South Asia or Pacific	Set	1	One water meter on the top floor (belonging to the water corporation)
11	Air drainage		2 inches		Set	1

Three. Telecommunication facilities

No.	Description	Specification	Brand	Unit	Quantity	Remark
1	Telecommunication box	10 pairs of terminals	None	Set	1	Box size: 35*40*10
2	Telephone connection box	Duplex receptacle (6-42H)	Pacific	PC	11

Five facility points are delivered this time (four pages).

Received by:

Xujia Economic & Trade Park

Four. Fire-fighting facilities

No.	Description of facility	Specification	Brand	Unit	Quantity	Remark
1	Air exhaust gate	220V	Shangde	Set	1	Size of exhaust outlet: 120*30 cm
2	Manual smoke exhausting device (fire alarm)	Indoor embedded type DC240/100mA	Meihua (MH-112T)	Set	1
3	Smoke detector	Local photoelectric type	Changlong (PHOTO)	PC	2
4	Differential detector	Local	Meihua	PC	2
5	Emergency exit indicator light	White lettering on green background 38*14*6cm	EL-615	PC	1	220V/ 0.22A, tube FL-10W*2 Battery: 6V/2.3AH
6	Emergency light	PL-type emergency light	Apollo	PC	1	220V/13*1 fluorescent lamp
7	Dry chemical fire extinguisher	ABC 10 type	ABC 10 type	PC	1	Including direction board and hook
8	Fire alarm speaker	DV-501-5WL grade	Risheng	PC	2	Speaker: 8, 5W/AC, above 100V; volume: above 95Db
9	Slowly descending device	Mechanical brake type (10kg)	Andaxing	Set	None
10	Slowly descending device indicator light	Black lettering on white background 38*14*6cm	EL-615	PC	None	220V/ 0.22A, tube FL-10W*2 Battery: 6V/2.3AH

Five. Security control facilities (the facilities listed under this item should not be altered)

No.	Description of facility	Specification	Brand	Unit	Quantity	Remark
1	Anti-theft imprinter	PG-878M-TFO	PEGASUS	PC	1
2	Indoor intercom	DH-306	Ruiyan	PC	1
3	Indoor security control system	SA-309	Ruiyan	PC	1
4	Ceiling infrared sensor	PA-370 (diameter: 11.5cm)	PUNIX	PC	1
5	Pushbutton and single break switch	/	International	Set	1

Five facility points are delivered this time (four pages).

Received by:

Xujia Economic & Trade Park

List of Indoor Facilities

Floor: 10F, Room: 1, 3, 5

Note: The amount and position of facilities shall be checked according to this list when the client leases the Premises and terminates lease of the Premises.

1.Items not to be altered:

a)Exterior wall and indoor aluminum windows;

b)Walls and floor of the lobby; and

c)Indoor security control system and intercom.

2.In case of any alteration to any other facilities, the client shall submit the drawing to the management office for review and put down related issues in meeting minutes (which effect shall be equal to the tenancy agreement).

3.Upon the expiration or termination of the tenancy agreement, the client shall restore the following equipment to their former position subject to the finished plan of this project (including internal pipelines of water, electricity, fire control and communications).

4.A water meter is installed at each of Rooms 5, 7, 10 and 12 of each floor.

5.Other regulations on construction shall be subject to the Detailed Rules and Regulations on Fitting-out Works at Xujia Economic & Trade Park.

Five facility points are delivered this time (four pages).

Received by:

Xujia Economic & Trade Park

One. Fitting-out facilities

No.	Description of facility	Specification	Brand	Remark
1	Aluminum & light steel joist ceilings	9*603*603mm (cherry blossom pattern)	Jiabao base gypsum board (GB-L)	If the indoor partition wall cuts the ceiling, the ceiling should be leveled or re-constructed when the tenancy is terminated.
2	Wall paint	Cement paint	Hong 450	One undercoat and one top coat
3	Aluminum windows	BUW100# (green powder coating)	Yali Curtain	Refer to the contract of this project XGH No. 019 for detailed specifications.
4	Aluminum window glass	5mm green half-reflecting tempered glass	Taiwan Glass	Gray Dow Corning silicone
5	Light steel joist gypsum board	4-point Grade A gypsum board R8 sound insulating glass wool	Global gypsum board /	Galvanized framework, 7.5cm wide, space 45cm Corridor partition wall
6	Stainless steel door	223*180 (cm) 180° double door (top and bottom bolt)	Refer to the remark for details	Stainless steel door: material: stainless steel plate #034, door frame 1.5mm (thickness of steel plate), door leaf 1.5mm (thickness of steel plate), 5mm tempered transparent glass embedded (refer to XGH No. 031 contract for related [illegible])
		Two top hinges	R510
		One set of horizontal lock	WALES 406-26D
		One set of reversible handle (H Type- Copper head)	/

Five facility points are delivered this time (four pages).

Received by:

Xujia Economic & Trade Park

Two. Electrical and water supply & drainage facilities

No.	Description of facility		Specification	Brand	Unit	Quantity	Remark
1	Master switch box (380V/ 220V)	NFB (no-fuse breaker)	125 A/3p	Taian	PC	1	Including one set of command control lights for air conditioner
		NFB (no-fuse breaker)	50 A/3p	Taian	PC	1
		NFB (no-fuse breaker)	20 A/3p	Taian	PC	1
		NFB (no-fuse breaker)	20 A/1p	Taian	PC	10
2	Master switch box (190V/ 110V)	NFB (no-fuse breaker)	40 A/3p	Taian	PC	1
		NFB (no-fuse breaker)	20 A/1p	Taian	PC	8
3	Transformer		380V converted into 11V (10KVA)	Yudong	PC	1
4	Light switch		Single break switch	International	PC	5
5	Outlet		Duplex receptacle (grounded)	International	PC	17
5	Light		2 chi * 4 chi (220V)	Xuguang	PC	60	Total of E, F, M, N and O
6	Temperature control switch for air conditioner		Temperature control three-speed (13*8.5*3.5cm)	Xintai	PC	4
7	Cooling fan (CF)		1400 minutes /cubic feet (individual 220V 60HZ)	Tianji SR	Unit	2	Hidden high static pressure (including SUS defrosting tray)
			1000 minutes /cubic feet (individual 220V 60HZ)			2
8	Air outlet for air conditioner		60*60cm	Qunlong	PC	10
9	Air inlet for air conditioner		60*60cm	Qunlong	PC	4
10	Air supply		1 inch	South Asia or Pacific	Set	None	One water meter on the top floor (belonging to the water corporation)
11	Air drainage		2 inches		Set	None

Three. Telecommunication facilities

No.	Description	Specification	Brand	Unit	Quantity	Remark
1	Telecommunication box	10 pairs of terminals	None	Set	1	Box size: 35*40*10
2	Telephone connection box	Duplex receptacle (6-42H)	Pacific	PC	11

Five facility points are delivered this time (four pages).

Received by:

Xujia Economic & Trade Park

Four. Fire-fighting facilities

No.	Description of facility	Specification	Brand	Unit	Quantity	Remark
1	Air exhaust gate	220V	Shangde	Set	1	Size of exhaust outlet: 120*30 cm
2	Manual smoke exhausting device (fire alarm)	Indoor embedded type DC240/100mA	Meihua (MH-112T)	Set	1
3	Smoke detector	Local photoelectric type	Changlong (PHOTO)	PC	2
4	Differential detector	Local	Meihua	PC	2
5	Emergency exit indicator light	White lettering on green background 38*14*6cm	EL-615	PC	1	220V/ 0.22A, tube FL-10W*2 Battery: 6V/2.3AH
6	Emergency light	PL-type emergency light	Apollo	PC	1	220V/13*1 fluorescent lamp
7	Dry chemical fire extinguisher	ABC 10 type	ABC 10 type	PC	1	Including direction board and hook
8	Fire alarm speaker	DV-501-5WL grade	Risheng	PC	2	Speaker: 8, 5W/AC, above 100V; volume: above 95Db
9	Slowly descending device	Mechanical brake type (10kg)	Andaxing	Set	None
10	Slowly descending device indicator light	Black lettering on white background 38*14*6cm	EL-615	PC	None	220V/ 0.22A, tube FL-10W*2 Battery: 6V/2.3AH

Five. Security control facilities (the facilities listed under this item should not be altered)

No.	Description of facility	Specification	Brand	Unit	Quantity	Remark
1	Anti-theft imprinter	PG-878M-TFO	PEGASUS	PC	1
2	Indoor intercom	DH-306	Ruiyan	PC	1
3	Indoor security control system	SA-309	Ruiyan	PC	1
4	Ceiling infrared sensor	PA-370 (diameter: 11.5cm)	PUNIX	PC	1
5	Pushbutton and single break switch	/	International	Set	1

Five facility points are delivered this time (four pages).

Received by:

EX-10.41

Exhibit 10.41

FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT

THIS FIRST AMENDMENT (this “Amendment”) to that certain Loan and Security Agreement dated April 7, 2008, by and between Silicon Valley Bank (“Bank”) and SOURCE PHOTONICS, INC., a Delaware corporation, FIBERXON, INC., a Delaware corporation and LUMINENTOIC, INC., a Delaware corporation (collectively, “Existing Borrowers”), each with its principal place of business at 20550 Nordhoff Street, Chatsworth, CA 91311 (FAX 818-349-9258) (as the same may from time to time be further amended, modified, supplemented or restated, the “Loan Agreement”), is entered into this      day of July, 2008, by and between Bank, Existing Borrowers and FIBERXON (MACAO COMMERCIAL OFFSHORE) LIMITED, an entity organized under the laws of Macao, registered with the Commercial and Movable Assets Registry of Macau under No. 24468 (SO) (“New Borrower” and together with Existing Borrowers, each a “Borrower” and collectively “Borrowers”).

RECITALS

A. Bank has extended credit to Existing Borrowers for the purposes permitted in the Loan Agreement.

B. Existing Borrowers have requested that Bank amend the Loan Agreement to (i) add New Borrower as a “Borrower” therunder and (ii) make certain other revisions to the Loan Agreement as more fully set forth herein.

C. Bank has agreed to so amend certain provisions of the Loan Agreement, but only to the extent, in accordance with the terms, subject to the conditions and in reliance upon the representations and warranties set forth below.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing recitals and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows:

1. New Borrower. New Borrower is hereby added as a “Borrower” under the Loan Documents. All references in the Loan Documents to “Borrowers” shall include New Borrower.

2. Definitions. Capitalized terms used but not defined in this Amendment shall have the meanings given to them in the Loan Agreement.

3. Amendments to Loan Agreement.

3.1 Section 11. (CHOICE OF LAW, VENUE, JURY TRIAL WAIVER AND JUDICIAL REFERENCE). The first paragraph of Section 11 of the Loan Agreement is hereby amended and restated as follows:

“California law the Loan Documents without regard to principles of conflicts of law except the laws of Macao govern any enforcement against the assets of Fiberxon Macao. Borrowers and Bank each submit to the exclusive jurisdiction of the State and Federal courts in Santa Clara County, California or, if applicable, the courts of Macao; provided, however, that nothing in this Agreement shall be deemed to operate to preclude Bank from bringing suit or taking other legal action in any other jurisdiction to realize on the Collateral or any other security for the Obligations, or to enforce a judgment or other court order in favor of Bank. Each Borrower expressly submits and consents in advance to such jurisdiction in any action or suit commenced in any such court, and each Borrower hereby waives any objection that it may have based upon lack of personal jurisdiction, improper venue, or forum non conveniens and hereby consents to the granting of such legal or equitable relief as is deemed appropriate by such court. Each Borrower hereby waives personal service of the summons, complaints, and other process issued in such action or suit and agrees that service of such summons, complaints, and other process may be made by registered or certified mail addressed to such Borrower at the address set forth in Section 10 of this Agreement and that service so made shall be deemed completed upon the earlier to occur of such Borrower’s actual receipt thereof or three (3) days after deposit in the U.S. mails, proper postage prepaid.”

3.2 Section 13 (Definitions). The following terms and their respective definitions are amended or added to Section 13.1 of the Loan Agreement as follows:

“Fiberxon Macao” means Borrower FIBERXON (MACAO COMMERCIAL OFFSHORE) LIMITED, an entity organized under the laws of Macao, registered with the Commercial and Movable Assets Registry of Macau under No. 24468 (SO).

“Loan Documents” are, collectively, this Agreement, the Perfection Certificate, the Macao Law Documents, any note, or notes or guaranties executed by Borrowers, and any other present or future agreement between Borrowers and/or for the benefit of Bank in connection with this Agreement, all as amended, restated, or otherwise modified.

“Macao Law Documents” means that certain Pledge Over Bank Accounts, Livranca, Authorization Letter and Floating Charge Agreement executed by Fiberxon Macao in favor or Bank and any other present or future agreement between Fiberxon Macao and/or for the benefit of Bank in connection with this Agreement, all as amended, restated, or otherwise modified.

3.3 Section 13 (Definitions). Subsection (b) of the defined term “Eligible Accounts” set forth in Section 13.1 of the Loan Agreement is amended in its entirety and replaced with the following:

“(b) Accounts billed and payable outside of the United States unless the Bank has a first priority, perfected security interest or other enforceable Lien in such Accounts and provided further than any such Accounts of Fiberxon Macao shall be billed in US Dollars and payments shall be remitted to the Lockbox;”

4. Limitation of Amendments.

4.1 The amendments set forth in Section 3, above, are effective for the purposes set forth herein and shall be limited precisely as written and shall not be deemed to (a) be a consent to any amendment, waiver or modification of any other term or condition of any Loan Document, or (b) otherwise prejudice any right or remedy which Bank may now have or may have in the future under or in connection with any Loan Document.

4.2 This Amendment shall be construed in connection with and as part of the Loan Documents and all terms, conditions, representations, warranties, covenants and agreements set forth in the Loan Documents, except as herein amended, are hereby ratified and confirmed and shall remain in full force and effect.

5. Representations and Warranties. To induce Bank to enter into this Amendment, each Borrower hereby represents and warrants to Bank as follows:

5.1 Immediately after giving effect to this Amendment (a) the representations and warranties contained in the Loan Documents are true, accurate and complete in all material respects as of the date hereof (except to the extent such representations and warranties relate to an earlier date, in which case they are true and correct as of such date), and (b) no Event of Default has occurred and is continuing;

5.2 Borrower has the power and authority to execute and deliver this Amendment and to perform its obligations under the Loan Agreement, as amended by this Amendment;

5.3 The organizational documents of Borrower delivered to Bank on the Effective Date (or on the date hereof with respect to New Borrower) remain true, accurate and complete and have not been amended, supplemented or restated and are and continue to be in full force and effect;

5.4 The execution and delivery by Borrower of this Amendment and the performance by Borrower of its obligations under the Loan Agreement, as amended by this Amendment, have been duly authorized;

5.5 The execution and delivery by Borrower of this Amendment and the performance by Borrower of its obligations under the Loan Agreement, as amended by this Amendment, do not and will not contravene (a) any law or regulation binding on or affecting Borrower, (b) any contractual restriction with a Person binding on Borrower, (c) any order, judgment or decree of any court or other governmental or public body or authority, or subdivision thereof, binding on Borrower, or (d) the organizational documents of Borrower;

5.6 The execution and delivery by Borrower of this Amendment and the performance by Borrower of its obligations under the Loan Agreement, as amended by this Amendment, do not require any order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by any governmental or public body or authority, or subdivision thereof, binding on either

Borrower, except as already has been obtained or made; and

5.7 This Amendment has been duly executed and delivered by Borrower and is the binding obligation of Borrower, enforceable against Borrower in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar laws of general application and equitable principles relating to or affecting creditors’ rights.

6. Counterparts. This Amendment may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument.

7. Effectiveness. This Amendment shall be deemed effective upon (a) the due execution and delivery to Bank of this Amendment by each party hereto, (b) Borrowers’ payment of an amendment fee in an amount equal to $5,000, (c) the due execution and delivery to Bank of the Macao Law Documents.

[Signature page follows.]

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to he executed as of the Effective Date.

SOURCE PHOTONICS, INC.

By	/s/ Brett Chloupek
Name: Brett Chloupek
Title: CFO
FIBERXON, INC.
By	/s/ Brett Chloupek
Name: Brett Chloupek
Title: CFO
LUMINENTOIC, INC.
By	/s/ Brett Chloupek
Name: Brett Chloupek
Title: CFO
FIBERXON (MACAO COMMERCIAL OFFSHORE) LIMITED,
By		/s/
Name:
Title:		Administrator
BANK:
SILICON VALLEY BANK
By
Name:
Title:

EX-21.1

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Exhibit 21.1

Subsidiaries of
MRV COMMUNICATIONS, INC.

Subsidiary Name (1)	Jurisdiction of Organization
Alcadon MRV AB	Sweden
Creative Electronic Systems SA	Switzerland
EDSLan SpA	Italy
Interdata	France
MRV Communications — Boston Division, Inc.	Massachusetts
MRV International, Ltd.	Israel
MRV Switzerland AG	Switzerland
Source Photonics, Inc.	Delaware
Source Photonics Santa Clara, Inc.	Delaware
Tecnonet SpA	Italy

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Subsidiaries of MRV COMMUNICATIONS, INC.

EX-23.1

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Exhibit 23.1

CONSENT OF ERNST & YOUNG LLP,
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

        We consent to the incorporation by reference in the following Registration Statements on Form S-8 pertaining to the Italian Employees Warrant Program (No. 333-87743), the 1998 Nonstatutory Stock Option Plan (No. 333-87739), the 1997 Incentive and Nonstatutory Stock Option Plan (Nos. 333-87735, 333-47896 and 333-81956), the 2000 MRV Communications, Inc. Stock Option Plan for Employees of Optronics International Corp. (No. 333-47898), the 2000 MRV Communications, Inc. Stock Option Plan for Employees of Astroterra Corporation (No. 333-47900), the 2001 MRV Communications, Inc. Stock Option Plan For Employees Of Appointech, Inc. (No. 333-71180), the MRV Communications, Inc. 2002 International Stock Option Plan (No. 333-81954), the MRV Communications, Inc. 2002 Nonstatutory Stock Option Plan for Employees Of LuminentOIC, Inc. (No. 333-81958), the LuminentOIC Inc. Amended and Restated 2000 Stock Option Plan (No. 333-81950) and Non-Director and Non-Executive Officer Consolidated Long-Term Stock Incentive Plan (Nos. 333-107109 and 333-129364); of our reports dated October 7, 2009, with respect to the consolidated financial statements and schedule of MRV Communications, Inc., and the effectiveness of internal control over financial reporting of MRV Communications, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2008.

	/s/ Ernst & Young LLP
Los Angeles, California October 7, 2009

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CONSENT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

EX-31.1

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Exhibit 31.1

CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) UNDER THE EXCHANGE ACT

        I, Noam Lotan, certify that:

1.

I have reviewed this Annual Report on Form 10-K of MRV Communications, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a.

all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: October 7, 2009 /s/ NOAM LOTAN
Noam Lotan
Chief Executive Officer
(Principal Executive Officer)

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CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) UNDER THE EXCHANGE ACT

EX-31.2

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Exhibit 31.2

CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) UNDER THE EXCHANGE ACT

        I, Chris King, certify that:

1.

I have reviewed this Annual Report on Form 10-K of MRV Communications, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a.

all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: October 7, 2009 /s/ CHRIS KING
Chris King
Chief Financial Officer
(Principal Financial Officer)

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CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) UNDER THE EXCHANGE ACT

EX-32.1

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Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350

        In connection with the Annual Report of MRV Communications, Inc. ("MRV") on Form 10-K for the period ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and on October 7, 2009, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and



2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of MRV.

Date: October 7, 2009 /s/ NOAM LOTAN
Noam Lotan
Chief Executive Officer
(Principal Executive Officer)

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CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350

EX-32.2

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Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350

        In connection with the Annual Report of MRV Communications, Inc. ("MRV") on Form 10-K for the period ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and on October 7, 2009, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and



2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of MRV.

Date: October 7, 2009 /s/ CHRIS KING
Chris King
Chief Financial Officer
(Principal Financial Officer)

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CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350