MRV Communications (MRVC) 10-Q 2011 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[x] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2011

[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act for the transition period from _______________ to ______________

Commission file number 001-11174

MRV COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

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

20415 Nordhoff Street, Chatsworth, CA 91311

(Address of principal executive offices, zip code)

(818) 773-0900

(Registrant's telephone number, including area code)

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 [x]  No [ ]

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 [x]  No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or 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.

Large accelerated filer  [ ]	Accelerated filer  [x]
Non-accelerated filer [ ]	Smaller reporting company [ ]

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

As of November 2, 2011, 157,703,451 shares of Common Stock of MRV Communications, Inc. were outstanding.

MRV Communications, Inc.

Form 10-Q for the Quarter Ended September 30, 2011

Index

		Page Number
PART I	Financial Information	3
Item 1.	Condensed Consolidated Financial Statements:	3
	Statements of Operations (unaudited) for the three and nine months ended September 30, 2011 and 2010	3
	Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010	4
	Statements of Cash Flows (unaudited) for the nine months ended September 30, 2011 and 2010	5
	Notes to Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36
PART II	Other Information	37
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 6.	Exhibits	40
	Signatures	41

2

PART I - FINANCIAL INFORMATION

Item 1.Condensed Consolidated Financial Statements

MRV Communications, Inc.

Statements of Operations

(In thousands, except per share data)

	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenue:
Product revenue	$	48,154		$	52,940		$	151,066		$	145,237
Service revenue	14,301			13,180			41,549			37,222
Total revenue	62,455			66,120			192,615			182,459
Cost of sales	37,368			38,631			113,056			100,862
Gross profit	25,087			27,489			79,559			81,597
Operating expenses:
Product development and engineering	5,666			5,654			18,059			15,770
Selling, general and administrative	15,918			16,443			52,853			54,896
Total operating expenses	21,584			22,097			70,912			70,666
Operating income	3,503			5,392			8,647			10,931
Interest expense	(217		)	(242		)	(687		)	(674		)
Gain from settlement of deferred consideration obligation	—			—			—			520
Other loss, net	(1,548		)	(1,245		)	(1,837		)	(1,336		)
Income from continuing operations before income taxes	1,738			3,905			6,123			9,441
Provision (benefit) for income taxes	(343		)	874			3,038			4,567
Income from continuing operations	2,081			3,031			3,085			4,874
Income (loss) from discontinued operations, net of income taxes of $20 in 2011 and $859 and $2,102 for the three and nine months in 2010, respectively	—			543			(3,414		)	6,409
Net income (loss)	2,081			3,574			(329		)	11,283
Less:
Net income from continuing operations attributable to noncontrolling interests	—			696			—			1,816
Net income (loss) attributable to MRV	$	2,081		$	2,878		$	(329	)	$	9,467
Net income from continuing operations attributable to MRV	$	2,081		$	2,335		$	3,085		$	3,058
Net income (loss) from discontinued operations attributable to MRV	$	—		$	543		$	(3,414	)	$	6,409
Net income (loss) attributable to MRV per share — basic:
From continuing operations	$	0.01		$	0.01		$	0.02		$	0.02
From discontinued operations	$	—		$	—		$	(0.02	)	$	0.04
Net income attributable to MRV per share — basic (1)	$	0.01		$	0.02		$	—		$	0.06
Net income (loss) attributable to MRV per share — diluted:
From continuing operations	$	0.01		$	0.01		$	0.02		$	0.02
From discontinued operations	$	—		$	—		$	(0.02	)	$	0.04
Net income attributable to MRV per share — diluted (1)	$	0.01		$	0.02		$	—		$	0.06
Weighted average number of shares:
Basic	157,535			157,707			157,518			157,674
Diluted	158,601			158,590			158,518			158,561

________________________________________

(1) Amounts may not add due to rounding.

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

3

MRV Communications, Inc.

Balance Sheets

(In thousands, except par values)

	September 30, 2011			December 31, 2010
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	153,754		$	141,001
Short-term marketable securities	—			13,474
Restricted time deposits	1,760			1,709
Accounts receivable, net	57,915			61,455
Other receivables	15,783			15,294
Inventories	36,654			41,072
Deferred income taxes	2,487			2,511
Other current assets	7,670			9,838
Current assets of discontinued operations	—			2,774
Total current assets	276,023			289,128
Property and equipment, net	8,653			8,461
Goodwill	25,879			25,229
Other intangibles	375			—
Deferred income taxes, net of current portion	3,337			2,125
Other assets	544			571
Noncurrent assets of discontinued operations	—			1,352
Total assets	$	314,811		$	326,866
Liabilities and equity
Current liabilities:
Short-term debt	$	13,188		$	18,036
Deferred consideration payable	4,615			4,615
Accounts payable	25,373			32,279
Accrued liabilities	21,339			23,714
Deferred revenue	13,724			14,186
Other current liabilities	3,491			2,166
Current liabilities of discontinued operations	—			1,376
Total current liabilities	81,730			96,372
Other long-term liabilities	6,434			8,931
Long-term liabilities from discontinued operations	—			462
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 — 160,341 shares in 2011 and 160,038 shares in 2010
Outstanding — 157,649 shares in 2011 and 157,600 shares in 2010	270			270
Additional paid-in capital	1,412,410			1,410,234
Accumulated deficit	(1,200,681		)	(1,200,352		)
Treasury stock — 2,692 shares in 2011 and 2,437 in 2010	(3,271		)	(2,846		)
Accumulated other comprehensive income	17,919			13,795
Total stockholders' equity	226,647			221,101
Total liabilities and stockholders' equity	$	314,811		$	326,866

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

4

MRV Communications, Inc.

Statements of Cash Flows

(In thousands)

Nine months ended September 30:	2011			2010
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net income (loss)	$	(329	)	$	11,283
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	1,831			7,352
Share-based compensation expense	1,995			1,676
Provision for doubtful accounts	325			12
Deferred income taxes	(1,155		)	837
Gain on disposition of property and equipment	21			27
Loss on sale of TurnKey	3,154			—
Gain on settlement of deferred consideration payable	—			(520		)
Changes in operating assets and liabilities:
Accounts receivable	4,767			(27,622		)
Inventories	4,849			(22,528		)
Other assets	2,790			(21,307		)
Accounts payable	(7,754		)	22,025
Accrued liabilities	(2,785		)	(5,313		)
Income tax payable	1,402			1,087
Deferred revenue	(1,035		)	1,873
Other current liabilities	(2,352		)	(353		)
Net cash provided by (used in) operating activities	5,724			(31,471		)
Cash flows from investing activities:
Purchases of property and equipment	(2,060		)	(11,664		)
Proceeds from sale of property and equipment	140			66
Purchases of intangibles	(474		)	—
Proceeds from sale of investments in unconsolidated entities	—			3,708
Proceeds from sale of subsidiaries	886			11,308
Investment in restricted time deposits	(157		)	(497		)
Release of restricted time deposits	270			123
Purchases of investments	—			(44,971		)
Proceeds from sale or maturity of investments	13,474			36,707
Net cash provided by (used in) investing activities	12,079			(5,220		)
Cash flows from financing activities:
Net proceeds from exercise of stock options	184			102
Purchase of treasury shares	(425		)	(409		)
Borrowings on short-term debt	34,403			117,004
Payments on short-term debt	(39,901		)	(120,112		)
Cash restricted to collateralize short-term debt	—			12,261
Payments on long-term obligations	—			(14		)
Net cash used by financing activities	(5,739		)	8,832
Effect of exchange rate changes on cash and cash equivalents	420			823
Net increase (decrease) in cash and cash equivalents	12,484			(27,036		)
Less: Net decrease in cash and cash equivalents of discontinued operations	(269		)	(9,800		)
Net increase (decrease) in cash and cash equivalents of continuing operations	12,753			(17,236		)
Cash and cash equivalents, beginning of year	141,001			40,455
Cash and cash equivalents, end of period	$	153,754		$	23,219
Supplemental disclosure of cash flow information:
Cash paid during year for interest — continuing operations	$	587		$	211
Cash paid during year for interest — discontinued operations	—			2,603
Cash paid during year for interest — Total	$	587		$	2,814
Cash paid during year for income taxes — continuing operations	$	2,935		$	3,705
Cash paid during year for income taxes — discontinued operations	—			289
Cash paid during year for income taxes — Total	$	2,935		$	3,994

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

5

MRV Communications, Inc.

Notes to Financial Statements

(Unaudited)

1.Basis of Presentation

The consolidated financial statements include the accounts of MRV Communications, Inc. (“MRV” or the “Company”) 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 investment by others in these enterprises reduces the Company's voting control below 50%, MRV discontinues consolidation and uses the cost or equity method of accounting for these investments, unless otherwise required. As of September 30, 2011, all of the Company's subsidiaries were wholly-owned.

The consolidated financial statements included herein have been prepared by MRV, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations although MRV believes that the disclosures are adequate to make the information presented not misleading. The information included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 (this “Form 10-Q”) should be read in conjunction with “Selected Financial Data,” “Management's Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” and the Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Form 10-K”) filed with the SEC.

In the opinion of MRV's management, these unaudited statements contain all adjustments, which include normal recurring adjustments, necessary to present fairly the financial position of MRV as of September 30, 2011, and the results of its operations for the three and nine months and its cash flows for the nine months then ended. The results reported in these financial statements should not be regarded as necessarily indicative of results that may be expected for the full year or any future periods.

On May 6, 2011, the Company sold all of the issued and outstanding capital stock of three wholly-owned operating subsidiaries, TurnKey Communications AG, TurnKey Services AG, and Elcoma AG (together “TurnKey"). The historical financial results of TurnKey prior to that date have been reclassified as discontinued operations for all periods presented. The related assets and liabilities of TurnKey have been classified as assets and liabilities of discontinued operations in the Balance Sheet as of December 31, 2010. Cash flows from discontinued operations are presented combined with the cash flows from continuing operations in the accompanying Statement of Cash Flows.

2.Cash and Cash Equivalents, Restricted Time Deposits and Marketable Securities

MRV treats highly liquid investments with an original maturity of 90 days or less as cash equivalents. Investments with maturities of less than one year are considered short-term. MRV maintains cash balances and investments in qualified financial institutions, and at various times such amounts are in excess of federal insured limits.

Restricted time deposits represent investments that are restricted as to withdrawal or use and are primarily in foreign subsidiaries. Restricted time deposits generally secure standby letters of credit, bank lines of credit, or bank loans. Investments in and releases of restricted time deposits are included in investing activities on the Company's Statement of Cash Flows unless the time deposits relate to an underlying bank loan and will be used to repay the loan, in which case the related cash flows are treated as financing activities.

MRV accounts for its marketable securities, which are available for sale, under the provisions of ASC 320-10 Accounting for Certain Investments in Debt and Equity Securities. The original cost of MRV's marketable securities approximated fair market value as of December 31, 2010. Unrealized losses at December 31, 2010 were $39,000.

6

Marketable securities consisted of the following (in thousands):

	September 30, 2011		December 31, 2010
U.S. government issues	$	—	$	11,699
Corporate issues	—		1,775
Total	$	—	$	13,474

3.Fair Value Measurement

MRV's financial instruments, including cash and cash equivalents, restricted time deposits, short-term marketable securities, accounts receivable, accounts payable, accrued liabilities and short-term debt obligations, are carried at cost, which approximates their fair market value.

ASC 820-10 Fair Value Measurements defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820-10 establishes a three-level hierarchy that prioritizes the use of observable inputs, such as quoted prices in active markets, and minimizes the use of unobservable inputs, to measure fair value. All of MRV's assets and liabilities that are measured at fair value are measured using the unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

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

The Company's available-for-sale securities consisted of U.S. government agencies' obligations and corporate debt securities and are valued using quoted market prices of recent transactions or are benchmarked to transactions of these securities which are considered Level 1 category items within the fair value hierarchy. There were no material re-measurements to fair value during the three and nine months ended September 30, 2011 of financial assets and liabilities that are not measured at fair value on a recurring basis.

4.Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and cash equivalents placed with high credit quality institutions and accounts receivable due from customers. MRV evaluates the collectability of accounts receivable based on a combination of factors. If the Company becomes aware of a customer's inability to meet its financial obligations after a sale has occurred, the Company records an allowance to reduce the net receivable to the amount which it reasonably believes to be collectable from the customer. For all other customers, the Company records allowances for doubtful accounts based on the length of time the receivables are past due, the current business environment, and historical experience. If the financial conditions of MRV's customers were to deteriorate or if economic conditions worsen, additional allowances may be required in the future.

7

The following table summarizes the changes in the allowance for doubtful accounts during the nine months ended September 30, 2011 (in thousands):

	Nine months ended
	September 30, 2011
Balance at beginning of period		$	3,492
Charged to expense, net of recoveries		325
Write-offs		(1,795		)
Foreign currency translation adjustment		16
Balance at end of period		$	2,038

5.Inventories

Inventories are stated at the lower of cost or market and consist of materials, labor and overhead. Cost is determined by the first in, first out method. Inventories, net of reserves, consisted of the following (in thousands):

	September 30, 2011		December 31, 2010
Raw materials	$	7,500	$	9,556
Work-in process	4,761		4,498
Finished goods	24,393		27,018
Total	$	36,654	$	41,072

The following table summarizes the change in inventory reserve during the nine months ended September 30, 2011 (in thousands):

	Nine months ended
	September 30, 2011
Balance at beginning of period		$	18,994
Charged to expense, net of recoveries		2,427
Write-offs		(2,896		)
Foreign currency translation adjustment		336
Balance at end of period		$	18,861

6.Goodwill and Other Intangibles

In accordance with ASC 350 Intangibles - Goodwill and Other, goodwill and intangibles with indefinite lives are not amortized, but instead measured for impairment at least annually or when events indicate that impairment exists. No events occurred during the nine months ended September 30, 2011 indicating impairment of goodwill existed, and accordingly, there was no change in the carrying balance of goodwill during that period. Goodwill is recorded at the subsidiary level in local currencies and converted into U.S. dollars at the balance sheet date. There was an unrealized gain of $0.7 million during the nine months ended September 30, 2011 due to the change in foreign currency rates from December 31, 2010 to September 30, 2011. The unrealized gain arising from the translation adjustment is recorded in accumulated other comprehensive income on the Balance Sheet.

Other intangibles consist of intellectual property purchased by the Company's subsidiary located in Geneva, Switzerland, Creative Electronic Systems, S.A. ("CES"). Amortization of other intangible assets was $38,000 and $88,000 for the three and nine months ended September 30, 2011.

8

7.Product Warranty

As of September 30, 2011 and December 31, 2010, MRV's product warranty liability recorded in accrued liabilities was $1.4 million and $1.0 million, respectively. MRV accrues for warranty costs as part of 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.

The following table summarizes the change in product warranty liability during the nine months ended September 30, 2011 (in thousands):

	Nine months ended
	September 30, 2011
Beginning balance	$	1,024
Cost of warranty claims	(417		)
Accruals for product warranties	754
Foreign currency translation adjustment	5
Total	$	1,366

8.Net Income (Loss) Per Share

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

Outstanding stock options to purchase 9.2 million and 12.2 million shares were excluded from the computation of dilutive shares for the three months ended September 30, 2011 and September 30, 2010, respectively, because such stock options were anti-dilutive since they were not in-the-money. For the nine months endedSeptember 30, 2011 and 2010, 7.7 million and 11.0 million potentially dilutive shares were excluded from the calculation of diluted net loss per share because such shares were anti-dilutive since they were not in the money. Shares purchased into treasury shares are excluded from any subsequent information concerning the number of shares outstanding.

9.Share-Based Compensation

MRV records share-based compensation expense in accordance with ASC Topic 718 Compensation - Stock Compensation. The following table summarizes the impact on MRV's results of operations of recording share-based compensation for the three and nine months ended September 30, 2011 and 2010 (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2011		2010		2011		2010
Cost of goods sold	$	22	$	7	$	59	$	32
Product development and engineering	29		76		116		204
Selling, general and administrative	361		458		1,820		986
Total share-based compensation expense (1)	$	412	$	541	$	1,995	$	1,222

(1) Income tax benefits realized from stock option exercises and similar awards were immaterial in both periods.

9

The weighted average fair value of stock options and restricted stock awards granted during the nine months ended September 30, 2011 was $1.02 and $1.38, respectively. The weighted average fair value of stock options and restricted stock awards granted during the nine months ended September 30, 2010 was $0.88 and $1.19, respectively. As of September 30, 2011, the total unrecorded deferred share-based compensation balance for unvested securities, net of expected forfeitures, was $2.9 million, which is expected to be amortized over a weighted-average period of 2.5 years.

Valuation Assumptions

MRV uses the Black-Scholes option pricing model to estimate the fair value of stock option awards. The Black-Scholes model requires the use of subjective and complex assumptions including the option's expected life and the underlying stock price volatility. MRV expects future volatility to approximate historical volatility. The following weighted average assumptions were used for estimating the fair value of options granted during the nine months ended September 30, 2011:

Nine months ended September 30:	2011		2010
Risk-free interest rate	2.0	%	1.6	%
Dividend yield	—	%	—	%
Volatility	87.0	%	94.0	%
Expected life (in years)	5.9		5.2

10.Segment Reporting and Geographic Information

MRV operates its business in two segments: the Network Equipment group and the Network Integration group. The Network Equipment group designs, manufactures and distributes optical networking solutions and Internet infrastructure products, and the Network Integration group provides value-added integration and support services for customers' networks.

The accounting policies of the segments are the same as those described in the summary of significant accounting polices disclosed in MRV's 2010 Form 10-K. MRV evaluates segment performance based on revenues, gross profit and operating income of each segment. As such, there are no separately identifiable Statements of Operations data below operating income.

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

	Three months ended						Nine months ended
	September 30,						September 30,
	2011			2010			2011			2010
Network Equipment group	$	31,455		$	32,202		$	96,461		$	91,980
Network Integration group	34,380			37,699			108,108			100,331
Before intersegment adjustments	65,835			69,901			204,569			192,311
Intersegment adjustments	(3,380		)	(3,781		)	(11,954		)	(9,852		)
Total	$	62,455		$	66,120		$	192,615		$	182,459

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

One customer accounted for $31.7 million and $32.1 million of revenue in the Network Integration group, or

10

16% and 18% of total revenue, for the nine months ended September 30, 2011, and 2010, respectively. The same customer accounted for $11.5 million, or 17%, of revenue for the three months ended September 30, 2010. Another customer accounted for $6.4 million, or 10%, of revenue for the three months ended September 30, 2010.

As of September 30, 2011, amounts due from one customer in the Network Integration group accounted for 20% of accounts receivable. The same customer accounted for 17% of accounts receivable as of December 31, 2010.

The following table summarizes external revenue by geographic region (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2011		2010		2011		2010
Americas	$	19,961	$	16,575	$	56,693	$	44,206
Europe	40,952		46,991		129,725		130,463
Asia Pacific	1,541		2,509		6,183		7,734
Other regions	1		45		14		56
Total	$	62,455	$	66,120	$	192,615	$	182,459

The following table summarizes long-lived assets, consisting of property and equipment, by geographic region (in thousands):

	September 30, 2011		December 31, 2010
Americas	$	2,208	$	2,273
Europe	6,391		6,157
Asia Pacific	54		31
Total	$	8,653	$	8,461

11

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

	Three months ended						Nine months ended
	September 30,						September 30,
	2011			2010			2011			2010
Gross profit
Network Equipment group	$	16,178		$	17,513		$	52,043		$	52,650
Network Integration group	8,954			10,233			28,152			29,203
Before intersegment adjustments	25,132			27,746			80,195			81,853
Corporate unallocated and intersegment adjustments (1)	(45		)	(257		)	(636		)	(256		)
Total	$	25,087		$	27,489		$	79,559		$	81,597
Depreciation expense
Network Equipment group	$	412		$	469		$	1,238		$	1,362
Network Integration group	106			80			354			254
Corporate	50			14			132			42
Total	$	568		$	563		$	1,724		$	1,658
Operating income (loss)
Network Equipment group	$	2,580		$	2,649		$	7,739		$	9,097
Network Integration group	3,702			4,859			10,943			11,217
Before intersegment adjustments	6,282			7,508			18,682			20,314
Corporate unallocated operating loss and adjustments (1)	(2,779		)	(2,116		)	(10,035		)	(9,383		)
Total	$	3,503		$	5,392		$	8,647		$	10,931

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

12

The following tables provide selected Balance Sheet and Statement of Cash Flow information by business segment (in thousands):

	Nine Months Ended
	September 30,
	2011		2010
Additions to Fixed Assets
Network Equipment group	$	1,493	$	1,978
Network Integration group	351		760
Corporate	201		36
Discontinued operations	15		8,890
Total	$	2,060	$	11,664

	September 30, 2011		December 31, 2010
Total Assets
Network Equipment group	$	84,069	$	82,913
Network Integration group	101,941		105,117
Corporate and intersegment eliminations	128,801		134,710
Discontinued operations	—		4,126
Total	$	314,811	$	326,866

	September 30, 2011		December 31, 2010
Goodwill
Network Equipment group	$	13,452	$	12,829
Network Integration group	12,427		12,400
Total	$	25,879	$	25,229

11.Comprehensive Income (Loss)

The following table summarizes the components of comprehensive income (loss) (in thousands):

	Three months ended					Nine months ended
	September 30,					September 30,
	2011			2010		2011			2010
Net income (loss)	$	2,081		$	3,574	$	(329	)	$	11,283
Unrealized loss from available-for-sale securities	(1		)	1		(2		)	16
Foreign currency translation gain (loss)	(5,999		)	9,535		4,126			419
Comprehensive income (loss)	(3,919		)	13,110		3,795			11,718
Less: comprehensive income attributable to noncontrolling interests	—			1,318		—			1,615
Comprehensive income (loss) attributable to MRV	$	(3,919	)	$	11,792	$	3,795		$	10,103

13

12.Recent Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update ("ASU") 2009-13, which amends ASC 605 Revenue Recognition. The amendment establishes a hierarchy for determining the selling price of a deliverable in a multiple-element deliverable revenue arrangement. The selling price used for each deliverable is based on (a) vendor-specific objective evidence if available; (b) third-party evidence if vendor-specific objective evidence is not available; or (c) estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The amendments also replace the term “fair value” in the revenue allocation guidance with “selling price” to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. The update eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally on the basis of the selling price of each deliverable. In October 2009, the FASB also issued ASU 2009-14, which amends ASC 985 Software. The amendments in this update change the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products containing software components and non-software components that function together to deliver the tangible product's essential functionality are no longer within the scope of the software revenue guidance in ASC Subtopic 985-605. In addition, the amendments in this update require that hardware components of a tangible product containing software components always be excluded from the software revenue guidance. In that regard, the amendments provide additional guidance on how to determine which software, if any, relating to the tangible product also would be excluded from the scope of the software revenue guidance. The amendments also provide guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes both tangible products and software. The amendments also provide further guidance on how to allocate arrangement consideration when an arrangement includes deliverables both included and excluded from the scope of the software revenue guidance. The Company adopted the amendments to ASC 605 and ASC 985 prospectively for revenue arrangements entered into or materially modified beginning January 1, 2011. The adoption of ASU 2009-13 did not have a material impact on the Company's financial condition, results of operations or liquidity.

In January 2010, the FASB issued ASU 2010-06 which amends the Fair Value Measurements and Disclosures topic of the ASC. The amended standards in the update require disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers, beginning in the first quarter of 2010. Additionally, the amended standards in the update require presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3). The Company adopted the amended standards on January 1, 2011. The adoption of ASU 2010-06 did not have a material impact on the Company's financial condition, results of operations or liquidity.

In December 2010, the FASB issued ASU 2010-28, which modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This accounting guidance was effective for the Company on January 1, 2011. The adoption of this guidance did not have a material impact on the Company's financial position and results of operations.

In June 2011, the FASB issued ASU 2011-05 to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity. ASU 2011-05 will be effective for the Company beginning January 1, 2012, and the Company will be required to apply it retrospectively. The adoption of this standard will only impact the presentation of our financial statements and will have no impact on the reported results.

14

13.Litigation

In connection with the acquisition of Fiberxon, Inc. in July 2007, MRV recorded a potential deferred consideration payable related to post-acquisition obligations of MRV pursuant to the purchase agreement. MRV filed an affirmative lawsuit in the California Superior Court in March 2009 against: a) former stockholders of Fiberxon, seeking to cancel a potential deferred consideration obligation of approximately $31.5 million; and b) certain former executives, directors and stockholders of Fiberxon alleging fraud and other claims. MRV entered into a Settlement Agreement and Release in December 2009 with Yoram Snir, personally and in his capacity as Stockholders' Agent for the former stockholders of Fiberxon. Pursuant to the settlement agreement, MRV has fully settled any obligation to pay the first $18 million of potential deferred consideration. This amount was reserved for set-off in the original merger agreement, and the former Fiberxon stockholders, pursuant to the settlement, were entitled to their pro rata portion of the $1.5 million settlement amount. Additionally, MRV agreed to pay up to $4.5 million to settle claims relating to the remaining $13.5 million of the potential deferred compensation. The second portion of the settlement was with the former stockholders directly, and stockholders holding approximately 67% of the former shares elected to participate in this portion of the settlement. The remaining deferred consideration payable as of September 30, 2011 of $4.6 million represents the remaining stockholders' pro rata share of the $13.5 million portion.

MRV did not settle the California Superior Court action with four remaining defendants, and in December 2010, the court issued a default judgment against them in the amount of $57.4 million. However, the court set aside this judgment in April 2011 at the request of the defendants. In addition, in 2010, four former stockholders, who owned approximately 27% of the former Fiberxon and who did not participate in the second portion of the settlement, initiated litigation in Beijing, PRC against MRV, Source Photonics LLC and other related parties alleging a claim for approximately $3.7 million, representing these former stockholders' pro rata amount of the $13.5 million portion of the potential deferred compensation. Two of the plaintiffs voluntarily withdrew their suits without prejudice in December 2010, but they have subsequently re-filed the suits. In connection with the sale by MRV of Source Photonics in October 2010, the Company agreed to indemnify the buyer against certain litigation, including these actions. The indemnification provisions, which have an aggregate $20.0 million cap with standard exclusions, also provide indemnification to the buyer for general claims arising from actions occurring prior to the sale which are brought within 15 months from the date of sale, and prior-occurring intellectual property, employee benefit, and environmental claims which are brought within 36 months of the date of sale.

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

From June to August 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 MRV's current and former officers and directors. The five lawsuits filed in the Central District of California were consolidated. Claims were asserted under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 10b-5 promulgated thereunder. The allegations set forth in the complaints were based on facts disclosed in the Company's press release of June 5, 2008, which stated that MRV's financial statements could not be relied on due to its historical stock option practices and related accounting. The complaints sought to recover from the defendants unspecified compensatory and punitive damages, to require MRV 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. In November 2010, the judge overseeing the securities class action lawsuits gave final approval to a stipulated $10 million settlement agreement, which was covered by the Company's director and officer insurance policies. 

Motions to dismiss the defendants were heard in the second half of 2010 in both the federal and California

15

state derivative lawsuits, and certain defendants and claims were dismissed. Discovery continues in these matters. The Company and plaintiffs in the federal and state derivative lawsuits have attended mediations but have not been successful in reaching a settlement of these claims. To date, a majority of the costs related to the Company's and defendants' defense of these actions have been paid by the Company's insurance carriers under its director and officer insurance policies, including the securities class action settlement. However, if litigation continues and the insurance coverage amounts are depleted, the Company may be asked to advance funds to cover its indemnification obligations for its current and past directors and officers who are defendants in this matter, and will continue to incur its own legal expenses. Any such future obligations are not determinable at this time. As of September 30, 2011, approximately $3.5 million in coverage remains available under the Company's policies.

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. The Company's policy is to discuss these notices with the parties in an effort to demonstrate that MRV's products and/or processes do not violate any patents. The Company has been involved in such discussions with International Business Machines, Alcatel-Lucent, Ortel Communications, Ltd., Nortel Networks Corporation, Rockwell Automation, Inc., The Lemelson Foundation, Finisar Corporation and Apcon, Inc. in the past.

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

14.    Discontinued Operations

On May 6, 2011, the Company sold all of the issued and outstanding capital stock of TurnKey. Prior to its disposition, TurnKey was part of the Network Integration segment. The historical financial results of TurnKey prior to its sale have been reclassified as discontinued operations for all periods presented. The Company recorded losses of $0.2 million and $0.3 million from discontinued operations, net of income tax expense, for the nine months ended September 30, 2011 and 2010, respectively. The loss from discontinued operations for the nine months ended September 30, 2011 includes $3.2 million for the loss on the sale of TurnKey.

The assets and liabilities of TurnKey are reflected as discontinued operations in the Balance Sheet as of December 31, 2010 and consisted of (in thousands):

	December 31, 2010
Cash and cash equivalents	$	568
Time deposits	104
Accounts receivable, net	1,060
Inventories	255
Other current assets	787
Total current assets	2,774
Property and equipment, net	80
Goodwill	1,272
Total assets	$	4,126
Accounts payable	$	659
Accrued liabilities	708
Other current liabilities	9
Non-current liabilities	462
Total liabilities	$	1,838

16

15.    Subsequent Events

On October 17, 2011, the Company's Board of Directors declared a dividend totaling $75.0 million on the outstanding shares of the Company's Common Stock. The dividend is payable on November 10, 2011 to holders of record as of the close of business on November 2, 2011. The Board also approved a staggered cash payment to option holders equal to the loss in the Black-Scholes fair value of their options as a result of the dividend. Option holders who provide service to the Company at the time of the payment of the dividend will receive 50 percent of the payment amount in respect of their vested options promptly following payment of the dividend, and 50 percent of the payment amount 12 months following, conditioned upon continuous service to MRV, subject to certain acceleration conditions such as involuntary termination without cause, death or disability, change of control, or a sale of the business unit in which the option holder is employed. Option holders with unvested options will receive the cash payment in 12 months, subject to the same conditions described above.

Item 2.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 Financial Statements and Notes thereto included elsewhere in this Form 10-Q, and Items 6, 7 and 8 of our 2010 Form 10-K. The discussion in this Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and may qualify for the safe harbor provided for in Section 21E of the 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,” “may,” “should,” “could,” “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. In addition, the statements in this Form 10-Q may involve certain risks, uncertainties and assumptions, the likelihood of which are difficult to assess and may not occur, including risks that each of its business segments may not make the expected progress in its respective market, or that management's long-term strategy may not achieve the expected results. Other risks and uncertainties relate to delayed lead times in receiving components and delayed delivery times to customers due to short-term capacity constraints, potential changes in relationships with MRV's customers and suppliers and their financial condition, MRV's success in developing, introducing and shipping product enhancements and new products, competition in our market segments, market acceptance of new products and our ability to succeed in entering new markets, continued market acceptance of existing products and continued success in selling the products of other companies, product price discounts and general pricing pressure in certain of our markets, the timing and amount of significant orders from customers, obsolete inventory or product returns, warranty and other claims on products, the continued ability of MRV to protect its intellectual property rights and avoid onerous licensing fees, changes in product mix, maturing product life cycles, implementation of operating cost structures that align with revenue growth, political instability in areas of the world in which MRV operates or sells its products and services, currency fluctuations, changes in accounting rules, general economic conditions, as well as changes in such conditions specific to our market segments, maintenance of our inventory and production backlog, supply constraints directly or indirectly caused by natural disasters such as Japan's recent earthquakes, litigation, including but not limited to litigation related to MRV's historical stock option granting practices and its acquisition of Fiberxon, Inc., a delay in the Company's annual stockholder meeting, and the Company's undertaking a review of its strategic alternatives and the risks that such a review might create.

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-Q will in fact transpire or prove to be accurate.  All subsequent written and oral forward-looking statements attributable to 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-Q should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved or that any of the Company's operating expectations will be realized. Revenue 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-Q for the reasons detailed in Item 1A “Risk Factors” of Part I on the Company's 2010 Form 10-K and in Item 1A "Risk Factors" of Part II of this Form 10-Q. Readers should not place undue reliance on forward-looking statements, which reflect management's view only as of the date of this Form 10-Q. The Company undertakes no obligation to amend this Form 10-Q 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

17

events or circumstances.  Readers should also carefully review the risk factors described in other documents the Company files from time to time with the SEC and the cautionary statements contained in our press releases when we provide forward-looking information.

Overview

MRV is a global supplier of communications equipment and services to carriers, governments and enterprise customers worldwide. We conduct our business along two principal segments: (a) the Network Equipment group; and (b) the Network Integration group. We evaluate segment performance based on the revenues, gross profit and operating expenses of each segment. We do not evaluate segment performance on additional financial information. As such, there are no separately identifiable Statements of Operations data below operating income. Our Network Equipment group provides communications equipment that facilitates access, transport, aggregation and management of voice, data and video traffic in networks, data centers and laboratories used by telecommunications service providers, cable operators, enterprise customers and governments worldwide. Our Network Integration group operates primarily in Italy, France, 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. We market and sell our products worldwide, through a variety of channels, which include a dedicated direct sales force, manufacturers' representatives, value-added-resellers, distributors and systems integrators.

On October 26, 2010, we sold all of the issued and outstanding capital stock of our wholly-owned subsidiaries Source Photonics, Inc. and Source Photonics Santa Clara, Inc. (together “Source Photonics"). On May 6, 2011, we sold all of the issued and outstanding capital stock of three wholly-owned operating subsidiaries, TurnKey Communications AG, TurnKey Services AG, and Elcoma AG (together “TurnKey"). We have reclassified the historical results of Source Photonics and TurnKey prior to their sale as discontinued operations in this Form 10-Q for all periods presented.

We recently reviewed our cash position and decided to return excess capital to shareholders through a $75.0 million special dividend payable on November 10, 2011. We also recently engaged investment banking firms to assist our Board of Directors in evaluating strategic and capital allocation alternatives. These evaluations are still on-going.

We believe that the recent downturn in global markets has affected our revenues and operating results, particularly in the Italian market, and that conditions may worsen.  When economic uncertainties increase, our customers often take a more cautious approach in their capital expenditures, resulting in order delays, slowing deployments, and lengthening sales cycles. This may lead to increased competition for projects and price pressures resulting in lower gross margins.  Despite these economic uncertainties, 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. 

Our businesses involve reliance on foreign-based offices. Several of our business units, outside subcontractors and suppliers are located in foreign countries, including Argentina, Canada, France, Germany, Israel, Italy, Japan, Korea, the Netherlands, Norway, Singapore, South Africa, Switzerland, Sweden, Taiwan, Turkey and the United Kingdom. For the three months ended September 30, 2011 and 2010, foreign revenue constituted 71% and 80%, respectively, of our total revenue. For the nine months ended September 30, 2011 and 2010, foreign revenue constituted 73% and 79%, respectively, of our total revenue. The majority of our foreign sales are to customers located in the European region, with remaining foreign sales primarily to customers in the Asia Pacific region.

Critical Accounting Policies

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

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue 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

18

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.

Revenue Recognition.    Our major revenue-generating products consists of fiber optic components, switches and routers, console management, and physical layer products during the quarter. We generally recognize product revenue, net of sales discounts, returns and allowances, in accordance with ASC 605 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 reasonably assured. Products are generally shipped “FOB shipping point,” with no right of return, and revenue is recognized upon shipment. If revenue is to be recognized upon delivery, such delivery date is tracked through information provided by the third party shipping company we use to deliver the product to the customer. Our Network Integration business units resell third party products. We recognize revenue on these sales on a gross basis, as a principal, because we are the primary obligor in the arrangement, we are exposed to inventory and credit risk, we negotiate the selling prices, and we sell the products as part of a solution in which we provide services. Sales of services and system support are deferred and recognized ratably over the contract period in accordance with ASC 605-20 Services. Sales to end customers with contingencies, such as rights of return, rotation rights, conditional acceptance provisions and price protection, are infrequent and insignificant and are deferred until the contingencies have been satisfied or the contingent period has lapsed. For sales to distributors, we generally recognize revenue when a product is sold to the distributor rather than when the product is sold by the distributor to the end user. In certain circumstances, distributors have limited rights of return, including stock rotation rights, and/or are entitled to price protection, in which case a rebate credit may be provided to the customer if we lower our price on products held in the distributor's inventory. We estimate and establish allowances for expected future product returns and credits in accordance with ASC 605. We record a reduction in revenue for estimated future product returns and future credits to be issued to the customer in the period in which revenue is recognized, and for future credits to be issued in relation to price protection at the time we make changes to our distributor price book. We monitor product returns and potential price adjustments on an ongoing basis and estimate future returns and credits based on historical sales returns, analysis of credit memo data and other factors known at the time of revenue recognition.

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

Accounting for Multiple-Element Arrangements entered into prior to January 1, 2011. Arrangements with customers may include multiple deliverables involving combinations of equipment, services and software. In accordance with ASC 605-25 Multiple-Element Arrangements, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when revenue recognition criteria for each element is met. Fair value for each element is established based on the sales price charged when the same element is sold separately. If multiple element arrangements include software or software-related elements, we apply the provisions of ASC 985 Software 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.

Accounting for Multiple-Element Arrangements entered into or materially altered after January 1, 2011. In October 2009, the FASB amended ASC 605-25 and ASC 985 and the Company adopted the amendments prospectively effective January 1, 2011. In accordance with the amendments, we allocate arrangement consideration at the inception of the arrangement to all deliverables using the relative selling price method. The selling price we use for each deliverable is based on (a) vendor-specific objective evidence if available; (b) third-party evidence if vendor-specific objective evidence is not available; or (c) estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. We allocate discounts in the arrangement proportionally on the basis of the selling price of each deliverable. In accordance with the amendments, we no longer apply the software revenue guidance in ASC Subtopic 985-605 to tangible products containing software components and non-software components that function together to deliver the tangible product's essential functionality.

Allowance for Doubtful Accounts.    We make ongoing estimates relating to the collectability of our accounts

19

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

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

Inventory Reserves.    We make ongoing estimates relating to the market value of inventories, based upon our assumptions about future demand and market conditions. If we estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record an adjustment to the cost basis equal to the difference between the cost of the inventory and the estimated net realizable market value. This adjustment is recorded as a charge to cost of goods sold, and includes estimates for excess quantities and obsolete inventory. If changes in market conditions result in reductions in the estimated market value of our inventory below previous estimates, we would make further adjustments in the period in which we make such a determination and record a charge to cost of goods sold. At the time of recording the reserve, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration of, or increase in, that newly established cost basis. The inventory reserve is not reduced until the underlying inventory is sold or otherwise disposed.

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

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

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

We utilize significant management judgment to determine the provision for income taxes, deferred income tax assets and liabilities, including uncertain tax positions, and any valuation allowance recorded against net deferred income tax assets. Management periodically evaluates the deferred income tax assets as to whether it is likely that the deferred income tax assets will be realized. We establish a valuation allowance on the deferred income tax asset at the time we determine the asset is not likely to be realized. If we later determine that it is more likely than not that a deferred tax asset will be realized, we release the valuation allowance and record a credit within the Statements of Operations.

Share-Based Compensation.    We determine the fair value of stock options and warrants using the Black-

20

Scholes valuation model as permitted under ASC 718 Compensation - Stock Compensation. The assumptions used in calculating the fair value of share-based payment awards represent our best estimates. Our estimates may be impacted by certain variables including stock price volatility, employee stock option exercise behaviors, additional stock option grants, estimates of forfeitures, and the related income tax impact. See Note 9 “Share-Based Compensation” to the Financial Statements in Item 1, Part 1 of this Form 10-Q for further discussion.

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, the Swedish krona, the Taiwan dollar and the Israeli new shekel. For the nine months ended September 30, 2011 and 2010, 70% and 69% of revenue and 41% and 39% of operating expenses, respectively, were incurred at subsidiaries with a reporting currency other than the U.S. dollar. For the three and nine months ended September 30, 2011, these currencies were stronger against the U.S. dollar compared to the three and nine months ended September 30, 2010, so revenue and expenses in these currencies 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 Part I, Item 3 “Quantitative and Qualitative Disclosures About Market Risk” of this Form 10-Q.

21

Management Discussion Snapshot

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

	Three months ended September 30,								Nine months ended September 30,
	2011				2010				2011				2010
	$		% (1)		$		% (1)		$		% (1)		$		% (1)
Revenue (1) (2)	$	62,455	100	%	$	66,120	100	%	$	192,615	100	%	$	182,459	100	%
Network Equipment group	31,455		50		32,202		49		96,461		50		91,980		50
Network Integration group	34,380		55		37,699		57		108,108		56		100,331		55
Gross profit (3)	25,087		40		27,489		42		79,559		41		81,597		45
Network Equipment group	16,178		51		17,513		54		52,043		54		52,650		57
Network Integration group	8,954		26		10,233		27		28,152		26		29,203		29
Operating expenses (4)	21,584		35		22,097		33		70,912		37		70,666		39
Network Equipment group	13,598		43		14,864		46		44,304		46		43,553		47
Network Integration group	5,252		15		5,374		14		17,209		16		17,986		18
Operating income (3) (4)	3,503		6		5,392		8		8,647		4		10,931		6
Network Equipment group	2,580		8		2,649		8		7,739		8		9,097		10
Network Integration group	3,702		11		4,859		13		10,943		10		11,217		11

___________________________________

(1) Consolidated Statements of Operations data and segment revenue data express percentages as a percentage of consolidated revenue. Other Statements of Operations data by segment express percentages as a percentage of applicable segment revenue.

(2) Revenue information by segment includes intersegment revenue reflecting sales of network equipment to the Network Integration group.

(3) Consolidated gross profit data reflects adjustments for intersegment eliminations.

(4) Consolidated operating expenses include corporate unallocated operating expenses.

22

Three Months Ended September 30, 2011 Compared To Three Months Ended September 30, 2010

Revenue

The following table summarizes revenue by segment, including intersegment sales (dollars in thousands):

							Favorable/(Unfavorable)
Three months ended September 30:	2011			2010			$ Change			% Change		% Change constant currency(1)
Network Equipment group	$	31,455		$	32,202		$	(747	)	(2	)%	(8	)%
Network Integration group	34,380			37,699			(3,319		)	(9	)	(17	)
Before intersegment adjustments	65,835			69,901			(4,066		)	(6	)	(13	)
Intersegment adjustments (2)	(3,380		)	(3,781		)	401			11		11
Total	$	62,455		$	66,120		$	(3,665	)	(6	)%	(13	)%

(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) Adjustments represent the elimination of intersegment revenue.

Consolidated revenue for the third quarter of 2011 decreased $3.7 million, or 6%, compared to the third quarter of 2010, due primarily to a $3.3 million, or 9%, decrease in Network Integration group revenue, and to a lesser extent a $0.7 million, or 2%, decrease in Network Equipment revenue, partially offset by a $0.4 million, or 11%, decrease in intersegment sales from the Network Equipment group to the Network Integration group, which are eliminated in consolidation.

Network Equipment Group.    Revenue, including intersegment revenue, generated from the Network Equipment group decreased $0.7 million, or 2%, in the third quarter of 2011 compared to the third quarter of 2010. Creative Electronic Systems SA ("CES"), our Swiss aerospace and defense business unit, increased revenue by 14% due in part to higher sales from its largest customer than in the prior year. CES revenues are denominated approximately 60% in U.S. dollars and 40% in euro. Due to significant strengthening of the Swiss franc against the U.S. dollar and euro compared to the third quarter of 2010, CES experienced an adverse impact when recording the revenue in its functional currency (Swiss franc), which was offset by the favorable impact of translating and reporting in U.S. dollars. Our Optical Communications Systems ("OCS") division had decreased revenue this quarter of 8% due in part to the loss in revenue from the free-space optics product line and other less profitable products discontinued since the third quarter of 2010. Product sales of out-of-band networking and fiber optic components were also weaker than last year. Partially offsetting the declines, OCS saw an increase in service revenues. Geographically, the decrease at OCS was led by the Central and Latin America, and Asia Pacific regions. Sales in the U.S. increased 15% over the same period of last year.

23

The following table summarizes Network Equipment revenue by geographic region (dollars in thousands):

					Favorable/(Unfavorable)
Three months ended September 30:	2011		2010		$ Change			% Change
Revenue, excluding intersegment sales:
Americas	$	19,961	$	16,575	$	3,386		20	%
Europe	6,572		9,292		(2,720		)	(29	)
Asia Pacific	1,541		2,509		(968		)	(39	)
Other regions	1		45		(44		)	(98	)
Total external sales	28,075		28,421		(346		)	(1	)
Sales to Network Integration group:
Europe	3,380		3,781		(401		)	(11	)
Total intersegment sales	3,380		3,781		(401		)	(11	)
Total Network Equipment revenue	$	31,455	$	32,202	$	(747	)	(2	)%

Network Integration Group.    Revenue generated from the Network Integration group decreased $3.3 million, or 9%, in the third quarter of 2011 compared to the third quarter of 2010. The decline in revenue was led by Tecnonet S.p.A., our Italian subsidiary, where revenue fell by 25% in local currency due to a project in the prior year of approximately 3.0 million euro, or $3.9 million US dollars, that led to an atypically strong third quarter of 2010, and due to the weakening in the Italian telecom market. Interdata, our French subsidiary, also had a decline in revenue, representing an 18% decrease in local currency, due to a slowdown in the local telecom market and delays in acceptance testing on some larger projects. These decreases were partially offset by a $1.6 million increase at Alcadon AB, our Scandinavian subsidiary, representing a 9% increase in local currency, primarily due to strong sales of the OptiSwitch product line and several broadband deployment projects. We also benefited by a favorable change in exchange rates. Revenue would have been $3.3 million lower in 2011 had foreign currency exchange rates remained the same as they were in 2010. All revenue in the Network Integration group was generated in Europe.

Gross Profit

The following table summarizes gross profit by segment (dollars in thousands):

							Favorable/(Unfavorable)
Three months ended September 30:	2011			2010			$ Change			% Change		% Change constant currency (1)
Network Equipment group	$	16,178		$	17,513		$	(1,335	)	(8	)%	(13	)%
Network Integration group	8,954			10,233			(1,279		)	(12	)	(21	)
Before intersegment adjustments	25,132			27,746			(2,614		)	(9	)	(16	)
Adjustments (2)	(45		)	(257		)	212			(82	)	(82	)
Total	$	25,087		$	27,489		$	(2,402	)	(9	)%	(16	)%

(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) Adjustments represent the change in the elimination of intersegment profit in ending inventory in order to reconcile to consolidated gross profit.

24

Consolidated gross profit decreased $2.4 million, or 9% in the third quarter of 2011 compared to the prior year quarter, due to the 6% decrease in revenue and a decrease in gross margin from 42% to 40%. The decline in average gross margins was due to decline in gross margin in both the Network Equipment group and the Network Integration group, as well as a to a decrease in sales from the Network Equipment group to the Network Integration group. Gross profit would have been $1.9 million lower if foreign currency exchange rates had remained the same as they were in the third quarter of 2010.

Network Equipment Group.    The $1.3 million, or 8%, decrease in gross profit for the Network Equipment group was due to a 2% decrease in revenue, as well as a decrease in average gross margin from 54% to 51%. The decline in average gross margin is due to lower margins at both OCS and CES. OCS gross margins were relatively low due to increased pricing pressures resulting in higher discounts and due to a change in product mix. CES margins decreased due primarily to a decrease in service revenue and the impact of foreign currency fluctuations, partially offset by the benefit of some cost reduction efforts enacted in response to the currency impact. CES revenue is denominated in U.S. dollars and euro, and CES incurs most of its costs of revenue in Swiss francs. The strengthening of the Swiss franc against the U.S. dollar and euro adversely impacted gross margins in local currency on previously negotiated contracts and price lists. This decline in gross margins at CES was partially offset by the gross profit in Swiss franc translating into more U.S. dollars. Gross profit would have been $1.0 million lower in 2011 had foreign currency exchange rates remained the same as they were in 2010.

Network Integration Group.    Gross profit for the Network Integration group decreased $1.3 million, or 12%. The decrease was driven by a 9% decrease in revenue, and by a decrease in average gross margins. Average gross margins were down due to declines at all three business units, especially at Tecnonet and Interdata, partially offset by a favorable change in mix toward the higher margin business units. Gross profit was also favorably impacted by changes in the exchange rate. Gross profit would have been $0.9 million lower in 2011 had foreign currency exchange rates remained the same as they were in 2010.

Operating Expenses

The following table summarizes operating expenses by segment (dollars in thousands):

					Favorable/(Unfavorable)
Three months ended September 30:	2011		2010		$ Change			% Change		% Change constant currency(1)
Network Equipment group	$	13,598	$	14,864	$	1,266		9	%	14	%
Network Integration group	5,252		5,374		122			2		12
Total segment operating expenses	18,850		20,238		1,388			7		13
Corporate unallocated operating expenses and adjustments (2)	2,734		1,859		(875		)	(47	)	(47	)
Total	$	21,584	$	22,097	$	513		2	%	8	%

(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.

Consolidated operating expenses were $21.6 million, or 35% of revenues, in 2011 compared to $22.1 million, or 33% of revenues, in 2010. The $0.5 million, or 2%, decrease occurred primarily in the Network Equipment group ($1.3 million) and to a lesser extent in the Network Integration group ($0.1 million), partially offset by an increase in corporate unallocated operating expenses of $0.9 million. Corporate expenses in the third quarter of 2010 included a credit of $1.4 million related to a litigation accrual related to the lawsuit by Finisar against MRV and Source Photonics which was settled in the third quarter of 2010 by Source Photonics; MRV was released from the claim as part of the settlement.

25

The expense incurred by Source Photonics is included in income from discontinued operations. Corporate operating expenses in the third quarter of 2011 also included $0.3 million of legal fees related to Board activities. The remaining decrease in corporate operating expenses is due primarily to a $0.4 million decrease in share-based compensation of our chief executive officer which was fully vested as of June 30, 2011 and a decrease in corporate headcount, partially offset by higher Board of Director compensation. Operating expenses would have been $1.3 million lower in 2011 had foreign currency exchange rates remained the same as they were in 2010. Operating expenses included share-based compensation of $0.4 million and $0.5 million in 2011 and 2010, respectively.

Network Equipment Group.    Operating expenses in the Network Equipment group for 2011 were $13.6 million, or 43% of revenues, compared to $14.9 million, or 46% of revenues in 2010. The $1.3 million, or 9%, decrease was due to a $2.0 million decrease in operating expenses at OCS, and to a decrease at CES in local currency, partially offset by an unfavorable foreign currency impact. The decrease at OCS is due to the closure of our free-space optics product line and rationalization of certain foreign offices and decreased employee benefits and voluntary reductions in headcount. Operating expenses were reduced at CES on a local currency basis in both sales and marketing and general and administrative expenses due to cost reduction efforts. Operating expenses would have been $0.8 million lower in 2011 had foreign currency exchange rates remained the same as they were in 2010.

Network Integration Group.    Operating expenses in the Network Integration group for 2011 were $5.3 million, or 15% of revenues, compared to $5.4 million, or 14% of revenues, in 2010. The $0.1 million, or 2%, decrease in operating expense was due to reductions measured in local currency at Alcadon and Tecnonet, partially offset by the adverse impact of changes in foreign exchange rates. Operating expenses would have been $0.5 million lower in 2011 had foreign currency exchange rates remained the same as they were in 2010.

Operating Income

The following table summarizes operating income by segment (dollars in thousands):

							Favorable/(Unfavorable)
Three months ended September 30:	2011			2010			$ Change			% Change		% Change constant currency(1)
Network Equipment group	$	2,580		$	2,649		$	(69	)	(3	)%	(12	)%
Network Integration group	3,702			4,859			(1,157		)	(24	)	(31	)
Total segment operating income	6,282			7,508			(1,226		)	(16	)	(25	)
Corporate unallocated and adjustments (2)	(2,779		)	(2,116		)	(663		)	(31	)	(31	)
Total	$	3,503		$	5,392		$	(1,889	)	(35	)%	(47	)%

(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) Adjustments represent the elimination of intersegment revenue and profit in inventory in order to reconcile to consolidated operating income (loss).

The $2.4 million, or 9%, decrease in gross profit partially offset by the $0.5 million, or 2%, decrease in operating expenses led to a $1.9 million, or 35%, decrease in operating income representing a decline in operating margin from 8% to 6%. Our operating income would have been $0.6 million lower in 2011 had foreign currency exchange rates remained the same as they were in 2010. Operating income included share-based compensation expense of $0.4 million and $0.5 million in 2011 and 2010, respectively.

Network Equipment Group.    The Network Equipment group reported operating income of $2.6 million in both 2011 and 2010. The $1.3 million decrease in gross profit was offset by the $1.3 million reduction in operating expenses. Operating margin was 8% in 2011 and 8% in 2010. Operating income would have been $0.2 million lower in 2011 had foreign currency exchange rates remained the same as they were in 2010.

Network Integration Group.    The Network Integration group reported operating income of $3.7 million for 2011,

26

compared to operating income of $4.9 million for 2010. The $1.2 million decrease was due to the $1.3 million decrease in gross profit, partially offset by a $0.1 million decrease in operating expenses. The Network Integration group operating margin was 11% in the third quarter of 2011 compared to 13% in the third quarter of 2010. Operating income would have been $0.4 million lower in 2011 had foreign currency exchange rates remained the same as they were in 2010.

Interest Expense and Other Income, Net

Interest expense was flat compared to 2010 at $0.2 million reflecting a steady average outstanding debt balance outstanding during the period. Other income, net, principally includes interest income on cash, cash equivalents and investments and gains and losses on foreign currency transactions. We recognized a net loss of $1.7 million on foreign currency transactions in 2011 compared to a $1.3 million net loss in 2010.

Provision for Income Taxes

In the third quarter of 2011 we had a $0.3 million income tax benefit compared to a provision for income taxes of $0.9 million in 2010. Income tax expense fluctuates based on the amount of pre-tax income generated in the various jurisdictions where we conduct operations and pay income tax. The income tax benefit during 2011 is due to a $1.3 million net operating loss ("NOL") carryforward generated by one of our subsidiaries in Israel related to the closure of Jolt, our free-space optics subsidiary. The valuation allowance against the NOLs of this Israeli subsidiary was released in the fourth quarter of 2010 upon determination that the deferred tax assets were likely to be realized, and we resumed recording a tax provision in the first quarter of 2011 as NOLs were utilized to offset their pre-tax income.

Discontinued Operations

Income from discontinued operations for the third quarter of 2010 includes $0.8 million of income related to the results of operations of Source Photonics, and a loss of $0.3 million related to the results of operations of TurnKey. We completed the sale of Source Photonics on October 26, 2010 and the sale of TurnKey on May 6, 2011.

Nine Months Ended September 30, 2011 Compared To Nine Months Ended September 30, 2010

Revenue

The following table summarizes revenue by segment, including intersegment sales (dollars in thousands):

							Favorable/(Unfavorable)
Nine months ended September 30:	2011			2010			$ Change			% Change		% Change constant currency(1)
Network Equipment group	$	96,461		$	91,980		$	4,481		5	%	—	%
Network Integration group	108,108			100,331			7,777			8		(1	)
Before intersegment adjustments	204,569			192,311			12,258			6		(1	)
Intersegment adjustments (2)	(11,954		)	(9,852		)	(2,102		)	(21	)	(21	)
Total	$	192,615		$	182,459		$	10,156		6	%	(2	)%

(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) Adjustments represent the elimination of intersegment revenue.

Consolidated revenue for the nine months ended September 30, 2011 increased $10.2 million, or 6%, compared to the comparable period of 2010, due primarily to a $7.8 million, or 8%, increase in Network Integration group revenue,

27

and to a lesser extent a $4.5 million, or 5%, increase in Network Equipment revenue, partially offset by a $2.1 million, or 21%, increase in intersegment sales from the Network Equipment group to the Network Integration group, which are eliminated in consolidation.

Network Equipment Group.    Revenue, including intersegment revenue, generated from the Network Equipment group increased $4.5 million, or 5%, in the nine months ended September 30, 2011 compared to the first nine months of 2010. CES increased revenue by 20%. CES revenues are denominated approximately 60% in U.S. dollars and 40% in euro. Due to significant strengthening of the Swiss franc against the U.S. dollar and euro compared to the first half of 2010, CES experienced an adverse impact when recording the revenue in its functional currency (Swiss franc), which was offset by the favorable impact of translating and reporting in U.S. dollars. OCS grew revenues during the period by 1% compared to the same period of the prior year led by gains in the OptiSwitch product line and in service revenues, offset by declines related to discontinued product lines, reductions in sales of fiber optic components, and lower sales of our Lambda Driver^tm product. The increase was led by 18% growth domestically, partially offset by declines in each of the foreign regions.

The following table summarizes Network Equipment revenue by geographic region (dollars in thousands):

					Favorable/(Unfavorable)
Nine months ended September 30:	2011		2010		$ Change			% Change
Revenue, excluding intersegment sales:
Americas	$	56,693	$	44,206	$	12,487		28	%
Europe	21,617		30,132		(8,515		)	(28	)
Asia Pacific	6,183		7,734		(1,551		)	(20	)
Other regions	14		56		(42		)	(75	)
Total external sales	84,507		82,128		2,379			3
Sales to Network Integration group:
Europe	11,954		9,852		2,102			21
Total intersegment sales	11,954		9,852		2,102			21
Total Network Equipment revenue	$	96,461	$	91,980	$	4,481		5	%

Network Integration Group.    Revenue generated from the Network Integration group increased $7.8 million, or 8%, in the first nine months of 2011 compared to the prior year period. Revenue growth was led by a $7.1 million increase at Alcadon, representing an 18% increase in local currency, primarily due to strong sales of the OptiSwitch product line and by a $3.3 million increase at Interdata due in part to recognition of previously deferred revenue upon customer acceptance of a significant project in the second quarter. Tecnonet revenue declined 11% on a local currency basis compared to the prior year. Revenue would have been $8.8 million lower in 2011 had foreign currency exchange rates remained the same as they were in 2010. All revenue in the Network Integration group was generated in Europe.

28

Gross Profit

The following table summarizes gross profit by segment (dollars in thousands):

							Favorable/(Unfavorable)
Nine months ended September 30:	2011			2010			$ Change			% Change		% Change constant currency (1)
Network Equipment group	$	52,043		$	52,650		$	(607	)	(1	)%	(7	)%
Network Integration group	28,152			29,203			(1,051		)	(4	)	(12	)
Before intersegment adjustments	80,195			81,853			(1,658		)	(2	)	(9	)
Adjustments (2)	(636		)	(256		)	(380		)	(148	)	(148	)
Total	$	79,559		$	81,597		$	(2,038	)	(2	)%	(9	)%

(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) Adjustments represent the change in the elimination of intersegment profit in ending inventory in order to reconcile to consolidated gross profit.

Consolidated gross profit decreased $2.0 million, or 2%, due to the decrease in average gross margin from 45% to 41%, partially offset by the 6% increase in revenue. The decline in average gross margins was due to declines in gross margins in both the Network Equipment group and the Network Integration group and to an increase in the proportion of revenues contributed by the Network Integration group, partially offset by an increase in intersegment sales. Gross profit would have been $5.4 million lower if foreign currency exchange rates had remained the same as they were in the first nine months of 2010.

Network Equipment Group.    The $0.6 million, or 1%, decrease in gross profit for the Network Equipment group was due to the decrease in average gross margin from 57% to 54%, partially offset by the 5% increase in revenue. The decline in average gross margin is due to lower margins at both OCS and CES. Gross profit at OCS declined $2.4 million in the first nine months of 2011 compared to 2010. OCS gross margins were within that business unit's normal range but declined compared to the first nine months of 2010 which was unusually high due in part to sales of optical components sold as part of system solutions, which had a more rapid decline in cost than in average selling prices during the first quarter of 2010. OCS gross margins were also unfavorably impacted by $0.6 million in one-time costs related to the exit of its free-space optics product line during the second quarter. CES margins decreased 419 basis points due to the impact of foreign currency fluctuations. CES revenue is denominated in U.S. dollars and euro, and CES incurs most of its costs of revenue in Swiss francs. The strengthening of the Swiss franc against the U.S. dollar and euro adversely impacted gross margins in local currency on previously negotiated contracts and price lists. This decline in gross margins at CES was partially offset by the gross profit in Swiss franc translating into more U.S. dollars. Gross profit would have been $2.9 million lower in 2011 had foreign currency exchange rates remained the same as they were in 2010.

Network Integration Group.    Gross profit for the Network Integration group decreased $1.1 million, or 4%. The decrease was driven by the decline in average gross margins from 29% to 26%, partially offset by the 8% increase in revenue. All three of our Network Integration business units had lower gross margins in the nine month period ended September 30, 2011 compared to the same period of the prior year. The reduced margins came in the first and third quarters, and there was a slight improvement in margins in the second quarter. The largest first quarter decrease was at Interdata, which had unusually high margins in the first quarter last year compared to the rest of the year and a temporary decrease in the proportion of revenue from services. A decrease at Tecnonet was due to unusually high margins in the first quarter of 2010 and relatively low margins in the first quarter of 2011, though within Tecnonet's normal range. Tecnonet's margins improved in the second quarter of 2011 and were only slightly below the second quarter of 2010. In the third quarter, Tecnonet saw lower margins again due to increased price pressures in a weak Italian telecom market. Tecnonet sees margin fluctuations from period to period due to the portion of revenues from product sales, solution sales, and services. Alcadon gross margins were down in the first nine months of 2011 compared to the first nine months of 2010 due in part to relatively high margins in the first quarter of 2010. Gross profit would

29

have been $2.5 million lower in 2011 had foreign currency exchange rates remained the same as they were in 2010.

Operating Expenses

The following table summarizes operating expenses by segment (dollars in thousands):

					Favorable/(Unfavorable)
Nine months ended September 30:	2011		2010		$ Change			% Change		% Change constant currency(1)
Network Equipment group	$	44,304	$	43,553	$	(751	)	(2	)%	3	%
Network Integration group	17,209		17,986		777			4		13
Total segment operating expenses	61,513		61,539		26			—		6
Corporate unallocated operating expenses and adjustments (2)	9,399		9,127		(272		)	(3	)	(3	)
Total	$	70,912	$	70,666	$	(246	)	—	%	5	%

(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.

Consolidated operating expenses were $70.9 million, or 37% of revenues, in 2011 compared to $70.7 million, or 39% of revenues, in 2010. The $0.2 million increase was due to a $0.8 million, or 2%, increase in the Network Equipment group, offset by a $0.8 million, or 4% decrease in the Network Integration group and due to a $0.3 million increase in corporate unallocated operating expenses. Corporate expenses in the first nine months of 2010 included $0.9 million in severance expenses related to our former CEO. Corporate operating expenses in the first nine months of 2011 included $1.0 million of legal fees related to board activities. The remaining $0.2 million increase in corporate operating expenses was due to relatively higher compensation costs, especially share-based compensation, of our current chief executive officer and higher board of director compensation, partially offset by corporate cost cutting and headcount reductions. Operating expenses would have been $3.5 million lower in 2011 had foreign currency exchange rates remained the same as they were in 2010. Operating expenses included share-based compensation of $1.9 million and $1.2 million in 2011 and 2010, respectively.

Network Equipment Group.    Operating expenses in the Network Equipment group for 2011 were $44.3 million, or 46% of revenues, compared to $43.6 million, or 47% of revenues in 2010. The $0.8 million, or 2%, increase was due primarily to CES. The increase at CES was due to the strengthening of the Swiss franc against the dollar, increased product development and engineering spending, and to a reversal of a bonus accrual for certain terminated employees during the second quarter of 2010. Operating expenses would have been $1.5 million lower in 2011 had foreign currency exchange rates remained the same as they were in 2010.

Network Integration Group.    Operating expenses in the Network Integration group for 2011 were $17.2 million, or 16% of revenues, compared to $18.0 million, or 18% of revenues, in 2010. The $0.8 million, or 4%, decrease in operating expense came from general and administrative cost reduction efforts at all three business units. Operating expenses would have been $2.0 million lower in 2011 had foreign currency exchange rates remained the same as they were in 2010.

Operating Income

The following table summarizes operating income by segment (dollars in thousands):

30

							Favorable/(Unfavorable)
Nine months ended September 30:	2011			2010			$ Change			% Change		% Change constant currency(1)
Network Equipment group	$	7,739		$	9,097		$	(1,358	)	(15	)%	(24	)%
Network Integration group	10,943			11,217			(274		)	(2	)	(12	)
Total segment operating income	18,682			20,314			(1,632		)	(8	)	(17	)
Corporate unallocated and adjustments (2)	(10,035		)	(9,383		)	(652		)	(7	)	(7	)
Total	$	8,647		$	10,931		$	(2,284	)	(21	)%	(38	)%

(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) Adjustments represent the elimination of intersegment revenue and profit in inventory in order to reconcile to consolidated operating income (loss).

The $2.0 million decrease in gross profit, and, to a lesser extent, the $0.2 million increase in operating expenses, led to a $2.3 million decrease in operating income representing a decline in operating margin from 6% to 4%. Our operating income would have been $1.9 million lower in 2011 had foreign currency exchange rates remained the same as they were in 2010. Operating income included share-based compensation expense of $2.0 million and $1.2 million in 2011 and 2010, respectively.

Network Equipment Group.    The Network Equipment group reported operating income of $7.7 million for 2011, compared to $9.1 million for 2010. The $1.4 million decrease in operating income was due to the $0.8 million increase in operating expenses and the $0.6 million decrease in gross profit. Operating income in 2011 reflected $0.9 million in one-time charges related to the exit of OCS's free-space optics product line in the second quarter. Operating margin was 8% in 2011 and 10% in 2010. Operating income would have been $0.9 million lower in 2011 had foreign currency exchange rates remained the same as they were in 2010.

Network Integration Group.    The Network Integration group reported operating income of $10.9 million for 2011, compared to operating income of $11.2 million for 2010. The $0.3 million decrease was due to a $1.1 million decrease in gross profit, partially offset by a $0.8 million decrease in operating expenses. Operating margins for the Network Integration group declined from 11% in the first nine months of 2010 to 10% in the first nine months of 2011. Operating income would have been $1.0 million lower in 2011 had foreign currency exchange rates remained the same as they were in 2010.

Interest Expense and Other Income, Net

Interest expense was relatively flat compared to the same period of the prior year. Other income, net, principally includes interest income on cash, cash equivalents and investments and gains and losses on foreign currency transactions. We recognized a net loss of $2.2 million on foreign currency transactions in 2011 compared to a $1.4 million net loss in 2010. Other income for 2010 includes a $0.5 million gain realized upon the settlement we negotiated with certain former Fiberxon stockholders of the net deferred consideration payable arising from the 2007 acquisition of Fiberxon.

Provision for Income Taxes

The provision for income taxes was $3.0 million in 2011 and $4.6 million in 2010. Income tax expense fluctuates based on the amount of pre-tax income generated in the various jurisdictions where we conduct operations and pay income tax. The decrease in the provision for income taxes during 2011 is due to a net decrease in pre-tax income in the jurisdictions where we pay taxes, particularly in Italy and Switzerland, partially offset by increases in Israel, France, and Sweden. OCS did not record any tax expense in Israel in 2010, as there was a full valuation allowance against their deferred tax assets. That valuation allowance was released in the fourth quarter of 2010 upon determination that the deferred tax assets were likely to be realized, and we resumed recording a tax provision in the first quarter of 2011

31

as NOLs were utilized to offset their pre-tax income. In the third quarter of 2011, we recognized an income tax benefit of $1.3 million related to the generation of net operating loss carryforwards in Israel related to the shut-down of our Jolt subsidiary.

Tax Loss Carryforwards

As of December 31, 2010, we had NOLs of $176.5 million, $156.8 million, and $88.7 million for federal, state, and foreign income tax purposes, respectively. Under the Internal Revenue Code, if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change NOLs, capital loss carryforwards 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 carryforwards existing at that time could be limited. As of September 30, 2011, the U.S. federal and state NOLs had a full valuation allowance.

Discontinued Operations

Income from discontinued operations for the nine months of 2010 includes $6.7 million of income related to the results of operations of Source Photonics and $0.3 million of net loss from the results of operations of TurnKey. Loss from discontinued operations for the nine months of 2011 included a net loss from the operations of TurnKey of $0.2 million and a loss on disposal of $3.2 million. We completed the sale of Source Photonics on October 26, 2010 and the sale of TurnKey on May 6, 2011.

Liquidity and Capital Resources

During the nine months ended September 30, 2011, the Company's cash, restricted time deposits, and short-term investments position decreased from $156.2 million to $155.5 million. Our cash inflows included $5.8 million in net income adjusted for non-cash expenses including depreciation and amortization, share-based compensation, changes in deferred tax assets, and allowance for doubtful accounts and the loss on sale of TurnKey. Our cash flow from operations includes a change in current assets and liabilities of $0.1 million, primarily due to a decrease in accounts payable and accrued liabilities of $10.5 million partially offset by a reduction of $4.8 million in accounts receivable from collection of amounts outstanding at December 31, 2010 and a decrease in inventory. Cash provided by operating activities was offset by net payments on short-term debt of $5.5 million, capital expenditures of $2.1 million, and $0.4 million used to repurchase shares of our Common Stock. We do not expect the sale of TurnKey or Source Photonics to have a significant adverse impact on our liquidity or capital resources.

We periodically review our capital position and consider returning capital to shareholders through share repurchase programs or special dividends when the cash on hand exceeds our foreseeable cash needs. On October 17, 2011, the Board of Directors declared a special dividend totaling $75.0 million on the the outstanding shares of the Company's Common Stock to return excess cash to the Company's stockholders. The dividend is payable on November 10, 2011 to holders of record on November 2, 2011. We do not expect the dividend to have a significant adverse impact on our operations. Adjusting our cash balance for the expected dividend, the Company would still have a cash to debt ratio of 6.1 to 1 as of September 30, 2011.

Cash and cash equivalents totaled $153.8 million at September 30, 2011 compared to $141.0 million in cash and cash equivalents as of December 31, 2010. The following table summarizes MRV's cash position including cash and cash equivalents, restricted time deposits and short-term marketable securities, and our short-term debt position (in thousands):

32

	September 30, 2011		December 31, 2010
Cash
Cash and cash equivalents	$	153,754	$	141,001
Short-term marketable securities	—		13,474
Restricted time deposits	1,760		1,709
	155,514		156,184
Short-term debt	13,188		18,036
Cash in excess of debt	$	142,326	$	138,148
Ratio of cash to debt (1)	11.8		8.7

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

Short-term Debt

All of our short-term debt is at Tecnonet, our Italian Network Integration subsidiary. The following table summarizes our short-term debt (dollars in thousands):

	September 30, 2011		December 31, 2010		Increase (decrease)
Lines of credit secured by accounts receivable	$	13,188	$	17,771	$	(4,583	)
Unsecured short-term debt	—		265		(265		)
Total short-term debt	$	13,188	$	18,036	$	(4,848	)

The decrease in short-term debt at Tecnonet includes net payments of $5.5 million, a reduction of 28% in local currency, partially offset by the impact of changes in foreign currency exchange rates.

33

Working Capital

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

	September 30, 2011		December 31, 2010
Current assets	$	276,023	$	289,128
Less: Current assets of discontinued operations	—		(2,774		)
Current assets from continuing operations	276,023		286,354
Current liabilities	81,730		96,372
Less: Current liabilities from discontinued operations	—		(1,376		)
Current liabilities from continuing operations	81,730		94,996
Working capital	$	194,293	$	194,132
Current ratio (1)	3.4		3.0

(1) Determined by dividing total current assets by total current liabilities.

Off-Balance Sheet Arrangements

We do not have transactions, arrangements or other relationships with unconsolidated entities that are reasonably likely to affect our liquidity or capital resources. We have no 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.

Contractual Obligations

There were no material changes in our contractual obligations since December 31, 2010 other than the decrease in short-term debt discussed above. 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 NOLs and capital loss carryforwards if we seek financing through issuance of additional equity securities.

Internet Access to Our Financial Documents

We maintain a website at www.mrv-corporate.com. We make available, free of charge, either by direct access or hyperlink, our Annual Reports 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.

34

Item 3.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 and short-term borrowings 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. Through certain foreign offices, and from time to time, we enter into interest rate swap contracts. As of September 30, 2011, 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.

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 accounts receivable or purchase commitments denominated in foreign currencies. These contracts cover periods commensurate with known or expected exposures, generally less than three months. As of September 30, 2011, we did not have any foreign exchange contracts outstanding.

Certain assets and liabilities, including certain bank accounts, accounts receivables, and accounts payables of some of our business units, exist in currencies other than the functional currency of the related business units and are sensitive to foreign currency exchange rate fluctuations. These currencies principally include the U.S. dollar, the euro, the Swedish krona, the Swiss franc, the Taiwan dollar, and the Israeli new shekel. Additionally, Tecnonet, which has a functional currency of the euro, has certain of its lines of credit denominated in U.S. dollars. When these transactions are settled in a currency other than the functional currency, we recognize a foreign currency transaction gain or loss.

When we translate the financial position and results of operations of subsidiaries with functional currencies other than the U.S. dollar, we recognize a translation gain or loss in other comprehensive income. Approximately 59% of our cost of sales and operating expenses are reported by these subsidiaries. These currencies were generally stronger against the U.S. dollar for the three and nine months ended September 30, 2011 compared to the same period last year, so revenues and expenses in these countries translated into more dollars than they would have in 2010. For the nine months ended September 30, 2011, we had approximately:

• $68.0 million in cost of goods and operating expenses recorded in euros;

• $17.8 million in cost of goods and operating expenses recorded in Swedish kronor;

• $21.1 million in cost of goods and operating expenses recorded in Swiss francs; and

• $1.1 million in cost of goods and operating expenses recorded in Taiwan dollars.

Had rates of these various foreign currencies been 10% higher relative to the U.S. dollar during the nine months ended September 30, 2011, our costs would have increased to approximately:

• $74.8 million in cost of goods and operating expenses recorded in euros;

• $19.6 million in cost of goods and operating expenses recorded in Swedish kronor;

• $23.2 million in cost of goods and operating expenses recorded in Swiss francs; and

• $1.2 million in cost of goods and operating expenses recorded in Taiwan dollars.

35

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

	September 30, 2011		December 31, 2010
U.S. dollars	$	131,177	$	123,371
Euros	6,255		7,986
Swiss francs	11,080		6,303
Taiwan dollars	73		266
Norwegian kronor	1,112		635
Swedish kronor	3,003		1,680
Israeli new shekels	827		671
Other	227		89
Total cash and cash equivalents	$	153,754	$	141,001

Macro-economic uncertainties.  We believe that the recent downturn in global markets has affected our revenues and operating results, particularly in the Italian market, and that conditions may worsen.  When economic uncertainties increase, our customers often take a more cautious approach in their capital expenditures, resulting in order delays, slowing deployments, and lengthening sales cycles. This may lead to increased competition for projects and price pressures resulting in lower gross margins.  Despite these economic uncertainties, 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.  Accordingly, we are unable to determine the resulting magnitude of impact, including timing and length of impact, on our revenues and operating results.  

Item 4.Controls and Procedures.

As of the end of the period covered by this report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report on Form 10-Q, the Company's disclosure controls and procedures were effective.

Changes in Internal Controls

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. In connection with this evaluation as to whether there have been changes, management identified control deficiencies at one of our business units which may rise to the level of a material weakness. We are in the process of evaluating and addressing these matters, and are unable to determine their materiality until that evaluation is complete.

36

PART II - OTHER INFORMATION

Item 1.Legal Proceedings.

We are subject to legal claims and litigation in the ordinary course of business, including but not limited to product liability, employment and intellectual property claims. The outcome of any such matters is currently not determinable. If one or more of the matters listed below or otherwise is ultimately determined not in our favor, it could have a material adverse effect on our consolidated financial position or results of operations in the period in which they occur.

Stock Option Litigation

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

From June to August 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 were 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 were based on facts disclosed in our press release of June 5, 2008, which stated that the Company's financial statements could not be relied on due to the Company's historical stock option practices and related accounting. The complaints sought 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. In November 2010, the judge overseeing the securities class action lawsuits gave final approval to a stipulated $10 million settlement agreement, which was covered by our director and officer insurance policies. 

Motions to dismiss the defendants were heard in the second half of 2010 in both the federal and California state derivative lawsuits, and certain defendants and claims were dismissed. Discovery continues in these matters. The Company and plaintiffs in the federal and state derivative lawsuits have attended mediations but have not been successful in reaching a settlement of these claims.

Fiberxon Acquisition Litigation

In July 2007, we purchased Fiberxon, Inc., and the purchase agreement included possible post-acquisition obligations on MRV. We filed an affirmative lawsuit in the California Superior Court in March 2009 against a) former stockholders of Fiberxon, seeking to cancel a potential deferred consideration obligation of approximately $31.5 million, and b) certain former executives, directors and stockholders of Fiberxon, alleging fraud and other claims. We entered into a Settlement Agreement and Release in December 2009 with Yoram Snir, personally and in his capacity as Stockholders' Agent for the former stockholders of Fiberxon. Pursuant to the settlement agreement, the Company has fully settled any obligation to pay the first $18 million of potential deferred consideration. This amount was reserved for set-off in the original merger agreement, and the former Fiberxon stockholders, pursuant to the settlement, were entitled to their pro rata portion of the $1.5 million settlement amount. Additionally, we agreed to pay up to $4.5 million to settle claims relating to the remaining $13.5 million of the potential deferred compensation. The second portion of the settlement is with the former stockholders directly, and to date, stockholders holding 67% of the former shares have elected to participate in this portion of the settlement.

We maintained the California Superior Court action with four remaining defendants, and in December 2010, the court issued a default judgment against them in the amount of $57.4 million. However, the court set aside this judgment in April 2011 at the request of the defendants. In addition, in 2010, four former stockholders, who owned

37

approximately 27% of the former Fiberxon and who did not participate in the second portion of the settlement, initiated litigation in Beijing, PRC against MRV, Source Photonics LLC and other related parties alleging a claim for approximately $3.7 million, representing these former stockholders' pro rata amount of the $13.5 million portion of the potential deferred compensation. Two of the plaintiffs voluntarily withdrew their suits without prejudice in December 2010, but they have subsequently re-filed the suits. In connection with the sale by MRV of Source Photonics in October 2010, we agreed to indemnify the buyer against certain litigation, including these actions. 

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

Item 1A.Risk Factors

For a more complete understanding of the risks associated with an investment in our securities, you should carefully consider and evaluate all of the information in this Form 10-Q, in combination with the more detailed description of our business in our 2010 Form 10-K. There have been no material changes in the Risk Factors as previously disclosed in our 2010 Form 10-K and the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, with the exception of the additional risk factor set forth below.

We have hired investment bankers to analyze our strategic and capital allocation alternatives which could have an impact on our business, competitive position, customer relationships and employee morale and retention.

In Periodic Reports filed on Form 8-K, we have announced that we have engaged investment bankers to assist us in the evaluation of strategic and capital allocation alternatives, including with respect to strategic alternatives for two of our business units, CES and OCS.  This review of strategic alternatives could result in the sale of one or more of our business units, although there can be no assurance that any additional action will result from these reviews, or the timing of any such action.  However, the announcements themselves could create concerns and uncertainty among our customer base and among our employees regarding the Company's future, and the future of the individual business units.  These concerns and uncertainly could materially adversely affect our ability to compete in our markets and retain and recruit qualified personnel.

38

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

The following table sets forth information regarding our repurchases of our Common Stock during the nine months ended September 30, 2011:

Period	Shares purchased	Average price per share	Total number of shares purchased as part of publicly announced share repurchase programs	Approximate dollar value that may yet be purchased under the program (in thousands) (1)
January 1, 2011 to January 31, 2011	69,600	1.68	69,600	8,389
February 1, 2011 to February 28, 2011	36,800	1.71	36,800	8,326
March 1, 2011 to March 31, 2011	149,152	1.64	149,152	8,081
April 1, 2011 to April 30, 2011	—	—	—	8,081
May 1, 2011 to May 31, 2011	—	—	—	8,081
June 1, 2011 to June 30, 2011	—	—	—	8,081
July 1, 2011 to July 31, 2011	—	—	—	8,081
August 1, 2011 to August 31, 2011	—	—	—	8,081
September 1, 2011 to September 30, 2011	—	—	—	8,081

(1) On September 13, 2010, we publicly announced that the Board of Directors of the Company approved a repurchase of shares of Common Stock of the Company in an amount up to $10,000,000 under a stock repurchase program operated in accordance with the requirements of Rule 10b-18 under the Exchange Act. The program expires on December 31, 2011.

39

Item 6.Exhibits

(a) Exhibits

No.	Description
10.1	Agreement, dated October 17, 2011, by and among the Company, Charles M. Gillman, Joan E. Herman, Michael E. Keane, Michael J. McConnell, Igal Shidlovsky, Kenneth Shubin Stein, Dilip Singh, Philippe Tartavull, Spencer Capital Management and Boston Avenue Capital LLC (incorporated by reference from Exhibit 10.1 of Form 8-K filed on October 21, 2011)
31.1	Certification of the Principal Executive Officer required by Rule 13a-14(a) of the Exchange Act (filed herewith)
31.2	Certification of the Principal Financial Officer required by Rule 13a-14(a) of the Exchange Act (filed herewith)
32.1	Certifications of the Principal Executive and Financial Officers pursuant to 18 U.S.C. Section 1350 (furnished herewith)
101.INS	XBRL Instance Document (furnished herewith)
101.SCH	XBRL Taxonomy Extension Schema Document (furnished herewith)
101.CAL	XBRL Taxonomy Calculation Linkbase Document (furnished herewith)
101.LAB	XBRL Taxonomy Label Linkbase Document (furnished herewith)
101.PRE	XBRL Taxonomy Presentation Linkbase Document (furnished herewith)
101.DEF	XBRL Taxonomy Extension Definition Document (furnished herewith)

40

SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on November 9, 2011.

MRV COMMUNICATIONS, INC.

By:  /s/ Dilip Singh

Dilip Singh

Chief Executive Officer

Principal Executive Officer

By:  /s/ Chris King

Chris King

Chief Financial Officer

Principal Financial Officer

41