MRV Communications (MRVC) 10-Q 2012 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 endedSeptember 30, 2012

[ ] 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 of	(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 Web site, 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, 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 [ ]
(Do not check if a 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 9, 2012,152,749,465shares of Common Stock of MRV Communications, Inc. were outstanding.

1

MRV Communications, Inc.

Form 10-Q for the Quarter Ended September 30, 2012

Index

		Page Number
PART I	Financial Information	3
Item 1.	Unaudited Condensed Consolidated Financial Statements:	3
	Statements of Operations (unaudited) for the three and nine months ended September 30, 2012 and 2011	3
	Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2012 and 2011	3
	Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011	5
	Statements of Cash Flows (unaudited) for the nine months ended September 30, 2012 and 2011	6
	Notes to Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	39
PART II	Other Information	40
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	41
Item 6.	Exhibits	41
	Signatures	43

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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,
	2012			2011			2012			2011
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenue:
Product revenue	$	38,372		$	40,102		$	115,538		$	126,307
Service revenue	13,241			14,091			39,466			40,289
Total revenue	51,613			54,193			155,004			166,596
Cost of sales	32,387			34,081			99,665			103,124
Gross profit	19,226			20,112			55,339			63,472
Operating expenses:
Product development and engineering	4,052			3,325			11,226			10,766
Selling, general and administrative	15,169			14,583			47,453			49,011
Impairment of Goodwill	1,055			—			4,689			—
Total operating expenses	20,276			17,908			63,368			59,777
Operating income (loss)	(1,050		)	2,204			(8,029		)	3,695
Interest expense	(82		)	(217		)	(540		)	(653		)
Gain from settlement of deferred consideration obligation	—			—			2,314			—
Other income (loss), net	57			(48		)	24			(260		)
Income (loss) from continuing operations before income taxes	(1,075		)	1,939			(6,231		)	2,782
Provision (benefit) for income taxes	1,252			(295		)	2,573			2,217
Income (loss) from continuing operations	(2,327		)	2,234			(8,804		)	565
Income (loss) from discontinued operations, net of year to date income taxes of $0 in 2012 and $841 in 2011	—			(153		)	7,975			(894		)
Net income (loss)	$	(2,327	)	$	2,081		$	(829	)	$	(329	)
Net income (loss) per share — basic (1):
From continuing operations	$	(0.01	)	$	0.01		$	(0.06	)	$	—
From discontinued operations	$	—		$	—		$	0.05		$	(0.01	)
Net income (loss) per share — basic	$	(0.01	)	$	0.01		$	(0.01	)	$	(0.01	)
Net Income (loss) per share — diluted (1):
From continuing operations	$	(0.01	)	$	0.01		$	(0.06	)	$	—
From discontinued operations	$	—		$	—		$	0.05		$	(0.01	)
Net income (loss) per share — diluted	$	(0.01	)	$	0.01		$	(0.01	)	$	(0.01	)
Weighted average number of shares:
Basic	155,314			157,535			156,939			157,518
Diluted	155,314			158,601			156,939			157,518

________________________________________

(1) Amounts may not add due to rounding.

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

3

MRV Communications, Inc.

Statements of Comprehensive Income (Loss)

(In thousands)

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net income (loss)		($2,327	)		$2,081			($829	)		($329	)
Other comprehensive income (loss), net of tax
Unrealized gain (loss) from available-for-sale securities	—			(1		)	—			(2		)
Foreign currency translation gain (loss)	1,511			(5,999		)	894			2,219
Foreign currency translation effect realized upon divestiture of subsidiary	—			—			(12,599		)	1,907
Total comprehensive income (loss)		($816	)		($3,919	)		($12,534	)		$3,795

4

MRV Communications, Inc.

Balance Sheets

(In thousands, except par values)

	September 30, 2012			December 31, 2011
Assets	(unaudited)
Current assets:
Cash and cash equivalents		$39,036			$71,352
Restricted time deposits	326			380
Accounts receivable, net	50,057			55,654
Other receivables	9,040			11,604
Inventories	30,873			28,134
Deferred income taxes	1,662			1,660
Other current assets	7,657			5,168
Current assets of discontinued operations	—			24,810
Total current assets	138,651			198,762
Property and equipment, net	6,442			6,789
Goodwill	324			5,156
Deferred income taxes, net of current portion	3,732			4,113
Intangibles, net	400			—
Other assets	749			574
Noncurrent assets of discontinued operations	—			15,295
Total assets		$150,298			$230,689
Liabilities and stockholders' equity
Current liabilities:
Short-term debt		$7,227			$8,987
Deferred consideration payable	233			4,615
Accounts payable	21,900			31,359
Accrued liabilities	22,341			20,924
Deferred revenue	11,741			10,985
Other current liabilities	236			1,693
Current liabilities of discontinued operations	—			3,236
Total current liabilities	63,678			81,799
Other long-term liabilities	6,230			6,209
Long-term liabilities from discontinued operations	—			467
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 — 161,285 shares in 2012 and 160,609 shares in 2011
Outstanding — 152,750 shares in 2012 and 157,806 in 2011	271			270
Additional paid-in capital	1,291,450			1,337,935
Accumulated deficit	(1,208,008		)	(1,207,178		)
Treasury stock — 8,535 shares in 2012 and 2,692 shares in 2011	(6,076		)	(3,271		)
Accumulated other comprehensive income	2,753			14,458
Total stockholders' equity	80,390			142,214
Total liabilities and stockholders' equity		$150,298			$230,689

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

5

MRV Communications, Inc.

Statements of Cash Flows

(In thousands)

	Nine months ended September 30,
	2012			2011
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net income (loss)		($829	)		($329	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	1,620			1,831
Share-based compensation expense	839			1,995
Provision for doubtful accounts	51			325
Deferred income taxes	386			(1,155		)
Gain on sale of deferred consideration litigation	(2,314		)	—
Gain on disposition of property and equipment	28			21
Gain (loss) on sale of subsidiary	(7,936		)	3,154
Impairment of goodwill and other intangibles	4,766			—
Changes in operating assets and liabilities:
Accounts receivable	5,495			4,767
Inventories	(3,060		)	4,849
Other assets	2,276			2,790
Accounts payable	(8,493		)	(7,754		)
Accrued liabilities	(226		)	(2,785		)
Income tax payable	(1,863		)	1,402
Deferred revenue	836			(1,035		)
Other current liabilities	152			(2,352		)
Net cash provided by (used in) operating activities	(8,272		)	5,724
Cash flows from investing activities:
Purchases of property and equipment	(2,106		)	(2,060		)
Proceeds from sale of property and equipment	192			140
Purchases of intangibles	(400		)	(474		)
Proceeds from sale of subsidiaries, net of cash acquired	16,791			1,155
Investment in restricted time deposits	1,364			(157		)
Release of restricted time deposits	—			270
Proceeds from sale or maturity of investments	—			13,474
Net cash provided by investing activities	15,841			12,348
Cash flows from financing activities:
Net proceeds from exercise of stock options	1			184
Purchase of treasury shares	(2,805		)	(425		)
Borrowings on short-term debt	19,421			34,403
Payments on short-term debt	(21,252		)	(39,901		)
Borrowing on long-term obligations	459			—
Dividend payment	(47,325		)	—
Payments on long-term obligations	(230		)	—
Net cash used by financing activities	(51,731		)	(5,739		)
Effect of exchange rate changes on cash and cash equivalents	(518		)	420
Net increase (decrease) in cash and cash equivalents	(44,680		)	12,753
Cash and cash equivalents, beginning of year (1)	83,716			141,001
Cash and cash equivalents, end of period		$39,036			$153,754

Supplement disclosure on following page.

6

	Nine months ended September 30,
	2012		2011
	(unaudited)		(unaudited)
Supplemental disclosure of cash flow information:
Cash paid during year for interest — continuing operations	$	320	$	566
Cash paid during year for interest — discontinued operations	—		20
Cash paid during year for interest — Total	$	320	$	586
Cash paid during year for income taxes — continuing operations	$	3,554	$	2,124
Cash paid during year for income taxes — discontinued operations	295		811
Cash paid during year for income taxes — Total	$	3,849	$	2,935

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

(1) The Cash and cash equivalents at the beginning of the periods presented include $12,364 and $7,222 from discontinued operations for September 30, 2012 and September 30, 2011, respectively.

7

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 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, 2012, 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, 2012 (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, 2011 (the “2011 Form 10-K”) filed with the SEC.

Restricted time deposits represent investments that are restricted as to withdrawal. 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.

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, 2012, and the results of its operations for the three and nine months and its cash flows and comprehensive income (loss) 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 its wholly-owned operating subsidiaries, TurnKey Communications AG, TurnKey Services AG, and Elcoma AG (together “TurnKey"), and on March 29, 2012, the Company sold all of the issued and outstanding capital stock of CES Creative Electronic Systems SA ("CES"). The historical financial results of TurnKey and CES prior to their respective dates of sale have been reclassified as discontinued operations for all periods presented. The related assets and liabilities of CES have been classified as assets and liabilities of discontinued operations in the Balance Sheet as of December 31, 2011. Cash flows from discontinued operations for CES and TurnKey are presented combined with the cash flows from continuing operations in the accompanying Statement of Cash Flows for the nine months ended September 30, 2011. CES is also included in the nine months ending September 30, 2012.

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.

The Company accounts for its marketable securities under the provisions of ASC 320-10 Accounting for Certain Investments in Debt and Equity Securities. As of September 30, 2012 and December 31, 2011, MRV did not hold any marketable securities.

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3. Fair Value Measurement

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

ASC 820-10Fair Value Measurementsdefines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820-10 establishes a three-level hierarchy that prioritizes the use of observable inputs, such as quoted prices in active markets, and minimizes the use of unobservable inputs, to measure fair value. All of MRV's assets and liabilities that are measured at fair value are measured using the unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. 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.

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.

The following table summarizes the changes in the allowance for doubtful accounts during the nine months ended September 30, 2012(in thousands):

	Nine months ended
	September 30, 2012
Balance at beginning of period		$1,672
Charged to expense	51
Write-offs	(74		)
Foreign currency translation adjustment	(2		)
Balance at end of period		$1,647

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, 2012		December 31, 2011
Raw materials		$4,339		$5,400
Work-in process	1,158		1,939
Finished goods	25,376		20,795
Total		$30,873		$28,134

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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. The following table summarizes the changes in the Company's goodwill accounts for the nine months ended September 30, 2012 in thousands.

	Network Equipment			Network Integration			Total (1)
Goodwill	$	170,740		$	21,662		$	192,402
Accumulated impairment losses and amortization	(157,897		)	(16,506		)	(174,403		)
Balance as of December 31, 2011	12,843			5,156			17,999
Divestiture of CES	(13,363		)				(13,363		)
Impairment of Alcadon goodwill				(3,711		)	(3,711		)
Impairment of Tecnonet goodwill				(1,055		)	(1,055		)
Foreign currency translation adjustment, net	520			(47		)	473
Goodwill	171,466			21,287			192,753
Accumulated impairment losses and amortization	(171,466		)	(20,963		)	(192,429		)
Balance as of September 30, 2012	$	—		$	324		$	324

(1) Total includes goodwill and accumulated amortization of $170.7 million and $157.9 million, respectively, that are included in non current assets of discontinued operations as of December 31, 2011.

The fair value of goodwill is tested for impairment on a non-recurring basis in the accompanying unaudited consolidated condensed financial statements using Level 3 inputs. During the three months ended September 30, 2012 the Company concluded that there was an indication of impairment to Tecnonet S.p.A, our Italian subsidiary. Below is a description of the Level 3 inputs used:

Quantitative Information about Level 3 Fair Value Measurements
($ in thousands)
	Fair Value at September 30, 2012	Valuation Technique	Unobservable Input	Range (Median)
Equity investment in Tecnonet	$20,100	Income approach-discounted cash flow ("DCF")	Weighted average cost of capital	19.8%-25.8% (22.8%)
			Long term growth rate	1.5%-4.5% (3.0%)

Based on the valuation of Tecnonet, the associated goodwill was determined to be impaired and was written off during the quarter ended September 30, 2012. Reasons for the impairment include lower revenue and lower profit forecast for the business due to worsening economic conditions in Italy. The amount of the impairment, $1.1 million, is equal to the total carrying amount of goodwill on the books as of September 30, 2012.

During the second quarter of 2012, the Company concluded that there was an indication of impairment to Alcadon-MRV AB ("Alcadon"), our Scandinavian subsidiary, which was subsequently sold in October 2012. Below is a description of the Level 3 inputs used:

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Quantitative Information about Level 3 Fair Value Measurements
($ in thousands)
	Fair Value at June 30, 2012	Valuation Technique	Unobservable Input	Range (Median)
Equity investment in Alcadon	$13,100	DCF	Weighted average cost of capital	34.3%-40.3% (37.3%)
			Long term growth rate	1.5%-4.5% (3.0%)
	$11,900	Non-binding offer from third party	N/A	$11,900

Based on the valuation of Alcadon, the goodwill associated with Alcadon was determined to be impaired and was written off during the quarter ended June 30, 2012. Reasons for the impairment include the loss of a key customer in first half of 2012 and lower revenue and lower profit forecast for the business. The amount of the impairment is equal to the total carrying amount of goodwill on the books as of June 30, 2012, $3.7 million.

The Company's remaining $0.3 million goodwill is recorded at Interdata, our French subsidiary which was subsequently sold in October 2012, in local currencies and converted into U.S. dollars at the balance sheet date. There was an unrealized loss of $0.1 million on the Interdata goodwill during the nine months ended September 30, 2012 due to the change in foreign currency rates from December 31, 2011 to September 30, 2012. The unrealized gain arising from the translation adjustment is recorded in accumulated other comprehensive income on the Balance Sheet. (See Note 17, Subsequent Events.)

Other intangibles consist of intellectual property purchased by an Israeli subsidiary of the comany during the quarter ended June 30, 2012. This asset was not in service as of June 30, 2012, therefore amortization of other intangible assets was zero for the three and nine months ended September 30, 2012 and September 30, 2011.

7. Product Warranty

As of September 30, 2012 and December 31, 2011, MRV's product warranty liability recorded in accrued liabilities was $1.0 million and $1.1 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, 2012 (in thousands):

	Nine months ended
	September 30, 2012
Beginning balance		$1,098
Cost of warranty claims	(495		)
Accruals for product warranties	384
Total		$987

8. Net Income (Loss) Per Share

Basic net income (loss) per share is computed using the weighted average number of shares of Common Stock outstanding, excluding restricted shares which, although they are legally outstanding and have voting rights, are subject to vesting and are treated as common stock equivalents in calculating diluted income (loss) per share. Diluted net income (loss) per share 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 also 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.

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Restricted shares of 0.2 million and outstanding stock options to purchase 10.1 million shares were excluded from the computation of dilutive shares for the three months ended September 30,2012 because of the net loss. Restricted shares of 0.1 million and outstanding stock options to purchase 9.2 million shares were included in the computation of dilutive shares for the three months ended September 30, 2011. In addition, for the three months ended September 30,2012 there were no potentially dilutive shares, and in 2011, there were 1.0 million potentially dilutive shares excluded from the calculation of diluted net loss per share because they were anti-dilutive. Treasury shares are excluded from the number of shares outstanding.

Restricted shares of 0.2 million and outstanding stock options to purchase 9.6 million shares were excluded from the computation of dilutive shares for the nine months ended September 30,2012 because of the net loss. Restricted shares of 0.1 million and outstanding stock options to purchase 7.7 million shares were excluded from the computation of dilutive shares for the nine months ended September 30,2011. In addition, for the nine months ended September 30,2012 and 2011, respectively, 0.1 million and 0.9 million potentially dilutive shares were excluded from the calculation of diluted net income (loss) per share because they were anti-dilutive. Treasury shares are excluded from the number of shares outstanding.

9. Share-Based Compensation

MRV records share-based compensation expense in accordance with ASC Topic 718Compensation - 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, 2012 and 2011 (in thousands):

	Three months ended				Nine months ended September 30,
	September 30,
	2012		2011		2012		2011
Cost of goods sold		$11		$20		$34		$52
Product development and engineering	9		26		30		107
Selling, general and administrative	327		351		750		1,792
Total share-based compensation expense (1)		$347		$397		$814		$1,951

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

The Company granted 354,719 stock options during the nine months ended September 30,2012 and the related average fair value was $0.48 per share. The average fair value of 786,502 restricted shares granted during the nine months ended September 30, 2012 was $0.81 per share. There were 1,931,361 options and 65,010 restricted shares granted during the nine months ended September 30, 2011. As of September 30, 2012, the total unrecorded deferred share-based compensation balance for unvested securities, net of expected forfeitures, was$1.3 million, which is expected to be amortized over a weighted-average period of1.6 years.

Valuation Assumptions

MRV uses the Black-Scholes option pricing model to estimate the fair value of stock option awards or related modifications. 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, 2012:

Nine months ended September 30,	2012		2011
Risk-free interest rate	0.8	%	2.0	%
Dividend yield	—		—
Volatility	89.0	%	87.0	%
Expected life (in years)	5.5		5.9

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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's2011Form 10-K. MRV evaluates segment performance based on revenues, gross profit and operating income (loss) of each segment. As such, there are no separately identifiable Statements of Operations data below operating income (loss).

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

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Network Equipment group		$23,310			$23,193			$65,248			$70,442
Network Integration group	30,763			34,380			98,188			108,108
Before intersegment adjustments	54,073			57,573			163,436			178,550
Intersegment adjustments	(2,460		)	(3,380		)	(8,432		)	(11,954		)
Total		$51,613			$54,193			$155,004			$166,596

Network Equipment revenue primarily consists of optical communication systems, that include Metro Ethernet equipment, optical transport equipment, out-of-band network equipment, and the related service revenue and fiber optic components are 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 $28.8 million and $31.9 million of revenue in the Network Integration group, or

19% of total revenue, for both the nine months ended September 30, 2012 and 2011.

The same customer in the Network Integration group accounted for 7% and 8% of accounts receivable as of September 30, 2012, and December 31, 2011, respectively. Another customer accounted for 19% and 16% of accounts receivable as of September 30, 2012, and December 31, 2011, respectively.

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

	Three months ended				Nine months ended September 30,
	September 30,
	2012		2011		2012		2011
Americas		$11,861		$13,977		$37,744		$40,717
Europe	34,182		38,717		109,438		119,808
Asia Pacific	5,570		1,498		7,822		6,057
Other regions			1				14
Total		$51,613		$54,193		$155,004		$166,596

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

	September 30, 2012		December 31, 2011
Americas		$1,788		$2,150
Europe	4,607		4,587
Asia Pacific	47		52
Total		$6,442		$6,789

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

	Three months ended						Nine months ended September 30,
	September 30,
	2012			2011			2012			2011
Gross profit
Network Equipment group	$	12,306		$	11,203		$	32,342		$	35,956
Network Integration group	7,116			8,954			22,897			28,152
Before intersegment adjustments	19,422			20,157			55,239			64,108
Corporate unallocated and intersegment adjustments(1)	(196		)	(45		)	100			(636		)
Total	$	19,226		$	20,112		$	55,339		$	63,472
Depreciation expense
Network Equipment group	$	286		$	190		$	745		$	594
Network Integration group	155			106			472			354
Corporate	48			50			143			132
Total	$	489		$	346		$	1,360		$	1,080
Operating income (loss)
Network Equipment group	$	2,163		$	1,281		$	396		$	2,787
Network Integration group	903			3,702			1,488			10,943
Before intersegment adjustments	3,066			4,983			1,884			13,730
Corporate unallocated operating loss and adjustments (1)	(4,116		)	(2,779		)	(9,913		)	(10,035		)
Total	$	(1,050	)	$	2,204		$	(8,029	)	$	3,695

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

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

	Nine months ended
	September 30,
	2012		2011
Additions to Fixed Assets
Network Equipment group	$	542	$	944
Network Integration group	631		351
Corporate	81		201
Discontinued operations	852		564
Total	$	2,106	$	2,060

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	September 30, 2012		December 31, 2011
Total Assets
Network Equipment group		$42,533		$45,512
Network Integration group	84,473		93,557
Corporate and intersegment eliminations	23,292		50,927
Discontinued operations	—		40,693
Total		$150,298		$230,689

	September 30, 2012		December 31, 2011
Goodwill
Network Integration group	324		5,156
Total		$324		$5,156

11. Recent Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04 to amend ASC 820 Fair Value Measurements and Disclosures effective for interim reporting periods after December 15, 2011 to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure guidance to include increased disclosures regarding valuation inputs and investment categorization. The adoption of this new accounting guidance in 2012 did not have a material impact on our consolidated financial position, results of operations or cash flows.

In January 2012, we adopted ASU 2011-12 Comprehensive Income (topic 220) which required additional disclosures for comprehensive income. As permitted under this standard, we have elected to present comprehensive income in two separate but consecutive financial statements, consisting of a statement of income followed by a separate statement of comprehensive income. This standard was required to be applied retrospectively beginning January 1, 2012, except for certain provisions for which adoption was delayed. The adoption of this new accounting guidance in 2012 did not have a material impact on our consolidated financial position, results of operations or cash flows.

In August 2011, the FASB approved a revised accounting standard update intended to simplify how an entity tests goodwill for impairment. The amendment will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This accounting standard update was effective for the Company beginning in the first quarter of fiscal 2012 and did not have a material impact on our consolidated financial position, results of operations or cash flows.

In July 2012 the FASB issued ASU 2012-02, Intangibles - Goodwill and Other (Topic 350 ): Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). The amendments in ASU 2012-02 are intended to reduce cost and complexity by providing an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The amendments in ASU 2012-02 also enhance the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset's fair value when testing an indefinite-lived intangible asset for impairment, which is equivalent to the impairment testing requirements for other long-lived assets. In accordance with the amendments in ASU 2012-02, an entity will have an option not to calculate annually the fair value of an indefinite-lived intangible asset if the entity determines that it is not more-likely-than-not that the asset is impaired. The amendments in ASU 2012-02 are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity's financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption of ASU 2012-02 is not expected to have a material impact on the Company's consolidated financial statements.

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12. Litigation

In connection with the acquisition of Fiberxon LLC (“Fiberxon”) in July 2007, MRV recorded a potential deferred consideration payable related to post-acquisition obligations of MRV pursuant to the purchase agreement. In June 2012, the Company and Source Photonics,LLC (“Source Photonics”), a former subsidiary of the Company that the Company is obligated to indemnify with respect to certain litigation, entered into a Settlement and Mutual Release Agreement with certain former officers, directors and stockholders of Fiberxon (collectively, the “Fiberxon Plaintiffs”) to settle claims among the Company, Source Photonics and the Fiberxon Plaintiffs.

Pursuant to the settlement agreement MRV paid $2.4 million to the Fiberxon Plaintiffs in the third quarter in consideration for the mutual release of the parties for all claims related to the Company's acquisition of Fiberxon in July 2007, and other claims and lawsuits held or filed by the Fiberxon Plaintiffs and the Company. An additional $2.2 million accrued reserve was released in connection with the settlement agreement. See Item 2, "Management's Discussion and Analysis to Consolidated Financial Statements," Quarterly Comparison, Other Gain (Loss), Net.

                In connection with the Company's past stock option grant practices, MRV and certain of its former directors and officers have been subjected to a number of 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. 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 former officers and directors, seeking 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.

                The class action lawsuits were settled in November 2010, and the federal and California state derivative lawsuits are on-going. 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, in this quarter we have accrued for estimated requests for payment for services of defense counsel and other parties through September 30, 2012 that exceed the limits of the insurance policy by $0.6 million. We have been asked to advance funds to cover purported indemnification obligations for our past directors and officers who are defendants in this matter, and will continue to incur our own legal expenses. Any such future obligations are not determinable at this time.

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, Ortel Communications, Ltd., Nortel Networks Corporation, Rockwell Automation, Inc., The Lemelson Foundation, Finisar Corporation and Apcon, Inc. in the past, and is currently in discussions with Alcatel-Lucent.

MRV and its subsidiaries have been named as a defendant in other 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.

13. 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 group. The historical financial results of TurnKey prior to its sale have been reclassified as discontinued operations for all periods presented. The Company recorded a net loss of $3.4 million from discontinued operations, net of income tax expense for the nine months ended September 30, 2011.

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On March 29, 2012, the Company completed the sale of all of the issued and outstanding capital stock of its wholly-owned subsidiary CES Creative Electronic Systems SA ("CES"). The sale was completed pursuant to a Stock Purchase Agreement (the "Purchase Agreement"), dated as of December 2, 2011, with CES Holding SA, as Purchaser, represented for purpose of the Agreement by Vinci Capital Switzerland SA. The Purchase Agreement and sale of CES were approved by the Company's stockholders at the Company's annual meeting of stockholders held on January 9, 2012.The purchase price for CES paid on closing to the Company was CHF 25.8 million, or U.S. $28.4 million, with CHF 2.6 million, or U.S. $2.8 million of the proceeds going into an indemnification escrow account to be released in one year to the Company (subject to any indemnification claims that may be brought by Purchaser). Cash proceeds to the Company were $24.2 million upon closing net of the escrowed funds and other closing costs.

The historical financial results of CES prior to its sale have been reclassified as discontinued operations for all periods presented. The Company recorded net income of $8.0 million and $2.4 million from discontinued operations, net of income tax expense, for the nine months ended September 30,2012 and 2011, respectively. The net income from discontinued operations for the nine months ended September 30,2012 includes an $8.6 million gain partially offset by a $0.1 million operating loss and $0.5 million in withholding tax expense.

The statements of operations for the nine months ended September 30,2012 and 2011 that would have been included if CES had not been sold and the assets and liabilities of CES that are reflected in the balance sheet as of December 31, 2011 consisted of (in thousands):

Nine months ended September 30,	2012			2011
Revenue		$6,829			$26,019
Income (loss) before income taxes	(135		)	3,250
Provision for income taxes	—			821
Income (loss) from operations of discontinued operations	(135		)	2,429
Net income (loss) from discontinued operations, net of income taxes		($135	)		$2,429

	December 31, 2011
Cash and cash equivalents		$12,364
Time deposits	1,281
Accounts receivable, net	5,310
Inventories	4,029
Other current assets	1,826
Total current assets	24,810
Property and equipment, net	2,571
Goodwill	12,843
Other assets	(119		)
Total assets		$40,105
Accounts payable		$705
Accrued liabilities	1,802
Other current liabilities	729
Non-current liabilities	467
Total liabilities		$3,703

14. Accounts Receivable Factoring

The Company has agreements with unrelated third-parties for the factoring of specific accounts receivable in Italy in order to reduce the amount of working capital required to fund such receivables. As of September 30, 2012 , the Company's credit facility agreements permit the factoring of up to €15.0 million, or $18.9 million, worth of receivables in operations outside of the United States. The factoring of accounts receivable under these agreements is accounted for as a sale in accordance with ASC 860 Transfers and Servicing, and accordingly, is accounted for as an off-balance sheet arrangement. Proceeds on the transfer reflect the face value of the account less a discount. The discount is

17

recorded as a charge in "interest" in the consolidated statement of income in the period of the sale. Net funds received reduced accounts receivable outstanding while increasing cash. The Company has no significant retained interests or servicing liabilities related to the accounts receivable that have been sold in Italy.

As of September 30, 2012, the Company had sold $22.9 million of accounts receivable pursuant to these agreements, which represents the face amount of total outstanding receivable at that date. At December 31, 2011, the Company had sold $21.8 million of accounts receivable under these agreements. The related outstanding balances on these amounts were $5.0 million and $10.1 million as of September 30, 2012 and December 31, 2011, respectively.

15. Dividend

On May 1, 2012, the Company's Board of Directors declared a dividend and payment to option holders totaling approximately $47.3 million, or $0.30 per share of the Company's Common Stock. The dividend was paid on May 25, 2012 to holders of record as of the close of business on May 16, 2012. 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. Restricted stockholders received per share payments in the same amount as the Company's stock holders promptly following payment of the dividend. Option holders who provided service to the Company at the time of the payment of the dividend received 50 percent of the payment amount in respect of their vested options promptly following payment of the dividend, and will receive 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.

16. Share Repurchase

On August 17, 2012, the Company entered into a Share Purchase Agreement (the "Agreement") with T2 Accredited Fund, L.P., T2 Qualified Fund, L.P. and Tilson Offshore Fund, Ltd. (collectively, the "Seller") to purchase 5,843,420 shares of the Company's Common Stock owned by the Seller at a price of $0.48 per share for an aggregate price of $2,804,842, which was a discount of 7.7% percent from the last reported trading price of $0.52 per share for the Company's Common Stock on August 16, 2012. The sale was executed on August 20, 2012.

17. Subsequent Event

Subsequent to September 30, 2012, the Company's stockholders approved the sale of two of the Company's European subsidiaries, Alcadon-MRV AB and Interdata. A description of the sales and pro forma financial statements illustrating the impact of the sale are provided below. For reporting purposes, the results of operations of Alcadon and Interdata will be included as income from discontinued operations in the Company's fourth quarter 2012 results.

On October12, 2012, the Company completed the sale of all of the shares of its wholly-owned subsidiary Alcadon pursuant to a Stock Purchase Agreement, dated as of September11, 2012 (the "Alcadon Purchase Agreement") with Deltaco Aktiebolag, a public corporation organized under the laws of Sweden (“Deltaco”). The Alcadon Purchase Agreement and sale of Alcadon were approved by the Company's stockholders at the Company's annual meeting of stockholders held on October11, 2012.

The purchase price paid at closing to the Company by Deltaco was $6.5 million plus estimated net cash as of September 30, 2012 of $1.2 million for an aggregate of $7.7 million. The cash proceeds received were subject to an escrow amount of $0.8 million and approximately $0.3 million in closing costs. The escrow fund is scheduled to be released on December 28, 2012, subject to any 'true-up' adjustments or indemnity claims. Prior to the closing, Alcadon paid a cash dividend to MRV in the amount of $3.7 million.

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The assets and liabilities of Alcadon are reflected as assets and liabilities from continuing operations in the Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011, respectively, and consisted of (in thousands):

	September 30, 2012		December 31, 2011
Cash and cash equivalents	$	5,300	$	6,392
Time deposits	77		101
Accounts receivable, net	3,938		3,912
Inventories	4,792		5,169
Other current assets	383		409
Total current assets	14,490		15,983
Property and equipment, net	845		660
Goodwill	—		3,737
Total assets	$	15,335	$	20,380
Accounts payable	$	1,828	$	1,988
Accrued liabilities	1,182		2,101
Other current liabilities	120		1,854
Non-current liabilities	865		599
Total liabilities	$	3,995	$	6,542

On October 16, 2012, the Company completed the sale of its wholly owned subsidiary Pedrena Enterprises B.V., a Dutch company ("Pedrena"). Pedrena is the parent company of Interdata, which is in turn, the parent company of J3TEL. The sale was completed pursuant to a Share Purchase Agreement, dated as of August 1, 2012 (the "Interdata Purchase Agreement") with IJ Next, a French "société par actions simplifiée," as Purchaser, a subsidiary of the French company of Holding Baelen Gaillard ("HBG").

The purchase price was 14.6 million euros ($19.0 million) and was paid in cash at closing by HBG to the Company. Cash proceeds to the Company are subject to closing costs of approximately $0.8 million. In addition to the Interdata Purchase Agreement, the Company and Purchaser entered into a Representations and Warranties Agreement on August 1, 2012 (the "Representation and Warranties Agreement") related to the transaction. In addition to customary representations, warranties, covenants and indemnification obligations, the Representations and Warranties Agreement contains a provision that if the Company does not obtain a representations and warranties insurance policy within 90 days of close of the transaction, and if the Company's cash falls below $20.0 million prior to December 31, 2013, the Company will deposit 1.5 million euros (or U.S. equivalent) in an escrow account to secure its indemnification obligations under the Representations and Warranties Agreement.

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The assets and liabilities of Interdata are reflected as assets and liabilities from continuing operations in the Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011, respectively, and consisted of (in thousands):

	September 30, 2012		December 31, 2011
Cash and cash equivalents		$6,779		$6,370
Accounts receivable, net	9,998		13,173
Inventories	2,491		1,554
Other current assets	1,632		1,115
Total current assets	20,900		22,212
Property and equipment, net	2,275		2,369
Goodwill	2,043		2,057
Other assets	258		260
Total assets		$25,476		$26,898
Accounts payable		$4,084		$4,191
Accrued liabilities	3,380		3,942
Other current liabilities	2,741		3,382
Non-current liabilities	378		380
Total liabilities		$10,583		$11,895

The use of proceeds from the sales of Alcadon and Interdata will be for general corporate purposes. Our Board of directors continuously evaluates the best use of the Company's assets for increasing shareholder value.

On October 11, 2012 the Company's stockholders approved a motion authorizing the Board of Directors to amend the Company's amended and restated certificate of incorporation to effect a reverse stock split of all outstanding shares of the Company's Common Stock at one of the approved ratios of 1:10, 1:11, 1:12, 1:13, 1:14, 1:15, 1:16, 1:17, 1:18, 1:19 or 1:20, at the Board of Director's discretion, and reduce the authorized shares of Common Stock in the same ratio. As of the date of the filing of this Form 10-Q, the Company's Board had not authorized an amendment to effect a reverse stock split or determined a ratio to be used.

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 our2011Form 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

20

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, litigation, including but not limited to patent infringement claims and litigation related to MRV's historical stock option granting practices, the long-term strategy of the Company's Board of Directors, and the review of strategic alternatives for MRV's Tecnonet subsidiary.

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 2011 Form 10-K and as set forth in item 1A 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 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

We supply 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 revenue, 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 for operating income (loss) for each segment. Our Network Equipment group provides optical communications systems that include 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. Specifically, the Optical Communication Systems division's ("OCS") carrier Ethernet strategy provides complete metro-Ethernet solutions that utilize our proprietary OptiSwitch® and LambdaDriver® products. 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 OCS, the business unit that makes up substantially all of our 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.

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 business involves reliance on foreign-based offices. Several of our divisions, outside subcontractors and suppliers are located in foreign countries, including Argentina, Australia, Canada, Denmark, France, Germany, Israel, Italy, Mexico, the Netherlands, Norway, Russia, Singapore, South Africa, Sweden, Taiwan, and the United Kingdom. For the three months ended September 30, 2012, and 2011, foreign revenue constituted 60% and 59%, 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.

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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").

On December 2, 2011, we announced that we entered into a stock purchase agreement with CES Holding SA, as Purchaser, represented for purpose of the agreement by Vinci Capital Switzerland SA, for the sale of CES Creative Electronic Systems SA (“CES”). The sale of CES was subject to stockholder approval, which was obtained on January 9, 2012, and the sale was completed on March 29, 2012.

We have reclassified the historical results of CES and TurnKey as discontinued operations in this Form 10-Q for all periods presented. Accordingly, the related assets and liabilities of CES have been classified as assets and liabilities from discontinued operations in the December 31, 2011 Balance Sheet and the net income or loss for CES and TurnKey prior to their dispositions has been classified as income or loss from discontinued operations. Cash flows from discontinued operations are presented combined with the cash flows from continuing operations in the accompanying Statement of Cash Flows. See Note 13 "Discontinued Operations" to the Financial Statements in Item 1 of this Form 10-Q for further discussion.

In October 2011, we declared a special dividend to stockholders of $75 million. Our Board of Directors considered the Company's liquidity and capital needs prior to declaring the dividend, and determined the $75 million to be excess capital. We believe that after the dividend, the Company continued to have ample capital to meet our expected capital needs.

In May 2012, we declared a special dividend to stockholders of $47.3 million. Our Board of Directors considered the Company's liquidity and capital needs prior to declaring the dividend, and determined the $47.3 million to be excess capital. We believe that after the dividend, the Company should continue to have sufficient capital to meet our expected capital needs.

On August 1, 2012 the Company entered into a sale purchase agreement for the sale of its French Network Integration subsidiary, Interdata. The Company entered into a sale purchase agreement for the sale of its Scandinavian Network Integration subsidiary, Alcadon, on September 11, 2012. The Company received stockholder approval to sell both Interdata and Alcadon on October 11, 2012. (See Note 17, Subsequent Events).

On August 9, 2012, the Company announced that it had completed its exploration of strategic alternatives and had decided to continue with the divestiture of its European Network Integration subsidiaries, and that it would retain and expand its OCS Network Equipment business which operates in the optical transport and carrier Ethernet markets, and specifically in the rapidly growing mobile backhaul data center and cloud computing verticals.

At September 30, 2012 we had $39.0 million in cash and cash equivalents, $0.3 million in restricted time deposits, and $7.2 million in short-term debt.

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 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

22

events or circumstances that would result in materially different amounts being reported.

Revenue Recognition.    Our major revenue-generating products consist of switches and routers, console management, physical layer products, and fiber optic components. 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 product is sold to the distributor rather than when the product is sold by the distributor to the end user. In certain circumstances, distributors have limited rights of return, including stock rotation rights, and/or are entitled to price protection, where a rebate credit may be provided to the customer if 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 and 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 985-605 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 we 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 Subtopic985-605 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 receivable and maintain a reserve for estimated losses resulting from the inability of customers to meet their financial obligations to us. In determining the amount of the reserve, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Because we cannot precisely predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers deteriorate, resulting in their inability to make payments, a larger reserve may be required. In the event we determine that a change in the allowance is appropriate, we would record a credit or a charge to selling, general and administrative expense in the period in which we make such a determination.

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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.    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 adjustment, 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.

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. See Note 6 "Goodwill and Other Intangibles" to the Financial Statements in Item 1 of this Form 10-Q for further discussion.

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

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

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

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Operations.

Share-Based Compensation.    We determine the fair value of stock options using the Black-Scholes valuation model as permitted under ASC 718 Compensation - Stock Compensation. The assumptions used in calculating the fair value of share-based payment awards represent our best estimates. Our estimates may be impacted by certain variables including stock price volatility, employee stock option exercise behaviors, additional stock option grants, estimates of forfeitures, and the related income tax impact. (See Note 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 Swedish krona, the Taiwan dollar and the Israeli new shekel. For the nine months ended September 30,2012 and 2011, 59% and 59% of revenue, respectively, and 33% and 29% of operating expenses, respectively, were incurred at subsidiaries with a reporting currency other than the U.S. dollar. For the nine months ended September 30,2012, these currencies were stronger against the U.S. dollar compared to the nine months ended September 30,2011, so revenue and expenses in these currencies translated into more dollars than they would have in the prior period. The Company's Taiwan subsidiary, Appointech, Inc. is included in its Network Equipment segment that also includes OCS. Relative to OCS the revenues and related operating gross profit and operating expenses are not material and the change in foreign currency does not have a material impact on the results for the three and nine months ended September 30, 2012 compared to 2011. 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.

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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,
	2012					2011				2012					2011
	$			% (1)		$		% (1)		$			%(1)		$		% (1)
Revenue(1) (2)		$51,613		100	%		$54,193	100	%		$155,004		100	%	$	166,596	100	%
Network Equipment group	23,310			45		23,193		43		65,248			42		70,442		42
Network Integration group	30,763			60		34,380		63		98,188			63		108,108		65
Gross profit (3)	19,226			37		20,112		37		55,339			36		63,472		38
Network Equipment group	12,306			53		11,203		48		32,342			50		35,956		51
Network Integration group	7,116			23		8,954		26		22,897			23		28,152		26
Operating expenses (4)	20,276			39		17,908		33		63,368			41		59,777		36
Network Equipment group	10,142			44		9,922		43		31,946			49		33,169		47
Network Integration group	6,213			20		5,252		15		21,408			22		17,209		16
Operating income (loss) (3) (4)	(1,050		)	(2	)	2,204		4		(8,029		)	(5	)	3,695		2
Network Equipment group	2,163			9		1,281		6		396			1		2,787		4
Network Integration group	903			3		3,702		11		1,488			2		10,943		10

___________________________________

(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.

Three months ended September 30,2012 Compared to the three months ended September 30,2011

Revenue

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

							Favorable/(Unfavorable)
Three months ended September 30:	2012			2011			$ Change			% Change		% Change constant currency(1)
Network Equipment group	$	23,310		$	23,193		$	117		1	%	1	%
Network Integration group	30,763			34,380			(3,617		)	(11	)	(1	)
Before intersegment adjustments	54,073			57,573			(3,500		)	(6	)	—
Intersegment adjustments (2)	(2,460		)	(3,380		)	920			(27	)	(27	)
Total	$	51,613		$	54,193		$	(2,580	)	(5	)%	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 third quarter of 2012decreased $2.6 million, or 5%, compared to the third quarter

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of 2011, due primarily to a $3.6 million, or 11%, decrease in Network Integration group revenue, partially offset by a $0.9 million, or 27%, decrease in intersegment sales, which are eliminated in consolidation and to a lesser extent a $0.1 million, or 1%, increase in Network Equipment revenue.

Network Equipment Group.    Revenue generated from the Network Equipment group increased $0.1 million, or 1%, in the third quarter of 2012 compared to the third quarter of 2011. Our OCS division had increased revenue this quarter of 1% due to higher product revenues. Sales for our Optiswitch and related components increased compared to last year while all other product categories were down from last year. Service revenues were flat compared to last year. Geographically, the increase at OCS was in the Asia Pacific region, which was partially offset by decreases in the Americas and Europe. The foreign exchange impact to the Network Equipment Group is not material due to Appointech being the only activity subject to foreign exchange fluctuations.

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

					Favorable/(Unfavorable)
Three months ended September 30:	2012		2011		$ Change			% Change
Revenue, excluding intersegment sales:
Americas		$11,861		$13,977		($2,116	)	(15	)%
Europe	3,419		4,337		(918		)	(21	)
Asia Pacific	5,570		1,497		4,073			272
Other regions			2		(2		)	(100	)
Total external sales	20,850		19,813		1,037			5
Sales to Network Integration group:
Europe	2,460		3,380		(920		)	(27	)
Total intersegment sales	2,460		3,380		(920		)	(27	)
Total Network Equipment revenue		$23,310		$23,193		$117		1	%

Network Integration Group.    Revenue generated from the Network Integration group decreased $3.6 million, or 11%, in the third quarter of 2012 compared to the third quarter of 2011. The decrease was related to Alcadon which was down 23% in local currency on lower sales of non-MRV products. Tecnonet decreased by 14% in local currency due to delayed acceptance of previously installed equipment at two major customers and economic weakness within the Italian economy. These decreases were partially offset by an increase in service revenue. At Interdata, revenue was up 54% from the prior year on two large product orders. Total revenue from this segment would have been $3.3 million, or 1%higher in 2012, compared to the prior year, had foreign currency exchange rates remained the same as they were in 2011. 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:	2012			2011			$ Change			% Change		% Change constant currency (1)
Network Equipment group		$12,306			$11,203			$1,103		10	%	12	%
Network Integration group	7,116			8,954			(1,838		)	(21	)	(13	)
Before intersegment adjustments	19,422			20,157			(735		)	(4	)	1
Adjustments (2)	(196		)	(45		)	(151		)	336		333
Total		$19,226			$20,112			($886	)	(4	)%	—	%

(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.

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Consolidated gross profit decreased $0.9 million, or 4%, in the third quarter of 2012 compared to the prior year third quarter, due to the 5%decrease in revenue. Gross margin as a percentage of revenue was 37% in both the current and the prior year third quarter. As explained below, an increase in the Network Equipment Group's gross margin was offset by a decrease in the Network Integration Group's gross margin. Gross profit would have been $0.7 millionhigher if foreign currency exchange rates had remained the same as they were in the third quarter of 2011.

Network Equipment Group.  The $1.1 million, or 10%, increase in gross profit for the Network Equipment group was due to a 1%increase in revenue, as well as an increase in average gross margin from 48% to 53% primarily due to increased sales of higher margin products, and a $0.1 million decline in write-offs of excess inventory held for sale service support. There was also a $0.2 million decrease for engineering labor reclassified to operating expense to more appropriately categorize the expense in the current year. In the third quarter of 2012, the effect of foreign currency exchange rates remained relatively the same as in 2011.

Network Integration Group.  Gross profit for the Network Integration group decreased $1.8 million, or 21%. The decrease was driven by an 11%decrease in revenue and a decrease in average gross margin from 26% to 23% due to gross margin declines at all three subsidiaries. The declines were largely driven by a shift between product and service revenues at Tecnonet and Interdata. In addition, we have continued to face increased pricing pressure that is resulting in lower margins in our European markets. Gross profit would have been $0.7 millionhigher in the thirdquarter of 2012 had foreign currency exchange rates remained the same as they were in the prior year quarter of 2011.

Operating Expenses

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

					(Favorable)/Unfavorable
Three months ended September 30:	2012		2011		$ Change		% Change		% Change constant currency (1)
Network Equipment group		$10,142		$9,922		$220	2	%	2	%
Network Integration group	6,213		5,252		961		18	%	—	%
Total segment operating expenses	16,355		15,174		1,181		8	%	1	%
Corporate unallocated operating expenses and adjustments (2)	3,921		2,734		1,187		43	%	43	%
Total		$20,276		$17,908		$2,368	13	%	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 in 2012 were $20.3 million, or 39% of revenue, compared to $17.9 million, or 33% of revenue, in the third quarter of 2011, an increase of $2.4 million, or 13%, and included a $1.1 million impairment charge related to Tecnonet. Excluding this charge, operating expenses in the third quarter of 2012 were $19.2 million, or 37% of revenue, compared to $17.9 million, or 33% of revenue, in 2011, a increase of $1.3 million, or 7%. This was due an increase in labor related costs at the Network Equipment group and higher legal and professional fees at Corporate.

Corporate expenses increased $1.2 million in the third quarter of 2012 compared to the third quarter of 2011 due to $0.8 million in legal and professional fees associated with the derivative litigation and the sale of the Company's Network Integration subsidiaries and $0.6 million in consulting fees associated with interim finance staffing support and other consulting. These were partially offset by $0.2 of labor savings due to the departure of the prior chief financial officer and vice president of finance. The Company has continued to incur legal and professional fees associated with the sale of the business units and other corporate matters.

Network Equipment Group.    Operating expenses in the Network Equipment group for the third quarter of 2012 were $10.1 million, or 44% of revenue, compared to $9.9 million, or 43% of revenue in 2011. The $0.2 million, or 2%, increase was due to $0.4 million in severance costs related to a reduction in force at the US and Israel divisions, additional labor and materials costs to support research and development and product development initiatives partially

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offset by savings due to vacancies in key senior-level sales and marketing positions. In the third quarter 2012, the effect of foreign currency exchange rates remained relatively the same as in 2011.

Network Integration Group.    Operating expenses in the Network Integration group for 2012 were $6.2 million, or 20% of revenue, compared to $5.3 million, or 15% of revenue, in 2011. The $1.0 million increase is due to the $1.1 million goodwill write off at Tecnonet and $0.3 million in severance for an officer at Interdata that were partially offset by lower expenses due to the decrease in revenues. Operating expenses would have been $0.4 millionhigher in 2012 had foreign currency exchange rates remained the same as they were in 2011.

Operating Income (Loss)

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

							Favorable/(Unfavorable)
Three months ended September 30:	2012			2011			$ Change			% Change		% Change constant currency(1)
Network Equipment group		$2,163			$1,281			$882		69	%	86	%
Network Integration group	903			3,702			(2,799		)	(76	)	(30	)
Total segment operating income (loss)	3,066			4,983			(1,917		)	(38	)	—
Corporate unallocated and adjustments (2)	(4,116		)	(2,779		)	(1,337		)	(48	)	(48	)
Total		($1,050	)		$2,204			($3,254	)	(148	)%	(62	)%

(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 $0.9 million, or 4%, decrease in gross profit and the $2.4 million, or 13%, increase in operating expenses primarily led to a $3.3 milliondecrease in operating income representing a decline in operating margin from 4% to -2%. Our operating income for the quarter ended September 30, 2012 would have been approximately $0.3 millionhigher had foreign currency exchange rates remained the same as they were in 2011. Operating income included share-based compensation expense of $0.3 million and $0.4 million in 2012 and 2011, respectively.

Network Equipment Group.    The Network Equipment group reported an operating income of $2.2 million and and $1.3 million in 2012 and 2011, respectively. The increase was due to a $1.1 millionincrease in gross profit partially offset by a $0.2 millionincrease in operating expenses. Operating margin was 9% in 2012 and 6% in 2011. Operating income was not impacted by foreign currency exchange rate fluctuations..

Network Integration Group.    The Network Integration group reported operating income of $0.9 million for 2012,

compared to $3.7 million in 2011. The $2.8 milliondecrease was due to the $1.8 milliondecrease in gross profit and offset by a $1.0 millionincrease in operating expenses. The Network Integration group operating margin was 3% in the third quarter of 2012 compared to 11% in the third quarter of 2011. Operating income would have been $0.3 millionhigher in 2012 had foreign currency exchange rates remained the same as they were in 2011.

Interest Expense and Other Income, Net

Interest expense was $0.1 million in three month periods ending September 30, 2012 compared to $0.2 million in 2011. Other income, net, principally includes interest income on cash, cash equivalents and investments and gains and losses on foreign currency transactions and litigation settlements. We recognized a net gain of $0.1 million on foreign currency transactions in 2012 compared to a $1.7 million net loss in 2011.

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Provision for Income Taxes

The tax provision for the third quarters of 2012 and 2011 was $1.3 million compared to a $0.3 million benefit, respectively. Our income tax provision fluctuates based on the amount of pre-tax income or loss generated in the various jurisdictions where we conduct operations and pay income tax. The income tax expense on an operating loss of $1.3 million in the third quarter of 2012 is due to income tax associated with our foreign subsidiaries that do not benefit from our federal net operating loss carryforwards, and to taking the full effect of the write down of Tecnonet's goodwill of $1.1 million during the third quarter of 2012.

Tax Loss Carryforwards

As of December 31, 2011, we had net operating losses ("NOLs") of $227.4 million, $161.8 million, and $89.9 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, 2012, the U.S. federal and state NOLs continued to carry a full valuation allowance.

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Nine Months Ended September 30,2012 Compared To Nine Months Ended September 30,2011

Revenue

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

							Favorable/(Unfavorable)
Nine Months Ended September 30:	2012			2011			$ Change			% Change		% Change constant currency(1)
Network Equipment group		$65,248			$70,442			($5,194	)	(7	)%	(7	)%
Network Integration group	98,188			108,108			(9,920		)	(9	)	(1	)
Before intersegment adjustments	163,436			178,550			(15,114		)	(8	)	(3	)
Intersegment adjustments (2)	(8,432		)	(11,954		)	3,522			(29	)	(29	)
Total		$155,004			$166,596			($11,592	)	(7	)%	(1	)%

___________________________________

(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 30,2012decreased $11.6 million, or 7%, compared to the comparable period of 2011, due primarily to a $9.9 million, or 9%, decrease in Network Integration group revenue as well as to a $5.2 million, or 7%, decrease in Network Equipment revenue, partially offset by a $3.5 million, or 29%, decrease in intersegment sales, which are eliminated in consolidation. Consolidated revenue would have been $9.2 millionhigher if foreign currency exchange rates had remained the same as they were in the first nine months of 2011.

Network Equipment Group.    Revenue generated from the Network Equipment group decreased $5.2 million, or 7%, in the nine months ended September 30,2012 compared to the nine months ended September 30,2011. Our OCS division revenues decreased 8% primarily due to a decrease in product revenues: specifically, out-of-band networking equipment and fiber optic components. Geographically, OCS Asia Pacific sales increased while all other geographic areas decreased.

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

					Favorable/(Unfavorable)
Nine Months Ended September 30:	2012		2011		$ Change			% Change
Revenue, excluding intersegment sales:
Americas		$37,744		$40,717		($2,973	)	(7	)%
Europe	11,250		11,700		(450		)	(4	)
Asia Pacific	7,822		6,057		1,765			29
Other regions	—		14		(14		)	(100	)
Total external sales	56,816		58,488		(1,672		)	(3	)
Sales to Network Integration group:
Europe	8,432		11,954		(3,522		)	(29	)
Total intersegment sales	8,432		11,954		(3,522		)	(29	)
Total Network Equipment revenue		$65,248		$70,442		($5,194	)	(7	)%

Network Integration Group.    Revenue generated from the Network Integration group decreased $9.9 million, or 9%, in the first nine months of 2012 compared to the first nine months of 2011. The decline in revenue was primarily due to Alcadon representing a 9% decrease in local currency, due to lower sales of non-MRV products as well as a loss of a major customer in the second quarter. Interdata experienced a 7% increase in sales in local currency due to unexpected product orders during the third quarter. At Tecnonet, revenue was flat, and we continue to see weakening

31

in the Italian telecom market. Revenue would have been $9.1 millionhigher in 2012 had foreign currency exchange rates remained the same as they were in 2011. 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)
Nine Months Ended September 30:	2012		2011			$ Change			% Change		% Change constant currency (1)
Network Equipment group		$32,342		$35,956			($3,614	)	(10	)%	(9	)%
Network Integration group	22,897		28,152			(5,255		)	(19	)	(11	)
Before intersegment adjustments	55,239		64,108			(8,869		)	(14	)	(10	)
Adjustments(2)	100		(636		)	736			(116	)	(116	)
Total		$55,339		$63,472			($8,133	)	(13	)%	(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 $8.1 million, or 13% for the nine months ended September 30, 2012 from the prior year period, due to the 7%decrease in revenue and a decrease in gross margin from 38% to 36%. 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 to a decrease in intersegment sales. Gross profit would have been $2.1 millionhigher if foreign currency exchange rates had remained the same as they were in the first nine months of 2011.

Network Equipment Group.    The $3.6 million, or 10%, decrease in gross profit for the Network Equipment group for the nine months ended September 30, 2012 from the prior year period was due to an 7%decrease in revenue, as well as a decrease in average gross margin from 51% to 50%. The decline in average gross margin is primarily due to lower margins at OCS, which were influenced by increased pricing pressures, a change in product mix, and an increase in inventory write-offs. Gross profit would have been flat in 2012 had foreign currency exchange rates remained the same as they were in 2011.

Network Integration Group.    Gross profit for the Network Integration group decreased $5.3 million, or 19% for the nine months ended September 30, 2012 from the prior year period. The decrease was driven by a 9%decrease in revenue and by a decrease in average gross margins from 26% to 23%. Average gross margins were down due to declines at Tecnonet and Interdata that were largely driven by change in product mix and lower margins on service revenue. Gross margins at Alcadon were also slightly down. Gross profit would have been $2.1 millionhigher in 2012 had foreign currency exchange rates remained the same as they were in 2011.

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Operating Expenses

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

					(Favorable)/Unfavorable
Nine Months Ended September 30:	2012		2011		$ Change			% Change		% Change constant currency (1)
Network Equipment group		$31,946		$33,169		($1,223	)	(4	)%	(4	)%
Network Integration group	21,408		17,209		4,199			24	%	29	%
Total segment operating expenses	53,354		50,378		2,976			6	%	8	%
Corporate unallocated operating expenses and adjustments(2)	10,014		9,399		615			7	%	7	%
Total		$63,368		$59,777		$3,591		6	%	7	%

(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 $63.4 million, or 41% of revenue, for the first nine months of 2012 compared to $59.8 million, or 36% of revenue, for the prior year period, an increase of $3.6 million, or 6%, and included a $4.7 million in impairment charges related to Alcadon and Tecnonet. Excluding these charges, operating expenses in the third quarter of 2012 were $58.7 million, or 37% of revenue, compared to $59.8 million, or 36% of revenue, in 2011, a decrease of $1.1 million, or 2%. The decrease was due to lower operating expenses in the Network Equipment group, which was partially offset by expenses at Corporate and the Network Integration group net of the impact of foreign currency exchange rates.

Corporate expenses increased $0.6 million in the first nine months of 2012 compared to the first nine months of 2011 primarily due to $1.0 million in consulting fees associated with interim finance staffing and $0.6 million in legal fees associated with the derivative litigation (see Note 12, Litigation). These increases were partially offset by $1.0 million in lower stock based compensation related to the Company's former CEO who was terminated in the prior year. The Company continues to incur legal and professional fees associated with the sale of the business units and other corporate matters.

Network Equipment Group.    Operating expenses in the Network Equipment group for for the first nine months of 2012 were $32.0 million, or 49% of revenue, compared to $33.2 million, or 47% of revenue in the prior year period of 2011, a decrease of $1.2 million, or 4%, due to a reduction of $1.5 million in general and administrative expenses and a reduction of $0.2 million in sales and marketing labor relating to vacancies in senior level positions. These reductions were partially offset by $0.5 million of additional labor and materials costs to support research and development and product development initiatives.

Network Integration Group.    Operating expenses in the Network Integration group for the first nine months of 2012 were $21.4 million, or 22% of revenue, compared to $17.2 million, or 16% of revenue, for the prior year period. The $4.2 million, or 24%, increase in operating expense was primarily due to $1.1 million in severance at Interdata, a $3.7 million of goodwill impairment at Alcadon, and a $1.1 million goodwill impairment at Tecnonet, that were partially offset by lower labor costs, marketing activities and consulting fees. Operating expenses would have been $1.9 millionhigher in the first nine months of 2012 had foreign currency exchange rates remained the same as they were in the prior year period.

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Operating Income (Loss)

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

							Favorable/(Unfavorable)
Nine Months Ended September 30:	2012			2011			$ Change			% Change		% Change constant currency(1)
Network Equipment group		$396			$2,787			($2,391	)	(86	)%	(78	)%
Network Integration group	1,488			10,943			(9,455		)	(86	)	(75	)
Total segment operating income (loss)	1,884			13,730			(11,846		)	(86	)	(76	)
Corporate unallocated and adjustments (2)	(9,913		)	(10,035		)	122			1		(1	)
Total		($8,029	)		$3,695			($11,724	)	(317	)%	(278	)%

(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 $8.1 million, or 13%, decrease in gross profit and the $3.6 million, or 6%, increase in operating expenses primarily led to a $11.7 milliondecrease in operating income representing a decline in operating margin from 2% to (5)%. Our operating loss would have been $0.2 millionhigher in the first nine months of 2012 had foreign currency exchange rates remained the same as they were in the prior year period. Operating losses included share-based compensation expense of $0.8 million and $2.0 million in the first nine months of 2012 and 2011, respectively.

Network Equipment Group.    The Network Equipment group reported an operating profit of $0.4 million and an operating profit of $2.8 million in the first nine months of 2012 and 2011, respectively. The decrease was due to a $3.6 milliondecrease in gross profit and $1.2 milliondecrease in operating expenses. Operating margin was 1% in the first nine months of 2012 and 4% in 2011, respectively. Operating losses would have been flat in the first nine months of 2012 had foreign currency exchange rates remained the same as they were in the prior year period.

Network Integration Group.    The Network Integration group reported operating income of $1.5 million for the first nine months of 2012, compared to operating income of $10.9 million for the prior year period. The $9.4 million decrease was due to the $5.2 million decrease in gross profit and a $4.2 millionincrease in operating expenses. The Network Integration group operating margin was 2% in the first nine months of 2012 compared to 10% in the first nine months of 2011. Operating income would have been $0.2 millionhigher in the first nine months of 2012 had foreign currency exchange rates remained the same as they were in the prior year period

Interest Expense and Other Income, Net

Interest expense was $0.5 million and $0.7 million in the nine months ended September 30,2012 and 2011, respectively. Other income, net, principally includes interest income on cash, cash equivalents and investments and gains and losses on foreign currency transactions and litigation settlement. In the second quarter of 2012, we recognized a $2.2 million gain on settlement of litigation that had been previously reserved, see Note 12, Litigation. We recognized a net loss of $0.3 million on foreign currency transactions in 2012 compared to a $2.2 million net loss in 2011.

Provision for Income Taxes

The tax provisions for the nine months ended September 30,2012 and 2011 were $2.6 million and $2.2 million, respectively. Income tax expense fluctuates based on the amount of pre-tax income generated in the various jurisdictions where we conduct operations and pay income tax. The increase in income tax provision for 2012 was due to an increase in pre-tax income in the jurisdictions where we owe taxes, particularly at OCS in Israel and Interdata in France. In addition, the full effect of the write down of Alcadon's goodwill of $3.7 million and Tecnonet's goodwill of $1.1 million was reflected during the second and third quarters of 2012, respectively.

Tax Loss Carryforwards

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As of December 31, 2011, we had NOLs of $227.4 million, $161.8 million, and $89.9 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, 2012, the U.S. federal and state NOLs had a full valuation allowance.

Discontinued Operations

Income from discontinued operations for the nine months ended September 30, 2011 included $2.4 million in income related to the results of operation of CES and a net loss from results of operations of TurnKey of $3.4 million. The income from discontinued operations for the nine months ended September 30, 2012 included a net loss from CES of $0.1 million and a net gain on disposal of $8.0 million. We completed the sale of CES on March 29, 2012 and the sale of TurnKey on May 6, 2011.

Liquidity and Capital Resources

During the nine months ended September 30, 2012, the Company's cash and restricted time deposits and escrow accounts decreased from $71.7 million to $39.4 million, a decrease of $32.3 million. Our cash outflows included a net loss of $3.4 million adjusted for non-cash expenses including depreciation and amortization, share-based compensation, the gains on sale of CES and Fiberxon litigation settlement and the goodwill impairments. Our cash outflows from operations also included a net increase in cash used to pay for current assets and liabilities of $4.9 million, and included a $3.1 million increase in inventory combined with a decrease in accounts payable, accrued liabilities and income taxes payable of $10.6 million. These outflows were partially offset by cash generated from accounts receivable collections of $5.5 million and a decrease in other assets of $2.3 million. Cash from investing activities included $16.8 million in proceeds from the sale of the Company's CES subsidiary. This reflects the $7.3 million of cash that remained on the balance sheet of CES at the closing of the sale and $2.8 million in sale proceeds that are in an indemnification escrow account to be released to the Company on March 31, 2013 subject to any indemnification claims that may be brought by the buyer. (See Note 13, "Discontinued Operations" to the Financial Statements in Item 1 of this Form 10-Q.) Cash provided by investing activities was offset by a net $51.7 million used for financing activities including payment of a special dividend totaling $47.3 million on the outstanding shares of the Company's Common Stock to return excess cash to the Company's stockholders in May 2012. (See Note 15, Dividend.) We also purchased 5.8 million shares of the Company's Common Stock for $2.8 million in August 2012. (See Note 16, Treasury Share Repurchase), and made $2.1 million in purchases of property and equipment. In addition, net payments on short-term debt and capital lease obligations of $21.3 million partially offset additional borrowings of $19.4 million.

We periodically review our capital position and consider returning capital to stockholders through special dividends or share repurchases when the cash on hand exceeds our foreseeable cash needs. We also periodically review the capital needs of our business units and following our October 10, 2012 Form 8-K filing announcing our plans to no longer sell OCS and operate it for the foreseeable future, a decision was made to invest approximately $4.6 million over the next 12 months to upgrade our systems and equipment needed to support the Company's growth objectives in the carrier Ethernet and optical transport markets among others. 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.

The following table summarizes MRV's cash position including cash and cash equivalents, restricted time deposits and our short-term debt position (in thousands):

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	September 30, 2012		December 31, 2011
Cash
Cash and cash equivalents		$39,036		$71,352
Restricted time deposits	326		380
	39,362		71,732
Short-term debt	7,227		8,987
Cash in excess of debt		$32,135		$62,745
Ratio of cash to debt(1)	5.4		8.0

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

Short-term Debt

Our short-term debt is related to Tecnonet, our Italian Network Integration subsidiary and Alcadon, our Scandinavian subsidiary. Customer accounts receivables of Tecnonet have been pledged as collateral on the related borrowings.

The following table summarizes our short-term debt (dollars in thousands):

	September 30, 2012		December 31, 2011		Increase (decrease)
Lines of credit secured by accounts receivable		$7,227		$8,987		($1,760	)
Total short-term debt		$7,227		$8,987		($1,760	)

The decrease in short-term debt at September 30, 2012 includes net payments of $21.3 million, a reduction of 19% in local currency, partially offset by additional borrowings of $19.4 million and the impact of changes in foreign currency exchange rates.

Working Capital

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

	September 30, 2012		December 31, 2011
Current assets		$138,651		$198,762
Less: Current assets of discontinued operations	—		(24,810		)
Current assets from continuing operations	138,651		173,952
Current liabilities	63,678		81,799
Less: Current liabilities from discontinued operations	—		(3,236		)
Current liabilities from continuing operations	63,678		78,563
Working capital		$74,973		$95,389
Current ratio(1)	2.2		2.2

(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.

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Contractual Obligations

During the quarter ended September 30, 2012, following validation of individual plaintiff releases, we released $2.4 million in funds held in escrow pursuant to our agreement for the Fiberxon litigation whereby MRV was to pay $2.4 million to the Fiberxon Plaintiffs in consideration for the mutual release of the parties for all claims related to the Company's acquisition of Fiberxon in July 2007, and other claims and lawsuits held or filed by the Fiberxon Plaintiffs. We had previously reserved approximately $4.5 million for this potential deferred obligation and released $2.2 million of the accrued liability related to these matters into income.

In addition, since December 31, 2011 there was a net $0.2 million increase in our capital lease obligations.

Internet Access to Our Financial Documents

We maintain a website at www.mrv.com. We make available, free of charge, either by direct access or 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.

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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 June 30, 2012, 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 June 30, 2012, 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 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 55% 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 nine months ended September 30, 2012 compared to the same period last year, so revenues and expenses in these countries translated into more dollars than they would have in 2011. For the nine months ended September 30, 2012, we had approximately:

• $66.7 million in cost of goods and operating expenses recorded in euros;

• $20.5 million in cost of goods and operating expenses recorded in Swedish kronor; and

• $1.3 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, 2012, our costs would have increased to approximately:

• $73.4 million cost of goods and operating expenses recorded in euros;

• $22.6 million in cost of goods and operating expenses recorded in Swedish kronor; and

• $1.4 million in cost of goods and operating expenses recorded in Taiwan dollars.

Fluctuations in currency exchange rates of foreign currencies held have an impact on the U.S. dollar equivalent

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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, 2012		December 31, 2011
U.S. dollars		$24,822		$55,552
Euros	9,343		8,233
Taiwan dollars	16		26
Norwegian kronor	1,568		1,026
Swedish kronor	2,547		5,168
Israeli new shekels	472		1,229
Other	268		118
Total cash and cash equivalents		$39,036		$71,352

Macro-economic uncertainties. We believe that the recent downturn in global markets has affected our revenues and operating results, particularly in the Italian and other European markets and more recently the markets in the United States, 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 revenue and operating results.  

Valuation and qualifying accounts. 

Accounts Receivable Reserve	Nine months ended
	September 30, 2012
Balance at beginning of period	$	1,672
Charged to expense	51
Write-offs	(74		)
Foreign currency translation adjustment	(2		)
Balance at end of period	$	1,647

Product Warranty Reserve	Nine months ended
	September 30, 2012
Beginning balance		$1,098
Cost of warranty claims	(495		)
Accruals for product warranties	384
Foreign currency translation adjustment	—
Total		$987

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

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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 continuing the process of evaluating and addressing these matters, and are unable to determine their materiality until that evaluation is complete.

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 toproduct liability, and 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.

In June2008, 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 Form10-K for the year ended December31, 2008 in October2009.

From Juneto August2008, 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 former officers and directors. The five lawsuits filed in the Central District of California were consolidated. Claims were asserted under Section10(b)and 20(a)of the Exchange Act, and Rule10b-5 promulgated thereunder. The allegations set forth in the complaints were based on facts disclosed in our press release of June5, 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 November2010, 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 and a trial date has been scheduled for April 2013. A Special Litigation Committee created by the Board engaged counsel to conduct an investigation to evaluate the benefits to the Company of continuing the litigation, and the committee has been involved with settlement discussions. While the Company, defendants and counsel for the plaintiffs in the federal and state derivative lawsuits have attended several mediations, we have not been successful in reaching a settlement of these claims to date.

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.

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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 2011 Form 10-K. There have been no material changes in the Risk Factors as previously disclosed in our 2011 Form 10-K, with the exception that the following risk factor supersedes and replaces the first risk factor set forth in the 2011 Form 10-K.

We have concluded our strategic process, and have adopted a new strategy involving the planned divestiture of our Network Integration businesses in Europe and the retention of our Network Equipment business, and there can be no assurance that any additional transactions will result from these activities or that we will successfully operate and grow the Network Equipment business.

In a current report on Form 8-K filed on October 18, 2012, we announced the closing of the sale of our Interdata and Alcadon subsidiaries. We had also previously announced that we have retained the investment bank Headwaters BD, LLC, to evaluate and explore strategic alternatives for our Italian subsidiary, Tecnonet. The Company will have ongoing indemnification obligations with respect to the two sales, and has not entered into any sale agreement or letter of intent with any potential purchaser of Tecnonet. Further, on August 9, 2012, we announced the conclusion of a strategic review process for strategic alternatives for OCS and the Company as a whole, and are retaining, building and investing in our Network Equipment business.

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. Further, we cannot assure you that a sale of, or other strategic alternative for, Tecnonet may occur. We also can give no assurance that any potential transaction or other strategic alternative, once identified, evaluated and consummated, will provide greater value to our stockholders than that reflected in the current stock price. Any actions, developments or transactions may be dependent on factors that may be beyond the Company's control.

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

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased	Average Price Paid per Share
August 2012	5,843,420	$0.48

On August 17, 2012, the Company entered into a Share Purchase Agreement with T2 Accredited Fund, L.P., T2 Qualified Fund, L.P. and Tilson Offshore Fund, Ltd. (collectively, the "Seller") to purchase 5,843,420 shares of the Company's Common Stock owned by the Seller at a price of $0.48 per share for an aggregate price of $2,804,842, which was a discount of 7.7 percent from the last reported trading price of $0.52 per share for the Company's Common Stock on August 16, 2012. The sale was executed on August 20, 2012.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 6. Exhibits

(a) Exhibits

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No.	Description
3.1	Amended and Restated Certificate of Incorporation of MRV Communications, Inc., as amended by a Certificate of Ownership and Merger on July 31, 2009 (filed herewith)
10.1	Share Purchase Agreement, dated as of August 1, 2012, between the Company, as Seller, and IJ Next, as Purchaser in the presence of Holding Baelen Gaillard (incorporated by reference from Exhibit 10.1 of Form 8-K filed on August 7, 2012)
10.2	Representations and Warranties Agreement, dated as of August 1, 2012, between the Company, as warrantor, and IJ Next, as beneficiary (incorporated by reference from Exhibit 10.2 of Form 8-K filed on August 7, 2012)
10.3	Share Purchase Agreement, dated as of August 17, 2012, by and among T2 Accredited Fund, L.P., T2 Qualified Fund, L.P. and Tilson Offshore Fund, Ltd. (collectively, as the “Seller”), and the Company as Purchaser (incorporated by reference from Exhibit 10.1 of Form 8-K filed on August 20, 2012)
10.4	Stock Purchase Agreement, dated as of September 11, 2012, by and between the Company as Seller, and Deltaco Aktiebolag, as Purchaser (incorporated by reference from Exhibit 10.1 of Form 8-K filed on September 12, 2012)
10.5	Employment Agreement, dated October 10, 2012, by and between the Company and Stephen Garcia (incorporated by reference from Exhibit 10.1 of Form 8-K filed on October 11, 2012)
10.6	Amendment to MRV Communications, Inc. 2007 Omnibus Incentive Plan, dated November 5, 2012 (filed herewith)
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 Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith)
32.2	Certifications of the Principal Financial Officer 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)

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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, 2012.

MRV COMMUNICATIONS, INC.

/s/ Barry Gorsun

Barry Gorsun

Chief Executive Officer

Principal Executive Officer

/s/ Stephen Garcia

Stephen Garcia

Chief Financial Officer

Principal Financial Officer

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