MRV Communications (MRVC) 10-Q 2009 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQuarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2009

oTransition report pursuant to section 13 or 15(d) of the Securities Exchange Act for the transition period from ____________________ to ____________________

Commission file number 001-11174

MRV COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

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

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

(818) 773-0900

(Registrant’s telephone number, including area code)

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

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

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

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

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

As of November 26, 2009,157,607,118 shares of MRV’s Common Stock were outstanding.

MRV Communications, Inc.

Form 10-Q for the Quarter Ended September 30, 2009

Index

		Page Number
PART I	Financial Information	3
Item 1.	Financial Statements:	3
	Statements of Operations (unaudited) for the three and nine months ended September 30, 2009 and 2008	3
	Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008	4
	Statements of Cash Flows (unaudited) for the nine months ended September 30, 2009 and 2008	5
	Notes to Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	41
PART II	Other Information	42
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 6.	Exhibits	42
	Signatures	43

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PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements

MRV Communications, Inc.

Statements of Operations

(In thousands, except per share data)

	Three months ended September 30,						Nine months ended September 30,
	2009(unaudited)			2008 (unaudited)			2009(unaudited)			2008 (unaudited)
Revenue	$	128,871		$	130,626		$	366,811		$	403,790
Cost of goods sold	91,095			97,187			272,307			287,248
Gross profit	37,776			33,439			94,504			116,542
Operating expenses:
Product development and engineering	9,261			9,616			26,839			30,106
Selling, general and administrative	25,087			35,106			78,917			95,534
Amortization of intangibles	564			564			1,692			1,870
Total operating expenses	34,912			45,286			107,448			127,510
Operating income (loss)	2,864			(11,847		)	(12,944		)	(10,968		)
Interest expense	(689		)	(1,118		)	(2,361		)	(3,047		)
Other income (expense), net	(195		)	2,029			1,088			3,620
Income (loss) before income taxes	1,980			(10,936		)	(14,217		)	(10,395		)
Provision (benefit) for income taxes	2,179			(1,188		)	5,924			2,413
Net loss	(199		)	(9,748		)	(20,141		)	(12,808		)
Less: net income attributable to non-controlling interests	338			109			1,466			6
Net loss attributable to MRV	$	(537	)	$	(9,857	)	$	(21,607	)	$	(12,814	)
Net loss per share attributable to MRV common stockholders:
Basic and Diluted	$ (0.00		)	$  (0.06		)	$ (0.14		)	$  (0.08		)
Weighted average number of shares:
Basic and Diluted	157,584			157,418			157,521			157,284

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

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MRV Communications, Inc.

Balance Sheets

(In thousands, except par values)

	September 30, 2009 (unaudited)			December 31, 2008
Assets
Current assets:
Cash and cash equivalents	$	67,888		$	67,950
Short-term marketable securities	8,598			12,295
Time deposits (restricted)	14,025			1,335
Accounts receivable, net	128,748			114,213
Inventories	80,206			92,391
Deferred income taxes	1,517			2,130
Other current assets	43,913			32,769
Total current assets	344,895			323,083
Property and equipment, net	26,535			25,489
Goodwill	28,446			27,037
Intangibles, net	7,867			9,560
Deferred income taxes, net of current portion	1,969			1,480
Other assets	5,757			5,870
Total assets	$	415,469		$	392,519
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	82,326		$	91,262
Accrued liabilities	39,364			42,105
Short-term obligations	77,979			32,893
Deferred consideration payable	30,036			30,036
Deferred revenue	15,524			12,635
Other current liabilities	5,424			2,503
Total current liabilities	250,653			211,434
Other long-term liabilities	9,238			9,274
Commitments and contingencies
Equity:
MRV stockholders’ equity:
Preferred stock, $0.01 par value:
Authorized — 1,000 shares; no shares issued or outstanding	-			-
Common stock, $0.0017 par value:
Authorized — 320,000 shares
Issued — 158,960 shares as of September 30, 2009 and 158,800 shares as of December 31, 2008
Outstanding — 157,607 shares as of September 30, 2009 and 157,446 shares as of December 31, 2008	268			268
Additional paid-in capital	1,404,377			1,403,663
Accumulated deficit	(1,270,246		)	(1,248,639		)
Treasury stock — 1,353 shares in 2009 and 2008	(1,352		)	(1,352		)
Accumulated other comprehensive income (loss)	16,095			12,760
Total MRV stockholders’ equity	149,142			166,700
Non-controlling interests	6,436			5,111
Total equity	155,578			171,811
Total liabilities and equity	$	415,469		$	392,519

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

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MRV Communications, Inc.

Statements of Cash Flows

(In thousands)

	2009			2008
Nine months ended September 30:	(unaudited)			(unaudited)
Cash flows from operating activities:
Net loss	$	(20,141	)	$	(12,808	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	7,465			9,802
Share-based compensation expense	1,622			3,487
Provision for doubtful accounts	323			2,707
Deferred income taxes	55			(453		)
Gain on disposition of property and equipment	(12		)	(11		)
Gain on sale of equity method investment	-			(288		)
Changes in operating assets and liabilities:
Time deposits	(429		)	5,134
Accounts receivable	(11,246		)	(5,057		)
Inventories	13,108			(10,152		)
Other assets	(9,747		)	(2,502		)
Accounts payable	(9,882		)	8,770
Accrued liabilities	(2,228		)	(3,256		)
Income tax payable	1,964			(1,251		)
Deferred revenue	2,435			420
Other current liabilities	(966		)	(1,231		)
Net cash used in operating activities	(27,679		)	(6,689		)
Cash flows from investing activities:
Purchases of property and equipment	(6,907		)	(9,162		)
Proceeds from sale of property and equipment	43			234
Proceeds from sale of equity method investment	-			287
Purchases of investments	(5,228		)	(500		)
Proceeds from sale or maturity of investments	8,900			3,372
Purchase of minority interest	(1,367		)	-
Net cash used in investing activities	(4,559		)	(5,769		)
Cash flows from financing activities:
Net proceeds from exercise of stock options	43			145
Cash restricted to collateralize short-term obligations	(12,261		)	-
Borrowings on short-term obligations	123,871			83,338
Payments on short-term obligations	(79,738		)	(78,055		)
Payments on long-term obligations	(39		)	(121		)
Net cash provided by financing activities	31,876			5,307
Effect of exchange rate changes on cash and cash equivalents	300			1,517
Net decrease in cash and cash equivalents	(62		)	(5,634		)
Cash and cash equivalents, beginning of period	67,950			72,474
Cash and cash equivalents, end of period	$	67,888		$	66,840
Supplemental information:
Cash paid during the period for interest	$	1,882		$	2,616
Cash paid during the period for taxes	$	2,099		$	3,793

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

5

MRV Communications, Inc.

Notes To Financial Statements

(Unaudited)

1.   Basis of Presentation

The consolidated financial statements include the accounts of MRV Communications, Inc. (“MRV” or the “Company”) and its wholly-owned and majority-owned subsidiaries.  All significant intercompany transactions and accounts have been eliminated.  MRV consolidates the financial results of less than majority-owned subsidiaries when it has effective control, voting control or has provided the entity’s working capital.

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, 2009 (this “Form 10-Q”) should be read in conjunction with “Risk Factors,” “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 (“2008 Form 10-K”) filed with the SEC.  Included in this Quarterly Report on Form 10-Q is the Statement of Cash Flows for the nine months ended September 30, 2008, which has not previously been disclosed in MRV’s filings.

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, 2009, and the results of its operations and its cash flows for the nine months then ended.  The results reported in these financial statements should not be regarded as necessarily indicative of results that may be expected for the full year or any future periods.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 105, Generally Accepted Accounting Principles (“ASC 105”) which establishes the ASC as the single source of authoritative U.S. GAAP for non-governmental entities.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants.  As of July 1, 2009, the Company adopted ASC 105, which supersedes all existing non-SEC accounting and reporting standards, and all corresponding changes in the Company’s notes to the unaudited financial statements reflect the adoption of this standard.

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2.   Cash and Cash Equivalents, 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.  Time deposits represent investments, which are restricted as to withdrawal or use based on maturity terms.  MRV maintains cash balances and investments in qualified financial institutions, and at various times such amounts are in excess of federal insured limits.  Time deposits of $14.0 million and $1.3 million as of September 30, 2009 and December 31, 2008, respectively, are restricted by short-term obligations.

MRV accounts for its marketable securities, which are available for sale, under the provisions of Topic 320, Investments — Debt and Equity Securities of the FASB ASC.  The original cost approximated fair market value as of September 30, 2009 and December 31, 2008.  Unrealized gains at September 30, 2009 and December 31, 2008 were $2,500 and $64,000, respectively.  Marketable securities mature at various dates through 2009 and consist of corporate and U.S. government issues.

(in thousands)	September 30, 2009		December 31, 2008
Corporate issues	$	-	$	999
U.S. government issues	8,598		11,296
Total	$	8,598	$	12,295

3.   Fair Value Measurement

MRV adopted the provisions of ASC Topic 820 Fair Value Measurements and Disclosures (“ASC 820”), effective January 1, 2008.  ASC 820 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value, as required by the Fair Value Measurements and Disclosures Topic of the ASC, must maximize the use of observable inputs and minimize the use of unobservable inputs.  The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.  The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.  The fair value hierarchy is broken down into three levels based on the source of inputs as follows: Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access; Level 2 - Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly; and Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

7

The Company’s available-for-sale securities comprise obligations of U.S. government agencies, corporate debt securities and other interest bearing securities and are categorized in Level 1 at September 30, 2009 (in thousands):

	Fair value measurement at reporting date using:
Assets:	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant other unobservable inputs (Level 3)		Balance as of September 30, 2009
Short-term marketable securities	$	8,598	$	-	$	-	$	8,598

During the nine months ended September 30, 2009, there were no re-measurements to fair value of financial assets and liabilities that are not measured at fair value on a recurring basis.

4.   Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents placed with high credit quality institutions and accounts receivable due from customers.  The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses.  At September 30, 2009, one customer accounted for 16% of our accounts receivable and trade notes receivable balance.

The following table summarizes the changes in the allowance for doubtful accounts during the nine months ended September 30, 2009 (in thousands):

Nine months ended September 30, 2009
Balance at beginning of period	$	9,026
Charged to cost and expense	323
Write-offs	(2,239		)
Foreign currency translation adjustment	107
Balance at end of period	$	7,217

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5.   Inventories

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

	September 30, 2009		December 31, 2008
Raw materials	$	34,702	$	36,997
Work-in-process	8,051		19,839
Finished goods	37,453		35,555
Total	$	80,206	$	92,391

The following table summarizes the change in inventory reserve during the nine months ended September 30, 2009 (in thousands):

Nine months ended: September 30, 2009
Balance at beginning of period	$	33,207
Charged to cost and expense	1,123
Write-offs	(3,658		)
Foreign currency translation adjustment	359
Balance at end of period	$	31,031

6.   Goodwill and Other Intangibles

Goodwill and intangible assets with indefinite lives are not amortized, but instead measured for impairment at least annually or when events indicate that impairment exists.  No events occurred during the nine months ended September 30, 2009 indicating impairment of goodwill existed, and accordingly, there was no change in the carrying balance of goodwill during that period.  Goodwill is recorded at the subsidiary level in local currencies and converted into U.S. dollars at the balance sheet date.  There was an unrealized gain of $1.4 million during the nine months ended September 30, 2009 due to the change in foreign currency rates from December 31, 2008 to September 30, 2009.  The unrealized gain arising from the translation adjustment is recorded in accumulated other comprehensive income in the Balance Sheet.

Other intangibles assets consist of intangibles assets identified as a result of the Fiberxon acquisition on July 1, 2007.  The following table summarizes MRV’s other intangible asset balances at September 30, 2009 (in thousands):

	Gross carrying amount		Accumulated amortization			Net carrying amount
Developed technology	$	8,500	$	(3,477	)	$	5,023
Customer relationships	4,800		(1,956		)	2,844
Customer backlog	600		(600		)	-
Total other intangible assets	$	13,900	$	(6,033	)	$	7,867

Amortization of other intangibles was $564,000 and $1.7 million for the three and nine months ended September 30, 2009, respectively.  Amortization of other intangibles was $564,000 and $1.9 million for the three and nine months ended September 30, 2008, respectively.

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7.   Product Warranty and Indemnification

As of September 30, 2009 and December 31, 2008, MRV’s product warranty liability recorded in accrued liabilities was $3.3 million and $2.6 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 the product warranty liability during the nine months ended September 30, 2009 (in thousands):

Nine months ended September 30, 2009
Beginning balance	$	2,605
Cost of warranty claims	(427		)
Accruals for product warranties	1,136
Foreign currency translation adjustment	6
Total	$	3,320

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8.   Noncontrolling Interests

In June 2009, the Company completed the purchase of 833,333 shares of Series A Preferred Stock and 12.8 million shares of common stock of its majority-owned subsidiary Charlotte’s Networks, Inc. (“Charlotte’s Networks”).  The total purchase price was $1.5 million.  After the purchase, MRV owned all of the preferred stock and 99.7% of the common stock of Charlotte’s Networks.  On August 4, 2009 the subsidiary was merged into MRV. The $1.0 million difference between the purchase price and the amount by which the noncontrolling interest was adjusted was recognized as a reduction of MRV equity.

The following table summarizes the change in noncontrolling interests in subsidiaries for the nine months ended September 30, 2009 (in thousands):

Nine months ended September 30, 2009
Non-controlling interests at December 31, 2008	$	5,111
Net income attributable to noncontrolling interests	1,466
Increase in noncontrolling interest due to share-based compensation in subsidiaries	41
Translation rate fluctuation adjustment attributable to noncontrolling interests	367
Purchase of subsidiary shares from noncontrolling interest	(549		)
Noncontrolling interests at September 30, 2009	$	6,436

9.   Net Income (Loss) Per Share

Basic net income (loss) per share is computed using the weighted average number of shares of Common Stock outstanding during the period.  Diluted net income 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 and warrants outstanding during the period.  Diluted shares outstanding include the dilutive effect of in-the-money options and warrants, calculated based on the average share price for each period using the treasury stock method.

Outstanding stock options and warrants to purchase 13.4 million and 15.0 million shares were excluded from the computation of diluted net loss per share for the three and nine months ended September 30, 2009 and 2008, respectively, because such stock options and warrants were anti-dilutive.

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10.  Share-Based Compensation

MRV records share-based compensation expense in accordance with Topic 718, Compensation — Stock Compensation of the FASB ASC.  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, 2009 and 2008 (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2009		2008		2009		2008
Cost of goods sold	$	41	$	76	$	155	$	294
Product development and engineering	159		329		385		1,056
Selling, general and administrative	390		572		1,082		2,137
Total share-based compensation expense (1)	$	590	$	977	$	1,622	$	3,487

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

There were no stock option awards granted during the nine months ended September 30, 2009 or the three months ended September 30, 2008.  The weighted average fair value of awards granted during the nine months ended September 30, 2008 was $0.88 per share.  As of September 30, 2009, the total unrecorded deferred share-based compensation balance for unvested shares, net of expected forfeitures, was $2.8 million which is expected to be amortized over a weighted-average period of two years.

Valuation Assumptions

MRV uses the Black-Scholes option pricing model to estimate the fair value of share-based awards.  The Black-Scholes model requires the use of subjective assumptions, including the option’s expected life and the underlying stock price volatility.  There were no options granted during the nine months ended September 30, 2009, nor in the three months ended September 30, 2008.  The following weighted average assumptions were used for estimating the fair value of options granted during the nine months ended September 30, 2008:

Nine months ended September 30, 2008
Risk-free interest rate	3.2%
Dividend yield	0%
Volatility	67.7%
Expected life	5.0 yrs

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11.  Segment Reporting and Geographic Information

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

The accounting policies of the segments are the same as those described in the summary of significant accounting polices disclosed in MRV’s 2008 Form 10-K.  MRV evaluates segment performance based on revenues and operating expenses of each segment.  As such, there are no separately identifiable segment assets nor are there any separately identifiable Statements of Operations data below operating income.

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

	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
Network Equipment group	$	26,580		$	31,462		$	74,758		$	95,729
Network Integration group	49,263			53,573			145,794			164,290
Optical Components group	55,879			49,039			154,026			155,195
All others	61			52			197			149
Before intersegment adjustments	131,783			134,126			374,775			415,363
Intersegment adjustments	(2,912		)	(3,500		)	(7,964		)	(11,573		)
Total	$	128,871		$	130,626		$	366,811		$	403,790

Network Equipment revenue primarily consists of Metro Ethernet equipment, optical transport equipment, out-of-band network equipment, and defense and aerospace related systems.  In addition, 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.  Optical Components revenue primarily consists of fiber optic components, such as those used in Fiber-to-the-Premises applications, fiber optic transceivers, discrete lasers and LEDs that generally are not sold as part of our Network Equipment or Network Integration solutions.

For the three and nine months and ended September 30, 2009 and 2008, no single customer accounted for 10% or more of revenues in either period.

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

	Three months ended September 30,				Nine months ended September 30,
	2009		2008		2009		2008
Americas	$	34,597	$	46,919	$	97,774	$	137,543
Europe	60,969		69,156		179,127		210,376
Asia Pacific	33,044		14,550		89,630		55,750
Other regions	261		1		280		121
Total	$	128,871	$	130,626	$	366,811	$	403,790

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

	September 30,		December 31,
	2009		2008
Americas	$	4,983	$	6,212
Europe	8,907		8,280
Asia Pacific	12,645		10,997
Total	$	26,535	$	25,489

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

	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
Network Equipment group	$	1,407		$	1,081		$	(1,442	)	$	3,107
Network Integration group	4,245			3,403			12,213			7,461
Optical Components group	1,250			(7,669		)	(12,091		)	(7,854		)
All others	(398		)	(428		)	(1,066		)	(1,358		)
	6,504			(3,613		)	(2,386		)	1,356
Corporate unallocated and adjustments	(3,640		)	(8,234		)	(10,558		)	(12,324		)
Total	$	2,864		$	(11,847	)	$	(12,944	)	$	(10,968	)

The following table summarizes income (loss) before provision for income taxes (in thousands):

	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
Domestic	$	(12,700	)	$	(8,018	)	$	(29,772	)	$	(15,668	)
Foreign	14,680			(2,918		)	15,555			5,273
Total	$	1,980		$	(10,936	)	$	(14,217	)	$	(10,395	)

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12.  Comprehensive Loss

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

	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
Net loss	$	(199	)	$	(9,748	)	$	(20,141	)	$	(12,808	)
Unrealized loss from available-for-sale securities	(17		)	(9		)	(62		)	(14		)
Foreign currency translation	4,407			(7,696		)	3,764			(782		)
Comprehensive income (loss)	4,191			(17,453		)	(16,439		)	(13,604		)
Less: comprehensive income attributable to noncontrolling interests	547			240			1,833			63
Comprehensive income (loss) attributable to MRV	$	3,644		$	(17,693	)	$	(18,272	)	$	(13,667	)

13.  Subsequent Events

We have evaluated subsequent events through the time of filing this Form 10-Q with the SEC on November 30, 2009. During this period we did not have any additional material subsequent events other than those discussed below.

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

On October 8, 2009, Spencer Capital Management, LLC, Spencer Capital Partners, LLC, Value Fund Advisors, LLC, Boston Avenue Capital, LLC, Yorktown Avenue Capital, LLC and Spencer Capital Opportunity Fund, LP, Charles M. Gillman, Michael J. McConnell and Kenneth H. Shubin Stein (collectively the “Dissidents”), and MRV entered into an agreement (the “Settlement Agreement”) to settle matters pertaining to the contested election of directors to the Company’s Board of Directors at the Company’s Annual Meeting of Stockholders held on November 11, 2009 (the “Annual Meeting”).  The Dissidents previously filed definitive proxy materials in connection with their nomination of a slate of eight nominees for election to the Board at the Annual Meeting.  Pursuant to the Settlement Agreement, the Dissidents withdrew their director nominations with respect to the Annual Meeting and did not solicit proxies or make other proposals at the Annual Meeting.  In addition, the Company received the resignations of Harold Furchtgott-Roth, Guenter Jaensch and Daniel Tsui, effective immediately prior to the Annual Meeting.  Further, Charles M. Gillman, Michael J. McConnell and Kenneth H. Shubin Stein were added to the Board of Directors, and were provided positions on each of the Boards’ committees.  Restrictions were set on the total number of Board and committee members.  In addition, the Board agreed to select a new independent Chair of the Board, and on November 12, 2009, Joan Herman became the Company’s first independent chairperson.  Finally, the Company agreed to reimburse the Dissidents for up to $1.0 million of its reasonable, documented out-of-pocket costs.

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14.  Recently Issued Accounting Pronouncements

In June 2009, the FASB issued Accounting Standards Update No. 2009-01, ASC Topic 105, Generally Accepted Accounting Principles, which establishes the FASB Accounting Standards Codification (“ASC”) as the single source of authoritative U.S. GAAP recognized by the FASB for non-governmental entities.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants.  On July 1, 2009, the Company adopted ASC 105, which supersedes all existing non-SEC accounting and reporting standards, and all corresponding changes in the Company’s notes to the unaudited condensed consolidated financial statements reflect the adoption of this standard.  The adoption of the FASB ASC did not have a material impact on MRV’s financial condition, results of operations or liquidity.

In February 2008, the FASB issued ASC Topic 820-10-55, Fair Value Measurements and Disclosures (“ASC 820-10-55”), which delayed the effective date of fair value accounting for all non-financial assets and liabilities, except those that are measured at fair value on a recurring basis.   On January 1, 2009, MRV adopted ASC 820-10 with respect to non-financial assets and liabilities that are not re-measured on a recurring basis; the adoption did not have a material impact on the Company’s financial condition, results of operations or liquidity.

In December 2007, the FASB issued ASC Topic 805-10, Business Combinations (“ASC 805-10”).  Under ASC 805-10, an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies and contingent consideration at their fair value on the acquisition date.  It further requires that acquisition related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense.  In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life.  The adoption of ASC 805-10 did not have a material impact on the Company’s financial condition, results of operations or liquidity.

ASC Topic 810-10-45, Consolidation (“ASC 810”) requires entities to report noncontrolling interests in subsidiaries as equity in the consolidated financial statements.  The adoption of ASC 810 on January 1, 2009 resulted in a change in the presentation of minority interests in subsidiaries, which were retrospectively reclassified to “noncontrolling interests” within equity.  In addition, the Company reclassified prior period’s income attributable to noncontrolling interests in the statement of operations and statement of cash flows to conform to the current period’s presentation.

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In June 2009, the FASB issued ASC 810-10, Consolidations providing (a) guidance on identifying variable interest entities and determining whether such entities should be consolidated; (b) general consolidation guidance; and (c) guidance on the consolidation of entities controlled by contract.  The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impacts the other entity’s economic performance.  ASC 810-10 will become effective for the Company beginning January 1, 2010.  Early application is not permitted.  The Company is evaluating the future effect, if any, of this standard on its results of operations and financial position.

ASC Topic 815, Derivatives and Hedging (“ASC 815”) requires additional disclosures about the objectives of using derivative instruments, the method by which the derivative instruments and related hedged items are accounted for, and where the effects of derivative instruments and related hedged items are reported within the financial statements.  ASC 815 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  The application of ASC 815 did not have a material impact on the Company’s financial condition, results of operations or liquidity.

ASC Topic 855, Subsequent Events (“ASC 855”) establishes general standards of accounting treatment and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  In particular, the topic focuses on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  ASC 855 became effective for MRV beginning on July 1, 2009, the first day of the third fiscal quarter of 2009.

In June 2009, the FASB issued ASC Topic 860, Transfers and Servicing (“ASC 860”) which requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets.  ASC 860 is effective for interim and annual reporting periods ending after November 15, 2009 and will be applied prospectively.  MRV plans to adopt the provisions of ASC 860 on January 1, 2010.  MRV is currently assessing the impact on its financial condition and results of operations of adopting of ASC 860.

In October 2009, the FASB issued ASC update No. 2009-13, to Topic 605, Revenue Recognition.  These amendments establish a selling price hierarchy for determining the selling price of a deliverable.  The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available.  The amendments also replace the term “fair value” in the revenue allocation guidance with “selling price” to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant.  In addition, the amendments eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method.  The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price.   The amendments will become effective for the Company prospectively for revenue arrangements entered into or materially modified beginning on January 1, 2011, with earlier adoption permitted.  The Company believes that the adoption of this new standard will have a material effect on its financial

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position and results of operations.  However, the Company is not able to estimate the effect on its financial position and results of operations.

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, Items 6 and 7, and Note 3 to the Financial Statements of our 2008 Form 10-K.   In addition to historical information, the discussion in this Form 10-Q contains certain forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from those anticipated by these forward-looking statements due to factors, including but not limited to, those set forth in the following and elsewhere in this Form 10-Q.  We assume no obligation to update any of the forward-looking statements after the date of this Form 10-Q.

Overview

MRV Communications is a supplier of communications equipment and services to carriers, governments and enterprise customers, worldwide.  We are also a supplier of optical components, primarily through our wholly-owned subsidiary Source Photonics, Inc..  We conduct our business along three principal segments: (a) the Network Equipment group; (b) the Network Integration group; and (c) the Optical Components group. Our Network Equipment group provides communications equipment that facilitates access, transport, aggregation and management of voice, data and video traffic in networks, data centers and laboratories used by telecommunications service providers, cable operators, enterprise customers and governments worldwide.  Our Network Integration group operates primarily in Italy, France, Switzerland and Scandinavia, servicing Tier One carriers, regional carriers, large enterprises, and government institutions. The Network Integration group provides network system design, integration and distribution services that include products manufactured by third-party vendors, as well as products developed and manufactured by the Network Equipment group.  Our Optical Components group designs, manufactures and sells optical communications products used in telecommunications systems and data communications networks. These products include passive optical network, or PON, subsystems, optical transceivers used in enterprise, access and metropolitan applications as well as other optical components, modules and subsystems. We market and sell our products worldwide, through a variety of channels, which include a dedicated direct sales force, manufacturers’ representatives, value-added-resellers, distributors and systems integrators.

We evaluate segment performance based on the revenues, cost of goods sold, and the operating expenses of each segment. We do not track segment data or evaluate segment performance on

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additional financial information. As such, there are no separately identifiable segment assets nor are there any separately identifiable Statements of Operations data below operating income (loss).

Our business involves reliance on foreign-based offices.  Several of our divisions, outside subcontractors and suppliers are located in foreign countries, including Argentina, Canada, China, Denmark, Finland, France, Germany, Israel, Italy, Japan, Korea, the Netherlands, Norway, Russia, Singapore, South Africa, Switzerland, Sweden, Taiwan and the United Kingdom. For the three months ended September 30, 2009 and 2008, foreign revenues constituted 75% and 73%, respectively, of total revenues.  For the nine months ended September 30, 2009 and 2008, foreign revenues constituted 79% and 73%, respectively, of total revenues.  The majority of foreign sales are to customers located in the European region, with remaining foreign sales primarily to customers in the Asia Pacific region.

Critical Accounting Policies

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

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

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

Revenue Recognition.    MRV’s major revenue-generating products consist of fiber optic components, switches and routers, console management; and physical layer products.  MRV generally recognizes product revenue, net of sales discounts, returns and allowances, in accordance with ASC Topic 605 Revenue Recognition (“ASC Topic 605”), when persuasive evidence of an arrangement exists, delivery has occurred and all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection is considered probable.  Products are generally shipped “FOB shipping point,” with no right of return and revenue is recognized upon shipment.  If revenue is to be recognized upon delivery, such delivery date is tracked through information provided by the third party shipping company used by us to deliver the product to the customer.  Sales of services and system support are deferred and recognized ratably over the contract period.  Sales with contingencies, such as rights of return, rotation rights, conditional acceptance provisions and price protection, are rare and insignificant and are deferred until the contingencies have been satisfied or the contingent period has lapsed.  For sales to distributors, we generally recognize revenue using the “sell in” method (i.e., when product is sold to the distributor) rather than the “sell through” method (i.e., when the product is sold by the distributor to the end user). In limited circumstances, certain distributors have limited rights of return (including stock rotation rights) and/or are entitled to price protection, where a rebate credit may be provided to the customer if MRV lowers its price on products

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held in the distributor’s inventory.  MRV estimates and establishes allowances for expected future product returns and credits in accordance with ASC Topic 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 revenues are recognized, and for future credits to be issued in relation to price protection at the time we make changes to our distributor price book.  The estimate of future returns and credits is based on historical sales returns, analysis of credit memo data, and other factors known at the time of revenue recognition.  We monitor product returns and potential price adjustments on an ongoing basis.

Arrangements with customers may include multiple deliverables, including any combination of equipment, services and software.  In accordance with ASC Topic 605, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when revenue recognition criteria for each element are met.   Fair value for each element is established based on the sales price charged when the same element is sold separately.  If multiple element arrangements include software or software related elements, we apply the provisions of ASC Topic 985 Software to the software and software related elements, or to the entire arrangement if the software is essential to the functionality of the non-software elements.

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

Allowance for Doubtful Accounts.    We make ongoing estimates relating to the collectability of our accounts receivable and maintain a reserve for estimated losses resulting from the inability of our customers to meet their financial obligations to us.  In determining the amount of the reserve, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations.  Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger reserve may be required.  In the event we determined that a smaller or larger reserve was appropriate, we would record a credit or a charge to selling, general and administrative expense in the period in which we made such a determination.

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, as discussed above.

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

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Goodwill and Other Intangibles.    In accordance with ASC Topic 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, or when events indicate that impairment exists.  We amortize intangible assets that have definite lives over their useful lives.

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

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

Share-Based Compensation.    As discussed in Note 10, “Share-Based Compensation” to the Financial Statements in Part I, Item 1 of this Form 10-Q, the fair value of stock options and warrants are determined using the Black-Scholes valuation model.  The assumptions used in calculating the fair value of share-based payment awards represent our best estimates.  Our estimates may be impacted by certain variables including, but not limited to, stock price volatility, employee stock option exercise behaviors, additional stock option grants, estimates of forfeitures, and related income tax impacts.  See Note 10 for a further discussion on share-based compensation and assumptions used.

Currency Rate Fluctuations

Changes in the relative values of non-U.S. currencies to the U.S. dollar affect our results.  We conduct a significant portion of our business in foreign currencies, including the euro, the Swiss franc, Swedish krona, and the Taiwan dollar. For the three and nine months ended September 30, 2009, 48% and 49% of revenues, and 42% and 38% of operating expenses, respectively, were incurred at subsidiaries with a reporting currency other than the U.S. dollar.  In general, these currencies were weaker against the U.S. dollar for the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008, so revenues and expenses in these countries translated into fewer dollars than they would have in the prior period.  Additional discussion of foreign currency risk and other market risks is included in Part I, Item 3. “Quantitative and Qualitative Disclosures About Market Risk” of this Form 10-Q.

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Management Discussion Snapshot

The following table summarizes certain consolidated and segment Statements of Operations data as a percentage of revenues (dollars in thousands):

	Three months ended September 30,								Nine months ended September 30,
	2009				2008				2009				2008
	$			%	$			%	$			%	$			%
Revenue	$	128,871		100%	$	130,626		100%	$	366,811		100%	$	403,790		100%
Network Equipment group (1) (2)	26,580			21	31,462			24	74,758			20	95,729			24
Network Integration group (1)(2)	49,263			38	53,573			41	145,794			40	164,290			41
Optical Components group (1)(2)	55,879			43	49,039			38	154,026			42	155,195			38
All others (1)(2)	61			-	52			-	197			-	149			-
Gross profit (2)	37,776			29	33,439			26	94,504			26	116,542			29
Network Equipment group (3)	14,744			55	16,462			52	40,520			54	50,363			53
Network Integration group (3)	13,445			27	13,675			26	39,170			27	40,319			25
Optical Components group (3)	9,614			17	3,259			7	14,600			9	25,642			17
All others (3)	36			59	32			62	121			61	90			60
Operating expenses (2)	34,912			27	45,286			35	107,448			29	127,510			32
Network Equipment group (3)	13,337			50	15,381			49	41,962			56	47,256			49
Network Integration group (3)	9,200			19	10,272			19	26,957			18	32,858			20
Optical Components group (3)	8,364			15	10,928			22	26,691			17	33,496			22
All others (3)	434			711	460			885	1,187			603	1,448			972
Operating income (loss) (2)	2,864			2	(11,847		)	(9)	(12,944		)	(4)	(10,968		)	(3)
Network Equipment group (3)	1,407			5	1,081			3	(1,442		)	(2)	3,107			3
Network Integration group (3)	4,245			9	3,403			6	12,213			8	7,461			5
Optical Components group (3)	1,250			2	(7,669		)	(16)	(12,091		)	(8)	(7,854		)	(5)
All others (3)	(398		)	(652)	(428		)	(823)	(1,066		)	(541)	(1,358		)	(911)

(1) Revenue information by segment includes intersegment revenue, primarily reflecting sales of fiber optic components to the Network Equipment group and sales of network equipment to the Network Integration group.

(2) Percentages represent percentage of consolidated revenue.

(3) Percentages represent percentage of applicable segment revenue.

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

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Three Months Ended September 30, 2009 Compared

To Three Months Ended September 30, 2008

Revenue

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

Three months ended September 30:	2009			2008			$ Change			% Change		% Change constant currency (2)
Network Equipment group	$	26,580		$	31,462		$	(4,882	)	(16	)%	(16	)%
Network Integration group	49,263			53,573			(4,310		)	(8	)	(3	)
Optical Components group	55,879			49,039			6,840			14		14
All others	61			52			9			17		17
	131,783			134,126			(2,343		)	(2	)	1
Adjustments (1)	(2,912		)	(3,500		)	588			(17	)	(17	)
Total	$	128,871		$	130,626		$	(1,755	)	(1	)%	1	%

(1) Adjustments represent the elimination of intersegment revenue in order to reconcile to consolidated revenues.

(2) Percentage information in constant currencies in the table above and in the text below excludes the effect of foreign currency translation on reported results.  Constant currency results were calculated by translating the current year results at prior year average exchange rates.

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

Three months ended September 30:	2009		2008		$ Change			% Change
Network Equipment group:
Americas	$	13,152	$	14,254	$	(1,102	)	(8	)%
Europe	8,698		11,451		(2,753		)	(24	)
Asia Pacific	2,694		3,435		(741		)	(22	)
Other regions	250		-		250			100
Total Network Equipment	24,794		29,140		(4,346		)	(15	)
Network Integration group:
Europe	49,263		53,573		(4,310		)	(8	)
Total Network Integration	49,263		53,573		(4,310		)	(8	)
Optical Component group:
Americas	21,445		32,666		(11,221		)	(34	)
Europe	3,009		4,130		(1,121		)	(27	)
Asia Pacific	30,349		11,115		19,234			173
Other regions	3		-		3			100
Total Optical Components	54,806		47,911		6,895			14
All others	8		2		6			300
Total	$	128,871	$	130,626	$	(1,755	)	(1	)%

Consolidated revenue for the third quarter of 2009 decreased $1.8 million, or 1%, compared to the third quarter of 2008, due to revenue declines in the Network Equipment and Network Integration segments, partially offset by an increase in revenue in the Optical Components segment.  Revenue would have been $3.2 million higher in the third quarter of 2009 had foreign currency exchange rates remained the same as they were in the third quarter of 2008.

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Network Equipment Group.  Revenue, including intersegment revenues, for the third quarter of 2009 generated from the Network Equipment group decreased $4.9 million, compared to the third quarter of 2008 primarily due to an 8% decline in the Americas region and a 24% decline in Europe Revenue would have been $0.1 million lower in 2009 had foreign currency exchange rates remained the same as they were in 2008.

Network Integration Group.  Revenue, including intersegment revenues, for the third quarter of 2009 generated from the Network Integration group decreased $4.3 million compared to the third quarter of 2008 primarily due to the effect of foreign currency exchange rates. Revenue would have been $3.0 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.  The remaining decrease in revenues arose as the result of decreases in revenues generated by our EDSLan, Alcadon, Interdata and TurnKey subsidiaries, partially offset by an increase in revenues generated by our Tecnonet subsidiary.

Optical Components Group.  Revenue, including intersegment revenue, for the third quarter of 2009 generated from the Optical Components group increased $6.8 million, or 14%, compared to the third quarter of 2008 primarily due to a $19.2 million, or 173%, increase in revenues in the Asia Pacific region, partially offset by an $11.2 million decrease in the Americas region and a $1.1 million decrease in the Europe region.  Revenues from sales, including intersegment sales, of passive optical network subsystems for applications in Fiber-to-the-Premises deployments, were $31.4 million and $28.4 million in the three months ended September 30, 2009 and 2008, respectively, representing an increase of $3.0 million.  Revenues from sales of datacom/telecom, or D/T, transceivers increased $3.7 million to $24.0 million from $20.3 million in 2008.  Revenue would have been $0.3 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.

Gross Profit

The following table summarizes certain gross profit data from our Statements of Operations (in thousands):

Three months ended September 30:	2009			2008		$ Change			% Change		% Change constant currency (2)
Network Equipment group	$	14,744		$	16,462	$	(1,718	)	(10	)%	(11	)%
Network Integration group	13,445			13,675		(230		)	(2	)	5
Optical Components group	9,614			3,259		6,355			195		198
All others	36			32		4			13		13
	37,839			33,428		4,411			13		16
Corporate unallocated cost of goods sold and adjustments (1)	(63		)	11		(74		)	(673	)	(673	)
Total	$	37,776		$	33,439	$	4,337		13	%	16	%

(1) Adjustments represent the elimination of intersegment revenue and related cost of goods sold in order to reconcile to consolidated gross profit.

(2) Percentage information in constant currencies in the table above and in the text below excludes the effect of foreign currency translation on reported results.  Constant currency results were calculated by translating the current year results at prior year average exchange rates.

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Consolidated gross profit for the third quarter of 2009 increased $4.3 million compared to the third quarter of 2008 due to a $6.4 million increase in gross profit in the Optical Components group, partially offset by a $1.7 million decrease in the Network Equipment segment and a $0.2 million decrease in the Network Integration segment.  Gross margin increased from 26% to 29% with improvements in all three business segments, most significantly in the Optical Components group, where gross margin increased from 7% to 17%. Gross margin in the Network Equipment group increased from 52% to 55% and in the Network Integration group from 26% to 27% in the third quarter of 2009 compared to the third quarter of 2008.  Gross profit would have been $1.0 million higher in the third quarter of 2009 had foreign currency exchange rates remained the same as they were in the third quarter of 2008.  Gross profit reflects share-based compensation in cost of goods sold of $42,000 and $0.1 million in the third quarters of 2009 and 2008, respectively.

Network Equipment Group.  Gross profit for the third quarter of 2009 decreased $1.7 million compared to the third quarter of 2008.   The 10% decrease in gross profit was due to a 16% drop in revenues, partially offset by an improvement in gross margin from 52% to 55%.  The effect of currency fluctuations did not have a significant impact on gross profit in 2009.  Gross profit reflects the effect of share-based compensation in cost of goods sold of $11,000 and $17,000 in 2009 and 2008, respectively.

Network Integration Group.  Gross profit for the third quarter of 2009 decreased $0.2 million compared to the third quarter of 2008.  The 2% decrease was due to the impact of foreign currency exchange rates.  Gross profit would have been $0.9 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.  Gross profit improved on a constant dollar basis due to an improvement in average gross margins from 26% to 27%, partially offset by a decrease in constant dollar revenues of 3%.  The Network Integration group did not incur share-based compensation in cost of goods sold in either year.

Optical Components Group.  Gross profit for the third quarter of 2009 increased $6.4 million compared to the third quarter of 2008.  The increase was driven by a 14% increase in revenues and an improvement in gross margins from 7% to 17%.  Gross margin improved as the result of several factors.  We began to recognize the increased manufacturing efficiencies as a result of the consolidation of in-house manufacturing in our new factory in Chengdu, PRC, and a significant shift from third party manufacturing services to in-house manufacturing.  In addition, we benefited from a shift in product mix during the quarter as a higher percentage of revenues came from sales of certain PON and D/T Transceivers product lines with higher gross margins.  Gross profit would have been $0.1 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.  Gross profit reflects share-based compensation in cost of goods sold of $31,000 and $53,000 in 2009 and 2008, respectively.

Operating Expenses

The following table summarizes certain operating expenses data from our Statements of Operations (dollars in thousands):

Three months ended September 30:	2009		2008		$ Change			% Change		% Change constant currency (1)
Network Equipment group	$	13,337	$	15,381	$	(2,044	)	(13	)%	(13	)%
Network Integration group	9,200		10,272		(1,072		)	(10	)	(4	)
Optical Components group	8,364		10,928		(2,564		)	(23	)	(23	)
All others	434		460		(26		)	(6	)	(6	)
	31,335		37,041		(5,706		)	(15	)	(14	)
Corporate unallocated operating expenses and adjustments (2)	3,577		8,245		(4,668		)	(57	)	(57	)
Total	$	34,912	$	45,286	$	(10,374	)	(23	)%	(21	)%

(1) Percentage information in constant currencies in the table above and in the text below excludes the effect of foreign currency translation on reported results.  Constant currency results were calculated by translating the current year results at prior year average exchange rates.

(2)  Corporate unallocated operating expenses include unallocated product development, and selling, general and administrative expenses.

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Consolidated operating expenses were $34.9 million, or 27% of revenues, in the third quarter of 2009, compared to $45.3 million, or 35% of revenues, in the third quarter of 2008.  The reduction was driven by decreases in all three business segments, as well as a decrease of $4.7 million in unallocated corporate expenses. The decrease in unallocated corporate expenses reflects the decline in restatement-related expenses incurred as the result of the investigation announced in June of 2008.  Operating expenses would have been $0.7 million higher in the third quarter of 2009 had foreign currency exchange rates remained the same as they were in the third quarter of 2008.  Product development and engineering expenses included segment and unallocated corporate share-based compensation of $0.2 million and $0.3 million in 2009 and 2008, respectively.  Selling, general and administrative expenses included segment and unallocated corporate share-based compensation of $0.4 million and $0.6 million in the third quarters of 2009 and 2008, respectively.

Network Equipment Group.  Operating expenses in the third quarter of 2009 were $13.3 million, or 50% of revenues, compared to $15.4 million, or 49% of revenues, in the third quarter of 2008.  The decrease in operating expenses was the result of improvements in the Americas and International sales offices’ operating expense structures following cost reductions implemented in 2009 in response to the decrease in revenue.  The effect of currency fluctuations did not have a significant impact on operating expenses in 2009.  Product development and engineering expenses included share-based compensation of $94,000 and $97,000 in 2009 and 2008, respectively.  Selling, general and administrative expenses included share-based compensation of $131,000 and $155,000 in 2009 and 2008, respectively.

Network Integration Group.  Operating expenses in the third quarter of 2009 were $9.2 million, or 19% of revenues, compared to $10.3 million, or 19% of revenues, in the third quarter of 2008.  The decrease in operating expenses was primarily the result of cost reduction measures implemented in 2009 in response to the decrease in revenue.  Operating expenses would have been $0.6 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.  The Network Integration group did not have product development and engineering share-based compensation in either year.  Selling, general and administrative expenses included share-based compensation of $4,000 and $62,000 in 2009 and 2008, respectively.

Optical Components Group.  Operating expenses in the third quarter of 2009 were $8.4 million, or 15% of revenues, compared to $10.9 million, or 22% of revenues, in the third quarter of 2008.  The decrease in operating expenses is primarily attributable to a decrease of $1.7 million in selling general and administrative expenses, and a $0.8 million decrease in product development and engineering expenses.  Operating expenses would have been $0.1 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.  Product development and engineering expenses included a share-based compensation of $51,000 and $215,000 in 2009 and 2008, respectively.  Selling, general and administrative expenses included share-based compensation of $106,000 and $181,000 in 2009 and 2008, respectively.

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Operating Income (Loss)

The following table summarizes certain operating income (loss) data from our Statements of Operations (dollars in thousands):

Three months ended September 30:	2009			2008			$ Change		% Change		% Change constant currency (2)
Network Equipment group	$	1,407		$	1,081		$	326	30	%	29	%
Network Integration group	4,245			3,403			842		25		32
Optical Components group	1,250			(7,669		)	8,919		(116	)	(117	)
All others	(398		)	(428		)	30		(7	)	(7	)
	6,504			(3,613		)	10,117		(280	)	(288	)
Corporate unallocated and adjustments (1)	(3,640		)	(8,234		)	4,594		(56	)	(56	)
Total	$	2,864		$	(11,847	)	$	14,711	(124	)%	(127	)%

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

(2) Percentage information in constant currencies in the table above and in the text below excludes the effect of foreign currency translation on reported results.  Constant currency results were calculated by translating the current year results at prior year average exchange rates.

Consolidated operating income was $2.9 million in the third quarter of 2009, or 2% of revenues, an increase of $14.7 million from an operating loss of $11.8 million in the third quarter of 2008.  The increase was primarily the result of the $8.9 million increase in operating income in the Optical Components group, and the $4.6 million decrease in Corporate unallocated expenses. The Network Equipment and Network Integration segments operating income increased $0.3 million and $0.8 million respectively, for the third quarter of 2009 compared to the third quarter of 2008.  Operating income would have been $0.3 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.  Operating income included segment and unallocated corporate share-based compensation expense of $0.6 million and $1.0 million in the second quarters of 2009 and 2008, respectively.

Network Equipment Group.  Operating income in the third quarter of 2009 was $1.4 million, compared to operating income of $1.1 million in the third quarter of 2008.  The increase was primarily the result of the $2.0 million reduction in operating expenses partially offset by the $1.7 million decrease in gross profit.  The effect of currency fluctuations did not have a significant impact on operating income in the third quarter of 2009.  Operating loss included share-based compensation expense of $235,000 and $269,000 in 2009 and 2008, respectively.

Network Integration Group.  Operating income in the third quarter of 2009 was $4.2 million, compared to operating income of $3.4 million in the third quarter of 2008, an increase of $0.8 million.  The improvement was the result of the $1.1 million reduction in operating expenses, partially offset by the decrease in gross profit.  Operating income would have been $0.3 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.  Operating income included share-based compensation expense of $4,000 and $62,000 in 2009 and 2008, respectively.

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Optical Components Group.  Operating income was $1.3 million in the third quarter of 2009, compared to an operating loss of $7.7 million in the third quarter of 2008, a $9.0 million improvement.  The improvement in operating income was primarily due to the $6.4 million increase in gross profit, and to a lesser extent, to the $2.6 million reduction in operating expenses.  The effect of currency fluctuations did not have a significant impact on operating income in 2009.  Operating income included share-based compensation expense of $188,000 and $448,000 in 2009 and 2008, respectively.

Interest Expense and Other Income, Net

Interest expense was $0.7 million and $1.1 million for the three months ended September 30, 2009 and 2008, respectively.  Other income, net, principally includes interest income on cash, cash equivalents and investments and gains (losses) on foreign currency transactions.  Interest income decreased from $0.4 million in 2008 to $0.1 million 2009 due to the decrease in underlying interest-bearing marketable securities.

Income Taxes

The provision (benefit) for income taxes was $2.2 million and $(1.2) million for the three months ended September 30, 2009 and 2008, respectively.  In 2009, pre-tax income increased in the jurisdictions where we record tax expense, particularly in the foreign subsidiaries comprising the Network Integration and Optical Components groups where higher operating income led to an increase of approximately $1.4 million and $0.4 million in tax expense, respectively.  Income tax expense fluctuates based on the amount of income or loss generated in the various jurisdictions where we recognize income taxes and are not recording or releasing a valuation allowance.

Nine Months Ended September 30, 2009 Compared

To Nine Months Ended September 30, 2008

Revenue

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

Nine months ended September 30:	2009			2008			$ Change			% Change		% Change constant currency (2)
Network Equipment group	$	74,758		$	95,729		$	(20,971	)	(22	)%	(21	)%
Network Integration group	145,794			164,290			(18,496		)	(11	)	-
Optical Components group	154,026			155,195			(1,169		)	(1	)	-
All others	197			149			48			32		32
	374,775			415,363			(40,588		)	(10	)	(5	)
Adjustments (1)	(7,964		)	(11,573		)	3,609			(31	)	(31	)
Total	$	366,811		$	403,790		$	(36,979	)	(9	)%	(4	)%

(1) Adjustments represent the elimination of intersegment revenue in order to reconcile to consolidated revenues.

(2) Percentage information in constant currencies in the table above and in the text below excludes the effect of foreign currency translation on reported results.  Constant currency results were calculated by translating the current year results at prior year average exchange rates.

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

Nine months ended September 30:	2009		2008		$ Change			% Change
Network Equipment group:
Americas	$	35,868	$	47,120	$	(11,252	)	(24	)%
Europe	23,999		33,015		(9,017		)	(27	)
Asia Pacific	9,429		8,042		1,387			17
Other regions	260		116		144			124
Total Network Equipment	69,556		88,293		(18,737		)	21
Network Integration group:
Europe	145,794		164,290		(18,496		)	(11	)
Total Network Integration	145,794		164,290		(18,496		)	(11	)
Optical Component group:
Americas	61,907		90,423		(28,516		)	(32	)
Europe	9,335		13,061		(3,726		)	(29	)
Asia Pacific	80,201		47,708		32,493			68
Other regions	9		5		4			80
Total Optical Components	151,452		151,197		255			-
All others	9		10		(1		)	(10	)
Total	$	366,811	$	403,790	$	(36,979	)	(9	)%

Consolidated revenue decreased $37.0 million, or 9%, for the nine months ended September 30, 2009, from the comparable period of 2008 primarily due to a $21.0 million decrease in the Network Equipment group, and an $18.5 million decrease in the Network Integration group.  The Optical components group also had a year-over-year revenue decline of $1.2 million.  Revenue would have been $20.4 million higher for the first three quarters of 2009 had foreign currency exchange rates remained the same as they were in 2008.

Network Equipment Group.  Revenues, including intersegment revenues, generated from the Network Equipment group decreased $21.0 million, for the nine months ended September 30, 2009, from the comparable period of 2008 which was primarily due to an $11.3 million decrease in sales in the Americas Region and a $9.0 million decrease in Europe, partially offset by a $1.4 million, or 17% increase in the Asia pacific region.  The revenue decline was due primarily to the impact of the economic recession and was experienced across all our product lines.  Revenue would have been $0.7 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.

Network Integration Group.  Revenue, including intersegment revenues, generated from the Network Integration group decreased $18.5 million for the nine months ended September 30, 2009, from the comparable period of 2008. Revenue would have been $18.4 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.

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Optical Components Group.  Revenue, including intersegment revenue, generated from the Optical Components group decreased $1.2 million for the nine months ended September 30, 2009, from the comparable period in 2008, which was primarily due to a $28.5 million decrease in revenues in the Americas region, and a $3.8 million decrease in Europe, partially offset by an increase of $32.5 million, or 68% in the Asia/Pacific region,   Revenues from sales of PON for applications in Fiber-to-the-Premises deployments, decreased from $92.0 million in the nine months ended September 30, 2008 to $89.0 million in the nine months ended September 30, 2009.  Revenues from sales of D/T increased $1.9 million from $62.2 million in 2008 to $64.1 million in 2009.  Revenue would have been $1.3 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.

Gross Profit

The following table summarizes certain gross profit data from our Statements of Operations (dollars in thousands):

Nine months ended September 30:	2009		2008		$ Change			% Change		% Change constant currency (2)
Network Equipment group	$	40,520	$	50,363	$	(9,843	)	(20	)%	(19	)%
Network Integration group	39,170		40,319		(1,149		)	(3	)	10
Optical Components group	14,600		25,642		(11,042		)	(43	)	(42	)
All others	121		90		31			34		34
	94,411		116,414		(22,003		)	(19	)	(14	)
Corporate unallocated cost of goods sold and adjustments(1)	93		128		(35		)	(27	)	(27	)
Total	$	94,504	$	116,542	$	(22,038	)	(19	)%	(14	)%

(1) Adjustments represent the elimination of intersegment sales and associated cost of goods sold in order to reconcile to consolidated gross profit.

(2) Percentage information in constant currencies in the table above and in the text below excludes the effect of foreign currency translation on reported results.  Constant currency results were calculated by translating the current year results at prior year average exchange rates.

Consolidated gross profit decreased $22.0 million for the nine months ended September 30, 2009, from the comparable period in 2008 primarily due to an $11.0 million decrease in our Optical Components segment and a $9.8 million decrease in our Network Equipment segment.  Gross margin on a consolidated basis for the first nine months of 2009 decreased from 29% in 2008 to 26% in 2009.  The decrease in gross margin is due to the Optical Components segment, where gross margin decreased from 17% to 9%.  Gross margins in the Network Equipment and Network Integration segments improved from 2008 to 2009.  Gross profit would have been $5.9 million higher year to date in 2009 had foreign currency exchange rates remained the same as they were year to date in 2008.  Gross profit reflects share-based compensation in cost of goods sold of $0.2 million and $0.3 million year to date in 2009 and 2008, respectively.

Network Equipment Group.  Gross profit decreased $9.8 million, or 20%, for the nine months ended September 30, 2009, from the comparable period in 2008.  The decrease was due to the $21.0 million decrease in revenue, partially offset by an improvement in gross margin from 53% to 54%.  Gross profit would have been $0.4 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.  Gross profit reflects the effect of share-based compensation in cost of goods sold of $37,000 and $63,000 in 2009 and 2008, respectively.

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Network Integration Group.  Gross profit decreased $1.1 million, or 3%, for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008, primarily due to the effect of foreign currency exchange rates.  Gross profit would have been $5.3 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.  The $4.2 million increase in gross profit in constant currency is due to an improvement in gross margin from 25% to 27%.  The Network Integration group did not have share-based compensation in cost of goods sold in either year.

Optical Components Group.  Gross profit decreased $11.0 million for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.  Gross margin declined as the result of several factors.  Beginning in late 2008, consolidation of in-house manufacturing into new manufacturing facilities in Chengdu, PRC and a significant shift from third party manufacturing services to in-house manufacturing led to significant increases in production material yield loss and manufacturing inefficiency during the initial ramp up of production through the first half of 2009.  As the shift to the Chengdu facility progressed in 2009, manufacturing efficiencies improved during the third quarter, but on a year-to-date basis, gross margins were negatively impacted by this shift.  We also had an adverse shift in product mix throughout the first three quarters of 2009, with a smaller portion of revenues coming from higher margin metropolitan transceivers and a larger portion of revenue coming from the lower margin GPON product line.  Gross profit would have been $0.2 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.  Gross profit reflects share-based compensation in cost of goods sold of $112,000 and $175,000 2009 and 2008, respectively.

Operating Expenses

The following table summarizes certain operating expenses data from our Statements of Operations (dollars in thousands):

Nine months ended September 30:	2009		2008		$ Change			% Change		% Change constant currency (1)
Network Equipment group	$	41,962	$	47,256	$	(5,294	)	(11	)%	(10	)%
Network Integration group	26,957		32,858		(5,901		)	(18	)	(5	)
Optical Components group	26,691		33,496		(6,805		)	(20	)	(20	)
All others	1,187		1,448		(261		)	(18	)	(18	)
	96,797		115,058		(18,261		)	(16	)	(12	)
Corporate unallocated operating expenses and adjustments (2)	10,651		12,452		(1,801		)	(14	)	(14	)
Total	$	107,448	$	127,510	$	(20,062	)	(16	)%	(12	)%

(1) Percentage information in constant currencies in the table above and in the text below excludes the effect of foreign currency translation on reported results.  Constant currency results were calculated by translating the current year results at prior year average exchange rates.

(2)  Corporate unallocated operating expenses include unallocated product development, and selling, general and administrative expenses.

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Consolidated operating expenses were $107.4 million, or 29% of revenues, year to date in 2009, compared to $127.5 million, or 32% of revenues, year to date in 2008.  Operating expenses were lower in all three segments, and unallocated corporate expenses were $1.8 million lower than 2008.   The decrease in operating expenses was largely due to our efforts to balance operating expense structures with decreased revenue streams across all segments.  The decrease in unallocated corporate expenses reflects the decline in restatement-related legal and accounting expenses incurred as the result of the investigation announced in June 2008.  Operating expenses would have been $4.8 million higher year to date in 2009 had foreign currency exchange rates remained the same as they were year to date in 2008.  Product development and engineering expenses included segment and unallocated corporate share-based compensation of $0.4 million and $1.1 million in 2009 and 2008, respectively.  Selling, general and administrative expenses included segment and unallocated corporate share-based compensation of $1.1 million and $2.1 million year to date in 2009 and 2008, respectively.

Network Equipment Group.  Operating expenses for the nine months ended September 30, 2009 were $42.0 million, or 56% of revenues, compared to $47.3 million, or 49% of revenues, for the nine months ended September 30, 2008.  The decrease in operating expenses was due to our efforts to balance costs in response to decreased revenues, and includes a reduction of $4.6 million in selling, general and administrative expenses and a reduction of $0.7 million in product development and engineering.  Operating expenses would have been $0.4 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.  Product development and engineering expenses included share-based compensation of $226,000 and $318,000 in 2009 and 2008, respectively.  Selling, general and administrative expenses included share-based compensation of $351,000 and $583,000 in 2009 and 2008, respectively.

Network Integration Group.  Operating expenses for the nine months ended September 30, 2009 were $27.0 million, or 18% of revenues, compared to $32.9 million, or 20% of revenues, for the nine months ended September 30, 2008.  The decrease in operating expenses was due to reductions in selling, general and administrative expenses on a constant dollar basis at our French, Scandinavian and one of our Italian subsidiaries in response to decreases in revenue, and due to the impact of changes in foreign currency exchange rates.  Operating expenses would have been $4.2 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.  The Network Integration group did not incur share-based compensation in cost of goods sold in either year.  Selling, general and administrative expenses included share-based compensation of $22,000 and $388,000 in 2009 and 2008, respectively.  The Network Integration group did not have share-based compensation in product development and engineering costs in either year.

Optical Components Group.  Operating expenses for the nine months ended September 30, 2009 were $26.7 million, or 17% of revenues, compared to $33.5 million, or 22% of revenues, for the nine months ended September 30, 2008.  The decrease was due to cost reduction efforts in response to the decline in revenues, and included a $4.5 million decrease in selling, general and administrative expenses, and a $2.2 million decrease in product development and engineering.  Operating expenses would have been $0.2 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.  Product development and engineering expenses included share-based compensation of $119,000 and $691,000 in 2009 and 2008, respectively.  Selling, general and administrative expenses included share-based compensation of $342,000 and $640,000 in 2009 and 2008, respectively.

Operating Income (Loss)

The following table summarizes certain operating income (loss) data from our Statements of Operations (dollars in thousands):

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Nine months ended September 30:	2009			2008			$ Change			% Change		% Change constant currency (2)
Network Equipment group	$	(1,442	)	$	3,107		$	(4,549	)	(146	)%	(145	)%
Network Integration group	12,213			7,461			4,752			64		78
Optical Components group	(12,091		)	(7,854		)	(4,237		)	54		54
All others	(1,066		)	(1,358		)	292			(22	)	(22	)
	(2,386		)	1,356			(3,742		)	(276	)	(195	)
Corporate unallocated and adjustments(1)	(10,558		)	(12,324		)	1,766			(14	)	(14	)
Total	$	(12,944	)	$	(10,968	)	$	(1,976	)	18	%	8	%

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

(2) Percentage information in constant currencies in the table above and in the text below excludes the effect of foreign currency translation on reported results.  Constant currency results were calculated by translating the current year results at prior year average exchange rates.

Consolidated operating loss was $12.9 million year to date in 2009, or 4% of revenues, an increase of 18% from the $11.0 million, or 3%, operating loss in the compable period in 2008.  The increase was primarily the result of negative gross profit in our Optical Components segment in the first quarter of 2009, which resulted in an increase in year to date operating loss of $4.2 million, and to an operating loss of $1.4 million in 2009 compared to operating income of $3.1 million in 2008 in our Network Equipment business.  These increased losses were partially offset by a decrease in corporate unallocated operating loss as a result of lower operating expenses, and a $4.8 million increase in operating income in out Network Integration segment.  Operating loss would have been $1.1 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.  Operating loss included segment and unallocated corporate share-based compensation expense of $1.6 million and $3.5 million year to date in 2009 and 2008, respectively.

Network Equipment Group.  Operating loss for the nine months ended September 30, 2009 was $1.4 million, compared to operating income of $3.1 million for the nine months ended September 30, 2008, a $4.5 million decline.  The decline was due to the $21.0 million decrease in revenues, partially offset by a decrease in operating expenses.  The effect of currency fluctuations did not have a significant impact on operating loss in 2009.  Operating loss included share-based compensation expense of $614,000 and $964,000 in 2009 and 2008, respectively.

Network Integration Group.  Operating income for the nine months ended September 30, 2009 was $12.2 million, compared to operating income of $7.5 million for the nine months ended September 30, 2008, an increase of $4.8 million.  The increase was the result of the $5.9 million reduction in operating expenses, partially offset by the decline in gross profit.  Operating income would have been $1.1 million higher in 2009 had foreign currency exchange rates remained the same as they were in 2008.  Operating income included share-based compensation expense of $22,000 and $388,000 in 2009 and 2008, respectively.

Optical Components Group.  Operating loss for the nine months ended September 30, 2009 was $12.1 million, compared to an operating loss of $7.9 million for the nine months ended September 30, 2008.  The $4.2 million increase in operating loss was due to the $11.0 million decrease in gross profit, partially offset by the $6.8 million reduction in operating expenses.  The effect of currency fluctuations did not have a significant impact on operating loss in 2009.  Operating loss included share-based compensation expense of $573,000 and $1.5 million in 2009 and 2008, respectively.

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Interest Expense and Other Income, Net

Interest expense was $2.4 million and $3.0 million for the nine months ended September 30, 2009 and 2008, respectively.  Other income, net, principally includes interest income on cash, cash equivalents and investments and gains (losses) on foreign currency transactions.  Interest income declined to $0.5 million in 2009 from and $1.2 million in 2008 as a result of the decrease in underlying interest-bearing marketable securities.

Income Taxes

The provision for income taxes was $5.9 million and $2.4 million for the nine months ended September 30, 2009 and 2008, respectively.  In 2009, pre-tax income increased in the jurisdictions where we incur tax expense, particularly in the Optical Components group where increased pre-tax income in the foreign locations led to a $2.5 million increase in tax expense and in the foreign subsidiaries comprising the Network Integration group where higher operating income, resulted in a $0.7 million increase in tax expense. Income tax expense fluctuates based on the amount of income or loss generated in the various jurisdictions where we recognize income taxes and are not recording or releasing a valuation allowance.

Tax Loss Carry Forwards

As of December 31, 2008, MRV had federal, state, and foreign net operating loss (“NOL”) carry forwards available of $196.6 million, $155.1 million and $97.7 million, respectively. For the year ended December 31, 2008, federal NOL carry forwards increased by $5.2 million, and state NOL carry forwards decreased by $42.1 million. For federal and state income tax purposes, the net operating losses are available to offset future taxable income through 2028 and 2029, respectively. Certain foreign net operating loss carryforwards and tax credits are available indefinitely. As of December 31, 2008, federal, state, and foreign income tax credits amounted to $6.1 million, $5.0 million, and $0.9 million, respectively. If not utilized, the federal and state income tax credits will begin to expire in 2019 and 2012, respectively. Capital loss carry forwards totaling $14.5 million as of December 31, 2008, will begin to expire in 2009. Under the Internal Revenue Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs, capital loss carry forwards and other pre-change tax attributes to offset its post-change income may be limited.  An ownership change is generally defined as a greater than 50% change in its equity ownership by value over a three-year period.  We may experience an ownership change in the future as a result of subsequent shifts in our stock ownership.  We have a full valuation allowance recorded against domestic deferred income tax assets due to a history of net losses. Although realization is not assured, management believes it is more likely than not certain foreign net deferred income tax assets, which relate primarily to profitable foreign subsidiaries, will be realized and therefore have been recognized.

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Liquidity and Capital Resources

Cash and cash equivalents totaled $67.9 million at September 30, 2009 compared to $68.0 million in cash and cash equivalents as of December 31, 2008.  The following table summarizes our cash position, which includes cash, cash equivalents, time deposits and short-term marketable securities, and short-term debt position (dollars in thousands):

	September 30, 2009		December 31, 2008
Cash
Cash and cash equivalents	$	67,888	$	67,950
Time deposits	14,025		1,335
Short-term marketable securities	8,598		12,295
	90,511		81,580
Debt
Short-term obligations (1)	77,979		32,893
Cash in excess of debt	$	12,532	$	48,687
Ratio of cash to debt (2)	1.2 : 1		2.5 : 1

(1) Includes current maturities of long-term obligations.

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

Working Capital

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

	September 30, 2009		December 31, 2008
Current assets	$	344,895	$	323,083
Current liabilities	250,653		211,434
Working capital	$	94,242	$	111,649
Current ratio (1)	1.4 : 1		1.5 : 1

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

Current assets increased $21.8 million primarily due to an increase of $14.5 million in accounts receivable, an increase of $12.7 million in time deposits, and an increase of $11.1 million in other current assets, partially offset by a decrease of $12.2 million in inventories and a decrease of $3.7 million in short-term marketable securities.  Fluctuations in current assets result from the timing of product shipments to customers, receipts of inventories and related payments to vendors, cash used in operations and the effects of changes in foreign currencies translation rates.

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Current liabilities increased $39.2 million primarily due to a $45.1 million increase in short-term obligations and to a lesser extent increases in deferred revenue and other current liabilities, partially offset by an $8.9 million decrease in accounts payable and a $2.7 million decrease in accrued liabilities.  Fluctuations in current liabilities result from the timing of payments to vendors for inventory, settlement of accrued liabilities such as payroll related expenses, borrowings and repayments on our short-term obligations, changes in deferred revenue, payments of income tax liabilities and the effects of changes in foreign currency translation rates.

The increase in other current assets and short-term obligations includes $18.9 million as a result of the sale with recourse of commercial drafts from a major customer of our subsidiary Source Photonics.  This customer has historically settled its accounts receivable by issuing short term notes receivable.  In the past, Source Photonics would sell these notes to its bank without recourse, and after the sale would no longer carry the note as an asset.  More recently, this customer modified the type of note issued to Source Photonics, and due to this change, the local laws provide a subsequent holder with recourse to Source Photonics in the event that the customer does not pay the note when due.  When the Company sells notes receivable with recourse, the notes remain in other current assets, and an equivalent obligation is recorded in short-term obligations until the customer pays the new note holder of the note.

The increase in short-term obligations also includes a $12.3 million loan that is secured by a restricted deposit which is reflected in the corresponding increase in time deposits.  This loan was initiated by our Source Photonics subsidiary as part of their longer term financing plan in China.

Cash Flow

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

Nine months ended September 30:	2009			2008
Net cash provided by (used in):
Operating activities	$	(27,679	)	$	(6,689	)
Investing activities	(4,559		)	(5,769		)
Financing activities	31,876			5,307
Effect of exchange rate changes on cash and cash equivalents	300			1,517
Net decrease in cash and cash equivalents	$	(62	)	$	(5,634	)

Cash Flows Related to Operating Activities.  Cash used in operating activities was the result of the $20.1 million net loss, adjusted for non-cash items such as depreciation and amortization and share-based compensation expense.  Increases in accounts receivable and inventories, and a decline in accounts payable negatively affected cash.  Cash used in operating activities for the prior period was the result of the $12.8 million net loss adjusted for non-cash items and changes in working capital.

Cash Flows Related to Investing Activities.  Cash used in investing activities for 2009 was primarily the result of investment purchases and capital expenditures partially offset by sales of short-term marketable securities.  As of September 30, 2009, we had no plans for major capital expenditures.  Cash flows used in investing activities for the prior period were primarily from capital expenditures.

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Cash Flows Related to Financing Activities.  Cash provided by financing activities was primarily the result of net borrowings on short-term obligations in both 2009 and 2008.  The sale of commercial drafts with recourse discussed above is reflected as $18.9 million of cash used in operations and $18.9 million of cash provided by financing activities in 2009.  The proceeds from the $12.3 million loan discussed above is reflected as cash provided by financing activities and the related restricted cash deposit to collateralize the loan is reflected as cash used in financing activities.

Off-Balance Sheet Arrangements

We do not have transactions, arrangements or other relationships with unconsolidated entities that are reasonably likely to affect our liquidity or capital resources.  We have no special purpose or limited purpose entities that provided off-balance sheet financing, liquidity or market or credit risk support, engaged in leasing, hedging, research and development services, or other relationships that expose us to liability that is not reflected on the face of the financials.

Contractual Obligations

The following table summarizes contractual obligations as of September 30, 2009 (in thousands):

Contractual Obligations	Total		Less than 1 Year		1 – 3 Years		3 – 5 Years		After 5 Years
Short-term debt	$	77,979	$	77,979	$	-	$	-	$	-
Operating leases	31,881		6,821		10,003		5,910		9,147
Deferred consideration payable	30,036		30,036		-		-		-
Purchase commitments with suppliers and contract manufacturers	5,602		5,483		119		-		-
Total contractual obligations	$	145,498	$	120,319	$	10,122	$	5,910	$	9,147

Contractual obligations as of September 30, 2009 primarily consist of short-term obligations.  Historically, these obligations have been satisfied through cash generated from our operations or other sources and we expect that this trend will continue.  The deferred consideration payable obligation arose from the acquisition agreement for Fiberxon, a subsidiary of MRV acquired in July 2007.  MRV has filed a complaint against former stockholders, executives and directors of Fiberxon to recover acquisition costs and damages in excess of $31.5 million.

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.

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We may limit our ability to use available net operating loss and capital loss carryforwards if we seek financing through issuance of additional equity securities.  Under the Internal Revenue Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs, capital loss carry forwards and other pre-change tax attributes to offset its post-change income may be limited.  An ownership change is generally defined as a greater than 50% change in its equity ownership by value over a three-year period.  This change in equity ownership includes the issuance of shares made in connection with the acquisition of Fiberxon.  Our future capital requirements will depend on many factors, including the rate of revenue growth, the timing and extent of spending to support development of new products and the expansion of sales and marketing efforts, the timing of new product introductions and enhancements to existing products and the market acceptance of our products.

Internet Access to Our Financial Documents

We maintain a website at www.mrv.com.  We make available, free of charge, either by direct access or a link to the SEC website, our Annual 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 Securities Exchange Act of 1934, as amended (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, short-term borrowings and long-term obligations expose us to interest rate fluctuations. Our cash and short-term investments are subject to limited interest rate risk, and are primarily maintained in money market funds and bank deposits. Our variable-rate short-term borrowings are also subject to limited interest rate risk because of their short-term maturities. Our long-term obligations were entered into with fixed interest rates. Through certain foreign offices, and from time to time, we enter into interest rate swap contracts. As of September 30, 2009, 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 purchase commitments denominated in foreign currencies. These contracts cover periods commensurate with known or expected exposures, generally less than 12 months. As of September 30, 2009, we did not have any foreign exchange contracts outstanding.

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

When we translate the financial position and results of operations of subsidiaries with reporting currencies other than the U.S. dollar, we recognize a translation gain or loss in other comprehensive income.  In general, these currencies were weaker against the U.S. dollar for the nine months ended September 30, 2009 compared to the same period last year, so revenues and expenses in these countries translated into fewer dollars than they would have in 2008. For the nine months ending September 30, 2009, we had approximately:

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· $109.1 million related to cost of goods and operating expenses settled in euros;

· $14.0 million related to cost of goods and operating expenses settled in Swedish kronor;

· $26.7 million related to cost of goods and operating expenses settled in Swiss francs; and

· $16.5 million related to cost of goods and operating expenses settled in Taiwan dollars.

Had rates of these various foreign currencies been 10% higher relative to the U.S. dollar during the year to date period in 2009, our costs would have increased approximately:

· $10.9 million related to cost of goods and operating expenses settled in euros;

· $1.4 million related to cost of goods and operating expenses settled in Swedish kronor;

· $2.7 million related to cost of goods and operating expenses settled in Swiss francs; and

· $1.7 million related to cost of goods and operating expenses settled in Taiwan dollars.

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

	September 30, 2009	December 31, 2008
U.S. dollars	$           41,583	$          49,540
Euros	10,503	8,550
Swiss francs	4,231	2,319
Swedish kronor	699	809
Norwegian kroner	396	913
Taiwan dollars	24	1,121
Chinese renminbi	9,759	2,559
Israeli new shekels	58	671
Other	635	1,468
Total cash and cash equivalents	$           67,888	$          67,950

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

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

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Item 4.  Controls and Procedures

As of the end of the period covered by this report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) pursuant to Rule 13a-15 of the Exchange Act.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report on Form 10-Q, the Company’s disclosure controls and procedures were not effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s Exchange Act filings.

Changes in Internal Controls

We are in the process of implementing changes to the Company’s internal control over financial reporting to remediate certain material weaknesses as described in our 2008 Form 10-K for the year ended December 31, 2008 filed on October 8, 2009.  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 after the filing of our Form 10-K that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

None.

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 2008 Form 10-K.  There have been no material changes in the Risk Factors as previously disclosed in our 2008 Form 10-K with the exception that our accounts receivable and trade notes receivable with a single customer have surpassed 10% in 2009.  Please refer to Note 4, “Credit Risk” to the Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q.

Item 6.  Exhibits

(a)Exhibits

No.	Description
31.1	Certification of the Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act (filed herewith)
31.2	Certification of the Chief Financial Officer required by Rule 13a-14(a) of the Exchange Act (filed herewith)
32.1	Certifications of the Principal Executive and Financial Officers pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 (filed herewith)

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SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Exchange Act, the Registrant certifies that it has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on November 30, 2009.

MRV COMMUNICATIONS, INC.

By:  /s/ Noam Lotan

Noam Lotan
Chief Executive Officer

By:  /s/ Chris King

Chris King

Chief Financial Officer

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