UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________

FORM 10-Q

________________________

[x] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2013

[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______________ to ______________

Commission file number: 001-11174

MRV COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

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

20415 Nordhoff Street, Chatsworth, CA 91311

(Address of principal executive offices, zip code)

(818) 773-0900

(Registrant's telephone number, including area code)

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

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

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

Large accelerated filer  [ ]	Accelerated filer  [x]
Non-accelerated filer [ ]	Smaller reporting company [ ]
(Do not check if a smaller reporting company)

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

As of  November 7, 2013, 7,301,504 shares of Common Stock of MRV Communications, Inc. were outstanding.

1

MRV Communications, Inc.

Form 10-Q for the Quarter Ended September 30, 2013

Index

		Page Number
PART I	Financial Information	3
Item 1.	Unaudited Condensed Consolidated Financial Statements:	3
	Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2013 and 2012	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2013 and 2012	3
	Condensed Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012	5
	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2013 and 2012	6
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	38
PART II	Other Information	39
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 6.	Exhibits	41
	Signatures	42

2

PART I - FINANCIAL INFORMATION

Item 1.Condensed Consolidated Financial Statements

MRV Communications, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2013			2012			2013			2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenue:
Product revenue	$	27,051		$	23,945		$	81,555		$	73,985
Service revenue	11,334			10,721			33,910			31,722
Total revenue	38,385			34,666			115,465			105,707
Cost of sales	23,411			20,294			74,092			65,342
Gross profit	14,974			14,372			41,373			40,365
Operating expenses:
Product development and engineering	4,627			4,023			13,729			11,111
Selling, general and administrative	10,308			11,414			32,153			35,208
Impairment of goodwill	—			1,055			—			1,055
Total operating expenses	14,935			16,492			45,882			47,374
Operating income (loss)	39			(2,120		)	(4,509		)	(7,009		)
Interest expense	(41		)	(52		)	(414		)	(451		)
Gain from settlement of deferred consideration obligation	—			—			—			2,314
Other (loss) income, net	(132		)	(17		)	(217		)	63
Loss from continuing operations before income taxes	(134		)	(2,189		)	(5,140		)	(5,083		)
Provision (benefit) for income taxes	12			(869		)	433			(2,090		)
Loss from continuing operations	(146		)	(1,320		)	(5,573		)	(2,993		)
Income (loss) from discontinued operations, net of income taxes of $2,121 and $4,663 in 2012	—			(1,007		)	—			2,164
Net Loss	$	(146	)	$	(2,327	)	$	(5,573	)	$	(829	)
Net loss per share — basic (1):
From continuing operations	$	(0.02	)	$	(0.17	)	$	(0.74	)	$	(0.38	)
From discontinued operations	$	—		$	(0.13	)	$	—		$	0.28
Net loss per share — basic	$	(0.02	)	$	(0.30	)	$	(0.74	)	$	(0.10	)
Net loss per share — diluted (1):
From continuing operations	$	(0.02	)	$	(0.17	)	$	(0.74	)	$	(0.38	)
From discontinued operations	$	—		$	(0.13	)	$	—		$	0.28
Net loss per share — diluted	$	(0.02	)	$	(0.30	)	$	(0.74	)	$	(0.10	)
Weighted average number of shares:
Basic	7,522			7,766			7,539			7,847
Diluted	7,522			7,766			7,539			7,847

________________________________________

(1) Amounts may not add due to rounding.

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

3

MRV Communications, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2013			2012			2013			2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net Loss		($146	)		($2,327	)		($5,573	)		($829	)
Other comprehensive income (loss), net of tax
Foreign currency translation gain	855			1,511			460			894
Foreign currency translation effect realized upon divestiture of subsidiaries	—			—			—			(12,599		)
Total other comprehensive income (loss), net of tax	855			1,511			460			(11,705		)
Total comprehensive (loss) income		$709			($816	)		($5,113	)		($12,534	)

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

4

MRV Communications, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except par values)

	September 30, 2013			December 31, 2012
Assets	(unaudited)			(unaudited)
Current assets:
Cash and cash equivalents		$30,819			$40,609
Restricted time deposits	244			240
Accounts receivable, net	36,658			32,237
Other receivables	15,801			18,287
Inventories, net	25,172			22,444
Deferred income taxes	1,426			1,145
Other current assets	5,183			4,629
Total current assets	115,303			119,591
Property and equipment, net	5,177			3,735
Deferred income taxes, net of current portion	4,556			3,711
Intangibles, net	453			400
Other assets	660			1,128
Total assets		$126,149			$128,565
Liabilities and stockholders' equity
Current liabilities:
Short-term debt		$3,935			$5,267
Deferred consideration payable	233			233
Accounts payable	22,330			20,478
Accrued liabilities	18,500			16,652
Deferred revenue	9,839			7,290
Other current liabilities	565			560
Total current liabilities	55,402			50,480
Other long-term liabilities	5,100			5,184
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.01 par value: Authorized — 1,000 shares; no shares issued or outstanding	—			—
Common Stock, $0.0017 par value:
Authorized — 16,000 shares
Issued — 8,144 shares in 2013 and 8,061 shares in 2012
Outstanding — 7,404 shares in 2013 and 7,594 in 2012	271			270
Additional paid-in capital	1,281,682			1,281,170
Accumulated deficit	(1,207,087		)	(1,201,515		)
Treasury stock — 740 shares in 2013 and 467 shares in 2012	(9,183		)	(6,528		)
Accumulated other comprehensive income	(36		)	(496		)
Total stockholders' equity	65,647			72,901
Total liabilities and stockholders' equity		$126,149			$128,565

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

5

MRV Communications, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

	Nine Months Ended   September 30,
	2013			2012
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net loss		($5,573	)		($829	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	1,288			1,620
Share-based compensation expense	511			839
Provision for doubtful accounts	323			51
Deferred income taxes	(803		)	386
Gain from settlement of deferred consideration obligation	—			(2,314		)
Loss on disposition of property and equipment	18			28
Gain on sale of subsidiaries	—			(7,936		)
Impairment of goodwill and other intangibles	—			4,766
Changes in operating assets and liabilities:
Accounts receivable	(4,308		)	5,495
Inventories	(2,536		)	(3,060		)
Other assets	2,498			2,276
Accounts payable	1,571			(8,493		)
Accrued liabilities	1,770			(226		)
Income tax payable	(34		)	(1,863		)
Deferred revenue	2,438			836
Other current liabilities	(162		)	152
Net cash used in operating activities	(2,999		)	(8,272		)
Cash flows from investing activities:
Purchases of property and equipment	(2,738		)	(2,106		)
Proceeds from sale of property and equipment	—			192
Purchases of intangibles	(53		)	(400		)
Proceeds from sale of subsidiaries, net of cash acquired	—			16,791
Release of restricted time deposits	—			1,364
Investment in time deposits	(4		)	—
Net cash (used in) provided by investing activities	(2,795		)	15,841
Cash flows from financing activities:
Net proceeds from exercise of stock options	—			1
Purchase of treasury shares	(2,654		)	(2,805		)
Borrowings on short-term debt	7,085			19,421
Payments on short-term debt	(8,524		)	(21,252		)
Borrowing on long-term obligations	—			459
Dividend payment	—			(47,325		)
Payments on long-term obligations	—			(230		)
Net cash used in financing activities	(4,093		)	(51,731		)
Effect of exchange rate changes on cash and cash equivalents	97			(518		)
Net decrease in cash and cash equivalents	(9,790		)	(44,680		)
Cash and cash equivalents, beginning of period (1)	40,609			83,716
Cash and cash equivalents, end of period		$30,819			$39,036

Supplement disclosure on following page.

6

	Nine Months Ended   September 30,
	2013		2012
	(unaudited)		(unaudited)
Supplemental disclosure of cash flow information:
Cash paid during period for interest — continuing operations	$	215	$	310
Cash paid during period for interest — discontinued operations	—		10
Cash paid during period for interest — Total	$	215	$	320
Cash paid during period for income taxes — continuing operations	$	656	$	377
Cash paid during period for income taxes — discontinued operations	—		3,472
Cash paid during period for income taxes — Total	$	656	$	3,849

(1) The Cash and cash equivalents at the beginning of the period for September 30, 2012 presented includes $25,126 from discontinued operations.

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

7

MRV Communications, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Summary of significant accounting policies

Organization and nature of operations

MRV Communications, Inc. (“MRV”, "we", "our", the “Company”, and "us") and its wholly-owned subsidiaries supply communications equipment and services to carriers, governments and enterprise customers worldwide. We conduct our business along two principal segments: (a) Network Equipment; and (b) Network Integration. Our Network Equipment segment 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 segment operates primarily in Italy, servicing Tier One carriers, regional carriers, large enterprises, and government institutions. Network Integration provides network system design, integration and distribution services that include products manufactured by third-party vendors. 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.

Basis of Presentation

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

The consolidated financial statements included herein have been prepared by MRV, and are unaudited, 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, 2013 (this “Form 10-Q”) should be read in conjunction with “Selected Financial Data,” “Management's Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” and the Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”) filed with the SEC.

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

In the opinion of MRV's management, these unaudited statements contain all adjustments, which include normal recurring adjustments, necessary to present fairly the financial position of MRV as of September 30, 2013, and the results of its operations and comprehensive income (loss) for the three and nine months ended September 30, 2013 and 2012 and its cash flows for the nine months ended September 30, 2013 and 2012. The results reported in these financial statements should not be regarded as necessarily indicative of results that may be expected for the full year or any future periods.

On March 29, 2012, we sold all of the issued and outstanding capital stock of CES Electronic Systems SA (“CES”). On October12, 2012, the Company completed the sale of all of the shares of its subsidiary Alcadon - MRV AB ("Alcadon"). On October 16, 2012, the Company completed the sale of its subsidiary Pedrena Enterprises B.V., a Dutch company ("Pedrena"). Pedrena is the parent company of Interdata, which is in turn, the parent company of J3TEL. The Company has reclassified the historical results of CES, Alcadon and Pedrena as discontinued operations in this Form 10-Q for all periods presented. Accordingly, upon completion of the terms of the related sales agreements,

8

the related assets and liabilities of these three entities have been removed from the Company's balance sheets. Cash flows from discontinued operations of these three entities are presented combined with the cash flows from continuing operations in the accompanying Statement of Cash Flows for the nine months ended September 30, 2012. See Note 13 "Discontinued Operations" to the Financial Statements in Item 1 of this Form 10-Q for further discussion.

2. Cash and Cash Equivalents and Restricted Time Deposits

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, and are included on the balance sheet in restricted time deposits. MRV maintains cash balances and investments in qualified financial institutions, and at various times such amounts are in excess of federal insured limits.

3. Fair Value Measurement

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

ASC 820-10Fair Value Measurementsdefines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820-10 establishes a three-level hierarchy that prioritizes the use of observable inputs. The fair value hierarchy is divided 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 for which all significant inputs are observable, either directly or indirectly, other than level 1 inputs; Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

All of MRV's assets and a majority of its liabilities that are measured at fair value are measured using the unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

During 2013 the Company updated the estimated fair value as of September 30, 2013 of 250,000 warrants that will be issued to plaintiffs' counsel in a litigation matter originally recorded as a liability in 2012. In calculating the fair value, the Company used the Black Scholes option pricing model with level 2 inputs including a volatility of 45% based on the Company's historical quoted prices and peer company data, the risk free interest rate of 1.4% and the 5 years expected term of the warrants. Volatility based on both the Company's historical quoted prices and peer company data was used as the Company's stock is thinly traded. The resulting fair value was $4.27 per warrant. In relation to this revaluation, the Company recorded expense of $0.2 million for the three months ended September 30,2013 and income of $0.01 million for the nine months ended September 30,2013.

4. Credit Risk

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

9

The following table summarizes the changes in the allowance for doubtful accounts during the nine months ended September 30, 2013(in thousands):

	Nine months ended
	September 30, 2013
Balance at beginning of period		$1,733
Charged to expense	323
Write-offs	(4		)
Foreign currency translation adjustment	20
Balance at end of period		$2,072

5. Inventories

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

	September 30, 2013		December 31, 2012
Raw materials		$6,447		$4,348
Work-in process	1,065		1,368
Finished goods	17,660		16,728
Total		$25,172		$22,444

6. Intangible Asset

The balance of the intangible asset was $0.5 million as of September 30, 2013 and $0.4 million as of December 31, 2012. This asset, which represents a software license agreement, was not placed in service as of September 30, 2013, therefore amortization of intangible assets was zero for the nine months ended September 30, 2013 and September 30, 2012. The term of the license agreement is indefinite and once placed in service, the Company plans to amortize the cost over the estimated useful life, which is approximately 5 years.

7. Product Warranty

As of September 30, 2013 and December 31, 2012, MRV's product warranty liability recorded in accrued liabilities was $0.9 million and $1.0 million, respectively. MRV accrues for warranty costs as part of cost of goods sold based on associated material product costs, technical support labor costs and associated overhead. The products sold are generally covered by a warranty for periods of 90 days to three years.

The following table summarizes the change in product warranty liability during the nine months ended September 30, 2013 (in thousands):

	Nine months ended
	September 30, 2013
Beginning balance		$1,006
Cost of warranty claims	(180		)
Accruals for product warranties	36
Total		$862

8. Net Income (Loss) Per Share

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

10

outstanding and dilutive potential shares of Common Stock from stock options outstanding during the period. Diluted shares outstanding also include the dilutive effect of in-the-money options, which is calculated based on the average share price for each period using the treasury stock method.

Outstanding stock options to purchase 0.4 million shares were excluded from the computation of dilutive shares for the three months ended September 30,2013 because of the net loss. Outstanding stock options to purchase 0.5 million shares were excluded in the computation of dilutive shares for the three months ended September 30, 2012 because they were anti-dilutive. Treasury shares are excluded from the number of shares outstanding.

Outstanding stock options to purchase 0.4 million shares were excluded from the computation of dilutive shares for the nine months ended September 30,2013 because of the net loss. Outstanding stock options to purchase 5,903 shares were excluded from the computation of dilutive shares for the nine months ended September 30,2012 because of the net loss. In addition, for the nine months ended September 30,2012 there were 0.5 million potentially dilutive shares excluded from the calculation of diluted net loss per share because they were anti-dilutive. Treasury shares are excluded from the number of shares outstanding.

9. Share-Based Compensation

MRV records share-based compensation expense in accordance with ASC Topic 718Compensation - Stock Compensation. The following table summarizes the impact on MRV's results of operations of recording share-based compensation for the nine months ended September 30, 2013 and 2012 (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2013		2012		2013		2012
Cost of goods sold		$27		$9		$70		$29
Product development and engineering	21		9		46		30
Selling, general and administrative	161		315		395		718
Total share-based compensation expense (1)		$209		$333		$511		$777

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

The Company granted 80,242 stock options during the nine months ended September 30,2013 and the related weighted average fair value was $4.89 per share. The average fair value of 91,388 restricted shares granted during the nine months ended September 30, 2013 was $9.98 per share. The Company granted 17,736 stock options during the nine months ended September 30,2012 and the related weighted average fair value was $9.60 per share. The average fair value of 39,325 restricted shares granted during the nine months ended September 30, 2012 was $16.20 per share. As of September 30, 2013, the total unrecorded deferred share-based compensation balance for unvested securities, net of expected forfeitures, was$0.9 million, which is expected to be amortized over a weighted-average period of1.7 years.

Valuation Assumptions

MRV uses the Black-Scholes option pricing model to estimate the fair value of stock option awards or related modifications. The Black-Scholes model requires the use of subjective and complex assumptions including the option's expected life and the underlying stock price volatility. In 2012 MRV assumed volatility to approximate historical volatility. In 2013, MRV based volatility on the Company's historical quoted prices and peer company data. The following weighted average assumptions were used for estimating the fair value of options modified during the nine months ended September 30, 2013 and 2012, respectively:

11

Nine months ended September 30,	2013		2012
Risk-free interest rate	1.2	%	0.8	%
Dividend yield (1)	—		—
Volatility	51.9	%	89.0	%
Expected life (in years)	5.7		5.5

(1) As the Company does not pay a dividend on a regular basis, and dividends paid in the past have been special in nature, a dividend rate of zero was used.

10. Segment Reporting and Geographic Information

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

The accounting policies of the segments are the same as those described in the summary of significant accounting polices disclosed in MRV's2012Form 10-K. MRV evaluates segment performance based on revenues, gross profit and operating income (loss) of each segment. As such, there are no separately identifiable Statements of Operations data below operating income (loss).

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

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2013			2012			2013			2012
Network Equipment		$22,806			$23,310			$64,852			$65,248
Network Integration	15,585			13,816			50,701			48,892
Before intersegment adjustments	38,391			37,126			115,553			114,140
Intersegment adjustments	(6		)	(2,460		)	(88		)	(8,433		)
Total		$38,385			$34,666			$115,465			$105,707

Network Equipment revenue primarily consists of optical communication systems that include Metro Ethernet equipment, optical transport equipment, lab automation equipment, out-of-band network equipment, and the related service revenue and fiber optic components sold as part of system solutions. Network Integration revenue primarily consists of value-added integration and support service revenue, related third-party product sales (including third-party product sales through distribution) and fiber optic components sold as part of system solutions. All Network Integration's sales are within Italy.

One customer accounted for $32.5 million and $25.6 million of revenue in Network Integration revenue, or 28% and 24% of total revenue, for the nine months ended September 30, 2013 and 2012, respectively. Another customer accounted for $12.9 million and $11.7 million of revenue in Network Integration revenue, or 11% of total revenue, for both the nine months ended September 30, 2013 and 2012, respectively.

The same customer in Network Integration accounted for 12% and 21% of net accounts receivable as of September 30, 2013, and December 31, 2012, respectively. Another Network Integration customer accounted for 16% and 9% of accounts receivable as of September 30, 2013, and December 31, 2012, respectively.

12

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

	Three months ended				Nine months ended
	September 30,				September 30,
	2013		2012		2013		2012
United States		$15,010		$10,223		$40,811		$33,042
Americas (Excluding the U.S.)	972		1,638		3,452		4,702
Europe	21,276		17,234		66,565		60,140
Asia Pacific	1,127		5,571		4,637		7,823
Total		$38,385		$34,666		$115,465		$105,707

Revenue from external customers attributed to Italy totaled $16.0 million and $13.9 million for the three months ended September 30, 2013 and September 30, 2012 respectively, and $51.5 million and $49.5 million for the nine months ended September 30, 2013 and September 30, 2012 respectively.

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

	September 30, 2013		December 31, 2012
Americas		$3,007		$2,099
Europe	2,132		1,590
Asia Pacific	38		46
Total		$5,177		$3,735

13

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

	Three months ended						Nine months ended
	September 30,						September 30,
	2013			2012			2013			2012
Gross profit
Network Equipment	$	12,041		$	12,306		$	33,990		$	32,342
Network Integration	2,934			2,261			7,378			7,923
Total before intersegment adjustments	14,975			14,567			41,368			40,265
Corporate unallocated and intersegment adjustments(1)	(1		)	(195		)	5			100
Total	$	14,974		$	14,372		$	41,373		$	40,365
Depreciation expense
Network Equipment	$	406		$	286		$	988		$	745
Network Integration	54			57			159			173
Corporate	45			48			141			143
Total	$	505		$	391		$	1,288		$	1,061
Operating income (loss)
Network Equipment	$	87		$	2,163		$	(1,328	)	$	396
Network Integration (1)	1,525			(168		)	2,891			2,509
Total before intersegment adjustments	1,612			1,995			1,563			2,905
Corporate unallocated operating loss and adjustments (2)	(1,573		)	(4,115		)	(6,072		)	(9,914		)
Total	$	39		$	(2,120	)	$	(4,509	)	$	(7,009	)

(1) Includes a write-down of goodwill for the three and nine months ended September 30, 2012.

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

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

	Nine months ended
	September 30,
	2013		2012
Additions to Fixed Assets
Network Equipment	$	2,679	$	542
Network Integration	53		58
Corporate	6		81
Discontinued operations	—		1,425
Total	$	2,738	$	2,106

	September 30, 2013		December 31, 2012
Total Assets
Network Equipment		$51,301		$44,445
Network Integration	49,458		47,400
Corporate and intersegment eliminations	25,390		36,720
Total		$126,149		$128,565

14

11. Indemnification Obligations

In connection with the sale by MRV of Source Photonics, Inc. and related entities in October 2010, MRV agreed to indemnify the buyer against certain claims brought after the closing for prior-occurring events.  Certain of the indemnification obligations have expired. However, indemnification obligations related to intellectual property extend until the third anniversary of the closing, indemnification obligations related to employee benefits, environmental liabilities and taxes extend until their applicable statute of limitations has expired plus 90 days, and indemnification obligations are not time limited for title and ownership representations.  These indemnification obligations are subject to a $1.0 million deductible and a $20.0 million cap and we have purchased an insurance policy to protect against such obligations. In connection with the sale by MRV of CES in March 2012, MRV agreed to indemnify the buyer for the representations and warranties made in the sale purchase agreement, and we have purchased an insurance policy to protect us against any claims of indemnification related to the representations and warranties. Our sale purchase agreements for the sale of Pedrena and Alcadon include customary indemnification obligations. In addition, in connection with the sale of Pedrena the Company and the buyer entered into a Representations and Warranties Agreement that contains an arrangement whereby if the Company does not obtain a representations and warranties insurance policy within 90 days of close of the sale transaction, and if the Company's cash falls below $20 million prior to December 31, 2013, the Company will deposit 1.5 million euros (or $2.0 million U.S. equivalent as of December 31, 2012) in an escrow account to secure its indemnification obligations under the Representations and Warranties Agreement. The Company has elected not to obtain the insurance policy and expects to maintain cash balances sufficient to avoid making a deposit.

12. Litigation

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

In connection with the Company's past stock option grant practices, MRV and certain of its former directors and officers have been subjected to a number of stockholder lawsuits. In June 2008, the Company announced that our Board of Directors, based on information provided by management, and in consultation with management, concluded that the financial statements and the related reports of our independent public accountants should not be relied upon due to the Company's intention to restate its financial results from 2002 through 2008 to correct its accounting for option grants and other issues and a restatement of the Company's financial statements was filed in its Annual Report on Form 10-K for the year ended December 31, 2008 in October 2009.

From June to August 2008, five purported stockholder derivative and securities class action lawsuits were filed in the U.S. District Court in the Central District of California and one derivative lawsuit was filed in the Superior Court of the State of California against the Company and certain of our former officers and directors. The five lawsuits filed in the Central District of California were consolidated. Claims were asserted under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 10b-5 promulgated thereunder. In November 2010, the judge overseeing the securities class action lawsuits gave final approval to a stipulated $10 million settlement agreement, which was covered by our director and officer insurance policies. The federal and state derivative lawsuits were not settled and continued to be litigated.

As of January 4, 2013, all pending litigation in the federal and state derivative actions was stayed by agreement of the parties pending final Federal Court approval of a settlement between derivative plaintiffs, individual defendants and the Company. On April 8, 2013 the Federal Court preliminarily approved a Stipulation of Settlement (the "Settlement Stipulation"), which includes, among other things, (a) a release of all claims relating to the derivative lawsuits for the Company, the individual defendants and the plaintiffs; (b) a provision that $2.5 million in cash be paid to the Company by the Company's insurance carriers; (c) a payment of attorney's fees to plaintiffs' counsel of up to $500,000 in cash and 250,000five-year term warrants to purchase the Company's Common Stock at a strike price equal to the closing price of the Company's Common Stock on the day the Court's judgment approving the settlement becomes final (as defined in the Settlement Stipulation); and (d) continued payment by the Company of applicable reasonable attorneys' fees for the individual defendants. On June 6, 2013, the Federal Court granted final approval of the Settlement and on June 13, 2013 entered Judgment dismissing the federal derivative action with prejudice. On June 24, 2013, the State Court entered a dismissal with prejudice of the state derivative action. The Company is now required to undertake certain corporate governance reform actions within 120 days, many of which have already been implemented.

15

A majority of the costs related to the Company's and defendants' defense of these actions was paid by the Company's insurance carriers under its director and officer insurance policies, including the securities class action settlement. Insurance proceeds paid to the Company upon settlement of the derivative litigation were $1.0 million. However, MRV has paid and accrued $1.9 million in payment for services of defense counsel and other parties through September 30, 2013 above the insured amount. We have agreed to pay reasonable attorney fees and expenses for the individual defendants in the Stipulation, and will continue to incur our own legal expenses until this matter is finally resolved and non-appealable. Any such future obligations are not determinable at this time.

From time to time, MRV has received notices from third parties alleging possible infringement of patents with respect to product features or manufacturing processes. Management believes such notices are common in the communications industry because of the large number of patents that have been filed on these subjects. The Company's policy is to discuss these notices with the parties in an effort to demonstrate that MRV's products and/or processes do not violate any patents. The Company has been involved in such discussions with Alcatel-Lucent SA, Apcon, Inc., Finisar Corporation, International Business Machines, Mediacom Broadband LLC, Ortel Communications, Ltd., Nortel Networks Corporation, Rockwell Automation, Inc. and The Lemelson Foundation in the past.

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

13. Discontinued Operations

On March 29, 2012, the Company sold all of the issued and outstanding capital stock of CES. Prior to its disposition, CES was part of Network Equipment. The historical financial results of CES prior to its sale have been reclassified as discontinued operations for all periods presented. The Company recorded net income of $6.0 million from discontinued operations, net of income tax expense for thenine months ended September 30, 2012, and nothing for the three months ended September 30, 2012 related to CES.

On October12, 2012, the Company completed the sale of all of the shares of its subsidiary Alcadon. Prior to its disposition, Alcadon was part of Network Integration. The historical financial results of Alcadon prior to its sale have been reclassified as discontinued operations for all periods presented. The Company recorded a net loss of $0.1 million and $2.3 million from discontinued operations, net of income tax expense for the three and nine months endedSeptember 30, 2012 related to Alcadon.

On October 16, 2012, the Company completed the sale of all of the shares of its subsidiary Pedrena, parent of Interdata. Prior to its disposition, Pedrena was part of Network Integration. The historical financial results of Pedrena prior to its sale have been reclassified as discontinued operations for all periods presented. The Company recorded a net loss of $0.9 million and $1.6 million from discontinued operations, net of income tax expense for the three and nine months endedSeptember 30, 2012, respectively related to Pedrena.

In 2012 we entered into distribution agreements with Alcadon and Pedrena whereby the Company continues to sell its products to both disposed entities. The amount of intercompany revenue that was previously eliminated from the Company's financial statements in consolidation for the three months ended September 30, 2012 was $1.2 million for both Alcadon and Pedrena, respectively. The amount of intercompany revenue that was previously eliminated from the Company's financial statements in consolidation for the nine months ended September 30, 2012 was $3.9 million and $4.2 million for Alcadon and Pedrena, respectively.

14. Accounts Receivable Factoring

The Company has agreements with unrelated third parties for the factoring of specific accounts receivable in Italy in order to reduce the amount of working capital required to fund such receivables. As of September 30, 2013, the Company's credit facility agreements permit the factoring of up to €15.0 million, or $20.3 million, worth of receivables in operations outside of the United States. The factoring of accounts receivable under these agreements is accounted for as a sale in accordance with ASC 860 Transfers and Servicing. Proceeds on the transfer reflect the face value of the account less a discount. The discount is recorded as a charge in "interest" in the consolidated statement of income in the period of the sale. Net funds received reduced accounts receivable outstanding while increasing cash. The

16

Company has no significant retained interests or servicing liabilities related to the accounts receivable that have been sold in Italy.

At September 30, 2013, and December 31, 2012, the face amount of total outstanding accounts receivable pursuant to these agreements was $21.2 million and $29.5 million, respectively. The related outstanding balances due from the factor were $15.0 million and $13.3 million as of September 30, 2013 and December 31, 2012, respectively, and are included on the balance sheet as part of other receivables. The related losses on sale were $0.1 million and $0.04 million for the three months ended September 30, 2013 and September 30, 2012, and $0.2 million and $0.1 million for the nine months ended September 30, 2013 and September 30, 2012.

15. Share Repurchase

On December 3, 2012, the Company announced that the Board of Directors approved a repurchase of shares of Common Stock of the Company in an amount up to $10.0 million under a stock repurchase program that was scheduled to expire on December 31, 2013. Under this program the Company purchased 261,863 shares at an average price of $9.71 per share and a total cost of approximately $2.6 million during the nine months ended September 30,2013. Under this Stock Repurchase Program as of September 30, 2013, the Company had purchased 302,178 shares at an average price of $9.90 per share and a total cost of approximately $3.0 million.

On August 15, 2013, the Company Board of Directors terminated the Company's existing stock repurchase plan and approved a replacement repurchase plan on substantially the same terms in an amount up to $7,013,838 that is scheduled to expire on May 14, 2014. Since August 15, 2013 the Company has purchased 11,216 shares at an average price of $9.93 per share and a total cost of approximately $0.1 million during the nine months ended September 30, 2013 leaving $6.9 million for future purchase.

16. Dividend

On May 1, 2012, the Company's Board of Directors (the "Board") declared a dividend and payment to option holders totaling approximately $47.3 million, or $0.30 per share of the Company's Issued Common Stock. The dividend was paid on May 25, 2012 to holders of record as of the close of business on May 16, 2012. The Board also approved a staggered cash payment to option holders equal to the loss in the Black-Scholes fair value of their options as a result of the dividend. Restricted stockholders received per share payments in the same amount as the Company's stock holders promptly following payment of the dividend. Option holders who provided service to the Company at the time of the payment of the dividend received 50 percent of the payment amount in respect of their vested options promptly following payment of the dividend, and received 50 percent of the payment amount 12 months following, conditioned upon continuous service to MRV, subject to certain acceleration conditions such as involuntary termination without cause, death or disability, change of control, or a sale of the business unit in which the option holder is employed. Option holders with unvested options received the cash payment 12 months following as well, subject to the same conditions described above.

17. Income Taxes

The following table provides details of income taxes (in thousands, except percentages):

	Three months ended						Nine months ended
	September 30,						September 30,
	2013			2012			2013			2012
Loss before provision for income taxes		($134	)		($2,189	)		($5,140	)		($5,083	)
Provision for income taxes	12			(869		)	433			(2,090		)
Effective tax rate	(9		)%	40		%	(8		)%	41		%

The effective tax rate for the three and nine months ended September 30, 2013 fluctuates based on the amount of pre-tax income or loss generated in the various jurisdictions where we conduct operations and pay income tax. In addition, various jurisdictions that generate losses do not benefit from the losses generated due to a valuation allowance placed on those benefits

17

As of December 31, 2012, we had net operating losses ("NOLs") of $173.7 million, $112.0 million, and $90.8 million for federal, state, and foreign income tax purposes, respectively. Additionally, the Company had capital loss carryforwards of $110.3 million and $47.1 million for federal and state tax purposes, respectively. Under the Internal Revenue Code, if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change NOLs, capital loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater than 50% change in its equity ownership by value over a three-year period. We may experience an ownership change in the future as a result of subsequent shifts in our stock ownership. If we were to trigger an ownership change in the future, our ability to use any NOLs and capital loss carryforwards existing at that time could be limited. As of September 30, 2013, the U.S. federal and state NOLs continued to carry a full valuation allowance.

18. New Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). ASU 2013-11 is effective for the first interim or annual period beginning on or after December 15, 2013 with early adoption permitted. ASU 2013-11 amends ASC Topic 740, Income Taxes, to provide guidance and reduce diversity in practice on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. We do not believe that the application of this standard will impact our company.

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 Form10-Q, and Items 6, 7 and 8 of our2012Form10-K. The discussion in this Form10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and may qualify for the safe harbor provided for in Section21E of the Exchange Act. Forward-looking statements are statements other than statements of historical fact and may be identified by use of such terms as “expects,”“anticipates,”“intends,”“potential,”“estimates,”“believes,”“may,”“should,”“could,”“will,”“would,” and words of similar import.

Forward-looking statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from those projected. In addition, the statements in this Form10-Q may involve certain risks, uncertainties and assumptions, the likelihood of which are difficult to assess and may not occur, including risks that each of its business segments may not make the expected progress in its respective market, or that management's long-term strategy may not achieve the expected results. Other risks and uncertainties relate to delayed lead times in receiving components and delayed delivery times to customers due to short-term capacity constraints, potential changes in relationships with MRV's customers and suppliers and their financial condition, MRV's success in developing, introducing and shipping product enhancements and new products, competition in our market segments, market acceptance of new products and our ability to succeed in entering new markets, continued market acceptance of existing products and continued success in selling the products of other companies, product price discounts and general pricing pressure in certain of our markets, the timing and amount of significant orders from customers, obsolete inventory or product returns, warranty and other claims on products, the continued ability of MRV to protect its intellectual property rights and avoid onerous licensing fees, changes in product mix, maturing product life cycles, implementation of operating cost structures that align with revenue growth, political instability in areas of the world in which MRV operates or sells its products and services, currency fluctuations, changes in accounting rules, general economic conditions, as well as changes in such conditions specific to our market segments, maintenance of our inventory and production backlog, supply constraints directly or indirectly caused by natural disasters, litigation, including but not limited to patent infringement claims and litigation related to MRV's historical stock option granting practices.

In light of the risks and uncertainties inherent whenever matters or events expected to occur or not occur in the future are discussed, there can be no assurance that the forward-looking information contained in this Form10-Q will in fact transpire or prove to be accurate. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on our behalf are expressly qualified in their entirety by this introduction. In light of the risks and uncertainties in all such projected operational matters, the inclusion of forward-looking statements in this Form10-Q should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved or that any of the Company's operating expectations will be realized. Revenue and results of operations are difficult to forecast and could differ materially from those projected in the forward-looking

18

statements contained in this Form10-Q for the reasons detailed in Item 1A “Risk Factors” of Part I on the Company's 2012 Form 10-K and as set forth in item 1A of Part II of this Form 10-Q. Readers should not place undue reliance on forward-looking statements, which reflect management's view only as of the date of this Form10-Q. The Company undertakes no obligation to amend this Form10-Q or revise publicly these forward-looking statements (other than pursuant to requirements imposed on registrants pursuant to Item 1A under PartII of Form10-Q) to reflect subsequent events or circumstances. Readers should also carefully review the risk factors described in other documents the Company files from time to time with the SEC and the cautionary statements contained in our press releases when we provide forward-looking information.

Overview

We supply communications equipment and services to carriers, governments and enterprise customers worldwide. We conduct our business along two principal segments: Network Equipment and Network Integration. We evaluate segment performance based on the revenues, gross profit and operating expenses of each segment. We do not evaluate segment performance on additional financial information. As such, there are no separately identifiable Statements of Operations data below operating income. Our Network Equipment segment 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 segment operates primarily in Italy, servicing Tier One carriers, regional carriers, large enterprises, and government institutions. Network Integration provides network system design, integration and distribution services that primarily include products manufactured by third party vendors. We market and sell our products worldwide, through a variety of channels, which include a dedicated direct sales force, manufacturers' representatives, value-added-resellers, distributors and systems integrators.

We believe that the past few years of sustained softness in the global economy has affected our revenues and operating results, particularly in the Italian market.  When economic uncertainties increase, our customers often take a more cautious approach in their capital expenditures, resulting in order delays, slowing deployments, and lengthening sales cycles. This may lead to increased competition for projects and price pressures resulting in lower gross margins. Although we are starting to see an improvement in market conditions in the latter part of 2013, such market opportunities and dynamics are in their early stages, and it remains uncertain as to their current and long term effect on our business. Despite these economic uncertainties, we believe that our customers need to continue investing in their networks to meet the growth in consumer and enterprise use of high-bandwidth communications services.  We believe in our longer term market opportunities, but we are uncertain how long the downturn in economic conditions will continue and how our customers will interpret and react to market conditions.

We continue to encounter very competitive markets, particular within Italy. In the Italian market, securing new opportunities often requires less favorable pricing on the third party products that we sell to Tier One carriers. This less favorable pricing combined with the protracted cash conversion cycle inherent in Italy place cash resources at risk. These market conditions can adversely affect our operations and cause fluctuations in our results.

Our business involves reliance on foreign-based offices. Some of our divisions, outside subcontractors and suppliers are located in foreign countries, including Argentina, Australia, Canada, Denmark, Germany, Israel, Italy, Netherlands, Philippines, Poland, Russia, Taiwan, Thailand, and United Kingdom. For the nine months ended September 30, 2013, and 2012, foreign revenue constituted 59.0% and 69.0%, respectively, of our total revenue. The majority of our foreign sales are to customers located in the European region, with the remaining foreign sales primarily to customers in the Asia Pacific region.

On March 29, 2012, we sold all of the issued and outstanding capital stock of CES. On October12, 2012, we completed the sale of all of the shares of our subsidiary Alcadon. On October 16, 2012, we completed the sale of our subsidiary Pedrena. We have reclassified the historical results of CES, Alcadon and Pedrena as discontinued operations in this Form 10-Q for all periods presented. Accordingly, the related assets and liabilities of these three entities have been removed from the Company's balance sheets. Cash flows from discontinued operations are presented combined with the cash flows from continuing operations in the accompanying Statement of Cash Flows. See Note 13 "Discontinued Operations" to the Financial Statements in Item 1 of this Form 10-Q for further discussion.

At September 30, 2013 we had $30.8 million in cash and cash equivalents, $0.2 million in restricted time deposits, and $3.9 million in short-term debt. In April 2013, $2.7 million, which was held in an escrow account related to the sale of CES, was released to the Company and converted to cash.

19

Critical Accounting Policies

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

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

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

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

We generally warrant our products against defects in materials and workmanship for 90 days to three year periods. The estimated cost of warranty obligations and sales returns and other allowances are recognized at the time of revenue recognition based on contract terms and prior claims experience.

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

Accounting for Multiple-Element Arrangements entered into or materially altered after January 1, 2011. In October 2009, the FASB amended ASC 605-25 and ASC 985 and we adopted the amendments prospectively effective

20

January 1, 2011. In accordance with the amendments, we allocate arrangement consideration at the inception of the arrangement to all deliverables using the relative selling price method. The selling price we use for each deliverable is based on (a) vendor-specific objective evidence if available; (b) third-party evidence if vendor-specific objective evidence is not available; or (c) estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. We allocate discounts in the arrangement proportionally on the basis of the selling price of each deliverable. In accordance with the amendments, we no longer apply the software revenue guidance in ASC Subtopic985-605 to tangible products containing software components and non-software components that function together to deliver the tangible product's essential functionality.

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

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

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

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

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

Internal Use Software Development. In accordance with ASC 350-40 Intangibles - Goodwill and Other, Internal-Use Software, any software that we acquire, internally develop, or modify solely to meet our internal needs, and for which we have no substantive plan to market the software externally, is capitalized. During the nine months ended September 30,2013, we have been implementing a new enterprise-wide software for which we are capitalizing the development costs. The costs of which are included in property and equipment on the balance sheet.

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

21

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

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

Currency Rate Fluctuations

Changes in the relative values of non-U.S. currencies to the U.S. dollar affect our results. We conduct a significant portion of our business in foreign currencies, including the euro, the Taiwan dollar and the Israeli new shekel. For the nine months ended September 30,2013 and 2012, 59% and 69% of revenue, respectively, and 39% and 35% of operating expenses, respectively, were incurred at subsidiaries with a reporting currency other than the U.S. dollar. For the nine months ended September 30,2013, these currencies remained relatively consistent against the U.S. dollar compared to the nine months ended September 30,2012, so revenue and expenses in these currencies translated into relatively the same dollars that they would have in the prior period. The Company's Taiwan subsidiary, Appointech, Inc., is included in Network Equipment that also includes our Optical Communications Systems ("OCS") division. Relative to OCS, the revenues and related operating gross profit and operating expenses are not material and the change in foreign currency did not have a material impact on the results for the nine months ended September 30, 2013 compared to the nine months ended September 30,2012. Additional discussion of foreign currency risk and other market risk is included in Part I, Item 3 “Quantitative and Qualitative Disclosures About Market Risk” of this Form 10-Q.

22

Management Discussion Snapshot

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

	Three months ended September 30,									Nine months ended September 30,
	2013				2012					2013					2012
	$		% (1)		$			% (1)		$			%(1)		$			% (1)
Revenue(1) (2)		$38,385	100	%		$34,666		100	%		$115,465		100	%	$	105,707		100	%
Network Equipment	22,806		59		23,310			67		64,852			56		65,248			62
Network Integration	15,585		41		13,816			40		50,701			44		48,892			46
Gross profit (3)	14,974		39		14,372			41		41,373			36		40,365			38
Network Equipment	12,041		53		12,306			53		33,990			52		32,342			50
Network Integration	2,934		19		2,261			16		7,378			15		7,923			16
Operating expenses (4)	14,935		39		16,492			48		45,882			40		47,374			45
Network Equipment	11,954		52		10,142			44		35,318			54		31,946			49
Network Integration	1,408		9		2,428			18		4,486			9		5,414			11
Operating income (loss) (3) (4)	39		—		(2,120		)	(6	)	(4,509		)	(4	)	(7,009		)	(7	)
Network Equipment	87		—		2,163			9		(1,328		)	(2	)	396			1
Network Integration	1,525		10		(168		)	(1	)	2,891			6		2,509			5

___________________________________

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

(2) Revenue information by segment includes intersegment revenue reflecting sales of Network Equipment to Network Integration.

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

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

On March 29, 2012, the Company sold all of the issued and outstanding capital stock of CES. Prior to its disposition, CES was part of Network Equipment. The historical financial results of CES prior to its sale have been reclassified as discontinued operations for all periods presented. The Company recorded net income of $6.0 million from discontinued operations, net of income tax expense for thenine months ended September 30, 2012, and nothing for the three months ended September 30, 2012 related to CES.

On October12, 2012, the Company completed the sale of all of the shares of its subsidiary Alcadon. Prior to its disposition, Alcadon was part of Network Integration. The historical financial results of Alcadon prior to its sale have been reclassified as discontinued operations for all periods presented. The Company recorded a net loss of $0.1 million and $2.3 million from discontinued operations, net of income tax expense for the three and nine months endedSeptember 30, 2012, respectively, related to Alcadon.

On October 16, 2012, the Company completed the sale of all of the shares of its subsidiary Pedrena, parent of Interdata. Prior to its disposition, Pedrena was part of Network Integration. The historical financial results of Pedrena prior to its sale have been reclassified as discontinued operations for all periods presented. The Company recorded a net loss of $0.9 million and $1.6 million from discontinued operations, net of income tax expense for the three and nine months endedSeptember 30, 2012, respectively related to Pedrena.

In 2012 we entered into distribution agreements with Alcadon and Pedrena whereby the Company continues to sell its products to both entities. The amount of intercompany revenue that was previously eliminated from the Company's financial statements in consolidation for the three months ended September 30, 2012 was $1.2 million for both Alcadon and Pedrena, respectively. The amount of intercompany revenue that was previously eliminated from

23

the Company's financial statements in consolidation for the nine months ended September 30, 2012 was $3.9 million and $4.2 million for Alcadon and Pedrena, respectively.

24

Three months ended September 30,2013 Compared to the Three months ended September 30,2012

Revenue

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

							Favorable/(Unfavorable)
Three months ended September 30:	2013			2012			$ Change			% Change		% Change constant currency(1)
Network Equipment	$	22,806		$	23,310		$	(504	)	(2	)%	(2	)%
Network Integration	15,585			13,816			1,769			13		7
Before intersegment adjustments	38,391			37,126			1,265			3		1
Intersegment adjustments (2)	(6		)	(2,460		)	2,454			(100	)	—
Total	$	38,385		$	34,666		$	3,719		11	%	8	%

___________________________________

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

(2) Adjustments represent the elimination of intersegment revenue. In 2012, the intersegment adjustment included $2.4 million for Network Equipment sales to Alcadon and Pedrena.

Consolidated revenue for the third quarter of 2013increased $3.7 million, or 11%, compared to the third quarter of 2012, due primarily to a $1.8 million, or 13%, increase in Network Integration revenue, a $2.5 milliondecrease in intersegment sales, which are eliminated in consolidation, and to a lesser extent a $0.5 million, or 2%, decrease in Network Equipment revenue. Our former subsidiaries, Alcadon and Pedrena, were sold in the fourth quarter of 2012. Since Alcadon and Pedrena were still our subsidiaries in the third quarter of 2012, revenue of $2.4 million from these former subsidiaries was reported as intersegment sales that was included in Network Equipment and eliminated in determining consolidated revenue. In the fourth quarter of 2012, after the two subsidiaries were sold, we continued to sell product to these former subsidiaries, and those sales are now reported as trade sales with no adjustment required.

Network Equipment.    Revenue generated from Network Equipment decreased $0.5 million, or 2%, in the third quarter of 2013 compared to the third quarter of 2012. The decrease is primarily due to lower service revenues. Revenue for our more mature product categories and carrier Ethernet networking products and related components decreased in the third quarter of 2013 compared to same period in the prior year, which was partially offset by an increase in some of our optical product categories. Service revenues were down 18% in the third quarter of 2013 compared to the same period last year primarily due to the roll off of older deferred service contracts that were using a grandfathered revenue recognition methodology. Geographically, after giving effect to the change in European intersegment sales, the decrease in revenues at Network Equipment was attributable to a $4.4 million decrease in Asia Pacific that was partially offset by strong performance our Americas regions. An Asia Pacific Tier One carrier placed significant initial contract purchases in the third quarter of 2012 that were not repeated in the third quarter of 2013. Within our Americas market we have seen strength in the mobile backhaul, data center, and content provider sectors. The foreign exchange impact to Network Equipment was not material due to Appointech being the only activity subject to foreign exchange fluctuations.

25

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

					Favorable/(Unfavorable)
Three months ended September 30:	2013		2012		$ Change			% Change
Revenue, excluding intersegment sales:
Americas		$15,982		$11,861		$4,121		35	%
Europe	5,691		3,419		2,272			66
Asia Pacific	1,127		5,570		(4,443		)	(80	)
Total external sales	22,800		20,850		1,950			9
Sales to Network Integration:
Europe	6		2,460		(2,454		)	(100	)
Total intersegment sales	6		2,460		(2,454		)	(100	)
Total Network Equipment revenue		$22,806		$23,310		($504	)	(2	)%

Network Integration.    Revenue generated from Network Integration increased $1.8 million, or 13%, in the third quarter of 2013 compared to the third quarter of 2012. The increase is due a $0.7 million, or 11%, increase in product revenue and a $1.1 million, or 14%, increase in service revenues at Tecnonet. While Tecnonet has seen an increase in order volume, the Italian public telecommunications market continues to be negatively impacted by the current political climate and challenging economic conditions. New product orders and customer acceptance were being delayed and product pricing remained under pressure. The service revenue growth was the result of a continued focus on this aspect of the business that has higher margins and potential for growth. Total revenue from this segment would have been $0.9 million, or 7%lower in the third quarter of 2013, compared to the prior third quarter of 2012, had foreign currency exchange rates remained the same as they were in the third quarter of 2012. All revenue in Network Integration was generated in Italy.

Gross Profit

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

							Favorable/(Unfavorable)
Three months ended September 30:	2013			2012			$ Change			% Change		% Change constant currency (1)
Network Equipment		$12,041			$12,306			($265	)	(2	)%	(2	)%
Network Integration	2,934			2,261			673			30		22
Before intersegment adjustments	14,975			14,567			408			3		2
Adjustments (2)	(1		)	(195		)	194			(99	)	(100	)
Total		$14,974			$14,372			$602		4	%	3	%

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

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

Consolidated gross profit increased $0.6 million in the third quarter of 2013 compared to the prior year third quarter, principally due to the 11%increase in revenue. Gross profit as a percentage of revenue (gross margin) for the third quarter of 2013 was 39%, a decrease of 200 basis points from 41% in the third quarter of 2012. The decrease was primarily due to the the shift of segment revenue toward a higher percentage of total revenue coming from Network Integration, which has lower gross margins than Network Equipment. Consolidated product to service revenue mix in the third quarter of 2013 remained consistent with the third quarter of 2012. In the third quarter of 2013, the foreign currency exchange rates remained relatively the same as in the third quarter of 2012.

Network Equipment.  The $0.3 million, or 2%, decrease in gross profit for Network Equipment in the third quarter of 2013, compared to the third quarter of the prior year, was due to a 2%decrease in revenue. Gross margins remained

26

consistent at 53% for the third quarter of 2013 and 2014. Product revenue in the third quarter of 2013 increased as a percentage of total revenues over the same period last year.

Network Integration.  Gross profit in the third quarter of 2013 as compared to the third quarter of 2012 for Network Integration increased $0.7 million, or 30%. The increase was driven by an increase in average gross margin from 16% to 19% due to gross margin improvement at Tecnonet. Tecnonet gross margins increased mainly due to service revenues, which have higher margin, increasing as a percentage of total Network Integration revenues, and an improvement in volume efficiency. While product gross margins did slightly improve, they remain depressed by competitive pricing pressure that arises from the difficult economic conditions in Italy. Tecnonet primarily serves as a reseller of the third party equipment it installs and services, and as a result, it experiences significant gross margin pressure on its product sales to major telecommunication carriers. Given the challenges still facing the Italian economy, we expect to continue to see pricing pressure on our product revenues.

Operating Expenses

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

					(Favorable)/Unfavorable
Three months ended September 30:	2013		2012		$ Change			% Change		% Change constant currency (1)
Network Equipment		$11,954		$10,142		$1,812		18	%	18	%
Network Integration	1,408		2,428		(1,020		)	(42	)%	(45	)%
Total segment operating expenses	13,362		12,570		792			6	%	5	%
Corporate unallocated operating expenses and adjustments (2)	1,573		3,922		(2,349		)	(60	)%	(60	)%
Total		$14,935		$16,492		($1,557	)	(9	)%	(10	)%

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

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

Consolidated operating expenses in the thirdquarter of 2013 were $14.9 million, or 39% of revenue, compared to $16.5 million, or 48% of revenue, in the third quarter of 2012, a decrease of $1.6 million, or 9%. The decrease is primarily due to a decrease of Corporate unallocated operating expenses $2.3 million as discussed below and a decrease in Network Integration expenses $1.0 million offset by an increase at Network Equipment $1.8 million. Lower audit and accounting fees and services contributed $0.8 million to the reduced costs.

Network Equipment.    Operating expenses in Network Equipment for the third quarter of 2013 were $11.9 million, or 52% of revenue, compared to $10.1 million, or 44% of revenue in the thirdquarter of 2012. The $1.8 million, or 18%, increase was planned for and was due to a $0.6 million increase in salaries for the hiring of new engineers and outside engineering support cost, a $0.4 million increase in consulting and support costs for the implementation of an enterprise-wide business software system, a $0.4 million increase in back office and IT support costs, a $0.4 million increase of sales team compensation and marketing activities, and a $0.2 million increase in finance support salaries. Partially offsetting these increases was $0.2 million in lower audit and accounting related fees. We do not expect to continue to incur support costs for the implementation of the business software system at the same level in the future, and we anticipate continuing to benefit from the lower auditing and accounting fees.

Network Integration.    Operating expenses in Network Integration for the thirdquarter of 2013 were $1.4 million, or 9% of revenue, compared to $2.4 million, or 18% of revenue, in the thirdquarter of 2012. In the third quarter of 2012, we had a $1.1 million write down of goodwill. Excluding this prior year write down, the increase in operating costs was mainly due to lower advertising costs in the third quarter of 2013 partially higher audit and accounting fees.

Corporate. Corporate expenses decreased by $2.3 million in the third quarter of 2013 compared to the third quarter of 2012. This decrease was due a $1.0 million decrease in legal fees primarily resulting from the settlement of the derivative litigation in June 2013, a $0.7 million decrease in professional consulting services to support the

27

transition of the Corporate structure, and a $0.6 million decrease in audit and accounting service fees. We anticipate to continue benefiting from lower professional consulting services and lower auditing and accounting fees.

Operating Income (Loss)

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

							Favorable/(Unfavorable)
Three months ended September 30:	2013			2012			$ Change			% Change		% Change constant currency(1)
Network Equipment		$87			$2,163			($2,076	)	(96	)%	(96	)%
Network Integration	1,525			(168		)	1,693			(1,008	)	(955	)
Total segment operating income (loss)	1,612			1,995			(383		)	(19	)	(24	)
Corporate unallocated and adjustments (2)	(1,573		)	(4,115		)	2,542			62		(62	)
Total		$39			($2,120	)		$2,159		(102	)%	(98	)%

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

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

The $0.6 million, or 4%, increase in gross profit and the $1.6 million, or (9)%, decrease in operating expenses primarily led to a $2.2 million increase in our operating profit.

Network Equipment.   Network Equipment reported an operating profit of $0.1 million and $2.2 million in the thirdquarter of 2013 and 2012, respectively. The change in operating profit was due to a $0.3 milliondecrease in gross profit and a $1.8 million planned increase in operating expenses. Operating margin was 0% in 2013 and 9% in 2012.

Network Integration.   Network Integration reported operating income of $1.5 million for the third quarter of 2013, compared to $0.2 million in the third quarter of 2012. Excluding the $1.1 million write down of goodwill, discussed above, the $0.6 million increase was primarily due to the $0.7 millionincrease in gross profit that was partially offset by a $0.1 million decrease in operating costs. Network Integration operating margin was 10% in the third quarter of 2013 compared to (1)% in the third quarter of 2012.

Interest Expense and Other Income, Net

Interest expense was $0.04 million in the third quarter of 2013 compared to $0.1 million in the third quarter of 2012. Other income, net, principally includes interest income on cash, cash equivalents and investments and gains and losses on foreign currency transactions and the litigation settlement.

Provision for Income Taxes

The tax provision for the third quarters of 2013 and 2012 was $0.01 million and $0.9 million, respectively. Our income tax provision fluctuates based on the amount of pre-tax income or loss generated in the various jurisdictions where we conduct operations and pay income tax. The income tax expense on an operating loss of $0.1 million in the third quarter of 2013 is due to income tax associated with our foreign subsidiaries that do not benefit from our federal net operating loss carryforwards.

Tax Loss Carryforwards

As of December 31, 2012, we had net operating losses ("NOLs") of $173.7 million, $112.0 million, and $90.8 million for federal, state, and foreign income tax purposes, respectively. Additionally, the Company had capital loss carryforwards of $110.3 million and $47.1 million for federal and state tax purposes, respectively. Under the Internal Revenue Code, if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change NOLs, capital loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited.

28

An ownership change is generally defined as a greater than 50% change in its equity ownership by value over a three-year period. We may experience an ownership change in the future as a result of subsequent shifts in our stock ownership. If we were to trigger an ownership change in the future, our ability to use any NOLs and capital loss carryforwards existing at that time could be limited. As of September 30, 2013, the U.S. federal and state NOLs continued to carry a full valuation allowance.

29

Nine months ended September 30,2013 Compared To Nine months ended September 30,2012

Revenue

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

							Favorable/(Unfavorable)
Nine Months Ended September 30:	2013			2012			$ Change			% Change		% Change constant currency(1)
Network Equipment group		$64,852			$65,248			($396	)	(1	)%	(1	)%
Network Integration group	50,701			48,892			1,809			4		1
Before intersegment adjustments	115,553			114,140			1,413			1		—
Intersegment adjustments (2)	(88		)	(8,433		)	8,345			(99	)	(99	)
Total		$115,465			$105,707			$9,758		9	%	8	%

___________________________________

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

(2) Adjustments represent the elimination of intersegment revenue.

Consolidated revenue for the nine months ended September 30,2013increased $9.8 million, or 9%, compared to the comparable period of 2012, due to a $1.8 million increase in Network Integration revenue and a $8.3 million, or 99% decrease in Intersegment adjustments, which are eliminated in consolidation. These were partially offset by a $0.4 milliondecrease in Network Equipment revenue. Our former subsidiaries, Alcadon and Pedrena, were sold in the fourth quarter of 2012. Since Alcadon and Pedrena were still our subsidiaries in the third quarter 2012, the revenue of $8.1 million from these former subsidiaries was reported as intersegment sales that were included in Network Equipment and eliminated in determining consolidated revenue. In the fourth quarter of 2012, after the two subsidiaries were sold, we continued to sell product to these former subsidiaries, and those sales are now reported as trade sales with no adjustment required. Consolidated revenue would have been $1.3 millionlower if foreign currency exchange rates had remained the same as they were in the first nine months of 2012.

Network Equipment Group.    Revenue generated from the Network Equipment group decreased $0.4 million in the nine months ended September 30,2013 compared to the nine months ended September 30,2012. Revenues increased primarily due to a decrease in service revenues that were partially offset by an increase in product revenue. Geographically, OCS Americas and Europe revenues increased $11.2 million that was partially offset by a $3.2 million decrease in Asia Pacific where large initial contract orders from a Tier One customer that drove significant revenue volume during the first nine months of 2012, were not repeated in first nine months of 2013.

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

					Favorable/(Unfavorable)
Nine Months Ended September 30:	2013		2012		$ Change			% Change
Revenue, excluding intersegment sales:
Americas		$44,264	37,744		6,520			17	%
Europe	15,864		11,250		4,614			41
Asia Pacific	4,637		7,822		(3,185		)	(41	)
Total external sales	64,765		56,816		7,949			14
Sales to Network Integration group:
Europe	87		8,432		(8,345		)	(99	)
Total intersegment sales	87		8,432		(8,345		)	(99	)
Total Network Equipment revenue		$64,852		$65,248		($396	)	(1	)%

30

Network Integration Group.    Revenue generated from the Network Integration group was $1.8 million higher in the first nine months of 2013 compared to the first nine months of 2012. At Tecnonet, service revenue was up 13% for the first nine months of 2013 as compared to the first nine months of the prior year. This was partially offset by a 5% decrease in product revenues. The competition within the Italian telecom market has increased as Italy continues to work through its economic and political difficulties. As Tecnonet is only a reseller of third party equipment, this competitive environment has hit Tecnonet's product revenue side of the business harder than its higher margin service business. We anticipate that product revenue will continue to be under pressure. Revenue would have been $1.3 millionlower in the first nine months of 2013 had foreign currency exchange rates remained the same as they were in the first nine months of2012. All revenue in the Network Integration group was generated in Italy.

Gross Profit

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

					Favorable/(Unfavorable)
Nine Months Ended September 30:	2013		2012		$ Change			% Change		% Change constant currency (1)
Network Equipment group		$33,990		$32,342		$1,648		5	%	5	%
Network Integration group	7,378		7,923		(545		)	(7	)	(10	)
Before intersegment adjustments	41,368		40,265		1,103			3		2
Adjustments (2)	5		100		(95		)	(95	)	(95	)
Total		$41,373		$40,365		$1,008		2	%	2	%

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

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

Consolidated gross profit increased $1.0 million, or 2% for the nine months ended September 30, 2013 from the prior year period, due to the 9%increase in revenue that was partially offset by a decrease in gross margin from 38% to 36%. The decline in average gross margins was due to the negative effect of the elimination of revenue and gross profit of our former subsidiaries, Alcadon and Pedrena, discussed above and decline in gross margin in Network Integration that was partially offset by an increase in Network Equipment group gross margins. Gross profit would have been $0.2 millionlower in the first nine months of 2013 if foreign currency exchange rates had remained the same as they were in the first nine months of 2012.

Network Equipment Group.    The $1.6 million, or 5%, increase in gross profit for the Network Equipment group for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012 was due to an increase in average gross margin from 50% to 52% that was partially offset by a $0.3 million decrease in revenue. The increase in average gross margin for the first nine months of 2013 as compared to the first nine months of prior year was due to an increase in labor and overhead of $0.1 million, a favorable change in product revenue mix of $0.8 million, and a decrease in inventory write-offs $1.0 million, all of which primarily occurred at OCS. The mix of product and service revenues for the first nine months of 2013 and 2012 remained consistent, and gross margin in both revenue streams improved during the first nine months of 2013. Gross profit would have been flat in in the first nine months of 2013 had foreign currency exchange rates remained the same as they were in the first nine months of 2012.

Network Integration Group.    Gross profit for the Network Integration group decreased $0.5 million, or 7% for the first nine months in 2013 as compared to first nine months in 2012. The decrease was primarily due to a decrease in average gross margins from 16% in the first nine months of the prior year to 15% in the first nine months of 2013 partially offset by a $1.8 million increase in revenue discussed above. The decline of average gross margins is due to significantly lower product gross margins in the first nine month of 2013 at Tecnonet. As previously discussed, this decline in product gross margins is the result Tecnonet competing as a reseller of third party product in the Italian telecommunications market that is experiencing intense competition on price. The decline in product margins was partially offset by an increase in service revenue gross margins during the first nine months of 2013 as compared to the first nine months of the prior year, and a favorable shift toward a higher proportion of service revenue to total revenue. The improvement in service gross margin is due to volume related efficiencies and a favorable change in support rev

31

enue mix toward internally supported services that have higher gross margin than service revenues with outsourced support. Gross profit would have been $0.2 millionlower in the first nine months of 2013 had foreign currency exchange rates remained the same as they were in the first nine months of 2012.

Operating Expenses

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

					(Favorable)/Unfavorable
Nine Months Ended September 30:	2013		2012		$ Change			% Change		% Change constant currency (1)
Network Equipment group		$35,318		$31,946		$3,372		11	%	11	%
Network Integration group	4,486		5,414		(928		)	(17	)%	(19	)%
Total segment operating expenses	39,804		37,360		2,444			7	%	6	%
Corporate unallocated operating expenses and adjustments (2)	6,078		10,014		(3,936		)	(39	)%	(39	)%
Total		$45,882		$47,374		($1,492	)	(3	)%	(3	)%

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

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

Consolidated operating expenses were $45.9 million, or 40% of revenue, for the first nine months of 2013 compared to $47.4 million, or 45% of revenue, for the prior year period, a decrease of $1.5 million, or 3%, that included $1.8 million and $2.5 million in unique costs (see below) related to investment in the core business, derivative litigation, and legal support costs for the first nine months of 2013 and 2012, respectively. Excluding these charges, operating expenses in the first nine months of 2013 were $44.1 million, or 38% of revenue, compared to $44.9 million, or 42% of revenue, in 2012, a decrease of $0.8 million, or 2%. Auditing and accounting service fees were $1.3 million lower in first nine months of 2013.

Although operating expenses decreased by $1.5 million in the first nine months of 2013 as compared to the first nine months of 2012, in both 2013 and 2012, the Company incurred additional expense of $1.8 million and $2.5 million, respectively, related to specific matters that were unique to each year. In 2013, there was a total of $1.8 million of these additional expenses, including $1.1 million in legal and support costs relating to a former employee matter, financial consulting fees incurred to provide interim support during the transition of the Corporate office of $0.4 million, $1.2 million of implementation and consulting costs for the implementation of our new enterprise-wide business software solution, and legal and settlement costs for the derivative litigation of $0.1 million. These were partially offset by insurance proceeds paid to the company upon settlement of the derivative litigation of $1.0 million. All of the additional costs incurred in the first nine months of 2013, except the $1.2 million in consultation and implementation costs, were incurred at our Corporate office. In the first nine months of 2012, we incurred $2.5 million of additional costs at our Corporate office including $0.8 million of severance costs for our former Chief Financial Officer and Vice President, Finance and $0.6 million of financial consulting fees for interim support during the transition of the Corporate office. In addition, there was a $1.1 million write down of goodwill in the Network Equipment segment in the first nine months of 2012. If the respective additional costs are excluded from the operating expenses for the first nine months of 2013 and the first nine months of the prior year, operating expense would have been $44.1 million and $44.9 for the first nine months of 2013 and the first nine months of the prior year, respectively. The Company does not anticipate the additional net costs for the first nine months of 2013 will be incurred at the same levels in the future.

Network Equipment Group.    Operating expenses in the Network Equipment group for the first nine months of 2013 were $35.3 million, or 54% of revenue, compared to $31.9 million, or 49% of revenue in the prior year period of 2012, an increase of $3.4 million, or 11%. If the consulting costs of $1.2 million for the implementation of our new enterprise-wide business software are excluded from the first nine months of 2013, the increase in operating expenses would have been $2.1 million. This increase is due to the planned investment of $2.6 million for additional engineers and engineering support to drive new product development, an increase of $0.6 million in sales and back office support

32

costs that were partially offset by a reduction of $0.5 million in external consulting expenses, and $0.6 million in lower auditing and accounting fees.

Network Integration Group.    Operating expenses in the Network Integration group for the first nine months of 2013 were $4.5 million, or 9% of revenue, compared to $5.4 million, or 11% of revenue, for the prior year period. In the third quarter of 2012, we had a $1.1 million write down of goodwill at Tecnonet. Excluding the write down of goodwill in 2012, increase in operating expense was primarily due to additional sales and administrative labor costs. Operating expenses would have been $0.1 millionlower in the first nine months of 2013 had foreign currency exchange rates remained the same as they were in the prior year period.

Corporate. Operating expenses decreased $3.9 million in the first nine months of 2013 compared to the first nine months of 2012. If the $0.8 million in net unique costs discussed above are excluded, operating expenses decreased $3.1 million. This decrease is primarily due to $0.8 million in lower labor costs due to a reduction in workforce and restructuring of the Corporate office in 2013, $0.8 million in lower audit and accounting support fees, $0.9 million in lower legal costs, $0.4 million in lower consulting support fees, and $0.2 million lower general support costs.

Operating Income (Loss)

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

							Favorable/(Unfavorable)
Nine Months Ended September 30:	2013			2012			$ Change			% Change		% Change constant currency(1)
Network Equipment group		($1,328	)		$396			($1,724	)	(435	)%	(435	)%
Network Integration group	2,891			2,509			382			15		11
Total segment operating income (loss)	1,563			2,905			(1,342		)	(46	)	(50	)
Corporate unallocated and adjustments (2)	(6,072		)	(9,914		)	3,842			39		(39	)
Total		($4,509	)		($7,009	)		$2,500		(36	)%	(34	)%

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

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

The $1.0 million, or 2%, increase in gross profit and the $1.5 million, or (3)%, decrease in operating expenses primarily led to a $2.5 million decrease in our operating loss. If the additional operating expenses for the first nine months of 2013 and 2012, as discussed above, are excluded, our decrease in operating loss would have been $1.8 million. Our operating loss would have been $0.1 millionhigher in the first nine months of 2013 had foreign currency exchange rates remained the same as they were in the prior year period. Operating losses included share-based compensation expense of $0.5 million and $0.8 million in the first nine months of 2013 and 2012, respectively.

Network Equipment Group.    The Network Equipment group reported an operating loss of $1.3 million and an operating profit of $0.4 million in the first nine months of 2013 and 2012, respectively. The increased loss was due to a $1.6 millionincrease in gross profit offset by a $3.3 million increase in operating expenses. Operating margin was (2)% in the first nine months of 2013 and 1% in 2012, respectively. Operating losses would have been flat in the first nine months of 2013 had foreign currency exchange rates remained the same as they were in the prior year period.

Network Integration Group.    The Network Integration group reported operating income of $2.9 million for the first nine months of 2013, compared to operating income of $2.5 million for the prior year period. Excluding the write down of goodwill in the prior year, the $0.7 million decrease was due to the $0.5 milliondecrease in gross profit and a $0.2 million increase operating expenses due to higher legal and accounting fees. The Network Integration group operating margin was 6% in the first nine months of 2013 compared to 5% in the first nine months of 2012. Operating income would have been $0.1 millionlower in the first nine months of 2013 had foreign currency exchange rates remained the same as they were in the prior year period

Interest Expense and Other Income, Net

33

Interest expense was $0.4 million in both the nine months ended September 30,2013 and the nine months ended September 30,2012, respectively. Other income, net, principally includes interest income on cash, cash equivalents and investments and gains and losses on foreign currency transactions and litigation settlement. In the second quarter of 2012, we recognized a $2.3 million gain on settlement of litigation that had been previously reserved.

Provision for Income Taxes

The tax provisions for the nine months ended September 30,2013 and 2012 were $0.4 million compared to a $2.1 million benefit, respectively. Our income tax provision fluctuates based on the amount of pre-tax income or loss generated in the various jurisdictions where we conduct operations and pay income tax. The income tax expense on an operating loss of $5.1 million in the nine months ended September 30,2013 is due to income tax associated with our foreign subsidiaries that do not benefit from our federal net operating loss carryforwards.

Tax Loss Carryforwards

As of December 31, 2012, we had NOLs of $173.7 million, $112.0 million, and $90.8 million forfederal, state, and foreign income tax purposes, respectively. Additionally, the Company had capital loss carryforwards of $110.3 million and $47.1 million for federal and state tax purposes, respectively. Under the Internal Revenue Code, if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change NOLs, capital loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater than 50% change in its equity ownership by value over a three-year period. We may experience an ownership change in the future as a result of subsequent shifts in our stock ownership. If we were to trigger an ownership change in the future, our ability to use any NOLs and capital loss carryforwards existing at that time could be limited. As of September 30, 2013, the U.S. federal and state NOLs had a full valuation allowance.

Liquidity and Capital Resources

During the nine months ended September 30, 2013, the Company's cash and restricted time deposits and escrow accounts decreased from $40.8 million to $31.1 million, a decrease of $9.7 million. Our cash outflows included a net loss adjusted for non-cash expenses of $4.2 million including depreciation and amortization, share-based compensation, and deferred taxes. These operating outflows were offset with cash inflows from working capital of $1.2 million, including a $2.5 million decrease in other assets primarily resulting from the receipt of escrowed funds due from the sale of CES in 2012, a $1.6 million increase in accounts payable that occurred due to an increase in materials purchased, a $1.8 million increase in accrued liabilities as a result of additional accruals for non-income taxes, a $2.4 million increase in deferred revenue as a result of a seasonal increase in service revenues, offset by a $2.5 million increase in inventory due to additions related to anticipated needs of projects, and an accounts receivable increase of $4.3 million resulting from a shift from financing certain Italian carrier receivables to traditional lines of credit versus factoring. These net cash outflows from operations were offset by cash used in investing and financing activities. We used $2.7 million of cash for purchases of property and equipment and purchased 273,079 shares of the Company's Common Stock for $2.7 million. (See Note 15, Share Repurchase). In addition, we made payments on short-term debt of $8.5 million, which partially offset additional borrowings of $7.1 million.

We periodically review our capital position and consider returning capital to stockholders through special dividends or share repurchases when our cash on hand exceeds our foreseeable cash needs. We also review the capital needs of our business units and make decisions regarding investing in our businesses. We continue to execute on a plan to complete upgrades to our systems and equipment needed to support our growth objectives in the carrier Ethernet and optical transport markets among others. As of September 30, 2013, we had used approximately $2.7 million of $4.6 million in cash earmarked for these initiatives during 2013. We believe that cash on hand and cash flows from operations will be sufficient to satisfy current operating needs, capital expenditures, and product development and engineering requirements for at least the next 12 months. We may seek to obtain additional debt or equity financing if we believe it appropriate. We may limit our ability to use available NOLs and capital loss carryforwards if we seek financing through issuance of additional equity securities.

34

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

	September 30, 2013		December 31, 2012
Cash
Cash and cash equivalents		$30,819		$40,609
Restricted time deposits	244		240
	31,063		40,849
Short-term debt	3,935		5,267
Cash in excess of debt		$27,128		$35,582
Ratio of cash to debt(1)	7.9		7.8

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

Short-term Debt

Our short-term debt is related to Tecnonet, our Italian Network Integration subsidiary. Customer accounts receivables of Tecnonet have been pledged as collateral on the related borrowings. These borrowings were substantially reduced during the quarter ending September 30, 2013 as the Company becomes more strategic in its financing arrangements and supplier selection.

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

	September 30, 2013		December 31, 2012		Increase (decrease)
Lines of credit secured by accounts receivable		$3,935		$5,267		($1,332	)
Total short-term debt		$3,935		$5,267		($1,332	)

The decrease in short-term debt at September 30, 2013 includes payments of $8.5 million, partially offset by additional borrowings of $7.1 million and the impact of changes in foreign currency exchange rates.

Working Capital

The following table summarizes our working capital position (dollars in thousands). While overall working capital decreased $9.3 million, it was primarily due to improvements in accounts receivable collections, a reduction in inventory balances and to strategic decisions made to reduce the Company's reliance on short-term debt at Tecnonet.

	September 30, 2013		December 31, 2012
Current assets		$115,303		$119,591
Current liabilities	55,402		50,480
Working capital		$59,901		$69,111
Current ratio(1)	2.1		2.4

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

Off-Balance Sheet Arrangements

We do not have transactions, arrangements or other relationships with unconsolidated entities that are reasonably likely to affect our liquidity or capital resources. We have no special purpose or limited purpose entities that provided off-balance sheet financing, liquidity or market or credit risk support, engaged in leasing, hedging, research

35

and development services, or other relationships that expose us to liability that is not reflected on the face of the financials.

Contractual Obligations

During the quarter ended September 30, 2013, there were no material changes in our contractual obligations.

Internet Access to Our Financial Documents

We maintain a website at www.mrv.com. We make available, free of charge, either by direct access or hyperlink, our Annual Reports on Form10-K, Quarterly Reports on Form10-Q, Current Reports on Form8-K and amendments to those reports filed or furnished pursuant to Section13(a)or 15(d)of the Exchange Act as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Our reports filed with, or furnished to, the SEC are also available directly at the SEC's website at www.sec.gov.

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. As of September 30, 2013, we did not have any such derivative financial instruments outstanding.

Interest Rates.    Our investments and short-term borrowings expose us to interest rate fluctuations. Our cash and short-term investments are subject to limited interest rate risk, and are primarily maintained in money market funds and bank deposits. Our variable-rate short-term borrowings are also subject to limited interest rate risk because of their short-term maturities. Through certain foreign offices, and from time to time, we enter into interest rate swap contracts. As of September 30, 2013, we did not have any interest rate swap contracts outstanding. The economic purpose of entering into interest rate swap contracts is to protect our variable interest debt from significant interest rate fluctuations.

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

Through certain foreign offices, and from time to time, we enter into foreign exchange contracts in an effort to minimize the currency exchange risk related to accounts receivable or purchase commitments denominated in foreign currencies. These contracts cover periods commensurate with known or expected exposures, generally less than three months. As of September 30, 2013, we did not have any foreign exchange contracts outstanding.

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

When we translate the financial position and results of operations of subsidiaries with functional currencies other than the U.S. dollar, we recognize a translation gain or loss in other comprehensive income. Approximately 66.0% of our cost of sales and operating expenses are reported by these subsidiaries for the nine months ended September 30,2013 compared to 64.0% for the same period for 2012. These currencies were generally stronger against the U.S. dollar for the nine months ended September 30,2013 compared to the same period for 2012, so revenues and expenses

36

in these countries translated into more dollars than they would have in the first nine months of 2012. For the nine months ended September 30,2013, we had approximately:

• $47.7 million in cost of goods and operating expenses recorded in euros;

• $0.9 million in cost of goods and operating expenses recorded in Taiwan dollars.

Had rates of these various foreign currencies been 10% higher relative to the U.S. dollar during the nine months ended September 30, 2013, our costs would have increased to approximately:

• $52.5 million cost of goods and operating expenses recorded in euros;

• $1.0 million in cost of goods and operating expenses recorded in Taiwan dollars.

Fluctuations in currency exchange rates of foreign currencies have an impact on the U.S. dollar equivalent of such currencies included in cash and cash equivalents reported in our financial statements. The following table summarizes cash and cash equivalents held in various currencies and translated into U.S. dollars (in thousands).

	September 30, 2013		December 31, 2012
U.S. dollars		$28,163		$37,620
Euros	1,513		1,008
Taiwan dollars	17		51
Israeli new shekels	1,015		1,631
Other	111		299
Total cash and cash equivalents		$30,819		$40,609

Macro-economic uncertainties. We believe that the past few years of sustained softness in the global economy has affected our revenues and operating results, particularly in the Italian market.  When economic uncertainties increase, our customers often take a more cautious approach in their capital expenditures, resulting in order delays, slowing deployments, and lengthening sales cycles. This may lead to increased competition for projects and price pressures resulting in lower gross margins. Although we are starting to see an improvement in market conditions in the latter part of 2013, such market opportunities and dynamics are in their early stages, and it remains uncertain as to their current and long term effect on our business. Despite these economic uncertainties, we believe that our customers need to continue investing in their networks to meet the growth in consumer and enterprise use of high-bandwidth communications services.  We believe in our longer term market opportunities, but we are uncertain how long the downturn in economic conditions will continue and how our customers will interpret and react to market conditions.

Valuation and qualifying accounts. 

Accounts Receivable Reserve	Nine months ended
	September 30, 2013
Balance at beginning of period		$1,733
Charged to expense	323
Write-offs	(4		)
Foreign currency translation adjustment	20
Balance at end of period		$2,072

37

Product Warranty Reserve	Nine months ended
	September 30, 2013
Beginning balance		$1,006
Cost of warranty claims	(180		)
Accruals for product warranties	36
Foreign currency translation adjustment	—
Total		$862

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) or Rule 15d-15(e) of the Exchange Act) pursuant to the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report on Form 10-Q, the Company's disclosure controls and procedures were effective.

Changes in Internal Controls

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. During this fiscal quarter, we implemented a new enterprise-wide business software. As such, management has updated its processes, control documentation, and is testing controls to determine if the new controls are designed appropriately and operate as management has intended.

38

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

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

In connection with the Company's past stock option grant practices, MRV and certain of its former directors and officers have been subjected to a number of stockholder lawsuits. In June 2008, the Company announced that our Board of Directors, based on information provided by management, and in consultation with management, concluded that the financial statements and the related reports of our independent public accountants should not be relied upon due to the Company's intention to restate its financial results from 2002 through 2008 to correct its accounting for option grants and other issues and a restatement of the Company's financial statements was filed in its Annual Report on Form 10-K for the year ended December 31, 2008 in October 2009.

From June to August 2008, five purported stockholder derivative and securities class action lawsuits were filed in the U.S. District Court in the Central District of California and one derivative lawsuit was filed in the Superior Court of the State of California against the Company and certain of our former officers and directors. The five lawsuits filed in the Central District of California were consolidated. Claims were asserted under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 10b-5 promulgated thereunder. In November 2010, the judge overseeing the securities class action lawsuits gave final approval to a stipulated $10 million settlement agreement, which was covered by our director and officer insurance policies. The federal and state derivative lawsuits were not settled and continued to be litigated.

As of January 4, 2013, all pending litigation in the federal and state derivative actions was stayed by agreement of the parties pending final Federal Court approval of a settlement between derivative plaintiffs, individual defendants and the Company. On April 8, 2013 the Federal Court preliminarily approved a Stipulation of Settlement (the "Settlement Stipulation"), which includes, among other things, (a) a release of all claims relating to the derivative lawsuits for the Company, the individual defendants and the plaintiffs; (b) a provision that $2.5 million in cash be paid to the Company by the Company's insurance carriers; (c) a payment of attorney's fees to plaintiffs' counsel of up to $500,000 in cash and 250,000five-year term warrants to purchase the Company's Common Stock at a strike price equal to the closing price of the Company's Common Stock on the day the Court's judgment approving the settlement becomes final (as defined in the Settlement Stipulation); and (d) continued payment by the Company of applicable reasonable attorneys' fees for the individual defendants. On June 6, 2013, the Federal Court granted final approval of the Settlement and on June 13, 2013 entered Judgment dismissing the federal derivative action with prejudice. On June 24, 2013, the State Court entered a dismissal with prejudice of the state derivative action. The Company is now required to undertake certain corporate governance reform actions within 120 days, many of which have already been implemented.

A majority of the costs related to the Company's and defendants' defense of these actions was paid by the Company's insurance carriers under its director and officer insurance policies, including the securities class action settlement. Insurance proceeds paid to the Company upon settlement of the derivative litigation were $1.0 million. However, MRV has paid and accrued $1.9 million in payment for services of defense counsel and other parties through September 30, 2013 above the insured amount. We have agreed to pay reasonable attorney fees and expenses for the individual defendants in the Stipulation, and will continue to incur our own legal expenses until this matter is finally resolved and non-appealable. Any such future obligations are not determinable at this time.

From time to time, MRV has received notices from third parties alleging possible infringement of patents with respect to product features or manufacturing processes. Management believes such notices are common in the communications industry because of the large number of patents that have been filed on these subjects. The Company's policy is to discuss these notices with the parties in an effort to demonstrate that MRV's products and/or processes do not violate any patents. The Company has been involved in such discussions with Alcatel-Lucent SA, Apcon, Inc., Finisar Corporation, International Business Machines, Mediacom Broadband LLC, Ortel Communications, Ltd., Nortel Networks Corporation, Rockwell Automation, Inc. and The Lemelson Foundation in the past.

39

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

Item 1A. Risk Factors

We may experience difficulties implementing our new enterprise-wide business software.

We are implementing a new enterprise-wide business software (“ERP”) to improve our operational

efficiency. The ERP is designed to accurately maintain our financial reporting data and provide information to our management team important to the operation of our business. Our ERP will require, the investment of significant human and financial resources. The implementation of this new ERP software involves numerous risks, including disruption to our normal accounting procedures and internal control over financial reporting, inaccuracies in the conversion of electronic data, difficulties integrating the systems and processes, additional costs to continue to refine the software's functionality, and disruption of our financial reporting process. We may not be able to successfully implement the ERP without experiencing significant delays, increased costs, or other difficulties. Any significant disruption or deficiency in the design or implementation of the ERP could adversely affect our business.

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 2012 Form 10-K.

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

Issuer Purchases of Equity Securities

The following table sets forth information regarding our repurchase of our Common Stock during the quarter ending September 30, 2013. These repurchases were pursuant to two repurchase plans. The first repurchase plan was for up to $10 million of the Company's Common Stock approved by our Board of Directors and announced by the Company in December 2012, and terminated in August, 2013. In August 2013, our Board of Directors approved a replacement repurchase plan on substantially the same terms for up to $7,013,838 of the Company's Common Stock. This repurchase plan is scheduled to expire on May 14, 2014.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Maximum Amount Remaining for Purchase Under the Repurchase Plan
July 1, 2013 to July 31, 2013	30,600		$9.19		$7,925,690
August 1, 2013 to August 31, 2013	88,161		$10.07		$7,037,908
September 1, 2013 to September 30, 2013	12,916		$10.00		$6,908,748

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

40

Item 5  - Other Information

Amendment to Bylaws

On November 8, 2013, the Board of MRV Communications, Inc. unanimously approved an amendment to the Company’s Bylaws. The amendment, which provides that the number of directors of the Company shall not be less than three (3), became effective November 8, 2013.

Item 6. Exhibits

(a)    Exhibits

No.	Description
3.1	Bylaws of MRV Communications, Inc., as amended through November 8, 2013
31.1	Certification of the Principal Executive Officer required by Rule 13a-14(a) of the Exchange Act (filed herewith)
31.2	Certification of the Principal Financial Officer required by Rule 13a-14(a) of the Exchange Act (filed herewith)
32.1	Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith)
32.2	Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith)
101.INS	XBRL Instance Document (filed herewith)
101.SCH	XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL	XBRL Taxonomy Calculation Linkbase Document (filed herewith)
101.LAB	XBRL Taxonomy Label Linkbase Document (filed herewith)
101.PRE	XBRL Taxonomy Presentation Linkbase Document (filed herewith)
101.DEF	XBRL Taxonomy Extension Definition Document (filed herewith)

41

SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on November 12, 2013.

MRV COMMUNICATIONS, INC.

By: /s/ David S. Stehlin

David S. Stehlin

Chief Executive Officer

Principal Executive Officer

By: /s/ Stephen A. Garcia

Stephen A. Garcia

Chief Financial Officer

Principal Financial Officer

42