UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2007

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act for the transition period from                      to                     

Commission File Number 001-11174

MRV COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction
incorporation or organization) 06-1340090
(I.R.S. Employer
Identification No.)

20415 Nordhoff Street, Chatsworth, CA 91311
(Address of principal executive offices, Zip Code)

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

     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 þ     No o

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

Large accelerated filer o                    Accelerated filer þ                    Non-accelerated filer o

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

     As of November 2, 2007, there were 158,246,258 shares of common stock, $.0017 par value per share, outstanding.

MRV Communications, Inc.

Quarterly Report on Form 10-Q

For the Period Ended September 30, 2007

Table of Contents

		Page
		Number
PART I     Financial Information
Item 1.	Financial Statements:
	Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2007 and 2006		3
	Condensed Consolidated Balance Sheets as of September 30, 2007 (unaudited) and December 31, 2006		4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2007 and 2006		5
	Notes to Unaudited Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		48
Item 4.	Controls and Procedures		49
PART II     Other Information
Item 1A.	Risk Factors		51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		62
Item 6.	Exhibits		63
	Signatures		64

     As used in this Report, “we”, “us,” “our,” “MRV” or the “Company” refer to MRV Communications, Inc. and its consolidated subsidiaries and “Fiberxon” refers to Fiberxon, Inc. our wholly-owned subsidiary that we acquired on July 1, 2007.

2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MRV Communications, Inc.

Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
	(Unaudited)
Revenue	$	115,700		$	89,616		$	307,341		$	253,843
Cost of goods sold		85,345			60,962			218,771			172,621
Gross profit		30,355			28,654			88,570			81,222
Operating costs and expenses:
Product development and engineering		9,314			7,331			23,466			20,983
Selling, general and administrative		25,759			20,991			72,533			63,602
Amortization of intangibles		806			—			806			—
Goodwill impairment		—			—			—			52
Total operating costs and expenses		35,879			28,322			96,805			84,637
Operating income (loss)		(5,524	)		332			(8,235	)		(3,415	)
Interest expense		(1,075	)		(819	)		(3,091	)		(2,608	)
Cost of debt conversion		(4,899	)		—			(4,899	)		—
Other income, net		201			1,646			2,843			3,312
Income (loss) before provision for income taxes		(11,297	)		1,159			(13,382	)		(2,711	)
Provision for income taxes		1,274			943			3,865			3,397
Net income (loss)	$	(12,571	)	$	216		$	(17,247	)	$	(6,108	)
Income (loss) per share:
Basic	$	(0.08	)	$	0.00		$	(0.13	)	$	(0.05	)
Diluted	$	(0.08	)	$	0.00		$	(0.13	)	$	(0.05	)
Weighted average number of shares:
Basic		151,183			125,202			134,411			119,394
Diluted		151,183			126,365			134,411			119,394

Note: Fiberxon’s results of operations for the three months ended September 30, 2007 are included in MRV’s consolidated financial statements subsequent to the July 1, 2007 acquisition date.

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

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MRV Communications, Inc.

Condensed Consolidated Balance Sheets
(In thousands, except par values)

	September 30,			December 31,
	2007			2006
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	69,103		$	91,722
Short-term marketable securities		7,736			25,864
Time deposits		7,949			821
Accounts receivable, net		116,231			95,244
Inventories		85,539			61,361
Deferred income taxes		895			895
Other current assets		19,528			13,607
Total current assets		306,981			289,514
Property and equipment, net		24,613			14,172
Goodwill		137,452			36,348
Intangibles		13,257			176
Long-term marketable securities		1,426			—
Deferred income taxes		1,460			1,460
Other assets		4,581			4,552
	$	489,770		$	346,222
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	61,549		$	47,384
Accrued liabilities		37,611			29,704
Short-term obligations		34,651			26,289
Deferred consideration payable		30,656			—
Deferred revenue		7,672			7,624
Deferred tax liability — short term		1,124			—
Other current liabilities		7,440			5,926
Total current liabilities		180,703			116,927
Convertible notes		—			23,000
Deferred tax liability — long term		3,617			—
Other long-term liabilities		7,459			7,295
Minority interest		5,191			5,248
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value:
Authorized — 1,000 shares; no shares issued or outstanding		—			—
Common stock, $0.0017 par value:
Authorized — 320,000 shares
Issued — 158,236 shares in 2007, 126,860 shares in 2006
Outstanding — 156,885 shares in 2007 and 125,507 shares in 2006		267			213
Additional paid-in capital		1,343,667			1,231,941
Accumulated deficit		(1,054,171	)		(1,036,924	)
Treasury stock — 1,352 shares in 2007 and 2006		(1,352	)		(1,352	)
Accumulated other comprehensive income (loss)		4,389			(126	)
Total stockholders’ equity		292,800			193,752
	$	489,770		$	346,222

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

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MRV Communications, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)

For the nine months ended September 30:	2007			2006
Cash flows from operating activities:
Net loss	$	(17,247	)	$	(6,108	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and other noncash items		4,884			4,064
Share-based compensation expense		2,874			2,476
Provision for doubtful accounts		316			582
Gain on disposition of property and equipment		(41	)		(80	)
Non-cash loss on debt conversion		4,899			—
Gain on sale of equity method investment		—			(50	)
Minority interests’ share of income		(57	)		42
Impairment of goodwill		—			52
Changes in operating assets and liabilities:
Time deposits		(4,825	)		704
Accounts receivable		3,050			9,362
Inventories		(3,832	)		(26,387	)
Other assets		1,758			(3,232	)
Accounts payable		(7,942	)		5,307
Accrued liabilities		(1,741	)		(174	)
Deferred revenue		(247	)		668
Other current liabilities		(3,073	)		853
Net cash used in operating activities		(21,224	)		(11,921	)
Cash flows from investing activities:
Purchases of property and equipment		(5,560	)		(3,891	)
Proceeds from sale of property and equipment		91			100
Proceeds from sale of equity method investment		—			114
Cash paid to purchase Fiberxon, net of cash acquired		(18,010	)		—
Proceeds from sale or (purchase) of investments, net		16,694			(34,809	)
Purchase of minority interest		—			(50	)
Net cash used in investing activities		(6,785	)		(38,536	)
Cash flows from financing activities:
Proceeds from issuance of common stock		1,913			71,810
Borrowings on short-term obligations		69,002			78,475
Payments on short-term obligations		(66,227	)		(87,346	)
Borrowings on long-term obligations		148			—
Payments on long-term obligations		(237	)		(234	)
Other long-term liabilities		(241	)		609
Net cash provided by financing activities		4,358			63,314
Effect of exchange rate changes on cash and cash equivalents		1,032			336
Net increase (decrease) in cash and cash equivalents		(22,619	)		13,193
Cash and cash equivalents, beginning of period		91,722			67,984
Cash and cash equivalents, end of period	$	69,103		$	81,177

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

5

MRV Communications, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)

For the nine months ended September 30:	2007		2006
Supplemental cash flow information:
Cash paid during the period for interest	$	3,168	$	2,372
Cash paid during the period for taxes	$	4,656	$	1,955
Non-cash transactions:
Issuance of common stock for conversion of debt to equity	$	28,025	$	—
Issuance of common stock and stock options in connection with acquisition of Fiberxon	$	78,967	$	—

The following sets forth the changes in assets and liabilities resulting from the purchase price allocation in connection with the acquisition of Fiberxon (see Note 2), for which adjustment was made in the Condensed Consolidated Statements of Cash Flows:

Cash	$	5,558
Time Deposits		2,302
Accounts Receivable		19,410
Inventories		17,896
Other current assets		7,053
Fixed Assets		9,033
Goodwill		99,611
Intangible assets		13,900
Short-term debt obligations		(3,905	)
Accounts payable		(19,486	)
Accrued liabilities		(7,861	)
Other liabilities		(8,590	)
Total Purchase Price	$	134,921

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

6

MRV Communications, Inc.

Notes To Condensed Consolidated Financial Statements

1. Basis of Presentation

     We prepared the accompanying unaudited condensed consolidated financial statements of MRV Communications, Inc. (MRV) in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial statements, and the rules and regulations of the U.S. Securities and Exchange Commission for interim financial statements. These financial statements and notes should be read in conjunction with the financial statements and related notes included in MRV’s annual report on Form 10-K for the year ended December 31, 2006.

     In our opinion, these financial statements contain all normal and recurring adjustments necessary to present fairly the financial condition of MRV Communications, Inc. as of September 30, 2007, and the results of its operations for the three and nine months ended September 30, 2007 and cash flows for the nine months ended September 30, 2007.

     Operating results for interim periods are not necessarily indicative of operating results for the full year. Certain prior year amounts have been reclassified to conform to the current year presentation.

2. Acquisition

     On July 1, 2007, MRV acquired Fiberxon, Inc. (“Fiberxon”), a privately-held Delaware corporation. Fiberxon develops and manufactures modular optical link interfaces for telecommunication systems and networks, with principal manufacturing operations in China. We believe that the acquisition of Fiberxon adds an established, vertically integrated manufacturing, sales and distribution model in China and strengthens MRV’s optical component groups positioning in Asia-Pacific, Europe and North America. MRV announced its intention to contribute the capital stock of Fiberxon to LuminentOIC, Inc. (“Luminent”), a wholly-owned subsidiary of MRV, or otherwise combine Fiberxon’s business with that of Luminent. In exchange for the outstanding capital stock of Fiberxon, MRV agreed to pay consideration composed of (i) approximately $17.7 million in cash, (ii) approximately 18.4 million shares of MRV’s common stock (excluding 2.8 million shares of MRV’s common stock underlying the assumption of Fiberxon outstanding stock options), and (iii) an obligation to pay an additional amount of approximately $31.5 million in cash or shares of MRV’s common stock, or a combination thereof, if Luminent does not complete an initial public offering (an “IPO”) of its common stock within 18 months after MRV receives Fiberxon’s audited consolidated financial statements for the three years ended December 31, 2006 (“Financials Receipt Date”) or the third trading day after Luminent’s IPO. The latter component of the purchase consideration may amount to more than $31.5 million if Luminent successfully completes an IPO within 18 months of the Financials Receipt Date. In such event and in lieu of $31.5 million, MRV has agreed to pay an amount equal to 9.0% of the product obtained by multiplying (x) the price per share to the public in the Luminent IPO, less the discount provided to the underwriters, by (y) the total number of shares of Luminent Common Stock outstanding immediately prior to the effectiveness of the agreement between Luminent and the underwriters of the Luminent IPO.

7

     Prior to closing, an amendment to the Agreement and Plan of Merger between MRV and Fiberxon was executed, which amended certain terms. The amendment 1) removed the condition for Fiberxon to deliver audited consolidated financial statements prior to closing, 2) restricted the transferability of the MRV shares issued to the Fiberxon stockholders until the earlier of one year from the closing date or three trading days after the Financials Receipt Date, 3) extended the duration of the related set-off period during which MRV may exercise its rights of set-off to the earlier of 18 months from the Financials Receipt Date or the third trading day after Luminent’s IPO, 4) reached agreement to share equally the third-party, out-of-pocket fees and expenses associated with the preparation and delivery of Fiberxon’s audited financial statements to MRV, and 5) established an intended closing and effective date of July 1, 2007. In regards to the set-off rights, up to $13 million of the deferred compensation payment has been made available for indemnification purposes relating to certain damages pertaining to circumstances existing at the effective July 1, 2007 date. Up to $5 million of the deferred compensation payment has been made available for indemnification purposes relating to certain damages incurred pertaining to certain circumstances arising during the set-off period. The set-off period ends on the earlier of 1) February 28, 2008 if the Luminent IPO has occurred prior to that date, 2) the date of the Luminent IPO closing if such date is after February 28, 2008 and prior to the IPO deadline of March 28, 2009, or 3) the date of the IPO deadline if the Luminent IPO has not occurred as of that date.

     As a result of obligations MRV agreed to undertake in connection with its acquisition of Fiberxon, MRV obtained an agreement to waive various covenants with respect to the 2003 Convertible Notes. The agreement waived the covenant restricting MRV’s ability to incur any indebtedness in excess of $17.0 million plus obligations arising from accounts receivable financing transactions with recourse through MRV’s foreign offices, in the ordinary course of business and consistent with past practices. See Note 3 for further discussion of the Convertible Notes.

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

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

Cash	$	17,651
MRV common stock issued		72,961
MRV stock options exchanged for Fiberxon stock options		7,604
Less: fair value of unvested MRV stock options exchanged for Fiberxon stock options		(1,598	)
Bonus payment to close		3,000
Deferred consideration		31,500
Less: reconstruction cost		(844	)
Legal, professional and banker’s fees related to acquisition cost		4,647
Total	$	134,921

     MRV and Fiberxon’s stockholders agreed to share the costs incurred following the closing to reconstruct Fiberxon’s prior years’ financial statements, and compilation and audit services incurred to produce Fiberxon’s audited financial statements in the form and content required under SEC rules. MRV paid for all of the costs on behalf of both entities and deducted the $844,000 portion attributable to the Fiberxon stockholders’ responsibility, from the purchase price per the amended agreement on June 26, 2007.

8

     The allocation of the purchase price, the estimates and assumptions used therein are subject to change. MRV believes the methodology and estimates utilized to determine the net tangible assets and intangible assets are reasonable. The Company’s fair value for the Fiberxon purchase price allocation is preliminary due to the finalization of valuation analysis and may change during the allowable allocation period, which is up to one year from the acquisition date. (in thousands):

Net tangible assets acquired	$	21,410
Intangible assets acquired:
Developed technology		8,500
Customer backlog		600
Customer relationships		4,800
Goodwill		99,611
Total purchase price	$	134,921

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

Accounts receivable	$	19,410
Inventories		17,896
Property and equipment		9,033
Other assets and liabilities, net		(24,929	)
Net tangible assets acquired	$	21,410

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

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

Developed technology	Straight Line Method	5.5 years
Customer relationships	Accelerated Method	10 years
Customer backlog	Straight Line Method	6 months

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

     MRV recorded a $4.7 million deferred tax liability based on the guidance contained in Statements of Financial Accounting Standards No. 109 (SFAS 109) “Accounting for Income Taxes.” The deferred tax liability arose as a result of the $13.9 million value assigned to identifiable intangible assets.

9

     The following unaudited pro forma condensed combined financial data below is based on current and historical unaudited financial statements of MRV and Fiberxon after giving effect to MRV’s acquisition of Fiberxon and the assumptions and adjustments described in this note. For the nine months ended September 30, 2007, Fiberxon’s unaudited statement of operations data reflects its results of operations for the six months period ended June 30, 2007. Fiberxon’s results of operations for the three months ended September 30, 2007 are included in MRV’s consolidated financial statements subsequent to the July 1, 2007 acquisition date. The unaudited pro forma condensed combined financial data of MRV and Fiberxon reflect results of operations as though the companies had been combined as of the beginning of each of the periods presented:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
	(In thousands, except per share data)
Pro forma net revenue	$	115,700		$	120,307		$	346,805		$	284,269
Pro forma net loss	$	(12,571	)	$	(4,616	)	$	(17,392	)	$	(10,657	)
Pro forma net loss per share (basic)	$	(0.08	)	$	(0.03	)	$	(0.13	)	$	(0.08	)
Pro forma net loss per share (diluted)	$	(0.08	)	$	(0.03	)	$	(0.13	)	$	(0.08	)

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

3. Convertible Notes

     On August 10, 2007, MRV and Deutsche Bank AG London Branch executed a Securities Exchange Agreement exchanging $23 million in five year 5% convertible notes for 11,900,000 shares of MRV’s common stock. The convertible notes were originally issued on June 4, 2003 when MRV completed a sale to Deutsche Bank in a private placement pursuant to Regulation D under the Securities Act of 1933, as amended. The original 9,913,914 shares of MRV common stock issuable upon conversion were subsequently registered for resale by Deutsche Bank pursuant to a related Registration Rights Agreement dated June 1, 2003.

     As a result of executing the Securities Exchange Agreement, any of MRV’s obligations related to the convertible notes, Securities Purchase Agreement, and the Registration Rights Agreement terminated effective August 10, 2007.

     MRV recorded the $4.9 million cost of debt conversion in accordance with the guidance provided in Statements of Financial Accounting Standards No. 84: Induced Conversions of Convertible Debt (an amendment of APB Opinion No. 26) (SFAS No. 84). The $4.9 million cost of debt conversion arose as a result of issuing 1,986,086 additional shares of common stock in excess of the original Securities Purchase Agreement terms. Additional paid in capital of $28 million was recorded in the balance sheet and $48,000 in interest was recorded in interest expense for the three months ending September 30, 2007.

10

4. Share-Based Compensation

     MRV records share-based compensation expense using the estimated grant date fair value method of accounting in accordance with the provisions of SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”.) MRV recorded share-based compensation for the three and nine month periods ended September 30, 2007 and 2006 as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Cost of goods sold	$	111	$	83	$	276	$	231
Product development and engineering		227		190		598		579
Selling, general and administrative		893		589		2,000		1,666
Total share-based compensation expense (1)	$	1,231	$	862	$	2,874	$	2,476

(1) No income tax benefits relating to share-based compensation were recognized for the periods presented.

     As of September 30, 2007, the total unrecorded deferred share-based compensation balance for unvested shares, net of expected forfeitures, was $7.2 million. There were no significant capitalized share-based compensation costs at September 30, 2007 and 2006.

5. Earnings (Loss) Per Share and Stockholders’ Equity

     Basic earnings (loss) per share was computed using the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share was computed using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of employee stock options and warrants. Diluted shares outstanding include the dilutive effect of in-the-money options, calculated based on the average share price for each period using the treasury stock method.

Anti-dilutive outstanding stock options and warrants were excluded in the computation of diluted loss per share for the three and nine months ended September 30, 2007 and the three and nine months ended September 30, 2006.

Stockholders’ Equity

     In March 2006, MRV completed a private placement of approximately 19.9 million shares of its common stock at $3.75 per share for gross proceeds of approximately $74.5 million with a group of institutional investors. The net proceeds to MRV were approximately $69.9 million. MRV intends to use the net proceeds for further acquisitions, working capital, general corporate purposes and in its efforts to support its recent growth in revenues. MRV may also use a portion of the net proceeds, currently intended for general corporate purposes, to acquire or invest in technologies, products or services that complement its business.

6. Segment Reporting and Geographical Information

     MRV operates its business based on three segments: the networking group, the optical components group and the development stage enterprise group. The networking group designs, manufactures and distributes optical networking solutions and Internet infrastructure products. The optical components group designs, manufactures and distributes optical components and optical subsystems. The development stage enterprise group develops optical components, subsystems and networks and products for the infrastructure of the Internet.

11

     The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in MRV’s annual report on Form 10-K for the year ended December 31, 2006. MRV evaluates segment performance based on revenues and operating expenses of each segment.

     Business segment revenues were as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Networking group	$	72,449		$	68,524		$	216,729		$	190,282
Optical components group		44,300			23,187			93,723			67,221
Development stage enterprise group		—			—			—			—
		116,749			91,711			310,452			257,503
Intersegment adjustment		(1,049	)		(2,095	)		(3,111	)		(3,660	)
Total	$	115,700		$	89,616		$	307,341		$	253,843

     Revenues by groups of similar products were as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Network equipment	$	25,394	$	28,519	$	76,749	$	72,594
Network integration		47,055		40,001		139,980		117,681
Fiber optic components		43,251		21,096		90,612		63,568
Total	$	115,700	$	89,616	$	307,341	$	253,843

     Network equipment revenue primarily consists of MRV’s internally developed products, such as Metro Ethernet equipment, optical transport equipment, out-of-band network equipment, defense and aerospace network applications, 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. Fiber optic revenues primarily consists of fiber optic components used in FTTP applications, fiber optic transceivers, discrete lasers and LEDs that are not sold as part of MRV’s network equipment or network integration solutions.

     Year to date, the optical components group revenue includes $2.9 million of revenue that was previously deferred from sales to one customer. During the three months ended March 31, 2007, MRV determined that the conditions resulting in deferral had lapsed and recognized the revenue at that time. The amount is included in both the segment fiber optic components revenue above and the Americas revenue below.

12

     Revenues by geographical region were as follows (in thousands):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007			2006		2007		2006
Americas	$	36,328		$	28,277	$	96,402	$	84,776
Europe		69,111			52,787		187,441		154,170
Asia Pacific		10,278			8,445		23,431		14,685
Other regions		(17	)		107		67		212
Total	$	115,700		$	89,616	$	307,341	$	253,843

     Long-lived assets, consisting of net property and equipment, by geographical region were as follows (in thousands):

	September 30,		December 31,
	2007		2006
Americas	$	4,654	$	3,595
Europe		8,536		7,277
Asia Pacific		11,423		3,300
Total	$	24,613	$	14,172

     Business segment operating income (loss) was as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Networking group	$	(3,458	)	$	279		$	(7,175	)	$	(2,115	)
Optical components group		(1,641	)		455			104			(190	)
Development stage enterprise group		(379	)		(404	)		(1,097	)		(1,090	)
		(5,478	)		330			(8,168	)		(3,395	)
Intersegment adjustment		(46	)		2			(67	)		(20	)
Total	$	(5,524	)	$	332		$	(8,235	)	$	(3,415	)

     Income (loss) before provision for income taxes was as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Domestic	$	(12,119	)	$	(2,618	)	$	(22,871	)	$	(12,675	)
Foreign		822			3,777			9,489			9,964
Total	$	(11,297	)	$	1,159		$	(13,382	)	$	(2,711	)

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7. Cash and Cash Equivalents, Time Deposits and Marketable Securities

     Cash, Cash Equivalents and Time Deposits

          MRV considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. Investments with maturities of less than one year are considered short-term. Time deposits represent investments, which are restricted as to withdrawal or use based on maturity terms. Furthermore, MRV maintains cash balances and investments in what management believes are highly qualified financial institutions. At various times such amounts are in excess of federally insured limits.

     Marketable Securities

          MRV’s short-term and long-term marketable securities are held as available for sale with various maturity dates through 2008. The original cost of marketable securities approximated fair market value as of September 30, 2007 and December 31, 2006 and consisted of (in thousands):

	September 30,		December 31,
	2007		2006
U.S. government issues	$	4,203	$	8,131
State and local government issues		—		1,500
Corporate issues		4,959		14,751
Foreign government issues		—		1,482
Total	$	9,162	$	25,864

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8. 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 consisted of the following (in thousands):

	September 30,		December 31,
	2007		2006
Raw materials	$	24,825	$	10,848
Work-in process		15,249		17,811
Finished goods		45,465		32,702
Total	$	85,539	$	61,361

9. Goodwill and Other Intangibles

          Goodwill and intangible assets with indefinite lives are measured for impairment at least annually, or when events indicate that impairment may exist. Intangible assets that are determined to have definite lives are amortized over their useful lives.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Beginning balance	$	36,316	$	35,215	$	36,348	$	33,656
Purchase of Fiberxon		99,611		—		99,611		—
Purchase of minority interest		—		—		—		39
Impairment		—		—		—		(52	)
Foreign currency translation		1,525		36		1,493		1,608
Total	$	137,452	$	35,251	$	137,452	$	35,251

10. Restructuring Costs

          During the second quarter of 2001, Luminent’s management approved and implemented a restructuring plan in order to align operations and administration with operating results arising from the dramatic slowdown in the communications equipment industry generally and the optical components sector in particular. Major actions primarily involved the reduction of workforce totaling $1.3 million, the abandonment of certain assets, including closed and abandoned facilities, amounting to $12.8 million and the cancellation and termination of purchase commitments totaling $6.2 million. In the third quarter of 2007, MRV paid the remaining obligation totaling $45,000 for its fulfillment of a lease obligation on an abandoned facility.

11. Product Warranty and Indemnification

          Financial Accounting Standards Board (“FASB”) Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation it assumes under that guarantee.

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          The requirements of FIN 45 are applicable to MRV’s product warranty liability. As of September 30, 2007 and 2006, MRV’s product warranty liability recorded in accrued liabilities was $2.5 million and $2.0 million, respectively. The following table summarizes the activity related to the product warranty liability during the periods presented (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Beginning balance	$	2,273		$	2,101		$	2,291		$	2,328
Fiberxon beginning balance		81			—			81			—
Cost of warranty claims		165			(290	)		(478	)		(616	)
Accruals for product warranties		(58	)		220			567			319
Total	$	2,461		$	2,031		$	2,461		$	2,031

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

          In the normal course of business, MRV indemnifies other parties, including customers, lessors and parties to other transactions with MRV, with respect to certain matters. MRV has agreed to hold the other party harmless against losses arising from a breach of representation or covenants, or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, MRV has entered into indemnification agreements with its officers and directors, and MRV’s bylaws contain similar indemnification obligations to MRV’s agents.

          MRV cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these agreements. MRV has not incurred any significant expense as a result of agreements of this type. Accordingly, MRV has not accrued any amounts for such indemnification obligations. However, there can be no assurances that MRV will not incur expense under these indemnification provisions in the future.

12. Income Taxes

          MRV adopted FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” on January 1, 2007. FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.

          There was no effect of adopting FIN 48 on net deferred income tax assets, liabilities or the balance of accumulated deficit. Upon adoption, there was no liability for income taxes associated with uncertain tax positions at January 1, 2007. Interest and penalties related to income tax liabilities will be included in the income tax provision. There was no accrued interest or penalties relating to income tax liabilities as of January 1, 2007.

          With limited exception, MRV is no longer subject to U.S. federal audits by taxing authorities for years through 2003 and certain state, local and foreign income tax audits through 2001 to 2003. MRV does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

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13. Comprehensive Income (Loss)

          The components of comprehensive income (loss) were as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Net income (loss)	$	(12,571	)	$	216		$	(17,247	)	$	(6,108	)
Unrealized (gain) loss from available-for-sale securities		3			7			9			4
Foreign currency translation		3,980			(105	)		4,506			3,780
Total	$	(8,588	)	$	118		$	(12,732	)	$	(2,324	)

14. Derivative Financial Instruments

          MRV has entered into interest rate swap contracts through certain foreign offices. All derivatives are held for purposes other than trading, and no hedging relationship is designated for derivatives held. The fair values of the derivatives are recorded in other current or non-current assets or liabilities in the accompanying balance sheet. The fair value of these derivative instruments is based on quoted market prices and mark to market changes flow through current earnings. Cash flows from financial instruments are recognized in the statement of cash flows in a manner consistent with the underlying transactions.

          Interest Rate Swaps. A foreign office of MRV manages its debt portfolio by utilizing interest rate swaps to achieve an overall desired position of fixed and floating rates. As of September 30, 2007 the Company had one interest rate swap contract maturing in 2008. Unrealized income on these interest rate swaps for the three and nine months ended September 30, 2007 were $183,000 and $321,000, respectively, and unrealized income on these interest rate swaps for the three and nine months ended September 30, 2006 were $50,000 and $133,000, respectively, which have been recorded in interest expense. The fair value and the carrying value of these interest rate swaps were $411,000 and $804,000 at September 30, 2007 and December 31, 2006, respectively, and were recorded in other long-term liabilities.

15. Recently Issued Accounting Pronouncements

          In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for consistently measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for the Company beginning January 1, 2008, and the provisions of SFAS No. 157 will be applied prospectively as of that date. MRV is currently evaluating whether the adoption of this statement will have a material effect on its financial condition, its results of operations or liquidity.

          On February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in SFAS No. 159 are elective; however, the amendment to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” applies to all entities with available-for-sale and trading securities. The fair value option established by SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157, “Fair Value Measurements”. MRV is currently evaluating whether the adoption of this statement will have a material effect on its financial condition, its results of operations or liquidity.

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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 Condensed Consolidated Financial Statements and Notes thereto included in this Report. In addition to historical information, the discussion in this Report contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by these forward-looking statements as a consequence of factors, including but not limited to, those set forth in the following and elsewhere in this Report. We assume no obligation to update any of the forward-looking statements after the date of this Report.

Overview

     MRV designs, manufactures, sells, distributes, integrates and supports communication equipment and services, and optical components. We conduct our business along three principal segments: the networking group, the optical components group and the development stage enterprise group. Our networking group provides equipment used by commercial customers, governments and telecommunications service providers. Equipment sold includes switches, routers, physical layer products and console management products, specialized networking products for aerospace and defense, and other applications including voice and cellular communication. Our optical components group designs, manufactures and sells optical communications components, primarily through our wholly-owned subsidiary, Luminent, Inc. These components include fiber optic transceivers for metropolitan, access and Fiber-to-the-Premises, or FTTP, applications. Our development stage enterprise group seeks to develop new optical components, subsystems and networks and other products for the infrastructure of the Internet.

     We market and sell our products worldwide, through a variety of channels, including a dedicated direct sales force, manufacturers’ representatives, value-added-resellers, distributors and systems integrators. We have operations in Europe providing network system design, integration and distribution services that include products manufactured by third-party vendors, as well as our products. We believe such specialization enhances access to customers and allows us to penetrate targeted vertical and regional markets.

     We generally recognize product revenue, net of sales discounts and allowances, when persuasive evidence of an arrangement exists, delivery has occurred and all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection is considered probable. Products are generally shipped “FOB shipping point” with no right of return, except on rare occasions in which our accounting is as described below. Sales of services and system support are deferred and recognized ratably over the contract period. Sales with contingencies, such as right of return, rotation rights, conditional acceptance provisions and price protection are rare and have historically been insignificant. We do not recognize such sales until the contingencies have been satisfied or the contingent period has lapsed. We generally warrant our products against defects in materials and workmanship for one to two year periods. The estimated costs 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. Gross profit is equal to our revenues less our cost of goods sold. Our cost of goods sold includes materials, direct labor and overhead. Cost of inventory is determined by the first-in, first-out method. Our operating costs and expenses generally consist of product development and engineering costs, or R&D, selling, general and administrative costs, or SG&A, and other operating related costs and expenses.

     We evaluate segment performance based on the revenues and the operating expenses of each segment. We do not track segment data or evaluate segment performance on additional financial information. The networking and optical components groups account for virtually all of our overall revenue.

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     Our business involves reliance on foreign-based offices. We have divisions in, and utilize outside subcontractors and suppliers located in, Argentina, China, Denmark, Finland, France, Germany, Israel, Italy, Japan, Korea, the Netherlands, Norway, Russia, Singapore, South Africa, Switzerland, Sweden, Taiwan and the United Kingdom. For the three months ended September 30, 2007 and 2006, foreign revenues constituted 69% and 68%, respectively, of our revenues. For the nine months ended September 30, 2007 and 2006, foreign revenues constituted 69% and 67%, respectively, of our revenues. The majority of foreign sales are to customers located in Europe. The remaining foreign sales are primarily to customers in the Asia Pacific region.

Critical Accounting Policies

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

     We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, allowance for doubtful accounts, inventory reserves and income taxes. These policies require that we make estimates in the preparation of our financial statements as of a given date. However, since our business cycle is relatively short, actual results related to these estimates are generally known within the six-month period following the financial statement date. Thus, these policies generally affect only the timing of reported amounts across two to three quarters.

     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. We generally recognize product revenue, net of sales discounts and allowances, when persuasive evidence of an arrangement exists, delivery has occurred and all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection is considered probable. Products are generally shipped “FOB shipping point” with no right of return. Sales of services and system support are deferred and recognized ratably over the contract period. Sales with contingencies, such as right of return, rotation rights, conditional acceptance provisions and price protection are rare and insignificant and are deferred until the contingencies have been satisfied or the contingent period has lapsed. We generally warrant our products against defects in materials and workmanship for one to two year periods. The estimated costs 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. Our major revenue-generating products consist of fiber optic components, switches and routers, console management products, and physical layer products.

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

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     Inventory Reserves. We also make ongoing estimates relating to the market value of inventories, based upon our assumptions about future demand and market conditions. If we estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable market value. This reserve is recorded as a charge to cost of goods sold. If changes in market conditions result in reductions in the estimated market value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination and record a charge to cost of goods sold.

     Goodwill and Other Intangibles. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” we do not amortize goodwill and intangible assets with indefinite lives, but instead measure these assets for impairment at least annually, or when events indicate that impairment exists. Intangible assets with definite lives are amortized over their useful lives.

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

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

     Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109.” FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not reflect actual outcomes.

     Share-Based Compensation. Share-based compensation represents the cost related to share-based awards granted to employees. We measure share-based compensation cost at the grant date, based on the estimated fair value of the award and recognize the cost as an expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. We estimate the fair value of stock options and warrants using the Black-Scholes valuation model. The assumptions used in calculating the fair value of share-based payment awards represent our best estimates. Our estimates may be impacted by certain variables including, but not limited to, stock price volatility, employee stock option exercise behaviors, additional stock option grants, estimates of forfeitures, and related income tax impacts. The expense is recorded in cost of goods sold, product development and engineering and selling, general and administrative expense in the Statements of Operations based on the employees’ respective function.

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Currency Rate Fluctuations

     Changes in the relative values of non-U.S. currencies to the U.S. dollar affect our results. We conduct a significant portion of our business in foreign currencies, including the euro, the Swedish krona, the Swiss franc and the Taiwan dollar. At September 30, 2007, currency changes resulted in assets and liabilities denominated in local currencies being translated into more dollars than at year-end 2006. We incurred approximately 40% of our operating expenses in currencies other than the U.S. dollar for the nine months ended September 30, 2007. In general, these currencies were stronger against the U.S. dollar for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006, so revenues and expenses in these countries translated into more dollars than they would have in the prior period. Additional discussion of foreign currency risk and other market risks is included in “Item 3. — Quantitative and Qualitative Disclosures About Market Risk” of this Report.

Acquisition of Fiberxon, Inc.

     On July 1, 2007, MRV acquired Fiberxon, Inc. (“Fiberxon”), a privately-held Delaware corporation. Fiberxon develops and manufactures modular optical link interfaces for telecommunication systems and networks, with principal manufacturing operations in China. We believe that the acquisition of Fiberxon adds an established, vertically integrated manufacturing, sales and distribution model in China and strengthens MRV’s optical component groups positioning in Asia-Pacific, Europe and North America. MRV announced its intention to contribute the capital stock of Fiberxon to LuminentOIC, Inc. (“Luminent”), a wholly-owned subsidiary of MRV, or otherwise combine Fiberxon’s business with that of Luminent. In exchange for the outstanding capital stock of Fiberxon, MRV has agreed to pay consideration composed of (i) approximately $17.7 million in cash, (ii) approximately 18.4 million shares of MRV’s common stock (excluding 2.8 million shares of MRV’s common stock underlying the assumption of Fiberxon outstanding stock options, which will be on a basis that will preserve the intrinsic value of such options and otherwise be on the same terms as the Fiberxon options being assumed), and (iii) an obligation to pay an additional amount of approximately $31.5 million in cash or shares of MRV’s common stock, or a combination thereof, if Luminent does not complete an initial public offering (an “IPO”) of its common stock within 18 months after MRV receives Fiberxon’s audited consolidated financial statements for the three years ended December 31, 2006 (“Financials Receipt Date”) or the third trading day after Luminent’s IPO. The latter component of the purchase consideration may amount to more than $31.5 million if Luminent successfully completes an IPO within 18 months of the Financials Receipt Date in that, in such event and in lieu of $31.5 million, MRV has agreed to pay an amount equal to 9.0% of the product obtained by multiplying (x) the price per share to the public in the Luminent IPO, less the discount provided to the underwriters, by (y) the total number of shares of Luminent Common Stock outstanding immediately prior to the effectiveness of the agreement between Luminent and the underwriters of the Luminent IPO.

     Prior to closing, an amendment to the Agreement and Plan of Merger between MRV and Fiberxon was executed, which amended certain terms. The amendment 1) removed the condition for Fiberxon to deliver audited consolidated financial statements prior to closing, 2) restricted the transferability of the MRV shares issued to the Fiberxon stockholders until the earlier of one year from the closing date or three trading days after the Financials Receipt Date, 3) extended the duration of the related set-off period during which MRV may exercise its rights of set-off to the earlier of 18 months from the Financials Receipt Date or the third trading day after Luminent’s IPO, 4) share equally the third-party, out-of-pocket fees and expenses associated with the preparation and delivery of Fiberxon’s audited financial statements to MRV, and 5) established an intended closing and effective date of July 1, 2007. In regards to the set-off rights, up to $13 million of the deferred compensation payment has been made available for indemnification purposes relating to certain damages pertaining to circumstances existing at the effective July 1, 2007 date. Up to $5 million of the deferred compensation payment has been made available for indemnification purposes relating to certain damages incurred pertaining to certain circumstances arising during the set-off period. The set-off period ends on the earlier of 1) February 28, 2008 if the Luminent IPO has occurred prior to that date, 2) the date of the Luminent IPO closing if such date is after February 28, 2008 and prior to the IPO deadline of March 28, 2009, or 3) the date of the IPO deadline if the Luminent IPO has not occurred as of that date.

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     During the course of our negotiations with Fiberxon leading up to the execution of the Merger Agreement, and thereafter during our due diligence investigation of Fiberxon, we learned of allegations of financial and accounting irregularities that called into question the reliability of Fiberxon’s consolidated financial statements for its fiscal years ended December 31, 2004, 2005 and 2006 and raised serious concerns regarding Fiberxon’s financial and reporting processes. We have been advised that these irregularities led to the termination of Fiberxon’s Chief Executive Officer and Vice President of Finance (principal accounting officer) during the first half of 2007 and to the commencement of investigations by Fiberxon’s audit committee into the nature and extent of the irregularities and their effect on Fiberxon’s historical financial statements as well as those to be prepared for its fiscal year ended December 31, 2006. We further learned in June 2007 that the independent accountants engaged by Fiberxon in April 2007 to audit Fiberxon’s financial statements at and for each of the three years ended December 31, 2006 had reported to Fiberxon’s audit committee that in addition to irregularities identified and reported by Fiberxon’s audit committee, they had identified a number of serious issues and encountered significant difficulties in the performance of its audit that, in the view of Fiberxon’s auditors, called into question the commitment of Fiberxon’s management to maintain reliable financial reporting systems, including accounting books and records, in conformity with accounting principles generally accepted in the United States or the People’s Republic of China (PRC); to identify and ensure that Fiberxon complies with the laws and regulations applicable to its activities and to inform Fiberxon’s auditors of any known material violations of such laws or regulations; to adjust Fiberxon’s financial statements to correct material misstatements; and to make all financial records and related information available to its auditors. In the view of Fiberxon’s auditors, these matters also raised doubt on the ability of Fiberxon’s existing management to provide its auditors the written representations required under auditing standards generally accepted in the United States. Later in June 2007, we learned that reports of subsequent investigations received by Fiberxon’s auditors from Fiberxon’s audit committee had not, in the view of Fiberxon’s auditors, brought closure to the issues raised previously by Fiberxon’s auditors, had raised additional issues and that Fiberxon’s auditors had determined to suspend its audit.

     In light of this decision by Fiberxon’s auditors and faced with a defined end date of July 1, 2007 under the Amended Merger Agreement dated June 26, 2007 for completion of the mergers, we concluded that Fiberxon would not be able to deliver to us its audited financial statements by June 30, 2007 or within any reasonable extension of that date. We further concluded that Fiberxon could not deliver the same to us while controlled by its existing management, board of directors or stockholders. We weighed these conclusions against our view that despite Fiberxon’s difficulties with its financial and reporting processes, Fiberxon’s fundamental business is sound, its current operations robust, and its employees are committed and dedicated to its success. We also believe that Fiberxon’s location in the People’s Republic of China would provide us with missing elements to our business that we view as critical to achieving our goals for the development and success of our fiber optics components business. With the unanimous approval of our board of directors, we determined to complete the acquisition by amending the Merger Agreement to waive delivery by Fiberxon of its audited financial statements as a condition to the closing. We chose to take control of that process ourselves, provided that Fiberxon would agree to defer the practical realization of most of the consideration to be received by its stockholders from the Mergers until we received Fiberxon’s financial statements in the form and content required under the SEC rules and that Fiberxon’s stockholders would share the cost incurred following the closing to obtain them.

     As a result of the amendment, MRV and Fiberxon’s stockholders agreed to share the costs to reconstruct Fiberxon’s prior years’ financial statements, and compilation and audit services incurred to produce Fiberxon’s audited financial statements in the form and content required under SEC rules. MRV paid for all of the costs on behalf of both entities and deducted the $844,000 portion attributable to the Fiberxon stockholders’ responsibility, from the purchase price as per the amended agreement dated June 26, 2007.

     On October 1, 2007, MRV filed a Form 8-K/A with the SEC which included the audited consolidated balance sheets of Fiberxon as of December 31, 2005 and 2006, and the related consolidated statements of income and comprehensive income (loss), stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006.

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     As a result of the circumstances and issues concerning the allegations of Fiberxon’s historical financial and accounting irregularities, MRV added certain new management team members at Fiberxon. MRV also reviewed the controls and procedures in place, and as of September 30, 2007, we are not aware of any material weaknesses in Fiberxon’s internal control over financial reporting. As part of this assessment, MRV will be reviewing and conforming Fiberxon’s policies and procedures to world-wide standards established by MRV to maintain reliable accounting books and records, in conformity with accounting principles generally accepted in the United States and applicable local laws. MRV’s world-wide standards also require Fiberxon to inform its auditors of any known material violations of such laws or regulations, and to make all financial records and related information available to its auditors.

Statement of Operations Data as a Percentage of Revenues

     The following table sets forth, for the periods indicated, certain Statements of Operations data expressed as a percentage of revenues:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Revenue (1)		100	%		100	%		100	%		100	%
Networking group		63			76			71			75
Optical components group		38			26			30			26
Gross margin (2)		26			32			29			32
Networking group		30			35			32			36
Optical components group		19			21			20			20
Operating costs and expenses (2)		31			32			32			33
Networking group		35			34			35			37
Optical components group		23			19			20			20
Development stage enterprise group	NM			NM			NM			NM
Operating income (loss) (2)		(5	)		0			(3	)		(1	)
Networking group		(5	)		0			(3	)		(1	)
Optical components group		(4	)		2			0			0
Development stage enterprise group	NM			NM			NM			NM

NM — not meaningful
(1)	Revenue information by segment includes intersegment revenue, primarily reflecting sales of fiber optic components to the networking group. No revenues were generated by the development stage enterprise group for the periods presented.
(2)	Statements of Operations data express percentages as a percentage of revenue. Statements of Operations data by segment express percentages as a percentage of applicable segment revenue. No revenues or corresponding gross profit were generated by the development stage enterprise group in 2007 or 2006.

     The following management discussion and analysis refers to and analyzes our results of operations among three segments as defined by our management. These three segments are the networking group, optical components group and development stage enterprise group, which includes all start-up activities.

23

Three Months Ended September 30, 2007 (“2007”) Compared
To Three Months Ended September 30, 2006 (“2006”)

Revenue

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

												% Change
For the three months ended												Constant
September 30:	2007			2006			$ Change		% Change			Currency (2)
Networking group	$	72,449		$	68,524		$	3,925		6	%		—	%
Optical components group		44,300			23,187			21,113		91			92
Development stage enterprise group		—			—			—		—			—
		116,749			91,711			25,038		27			25
Adjustments (1)		(1,049	)		(2,095	)		1,046		(50	)	NM
Total	$	115,700		$	89,616		$	26,084		29	%		25	%

NM — not meaningful
(1)	Adjustments represent the elimination of intersegment revenue in order to reconcile to consolidated revenues.
(2)	Percentage information in constant currencies in the table above and in the text below excludes the effect of foreign currency translation on reported results. Constant currency results were calculated by translating the current year results at prior year average exchange rates.

24

     The following table sets forth, for the periods indicated, revenues by groups of similar products by geographical region (dollars in thousands):

For the three months ended September 30:	2007			2006		$ Change			% Change
Network equipment (1):
Americas	$	12,084		$	10,562	$	1,522			14	%
Europe		11,647			11,052		595			5
Asia Pacific		1,691			6,854		(5,163	)		(75	)
Other regions		(28	)		51		(79	)		(155	)
Total network equipment		25,394			28,519		(3,125	)		(11	)
Network integration (2):
Europe		47,055			40,001		7,054			18
Total network integration		47,055			40,001		7,054			18
Fiber optic components (3):
Americas		24,244			17,715		6,529			37
Europe		10,409			1,734		8,675			500
Asia Pacific		8,587			1,591		6,996			440
Other regions		11			56		(45	)		(80	)
Total fiber optic components		43,251			21,096		22,155			105
Total	$	115,700		$	89,616	$	26,084			29	%

(1)	Network equipment revenue primarily consists of MRV’s internally developed products, such as Metro Ethernet equipment, optical transport equipment, out-of-band network equipment, defense and aerospace network applications, the related service revenue and fiber optic components sold as part of the system solution.
(2)	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 the system solution.
(3)	Fiber optic components revenue primarily consists of fiber optic components, such as components for FTTP applications, fiber optic transceivers, discrete lasers and LEDs that are not sold as part of MRV’s network equipment or network integration solutions.

     Consolidated revenues for 2007 increased $26.1 million, or 29%, to $115.7 million from $89.6 million for 2006. Geographically, revenues in the Americas increased $8.1 million, or 29%, to $36.3 million for 2007 from $28.3 million for 2006, which was primarily the result of the Fiberxon acquisition and consolidation effective July 1, 2007. Revenues in Europe increased $16.3 million, or 31%, to $69.1 million for 2007 from $52.8 million in 2006, which was primarily a result of the Fiberxon acquisition and consolidation effective July 1, 2007. Revenues in Asia Pacific increased $1.8 million, or 21%, to $10.3 million for 2007 from $8.4 million for 2006, primarily because of the Fiberxon acquisition and consolidation effective July 1, 2007, which is offset by lower networking equipment revenues in Japan. Revenue would have been $3.6 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006.

     Networking Group. Our networking group includes two distinct groups of similar products and services: network equipment and network integration, which are described in the table above. Revenues, including intersegment revenues, generated from our networking group increased $3.9 million, or 6%, to $72.4 million for 2007 as compared to $68.5 million for 2006. External network equipment revenues decreased $3.1 million, or 11%, to $25.4 million for 2007 from $28.5 million for 2006, which was primarily the result of one time deal in Japan in 2006. External network integration revenues increased $7.1 million, or 18%, to $47.1 million for 2007 from $40.0 million for 2006, which was due primarily to increased revenue from our network integration and distribution activities throughout Europe and favorable foreign currency exchange rates. Revenue would have been $3.7 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006.

25

     Optical Components Group. Our optical components group designs, manufactures and sells fiber optic components, which are described in the table above and primarily consist of products manufactured by our wholly-owned subsidiaries, Luminent and Fiberxon. Revenues, including intersegment revenue, generated from our optical components group increased $21.1 million, or 91%, to $44.3 million for 2007 as compared to $23.2 million for 2006. Approximately 49% of optical components’ revenue related to shipments of optical components used by those customers deploying FTTP networks. FTTP networks use fiber optic cables, rather than copper cables, to deliver voice, video and high-speed data to customer premises. These networks can transmit voice, data and video signals at speeds and capacities far exceeding the traditional broadband services offered by telecommunication providers. FTTP deployment will allow communication providers to offer superior services at very competitive prices. Shipments of FTTP products for 2007 totaled approximately $21.6 million, compared to $15.2 million for 2006. Recent announcements suggest that FTTP deployments in North America made services available to approximately six million homes through 2006 and that continuing deployments are expected to make FTTP services available to an additional three million residences each year through the end of 2010; however, the number of actual residential homes subscribing to such services has been forecasted to reach 35% to 40% of the total deployments. We expect sales of FTTP products to continue to grow for 2007 and beyond. However, this forward-looking statement may not come to pass if the actual deployments do not meet the expectations of industry announcements, if the orders we expect to receive do not materialize, are delayed or cancelled or if we are unable to ship the products as required. Revenue would have been $111,000 higher in 2007 had foreign currency exchange rates remained the same as they were in 2006.

     Development Stage Enterprise Group. No revenues were generated by this group for 2007 and 2006.

Gross Profit

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

												% Change
For the three months ended												Constant
September 30:	2007			2006		$ Change			% Change			Currency (2)
Networking group	$	21,899		$	23,792	$	(1,893	)		(8	%)		(12	%)
Optical components group		8,470			4,860		3,610			74			75
Development stage enterprise group		—			—		—			—			—
		30,369			28,652		1,717			6			3
Adjustments (1)		(14	)		2		(16	)	NM			NM
Total	$	30,355		$	28,654	$	1,701			6	%		3	%

	NM — not meaningful
(1)	Adjustments represent the elimination of intersegment revenue in order to reconcile to consolidated gross profit.
(2)	Percentage information in constant currencies in the table above and in the text below excludes the effect of foreign currency translation on reported results. Constant currency results were calculated by translating the current year results at prior year average exchange rates.

     Consolidated gross profit increased $1.7 million, or 6%, to $30.4 million for 2007 from $28.7 million for 2006. Gross margin decreased to 26% for 2007, as compared to 32% for 2006. The decrease in gross margin was primarily the result of the impact of differences in the composition of the products we sold in each period within the networking group. This included an increase in the network integration revenue that typically carries lower gross margins than the Company average. The gross profit was negatively impacted by the factors described above that negatively impacted gross margin. Gross profit would have been $886,000 lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. Gross profit includes share-based compensation expense of $111,000 and $83,000 in 2007 and 2006, respectively.

26

     Networking Group. Gross profit for our networking group was $21.9 million for 2007 compared to $23.8 million for 2006, a decrease of $1.9 million. Gross margins decreased to 30% from 2007, as compared to 35% for 2006. The decrease in gross margins in 2007 was primarily the result of differences in the composition of the products we sold in each period. This included an increase in the network integration revenue that typically carries lower gross margins than the average for this segment. Gross profit would have been $899,000 lower and gross margins would have been 31% in 2007 had foreign currency exchange rates remained the same as they were in 2006. Gross profit includes share-based compensation expense of $25,000 and $24,000 in 2007 and 2006, respectively.

     Optical Components Group. Gross profit for 2007 was $8.5 million, compared to $4.9 million for 2006, an increase of $3.6 million. Our optical components group gross margin was 19% for 2007 as compared to 21% in 2006. Gross profit would have been $13,000 higher and gross margins would have been 19% in 2007 had foreign currency exchange rates remained the same as they were in 2006. Gross profit includes share-based compensation expense of $87,000 and $59,000 in 2007 and 2006, respectively.

     Development Stage Enterprise Group. As we had no sales by this group, no gross margins were generated by this group for 2007 and 2006.

Operating Costs and Expenses

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

										% Change
For the three months ended										Constant
September 30:	2007		2006		$ Change		% Change			Currency (1)
Networking group	$	25,357	$	23,513	$	1,844		8	%		5	%
Optical components group		10,111		4,405		5,706		130			130
Development stage enterprise group		411		404		7		2			2
Total	$	35,879	$	28,322	$	7,557		27	%		24	%

(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.

     Consolidated operating costs and expenses were $35.9 million, or 31% of revenues, for 2007, compared to $28.3 million, or 32% of revenues, for 2006. Operating costs and expenses increased $7.6 million in 2007 compared to 2006. The increase in our operating costs and expenses was largely the result of increases in labor and related costs, particularly from the additional investment in our North American sales organization in the networking group. Operating costs and expenses would have been $714,000 lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. Product development and engineering expenses included share-based compensation expense of $227,000 and $190,000 in 2007 and 2006, respectively. Selling, general and administrative expenses included share-based compensation expense of $893,000 and $589,000 in 2007 and 2006, respectively.

     Networking Group. Operating costs and expenses for 2007 were $25.4 million, or 35% of revenues, compared to $23.5 million, or 34% of revenues, for 2006. Operating costs and expenses increased $1.8 million, or 8%, in 2007 compared to 2006. The increase in operating costs and expenses was primarily the result of increases in labor and related costs, particularly from the additional investment in our North American sales organization. Operating costs and expenses would have been $717,000 lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. Product development and engineering expenses included share-based compensation expense of $117,000 and $114,000 in 2007 and 2006, respectively. Selling, general and administrative expenses included share-based compensation expense of $581,000 and $484,000 in 2007 and 2006, respectively.

27

     Optical Components Group. Operating costs and expenses for 2007 and 2006 were $10.1 million, or 23% of revenues for 2007 and $4.4 million or 19% of revenues for 2006. Operating costs and expenses increased as a percentage of revenue primarily as a result of the Fiberxon acquisition. The effect of currency fluctuations did not have a significant impact on the year-over-year change in our operating costs and expenses. Product development and engineering expenses included share-based compensation expense of $111,000 and $76,000 in 2007 and 2006, respectively. Selling, general and administrative expenses included share-based compensation expense of $311,000 and $105,000 in 2007 and 2006, respectively.

     Development Stage Enterprise Group. Operating costs and expenses for 2007 were $411,000 compared to $404,000 for 2006. Operating costs and expenses increased $7,000, or 2%, in 2007 compared to 2006. The increase in operating costs and expenses relates primarily to the increase in general and administrative costs.

Operating Income (Loss)

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

													% Change
For the three months ended													Constant
September 30:	2007			2006			$ Change			% Change			Currency (2)
Networking group	$	(3,458	)	$	279		$	(3,737	)		(1,339	)%		(1,404	)%
Optical components group		(1,641	)		455			(2,096	)		(461	)		(458	)
Development stage enterprise group		(379	)		(404	)		25			(6	)		(6	)
		(5,478	)		330			(5,808	)		(1,760	)		(1,812	)
Adjustments (1)		(46	)		2			(48	)	NM			NM
Total	$	(5,524	)	$	332		$	(5,856	)		(1,764	)%		(1,801	)%

	NM — not meaningful
(1)	Adjustments represent the elimination of intersegment revenue in order to reconcile to consolidated operating income (loss).
(2)	Percentage information in constant currencies in the table above and in the text below excludes the effect of foreign currency translation on reported results. Constant currency results were calculated by translating the current year results at prior year average exchange rates.

     We reported a consolidated operating loss of $5.5 million, or 5% of revenues, for 2007 compared to operating income of $332,000 or 0% of revenues, for 2006. The decline was primarily the result of one time deal in Japan in 2006. Operating loss would have been $172,000 higher in 2007 had foreign currency exchange rates remained the same as they were in 2006. Operating loss includes share-based compensation expense of $1,231,000 and $862,000 in 2007 and 2006, respectively.

     Networking Group. Our networking group reported an operating loss totaling $3.5 million for 2007, compared to operating income of $279,000 for 2006, a decrease of $3.7 million in 2007, when compared to 2006. The decline was largely the result of lower gross profit on the increase in revenue in 2007 compared to 2006 and increase in general and administration expenses in the network integration. This decline was negatively impacted by the decrease in gross margins resulting from differences in the composition of the products we sold in each period and the increases in labor costs, particularly from the additional investment in our North American sales organization. The composition of revenue included an increase in the network integration revenue that typically carries lower gross margins than the average for this segment. Operating loss would have been $182,000 higher in 2007 had foreign currency exchange rates remained the same as they were in 2006. Operating loss includes share-based compensation expense of $723,000 and $622,000 in 2007 and 2006, respectively.

28

     Optical Components Group. Our optical components group reported operating loss of $1.6 million, or 4% of revenues for 2007, compared to operating income of $455,000, or 2% of revenues, for 2006. Foreign currency exchange rates did not have a significant impact on operating loss in 2007.Operating loss includes share-based compensation expense of $509,000 and $240,000 in 2007 and 2006, respectively.

     Development Stage Enterprise Group. Our development stage enterprise group reported an operating loss of $379,000 for 2007 as compared to $404,000 for 2006. Our operating loss decreased $25,000, or 6%, in 2007 compared to 2006. The decrease in operating loss relates primarily to the decrease in product development and engineering costs.

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

     Interest expense was $1.1 million and $0.8 million for 2007 and 2006, respectively. The $4.9 million of debt conversion costs in 2007 was associated with exchanging our $23 million convertible notes into common stock. Other Income was $201,000 and $1.6 million for 2007 and 2006, respectively, a decrease of $1.4 million, primarily due to decreased cash and associated interest income.

Provision for Income Taxes

     The provision for income taxes for 2007 was $1.3 million as compared to $943,000 for 2006. Our income tax expense fluctuates based on the amount of income generated in the various jurisdictions where we conduct operations and pay income tax.

29

Nine months ended September 30, 2007 (“2007”) Compared
To Nine months ended September 30, 2006 (“2006”)

Revenue

     The following table sets forth certain revenue data from our Statements of Operations (dollars in thousands):

												% Change
For the nine months ended												Constant
September 30:	2007			2006			$ Change		% Change			Currency (2)
Networking group	$	216,729		$	190,282		$	26,447		14	%		8	%
Optical components group		93,723			67,221			26,502		39			12
Development stage enterprise group		—			—			—		—			—
		310,452			257,503			52,949		21			9
Adjustments (1)		(3,111	)		(3,660	)		549	NM			NM
Total	$	307,341		$	253,843		$	53,498		21	%		9	%

	NM — not meaningful
(1)	Adjustments represent the elimination of intersegment revenue in order to reconcile to consolidated revenues.
(2)	Percentage information in constant currencies in the table above and in the text below excludes the effect of foreign currency translation on reported results. Constant currency results were calculated by translating the current year results at prior year average exchange rates.

30

     The following table sets forth revenues by groups of similar products by geographical region (dollars in thousands):

For the nine months ended
September 30:	2007		2006		$ Change			% Change
Network equipment (1):
Americas	$	35,090	$	30,585	$	4,505			15	%
Europe		35,166		32,981		2,185			7
Asia Pacific		6,443		8,896		(2,453	)		(28	)
Other regions		50		132		(82	)		(62	)
Total network equipment		76,749		72,594		4,155			6
Network integration (2):
Europe		139,980		117,681		22,299			19
Total network integration		139,980		117,681		22,299			19
Fiber optic components (3):
Americas		61,312		54,191		7,121			13
Europe		12,295		3,508		8,787			250
Asia Pacific		16,988		5,789		11,199			193
Other regions		17		80		(63	)		(79	)
Total fiber optic components		90,612		63,568		27,044			43
Total	$	307,341	$	253,843	$	53,498			21	%

(1)	Network equipment revenue primarily consists of MRV’s internally developed products, such as Metro Ethernet equipment, optical transport equipment, out-of-band network equipment, defense and aerospace network applications, the related service revenue and fiber optic components sold as part of the system solution.
(2)	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 the system solution.
(3)	Fiber optic components revenue primarily consists of fiber optic components, such as components for FTTP applications, fiber optic transceivers, discrete lasers and LEDs that are not sold as part of MRV’s network equipment or network integration solutions.

     Consolidated revenues for 2007 increased $53.5 million, or 21%, to $307.3 million from $253.8 million for 2006. Geographically, revenues in the Americas increased $11.6 million, or 14%, to $96.4 million for 2007 from $84.8 million for 2006, which was largely because of the network equipment and fiber optic components growth. The growth in fiber optic components revenues in North America includes $2.9 million of optical components group revenue in the first quarter of 2007 that was previously deferred from sales of products to one customer in periods prior to those periods as a result of our evaluation of the deferred revenue in the first quarter of 2007, we determined that the circumstances that caused us to defer such revenue lapsed and thus concluded that revenue recognition was appropriate in the first quarter of 2007. Revenues in Europe increased $33.3 million, or 22%, to $187.4 million for 2007 from $154.2 million in 2006, which was primarily a result of increased revenue from our network integration and distribution activities throughout Europe and favorable foreign currency exchange rates for those activities and the acquisition of Fiberxon that increased the fiber optic components revenue in Europe. Revenues in Asia Pacific increased $8.7 million, or 60%, to $23.4 million for 2007 from $14.7 million for 2006, primarily because of the acquisition of Fiberxon. Revenue would have been $30.1 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006.

31

     Networking Group. Our networking group includes two distinct groups of similar products and services: network equipment and network integration, which are described in the table above. Revenues, including intersegment revenues, generated from our networking group increased $26.4 million, or 14%, to $216.7 million for 2007 as compared to $190.3 million for 2006. External network equipment revenues increased $4.2 million, or 6%, to $76.7 million for 2007 from $72.6 million for 2006, which was primarily the result of the continued success with MRV’s optical transport products and Metro Ethernet. External network integration revenues increased $22.3 million, or 19%, to $140 million for 2007 from $117.7 million for 2006, which was due primarily to increased revenue from our network integration and distribution activities throughout Europe and favorable foreign currency exchange rates. Revenue would have been $11.3 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006.

     Optical Components Group. Our optical components group designs, manufactures and sells fiber optic components, which are described in the table above and primarily consist of products manufactured by our wholly-owned subsidiaries, Luminent, Inc. and Fiberxon Inc. Revenues, including intersegment revenue, generated from our optical components group increased $26.5 million, or 39%, to $93.7 million for 2007 as compared to $67.2 million for 2006. For the first quarter of 2007, our optical components group revenue includes $2.9 million of revenue that was previously deferred from sales of products to one customer in periods prior to those periods presented herein. As a result of our evaluation of the deferred revenue during the first quarter, we determined that the circumstances that caused us to defer such revenue lapsed and thus concluded that revenue recognition was appropriate in the first quarter of 2007. The products underlying this recognized deferred revenue are not a meaningful part of our ongoing business and the customer is not an active customer of the optical components group. Approximately 60% of optical components’ revenue related to shipments of optical components used by those customers deploying FTTP networks. Shipments of FTTP products for 2007 totaled approximately $56.5 million, compared to $44.5 million for 2006. Revenue would have been $18.8 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006.

     Development Stage Enterprise Group. No revenues were generated by this group for 2007 and 2006.

Gross Profit

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

													% Change
For the nine months ended													Constant
September 30:	2007			2006			$ Change			% Change			Currency (2)
Networking group	$	69,438		$	67,722		$	1,716			3	%		(2	)%
Optical components group		19,167			13,520			5,647			42			10
Development stage enterprise group		—			—			—			—			—
		88,605			81,242			7,363			9			—
Adjustments (1)		(35	)		(20	)		(15	)	NM			NM
Total	$	88,570		$	81,222		$	7,348			9	%		—	%

	NM — not meaningful
(1)	Adjustments represent the elimination of intersegment revenue in order to reconcile to consolidated gross profit.
(2)	Percentage information in constant currencies in the table above and in the text below excludes the effect of foreign currency translation on reported results. Constant currency results were calculated by translating the current year results at prior year average exchange rates.

32

     Consolidated gross profit increased $7.4 million, or 9%, to $88.6 million for 2007 from $81.2 million for 2006. Our gross margin decreased to 29% for 2007, as compared to 32% for 2006. The decrease in gross margin was primarily the result of the impact of differences in the composition of the products we sold in each period. This included an increase in the network integration revenue that typically carries lower gross margins than the Company average. The gross profit was negatively impacted by the factors described above that negatively impacted gross margin. As discussed above, in the first quarter of 2007, our optical components group recognized approximately $2.9 million in revenue that was previously deferred for which the costs associated with that revenue were recognized in periods prior to those periods presented herein. The gross profit and resulting gross margin were positively affected by recognizing this deferred revenue in the amount of $2.9 million during the first quarter of 2007. Gross profit would have been $7.2 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. Gross profit includes share-based compensation expense of $276,000 and $231,000 in 2007 and 2006, respectively.

     Networking Group. Gross profit for our networking group was $69.4 million for 2007 compared to $67.7 million for 2006, an increase of $1.7 million. Gross margins decreased to 32%, as compared to 36% for 2006. The decrease in gross margins in 2007 was primarily the result of differences in the composition of the products we sold in each period. This included an increase in the network integration revenue that typically carries lower gross margins than the average for this segment. Gross profit would have been $2.9 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. Gross profit includes share-based compensation expense of $72,000 in 2007 and 2006, respectively.

     Optical Components Group. Gross profit for 2007 was $19.2 million, compared to $13.5 million for 2006, an increase of $5.7 million. Our optical components group gross margin increased to 21% for 2007, as compared to gross margin of 20% for 2006. As discussed above, in the first quarter of 2007, our optical components group recognized approximately $2.9 million in revenue that was previously deferred for which the costs associated with that revenue were recognized in periods prior to those periods presented herein. The gross profit and resulting gross margin were positively affected by recognizing this deferred revenue in the amount of $2.9 million during the first quarter of 2007. Factors that negatively affected gross margins were the reduced revenue from the metro and discrete product lines, which carry a higher margin profile, and an increased proportion of revenue from the GPON product line, which has resulted in a lower margin as we ramped up production in this area in 2007 compared to 2006. Gross profit would have been $4.3 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. Gross profit includes share-based compensation expense of $205,000 and $159,000 in 2007 and 2006, respectively.

     Development Stage Enterprise Group. As we had no sales by this group, no gross margins were generated by this group for 2007 and 2006.

Operating Costs and Expenses

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

										% Change
For the nine months ended										Constant
September 30:	2007		2006		$ Change		% Change			Currency (1)
Networking group	$	76,614	$	69,837	$	6,777		10	%		7	%
Optical components group		19,063		13,710		5,353		39			(2	)
Development stage enterprise group		1,128		1,090		38		3			3
Total	$	96,805	$	84,637	$	12,168		14	%		5	%

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

33

     Consolidated operating costs and expenses were $96.8 million, or 32% of revenues, for 2007, compared to $84.6 million, or 33% of revenues, for 2006. Operating costs and expenses increased $12.2 million in 2007 compared to 2006. The increase in our operating costs and expenses was largely the result of increases in labor and related costs, particularly from the additional investment in our North American sales organization in the networking group and the acquisition of Fiberxon on July 1, 2007. Operating costs and expenses would have been $7.9 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. Product development and engineering expenses included share-based compensation expense of $598,000 and $579,000 in 2007 and 2006, respectively. Selling, general and administrative expenses included share-based compensation expense of $2.0 million and $1.7 million in 2007 and 2006, respectively.

     Networking Group. Operating costs and expenses for 2007 were $76.6 million, or 35% of revenues, compared to $69.8 million, or 37% of revenues, for 2006. Operating costs and expenses increased $6.8 million, or 10%, in 2007 compared to 2006. The increase in operating costs and expenses was primarily the result of increases in labor and related costs, particularly from the additional investment in our North American sales organization. Operating costs and expenses would have been $2.3 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. Product development and engineering expenses included share-based compensation expense of $336,000 and $352,000 in 2007 and 2006, respectively. Selling, general and administrative expenses included share-based compensation expense of $1.5 million and $1.4 million in 2007 and 2006, respectively.

     Optical Components Group. Operating costs and expenses for 2007 were $19.1 million, or 20% of revenues, compared to $13.7 million, or 20% of revenues, for 2006. Operating costs and expenses increased $5.4 million, or 39%, in 2007 compared to 2006. Operating costs and expenses increased primarily as a result of the acquisition of Fiberxon. Operating costs and expenses would have been $5.6 million lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. Product development and engineering expenses included share-based compensation expense of $263,000 and $227,000 in 2007 and 2006, respectively. Selling, general and administrative expenses included share-based compensation expense of $497,000 and $315,000 in 2007 and 2006, respectively.

     Development Stage Enterprise Group. Operating costs and expenses for 2007 were $1,128,000 compared to $1,090,000 for 2006. Operating costs and expenses increased $38,000, or 3%, in 2007 compared to 2006. The increase in operating costs and expenses relates primarily to the increase in general and administrative costs.

Operating Income (Loss)

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

													% Change
For the nine months ended													Constant
September. 30:	2007			2006			$ Change			% Change			Currency (2)
Networking group	$	(7,175	)	$	(2,115	)	$	(5,060	)		239	%		265	%
Optical components group		104			(190	)		294			(155	)		(818	)
Development stage enterprise group		(1,097	)		(1,090	)		(7	)		1			1
		(8,168	)		(3,395	)		(4,773	)		141			120
Adjustments (1)		(67	)		(20	)		(47	)	NM			NM
Total	$	(8,235	)	$	(3,415	)	$	(4,820	)		141	%		121	%

	NM — not meaningful
(1)	Adjustments represent the elimination of intersegment revenue in order to reconcile to consolidated operating income (loss).
(2)	Percentage information in constant currencies in the table above and in the text below excludes the effect of foreign currency translation on reported results. Constant currency results were calculated by translating the current year results at prior year average exchange rates.

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     We reported a consolidated operating loss of $8.2 million, or 3% of revenues, for 2007 compared to an operating loss of $3.4 million, or 1% of revenues, for 2006, a decrease in our results of $4.8 million. As discussed above, in the first quarter of 2007, our optical components group recognized approximately $2.9 million in revenue that was previously deferred for which the costs associated with that revenue were recognized in periods prior to those periods presented herein. The operating loss was positively impacted by recognizing this deferred revenue in the amount of $2.9 million in the first quarter of 2007. This improvement in our results was negatively impacted by the decrease in gross margins resulting from differences in the composition of the products we sold in each period. Operating loss would have been $704,000 lower in 2007 had foreign currency exchange rates remained the same as they were in 2006. Operating loss includes share-based compensation expense of $2.9 million and $2.5 million in 2007 and 2006, respectively.

     Networking Group. Our networking group reported an operating loss totaling $7.2 million, or 3% of revenues, for 2007, compared to an operating loss of $2.1 million, or 1% of revenues for 2006, a decrease in our results of $5.1 million. This decrease in our results was primarily the result of the decrease in gross margins resulting from differences in the composition of the products we sold in each period and increases in labor and related costs, particularly from the additional investment in our North American sales organization. The composition of revenue included an increase in the network integration revenue that typically carries lower gross margins than the average for this segment. Operating loss would have been $554,000 higher in 2007 had foreign currency exchange rates remained the same as they were in 2006. Operating loss includes share-based compensation expense of $1.9 million and $1.8 million in 2007 and 2006, respectively.

     Optical Components Group. Our optical components group reported operating income of $104,000 or 0% of revenues, for 2007, compared to an operating loss of $190,000, or 0% of revenues, for 2006. Our operating income improved $294,000 in 2007 compared to 2006. As discussed above, in the first quarter of 2007, our optical components group recognized approximately $2.9 million in revenue that was previously deferred for which the costs associated with that revenue were recognized in periods prior to those periods presented herein. The operating income was positively impacted by recognizing this deferred revenue in the amount of $2.9 million in the first quarter of 2007. Factors that negatively affected operating income were the reduced revenue from the metro and discrete product lines, which carry a higher margin profile, and an increased proportion of revenue from the GPON product line, which has resulted in a lower margin as we ramped up production in this area in 2007 compared to 2006. Operating income would have been $1.3 million higher in 2007 had foreign currency exchange rates remained the same as they were in 2006. Operating income (loss) includes share-based compensation expense of $965,000 and $701,000 in 2007 and 2006, respectively.

     Development Stage Enterprise Group. Our development stage enterprise group reported an operating loss of $1.1 million for 2007 as compared to $1.1 million for 2006. Our operating loss remained same and consistent over 2006.

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

     Interest expense was $3.1 million and $2.6 million for 2007 and 2006, respectively. The $4.9 million of debt conversion costs in 2007 was associated with exchanging our $23 million convertible notes into common stock. Other Income was $2.8 million and $3.3 million for 2007 and 2006, respectively, a decrease of $0.5 million.

Provision for Income Taxes

     The provision for income taxes for 2007 was $3.9 million as compared to $3.4 million for 2006. Our income tax expense fluctuates based on the amount of income generated in the various jurisdictions where we conduct operations and pay income tax. For 2007, income tax provision was impacted by higher taxable income for subsidiaries in Sweden and Taiwan, which was mostly offset by lower taxable income for subsidiaries in Switzerland and Italy compared to 2006.

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     As discussed above, in the first quarter of 2007, our optical components group recognized approximately $2.9 million in deferred revenue for which the costs associated with that revenue were recognized in periods prior to those periods presented herein. There was no impact on the provision for income taxes resulting from the recognition of this deferred revenue, since there was a full valuation allowance against the deferred tax assets relating to this deferred revenue. Thus, the entire $2.9 million of recognized revenue that was previously deferred improved net loss in 2007 by $2.9 million and diluted loss per share by $0.02 per share, as there were no associated costs or income tax provision relating to the amount that was recognized in the first quarter of 2007.

Tax Loss Carry forwards

     As of December 31, 2006, the end of our last tax year, we had NOLs of approximately $171.8 million for federal income tax purposes and approximately $214.4 million for state income tax purposes. We also had capital loss carry forwards totaling $262.0 million as of December 31, 2006, which begin to expire in 2007. Utilization of these net operating losses and credit carry forwards are dependent upon us achieving profitable results and, in such case, these net operating loss carry forwards would represent an asset to us to the extent they can be utilized to reduce cash income tax payments. Under Section 382 of the Internal Revenue Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs, capital loss carry forwards and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater than 50% change in its equity ownership by value over a three-year period. The effect of an ownership change would be the imposition of an annual limitation on the use of the net operating loss carry forwards attributable to periods before the change. We may experience an ownership change in the future as a result of subsequent shifts in our stock ownership, including as a result of our issuance of shares in connection with our acquisition of Fiberxon. If we were to trigger an ownership change in the future, our ability to use any NOLs and capital loss carry forwards existing at that time could be limited. As of September 30, 2007, there was sufficient valuation allowance against these deferred tax assets, such that additional valuation allowance against these deferred tax assets would not be necessary in the future if the NOLs and capital loss carry forwards described above were to be limited.

Recently Issued Accounting Standards

     For a discussion of recently issued accounting standards relevant to our financial performance, see Note 15 of Notes to the Condensed Consolidated Financial Statements included in this Report.

Liquidity and Capital Resources

     We had cash and cash equivalents of $69.1 million as of September 30, 2007, a $22.6 million decrease from the cash and cash equivalents of $91.7 million we had as of December 31, 2006. The decrease in cash and cash equivalents was primarily the result of investing activities for $18.0 million in cash paid related to the Fiberxon acquisition net of cash acquired and the sales and maturities of marketable securities, which was partially offset by our purchase of marketable securities, increase in time deposits, cash we used in our operations, the timing of cash collections from customers, cash we used to procure necessary raw materials and components to build our inventories for products we expect to ship in the future, cash we used to satisfy vendor obligations and net payments on short-term and long-term obligations. Of the increase in time deposits, $4.0 million related to a standby letter of credit entered into by Luminent in favor of a creditor of a PRC subsidiary of Fiberxon prior to our acquisition of Fiberxon on July 1, 2007, to enable the creditor to extend further banking facilities to, what has become through our acquisition of Fiberxon and its PRC subsidiaries. The standby letter of credit expired on April 1, 2007. Now that we have acquired Fiberxon and its subsidiary, their agreement to indemnify Luminent for any losses it may suffer as a result of a breach by the subsidiary of its loan agreement with its creditor is moot. For a discussion of the acquisition of Fiberxon, which closed on July 1, 2007, see Note 2 of Notes to Financial Statements included in this Report.

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     The following table illustrates our cash position, which we define as cash, cash equivalents, time deposits, and short-term and long-term marketable securities, as it relates to our debt position, which we define as all short-term and long-term obligations (in thousands):

	September 30,		December 31,
	2007		2006
Cash
Cash and cash equivalents	$	69,103	$	91,722
Short-term and long-term marketable securities		9,162		25,864
Time deposits		7,949		821
		86,214		118,407
Debt
5% convertible notes due 2008		—		23,000
Short-term obligations		34,651		26,289
Long-term debt		78		88
		34,729		49,377
Excess cash versus debt	$	51,485	$	69,030
Ratio of cash versus debt (1)		2.5:1		2.4:1

(1) Determined by dividing total “cash” by total “debt,” in each case as reflected in the table.

Working Capital

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

	September 30,		December 31,
	2007		2006
Current assets	$	306,981	$	289,514
Current liabilities		180,703		116,927
Working capital	$	126,278	$	172,587
Current ratio (1)		1.7:1		2.5:1

(1) Determined by dividing total “current assets” by total “current liabilities,” in each case as reflected in the table.

     Current assets increased $17.5 million primarily due to increases in accounts receivable, and inventories as a result of the Fiberxon acquisition, partially offset by decreases in short-term marketable securities. Fluctuations in current assets typically result from the timing of: shipments of our products to customers, receipts of inventories from and payments to our vendors, cash used for capital expenditures and the effects of changes in foreign currency.

     Current liabilities increased $63.8 million primarily due to an increase in accounts payable and accrued liabilities as a result of the Fiberxon acquisition. The remainder of the increase related to an increase in deferred income taxes and short-term obligations. Fluctuations in current liabilities typically result from the timing of: payments to our vendors for raw materials, timing of payments for accrued liabilities, such as payroll related expenses and interest on our short-term and long-term obligations, changes in deferred revenue, income tax liabilities and the effects of changes in foreign currencies.

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Cash Flow

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

For the nine months ended September 30:	2007			2006
Net cash provided by (used in):
Operating activities	$	(21,224	)	$	(11,921	)
Investing activities		(6,785	)		(38,536	)
Financing activities		4,358			63,314
Effect of exchange rate changes on cash and cash equivalents		1,032			336
Net change in cash and cash equivalents	$	(22,619	)	$	13,193

     Cash Flows Related to Operating Activities. Cash used in operating activities was $21.2 million for the nine months ended September 30, 2007, compared to cash used in operating activities of $11.9 million for the same period last year. Cash used in operating activities was a result of our net loss of $17.2 million, adjusted for non-cash items such as the non-cash loss on the debt conversion, depreciation and amortization, additional allowances for doubtful accounts, share-based compensation expense, and gains on the disposition of fixed assets. In 2007, decreases in accounts receivable and other assets positively affected cash used in operating activities. In the same period, cash used in operating activities was negatively affected by increases in time deposits, inventories, other assets, and decreases in accounts payable, accrued liabilities, deferred revenue, and other current liabilities. The decrease in accounts receivable resulted from the timing of customer payments and collection efforts. The increase in inventories was primarily the result of our purchase of raw materials and components for products we expect to ship in the future. Increases in accounts payable were the result of the timing of payments to our vendors. As described above, the increase in time deposits was the result of the standby letter of credit relating to the creditor of a subsidiary of Fiberxon. Cash used in operating activities for the prior period was the result of our net loss adjusted for non-cash items and changes in working capital.

     Cash Flows Related to Investing Activities. Cash used in investing activities was $6.8 million for the nine months ended September 30, 2007, compared to cash used in investing activities totaling $38.5 million for the same period last year. Cash provided by investing activities for 2007 was primarily the result of $18.0 million in cash paid related to the Fiberxon acquisition net of cash acquired, purchases of short-term and long-term marketable securities, and capital expenditures offset by the sale or maturity of short-term marketable securities. As of September 30, 2007, we had no plans for major capital expenditures. For a discussion of the cash consideration for the acquisition of Fiberxon, which closed on July 1, 2007, see Note 7 of Notes to Financial Statements included elsewhere in this Report. Cash flows used in investing activities for the prior period was primarily from the purchase of short-term marketable securities and capital expenditures.

     Cash Flows Related to Financing Activities. Cash provided by financing activities was $4.4 million for the nine months ended September 30, 2007, as compared to cash flows provided by financing activities of $63.3 million for the same period last year. Cash provided by financing activities was primarily the result of borrowings on short-term debt and proceeds from the exercise of employee stock options, partially offset by payments on short-term obligations. Cash flows provided by financing activities for the prior period represent the net proceeds from the issuance of our common stock, the proceeds from the exercise of employee stock options, partially offset by the net cash payments on short-term borrowings.

     In March 2006, we completed a private placement of approximately 19.9 million shares of our common stock at $3.75 per share for gross proceeds of approximately $74.5 million with a group of institutional investors. The net proceeds to us were approximately $69.9 million. The net proceeds will be used for working capital, general corporate purposes and in efforts to support our recent growth in revenues. We may also use a portion of the net proceeds, currently intended for general corporate purposes, to acquire or invest in technologies, products or services that complement our business.

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Off-Balance Sheet Arrangements

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

Contractual Cash Obligations

     The following table illustrates our total contractual cash obligations as of September 30, 2007 (in thousands):

			Less than						After
Cash Obligations	Total		1 Year		1 - 3 Years		4 - 5 Years		5 Years
Short-term obligations (1)	$	34,651	$	34,561	$	90	$	—	$	—
Deferred consideration payable		30,656		30,656		—		—		—
Unconditional purchase obligations		4,730		4,730		—		—		—
Operating leases		25,366		5,912		8,631		4,743		6,080
Total contractual cash obligations	$	95,403	$	75,859	$	8,721	$	4,743	$	6,080

     Our total contractual cash obligations as of September 30, 2007, were $95.4 million, of which, $75.9 million are due by September 30, 2008. These total contractual cash obligations primarily consist of short-term and long-term obligations, operating leases for our equipment and facilities and unconditional purchase obligations for necessary raw materials. Historically, these obligations have been satisfied through cash generated from our operations or other avenues and we expect that this will continue to be the case.

     The table above does not reflect approximately $17.7 million of purchase consideration that we paid to the shareholders of Fiberxon upon closing of the Fiberxon acquisition on July 1, 2007 or the deferred consideration payment of approximately $31.5 million to be paid in cash and/or shares, or a combination thereof, that we are obligated to pay to the shareholders of Fiberxon within 18 months of the Financials Receipt Date, or sooner upon the occurrence of certain acceleration events. For further information on the Fiberxon acquisition, please see Note 2, “Acquisition” included in the “Notes to Financial Statements” appearing elsewhere in this Report.

     We believe that our cash on hand and cash flows from operations will be sufficient to fund our current operations, capital expenditures and product development and engineering requirements for at least the next 12 months.

Internet Access to Our Financial Documents

     We maintain a website at www.mrv.com. We make available, free of charge, either by direct access or a link to the SEC website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Our reports filed with, or furnished to, the SEC are also available directly at the SEC’s website at www.sec.gov.

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Certain Factors That Could Affect Future Results

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

If any circumstances discussed in the following factors actually occur or occur again, our business could be materially harmed. If our business is harmed, the trading price of our common stock could decline.

Some of the statements contained in this report discuss future events or expectations, contain projections of results of operations or financial condition, changes in the markets for our products and services, or state other “forward-looking” information. MRV’s “forward-looking” information is based on various factors and was derived using numerous assumptions. In some cases, you can identify these “forward-looking statements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of those words and other comparable words. You should be aware that these statements only reflect our current predictions and beliefs. These statements are subject to known and unknown risks, uncertainties and other factors, and actual events or results may differ materially. Important factors that could cause our actual results to be materially different from the forward-looking statements are disclosed throughout this report, particularly those immediately below and under the heading “Risk Factors” in Item 1A of Part II of this report. You should review these factors that could affect our future results and the risk factors in Item 1A of this report and the rest of this quarterly report in combination with the more detailed description of our business in our annual report on Form 10-K, which we filed with the Securities and Exchange Commission on March 6, 2007, for a more complete understanding of the risks associated with an investment in our securities. We undertake no obligation to revise or update any forward-looking statements.

Our Operating Results Could Fluctuate Significantly from Quarter to Quarter. Our operating results for a particular quarter are extremely difficult to predict. Our revenue and operating results could fluctuate substantially from quarter to quarter and from year to year. This could result from any one or a combination of factors such as:

• the cancellation or postponement of orders;

• the timing and amount of significant orders;

• our success in developing, introducing and shipping product enhancements and new products;

• the mix of products we sell;

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

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

• new product introductions by our competitors;

• the timing of delivery and availability of components from suppliers;

• readiness of customer sites for installation;

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

• changes in material costs;

• currency fluctuations;

• changes in accounting rules; and

• general economic conditions as well as changes in such conditions specific to our market segments.

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     Moreover, the volume and timing of orders we receive during a quarter are difficult to forecast. From time to time, our customers encounter uncertain and changing demand for their products. Customers generally order based on their forecasts. If demand falls below these forecasts or if customers do not control inventories effectively, they may cancel or reschedule shipments previously ordered from us. Our expense levels during any particular period are based, in part, on expectations of future sales. If sales in a particular quarter do not meet expectations, our operating results could be materially adversely affected.

     Our success is dependent, in part, on the overall growth rate of the fiber optic components and networking industry. The Internet, or the industries that serve it, may not continue to grow, and even if it does or they do, we may not achieve increased growth. Our business, operating results or financial condition may be adversely affected by any decreases in industry growth rates. In addition, we can give no assurance that our results in any particular period will fall within the ranges for growth forecast by market researchers or securities analysts.

     Because of these and other factors, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. It is possible that, in future periods, our results of operations will be below the expectations of public market analysts and investors. This failure to meet expectations could cause the trading price of our common stock to decline. Similarly, the failure by our competitors or customers to meet or exceed the results expected by their analysts or investors could have a ripple effect on us and cause our stock price to decline.

     One Customer Accounted for over 10 percent of Our Sales During the Year Ended December 31, 2006, Increasing Both Our Dependence on a Single Revenue Source and the Risk that Our Operations Will Suffer Materially If the Customer Stopped Ordering from Us or Substantially Reduced Its Business With Us. For the last several years prior to 2006 and for the interim periods within those years, no customer has accounted for 10 percent or more of our revenues and accordingly we were not dependent on any single customer. For the year ended December 31, 2006, however, we had one customer, Tellabs, Inc., which, among other projects, supplies Verizon for its FiOS FTTP project, accounted for 13% of our total revenues. While our financial performance during this year benefited from the increased sales to that customer, because of the magnitude of our sales to that customer, our results would suffer if we lost that customer or it made a substantial reduction in orders unless we were able to replace the customer or orders with one or more of comparable size. In addition, our sales are made on credit and our results of operations would be adversely affected if this customer were to experience unexpected financial reversals resulting in it being unable to pay for our products.

Our Markets Are Subject to Rapid Technological Change, and to Compete Effectively, We Must Continually Introduce New Products That Achieve Market Acceptance. The markets for our products are characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. We expect that new technologies will emerge as competition and the need for higher and more cost effective transmission capacity, or bandwidth, increases. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address these changes as well as current and potential customer requirements. The introduction of new and enhanced products may cause our customers to defer or cancel orders for existing products. We have in the past experienced delays in product development and these delays may occur in the future. Therefore, to the extent that customers defer or cancel orders in the expectation of a new product release or there is any delay in development or introduction of our new products or enhancements of our products, our operating results would suffer. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements, or to license these technologies from third parties. Product development delays may result from numerous factors, including:

• changing product specifications and customer requirements;

• difficulties in hiring and retaining necessary technical personnel;

• difficulties in reallocating engineering resources and overcoming resource limitations;

• difficulties with contract manufacturers;

• changing market or competitive product requirements; and

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• unanticipated engineering complexities.

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

Defects In Our Products Resulting from Their Complexity or Otherwise Could Hurt Our Financial Performance. Complex products, such as those we offer, may contain undetected software or hardware errors when we first introduce them or when we release new versions. The occurrence of these errors in the future, and our inability to correct these errors quickly or at all, could result in the delay or loss of market acceptance of our products. It could also result in material warranty expense, diversion of engineering and other resources from our product development efforts and the loss of credibility with, and legal actions by, our customers, system integrators and end users. Any of these or other eventualities resulting from defects in our products could cause our sales to decline and have a material adverse effect on our business, operating results and financial condition.

The Long Sales Cycles for Our Products May Cause Revenues and Operating Results to Vary from Quarter to Quarter, Which Could Cause Volatility In Our Stock Price. The timing of our revenue is difficult to predict because of the length and variability of the sales and implementation cycles for our products. We do not recognize revenue until a product has been shipped to a customer, all significant vendor obligations have been performed and collection is considered probable. Customers often view the purchase of our products as a significant and strategic decision. As a result, customers typically expend significant effort in evaluating, testing and qualifying our products and our manufacturing process. This customer evaluation and qualification process frequently results in a lengthy initial sales cycle of, depending on the products, many months or more. In addition, some of our customers require that our products be subjected to lifetime and reliability testing, which also can take months or more. While our customers are evaluating our products and before they place an order with us, we may incur substantial sales and marketing and research and development expenses to customize our products to the customer’s needs. We may also expend significant management efforts, increase manufacturing capacity and order long lead-time components or materials prior to receiving an order. Even after this evaluation process, a potential customer may not purchase our products. Even after acceptance of orders, our customers often change the scheduled delivery dates of their orders. Because of the evolving nature of the optical networking and network infrastructure markets, we cannot predict the length of these sales, development or delivery cycles. As a result, these long sales cycles may cause our net sales and operating results to vary significantly and unexpectedly from quarter-to-quarter, which could cause volatility in our stock price.

Cost Containment Is Critical to Achieving Positive Cash Flow from Operations and Profitability Consistently. We are continuing efforts at strict cost containment and believe that such efforts are essential to achieving positive cash flow from operations in future quarters and maintaining profitability on a consistent basis, especially since the outlook for future quarters is subject to numerous challenges. Additional measures to contain costs and reduce expenses may be undertaken if revenues do not continue to improve. A number of factors could preclude us from consistently bringing costs and expenses in line with our revenues, such as our inability to forecast business activities and the deterioration of our revenues accurately. If we are not able to maintain an expense structure commensurate with our business activities and revenues, we may have inadequate levels of cash for operations or for capital requirements, which could significantly harm our ability to operate the business.

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Our Business and Future Operating Results Are Subject to a Wide Range of Uncertainties Arising Out of the Continuing Threat of Terrorist Attacks and Ongoing Military Action In the Middle East. Like other U.S. companies, our business and operating results are subject to uncertainties arising out of the continuing threat of terrorist attacks on the United States and ongoing military action in the Middle East, including the potential worsening or extension of the current global economic slowdown, the economic consequences of the war in Iraq or additional terrorist activities and associated political instability, and the impact of heightened security concerns on domestic and international travel and commerce. In particular, due to these uncertainties, we are subject to:

• increased risks related to the operations of our manufacturing facilities in China;

• greater risks of disruption in the operations of our Asian contract manufacturers and more frequent instances of shipping delays; and

• the risk that future tightening of immigration controls may adversely affect the residence status of non-U.S. engineers and other key technical and other employees in our U.S. facilities or our ability to hire new non-U.S. employees in such facilities.

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

Our Ability to Utilize Our NOLs and Certain Other Tax Attributes May Be Limited. As of December 31, 2006, we had net operating losses, or NOLs, of approximately $171.8 million for federal income tax purposes and approximately $214.4 million for state income tax purposes. We also had capital loss carryforwards totaling $262.0 million as of December 31, 2006, which begin to expire in 2007. Under Section 382 of the Internal Revenue Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs, capital loss 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, including as a result of our issuance of shares pursuant to the Fiberxon acquisition. 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.

Our Manufacturing Capacity May be Interrupted, Limited or Delayed If We Cannot Maintain Sufficient Sources of Electricity in China, or If There is a Natural Disaster or Other Catastrophic Event in China. The manufacturing process for optical component manufacturing requires a substantial and stable source of electricity. As our production capabilities increase in China, our requirements for electricity in China will grow substantially. Many companies with operations in China have experienced a lack of sufficient electricity supply and we cannot be assured that electric power generators that we or Fiberxon may have available will produce sufficient electricity supply in the event of a disruption in power. Power interruptions, electricity shortages, the cost of fuel to run power generators or government intervention, particularly in the form of rationing, are factors that could restrict access to electricity to Fiberxon’s PRC manufacturing facilities, and adversely affect manufacturing costs. If we successfully acquire Fiberxon, any such power shortages could result in delays in shipments to Fiberxon’s or our customers and, potentially, the loss of customer orders and penalties from such customers for the delay.

     Natural disasters or other catastrophic events, including wildfires and other fires, earthquakes, excessive rain, terrorist attacks and wars, could disrupt manufacturing ability or capacity, which could harm our operations and financial results.

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China’s Legal System Embodies Uncertainties That Could Harm Our Business Operations. Since 1979, many new laws and regulations and government policies covering general economic matters have been implemented in China. Despite the development of the legal system, China’s system of laws is not yet complete. Even where adequate law exists in China, enforcement of contracts based on existing law may be uncertain and sporadic, and it may be difficult to obtain swift and equitable enforcement or to obtain enforcement of a judgment by a court of another jurisdiction. The relative inexperience of China’s judiciary in many cases creates additional uncertainty as to the outcome of any litigation. In addition, interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes.

     As our activities in China increase, we will be subject to administrative review and approval by various national and local agencies of China’s government. Given the changes occurring in China’s legal and regulatory structure, we may not be able to secure the requisite governmental approval for our activities. Failure to obtain the requisite governmental approval for any of our activities could impede our ability to operate our business or increase our expenses.

We Currently Depend On Third-Party Contract Manufacturers and Therefore Could Face Delays Harming Our Sales. We outsource the board-level assembly, test and quality control of material, components, subassemblies and systems relating to our networking products to third-party contract manufacturers. Though there are a large number of contract manufacturers that we can use for outsourcing, we have elected to use a limited number of vendors for a significant portion of our board assembly requirements in order to foster consistency in quality of the products and to achieve economies of scale. These independent third-party manufacturers also provide the same services to other companies. Risks associated with the use of independent manufacturers include unavailability of or delays in obtaining adequate supplies of products and reduced control of manufacturing quality and production costs. If our contract manufacturers failed to deliver needed components timely, we could face difficulty in obtaining adequate supplies of products from other sources in the near term. Our third party manufacturers may not provide us with adequate supplies of quality products on a timely basis, or at all. While we could outsource with other vendors, a change in vendors may require significant lead-time and may result in shipment delays and expenses. Our inability to obtain these products on a timely basis, the loss of a vendor or a change in the terms and conditions of the outsourcing would have a material adverse effect on our business, operating results and financial condition.

We May Lose Sales If Suppliers of Other Critical Components Fail to Meet Our Needs. Our companies currently purchase several key components used in the manufacture of our products from single or limited sources. We depend on these sources to meet our needs. Moreover, we depend on the quality of the products supplied to us over which we have limited control. We have encountered shortages and delays in obtaining components in the past and expect to encounter shortages and delays in the future. If we cannot supply products due to a lack of components, or are unable to redesign products with other components in a timely manner, our business will be significantly harmed. We have no long-term or short-term contracts for any of our components. As a result, a supplier can discontinue supplying components to us without penalty. If a supplier discontinued supplying a component, our business may be harmed by the resulting product manufacturing and delivery delays.

We May Suffer Losses as a Result of Entering into Fixed Price Contracts. From time to time we enter into contracts with certain customers where the price we charge for particular products is fixed. Although our estimated production costs for these products is used to compute the fixed price for sale, if our actual production cost exceeds the estimated production cost due to our inability to obtain needed components timely or at all or for other reasons, we may incur a loss on the sale. Sales of material amounts of products on a fixed price basis where we have not accurately predicted the production costs could have a material adverse affect on our results of operations.

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

If We Fail to Protect Our Intellectual Property, We May Not Be Able to Compete. We rely on a combination of trade secret laws and restrictions on disclosure and patents, copyrights and trademarks to protect our intellectual property rights. We cannot assure you that our pending patent applications will be approved, that any patents that may be issued will protect our intellectual property or that third parties will not challenge any issued patents. Other parties may independently develop similar or competing technology or design around any patents that may be issued to us. We cannot be certain that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Any of this kind of litigation, regardless of outcome, could be expensive and time consuming, and adverse determinations in any of this kind of litigation could seriously harm our business.

We Could In the Future Become Subject to Litigation Regarding Intellectual Property Rights, Which Could Be Costly and Subject Us to Significant Liability. From time to time, third parties, including our competitors, may assert patent, copyright and other intellectual property rights to technologies that are important to us. Over the years, we have received notices from third parties alleging possible infringement of patents with respect to certain features of our products or our manufacturing processes and in connection with these notices have been involved in discussions with the claimants, including IBM, Lucent, Ortel, Nortel, Rockwell, the Lemelson Foundation, Finisar and Apcon. To date, our aggregate revenues potentially subject to the foregoing claims have not been material. However, these or other companies may pursue litigation with respect to these or other claims. The results of any litigation are inherently uncertain. In the event of an adverse result in any litigation with respect to intellectual property rights relevant to our products that could arise in the future, we could be required to obtain licenses to the infringing technology, to pay substantial damages under applicable law, to cease the manufacture, use and sale of infringing products or to expend significant resources to develop non-infringing technology. Licenses may not be available from third parties either on commercially reasonable terms or at all. In addition, litigation frequently involves substantial expenditures and can require significant management attention, even if we ultimately prevail. Accordingly, any infringement claim or litigation against us could significantly harm our business, operating results and financial condition.

In the Future, We May Initiate Claims or Litigation Against Third Parties for Infringement of Our Proprietary Rights to Protect These Rights or to Determine the Scope and Validity of Our Proprietary Rights or the Proprietary Rights Of Competitors. These Claims Could Result In Costly Litigation and the Diversion of Our Technical and Management Personnel. Necessary licenses of third-party technology may not be available to us or may be very expensive, which could adversely affect our ability to manufacture and sell our products. From time to time we may be required to license technology from third parties to develop new products or product enhancements. We cannot assure you that third-party licenses will be available to us on commercially reasonable terms, if at all. The inability to obtain any third-party license required to develop new products and product enhancements could require us to obtain substitute technology of lower quality or performance standards or at greater cost, either of which could seriously harm our ability to manufacture and sell our products.

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We Are Dependent On Certain Members of Our Senior Management. We are substantially dependent upon Dr. Shlomo Margalit, our Chairman of the Board of Directors, Chief Technical Officer and Secretary, and Mr. Noam Lotan, our President and Chief Executive Officer. The loss of the services of either of these officers could have a material adverse effect on us. We have entered into employment agreements with Dr. Margalit and Mr. Lotan and are the beneficiary of a key man life insurance policy in the amount of $1.0 million on Mr. Lotan’s life. However, we can give no assurance that the proceeds from this policy will be sufficient to compensate us in the event of the death of Mr. Lotan, and the policy is not applicable in the event that he becomes disabled or is otherwise unable to render services to us. We no longer maintain a key man life insurance policy on Dr. Margalit.

Environmental Regulations Applicable to Our Manufacturing Operations Could Limit Our Ability to Expand or Subject Us to Substantial Costs. We are subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our manufacturing processes. Further, we are subject to other safety, labeling and training regulations as required by local, state and federal law. Any failure by us to comply with present and future regulations could subject us to future liabilities or the suspension of production. In addition, these kinds of regulations could restrict our ability to expand our facilities or could require us to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. We cannot assure you that these legal requirements will not impose on us the need for additional capital expenditures or other requirements. If we fail to obtain required permits or otherwise fail to operate within these or future legal requirements, we may be required to pay substantial penalties, suspend our operations or make costly changes to our manufacturing processes or facilities.

Our Headquarters Are Located In Southern California, and Certain of Our Manufacturing Facilities Are Located In Southern California and Taiwan, Where Disasters May Occur That Could Disrupt Our Operations and Harm Our Business. Our corporate headquarters is located in the San Fernando Valley of Southern California and some of our manufacturing facilities are located in Southern California, Taiwan and China. Historically, these regions have been vulnerable to natural disasters and other risks, such as earthquakes, fires and floods, which at times have disrupted the local economies and posed physical risks to our property and personnel.

     In addition, terrorist acts or acts of war targeted at the United States, and specifically Southern California, has caused damage and disruption to us and could again cause damage or disruption to us, our employees, facilities, partners, suppliers, distributors and resellers, and customers, which could have a material adverse effect on our operations and financial results.

If We Fail to Forecast Component and Material Requirements for Our Manufacturing Facilities Accurately, We Could Incur Additional Costs or Experience Manufacturing Delays. We use rolling forecasts based on anticipated product orders to determine our component requirements. It is very important that we accurately predict both the demand for our products and the lead times required to obtain the necessary components and materials. Lead times for components and materials that we order vary significantly and depend on factors such as specific supplier requirements, the size of the order, contract terms and current market demand for the components. For substantial increases in production levels, some suppliers may need nine months or more lead-time. If we overestimate our component and material requirements, we may have excess inventory, which would increase our costs. If we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Any of these occurrences would negatively impact our net sales.

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Legislative Actions, Higher Insurance Costs and Potential New Accounting Pronouncements Are Likely to Impact Our Future Financial Position and Results of Operations and In the Case of FASB’s New Pronouncement Regarding the Expensing of Stock Options Has and Will Adversely Impact Our Financial Results. There have been regulatory changes, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Stock Market rules and there may be potential new accounting pronouncements or regulatory rulings, which will have an impact on our future financial position and results of operations. These regulatory changes and other legislative initiatives have increased general and administrative costs. In addition, insurers are likely to increase rates as a result of high claims rates recently and our rates for our various insurance policies are likely to increase. The Financial Accounting Standards Board’s recent change to mandate the expensing of stock compensation will require us to record charges to earnings for stock option grants to employees and directors and will adversely affect our financial results for periods after we implement the pronouncement. As required, we implemented this pronouncement on January 1, 2006.

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risks

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

     Interest Rates. We are exposed to interest rate fluctuations on our investments, short-term borrowings and long-term obligations. Our cash and short-term investments are subject to limited interest rate risk, and are primarily maintained in money market funds and bank deposits. Our variable-rate short-term borrowings are also subject to limited interest rate risk because of their short-term maturities. Our long-term obligations were entered into with fixed interest rates. As of September 30, 2007, through a foreign office, we had one interest rate swap contract outstanding. The Company also had a second interest rate swap contract that matured during March 2007. The economic purpose of these interest rate swap contracts was to utilize them in an effort to protect our variable interest debt from significant interest rate fluctuations. Unrealized income on these interest rate swaps for the three and nine months ended September 30, 2007 were $183,000 and $321,000, respectively, and unrealized income on these interest rate swaps for the three and nine months ended September 30, 2006 were $50,000 and $133,000, respectively, which have been recorded in interest expense in the accompanying Statements of Operations.

     Foreign Exchange Rates. We operate on an international basis with a portion of our revenues and expenses being incurred in currencies other than the U.S. dollar. Fluctuation in the value of these foreign currencies in which we conduct our business relative to the U.S. dollar 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.

     Certain assets, including certain bank accounts and accounts receivables, exist in non-U.S. dollar-denominated currencies, which are sensitive to foreign currency exchange rate fluctuations. The non-U.S. denominated currencies is principally in the euro, the Swedish krona, the Swiss franc, the Chinese renminbi (RMB) and the Taiwan dollar. Additionally, certain of our current and long-term liabilities are denominated in these foreign currencies. At September 30, 2007, currency changes resulted in assets and liabilities denominated in local currencies being translated into more dollars than at year-end 2006.

     We incurred approximately 40% of our operating expenses in currencies other than the U.S. dollar during the nine months ended September 30, 2007. In general, these currencies were stronger against the U.S. dollar for the nine months ended September 30, 2007 compared to the same period last year. Therefore, revenues and expenses in these countries translated into more dollars than they would have in 2006. For the first nine months of 2007, we had approximately:

• $20.2 million of operating expenses that were settled in the euro;

• $9.8 million of operating expenses that were settled in Swiss francs;

• $5.4 million of operating expenses that were settled in Swedish krona

• $5.7 million of operating expenses that were settled in the Chinese RMB; and

• $3.7 million of operating expenses settled in the Taiwan dollar.

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     Had rates of these various foreign currencies been 10% higher relative to the U.S. dollar for the first nine months of 2007, our costs would have increased approximately:

• $2.0 million related to expenses settled in euros;

• $977,000 related to expenses settled in Swiss francs;

• $538,000 in expenses settled in Swedish kronas

• $406,000 in expenses settled in the Chinese RMB; and

• $371,000 in expenses settled in the Taiwan dollar.

     As of September 30, 2007, we held as part of our cash and cash equivalents $5.0 million of euros, $3.6 million of Swiss francs, $2.6 million of Swedish kronas, $5.5 million of Chinese RMB and $1.0 million of Taiwan dollars. If rates of these foreign currencies were to move higher or lower by some percentage, it would have an equal effect on the relative U.S. dollar value of the balances we hold.

     Inflation. We believe that the relatively moderate rate of inflation in the United States over the past few years has not had a significant impact on our sales or operating results or on the prices of raw materials. However, in view of our recent expansion of operations in Taiwan, Israel and other countries, which have experienced greater inflation than the United States, there can be no assurance that inflation will not have a material adverse effect on our operating results in the future.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     Disclosure controls and procedures are controls and other procedures that are designed to assure that information required to be disclosed by a public company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a public company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

     As of the end of the period covered by this report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by the report on Form 10-Q, the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s Exchange Act filings. In accordance with Frequently Asked Questions No. 3, “Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports,” of the Office of Chief Accountant of the SEC’s Division of Corporation Finance (revised Oct. 6, 2004), the scope of management’s evaluation excluded internal control over financial reporting for Fiberxon, which we acquired on July 1, 2007 and which represented approximately 17% of our consolidated net revenues and 33% of our consolidated net loss for the three months ended September 30, 2007 and approximately 36% of our consolidated total assets and liabilities as of September 30, 2007.

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Changes in Internal Controls

     We are in the process of upgrading and replacing information systems used by two of our subsidiaries to accumulate, track and store financial and other data used in the preparation of their financial statements that are consolidated with our financial statements and the financial statements of our other subsidiaries. During the year ended December 31, 2006, one of these subsidiaries began to upgrade the software information system that it utilizes in all aspects of its operations in Taiwan. During the same period, the other subsidiary began to use the new system with respect to certain aspects of its U.S. operations that relate to fulfillment of orders from its U.S. customers with products manufactured by the other subsidiary in Taiwan or by third-party contract manufacturers in China, all of which ship directly to our subsidiary’s customers, a process called drop-shipping. While this new system was placed on line in the latter half of the quarter ended September 30, 2006, it was operated in parallel with our subsidiaries’ legacy systems which continued to provide the financial and other data that our subsidiaries used in preparing their financial statements for the nine months ended September 30, 2006. Our Taiwan subsidiaries began relying on the new information systems exclusively in the fourth quarter of 2006 and our U.S. subsidiary has begun using the new system in connection with its business activities in addition to those involving drop-shipping from Asian manufacturers from August 2007 onwards.

     As noted previously, we acquired Fiberxon on July 1, 2007. We consider the acquisition of Fiberxon a material change in our internal control over financial reporting. As a result of the circumstances and issues concerning the allegations of Fiberxon’s historical financial and accounting irregularities, we have added certain new management team members at Fiberxon. We also reviewed the controls and procedures in place, and as of September 30, 2007, we are not aware of any material weaknesses in Fiberxon’s internal control over financial reporting. As part of this assessment, we will be reviewing and conforming Fiberxon’s policies and procedures to world-wide standards we have established to maintain reliable accounting books and records, in conformity with accounting principles generally accepted in the United States and applicable local laws. Our world-wide standards also require Fiberxon to inform its auditors of any known material violations of such laws or regulations, and to make all financial records and related information available to its auditors.

     Except as described in the paragraphs above, 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 last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1A. RISK FACTORS

     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 annual report on Form 10-K for the year ended December 31, 2006, which we filed with the Securities and Exchange Commission on March 6, 2007, for a more complete understanding of the risks associated with an investment in our securities. There have been material changes in the Risk Factors as previously disclosed in our annual report on Form 10-K for the year ended December 31, 2006 and such changes are reflected immediately below. The following risk factors, as well those contained in our annual report on Form 10-K for the year ended December 31, 2006 and elsewhere in this Report are not the only ones facing our company. Additional risks not now known to us or that we currently deem immaterial may also impair our business operations.

The Price of Our Shares May Continue to Be Highly Volatile; and the Negative Fallout from Our Acquisition of Fiberxon May Make Them More So.

     Historically, the market price of our shares has been extremely volatile. For example, on July 2, 2007, the day of our announcement of the completion of the Fiberxon acquisition, the market price of our common stock declined to $2.95 per share, or 9.2%, from the closing price of $3.25 per share on June 29, 2007, and further declined during the week of July 2, 2007 to close at $2.81 per share on July 6, 2007. The market price of our common stock is likely to continue to be highly volatile, affected by factors such as:

• actual or anticipated fluctuations in our operating results;

• announcements of technological innovations or new product introductions by us or our competitors;

• changes of estimates of our future operating results by securities analysts;

• developments with respect to patents, copyrights or proprietary rights;

• sales of substantial numbers of our shares by stockholders covered by our existing shelf registration statement; or

• general market conditions and other factors.

     In addition, the stock market has experienced extreme price and volume fluctuations that have particularly affected the market prices for shares of the common stocks of technology companies in particular, and that have been unrelated to the operating performance of these companies.

     The above factors, and other risks perceived by investors or financial analysts as negative fallout to MRV or Luminent from our acquisition of Fiberxon, as well as general economic and political conditions, may materially adversely affect the market price of our common stock in the future. Similarly, the failure by our competitors or customers to meet or exceed the results expected by their analysts or investors could have a ripple effect on us and cause our stock price to decline.

Sales of Substantial Amounts of Our Shares By Selling Stockholders Could Cause the Market Price of Our Shares to Decline.

     Under our registration statement that the SEC declared effect in April 2006, selling stockholders are offering 19,858,156 shares of our common stock. This represents approximately 12.6% of the outstanding shares of our common stock on September 30, 2007.

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     On August 10, 2007, we issued 11,900,000 shares of our common stock to Deutsche Bank in exchange for our outstanding 5% Convertible Notes issued in June 2003 and due in June 2008 (the “2003 Notes”). This represents approximately 7.3% of the outstanding shares of our common stock on September 30, 2007 and when added to the shares of our common stock registered with the SEC under our April 2006 registration statement mentioned above, totals 19.8% of our outstanding common stock on September 30, 2007. Although the shares issued in the Exchange were “restricted securities” within the meaning of Rule 144(a) because the Notes we exchanged for the Shares were restricted securities, Deutsche Bank’s holding period for the Shares is deemed to begin on the date the Notes were originally issued in June 2003 in accordance with Rule 144(d) under the Securities Act. Accordingly, any or all of the shares received by Deutsche Bank in the exchange for our 2003 Notes may be resold without registration or restriction in accordance with Rule 144(k) under the Securities Act of 1933 (the “Securities Act”).

     Under the Merger Agreement dated January 26, 2007 pursuant to which we acquired Fiberxon, as amended on June 26, 2007, we issued approximately 18.4 million shares of our common stock (excluding shares of our common stock underlying outstanding Fiberxon stock options that we assumed) to Fiberxon’s stockholders in partial consideration for our acquisition of Fiberxon on July 1, 2007. This represents approximately 11.6% of the outstanding shares of our common stock on September 30, 2007. In issuing and selling these shares, we relied upon the exemption from the registration provisions of the Securities Act provided by Section 3(a)(10) of the Securities Act. Although our shares were eligible for sale in the open market immediately following completion of the acquisition, the parties agreed that the transferability of the shares of our common stock issued in he acquisition to Fiberxon’s stockholders would be restricted during a period ending on the earlier of (a) three trading days following the date of our receipt of Fiberxon’s audited consolidated financial statements for the years ended December 31, 2004, 2005 and 2006 and (b) June 30, 2008. As we received the required financial statements on September 30, 2007, the restrictions on the transfer of our shares issued in the acquisition lapses on October 3, 2007 and the shares issued in the acquisition may thereafter be resold in the open market in accordance with the provisions of Rule 145 of the Securities Act.

     The shares issued to Fiberxon’s stockholders in that acquisition, when added to the shares offered by the selling stockholders under our 2006 registration statement and the shares we issued in August 2007 in exchange for our 2003 Notes, amount to an aggregate of approximately 31.5% of the outstanding shares of our common stock on September 30, 2007.

     Sales of substantial amounts of these shares at any one time or from time to time, or even the availability of these shares for sale, could adversely affect the market price of our shares.

     The information presented in this risk factor has been calculated assuming that none of the shares covered by our 2006 registration statement and those issued in exchange for our 2003 Notes have not yet been sold, which may not be the case.

We Are At Risk of Securities Class Action, Derivative and Other Litigation That Could Result In Substantial Costs and Divert Management’s Attention and Resources.

     Securities class action and stockholder derivative litigation has often been brought against companies following periods of volatility in the market price of their securities or for perceived breaches of duties owing to the companies’ stockholders. Due to the volatility and potential volatility of our stock price generally, or as result of the consequences or potential consequences of our acquisition of Fiberxon, we may be the target of securities, derivative or other litigation in the future. Such litigation could result in substantial costs and divert management’s attention and resources.

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If Our Cash Flow Significantly Deteriorates In the Future, Our Liquidity and Ability to Operate Our Business Could Be Adversely Affected.

     We incurred net losses in the years ended December 31, 2006, 2005 and 2004 and the nine months ended September 30, 2007 and 2006, and our combined cash and short-term investments declined in each of those periods except the year ended December 31, 2006 and the nine months ended September 30, 2006. Excluding the private placement of approximately 19.9 million shares of our common stock issued to a group of institutional investors in March 2006, which resulted in proceeds of $69.9 million, our combined cash, cash equivalents, time deposits and short-term and long-term marketable securities would have declined for the year ended December 31, 2006 and the nine months ended September 30, 2006. Although we generate cash from operations, we may continue to experience negative overall cash flow in future quarters. Moreover, we used approximately $17.7 million of our cash reserves as purchase consideration to the shareholders of Fiberxon upon closing of the Fiberxon acquisition on July 1, 2007. If our cash flow significantly deteriorates in the future, our liquidity and ability to operate our business could be adversely affected. For example, our ability to raise financial capital may be hindered due to our net losses and the possibility of future negative cash flow and, as discussed in the Risk Factors below, maybe hindered while we are ineligible to use Form S-3 to raise capital.

Our Gross Margin May Fluctuate from Period to Period and Our Gross Margins for Optical Components and/or Networking Equipment May Be Adversely Affected by a Number Of Factors.

     The following table sets forth, for the periods indicated, our gross margins from our two principal operating segments and for our company as a whole:

	Three months ended						Nine months ended						Year ended
	September 30						September 30,						December 31,
	2007			2006			2007			2006			2006			2005			2004
Networking group		30	%		35	%		32	%		36	%		35	%		36	%		38	%
Optical components group		19	%		21	%		20	%		20	%		19	%		11	%		14	%
Total		26	%		32	%		29	%		32	%		31	%		32	%		34	%

     Our gross margins also fluctuate from quarter to quarter within a year and from year-to-year. These yearly and quarterly fluctuations in our margins have been affected, often adversely, and may continue to be affected, by numerous factors, including:

• increased price competition, including competition from low-cost producers in Asia;

• price reductions that we make, such as marketing decisions that we have made in the past to reduce the price for our optical components to certain customers in an effort to secure long-term leadership in the market for FTTP components;

• decreases in average selling prices of our products which, in addition to competitive factors and pressures from, or accommodations made to, significant customers, result from factors such as overcapacity and the introduction of new and more technologically advanced products in the case of optical components and excess inventories, increased sales discounts and new product introductions in the case of networking equipment;

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

• sales volume during a particular period or year;

• charges for excess or obsolete inventory;

• changes in the prices or the availability of components needed to manufacture our products;

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• the relative success of our efforts to reduce product manufacturing costs, such as the transition of our optical component manufacturing to our Taiwan facility or to low-cost third party manufacturers in China;

• our introduction of new products, with initial sales at relatively small volumes with resulting higher production costs; and

• increased warranty or repair costs.

     We expect gross margins generally and for specific products to continue to fluctuate from quarter to quarter and year to year and margins fluctuations may be even more pronounced when Fiberxon’s operations are included in our financial results.

We Face Risks from Our International Operations.

     International sales have become an increasingly important part of our operations. The following table sets forth the percentage of our total revenues from sales to customers in foreign countries for the periods identified:

	Three months ended						Nine months ended						Year ended
	September 30,						September 30,						December 31,
	2007			2006			2007			2006			2006			2005			2004
Percentage of total revenue from foreign sales		69	%		68	%		69	%		67	%		67	%		74	%		77	%

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

     We have offices in, and conduct a significant portion of our operations in and from Israel and in Taiwan. We expect to continue to use independent electronic contract manufacturers in the PRC. With our acquisition of Fiberxon on July 1 2007, our operations and manufacturing in mainland China has increased substantially. Our financial performance and success of our business are and will be influenced by the political and economic conditions affecting Israel and Taiwan and China and the heightening of tensions between them. Any major hostilities involving Israel or Taiwan and/or China, the interruption or curtailment of trade between Israel and its trading partners or a substantial downturn in the economic or financial condition of Israel could have a material adverse effect on our operations. Risks we face due to international sales and the use of overseas manufacturing include:

• greater difficulty in accounts receivable collection and longer collection periods;

• the impact of recessions in economies outside the United States;

• unexpected changes in regulatory requirements;

• seasonal reductions in business activities in some parts of the world, such as during the summer months in Europe or in the winter months in Asia when the Chinese New Year is celebrated;

• difficulties in managing operations across disparate geographic areas;

• difficulties associated with enforcing agreements through foreign legal systems;

• the payment of operating expenses in local currencies, which exposes us to risks of currency fluctuations;

• higher credit risks requiring cash in advance or letters of credit;

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• potentially adverse tax consequences;

• unanticipated cost increases;

• unavailability or late delivery of equipment;

• trade restrictions;

• limited protection of intellectual property rights;

• unforeseen environmental or engineering problems; and

• personnel recruitment delays.

     Through one of our foreign subsidiaries, we have entered into interest rate swap contracts to hedge exposure to interest rate fluctuations. Unrealized gains on these interest rate swap contracts for the nine months ended September 30, 2007 and 2006 were approximately $183,000 and $167,000, respectively, and we could incur losses from these or other hedging activities in the future.

We Are Subject to A Number of Business Risks As A Consequence of Our Recent Acquisition of Fiberxon.

     On July 1, 2007, we acquired Fiberxon, which designs, manufacturing and markets high performance, cost effective and value-added modular optical link interfaces for optical communication systems, which, although headquartered in Santa Clara, California, USA, conducts its design and manufacturing activities at its facilities located in the PRC. Our future results of operations will be substantially influenced by the operations of Fiberxon’s legacy business, and, in addition to the risks associated with any acquisition such as those discussed immediately below, we are subject to a number of risks, uncertainties and challenges related specifically to the acquisition of Fiberxon, including:

• integration and retention of Fiberxon’s key management, sales, research and development and other personnel and recruiting trained and experienced successor personnel in China, who are in much demand and limited supply, to fill vacancies in key positions;

• incorporation of Fiberxon’s products and technology that we acquired as part of the acquisition with our products and technology;

• coordinating Fiberxon’s manufacturing operations with ours;

• integrating and supporting Fiberxon’s pre-existing supplier, distribution and customer relationships and coordinating sales and marketing efforts to communicate the capabilities of our combined company effectively;

• consolidating duplicate facilities and functions, combining back office accounting, order processing and support functions and rationalizing information technology and operational infrastructures;

• minimizing the diversion of attention by our management and that of Fiberxon from ongoing core business concerns and successfully returning managers to regular business responsibilities from their integration activities;

• operating a much larger company with operations in China, where our senior management has no operational experience;

• managing geographically dispersed operations and personnel with diverse cultural backgrounds and organizational structures and overcoming the potential incompatibility of business cultures and/or the loss of key Fiberxon personnel;

• efficiently reducing the combined company’s sales and marketing and general and administrative expenses; including expected increases in professional advisor fees related to the new profile of our combined companies, without associated disruption of our combined businesses;

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• overcoming expected difficulties in financial forecasting due to our limited familiarity with Fiberxon’s operations, customers and markets or their impact on the overall results of operations of the combined company; and

• maintaining the proper level of internal control over financial reporting in a foreign business environment in which we became aware of allegations of historical financial and accounting irregularities.

     Our efforts to meet these and other challenges could potentially disrupt our ongoing business operations and distract management from day-to-day operational matters, as well as forestall other strategic opportunities. These efforts could strain our financial and managerial controls and reporting systems and procedures implemented to collect financial data, prepare financial statements, books of account and corporate records, and hinder our ability to prepare business and financial forecasts reliably or otherwise institute business practices that meet Western standards and the expectations of the US financial and investment community. Many of the expenses that will be incurred, by their nature, are impracticable to estimate now. We may encounter unforeseen obstacles or costs in the integration of Fiberxon’s business or discover the existence of one or more material liabilities that are not now known and were not known at the time of the closing of the acquisition. The known and unknown problems and expenses and other difficulties we encounter in the integration process could, particularly in the near term, exceed the benefits that we expect to realize from the combination of Fiberxon’s business with ours.

We May Not Address Successfully Problems Encountered in Connection With Future Acquisitions on Which We May Embark.

     As we have in connection with our acquisition of Fiberxon, we expect to continue to consider opportunities to acquire or make investments in other technologies, products and businesses that could enhance our capabilities, complement or augment our current products or expand the breadth and geography of our markets or customer base. We have limited experience in acquiring other businesses and technologies. The acquisition of Fiberxon, and other potential acquisitions we may make, involve numerous risks, including:

• problems assimilating the purchased technologies, products or business operations, including the timely integration of financial reporting systems particularly if, like in the case of Fiberxon if our acquisition is successfully completed, we acquire companies in countries where English is not widely spoken, the culture and political, economic, financial or monetary systems, principles or controls are different from those of the U.S., Taiwan, Israel or countries in Europe where we currently have offices or significant operations;

• problems maintaining uniform standards, procedures, controls and policies;

• unanticipated costs associated with the acquisition;

• start-up costs associated with any new business or product line we may acquire;

• possible charges to operations for purchased technology and restructuring;

• incurrence of amortization expenses and impairment charges related to goodwill and other intangible assets and deferred stock expense;

• incurrence of debt and contingent liabilities;

• problems, and adverse effects on our existing businesses of, providing funds or financing to support the operations of the acquired business;

• adverse effects on existing business relationships with suppliers and customers or on relations with our existing employees;

• risks associated with entering new markets, such as those in China, in which we have no or limited prior experience;

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• potential loss of key employees of acquired businesses and difficulties recruiting adequate replacements;

• the need to hire additional employees to operate the acquired business effectively, including employees with specialized knowledge or language skills;

• potential litigation risks associated with acquisitions, whether completed or not;

• dilutive issuances of our equity securities; and

• increased legal and accounting costs as a result of the Sarbanes-Oxley Act.

     If we fail to evaluate and execute acquisitions properly, our management team may be distracted or their attention diverted from our core businesses and their day-to-day operations, disrupting our business and adversely affecting our operating results. Our efforts to acquire Fiberxon has resulted in substantial expenses. Any efforts to pursue other acquisitions could result in substantial expenses and could adversely affect our operating results if those, if any, acquisitions are not successfully consummated.

We Expect That Our Future Operating Results May Be Subject to Volatility As A Result of Exposure to Foreign Exchange Risks, Particularly As A Result of the Addition of Fiberxon.

     We are exposed to foreign exchange risks, particularly so with our acquisition of Fiberxon. Foreign currency fluctuations between the Chinese RMB and the U.S. dollar may affect our total revenues going forward and, if present trends continue, are expected to impact adversely our costs and expenses and could significantly affect our operating results.

     On July 21, 2005, the People’s Bank of China adjusted the exchange rate of RMB to the U.S. dollar by linking the RMB to a basket of currencies and simultaneously setting the exchange rate of RMB to U.S. dollars, from 1:8.27, to a narrow band of around 1:8.11, resulting in an approximate 2.4% appreciation in the value of the RMB against the U.S. dollars at the end of 2005 from the July 21, 2005 RMB adjustment, a 3.3% appreciation at the end of 2006 as compared to the end of 2005 and 5.7% cumulative appreciation at the end of 2006 as compared to the level immediately prior to the July 21, 2005 adjustment in the exchange rate.

     If the trend of RMB appreciation to the U.S. dollar continues or the PRC government allows a further and significant RMB appreciation, and there are indications that the Chinese government has accelerated the RMB’s appreciation to the dollar with it reaching 7.5712:1 on July 20, 2007, our operating costs would increase and our financial results would be adversely affected unless our RMB denominated sales increased commensurately. If we determined to pass onto our customers through price increases the effect of increases in the RMB relative to the U.S. dollars, it would make our products more expensive in global markets, such as the United States and the European Union. This could result in the loss of customers, who may seek, and be able to obtain, products comparable to those we offer in lower-cost regions of the world. If we did not increase our prices to pass on the effect of increases in the RMB relative to the U.S. dollars, our margins would suffer, reported net income would decrease and reported net losses would increase.

We Face Risks Inherent in Doing Business in China.

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

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

• compliance with PRC laws, including employment laws;

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

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• the need to successfully migrate the PRC locations to the financial reporting system used by us in the United States, including the need to implement and maintain financial controls that comply with the Sarbanes-Oxley Act;

• trade restrictions or higher tariffs;

• transportation delays and difficulties of managing international distribution channels;

• longer payment cycles for, and greater difficulty collecting, accounts receivable;

• difficulties in collecting payments from PRC customers to whom we or Fiberxon have extended significant amounts of credit if those customers do not pay on the payment terms extended to them;

• currency exchange rate fluctuations of the RMB, which has been appreciating in relation to the U.S. dollar since July 2005 when the People’s Bank of China announced that the yuan would no longer be pegged to the U.S. dollar; that may increase our manufacturing and labor costs in the PRC when translated to U.S. dollars and render prices on our products manufactured in China uncompetitive, and

• unexpected changes in regulatory requirements, royalties and withholding taxes that restrict or make more costly the repatriation of earnings generated by Fiberxon’s operations in the PRC or influence the effective income tax rate attributable to profits generated or lost in the PRC.

     Any of these factors could harm our future revenues, gross margins and operations significantly. Moreover, the political tension between Taiwan and the PRC that continues to exist, could eventually lead to hostilities or there may be regulatory issues with either the PRC or Taiwan as a result of our having operations or business interests in both countries.

Failure to Comply With the United States foreign Corrupt Practices Act Could Subject Us to Penalties and Other Adverse Consequences. We Could Suffer Losses From Corrupt or Fraudulent Business Practices.

     We are subject to the United States Foreign Corrupt Practices Act, or FCPA, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are required to maintain records that accurately and fairly represent our transactions and have an adequate system of internal accounting controls. Foreign companies, including some that may compete with us, are not subject to these prohibitions, and therefore may have a competitive advantage over us. Prior to the completion of the acquisition, Fiberxon’s management and employees were not been subject to the FCPA. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices are common in the PRC. Unless we are successful in implementing and maintaining adequate preventative measures, of which there can be no assurance, our employees or other agents engaging in such conduct could render us responsible under the FCPA. If our employees or other agents are found to have engaged in these practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

Our Proprietary Rights May Be inadequately Protected and There Is a Risk of Poor Enforcement of Intellectual Property Rights in China.

     The validity, enforceability and scope of protection of intellectual property in China is uncertain and still evolving, and PRC laws may not protect intellectual property rights to the same extent as the laws of some other jurisdictions, such as the United States. Policing unauthorized use of proprietary technology is difficult and expensive. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable competitors, especially in the PRC, to benefit from our technologies without paying us any royalties.

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Labor Shortages in Southern China Could Adversely Affect Our Gross Margins or Decrease Revenue.

     Historically, there has been an abundance of labor in Southern China, but over the last few years, factories in Southern China, particularly in Shenzhen and to a lesser extent in Chengdu, where Fiberxon’s manufacturing facilities are located, are to varying degrees facing a labor shortage as migrant workers and middle level management seek better wages and working conditions elsewhere. If this trend continues and adversely affects our ability to recruit or retain necessary workers and management personnel, our operations could be adversely impacted by, for example, preventing us and third-party contract manufacturers from manufacturing at peak capacity or forcing us or the PRC companies we use for contract manufacturing to increase wages and benefits to attract necessary workers. This could result in lower revenues or increased manufacturing costs, which would adversely affect gross margins.

China’s Legal System Embodies Uncertainties That Could Harm Our Business Operations.

     Since 1979, many new laws, regulations, and government policies covering general economic matters have been implemented in China. Despite the development of the legal system, China’s system of laws is not yet complete. Even where adequate law exists in China, enforcement of contracts based on existing law may be uncertain and sporadic, and it may be difficult to obtain swift and equitable enforcement or to obtain enforcement of a judgment by a court of another jurisdiction. The relative inexperience of China’s judiciary in many cases creates additional uncertainty as to the outcome of any litigation. In addition, interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes.

     As our activities in China increase, we will be subject to administrative review and approval by various national and local agencies of China’s government. Given the changes occurring in China’s legal and regulatory structure, we may not be able to secure the requisite governmental approval for our activities. Failure to obtain the requisite governmental approval for any of our activities could impede our ability to operate our business or increase our expenses.

We Are Subject to the Risk of increased income and Other Taxes in China.

     Fiberxon has enjoyed preferential tax concessions in the PRC as a high-tech enterprise. In March 2007, China enacted the PRC Enterprise Income Tax Law, or EIT Law, under which, effective January 1, 2008, China will adopt a uniform income tax rate of 25.0% for all enterprises (including foreign-invested enterprises) and cancel several tax incentives enjoyed previously by foreign-invested enterprises such as Fiberxon. However, for foreign-invested enterprises like Fiberxon, which were established before the promulgation of the EIT Law, a five-year transition period is provided during which reduced income tax rates will apply but gradually be phased out. Since the PRC government has not announced implementation measures for the transitional policy concerning such preferential tax rates, we cannot at this time reasonably estimate the financial impact of the new tax law on Fiberxon or to us at this time.

     The EIT Law further includes provisions relating to withholding on interest, royalties, dividends or other passive income, including dividend payments from companies in the PRC like Fiberxon.

     It currently appears that the EIT Law and its associated new income tax rates and withholding provisions will reduce after-tax net income from Fiberxon’s operations if they become profitable and decrease income, if any, available for distribution to us from our China subsidiaries. Accordingly, the enactment and implementation of the EIT and potential new tax laws in China may ameliorate many of the tax saving benefits we had hoped to realize by expanding our operations into the PRC.

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Payment of Dividends by Our Subsidiaries in China to Us Is Subject to Restrictions Under PRC Law.

     Under PRC law, dividends may be paid only out of distributable profits. Distributable profits with respect to our subsidiaries in China refers to after-tax profits as determined in accordance with accounting principles and financial regulations applicable to PRC enterprises, or China GAAP, less any recovery of accumulated losses and allocations to statutory funds that it is required to make. Any distributable profits that are not distributed in a given year are retained and available for distribution in subsequent years. The calculation of distributable profits under China GAAP differs in many respects from the calculation under accounting principles generally accepted in the United States, or U.S. GAAP. As a result, our subsidiaries in China may not be able to pay any dividend in a given year as determined under China GAAP. China’s tax authorities may require changes in determining income of Fiberxon that would limit its ability to pay dividends and make other distributions. PRC law requires companies to set aside a portion of net income to fund certain reserves for future development and staff welfare, which amounts are not distributable as dividends. These rules and possible changes could restrict our PRC subsidiaries from repatriating funds ultimately to us as dividends.

The Economy of China Has Been Experiencing Significant Growth, Leading to Some inflation. If the Government Tries to Control inflation by Traditional Means of Monetary Policy or Returns to Planned Economic Techniques, Our PRC-Based Business May Suffer a Reduction in Sales Growth and Expansion Opportunities.

     The rapid growth of the PRC economy has historically resulted in high levels of inflation. If the government tries to control inflation, it may have an adverse effect on the business climate and growth of private enterprise in the PRC. An economic slowdown may increase our costs. If inflation is allowed to proceed unchecked, our costs in China would likely increase, and there can be no assurance that we would be able to increase our prices to an extent that would offset the increase in our expenses.

Our Manufacturing Capacity May Be interrupted, Limited or Delayed If We Cannot Maintain Sufficient Sources of Electricity in China

     The manufacturing process for optical component manufacturing requires a substantial and stable source of electricity. As our production capabilities increase in China, our requirements for electricity in China will grow substantially. Many companies with operations in China have experienced a lack of sufficient electricity supply and we cannot be assured that electric power generators that we or Fiberxon may have available will produce sufficient electricity supply in the event of a disruption in power. Power interruptions, electricity shortages, the cost of fuel to run power generators or government intervention, particularly in the form of rationing, are factors that could restrict access to electricity to Fiberxon’s PRC manufacturing facilities, and adversely affect manufacturing costs. Any such power shortages could result in delays in shipments to Fiberxon’s or our customers and, potentially, the loss of customer orders and penalties from such customers for the delay.

Controversies Affecting China’s Trade With the United States Could Harm Our Operating Results or Depress Our Stock Price.

     While China has been granted permanent most favored nation trade status in the United States through its entry into the World Trade Organization, controversies between the United States and China may arise that threaten the status quo involving trade between the United States and China. These controversies could materially and adversely affect our business by, among other things, causing products we manufacture in China for customer in the US to become more expensive resulting in reduced demand for our products by those customers. Political or trade friction between the United States and China, whether or not actually affecting our business, could also materially and adversely affect the prevailing market price of our common stock.

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Changes in Foreign Exchange Regulations of China Could Adversely Affect Our Operating Results.

     Changes in foreign exchange regulations of China could adversely affect our operating results. Our earnings, if any, from our operations in China are denominated in yuan, the base unit of the RMB. The People’s Bank of China and the State Administration of Foreign Exchange, or SAFE, regulate the conversion of RMB into foreign currencies. Under the current unified floating exchange rate system, the People’s Bank of China publishes a daily exchange rate for RMB based on the previous day’s dealings in the inter-bank foreign exchange market. Financial institutions may enter into foreign exchange transactions at exchange rates within an authorized range above or below the exchange rate published by the People’s Bank of China according to the market conditions. Since 1996, the PRC government has issued a number of rules, regulations and notices regarding foreign exchange control designed to provide for greater convertibility of RMB. Under such regulations, any foreign investment enterprise, or FIE, must establish a “current account” and a “capital account” with a bank authorized to deal in foreign exchange. Currently, FIEs are able to exchange RMB into foreign exchange currencies at designated foreign exchange banks for settlement of current account transactions, which include payment of dividends based on the board resolutions authorizing the distribution of profits or dividends of the company concerned, without the approval of SAFE. Conversion of RMB into foreign currencies for capital account transactions, which include the receipt and payment of foreign exchange for loans, capital contributions and the purchase of fixed assets, continues to be subject to limitations and requires the approval of SAFE. Our subsidiaries in China are all FIEs and subject to the laws of China to which such regulations apply. However, there can be no assurance that we will be able to obtain sufficient foreign exchange to make relevant payments or satisfy other foreign exchange requirements in the future.

Our Business Requires Us to Attract and Retain Qualified Personnel.

     Our ability to develop, manufacture and market our products, run our operations and our ability to compete with our current and future competitors will depend, in large part, on our ability to attract and retain qualified personnel. Competition for executives and qualified personnel in the networking and fiber optics industries is intense, and we will be required to compete for those personnel with companies having substantially greater financial and other resources than we do. To attract executives, we have had to enter into compensation arrangements, which have resulted in substantial deferred stock expense and adversely affected our results of operations. We may enter into similar arrangements in the future to attract qualified executives. If we should be unable to attract and retain qualified personnel, our business could be materially adversely affectedThe volatility or a lack of positive performance in our stock price may adversely affect our ability to recruit or retain key employees, most of whom have been granted stock options.

As We Were Unable to File an Amendment to Our Form 8-K Reporting the Completion of Our Acquisition of Fiberxon Containing Fiberxon’s Audited Consolidated Financial Statements and the Pro Forma Financial information Required by Item 9.01 of Form 8-K by September 14, 2007, We Were Late in Complying With Our Reporting Obligations Under the Exchange Act. Consequently, We Are ineligible to Use the SEC’s Short-Form Registration Statement to Raise Capital for 12 Months.

     On July 2, 2007, within the period required by SEC rules, we filed with the SEC a Current Report on Form 8-K reporting the completion of our acquisition of Fiberxon on July 1, 2007. In order to close the acquisition of Fiberxon on July 1, 2007, we, among other things, waived the condition precedent to the closing requiring that Fiberxon deliver to us its audited consolidated financial statements at, and for the years ended, December 31, 2004, 2005 and 2006. Under Item 9.01, of Form 8-K, we were required to include Fiberxon’s audited consolidated financial statements and pro forma financial information in the form and for the periods specified in Regulation S-X, the SEC’s regulation containing the rules governing the form and content of financial statements for public companies, in an amendment to that Form 8-K that was due by September 14, 2007 (71 days after the date that our initial Report on Form 8-K must be filed as a result of our acquisition of Fiberxon).

     For information regarding the circumstances and events leading to our decision to close the Fiberxon acquisition without having received its audited financial statement, see “Acquisition of Fiberxon, Inc.” in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part I, Item 2 of this Form 10-Q.

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     Our inability to file the required financial statements and pro forma financial information by the September 14, 2007 deadline has rendered us ineligible for 12 months to use the SEC’s short-form registration statement on Form S-3 to register the issuance of our securities for any capital raising activities and that ineligibility may inhibit our ability to raise capital during that period. If we were able to raise capital during the period of our ineligibility to use Form S-3, the process of doing so will be more expense and time consuming and the terms of any offering transaction may not be as favorable as they would have been if we were eligible to use Form S-3.

We Cannot Predict the Impact of a Review of Fiberxon’s Financial Statements and Pro Forma Financial information Relating to Acquisition of Fiberxon by the SEC’s Staff.

     As part of its normal reviews of periodic reports filed by public companies, the SEC’s staff in connection with its review of our Annual Report of Form 10-K for the year ended December 31, 2006 is reviewing Fiberxon’s financial statements and the pro forma financial information relating to our acquisition of Fiberxon that we filed with the SEC in our Form 8-K/A (Amendment No. 1) on October 1, 2007. This amendment amended our Form 8-K that we filed with the SEC on July 2, 2007 reporting our acquisition of Fiberxon.

     We have received comments from the SEC’s staff on the pro forma financial information included in our Form 8-K/A (Amendment No. 1) and are in the process of reviewing and analyzing these comments for the purpose of responding to them. We expect to submit our responses to the SEC’s comments after this Report on Form 10-Q is filed and further that we will be filing another amendment to our Form 8-K filed on July 2, 2007 that will include revised pro forma financial information relating to our acquisition of Fiberxon. Although we continue to believe that Fiberxon’s financial statements included in our Form 8-K/A (Amendment No. 1) were in compliance with all of the existing rules and related guidance as applicable to Fiberxon’s business at and for the periods presented, as part of the ongoing review and comment process, the SEC’s staff may still issue comments on Fiberxon’s financial statements included in that Report and as a result of that comment process may disagree with positions taken in connection with the preparation or presentation of Fiberxon’s financial statements or require revisions to them. We cannot predict the outcome of that process or its effect, if any, on the Fiberxon financial statements included in our Form 8-K/A (Amendment No. 1), any ripple effect on this Form 10-Q or our future SEC filings or on the prevailing market price of our shares.

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

     Registrant incorporates hereby by reference the disclosure under Item 3.02 of its Form 8-K filed with the SEC on August 13, 2007.

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ITEM 6. EXHIBITS

     (a) Exhibits

No.	Description
10.5	Securities Exchange Agreement dated August 10, 2007 between registrant and Deutsche Bank AG, London Branch (incorporated by reference to Exhibit 99.1 of registrant’s Current Report on Form 8-K filed with the SEC on August 13, 2007)
31.1	Certification of the Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act.
31.2	Certification of the Chief Financial Officer required by Rule 13a-14(a) of the Exchange Act.
32.1	Certifications pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.

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SIGNATURES

     Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant certifies that it has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on November 9, 2007.

MRV COMMUNICATIONS, INC.
By:	/s/ Noam Lotan
	Noam Lotan
	President and Chief Executive Officer
By:	/s/ Guy Avidan
	Guy Avidan
	Acting Chief Financial Officer

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