e10vq

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 March 31, 2008


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

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

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

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

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

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company o

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

As of May 5, 2008, 157,179,177 shares of MRV common stock were outstanding.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

MRV Communications, Inc.

Consolidated Statements of Operations

(In thousands, except per share data)


For the three months ended March 31:	2008			2007

	(Unaudited)
Revenue	$	125,586		$	89,679
Cost of goods sold		88,452			61,363

Gross profit		37,134			28,316

Operating costs and expenses:
Product development and engineering		10,530			7,306
Selling, general and administrative		28,784			22,739
Amortization of intangibles		653			—

Total operating costs and expenses		39,967			30,045

Operating loss		(2,833	)		(1,729	)

Interest expense		(914	)		(1,052	)
Other income, net		704			1,435

Loss before provision for income taxes		(3,043	)		(1,346	)

Provision for income taxes		637			870

Net loss	$	(3,680	)	$	(2,216	)


Loss per share:
Basic and diluted	$	(0.02	)	$	(0.02	)
Weighted average number of shares:
Basic and diluted		157,152			125,758

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

MRV Communications, Inc.

Consolidated Balance Sheets

(In thousands, except par values)


	March 31,			December 31,
	2008			2007

	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	72,591		$	72,474
Short-term marketable securities		3,006			6,402
Time deposits		5,113			6,055
Accounts receivable, net		129,455			128,368
Inventories		99,118			86,676
Deferred income taxes		360			838
Other current assets		22,636			25,370

Total current assets		332,279			326,183
Property and equipment, net		25,730			24,510
Goodwill		140,303			137,371
Deferred income taxes		1,669			907
Long term marketable securities		1,445			1,442
Intangibles, net		11,341			11,994
Other assets		5,478			5,097

Total Assets	$	518,245		$	507,504

Liabilities and stockholders’ equity
Current liabilities:
Short-term obligations	$	29,265		$	28,931
Accounts payable		91,506			82,927
Accrued liabilities		37,169			38,902
Deferred consideration payable		30,561			30,561
Deferred revenue		10,413			9,203
Other current liabilities		4,038			7,766

Total current liabilities		202,952			198,290
Other long-term liabilities		9,981			9,322
Minority interest		5,431			5,193
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 — 158,567 shares in 2008 and 158,480 shares in 2007 Outstanding — 157,214 shares in 2008 and 157,127 shares in 2007		267			267
Additional paid in capital		1,345,644			1,344,661
Accumulated deficit		(1,059,232	)		(1,055,552	)
Treasury stock — 1,353 shares in 2008 and 2007		(1,352	)		(1,352	)
Accumulated other comprehensive loss		14,554			6,675

Total stockholders’ equity		299,881			294,699

Total liabilities and stockholders’ equity	$	518,245		$	507,504

The accompanying notes are an integral part of these consolidated balance sheets.

MRV Communications, Inc.

Consolidated Statements of Cash Flows

(In thousands)


For the three months ended March 31:	2008			2007

	(Unaudited)
Cash flows from operating activities:
Net loss	$	(3,680	)	$	(2,216	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and other noncash items		2,879			865
Share-based compensation expense		1,296			824
Provision for doubtful accounts		(20	)		106
Deferred income taxes		(105	)		—
(Gain) loss on disposition of property and equipment		12			(11	)
Minority interests’ share of income (loss)		(117	)		13
Changes in operating assets and liabilities:
Time deposits		972			(4,251	)
Accounts receivable		4,518			10,630
Inventories		(8,702	)		(3,912	)
Other assets		3,895			(2,024	)
Accounts payable		4,527			2,755
Accrued liabilities		(1,683	)		(5,378	)
Deferred revenue		861			57
Other current liabilities		(5,547	)		1,799

Net cash used in operating activities		(894	)		(743	)

Cash flows from investing activities:
Purchases of property and equipment		(2,759	)		(1,674	)
Proceeds from sale of property and equipment		194			48
Purchases of investments		—			(4,000	)
Proceeds from sale or maturity of investments		3,395			3,500

Net cash provided by (used in) investing activities		830			(2,126	)

Cash flows from financing activities:
Net proceeds from issuance of common stock		44			946
Borrowings on short-term obligations		939			33,757
Payments on short-term obligations		(2,304	)		(38,678	)
Borrowings on long-term obligations		—			148
Payments on long-term obligations		(45	)		(72	)
Other long-term liabilities		(201	)		4

Net cash used in financing activities		(1,567	)		(3,895	)

Effect of exchange rate changes on cash and cash equivalents		1,748			311

Net increase (decrease) in cash and cash equivalents		117			(6,453	)

Cash and cash equivalents, beginning of period		72,474			91,722

Cash and cash equivalents, end of period	$	72,591		$	85,269

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

MRV Communications, Inc.

Notes To Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation

The consolidated financial statements include the accounts of MRV Communications, Inc. (MRV) and its subsidiaries; all significant intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation.

The consolidated financial statements included herein have been prepared by MRV, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations although MRV believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in MRV’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

In the opinion of MRV’s management, these unaudited statements contain all adjustments, which include normal recurring adjustments, necessary to present fairly the financial position of MRV Communications, Inc. as of March 31, 2008, and the results of its operations and its cash flows for the three months then ended.

The results reported in these consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the full year or any future periods.

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

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. MRV maintains cash balances and investments in highly qualified financial institutions, and at various times such amounts are in excess of insured limits. MRV’s marketable securities are available for sale, and the original cost approximated fair market value as of March 31, 2008 and December 31, 2007. Marketable securities mature at various dates through 2008 and 2009 and consist of corporate issues.

3. Allowance for Doubtful Accounts

The following table summarizes the changes in the allowance for doubtful accounts during the three months ended March 31, 2008 (in thousands):


Three months ended March 31:	2008


Beginning balance	$	6,651
Charged to cost and expense		(20	)
Foreign currency translation		274
Deductions		111

Total	$	7,016

4. Inventories

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


	March 31,		December 31,
	2008		2007


Raw materials	$	34,348	$	29,863
Work-in process		22,095		18,968
Finished goods		42,675		37,845

Total	$	99,118	$	86,676

5. Goodwill and Other Intangibles

The following table summarizes the changes in carrying value of goodwill during the three months ended March 31, 2008 (in thousands):


Three months ended March 31:	2008


Beginning balance	$	137,371
Foreign currency translation		2,932

Total	$	140,303

Other intangibles assets consist of the intangibles assets identified as a result of the Fiberxon acquisition on July 1, 2007. The following table summarizes MRV’s other intangible asset balances at March 31, 2008 (in thousands):


	Gross					Net
	Carrying		Accumulated			Carrying
	Amount		Amortization			Amount

Developed technology	$	8,500	$	(1,159	)	$	7,341
Customer relationships		4,800		(800	)		4,000
Customer backlog		600		(600	)		—

Total other intangible assets	$	13,900	$	(2,559	)	$	11,341

Amortization of other intangibles was $653,000 for the three months ended March 31, 2008.

6. Product Warranty and Indemnification

As of March 31, 2008, MRV’s product warranty liability recorded in accrued liabilities was $2.6 million. MRV accrues for warranty costs as part of cost of goods sold based on associated material product costs, technical support labor costs and associated overhead. The products sold are generally covered by a warranty for periods of one to two years. The following table summarizes the activity related to the product warranty liability during the three months ended March 31, 2008 (in thousands):


Three months ended March 31:	2008


Beginning balance	$	2,547
Cost of warranty claims		(119	)
Accruals for product warranties		107
Foreign currency translation		24

Total	$	2,559

7. Convertible Debt

In June 2003, MRV completed the sale of $23.0 million principal amount of five-year 5% convertible notes (2003 Notes) due in 2008, to Deutsche Bank AG, London Branch, in a private placement. The 2003 Notes bore interest at 5% per annum and were convertible into shares of MRV’s common stock at a conversion price of $2.32 per share. 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.

On August 10, 2007, MRV executed a Securities Exchange Agreement exchanging the 2003 Notes for 11,900,000 shares of MRV’s common stock. 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. Interest expense related to the 2003 Notes amounted to $289,000 for the three months ended March 31, 2007.

8. Loss Per Share

Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share are 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, which is calculated based on the average share price for each period using the treasury stock method.

Outstanding stock options and warrants to purchase 15.7 million shares and 11.0 million shares as of March 31, 2008 and 2007, respectively, were anti-dilutive and excluded from the computation of diluted loss per share. Potential common shares associated with the 2003 Notes were anti-dilutive and excluded from the computation of diluted loss per share for the three months ended March 31, 2007.

9. Share-Based Compensation

MRV records share-based compensation expense in accordance with the provisions of SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123(R)). The following is a summary of the impact on MRV’s results of operations of recording share-based compensation under SFAS No. 123(R) for the three months ended March 31, 2008 and 2007 (in thousands):


Three months ended March 31:	2008		2007


Cost of goods sold	$	101	$	85
Product development and engineering		460		190
Selling, general and administrative		735		549

Total share-based compensation expense ⁽¹⁾	$	1,296	$	824


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

The weighted average fair value of awards granted during the three months ended March 31, 2008 was $0.76 per share. There were no share-based awards granted during the three months ended March 31, 2007. The total fair value of options vested during the three months ended March 31, 2008 and 2007 was $670,000 and $501,000, respectively. As of March 31, 2008, the total unrecorded deferred share-based compensation balance for unvested shares, net of expected forfeitures, was $6.2 million which is expected to be amortized over a weighted-average period of 2.6 years. On July 1, 2007 Source Photonics issued restricted stock units to employees of Fiberxon. MRV valued the restricted stock units using a third party valuation. The $2.2 million aggregate grant date fair value, less forfeitures, is being recognized ratably over the four year vesting period.

Valuation Assumptions

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


Three months ended March 31:	2008			2007⁽¹⁾


Risk-free interest rate		2.3	%	NA
Dividend yield		0	%	NA
Volatility		63.3	%	NA
Expected life	4.3 yrs			NA


(1)		There were no share-based awards granted during the three months ended March 31, 2007.

10. Segment Reporting and Geographical Information

MRV divides and operates its business based on three segments: the network equipment group, the network integration group, and the optical components group. In the fourth quarter of 2007, MRV disaggregated its networking reporting segment and began disclosing the network equipment group separately from the network integration group. Prior year amounts have been reclassified to conform to the current year presentation. The network equipment group designs, manufactures and distributes optical networking solutions and Internet infrastructure products. The network integration group provides value-added integration and support services for customers’ networks. The optical components group designs, manufactures and distributes optical components and optical subsystems. Segment information is therefore being provided on this basis.

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

Following is a summary of revenues by segment, including intersegment sales (in thousands):


Three months ended March 31:	2008			2007


Network equipment group	$	30,649		$	23,569
Network integration group		49,087			46,951
Optical components group		49,999			22,918
All others		31			—

		129,766			93,438
Adjustments ⁽¹⁾		(4,180	)		(3,759	)

Total	$	125,586		$	89,679


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

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. 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. Fiber optic components revenue primarily consists fiber optic components, such as components for fiber-to-the premises, or FTTP, applications, fiber optic transceivers, discrete lasers and LEDs, that are not sold as part of MRV’s network equipment or network integration solutions.

For the three months ended March 31, 2007, the optical components group revenue included $2.9 million of revenue that was previously deferred from prior period sales of products to one customer. MRV evaluated the conditions that resulted in the deferred revenue and determined that such conditions lapsed during the three months ended March 31, 2007. This amount is classified as Americas revenue in the revenue by geographical region table below.

For the three months ended March 31, 2008 and 2007, no single customer accounted for 10% or more of revenues in either period. MRV does not track customer revenue by region for each individual reporting segment.

Following is a summary of external revenue by geographical region (in thousands):


Three months ended March 31:	2008		2007


Americas	$	41,364	$	27,101
Europe		64,622		55,392
Asia Pacific		19,530		7,123
Other regions		70		63

Total	$	125,586	$	89,679

Following is a summary of long-lived assets, consisting of property and equipment, by geographical region (in thousands):


	March 31,		December 31,
	2008		2007


Americas	$	5,434	$	5,111
Europe		9,003		8,601
Asia Pacific		11,293		10,798

Total	$	25,730	$	24,510

Following is a summary of operating income (loss) by segment (in thousands):


Three months ended March 31:	2008			2007


Network equipment group	$	(441	)	$	(3,274	)
Network integration group		(107	)		2,504
Optical components group		(299	)		1,338
All others		(458	)		(376	)

		(1,305	)		192
Corporate unallocated		(1,976	)		(2,034	)
Adjustments ⁽¹⁾		448			113

Total	$	(2,833	)	$	(1,729	)


(1)		Adjustments represent the elimination of intersegment sales and related balances in order to reconcile to consolidated operating loss

Following is a summary of Income (loss) before provision for income taxes (in thousands):


Three months ended March 31:	2008			2007


Domestic	$	(350	)	$	(1,923	)
Foreign		(2,693	)		577

Total	$	(3,043	)	$	(1,346	)

11. Comprehensive Loss

Following is a summary of the components of comprehensive income (loss) (in thousands):


For the three months ended March 31:	2008			2007


Net loss	$	(3,680	)	$	(2,216	)
Unrealized loss from available-for-sale securities		—			(1	)
Pension obligation		62			—
Foreign currency translation		7,817			(161	)

Total	$	4,199		$	(2,378	)

12. Derivative Financial Instruments

MRV, through certain foreign offices, has entered into foreign exchange and interest rate swap contracts. All derivatives are held for purposes other than trading. The fair values of the derivatives are recorded in other current or non-current assets or liabilities in the accompanying Balance Sheets. No hedging relationship is designated for these derivatives held and they are marked to market through earnings. The fair value of these derivative instruments is based on quoted market prices. Cash flows from financial instruments are recognized in the Consolidated Statements of Cash Flows in a manner consistent with the underlying transactions.

Foreign Exchange Contracts. Certain foreign offices of MRV enter into foreign exchange contracts in an effort to minimize the currency exchange risk related to purchase commitments denominated in foreign currencies. These contracts cover periods commensurate with known or expected exposures, generally less than 12 months, and are principally unsecured foreign exchange contracts with carefully selected banks. The market risk exposure is essentially limited to risk related to currency rate movements. As of March 31, 2008, there were no outstanding foreign currency contracts.

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 March 31, 2008 this foreign office had one interest rate swap contract maturing in 2008. Unrealized gains on interest rate swaps for the three months ended March 31, 2008 and 2007 were $102,000 and $22,000, respectively, which have been recorded in interest expense. The fair value and the carrying value of the interest rate swap was $96,000 at March 31, 2008 and was recorded in other current liabilities.

13. Supplemental Statement of Cash Flow Information (in thousands)


For the three months ended March 31:	2008		2007


Cash paid during the period for interest	$	748	$	986

Cash paid during the period for taxes	$	498	$	1,787

14. 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. MRV acquired Fiberxon to add an established, vertically integrated manufacturing, sales and distribution model in China and strengthens the Company’s optical component groups positioning in Asia-Pacific, Europe and North America. MRV has announced its intention to contribute the capital stock of Fiberxon to Source Photonics, Inc. (Source Photonics), a wholly-owned subsidiary of MRV, or otherwise combine Fiberxon’s business with that of Source Photonics. 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 Source Photonics does not complete an initial public offering (an “IPO”) of its common stock by March 27, 2009. The third component of the purchase consideration may amount to more or less than $31.5 million if Source Photonics successfully completes an IPO on or prior to March 27, 2009. 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 Source Photonics IPO, less the discount provided to the underwriters, by (y) the total number of shares of Source Photonics Common Stock outstanding immediately prior to the effectiveness of the agreement between Source Photonics and the underwriters of the Source Photonics 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 the Source Photonics 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) the date of the Source Photonics IPO closing or 2) the IPO deadline of March 27, 2009.

MRV 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; and the net tangible assets acquired were recorded at fair value on the acquisition date.

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


Cash	$	17,651
MRV common stock issued		72,777
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: recoverable costs		(939	)
Legal, professional and banker’s fees related to acquisition cost		4,926

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 $939,000 portion attributable to the Fiberxon stockholders’ responsibility, from the purchase price per the amended agreement of June 26, 2007.

MRV believes the methodology and estimates used to value the net tangible assets and intangible assets are reasonable. The following table shows the allocation of purchase price (in thousands):


Net tangible assets acquired	$	22,104
Intangible assets acquired:
Developed technology		8,500
Customer backlog		600
Customer relationships		4,800
Goodwill		98,917

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		(24,235	)

Net tangible assets acquired	$	22,104

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 components segment.

In connection with the purchase price allocation, MRV recorded a $2.2 million net deferred tax liability. The deferred tax liability arose as a result of the $13.9 million value assigned to identifiable intangible assets, offset by deferred tax assets related to accruals and reserves.

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. Fiberxon’s results of operations for the three months ended March 31, 2008 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 2007:


For the three months ended March 31:	2007

Pro forma net revenue	$	108,862
Pro forma net loss	$	(3,163	)
Pro forma net loss per share (basic)	$	(0.03	)
Pro forma net loss per share (diluted)	$	(0.03	)

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.

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 became effective for MRV beginning January 1, 2008, and the provisions of SFAS No. 157 were applied prospectively as of that date. SFAS No. 157 establishes a three-level hierarchy that prioritizes the use of observable inputs, such as quoted prices in active markets, and minimizes the use of unobservable inputs, to measure fair value. All of MRV’s assets and liabilities that are measured at fair value are measured using the unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. The adoption of SFAS No. 157 did not have a material effect on MRV’s financial condition, its results of operations or liquidity.

In February 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. MRV elected the fair value option at adoption of this statement on January 1, 2008. The adoption of SFAS No. 159 did not have a material effect on the Company’s financial condition, results of operations or liquidity.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. This standard requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. Its intention is to eliminate the diversity in practice regarding the accounting for transactions between an entity and noncontrolling interests. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The impact of this statement will be a reclassification of minority interests to stockholders’ equity in MRV’s balance sheet.

In December 2007, the FASB issued SFAS No. 141(R), which revises SFAS No. 141, Business Combinations, to simplify existing guidance and converge rulemaking under US GAAP with international accounting standards. SFAS No. 141(R) applies prospectively to business combinations where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 31, 2008. Earlier adoption is prohibited. MRV is currently assessing the impact that SFAS No. 141(R) will have on our financial condition, results of operations and liquidity. The effects of adoption will depend on the nature and significance of any acquisitions subject to this statement.

16. Subsequent Event

On April 7, 2008, Source Photonics, LuminentOIC, Inc., and Fiberxon, Inc. (the Borrowers), all wholly-owned subsidiaries of MRV, entered into a Loan and Security Agreement with Silicon Valley Bank (SVB) for a working capital loan facility of up to $15.0 million against qualified accounts receivable of up to $18.75 million (the Agreement). The maturity date of the Agreement is April 6, 2009. Under the terms of the Agreement, the Borrowers may finance certain eligible accounts receivable in amounts equal to the advance rate (currently 80%) in effect multiplied by the face amount of the account receivable. The interest rate applicable to each advance ranges from zero to four percent over SVB’s prime rate, dependent on the Borrowers’ ratio of unrestricted cash and cash equivalents held at SVB and net accounts receivable to all obligations and liabilities of the Borrowers to SVB, plus, without duplication, the aggregate amount of the Borrowers’ total liabilities, as defined, that mature within one year. Under the Agreement, each of the Borrowers granted SVB a security interest in all of its right, title and interest in its assets, other than intellectual property, and agreed not to sell, transfer, assign, mortgage, pledge, grant a security interest in or encumber any of its intellectual property without SVB’s prior written consent. The Borrowers paid a $50,000 facility fee, and are subject to additional administrative fees under certain circumstances.

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

Overview

MRV Communications is a supplier of communications equipment and services to carriers, governments and enterprise customers, worldwide. We are also a supplier of optical components, primarily through our wholly owned subsidiaries: Source Photonics and Fiberxon. We conduct our business along three principal segments: (1) the network equipment group, (2) the network integration group and (3) the optical components group. Our network equipment group provides communications equipment that facilitates access, transport, aggregation and management of voice, data and video traffic in networks, data centers and laboratories used by telecommunications service providers, cable operators, enterprise customers and governments worldwide. Our network integration group operates primarily in Italy, France, Switzerland and Scandinavia, servicing Tier One carriers, regional carriers, large enterprises, and government institutions. We provide network system design, integration and distribution services that include products manufactured by third-party vendors, as well as products developed and manufactured by the network equipment group. Our optical components group designs, manufactures and sells optical communications products used in telecommunications systems and data communications networks. These products include passive optical network, or PON, subsystems, optical transceivers used in enterprise, access and metropolitan applications as well as other optical components, modules and subsystems. We market and sell our products worldwide, through a variety of channels, which include a dedicated direct sales force, manufacturers’ representatives, value-added-resellers, distributors and systems integrators.

In July 2007, we completed our acquisition of Fiberxon, a PRC-based supplier of transceivers for applications in metropolitan networks, access networks and passive optical networks, for approximately $131 million in cash and stock. Fiberxon is part of the Optical Components group, and its results of operations are included in our Consolidated Financial Statements from July 1, 2007.

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. For arrangements with multiple deliverables, the revenue is allocated to each deliverable based on its relative fair value, and revenue is recognized for each deliverable as the revenue recognition criteria are met. 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. As such, there are no separately identifiable segment assets nor are there any separately identifiable Statements of Operations data below operating income (loss).

Our business involves reliance on foreign-based offices. Several of our divisions, outside subcontractors and suppliers are located in foreign countries, including Argentina, Australia, Canada, China, Denmark, Finland, France, Germany, Hungary, Israel, Italy, Japan, Korea, Mexico, the Netherlands, Norway, Russia, Singapore, South Africa, Switzerland, Sweden, Taiwan and the United Kingdom. For the three months ended March 31, 2008 and 2007, foreign revenues constituted 67% and 70%, respectively, of our total revenues. The majority of our foreign sales are to customers located in the European region. The remaining foreign sales are primarily to customers in the Asia Pacific region.

Critical Accounting Policies

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

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

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

Revenue Recognition. 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. For arrangements with multiple deliverables, the revenue is allocated to each deliverable based on its relative fair value, and revenue is recognized for each deliverable as the revenue recognition criteria are met. 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.

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

Goodwill and Other Intangibles. In accordance with Statements 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. We amortize intangible assets that have definite lives over their useful lives.

Income Taxes. As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves 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.

Share-Based Compensation. As discussed in Note 9, Share-Based Compensation of Notes to Consolidated Financial Statements included in this report, the fair value of stock options and warrants are determined using the Black-Scholes valuation model. The assumptions used in calculating the fair value of stock option awards represent our best estimates. Our estimates may be impacted by certain variables including, but not limited to, stock price volatility, employee stock option exercise behaviors, additional stock option grants, estimates of forfeitures, and related income tax impacts. See Note 9 for a further discussion on stock-based compensation and assumptions used. MRV used a third party’s valuation to value the restricted stock units issued by our subsidiary, Source Photonics, in July 2007. The aggregate grant date fair value, less forfeitures, is being recognized ratably over the four year vesting period.

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. Additional discussion of foreign currency risk and other market risks is included in Item 3. Quantitative and Qualitative Disclosures About Market Risk in this Report.

Management Discussion Snapshot

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


Three months ended March 31:	2008						2007
	$			%			$			%
Revenue ⁽¹⁾		125,586			100			89,679			100

Network equipment group ⁽²⁾		30,649			24			23,569			26
Network integration group ⁽²⁾		49,087			39			46,951			52
Optical components group ⁽²⁾		49,999			40			22,918			26
All others ⁽²⁾		31			—			—			—

Gross margin ⁽²⁾		37,134			30			28,316			32

Network equipment group ⁽³⁾		14,991			49			11,310			48
Network integration group ⁽³⁾		11,533			23			11,369			24
Optical components group ⁽³⁾		10,181			20			5,564			24
All others ⁽³⁾		16		NM				—		NM

Operating costs and expenses ⁽²⁾		39,967			32			30,045			34

Network equipment group ⁽³⁾		15,432			50			14,585			62
Network integration group ⁽³⁾		11,640			24			8,864			19
Optical components group ⁽³⁾		10,480			21			4,226			18
All others ⁽³⁾		474		NM				376		NM

Operating income (loss) ⁽²⁾		(2,833	)		(2	)		(1,729	)		(2	)

Network equipment group ⁽³⁾		(441	)		(1	)		(3,274	)		(14	)
Network integration group ⁽³⁾		(107	)	NM				2,504			5
Optical components group ⁽³⁾		(299	)		(1	)		1,338			6
All others ⁽³⁾		(458	)	NM				(376	)	NM


NM		— not meaningful

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

(2)		Percentages as a percent of consolidated revenue.

(3)		Percentages as a percent of applicable segment revenue.

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 network equipment group, network integration group, and the optical components group.

Three Months Ended March 31, 2008 Compared
To Three Months Ended March 31, 2007

Revenue

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


													% Change
													Constant
For the three months ended March 31:	2008			2007			$ Change			% Change			Currency⁽²⁾


Network equipment group	$	30,649		$	23,569		$	7,080			30	%		27	%
Network integration group		49,087			46,951			2,136			5			(8	)
Optical components group		49,999			22,918			27,081			118			113
All others		31			—			31		NM			NM

		129,766			93,438			36,328			39			30
Adjustments ⁽¹⁾		(4,180	)		(3,759	)		(421	)		11			11

Total	$	125,586		$	89,679		$	35,907			40	%		31	%


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.

The following table sets forth, for the periods indicated, external revenues by segment by geographical region (dollars in thousands):


For the three months ended March 31:	2008		2007		$ Change			% Change


Network equipment group:
Americas	$	14,424	$	10,690	$	3,734			35	%
Europe		10,720		7,513		3,207			43
Asia Pacific		2,765		2,730		35			1
Other regions		68		60		8			13

Total network equipment		27,977		20,993		6,984			33

Network integration group:
Europe		49,087		46,951		2,136			5

Total network integration		49,087		46,951		2,136			5

Optical component group:
Americas		26,940		16,411		10,529			64
Europe		4,807		928		3,879			418
Asia Pacific		16,765		4,393		12,372			282
Other regions		2		3		(1	)	NM

Total optical components		48,514		21,735		26,779			123
All others		8		—		8		NM
Total	$	125,586	$	89,679	$	35,907			40	%

Consolidated revenues for 2008 increased $35.9 million, or 40% due primarily to the acquisition of Fiberxon, which added $22.2 million of new revenue growth to the optical components segment. Additional organic growth in the network equipment segment was $7.1 million, or 30%, network integration grew $2.1 million, or 5%, and the legacy portion of the optical components segment increased $4.9 million, or 21% over the prior year. Revenue would have been $7.8 million lower in the first quarter of 2008 had foreign currency exchange rates remained the same as they were in the first quarter of 2007.

Network Equipment Group. Revenues, including intersegment revenues, generated from the network equipment group increased $7.1 million, which was due primarily to increased sales in the Americas region of $3.7 million, and increased sales in the European region of $3.2 million. We attribute the 35% increase in the Americas region to the investment made in 2007 to expand the U.S. sales force. Revenue would have been $733,000 lower in 2008 had foreign currency exchange rates remained the same as they were in 2007.

Network Integration Group. Revenues, including intersegment revenues, generated from the network integration group increased $2.1 million due to the favorable impact of foreign currency movements on revenues, partially offset by decreases in integration and distribution activities throughout Europe. Revenue would have been $6.0 million lower in 2008 had foreign currency exchange rates remained the same as they were in 2007.

Optical Components Group. Revenues, including intersegment revenue, generated from the optical components group increased $27.1 million, of which $22.2 million was attributable to sales generated by the Fiberxon subsidiary. Revenue in 2007 includes $2.9 million that had been previously deferred from sales of products to one customer in periods prior to the first quarter of 2007. Revenue from sales of passive optical network subsystems, or PON, for applications in FTTP deployments, were $30.1 million and $14.6 million in the three months ended March 31, 2008 and 2007, respectively. Revenue from sales of datacom/telecom transceivers, or D/T, were $19.5 million and $8.0 million in the three months ended March 31, 2008 and 2007. Revenue would have been $1.1 million lower in 2008 had foreign currency exchange rates remained the same as they were in 2007.

Gross Profit

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


												% Change
												Constant
For the three months ended March 31:	2008			2007			$ Change		% Change			Currency ⁽²⁾


Network equipment group	$	14,991		$	11,310		$	3,681		33	%		28	%
Network integration group		11,533			11,369			164		1			1
Optical components group		10,181			5,564			4,617		83			82
All others		16			—			16	NM			NM

		36,721			28,243			8,478		30			28
Corporate unallocated cost of goods sold		(39	)		(40	)		1	NM			NM
Intersegment adjustments ⁽¹⁾		452			113			339		300			492

Total	$	37,134		$	28,316		$	8,818		31	%		29	%


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 $8.8 million due to the $35.9 million increase in revenues partially offset by a decrease in gross margin from 32% to 30%. The decline in gross margin was primarily attributable to a change in segment mix, primarily resulting from the increasing percentage of revenues in 2008 contributed from the optical components group, which has lower margins than the other segments. Gross profit would have been $595,000 lower in 2008 had foreign currency exchange rates remained the same as they were in 2007. Gross profit reflects the effect of share-based compensation in cost of goods sold of $101,000 and $85,000 in 2008 and 2007, respectively.

Network Equipment Group. Gross profit for the network equipment group increased $3.7 million. The increase was due to the $7.0 million increase in external revenues and an increase in gross margins from 48% to 49%. The increase in gross margins in 2008 was the result of differences in the composition of the products sold in each period. Gross profit would have been $475,000 lower in 2008 had foreign currency exchange rates remained the same as they were in 2007.

Network Integration Group. Gross profit for the network integration group increased $164,000. The increase was due to the $2.1 million increase in external revenues partially offset by a decrease in gross margin from 24% to 23%. The decrease in gross margins in 2008 was the result of differences in the composition of the products and services sold in each period. The effect of currency fluctuations did not have a significant impact on the year-over-year change in gross profit.

Optical Components Group. Gross profit for the optical components group increased $4.6 million. The increase was due to the $26.8 million increase in external revenues partially offset by a decrease in gross margin from 24% to 20%. The gross margin decreased in 2008 primarily because of lower (16%) gross margins from Fiberxon. The effect of currency fluctuations did not have a significant impact on the year-over-year change in gross profit.

Operating Costs and Expenses

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


											% Change
					$			%			Constant
For the three months ended March 31:	2008		2007		Change			Change			Currency ⁽¹⁾


Network equipment group	$	15,432	$	14,585	$	847			6	%		3	%
Network integration group		11,640		8,864		2,776			31			15
Optical components group		10,480		4,226		6,254			148			147
All others		474		376		98			26			26

		38,026		28,051		9,975			36			29
Corporate unallocated operating expenses ⁽²⁾		1,941		1,994		(53	)	NM			NM

Total	$	39,967	$	30,045	$	9,922			33	%		27	%


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

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

Consolidated operating costs and expenses were $40 million, or 32% of revenues, for 2008, compared to $30.0 million, or 34% of revenues, for 2007. The increase in operating costs and expenses was largely due to the inclusion of Fiberxon’s operating costs in 2008, whereas operating costs in the prior year period were incurred prior to the acquisition of Fiberxon. Operating costs increased in the network integration group, and to a lesser extent, the network equipment group. Operating costs and expenses would have been $1.9 million lower in 2008 had foreign currency exchange rates remained the same as they were in 2007. Product development and engineering expenses included the effect of segment and unallocated corporate share-based compensation of $460,000 and $190,000 in 2008 and 2007, respectively. Selling, general and administrative expenses included the effect of segment and unallocated corporate share-based compensation of $734,000 and $550,000 in 2008 and 2007, respectively.

Network Equipment Group. Operating costs and expenses for 2008 were $15.4 million, or 50% of revenues, compared to $14.6 million, or 62% of revenues, for 2007. The absolute dollar increase in operating costs and expenses was the result of a $339,000 increase in labor and related costs for product development and engineering, additional investment in our North American sales organization of $372,000 and increases due to foreign currency translation. Operating costs and expenses would have been $393,000 lower in 2008 had foreign currency exchange rates remained the same as they were in 2007. Product development and engineering expenses included the effect of share-based compensation of $99,000 and $112,000 in 2008 and 2007, respectively. Selling, general and administrative expenses included the effect of share-based compensation of $190,000 and $178,000 in 2008 and 2007, respectively.

Network Integration Group. Operating costs and expenses for 2008 were $11.6 million, or 24% of revenues, compared to $8.9 million, or 19% of revenues, for 2007. The increase in operating costs and expenses was primarily the result of foreign currency exchange rates. Operating costs and expenses would have been $1.4 million lower in 2008 had foreign currency exchange rates remained the same as they were in 2007. The remaining increase was primarily due to increased selling, general and administrative labor and related costs. Selling, general and administrative expenses included the effect of share-based compensation of $96,000 and $155,000 in 2008 and 2007, respectively.

Optical Components Group. Operating costs and expenses for 2008 were $10.5 million, or 21% of revenues, compared to $4.2 million, or 18% of revenues, for 2007. Substantially all of the increased operating costs and expenses are attributable to the addition of Fiberxon’s 2008 operating costs whereas operating costs in the prior year period were incurred prior to the acquisition of Fiberxon. The effect of currency fluctuations did not have a significant impact on the year-over-year change in operating costs and expenses. Product development and engineering expenses included the effect of share-based compensation of $354,000 and $76,000 in 2008 and 2007, respectively. Selling, general and administrative expenses included the effect of share-based compensation of $284,000 and $86,000 in 2008 and 2007, respectively.

Operating Income (Loss)

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


													% Change
							$			%			Constant
For the three months ended March 31:	2008			2007			Change			Change			Currency ⁽²⁾


Network equipment group	$	(441	)	$	(3,274	)	$	2,833			87	%		84	%
Network integration group		(107	)		2,504			(2,611	)		(104	)		(50	)
Optical components group		(299	)		1,338			(1,637	)		(122	)		(124	)
All others		(458	)		(376	)		(82	)		(22	)		(22	)

		(1,305	)		192			(1,497	)		(780	)		(119	)
Corporate unallocated		(1,976	)		(2,034	)		58		NM			NM
Adjustments ⁽¹⁾		448			113			335		NM			NM

Total	$	(2,833	)	$	(1,729	)	$	(1,104	)		(64	%)		(10	)%


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.

Consolidated operating loss was $2.8 million in 2008, or 2% of revenues, an increase of $1.1 million from a $1.7 million operating loss, or 2% of revenues, in 2007. The increase was primarily the result of the addition of the Fiberxon’s operations and increased network equipment operating expenses. Operating loss would have been $1.3 million less in 2008 had foreign currency exchange rates remained the same as they were in 2007. Operating loss included the effect of segment and unallocated corporate share-based compensation expense of $1.3 million and $824,000 in 2008 and 2007, respectively.

Network Equipment Group. Our network equipment group reported an operating loss of $441,000 for 2008, compared to an operating loss of $3.3 million for 2007, a $2.8 million improvement. The improvement was primarily the result of increased revenues and higher gross profit. Operating loss would have been $82,000 more in 2008 had foreign currency exchange rates remained the same as they were in 2007. Operating loss included the effect of share-based compensation expense of $307,000 and $313,000 in 2008 and 2007, respectively.

Network Integration Group. Our network integration group reported an operating loss of $107,000 for 2008, compared to operating income of $2.5 million for 2007, a decrease of $2.6 million. The decrease was the result of a $2.8 million increase in operating expenses. Operating income would have been $1.4 million higher in 2008 had foreign currency exchange rates remained the same as they were in 2007. Operating income included the effect of share-based compensation expense of $96,000 and $155,000 in 2008 and 2007, respectively.

Optical Components Group. Our optical components group reported an operating loss of $299,000 for 2008, compared to operating income of $1.3 million for 2007. The operating loss was primarily due to the addition of Fiberxon’s $2.2 million net loss in 2008. In 2007, the optical components group recognized approximately $2.9 million that had been previously deferred from sales of products to one customer in periods prior to the first quarter of 2007. The effect of currency fluctuations did not have a significant impact on the year-over-year change in operating loss. Operating loss included the effect of share-based compensation expense of $718,000 and $221,000 in 2008 and 2007, respectively.

Interest Expense and Other Income, Net

Interest expense was $0.9 million for 2008 and $1.1 million for 2007. The decrease in interest expense was primarily the net result of the decrease in interest expense related to the 2003 Notes that were converted into common stock in August 2007, partially offset by an increase in interest expense related to the Fiberxon subsidiary. Other income, net, principally includes interest income on cash, cash equivalents and investments and gains (losses) on foreign currency transactions. Interest income declined to $0.7 million in 2008 from and $1.3 million in 2007 as a result of the decrease in underlying interest-bearing marketable securities.

Income Taxes

The provision for income taxes was $637,000 in 2008 and $870,000 in 2007. In 2008, we generated less pre-tax income in the jurisdictions where we pay taxes, particularly in the foreign subsidiaries comprising the network integration group where non-operating expenses, combined with moderately lower operating income, resulted in a $233,000 decrease in tax expense. In 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. As a result of the full valuation allowance against the deferred tax assets relating to the deferred revenue, there was no impact to the 2007 provision for income taxes from the recognition of this revenue. Income tax expense fluctuates based on the amount of income generated in the various jurisdictions where we conduct operations and pay income tax.

Tax Loss Carryforwards

As of December 31, 2007, we had net operating loss carryforwards, or NOLs, of approximately $193.8 million for federal income tax purposes and approximately $199.6 million for state income tax purposes. We also had capital loss carry forwards totaling $47.6 million as of December 31, 2007, which begin to expire in 2009. Under the Internal Revenue Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs, capital loss carry forwards and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater than 50% change in its equity ownership by value over a three-year period. We may experience an ownership change in the future as a result of subsequent shifts in our stock ownership. 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 December 31, 2007, the NOLs had a full valuation allowance.

Recently Issued Accounting Standards

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

Liquidity and Capital Resources

We had cash and cash equivalents of $72.6 million as of March 31, 2008, compared to $72.5 million in cash and cash equivalents as of December 31, 2007. The following table summarizes our cash position, which includes cash, cash equivalents, time deposits and short-term and long-term marketable securities, and debt position, which includes all short-term and long-term obligations (dollars in thousands):


	March 31,		December 31,
	2008		2007


Cash
Cash and cash equivalents	$	72,591	$	72,474
Time deposits		5,113		6,055
Short-term marketable securities		3,006		6,402
Long-term marketable securities		1,445		1,442

		82,155		86,373

Debt
Short-term obligations ⁽¹⁾		29,265		28,931
Long-term debt		53		66

		29,318		28,997

Cash in excess of debt	$	52,837	$	57,376

Ratio of cash to debt ⁽²⁾		2.8 : 1		3.0 : 1


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

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

Working Capital

The following is a summary of our working capital position (dollars in thousands):


	March 31,		December 31,
	2008		2007


Current assets	$	332,279	$	326,183
Current liabilities		202,952		198,290

Working capital	$	129,327	$	127,893

Current ratio ⁽¹⁾		1.6 : 1		1.6 : 1


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

Current assets increased $6.1 million due primarily to an increase in inventories, partially offset by decreases in short term marketable securities, and prepaid and other assets. 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 currencies.

Current liabilities increased $4.7 million due primarily to the increase in accounts payable and deferred income, partially offset by the decrease in other current and accrued liabilities. 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.

Cash Flow

The following is a summary of certain cash flow data from our Consolidated Statements of Cash Flows (dollars in thousands):


For the three months ended March 31:	2008			2007


Net cash provided by (used in):
Operating activities	$	(894	)	$	(743	)
Investing activities		830			(2,126	)
Financing activities		(1,567	)		(3,895	)
Effect of exchange rate changes on cash and cash equivalents		1,748			311

Net increase (decrease) in cash and cash equivalents	$	117		$	(6,453	)

Cash Flows Related to Operating Activities. Cash used in operating activities was $0.9 million for the three months ended March 31, 2008, compared to cash used in operating activities of $0.7 million for the same period last year. Cash used in operating activities was a result of our $3.7 million net loss, adjusted for non-cash items such as depreciation and amortization and share-based compensation expense. An increase in accounts payable positively affected cash used in operating activities. In the same period, cash used in operating activities was negatively affected by increases in inventories and a reduction in other liabilities. Raw materials, and component purchases that we expect to ship in future periods, increased our inventories. Timing of payments to vendors resulted in an increase in accounts payable. 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 $0.8 million for the three months ended March 31, 2008, compared to cash used in investing activities totaling $2.1 million for the same period last year. Cash used in investing activities for 2008 was primarily the result of capital expenditures offset by sales of short-term marketable securities. As of March 31, 2008, we had no plans for major capital expenditures. Cash flows used in investing activities for the prior period were primarily from capital expenditures.

Cash Flows Related to Financing Activities. Cash used in financing activities was $1.6 million for the three months ended March 31, 2008, compared to $3.9 million in cash flows used in financing activities for the same period last year. Cash used in financing activities was primarily the result of net payments on short-term obligations, partially offset by net borrowings 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, changes in other long-term liabilities, and net cash payments on short-term borrowings.

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 Obligations

The following table summarizes our contractual obligations as of March 31, 2008 (in thousands):


			Less than 1						After 5
Contractual Obligations	Total		Year		1—3 Years		3—5 Years		Years


Deferred consideration payable	$	30,561	$	30,561	$	—	$	—	$	—
Short-term debt		27,814		27,814		—		—		—
Operating leases		24,664		6,765		8,537		4,845		4,517
Purchase commitments with suppliers and contract manufacturers		5,777		5,777		—		—		—
Long-term debt		158		105		53		—		—

Total contractual obligations	$	88,974	$	71,022	$	8,590	$	4,845	$	4,517

Contractual obligations primarily consist of deferred consideration payable to the former Fiberxon stockholders, equipment and facilities operating leases, short-term debt (describe) and unconditional purchase obligations for raw materials. The deferred compensation payable is contingent on Source Photonics successfully completing an initial public offering (IPO) by March 27, 2009. In the event this does not occur, MRV may settle the deferred compensation payable in cash or shares of MRV’s common stock, or a combination thereof. If Source Photonics successfully completes an IPO on or prior to March 27, 2009, 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 Source Photonics IPO, less the discount provided to the underwriters, by (y) the total number of shares of Source Photonics Common Stock outstanding immediately prior to the effectiveness of the agreement between Source Photonics and the underwriters of the Source Photonics IPO.

Historically, the short-term and long-term debt, operating lease, and purchase commitment obligations have been satisfied through cash generated from our operations or other avenues and we expect that this trend will continue. After the end of the first quarter of 2008, on April 7, 2008, our fiber optics subsidiaries, including Source Photonics and Fiberxon, entered into a Loan and Security Agreement with Silicon Valley Bank for a working capital loan facility which will enable the subsidiaries to borrow up to a maximum of $15.0 million against qualified accounts receivable of up to $18.75 million. The maturity date of the facility is April 6, 2009. Under the terms of this facility, the subsidiaries may finance certain of their accounts receivable in amounts equal to the “Advance Rate” in effect at the time amounts are borrowed, multiplied by the face amount of the eligible account. The initial Advance Rate on the date the facility was consummated was 80.0%, net of any offsets related to each specific account debtor, but the bank may change the percentage of the Advance Rate for a particular eligible account on a case by case basis. Repayment of amounts advanced is due on the date of collection of the individual financed receivable with respect to which the advance was made or the maturity date, if earlier. Payment would be accelerated to the date a financed receivable no longer qualifies as an eligible account, the date on which any adjustment is asserted to the financed receivable; or if there is a default under the facility. The facility is secured by a security interest in our optical component subsidiaries’ assets, other than their intellectual property.

We believe that cash on hand, cash flows from operations, and the new accounts receivable facility to our optical components’ subsidiaries will be sufficient to satisfy current operating needs, capital expenditures, and product development and engineering requirements, as applicable, for at least the next 12 months. However, we may choose to obtain additional debt or equity financing if we believe it appropriate. In December 2007, Source Photonics filed a registration statement with Securities and Exchange Commission for the proposed underwritten initial public offering of the Class A common stock of Source Photonics. That registration statement has not yet become effective and those securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. The number of shares to be offered and the price range of the proposed offering have not yet been determined. The proposed offering will be made only by means of a prospectus. When available, copies of the preliminary prospectus related to the offering can be obtained from either of the following:


	Cowen and Company, LLC		Credit Suisse Securities (USA) LLC
Address:	c/o Broadridge Financial Solutions		Prospectus Department
	Prospectus Department	Address:	One Madison Avenue
	1155 Long Island Avenue		New York, NY 10010
	Edgewood, NY 11717
Fax:	(631) 254-7140	Telephone:	(800) 221-1037

We may limit our ability to use available net operating loss and capital loss carryforwards if we seek financing through issuance of additional equity securities. Under the Internal Revenue Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs, capital loss carry forwards and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater than 50% change in its equity ownership by value over a three-year period. This change in equity ownership includes the issuance of shares made in connection with the acquisition of Fiberxon. For additional information on the potential limitations on our use of net operating loss and capital loss carry forwards available to us at December 31, 2007, see below under the section entitled “Certain Factors That Could Affect Our Future Results,” and in particular, the factor entitled, “Our Ability to Utilize Our NOLs and Certain Other Tax Attributes May Be Limited.” Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support development of new products and the expansion of sales and marketing efforts, the timing of new product introductions and enhancements to existing products and the market acceptance of our products.

Internet Access to Our Financial Documents

We maintain a website at www.mrv.com. We make available, free of charge, either by direct access or a link to the SEC website, our annual 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.

Certain Factors That Could Affect Our 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 risks not now known to us or that we currently deem immaterial may also impair our business operations. If any circumstances discussed in these risks 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 or in our press releases 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 and in those press releases that contain such forward-looking statements, particularly those immediately below and under the heading “Risk Factors” in Item 1A of Part II of this report. For a more complete understanding of the risks associated with an investment in our securities, 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 for the year ended December 31, 2007, which we filed with the Securities and Exchange Commission on March 17, 2008. We undertake no obligation to revise or update any forward-looking statements.

Our quarterly operating results are subject to significant fluctuations, and you should not rely on them as an indication of our future performance. Our operating results could fluctuate significantly from quarter to quarter and year to year.

Our operating results for a particular quarter are 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.

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.

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.

Competition in the network infrastructure and optical components markets is ever increasing, which could reduce our revenue and gross margins or cause us to lose market share.

The communications equipment and optical component industries are intensely competitive. We compete directly with a number of established and emerging networking and optical components companies.

Our direct competitors in networking products, switches and routers generally include: ADVA Optical Networks, Alcatel-Lucent, Allied Telesyn, Avocent, Ciena, Cisco Systems, Extreme Networks, Foundry Networks, Nortel Networks and Raritan. Our competitors in fiber optic components include: Delta Electronics, Inc., EMCORE Corporation, ExceLight Communications, Inc., Finisar Corporation, JDS Uniphase Corporation, Ligent Photonics, Inc., NEC Corporation, NeoPhotonics Corporation, Nokia Siemens, Oplink Communications, Inc., Opnext Inc., Optium Corporation and Wuhan Telecommunication Devices Co., Ltd. Many of our competitors have significantly greater financial, technical, marketing, distribution and other resources and larger installed customer bases than we do. Many of our larger competitors offer customers a broader product line, which provides a more comprehensive networking solution than we provide.

Many of our competitors have significantly greater financial, technical, marketing, distribution and other resources and larger installed customer bases than we have. Several of our competitors in our markets have recently introduced or announced their intentions to introduce new competitive products. Many of our larger competitors in the networking infrastructure market offer customers broader product lines, which provide a more comprehensive networking solution than we provide.

As a result, many of our competitors are able to devote greater resources than we can to the development, promotion, sale and support of their products. In addition, several of our competitors have large market capitalizations, substantially larger cash reserves, and are much better positioned than we are to acquire other companies in order to gain new technologies or products that may displace our product lines. Any of these acquisitions could give our competitors a strategic advantage. Accordingly, in certain regional markets we have collaborated with other vendors in an effort to enhance our overall capability in providing products and services.

Many of our competitors have significantly more established sales and customer support organizations than we do. In addition, many of our competitors have much greater name recognition, more extensive customer bases, better-developed distribution channels and broader product offerings than we have. These companies can leverage their customer bases and broader product offerings and adopt aggressive pricing policies to gain market share.

Additional competitors may enter the market, and we are likely to compete with new companies in the future. Companies competing with us may introduce products that are more competitively priced, have increased performance or functionality, or incorporate technological advances that we have not yet developed or implemented, and may be able to react more quickly to changing customer requirements and expectations. There is also the risk that other network system vendors may enter or re-enter the subsystem market and begin to manufacture in-house the optical and networking subsystems incorporated into their network systems. We also expect to encounter potential customers that, because of existing relationships with our competitors, are committed to the products offered by these competitors.

As a result of the foregoing factors, we expect that competitive pressures may result in price reductions, reduced margins or loss of market share in our markets.

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

	•		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.

Our products are deployed in large and complex systems and may contain defects that are not detected until after our products have been installed, which may cause us to incur significant costs, divert our attention from product development efforts or damage our reputation and cause us to lose customers.

Our products are complex and undergo internal quality testing and qualification as well as formal qualification by our customers. However, defects may be found from time to time. Our customers’ testing procedures are limited to evaluating our products under likely and foreseeable failure scenarios and over varying amounts of time. For various reasons, including among others, the occurrence of performance problems that are unforeseeable in testing or that are detected only when products age or are operated under peak stress conditions, our products may fail to perform as expected long after customer acceptance. Failures could result from faulty components or design, problems in manufacturing or other unforeseen reasons. As a result, we could incur significant costs to repair and/or replace defective products under warranty, particularly when such failures occur in installed systems. We have experienced such failures in the past and will continue to face this risk going forward, as our products are widely deployed throughout the world in multiple demanding environments and applications. In addition, we may in certain circumstances honor warranty claims after the warranty period has expired or for problems not covered by warranty in order to maintain customer relationships. Although we have limited by contract the types of damages customers may seek in conjunction with a warranty claim, Fiberxon did not do so and as a result we currently bear increased exposure to damages upon claims related to historical Fiberxon products. We believe that our warranty reserves adequately address our potential exposure to liability for warranty claims. Our warranty reserves are based on historical return rates, our average material costs incurred to repair items, including labor costs, and, with respect to Fiberxon, the lack of contractual limitations on such claims in some instances. The warranty reserves are evaluated and adjusted based on updated experience.

In addition, our optical component products and certain of our data networking products are typically embedded in, or deployed in conjunction with, our customers’ products, which incorporate a variety of components and may be expected to interoperate with modules produced by third parties. As a result, not all defects are immediately detectable and when problems occur, it may be difficult to identify the source of the problem. These problems may cause us to incur significant damages or warranty and repair costs, divert the attention of our engineering personnel from our product development efforts, cause significant customer relation problems or loss of customers and harm our reputation and brand, any of which could materially and adversely affect our business.

The long and uncertain 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 sales 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 up to one year or more. In addition, some of our customers require that our products be subjected to life-time and reliability testing, which can take up to nine 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 product development expenses to customize our products to the customer’s needs. We may also expend significant management effort, 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. Moreover, 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 networking infrastructure markets, we cannot predict the length of these sales, or the development or delivery cycles. As a result, fluctuations in our sales cycles may cause our revenue and operating results to vary significantly and unexpectedly from quarter-to-quarter, which could cause volatility in our stock price.

Our customers may adopt alternate technologies for which we do not produce products or for which our products are not adaptable.

The market for our products is characterized by rapidly changing technology, evolving industry standards and new product introductions, which may minimize the demand for our existing products or render them obsolete. Our future success will depend in part upon our ability to enhance existing products and to develop and introduce new products that address such changes in technology and standards and respond to our customers’ potential desire to adopt such technologies in place of those supported by our current product offerings. The development of new or enhanced products is a complex and uncertain process requiring the accurate anticipation of technological and market trends as well as precise technological execution. Further, the development cycle for products integrating new technologies or technologies with which we are not as familiar may be longer and more costly than our current product development process. We may experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products and the new products may not be successfully commercialized. These costs and delays may prevent us from being able to establish a market position with respect to such new technologies and industry standards or be as responsive as we would like to be in meeting our customers’ demands for such products, thus adversely affecting our results of operations and our customer relationships.

If our customers do not qualify our products or if their customers do not qualify their products, our results of operations may suffer.

Some of our customers purchase our products prior to qualification and satisfactory completion of factory audits and vendor evaluation. Our existing products, as well as each new product, must pass through varying levels of qualification with our customers. In addition, because of rapid technological changes in our market, a customer may cancel or modify a design project before we begin large-scale manufacture of the product and receive revenue from the customer. It is unlikely that we would be able to recover the expenses for cancelled or unutilized custom design projects. It is difficult to predict with any certainty whether our customers will delay or terminate product qualification or the frequency with which customers will cancel or modify their projects, but any such delay, cancellation or modification could have a negative effect on our results of operations.

If network service providers that purchase equipment or systems from our customers fail to qualify or delay qualifications of our customers’ equipment or systems that contain our products, our business could be harmed. Qualification and field-testing of our customers’ systems by network service providers is long and unpredictable. This process is not under the control of our company or our customers, and, as a result, timing of our sales is unpredictable. Any unanticipated delay in qualification of one of our customers’ network systems could result in the delay or cancellation of orders from our

customers for components and systems included in the applicable network system and could harm our results of operations.

Our customers may elect to in-source production of certain components they traditionally have purchased from us, resulting in decreases in our revenue.

Our revenue may decrease if certain of our direct and indirect significant customers, such as Tellabs and Verizon, respectively, or a substantial number of our customers overall chose to in-source production of the various types of components they currently purchase from us. If we cannot find alternate customers to purchase such components going forward, we may suffer not only a reduction in revenue, but may also have excess capacity in our production facilities and underutilized employees, undermining the overall efficiency and productivity of our operations.

We do not have long-term volume purchase contracts with our customers, so our customers may increase, decrease, cancel or delay their buying levels at any time with minimal advance notice to us, which may significantly harm our business.

Our customers typically purchase our products pursuant to individual purchase orders. While our customers generally provide us with their demand forecasts, in most cases they are not contractually committed to buy any quantity of products beyond firm purchase orders. Our customers may increase, decrease, cancel or delay purchase orders already in place. If any of our major customers decrease, stop or delay purchasing our products for any reason, our business and results of operations would be harmed. Cancellation or delays of such orders may cause us to fail to achieve our short- and long-term financial and operating goals. In the past, during periods of severe market downturns, certain of our largest customers canceled significant orders with us and with our competitors, which resulted in losses of sales and excess and obsolete inventory, that led to inventory and asset disposals throughout the industry. Similarly, decreases or deferrals of purchases by our customers may significantly harm our industry and specifically our business in these and in additional unforeseen ways, particularly if they are not anticipated.

We may suffer losses as a result of entering into fixed price contracts.

From time to time we enter into contracts with certain customers in which 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 because of 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, for which we have not accurately forecasted the production costs, could have a material adverse affect on our results of operations.

One customer accounted for a substantial portion of our sales during the years ended December 31, 2007 and 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. The evident trend of consolidations in our markets could make us dependent on a smaller number of customers or force us to compete with even larger competitors.

Until 2006, no customer accounted for 10 percent or more of our revenue and accordingly we were not dependent on any single customer. For the three months ended March 31, 2008, there were no customers accounting for 10% or more of our revenue. For the year ended December 31, 2007, no customer accounted for 10 percent or more of our revenue. For the year ended December 31, 2006, we had one customer, Tellabs, Inc., an original equipment manufacturer for Verizon Communications, Inc., which accounted for 13% of our total revenues. Although not amounting to 10% or more of our total revenues during 2007, Tellabs accounted for a substantial portion of those revenues. Among other projects, Tellabs supplies Verizon for its large-scale deployment of fiber optic technology to individual homes and businesses to replace copper wire. Called fiber-to-the-premise, or FTTP, the technology provides the bandwidth and speed to make available an array of services that Verizon markets under the brand name “FiOS.”

While our financial performance for 2007 and 2006 benefited from substantial sales to Tellabs, because of the magnitude of sales to that customer, our results would suffer if we were to lose their business. Our results of operations would suffer if Tellabs made a substantial reduction in orders, or Verizon switched OEMs to a company that was not our customer, unless we were able to replace the customer or orders with one or more customers of comparable size. 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.

The markets for network infrastructure fiber optic products, which constitute our customer base and competition, are each dominated by a small number of large companies and each is currently consolidating. Consolidation reduces the number of potential customers and may increase our dependence on an even smaller number of customers. It is also creating competition from other companies, which, through consolidation with other equipment and component suppliers, are growing larger with greater resources than we have to devote to development, promotion, sale and support of their products.

Global economic conditions affecting our markets and those of our customers have harmed our operations and although conditions in our markets have improved, we have not achieved profitably on a consolidated basis for a full year since 1997 and may never again achieve such profitability.

From time to time, we have experienced significant decreases in demand for our products and services as a result of economic conditions affecting our markets. Similarly, demand for our customers’ products has been negatively impacted, resulting in our customers delaying purchases of our products, or ordering lower volumes of our products than we previously anticipated. In the first few years of the new millennium, as a result of the economic downturn in the United States and internationally, and reduced capital spending, sales in our markets declined substantially. While the markets, our business, and our customers’ businesses have improved each year since 2003, we cannot provide assurance that this improvement is sustainable, or that our markets will not again suffer declines similar to or worse than those occurring in 2002 and 2003.

On a consolidated basis, we reported net losses for the years ended December 31, 2007, 2006 and 2005 and have not achieved profitability on a consolidated basis for a full year since 1997. We anticipate continuing to incur significant product development, sales and marketing and general and administrative expenses and, as a result, we will need to continue our efforts to contain expense levels and increase revenue levels in an effort to achieve profitability in future fiscal quarters and years. However, we may not be successful and we may not attain profitability on a sustained basis or at all.

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. We are unable to evaluate fully the potential magnitude of these warranty claims as the equipment has been designed and manufactured by others.

There is a limited number of potential source suppliers for certain components.

We 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 certain components, or are unable to redesign products with other components, which in certain cases have been qualified by our customers, in a timely manner, our business will be significantly harmed.

In our fiber optic components business particularly, our customers generally restrict our ability to change the component parts in our modules without their approval. For less critical components, this

may require as little as a specification comparison. For more critical components, such as lasers, photodetectors and key integrated circuits, this may result in repeating the entire qualification process. We depend on a limited number of suppliers for key components that we have qualified to use in the manufacture of certain of our products. Some of these components are available only from a sole source or have been qualified only from a single supplier. We typically have not entered into long-term agreements with our suppliers and, therefore, our suppliers could stop supplying materials and equipment at any time or fail to supply adequate quantities of component parts on a timely basis. It is difficult, costly, time consuming and, on short notice, sometimes impossible for us to identify and qualify new component suppliers. The reliance on a sole supplier, single qualified vendor or limited number of suppliers could result in delivery and quality problems, reduced control over product pricing, reliability and performance and an inability to identify and qualify another supplier in a timely manner. We have in the past had to change suppliers, which, in some instances, has resulted in delays in product development and manufacturing until another supplier was found and qualified. Any such delays in the future may limit our ability to respond to changes in customer and market demands. During the last several years, the number of suppliers of components has decreased significantly and, more recently, demand for components has increased rapidly. Any supply deficiencies relating to the quality or quantities of components we use to manufacture our products could adversely affect our ability to fulfill customer orders and our results of operations.

Our inability to achieve adequate production yields for certain components could result in a loss of sales and customers or higher than expected costs.

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.

Manufacturing yields depend on a number of factors, including the stability and manufacturability of the product design, manufacturing improvements gained over cumulative production volumes, the quality and consistency of component parts and the nature and extent of customization requirements by customers. Higher volume demand for more mature designs requiring less customization generally results in higher manufacturing yields than products with lower volumes, less mature designs and extensive customization. Capacity constraints, raw materials shortages, logistics issues, the introduction of new product lines and changes in our customer requirements, manufacturing facilities or processes or those of our third party contract manufacturers and component suppliers have historically caused, and may in the future cause, significantly reduced manufacturing yields, negatively impacting the gross margins on and our production capacity for those products. Our ability to maintain sufficient manufacturing yields is particularly important with respect to certain products we manufacture such as lasers and photodetectors as a consequence of the long manufacturing process. Moreover, an increase in the rejection and rework rate of products during the quality control process before, during or after manufacture would result in lower yields, gross margins and production capacity. Finally, manufacturing yields and margins can also be lower if we receive and inadvertently use defective or contaminated materials from our suppliers. Because a significant portion of our manufacturing costs is relatively fixed, manufacturing yields may have a significant effect on our results of operations. Lower than expected manufacturing yields could delay product shipments and decrease our revenue and gross margins

We rely substantially upon a limited number of contract manufacturing partners and if these contract manufacturers fail to meet our short- and long-term needs and contractual obligations, our business may be negatively impacted.

We rely to a significant extent on a limited number of contract manufacturers to assemble, manufacture and test our products. The qualification and set up of these independent manufacturers

under quality assurance standards is an expensive and time-consuming process. Certain of our independent manufacturers have a limited history of manufacturing optical modules or other components we use in our products and equipment. In the past, we have experienced delays or other problems, such as inferior quality, insufficient quantity of product and an inability to meet cost targets, which have led to delays in our ability to fulfill customer orders. Additionally, in the past, we have been required to qualify new contract manufacturing partners and replace contract manufacturers, which led to delays in deliveries. Any future interruption in the operations of these manufacturers, or any deficiency in the quality, quantity or timely delivery of the components or products built for us by these manufacturers, could impede our ability to meet our scheduled product deliveries to our customers or require us to contract with and qualify new contract manufacturing partners. As a result, we may lose existing or potential customers or orders and our business may be negatively impacted.

If we fail to forecast component and material requirements accurately for our manufacturing facilities, 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 six 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 revenue.

If we are unable to expand our manufacturing capacity in a timely manner, we may have insufficient capacity to meet demand.

We have manufacturing operations in Chatsworth, California and in Hinchey, Taiwan. We also have manufacturing facilities in Shenzhen and Chengdu in the PRC through our acquisition of Fiberxon. We could experience difficulties and disruptions in the manufacture of our products, which could prevent us from achieving timely delivery of products and could result in lost sales. We could also face the inability to procure and install additional capital equipment, a shortage of raw materials we use in our products, a lack of availability of qualified manufacturing personnel to work in our facilities, difficulties in achieving adequate yields from new manufacturing lines and an inability to predict future order volumes. We may experience delays, disruptions, capacity constraints or quality control problems in our manufacturing operations, and, as a result, product shipments to our customers could be delayed, which would negatively impact our sales, competitive position and reputation. If we experience disruptions in the future, it may result in lower yields or delays of our product shipments, which could adversely affect our revenue, gross margins and results of operations.

We face increased risks associated with our consolidation of our PRC-based manufacturing operations in a single location in Chengdu, China.

Historically, we have manufactured most of our products in Taiwan, with some reliance on contract manufacturers in China as well, and Fiberxon manufactured its products in China. We anticipate consolidating our PRC-based manufacturing operations at a single location in Chengdu, China beginning in the second quarter of 2008. Although we believe that the consolidation process should take 18 to 24 months to complete, we could experience delays if we do not receive necessary permits from the local regulatory authorities as quickly as anticipated. Additional delays may occur if we are not able to transition our staff and equipment to our new facilities efficiently, which could result in short-term reductions in our production capabilities or an inability to increase production consistent with our long-term plans. In addition, we may experience higher manufacturing losses and lower gross margins due to the need to maintain older production lines while at the same time incurring expenses related to the consolidation process. Once the consolidation effort is complete, we will face increased risk of loss from any disruption of operations in Chengdu affecting our consolidated facility. Damage to our Chengdu manufacturing facility due to fire, contamination, natural disaster, power loss, unauthorized entry or other events could force us to cease manufacturing our products, resulting in loss of revenue and breached customer contracts. In addition, if the facility or the equipment in the facility is significantly damaged or

destroyed for any reason, we may be unable to reallocate efficiently or replace our manufacturing capacity for an extended period of time, and our business, financial condition and results of operations would be materially and adversely affected. Although our current manufacturing facilities each have a disaster recovery plan, and we intend to adopt a similar plan for the consolidated Chengdu facility, we cannot provide assurance that efforts will proceed according to such plans or that the plans adequately address all potential risks and outcomes. In addition, if the governmental regulations and special incentives pursuant to which we have negotiated use of our facility in Chengdu change, the perceived benefits from such consolidation of our PRC-based manufacturing efforts in Chengdu may not be realized fully or at all.

Delays, disruptions or quality control problems in manufacturing could result in delays in product shipments to customers and could adversely affect our business.

We may experience delays, disruptions or quality control problems in our manufacturing operations. As a result, we could incur additional costs that would adversely affect gross margins, and product shipments to our customers could be delayed beyond the shipment schedules requested by our customers, which would negatively affect our sales, competitive position and reputation.

Our business and future operating results may be adversely affected by events outside of our control. Our insurance coverage for natural disasters is limited.

Prior to our acquisition of Fiberxon, we used our facilities in Chatsworth, California for major product design and development and customer support and we manufactured products at our facilities in Hinchey, Taiwan. Although our acquisition of Fiberxon provided us with manufacturing facilities in China, we plan to continue material manufacturing activities in Taiwan. The risk of earthquakes in Southern California and Taiwan is significant because of the proximity of these manufacturing facilities to major earthquake fault lines. In January 1994 and September 1999, major earthquakes near Chatsworth and in Taiwan, respectively, affected our facilities, causing power and communications outages and disruptions that impaired production capacity. While our facilities did not suffer material damage and our business was not materially disrupted by these earthquakes, the occurrence of an earthquake or other natural disaster could result in the disruption of our manufacturing facilities. Any disruption in our manufacturing facilities arising from earthquakes, other natural disasters or other catastrophic events including wildfires and other fires, excessive rain, terrorist attacks and wars, could disrupt our manufacturing ability, which could harm our operations and financial results, and could cause significant delays in the production or shipment of our products until we are able to shift production to different facilities or arrange for third parties to manufacture our products. We may not be able to obtain alternate capacity on favorable terms or at all. The location of our manufacturing facilities in Southern California, Taiwan and China subjects us to increased risk that a natural disaster could disrupt our operations.

Although we believe our insurance coverage is adequate to address the variety of potential liabilities we face, our insurance coverage is subject to deductibles and coverage limits. Upon an occurrence of significant natural disaster, such coverage may not be adequate or continue to be available at commercially reasonable rates and terms. In the event of a major earthquake or other disaster affecting one or more of our facilities, it could significantly disrupt our operations, delay or prevent product manufacture and shipment for the time required to transfer production, repair, rebuild or replace the affected manufacturing facilities. This time frame could be lengthy, and result in significant expenses for repair and related costs. In addition, concerns about terrorism or an outbreak of epidemic diseases such as avian influenza or severe acute respiratory syndrome, or SARS, could have a negative effect on travel and our business operations, and result in adverse consequences to our business and results of operations.

Environmental regulations applicable to our manufacturing operations could limit our ability to expand or subject us to substantial costs. Compliance with current and future environmental regulations may be costly which could impact our future operating results.

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 foreign, local, state and federal law. We believe we are compliant in all material respects with applicable environmental regulations in the U.S., Taiwan and China. However, any failure by us to comply with present and future regulations, could

subject us to future liabilities or the suspension of production. In addition, such regulations could restrict our ability to expand our facilities and we may need to acquire costly equipment or incur other significant expenses to comply with environmental regulations. We cannot provide assurance that legal requirements will not be imposed on us that would require additional capital expenditures or the satisfaction of other requirements. If we fail to obtain required permits or otherwise fail to operate within current or future legal requirements, including those applicable to us in the U.S., Taiwan and China where we maintain facilities, we may be required to pay substantial penalties, suspend our operations or make costly changes to our manufacturing processes or facilities.

In addition, we could face significant costs and liabilities in connection with legislation which enables customers to return a product at the end of its useful life and charges us with financial and other responsibility for environmentally safe collection, recycling, treatment and disposal. We also face increasing complexity in our product design and procurement operations as we adjust to new and upcoming requirements relating to the materials composition of our products. This includes the restrictions on lead and certain other substances in electronics that apply to specified electronics products put on the market in the European Union as of July 1, 2007 (Restriction of Hazardous Substances in Electrical and Electronic Equipment Directive (RoHS)). The labeling provisions of similar legislation in China went into effect on March 1, 2007. Consequently, many suppliers of products sold into the EU countries have required their suppliers to be compliant with the new directive. Many of our customers have adopted this approach and have required our full compliance. For all customers who require us to ship RoHS-compliant products, we believe we have been able to do so and are not aware of any complaints or investigations regarding our RoHS program. Even though we have devoted a significant amount of resources and effort planning and executing our RoHS program, it is possible that some of our products might be incompatible with such regulations. In such event, we could experience the following: loss of revenue, damaged reputation, diversion of resources, monetary penalties and legal action. Other environmental regulations may require us to reengineer our products to utilize components that are more environmentally compatible. Such reengineering and component substitution may result in additional costs to us. Although we currently do not anticipate any material adverse effects based on the nature of our operations and the effect of such laws, there is no assurance that such existing laws or future laws will not have a material adverse effect on us.

Our business and our customers are dependent on shipping companies for delivery of our products and interruptions to shipping or increased shipping costs could materially and adversely affect our business and operating results.

Our business and our customers rely on a variety of carriers for product transportation through various world ports. A work stoppage, strike or shutdown of one or more major ports or airports could result in shipping delays materially and adversely affecting us and our customers, which could have a material adverse effect on our business and operating results. Similarly, an increase in freight surcharges from rising fuel costs or general price increases could materially and adversely affect our business and operating results.

We may be faced with product liability claims.

Despite quality assurance measures, there remains a risk that defects may occur in our products. The occurrence of any defects in our products could give rise to liability for damages caused by such defects. Defects could, moreover, impair the market’s acceptance of our products. Both could have a material adverse effect on our business and financial condition. Although we carry product liability insurance, and believe such coverage is adequate based on the historical rate and nature of customer product quality claims or complaints, we cannot provide assurance that this insurance would adequately cover our costs arising from any significant defects in our products.

If we become subject to unfair hiring claims, we could incur substantial defense costs

Companies in our industry whose employees accept positions with competitors frequently claim that their competitors have engaged in unfair hiring practices or that employees have misappropriated confidential information or trade secrets. We cannot provide assurance that we will not receive claims of this kind or other claims relating to our employees in the future as we seek to hire qualified personnel or that those claims will not result in material litigation. We could incur substantial costs in defending ourselves or our employees against such claims, regardless of their merits. In addition, defending

ourselves or our employees from such claims could divert the attention of our management away from our operations.

We are subject to a number of additional business risks as a consequence of our 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. Although formerly headquartered in Santa Clara, California, USA, the Fiberxon entity conducts 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. In addition to the risks associated with any acquisition, 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;

	•		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;

	•		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;

	•		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, reporting systems, procedures implemented to collect financial data, prepare financial statements, books of account, and corporate records, and hinder our ability to prepare reliable business and financial forecasts. We may also encounter difficulties instituting business practices that meet Western standards and the expectations of the U.S. 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 successfully address 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;

	•		problems may arise from acquiring companies in countries where English is not widely spoken, and the culture, political, economic, financial or monetary systems, principles or controls are different from those countries where we have maintained offices and have had facilities for an extended period, and in which we have substantial experience conducting 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;

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

	•		incurrence of debt and contingent liabilities;

	•		adverse effects on our existing businesses as a result 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 limited or no prior experience;

	•		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 have resulted in substantial expenses. Efforts to pursue other acquisitions, if any, could result in substantial expenses and could adversely affect our operating results if those acquisitions are not successfully consummated.

The challenges of the integration process may minimize or negate the anticipated benefits from our acquisition of Fiberxon.

Realization of the anticipated benefits of our acquisition of Fiberxon depends on our ability to complete the integration of Fiberxon’s technology, products, operations, personnel and distribution channels with our historical operations and systems in a timely and efficient manner. The challenges involved in this integration include:

	•		incorporating acquired technology and products into a cohesive line of products;

	•		introducing Fiberxon’s products into existing distribution channels while maintaining any vital historical Fiberxon distribution channels;

	•		transitioning Fiberxon’s operations and financial reporting function to our existing operations and financial reporting systems; and

	•		coordinating the efforts of the resulting larger manufacturing and sales organizations.

The integration of any newly acquired business is time consuming and expensive, and may disrupt both the acquiree’s business as well as our historical businesses. Specifically, delays or disruptions in existing processes as a result of the integration may result in the loss of customers or key employees and the diversion of the attention of management from other operational issues, any of which could have a negative effect upon our overall business results and our stock price.

Our operating results have been impacted by foreign exchange rates and our activities seeking to hedge against currency exchange and interest rate fluctuations.

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 relative 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 or interest rates in these countries could increase our expenses and thereby adversely affect our operating results.

Due to our acquisition of Fiberxon, foreign currency fluctuations between the Chinese RMB and the U.S. dollar may affect our total revenue going forward and, if present trends continue in China could significantly affect our operating results.

Through one of our foreign subsidiaries, we have entered into foreign exchange and interest rate swap contracts to protect against currency exchange risks related to purchase commitments denominated in foreign currencies other than their functional currency, primarily the U.S. dollar and to hedge exposure to interest rate fluctuations. We could incur losses from these or other hedging activities in the future.

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:

	•		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;

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

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

	•		compliance with PRC laws, including employment laws; and

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

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.

Our manufacturing capacity may be interrupted, limited or delayed if we cannot maintain sufficient sources of electricity in China.

The manufacturing processes for our products require 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 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 our PRC manufacturing facilities, and adversely affect manufacturing costs. Any such power shortages could result in delays in shipments to our customers and, potentially, the loss of customer orders and penalties from such customers for the delay.

Prior to our acquisition of Fiberxon, allegations of financial and accounting irregularities were revealed. If we failed to identify all of the irregularities, we may have to restate Fiberxon’s financial statements, as well as MRV financial statements, which could negatively impact the price of our common stock.

We are in the process of implementing our internal controls over financial reporting and procedures throughout Fiberxon’s operations and taking other remedial actions designed to prevent the reoccurrence of pre-acquisition accounting irregularities discovered in Fiberxon’s financial statements. Prior to our acquisition of Fiberxon, allegations of financial and accounting irregularities were revealed that called into question the reliability of Fiberxon’s consolidated financial statements for its fiscal years ended December 31, 2004 and 2005 and raised serious concerns regarding Fiberxon’s financial reporting processes. These irregularities led to the departure of both Fiberxon’s chief executive officer (principal executive officer) and its vice president of finance (principal financial and accounting officer), in early 2007 prior to the closing of our acquisition of Fiberxon. These issues led to the investigation by

Fiberxon’s audit committee into the nature and extent of the irregularities and their effect on Fiberxon’s historical financial statements. Further, in June 2007 the independent auditors engaged by Fiberxon to audit its financial statements at and for each of the three years ended December 31, 2006 reported to Fiberxon’s audit committee that in addition to irregularities identified and reported by Fiberxon’s audit committee, Fiberxon’s independent auditors had identified a number of serious issues and encountered significant difficulties in the performance of its audit. In the view of Fiberxon’s auditors, these issues called into question Fiberxon’s ability to: maintain reliable financial reporting systems including accounting books and records, in conformity with accounting principles generally accepted in the United States or the PRC; 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; adjust Fiberxon’s financial statements to correct material misstatements; and make all financial records and related information available to its auditors. In the view of Fiberxon’s auditors, these matters also raised doubt regarding the ability of Fiberxon’s departed management to provide its auditors the written representations required under auditing standards generally accepted in the United States.

After our acquisition of Fiberxon, we engaged third parties who conducted internal investigations and concluded that the actions resulting in the financial and accounting irregularities were limited to the ex-chief executive officer and the ex-vice president of finance. In addition, we engaged third parties to reconstruct the financial statements of Fiberxon for each of the three years ended December 31, 2006, and the six months ended June 30, 2007. Based upon the reconstructed financial statements, an independent accounting firm conducted an audit of Fiberxon’s balance sheets at December 31, 2005 and 2006 and Consolidated Statements of Operations for each of the three years ended December 31, 2006. However, Fiberxon’s financial statements for the six month period ended June 30, 2007 were not audited.

Despite the results of our third party investigations, we cannot provide absolute assurance that the conduct that resulted in the financial and accounting irregularities affecting Fiberxon’s pre-reconstructed financial statements was limited to the misconduct of the ex-chief executive officer and the ex-vice president of finance. We cannot provide assurance that there was no other past misconduct or irregularities, not currently known to us, that might result in further material adjustments to Fiberxon’s financial statements and, as a result, our pro forma combined financial statements. If material adjustments were made to our financial statements, or they were restated, as a consequence of the discovery of additional financial irregularities, it could erode investor confidence in our ability to provide accurate financial statements and negatively impact the price of our common stock.

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 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.

We are subject to increased taxes in China because of the discontinuation of certain preferential tax treatments that were available to foreign enterprises prior to January 1, 2008.

Our subsidiaries in China formerly paid enterprise income taxes, or EIT, under an income tax law that was applicable to both wholly domestic China enterprises and so-called foreign invested enterprises, or FIEs. Within the PRC, both domestic enterprises and foreign-invested enterprises were generally subject to an EIT rate of 33%. However, under this law and its implementing rules, qualified foreign-

invested production enterprises incorporated and operating in certain economic development zones designated by the State Council enjoyed reduced EIT rates and certain preferential tax treatments.

Our subsidiaries in China, which are FIEs, qualified for these reduced EIT rates and preferential tax treatments and prior to January 1, 2008 were subject to a reduced EIT rate of 15%. In addition, our China subsidiaries were entitled to a two-year exemption from EIT, followed by three years of a 50% tax reduction beginning from the first cumulative profit-making year net of losses carried forward. One of our China subsidiaries in Shenzhen was not able to realize such preferential tax treatment because it has not made a profit since its inception. Another subsidiary in Chengdu is in its fifth year of the five years of preferential tax treatment under the law preexisting January 1, 2008.

On March 16, 2007, China enacted a new Enterprise Income Tax Law (the “EIT Law”) under which, effective January 1, 2008, China adopted a uniform EIT rate of 25% for all enterprises (including FIEs) and cancels all preferential tax treatments that were previously enjoyed by FIEs. According to the China State Council circular (Guofa [2007] No.39) dated December 26, 2007, for FIEs, such as our Shenzhen and Chengdu subsidiaries, which were established before March 16, 2007, a five-year transition period is provided during which the preferential tax treatments will continue to apply but gradually be phased out. Under the Circular, qualifying FIEs will continue to benefit from reduced EIT rates during the five-year transition period in accordance with the following schedule:


Tax Year	Rate under EIT Law

2008		18	%
2009		20	%
2010		22	%
2011		24	%
2012		25	%

In addition, pursuant to the Circular, for FIEs that have begun to realize the preferential tax treatment of the two year tax exemption and three year 50% tax reduction, they can continue to utilize such benefit until the expiration of the five year term. However, for FIEs that have not begun to realize such preferential tax treatment prior to January 1, 2008, the five year term shall begin to run effective January 1, 2008, regardless of whether those FIEs are making profit or not. Accordingly, our Shenzhen subsidiary entered into this five year term effective January 1, 2008 irrespective of its profitability and 2008 is the last year in which our Chengdu subsidiary will be entitled to a 50% tax reduction on EIT.

It thus appears that the EIT Law and its associated new income tax rates 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 will, and potential new tax laws in China may further, reduce many of the tax saving benefits we had hoped to realize by expanding our operations into the PRC.

Payment of dividends by our subsidiaries in the PRC to us is subject to restrictions and taxes under PRC law.

Under PRC law, dividends may be paid only out of distributable profits. Distributable profits with respect to our subsidiaries in the PRC 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 U.S. GAAP. Further, under PRC law, our subsidiaries in the PRC are required to allocate no less than 10 percent of their after-tax profits to a statutory general reserve fund until the aggregate balance in the fund reaches 50% of such subsidiaries’ registered capital, at which point further allocations to the fund are no longer required. There is also a requirement for our subsidiaries in the PRC to allocate certain after-tax profits to a staff bonus and welfare fund. But the exact percentage of such allocation is subject to the discretion of such subsidiaries. Allocations to these statutory reserves can only be used for specific purposes and are not distributable to us in the form of loans, advances or cash dividends. As a result, even if our subsidiaries in PRC become profitable, they may not be able to pay any dividend in a given year as determined under China GAAP.

Moreover, prior to the new EIT Law, non-PRC equity holders of PRC companies were specifically exempt from withholding taxes with respect to earnings, distributions, or dividends payable to them by such PRC companies. However, under the new EIT Law, dividends payable to foreign investors, which are derived from sources within the PRC, will be subject to income taxes at the rates of up to 10%, which tax must be withheld from the dividends otherwise distributable. As a consequence of this new PRC withholding tax, if our PRC subsidiaries ever become profitable to the extent of being able to pay their stockholders distributable profits as dividends, the amounts available to us in earnings distributions from our PRC enterprises would be reduced by the amount of this new PRC withholding tax at the rates then prevailing.

Recent changes in the PRC’s labor law restricts our ability to reduce our workforce in China in the event of an economic downturn and will increase our manufacturing costs and those of the contract manufacturers we use in China to manufacture our products.

In June 2007, the National People’s Congress of the PRC enacted new labor law legislation called the Labor Contract Law, which became effective on January 1, 2008. It formalizes workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions. Considered one of the strictest labor laws in the world, among other things, this new law provides for specific standards and procedures for the termination of an employment contract and places the burden of proof on the employer. In addition, the law requires the payment of a statutory severance pay upon the termination of an employment contract in most cases, including the case of the expiration of a fixed term employment contract. Further, the law requires an employer to conclude an “employment contract without a fixed term” with any employee who either has worked for the same employer for 10 consecutive years or more or has had two consecutive fixed term contracts with the same employer. An “employment contract without a fixed term” can no longer be terminated on the ground of the expiration of the contract, although it can sill be terminated pursuant to the standards and procedure set forth under the new law. Because of the lack of implementing rules for the new law and the precedents for the enforcement of such a law, the standards and procedure set forth under the law in relation to the termination of an employment contract have raised concerns among FIEs in China that such “employment contract without a fixed term” might in fact become a “lifetime, permanent employment contract.” Finally, under the new law, downsizing by either more than 20 people or more than 10% of the workforce may occur only under specified circumstances, such as a restructuring undertaken pursuant China’s Enterprise Bankruptcy Law, or where a company suffers serious difficulties in production and/or business operations, or where there has been a material change in the objective economic circumstances relied upon by the parties at the time of the conclusion of the employment contract, thereby making the performance of such employment contract not possible. Again, there has been very little guidance and precedents as to how such specified circumstances for downsizing will be interpreted and enforced by the relevant PRC authorities. All of our employees working for us exclusively within the PRC are covered by the new law and thus, our ability to adjust the size of our operations when necessary in periods of recession or less severe economic downturns may be curtailed. Accordingly, if we face future periods of decline in business activity generally or adverse economic periods specific to our business, this new law can be expected to exacerbate the adverse effect of the economic environment on our results of operations and financial condition. In addition, the new law can be expected to increase our manufacturing costs and those of the contract manufacturers we use in China to manufacture our products in China and, unless we can pass any increases on to customers, which could be difficult, would reduce our gross margins.

Labor shortages in Southern China could adversely affect our gross margins or decrease revenues.

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 our 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. This trend of labor shortages is expected to continue, fueled by the effects of the one-child policy imposed by the Chinese government over the past three decades and will likely result in increasing wages as companies seek to keep their existing work forces. Continuing labor shortages can be expected to adversely impact our future operating results by, for example, preventing us from manufacturing at peak capacity and forcing us to increase wages and benefits to attract the diminishing pool of available workers. This could result in lower revenue or increased manufacturing costs, which would adversely affect gross margins.

Political or trade controversies between China and the United States could harm our operating results or depress our stock price.

Differences between the United States and PRC governments on some political issues occasionally negatively influence the trade relationship between the two countries. These controversies, if and when they arise, could materially and adversely affect our business and operations. Political or trade friction between the two countries could also materially and adversely affect the market price of our shares, whether or not they have a direct impact on our business.

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.

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.

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 person 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.

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 depend, and 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 affected.

Our ability to utilize our NOLs and certain other tax attributes may be limited.

As of December 31, 2007, we had net operating losses, or NOLs, of approximately $193.8 million for federal income tax purposes and approximately $199.6 million for state income tax purposes. We also had capital loss carry forwards totaling $47.6 million as of December 31, 2007, which begin to expire in 2009. 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. We may experience an ownership change in the future as a result of subsequent shifts in our stock ownership, including as a result of issuing shares pursuant to the Fiberxon transaction. 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.

The price of our shares may continue to be highly volatile.

Historically, the market price of our shares has been volatile. The market price of our common stock is likely to continue to be highly volatile and could be significantly 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;

	•		to the extent not already sold, sales, or the potential for sales, of substantial numbers of our shares by 1) stockholders who acquired our shares in a private placement we completed in March 2006, by 2) stockholders receiving our shares in our acquisition of Fiberxon on July 1, 2007, or by 3) Deutsche Bank, which received our shares in August 2007 in exchange for our outstanding 5% Convertible Notes issued in June 2003. These shares are held by persons or entities who we believe are not our affiliates and are therefore eligible for sale under Rule 144 or Rule 145, as amended effective February 15, 2007, without restriction; or

	•		general market conditions and other factors.

In addition, the stock market has experienced price and volume fluctuations that have particularly affected the market prices for shares of the common stocks of technology companies, unrelated to the operating performance of these companies. These factors, 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 analysts or investors could have a residual effect on us and cause our stock price to decline. Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, all of whom have been granted stock options.

Legislative actions, higher insurance costs and new accounting pronouncements are likely to impact our future financial position and results of operations.

There have been regulatory changes, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ Stock Market rules and there may be 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 claim rates recently and our rates for various insurance policies are likely to increase. The Financial Accounting Standards Board’s change to mandate expensing share-based compensation requires us to record charges to operations for stock option grants to employees and directors. Such change has adversely affected our financial results since we implemented the new pronouncement in 2006 and will continue to adversely affect our financial results in the future.

We are at risk of securities class action or 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.

We were unable to timely 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. As such, we were late in complying with our reporting obligations under the Exchange Act, and we are ineligible until October 1, 2008 to use the SEC’s short-form registration statement to raise capital.

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, among other things, we 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 by the SEC in an amendment to that Form 8-K that was due by September 14, 2007.

Our inability to timely file the required financial statements and pro forma financial information by the September 14, 2007 deadline has rendered us ineligible until October 1, 2008 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 expensive 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.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rates. Our investments, short-term borrowings and long-term obligations expose us to interest rate fluctuations. Our cash and short-term investments are subject to limited interest rate risk, and are primarily maintained in money market funds and bank deposits. Our variable-rate short-term borrowings are also subject to limited interest rate risk because of their short-term maturities. Our long-term obligations were entered into with fixed interest rates. As of March 31, 2008, through a foreign office, we had one interest rate swap contract outstanding. The economic purpose of entering into interest rate swap contracts is to protect our variable interest debt from significant interest rate fluctuations. Unrealized gains on these interest swap contracts for the three months ended March 31, 2008 and 2007 were $102,000 and $22,000, respectively, and have been included in interest expense in the accompanying Consolidated Statements of Operations.

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

Through certain foreign offices, and from time to time, we enter into foreign exchange contracts in an effort to minimize the currency exchange risk related to purchase commitments denominated in foreign currencies. These contracts cover periods commensurate with known or expected exposures, generally less than 12 months. As of March 31, 2008, we did not have any foreign exchange contracts outstanding.

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

When we translate the financial position and results of operations of subsidiaries with reporting currencies other than the U.S. dollar, we recognize a translation gain or loss in other comprehensive income. Approximately 51% of our operating expenses are reported by these subsidiaries. In general, these currencies were stronger against the U.S. dollar for the three months ended March 31, 2008 compared to the same period last year, so revenues and expenses in these countries translated into more dollars than they would have in 2007. For 2008, we had approximately:

	•		$9.1 million of operating expenses that were reported in euros;

	•		$3.4 million of operating expenses that were reported in Swiss francs;

	•		$2.1 million of operating expenses that were reported in Swedish krona; and

	•		$1.2 million of operating expenses reported in the Taiwan dollar.

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

	•		$909,000 related to expenses settled in euros;

	•		$341,000 related to expenses settled in Swiss francs;

	•		$216,000 in expenses settled in Swedish kronas; and

	•		$120,000 in expenses settled in the Taiwan dollar.

The following table summarizes the U.S. dollar equivalent of material amounts of currencies included in cash and cash equivalents (in thousands):


	March 31,		December 31,
	2008		2007


U.S. dollars	$	59,609	$	55,197
Euros		6,241		7,051
Swiss francs		787		1,213
Swedish kronas		244		2,392
Norwegian krone		752		1,916
Taiwan dollars		109		1,873
Renminbi		4,041		1,618
Other		808		1,214

Total cash and cash equivalents	$	72,591	$	72,474

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

Inflation. We believe that the relatively moderate rate of inflation in the United States over the recent past has not had a significant impact on our sales, operating results, or prices of raw materials. However, we are exposed to a greater risk of inflation as a result of our operations in Taiwan, Israel, and China, in particular.

Item 4. Controls and Procedures

As of the end of the period covered by this report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (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. At March 31, 2008, Fiberxon’s total assets were $181.6 million and net assets were $129.8 million. During the three months ended March 31, 2008, Fiberxon’s results of operations contributed $22.2 million in revenue, $2.2 million in operating loss and a net loss of $2.3 million.

Changes in Internal Controls

We completed the process of upgrading and replacing information systems used by two locations of our Source Photonics subsidiary 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 locations began to upgrade the software information system that it utilizes in all aspects of its operations in Taiwan. During the same period, the other location began to use the new system with respect to certain aspects of its US operations that relate to fulfillment of orders from its US customers with products manufactured by the other location in Taiwan or by third-party contract manufacturers in China, all of which drop ship directly to our subsidiary’s customers. These locations began relying on the new information systems exclusively in the fourth quarter of 2006. The US location is now using the new system in connection with its business activities in addition to those involving drop-shipping from Asian manufacturers. Related to these improvements, the Fiberxon subsidiary began implementing an upgraded information system to meet MRV’s worldwide information system standards. We anticipate that the implementation of Fiberxon’s information systems will be completed by the end of 2008.

Except as described in the paragraph 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.

PART II — OTHER INFORMATION

Item 1A. Risk Factors

For a more complete understanding of the risks associated with an investment in our securities, you should carefully consider and evaluate all of the information in this Form 10-Q, in combination with the more detailed description of our business in our annual report on Form 10-K for the year ended December 31, 2007, which we filed with the Securities and Exchange Commission on March 17, 2008. There has been material changes in the Risk Factors as previously disclosed in our annual report on Form 10-K for the year ended December 31, 2007 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, 2007 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.

Our gross margins 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 summarizes gross margins from our three principal operating segments and for our company as a whole:


Three Months ended March 31:	2008			2007


Network equipment group		49	%		48	%
Network integration group		23	%		24	%
Optical components group		20	%		24	%

Total		30	%		32	%

Our gross margins also fluctuate from year to year. 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 market conditions, 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;

	•		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;

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

Our business and future operating results are subject to a wide range of uncertainties arising out of the international nature of our operations and facilities.

International sales are a significant part of our business. For the three months ended March 31, 2008 and 2007, 67% and 70%, respectively, of total revenues were from sales to customers in foreign countries. For the years ended December 31, 2007, 2006 and 2005, 68%, 67% and 74% respectively, of total revenues were from sales to customers in foreign countries.

We have offices and facilities in, and conduct a significant portion of our operations in and from Israel, China and Taiwan and outsource substantial manufacturing to third-party contract manufacturers in China. We are, therefore, influenced by the political and economic conditions affecting these countries. Risks we face from international sales and our use of facilities and suppliers overseas for manufacturing include:

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

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

	•		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 Lunar 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 exchange rate fluctuations;

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

	•		potentially adverse tax consequences, increasing taxes and heightened efforts by officials of foreign countries to increase revenues from tax collection;

	•		increasing labor costs or other cost increases;

	•		unavailability or delays in delivery of equipment, raw materials or key components;

	•		trade restrictions, tariff increases and increasing import-export duties;

	•		shipping delays;

	•		limited protection of intellectual property rights;

	•		tightening immigration controls that may adversely affect the residency status of our engineers, other key technical and other employees in our U.S. facilities who are not permanent U.S. residents or our ability to hire new non-U.S. employees in our U.S. facilities;

	•		increasing U.S. and foreign environmental regulation or unforseen environmental or engineering problems; and

	•		personnel recruitment delays or the inability to obtain skilled technical, financial and management personnel needed in countries, such as China where we have facilities.

Our business and operations are also subject to general geopolitical conditions, such as terrorism, political and economic instability, changes in the costs of key resources such as crude oil and changes in diplomatic or trade relationships.

Economic conditions in several countries and markets outside the United States in which we have offices, personnel, facilities or sales represent significant risks to us. Instability in the Middle East, China or the European Union could have a negative impact on our sales and operations in these regions, and unstable conditions could have a material adverse effect on our business and results of operations. The wars in Afghanistan and Iraq and other turmoil in the Middle East and the global war on terror also may have negative effects on our business operations, including our U.S. operations. For example, heightened U.S. security concerns on domestic and international travel and commerce may result in increased immigration controls that could impact the residency status of our non-U.S. engineers and other key employees working in our U.S. facilities. In addition to the effect of global economic instability on our operations or facilities on sales to customers outside the United States, sales to United States customers could be negatively impacted by these conditions.

If we fail to implement and maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected. Fiberxon’s internal controls are not included in management’s assessment of internal controls over financial reporting as of December 31, 2007.

We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal controls over financial reporting or our independent registered public accounting firm’s report on our internal controls over financial reporting may have an adverse impact on the price of our common stock and may require significant management time and resources to remedy. For example, in connection with the previously disclosed accounting irregularities at Fiberxon prior to its acquisition, we have taken remediation steps that include the following:

	•		We have further engaged one of the firms responsible for the reconstruction of Fiberxon’s financial statements to assist us in prioritizing and implementing key internal controls at Fiberxon that are comparable to those underlying our financial reporting process.

	•		We have implemented a new financial reporting structure under which all financial and accounting matters are reported directly to our Chief Financial Officer.

	•		We have hired a new vice president of finance based in China with U.S. public company experience and five additional financial and accounting professionals to support her.

We acquired Fiberxon on July 1, 2007 and Fiberxon’s assets and liabilities and financial results at, and for the three months ended, March 31, 2008 have been included in our consolidated financial statements included elsewhere in this Report. At March 31, 2008, Fiberxon’s total assets were $181.6 million and net assets were $129.8 million. During the three months ended March 31, 2008, Fiberxon’s results of operations contributed $22.2 million in revenue, $2.2 million in operating loss and a net loss of $2.3 million. Because the acquisition was completed in mid 2007, the scope of management’s assessment of the effectiveness of internal control over financial reporting will be expanded to encompass Fiberxon’s internal controls by the end of fiscal year 2008.

We continue to assess and take steps designed to improve Fiberxon’s internal controls over financial reporting and procedures; however, if these accounting controls and procedures ultimately prove to be ineffective, we could experience future accounting irregularities and restatements of our financial results, which would negatively impact the price of our common stock.

If our cash flow significantly deteriorates in the future, our liquidity and ability to operate our business could be adversely affected. We may not be able to attain capital when desired on favorable terms, if at all.

We incurred net losses in each of the years ended December 31, 2007, 2006 and 2005, and in the three months ended March 31, 2008 and 2007. Our combined cash and short-term investments declined at December 31, 2007 and March 31, 2008. Excluding the private placement of approximately 19.9 million shares of common stock we 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 at December 31, 2006. As of March 31, 2008, cash, cash equivalents, time deposits and marketable securities have declined by $4.2 million, or (5%), since December 31, 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.

We may not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. If this occurs, we may need additional financing to satisfy our remaining deferred consideration obligation in connection with our acquisition of Fiberxon, if we choose to pay it in cash, or to execute on our current or future business strategies, including to:

	•		satisfy our deferred payment obligation, if paid in cash, to the former stockholders of Fiberxon, which amounts to $31.5 million (excluding applicable offsets) and is due no later than March 28, 2009;

	•		acquire complementary businesses or technologies;

	•		enhance our operating infrastructure;

	•		hire additional technical, sales and other personnel;

	•		make investments in capital equipment, facilities and technology;

	•		expand our manufacturing facilities;

	•		fund our working capital requirements; or

	•		otherwise respond to competitive pressures.

If we raise additional funds through the issuance of our common stock or convertible securities, or if we elect to satisfy our deferred consideration obligation to Fiberxon’s former stockholders using shares of our common stock, the percentage ownership of our stockholders could be significantly diluted.

We cannot provide assurance that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations, use cash to satisfy our deferred consideration obligation, take advantage of unanticipated opportunities, develop or enhance our products, or otherwise respond to competitive pressures could be significantly limited.

Item 6. Exhibits

(a) Exhibits


No.		Description

31.1		Certification of the Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act.

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.


		Page
		Number

PART I	Financial Information		3

Item 1.	Financial Statements:		3

	Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2008 and 2007		3

	Consolidated Balance Sheets as of March 31, 2008 (unaudited) and December 31, 2007		4

	Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2008 and 2007		5

	Notes to Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		52

Item 4.	Controls and Procedures		53

PART II	Other Information		55

Item 1A.	Risk Factors		55

Item 6.	Exhibits		58

	Signatures		59
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1


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


	By:	/s/ Guy Avidan
		Guy Avidan
		Chief Financial Officer