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We consider a network design problem arising in the development of an all-optical future generation Internet network called a flex-grid. An optical island is a set of core nodes that can be fully interconnected by transparent wavelength routes. We present a mathematical model for finding an optimal optical island, show that it is an NP-hard problem, and present a decomposition for solving it. In a first phase, we choose network links and route the traffic over the resulting network. In the second phase, we allocate the light-paths associated with the traffic requests to individual fibres and spectrum segments on the fibres. This so-called routing and spectrum assignment (RSA) problem is a generalisation of the well-known routing and wavelength assignment problem (RWA) of conventional optical networks. Flex-grid optical networks allow us to bundle higher capacity connection requests by allocating channels in a number …