We present algorithms for the design of optimal virtual topologies embedded on wide-area wavelength-routed optical networks. The physical network architecture employs wavelength-conversion-enabled wavelength-routing switches (WRS) at the routing nodes, which allow the establishment of circuit-switched all-optical wavelength-division multiplexed (WDM) channels, called lightpaths. We assume packet-based traffic in the network, such that a packet travelling from its source to its destination may have to multihop through one or more such lightpaths. We present an exact integer linear programming (ILP) formulation for the complete virtual topology design, including choice of the constituent lightpaths, routes for these lightpaths, and intensity of packet flows through these lightpaths. By minimizing the average packet hop distance in our objective function and by relaxing the wavelength-continuity constraints, we demonstrate that the entire optical network design problem can be considerably simplified and made computationally tractable. Although an ILP may take an exponential amount of time to obtain an exact optimal solution, we demonstrate that terminating the optimization within the first few iterations of the branch-and-bound method provides high-quality solutions. We ran experiments using the CPLEX optimization package on the NSFNET topology, a subset of the PACBELL network topology, as well as a third random topology to substantiate this conjecture. Minimizing the average packet hop distance is equivalent to maximizing the total network throughput under balanced flows through the lightpaths. The problem formulation can be used to design a balanced network, such that the utilizations of both transceivers and wavelengths in the network are maximized, thus reducing the cost of the network equipment. We analyze the trade-offs in budgeting of resources (transceivers and switch sizes) in the optical network, and demonstrate how an improperly designed network may have low utilization of any one of these resources. We also use the problem formulation to provide a reconfiguration methodology in order to adapt the virtual topology to changing traffic conditions.