UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________

FORM 10-K

ALLIANCE FIBER OPTIC PRODUCTS, INC.
(Exact name of registrant as specified in its charter)

Delaware	77-0554122
(State or other jurisdiction of incorporation	(IRS Employer Identification No.)
or organization)

275 Gibraltar Drive, Sunnyvale, CA 94089
(Address of principal executive offices)

Title of each class		Name of each exchange on which registered
Common Stock, par value $0.001 per share		The Nasdaq Stock Market LLC
Series A Participating Preferred Stock Purchase Rights		The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and disclosure will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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):

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates (based upon the closing sale price on The Nasdaq Global Market on June 30, 2015) was approximately $241,321,495.

As of March 2, 2016 there were 15,788,585 shares of Common Stock, $0.001 per share par value, outstanding.

Items 10 (as to directors and Section 16(a) Beneficial Ownership Reporting Compliance), 11, 12 (as to Security Ownership of Certain Beneficial Owners) and 13 of Part III incorporate by reference information from the registrant’s proxy statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the registrant’s 2016 Annual Meeting of Stockholders to be held on May 20, 2016.

When used in this Report, the words “expects,” “anticipates,” “believes”, “estimates,” “plans,” “intends,” “could,” “will,” “may” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements as to our operating results, revenues, sources of revenues, cost of revenues, gross margin, profitability, the amount and mix of anticipated investments, expenditures and expenses, our liquidity and the adequacy of our capital resources, our uses of cash, the impact of the economic environment on our business, exposure to interest rate or currency fluctuations, anticipated working capital and capital expenditures, reliance on our connectivity products, our cash flow, trends in average selling prices, our reliance on the commercial success of our optical passive products, plans for future products and enhancements of existing products, features, benefits and uses of our products, demand for our products, our success being tied to relationships with key customers, industry trends and market demand, our ability to protect our intellectual property, the potential benefit of indemnification agreements, increases in the number of possible requests for licenses and patent infringement claims, our competitive position, sources of competition, consolidation in our industry, our international strategy, risks associated with our international operations, inventory management, our factory utilization levels, our employee relations, the adequacy of our internal controls, and the effect of recent, future and changing accounting pronouncements and our critical accounting policies, estimates, models, judgments and assumptions related to our financial results. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expected. These risks and uncertainties include, but are not limited to, those risks discussed elsewhere in this report, as well as risks related to the development of the metropolitan, last mile access, data center and enterprise networks, customer acceptance of our products, our ability to retain and obtain customers, industry-wide overcapacity and shifts in supply and demand for optical components and modules, our ability to meet customer demand and manage inventory, fluctuations in demand for our products, declines in average selling prices, pricing pressure from customers or potential customers, development of new products by us and our competitors, increased competition, inability to obtain sufficient quantities of a raw material component, loss of a key supplier, integration of acquired businesses or technologies, financial stability in foreign markets, foreign currency exchange rates, interest rates, taxation levels, costs associated with being a public company, compliance with laws and regulations applicable to us, failure to meet customer requirements, our ability to license intellectual property on commercially reasonable terms, the impact of the economic environment, and the risks set forth below under Part II, Item 1A, “Risk Factors.” These forward-looking statements speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

All references to “Alliance Fiber Optic Products,” “AFOP,” “we,” “us,” “our” or the “Company” mean Alliance Fiber Optic Products, Inc. and its subsidiaries, except where it is made clear that the term means only the parent company.

AFOP, OPIS and SPECTRAMUX are our trademarks. We may also refer to trademarks of other corporations and organizations in this document.

Alliance Fiber Optic Products designs, manufactures and markets a broad range of high-performance fiber optic components, and integrated modules incorporating these components, for leading and emerging communications equipment manufacturers and service providers. We offer a broad range of products including interconnect devices that are used to connect optical fibers and components, couplers and splitters that are used to divide and combine optical power, and dense wavelength division multiplexing, or DWDM, devices that separate and combine multiple specific wavelengths. Our emphasis on design for manufacturing and our comprehensive manufacturing expertise enable us to produce our products efficiently, with high quality, and in volume quantities. Our product scope and ability to integrate our components into optical modules enable us to satisfy a wide range of customer requirements throughout the optical networking market. Our customers deploy our products in long-haul networks that connect cities, metropolitan networks that connect areas within cities, last mile access networks that connect to individual businesses and homes, and enterprise networks within businesses.

The growing number of data-intensive Internet-based applications and services has fueled a significant increase in the volume of data traffic. This traffic growth has increased the demands on communication networks originally developed to primarily transport voice traffic. To meet this demand, many communications service providers have and are designing and installing new networks based on fiber optic technology, which provides greater data-carrying capacity, or bandwidth, and increased transmission speeds compared to existing communications networks. Until recently, much of the fiber deployed had been dedicated to long-haul networks. However, the demands for high-speed network access and bandwidth are shifting the focus towards more complex metropolitan networks and last mile access networks, which require an increasing number of connections and components.

Optical fiber is currently being deployed across the following segments of communications networks: long-haul, metropolitan, last mile access, and enterprise.

Long-haul networks. Long-haul networks connect the communications networks of cities around the world and transport large amounts of data and voice traffic. To solve congestion problems, service providers have invested significant resources in the deployment of optical infrastructure. As a result, current long-haul networks provide high bandwidth for transmitting data over very long distances. The build-out of long-haul networks represents an important step in improving network infrastructure to support increased demand for new services and greater traffic volumes.

Metropolitan networks. Metropolitan networks connect long-haul networks to last mile access networks within urban areas. Due to the increase in data traffic and the demand for enhanced services, the existing metropolitan network infrastructure has become a bottleneck for the provision of communications services to business and residential end users. As a result, service providers are making investments in infrastructure to reduce capacity constraints in metropolitan networks.

Last mile access networks. Last mile access networks connect business and residential end users to their service provider in order to provide increased bandwidth to the end user. Traditional access networks use the existing copper wire-based infrastructure, which is slow compared to the high-speed networks commonly used within businesses. Service providers are beginning to deploy fiber technologies in the last mile access network in order to provide high bandwidth connectivity to the end user.

Enterprise networks. Local area networks serving the business community have utilized fiber optic links for over a decade. Historically these links have connected vertical backbone requirements between various floors of copper-based networks within office buildings. As the bandwidth of local networks has increased, optical fiber has become a pervasive medium for horizontal network links especially in the storage network environment and datacenters.

Service providers are seeking to maximize the performance and capacity of both new and existing optical networks through advances in optical technology. Wavelength division multiplexing, or WDM, has been used for several years to increase system capacity by combining different light signals at different wavelengths, on a single optical fiber. Each wavelength represents a separate high-bandwidth channel that can carry data. Multiplexing devices combine, or multiplex, these different wavelengths at one end of the optical network, and demultiplexing devices, or demultiplexer, separate them at the other end. WDM technology has been enhanced with the introduction of dense wavelength division multiplexing, or DWDM, which permits the wavelengths to be spaced more closely together. The tighter spacing allows even more wavelengths to be transmitted on one optical fiber. The use of WDM and DWDM technology is well established in the long-haul market and is increasingly utilized in the metropolitan and last mile access markets.

Fiber optic components are used within optical networks to create, combine, isolate, amplify, split, direct and perform various other functions on the optical signals. Fiber optic components are divided into two broad categories, active and passive components. Active components require power to operate and use electrical signals to create, modulate or amplify optical signals. Passive optical components connect, guide, mix, filter, route, adjust and stabilize optical signals transmitted through an optical network.

In periods prior to 2004, communication equipment manufacturers purchased optical transport systems and related devices in anticipation of an extremely rapid increase in demand for bandwidth. While demand for bandwidth continued to increase, this demand had grown at a far slower pace than previously anticipated. As a result, communication equipment manufacturers ended up with excess inventories of optical systems and devices that continue to create a barrier to new sales opportunities for much of the following several years.

This situation has created challenges for suppliers in the optical communication industry. Due to decreased unit shipments as a result of overcapacity in the industry and the resulting competition for fewer sales opportunities, average selling prices have declined as companies compete for significantly smaller market opportunities.

Over the past five years, the optical components industry has experienced a slight increase and resumption in business levels. Recent orders for our products have been utilized both for upgrades of existing networks and new network builds. In addition, certain large telecommunications service providers have recently begun to deploy new broadband access networks based on fiber optic technologies for residential users. These fiber-to-the-home networks, or FTTH, are expected to significantly increase the capacity and expand the types of services that can be utilized by residential users. It remains difficult, however, to predict the timing or extent of a full industry recovery and the potential impact to our business from this or any other deployment initiatives.

Our lines of optical products support the needs of current and next generation optical network systems applications. Our connectivity product family provides a comprehensive line of optical interconnect devices, couplers and splitters, PLC (planar lightwave circuits) and related optical products, as well as customized integrated modules incorporating these devices. Our optical passive products include WDM, CWDM and DWDM components and modules that utilize thin film filter technologies to separate optical signals, variable attenuators, optical switches and other optical devices utilizing micro optic lensing technology including integrated electro-optical modules incorporating these products.

Connectivity Products. In nearly all fiber optic networks, the optical fiber, passive optical components and active optical devices must be joined using optical interconnection systems. Our connectivity platform provides fundamental component support for these applications as well as standard and custom value added integrated solutions that address the need for higher functionality and modularity. All of our connectivity products described below are in production and are shipping to customers.

Connectivity Modules. The evolution of optical components is driven by the increasing need for packaging density, module performance and overall cost effectiveness. We design and package our various components to provide superior integrated connectivity modules for our customers. Our integrated modules are designed to reduce our customers’ system design requirements and ease implementation.

Optical Connectors, Adapters and Cable Assemblies. Optical connectors and adapters are precision devices that connect fibers together. Optical cable assemblies are used to bridge relatively short distances with optical paths. We offer a broad range of industry standard connection products that support a wide range of fiber and fiber cable types. Further, with our vertically integrated design and manufacturing capability, we are able to customize these products to meet our customers’ needs for compact size and special features. We specialize in providing our customers with high performance custom cable assemblies to serve in conjunction with our optical interconnection solutions at all interface points in the optical communications network.

Fused and Planar Fiber Optical Splitters and Couplers. Fused and planar fiber optical splitters and couplers are branching devices that are used to split optical power from a single fiber, or set of fibers, into a different set of fibers. They are often used to distribute optical signals to multiple locations for processing. These devices utilize signal and power sharing features to reduce the total cost of delivering bandwidth to end-users. Our optical splitters and couplers reduce insertion loss, or the power loss incurred when inserting components into an optical path, and deliver high performance, including uniform optical wavelength splitting.

Optical Tap Couplers and Ultra Low Polarization Dependent Loss Tap Couplers. Optical tap couplers are fused fiber branching devices that split off a portion of light to allow for optical monitoring and feedback. These devices are used extensively in fiber amplifier power control. They are also utilized in transmission equipment for performance monitoring and control. Our ultra low polarization dependent loss devices offer low levels of sensitivity to polarization, which is a characteristic of light that can cause a reduction in the fidelity of optical signals. These devices enable more effective monitoring and management of optical networks.

Amplifier WDM Couplers. Amplifier WDM couplers are used with specialized fibers to combine or separate specific wavelengths of light associated with standard telecommunications optical amplifier requirements. Our amplifier WDM couplers are stable low power loss components with high power handling capability.

Optical Fixed Attenuators. Optical fixed attenuators diminish the optical power within a given optical path without interference or reduction in optical signal quality. Typically, this function is embedded in an optical connector or adapter element to simplify optical network installation. We utilize attenuating fiber that reduces power while preserving performance characteristics, including optical signal quality and reliability.

Fused Fiber WDM Couplers. Fused fiber WDM couplers are used to combine and separate optical signals transmitted on different wavelengths. This function provides the first level of bandwidth expansion for a network by increasing a fiber’s signal carrying capacity. Fused fiber WDM couplers may also be used to add additional functionality to the network such as network status monitoring. We believe our fused fiber WDM couplers provide a cost effective way to minimize loss and maximize wavelength isolation.

Fiber Array Units ( FAUs). FAUS are used to precisely attach multiple fibers to Planar Waveguide Circuit devices including PLC AWGs, VMUX, and PLC based WSS and ROADMs. These fiber arrays are often provided with standard connector terminations on the opposing end of the array and can be constructed to incorporate up to 100 fibers in a single precise array configuration. Our fiber array products are targeted at the highest precision and reliability requirements in the communications market.

Optical Passive Products. As the capacity and complexity of optical networks increases, future systems face significant challenges. Performance characteristics such as stability, wavelength isolation, channel balance and power loss due to polarization become important to optimize, and product solutions which enhance these characteristics provide competitive advantage. In recent years, WDM has become the preferred method of increasing bandwidth throughout optical networks. Our filter-based products serve WDM and DWDM systems as core passive elements that direct and manage larger numbers of optical signal channels. These particular optical passive products also enable network DWDM systems to manage and monitor a large number of optical signals by separating these signals into different paths that can be processed individually.

Our optical passive product devices serve many system original equipment manufacturers, or OEM, customers’ needs for current and next generation network equipment. All of our optical passive products described below are in production and are shipping to customers.

Filter WDMs. Our thin film filter based WDMs are used to combine and separate optical signals. Our filter-based products allow for higher isolation and narrower wavelength separations than fused fiber technology. Our filter WDMs are designed for a range of network applications including combining active and passive components and wavelength monitoring, splitting and separating tasks.

DWDMs. Dense wave division multiplexers, or DWDMs, are integrated optical modules that combine, or multiplex, and separate, or demultiplex, multiple optical signals of different wavelengths on a single fiber. The separation of wavelengths are so narrow, or dense, that a large number of channels (greater than 10) can be combined within the band of usable wavelengths of the fiber itself. We utilize proprietary thin film technology in the development and manufacture of our DWDM products. This technology delivers excellent performance characteristics, including narrow channel separation and wide channel bandpass, which is the range of frequencies that will pass through a filter. Thin film filter technology allows for a range of solutions for 200 GHz, 100 GHz and 50 GHz International Telecom Union wavelength spacing applications, which permit 40 channels, 80 channels, and 160 channels, respectively, to be transmitted across a single fiber. We believe that our DWDMs directly address the scalable channel plans found in metropolitan and last mile access network applications.

CWDMs. Coarse wavelength division multiplexers, or CWDMs, are integrated optical modules that multiplex or demultiplex multiple optical signals of different wavelengths on a single fiber. Our CWDM product separate wavelength into 20 nanometers, or spacing to cover the complete fiber optical communication spectrum from 1270 nm to 1610 nm.

With the unique low insertion loss and flat band-pass profile, CWDMs provide an economic and efficient wavelength division multiplexing solution for metropolitan and access networks. Our CWDM product covers four channel, eight channel, and sixteen channel mux and demux applications, and upgradeability for both four channel and eight channel types. We also offer optical add-drop modules, or OADMs, for CWDM networks, with the capability of adding or dropping from one to fifteen channels. In addition to the CWDM mux, demux and optical add/drop modules, we also offer complete rackmount CWDM solutions to customers so they can easily mount our CWDM products directly on their system rack. We believe our CWDM products directly address the metropolitan and access markets’ competitive wavelength management needs.

CCWDMs. Compact coarse wavelength division multiplexers, or CCWDMs, are integrated optical modules that are designed to significantly improve optical performance, while reducing manufacturing costs, in a package less than 1/4 the size of conventional CWDM modules. Our CCWDMs feature high wavelength accuracy and stability, low insertion loss, high isolation, low polarization dependent loss and an epoxy-free optical path. Our Telcordia 1209/1221-qualified CCWDM builds on our proprietary optical bench platform, and we believe it has the smallest footprint of any comparable CWDMs. With a channel spacing of 20 nm and wide bandpass characteristics, it allows for datacom or telecom network applications with low-cost uncooled lasers. These CCWDM mux/demuxes are available in four or eight channels and include an expansion port for 16 channel systems.

Add/Drop DWDM Filters. Add/drop DWDM filter products are used to insert or extract specific wavelengths in a DWDM system. While a large number of channels can be transmitted through a single fiber network, often only selected channels of information are required at a particular location. Our 200 GHz, 100 GHz and 50 GHz add/drop components use high performance filter technology and operate with very little optical power loss in order to provide high channel separation and high stability.

Optical Isolators These devices use polarization rotation to block return signals from the forward optical path. They limit distortions in devices and signals caused by reflected lights in the fiber.

Optical Bypass Switches As the name suggests, these devices utilize beam shifting optics or mirror to switch optical signals from one fiber to another in response to a control signal provided electronically. Optical switches are used in test equipment for basic functionality and in networks to provide protection and redundancy.

Automatic Variable Optical Attenuators. Automatic variable optical attenuators are designed to control the optical power in a fiber. They are often combined with an active system component to maintain optical power on a network even if the input signal is changing power. Our automatic variable optical attenuators are specifically designed for application in DWDM networks for use with individual channel source elements such as add/drop transmitters. The cost and performance characteristics of our automatic variable optical attenuators are specifically targeted to allow for the use of these devices in volume as principal DWDM channel stabilization components.

We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. As of December 31, 2015, we had 74 United States patents issued or assigned to us and had 14 United States patent applications pending. Our U.S. patents expire between May 2016 and December 2035. We also have 6 foreign patents issued, and 2 foreign patent applications pending. Our foreign patents issued will expire between August 2016 and April 2030. We also utilize unpatented proprietary know-how and trade secrets and employ various methods to protect them.

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. We expect we will increasingly be subject to license offers and infringement claims as the number of products and competitors in our market grows and the functions of products overlap. Patents of third parties may be determined to be valid, or some of our products may ultimately be determined to infringe them. Other companies may pursue litigation with respect to those 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, financial condition, or cash flows. As of December 31, 2015, we were not aware of infringement claims or litigation pending against us.

We sell our products to communications equipment manufacturers that incorporate our products into their systems that they in turn sell to network service providers. In certain cases, we sell our products to other component manufacturers for resale or inclusion in their products. In the year ended December 31, 2015, we sold our products to more than 200 customers. One customer accounted for 31.0%, 39.6% and 35.3% of our revenues in the years ended December 31, 2015, 2014 and 2013, respectively. The following is a summary of our revenues by geographic segment (in thousands):

	Years Ended December 31,
	2015		2014		2013
Revenues
United States	$	41,624	$	49,556	$	41,350
Rest of North America		3,409		2,545		1,465
Europe		17,513		18,102		15,604
China		8,141		9,278		8,854
Rest of Asia		10,502		6,506		8,797
	$	81,189	$	85,987	$	76,070

Additional geographic and segment related information can be found in Note 9 to the Consolidated Financial Statements included in Item 8 of this Annual Report Form 10-K.

Sales. Our direct sales force markets and sells our products primarily in the United States. We also maintain a sales support staff in Taiwan to service customers based in the Asia Pacific region. Our direct sales force and technical marketing personnel maintain close contact with our customers and provide technical support.

Marketing. We have a number of marketing programs to support the sale and distribution of our products and to inform existing and potential customers about the capabilities and benefits of our products. Our marketing efforts include participating in industry trade shows and technical conferences, advertising in trade journals and communicating through our corporate website and direct mail.

Technical Support and Product Management. We maintain a technically knowledgeable support staff that we believe is critical to our development of long-term customer relationships. Our technical support and product management staff works closely with our customers to understand their product requirements, to assist customers with utilizing our product line, and to develop customized product solutions.

The fiber optic component industry is highly competitive and subject to rapid technological change. We believe that the principal differentiating factors in the fiber optic component market are support for multiple optical interfaces, high optical power, wavelength selection, manufacturing capacity, reliable and compact packaging, price, product innovation and reliability of product performance. Based on our assessment of the performance and price of similar competitive product offerings, we believe that our products compare favorably, although we cannot assure you that they will continue to do so.

Our principal competitors in the components market include JDS Uniphase Corp., Molex Inc. Oclaro Inc., Senko Advanced Components and TE Connectivity. We estimate that we had over 20 competitors in the components market as of December 31, 2015. We believe that we primarily compete with diversified suppliers for the majority of our product line and to a lesser extent with a large number of niche companies that offer a more limited product line. Competitors throughout the optical component industry, including those who sell active components, may rapidly become competitors in portions of our business. Competitors who provide both active and passive components may have a competitive advantage because they provide a more complete product solution than we provide. In addition, our industry has continued to experience significant consolidation, and we anticipate that further consolidation will occur. This consolidation has further increased and we believe will further increase competition. We expect significant pricing pressure from our competitors that may negatively affect our margins. We cannot assure you that we will be able to compete successfully with existing or future competitors or that competitive pressures will not seriously harm our business, operating results and financial condition.

As of December 31, 2015, we had a total of 84 engineers and technicians that are directly involved in research and development of our products located in the United States, Taiwan and China. Our engineering team has extensive design, packaging, processing, and software experience in optical components, interfaces and systems.

Our primary product development center is located in Sunnyvale, California, where we opened our Photonics Technology Center in March 2001. Our Taiwanese subsidiary also engages in product development. Our research and development expenses were $4.4 million, $4.3 million and $3.7 million for the years ended December 31, 2015, 2014 and 2013, respectively. We spend a substantial proportion of our financial resources to develop new technologies and products to serve the next generation communication markets.

We make significant purchases of key materials, components and equipment, including ferrules, filters and other components from third party suppliers. We have established multiple sources from which to obtain our critical raw materials and components. If there is a significant surge in demand, we may have difficulty obtaining sufficient quantities of these materials or components, which may result in delays, increased costs, and reductions in our product shipments.

We manufacture the majority of our connectivity products at our facility in Tu-Cheng City, Taiwan. We manufacture our filter-based and advanced products at our facility near Shenzhen, China.

Each of these facilities maintains comprehensive in-house manufacturing processes, including component and integrated module design, integration, production, and testing. We plan to continue to invest resources in manufacturing management, engineering and quality control.

We have established a quality management system which is designed to ensure that the products we provide to our customers meet or exceed their requirements. Our Taiwan and China facilities are ISO 9001-2000 certified. In addition, our Taiwan facility is TL-9000 certified.

As of December 31, 2015, we had 1,576 full-time employees, including 35 located in the United States, 389 in Taiwan and 1,152 in China. Of our full-time employees, 84 are engaged in research and development, 1,378 are engaged in manufacturing production, 25 are engaged in sales, marketing, application support and customer service, and 89 are engaged in general and administration. None of our employees are represented by a labor union. We have not experienced any work stoppages and we consider our relations with our employees to be good.

We were incorporated in California in December 1995. In October 2000, prior to our initial public offering, we reincorporated in Delaware as Alliance Fiber Optic Products, Inc. Our website is www.afop.com. We make available free of charge through a hyperlink on our website our annual reports 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) of the Securities Exchange Act as soon as reasonably practicable after the material is furnished to the SEC. Our website and the information contained therein or connected thereto is not intended to be incorporated into this Annual Report on Form 10-K.

From inception through December 31, 2015, we had an accumulated deficit of $13.8 million.

We continue to experience fluctuating demand for our products. If demand for our products declines, we may not be able to decrease our expenses on a timely basis or at levels that offset any such decreases. If demand for our products continues to increase in the future, we may incur significant and increasing expenses for expansion of our manufacturing operations, research and development, sales and marketing, and administration, and in expanding our direct sales and distribution channels. Given the rate at which competition in our industry intensifies and the fluctuations in demand for our products, we may not be able to adequately control our costs and expenses or achieve or maintain adequate operating margins. As a result, we will need to generate and sustain substantially higher revenues while maintaining reasonable cost and expense levels.

We depend on a small number of customers for a significant portion of our revenues, and one customer accounted for approximately 31% of our revenues in 2015 and the loss of, or a significant reduction in orders from, any of these customers, would significantly reduce our revenues and harm our operating results.

In the years ended December 31, 2015, 2014 and 2013, our 10 largest customers comprised 71.7%, 74.3% and 75.6% of our revenues, respectively. One customer accounted for 31.0%, 39.6% and 35.3% of our revenues for the years ended December 31, 2015, 2014 and 2013, respectively.

We derive a significant portion of our revenues from a small number of customers, and we anticipate that we will continue to do so in the foreseeable future. These customers may decide not to purchase our products at all, to purchase fewer products than they did in the past, to demand price concessions, or to alter their purchasing patterns in some other way. For example, a significant customer ordered fewer products in the third and fourth quarters of 2015 than we expected, and this had an adverse effect on our operating results. The loss of any significant customer, a significant reduction or fluctuations in sales we make to a customer, or any problems collecting receivables from one or more significant customers would likely harm our financial condition and results of operations. Changes in purchasing levels by these customers may also cause our operating results to fluctuate from period to period.

Our connectivity products have historically represented a significant part of our revenues, and if we are unsuccessful in selling our optical passive products, our business may be harmed.

Sales of our connectivity products accounted for 75.5%, 75.3% and 75.8% of our revenues in the years ended December 31, 2015, 2014 and 2013, respectively, and a majority of our historical revenues. We expect to substantially depend on these products for the majority of our near-term revenues. We have in the past, and may in the future experience declines in average selling prices. Any significant decline in the price of, or demand for, these products, or failure to increase their market acceptance, would seriously harm our business. In addition, we believe that our future growth and a significant portion of our future revenues will depend on the commercial success of our optical passive products. If demand for these products does not continue to increase and our target customers do not continue to adopt and purchase our optical passive products, our revenues may decline.

Continuing weak general economic or business conditions may have a negative impact on our business.

Continuing concerns over inflation, deflation, another recession, energy costs, geopolitical issues, the availability and cost of credit, Federal budget proposals, the Federal deficit and credit rating, unemployment, global economic instability, slowing growth in China and an uncertain real estate market in the U.S. have contributed to increased volatility and diminished expectations for the global economy and expectations of slower global economic growth. These factors, combined with low oil prices, weak business and consumer confidence, a volatile stock market and unemployment levels, have resulted in an economic slowdown. If the economic climate in the U.S. and abroad does not improve or deteriorates, our business, including our customers and our suppliers, could be negatively affected, resulting in a negative impact on our revenues.

Our quarterly and annual financial results have historically fluctuated due primarily to introduction of, demand for, and sales of our products, and future fluctuations may cause our stock price to decline.

We believe that period-to-period comparisons of our operating results are not a good indication of our future performance. Our quarterly operating results have fluctuated in the past and are likely to fluctuate significantly in the future due to a number of factors. For example, the timing and expenses associated with product introductions and establishing additional manufacturing lines and facilities, changes in manufacturing volume, declining average selling prices of our products, the timing and extent of product sales, the mix of domestic and international sales, the mix of sales channels through which our products are sold, the mix of products sold and significant fluctuations in demand for our products have caused our operating results to fluctuate. Because we incur operating expenses based on anticipated revenue levels; and a significant percentage of our expenses are fixed in the short term, any delay in generating or recognizing revenues or any decrease in revenues could significantly harm our quarterly results of operations. Other factors, many of which are more fully discussed elsewhere in this report, may also cause our results to fluctuate. Many of the factors that may cause our results to fluctuate are outside of our control. If our quarterly or annual operating results do not meet the expectations of investors and securities analysts, the trading price of our common stock could significantly decline.

If we cannot attract more optical communications equipment manufacturers to purchase our products, we may not be able to increase or sustain our revenues.

Our future success will depend on our ability to migrate existing customers to our new products and our ability to attract additional customers. Some of our present customers are relatively new companies. The growth of our customer base could be adversely affected by:

The fluctuations in the economy have affected the telecommunications industry. Telecommunications companies have cut back on their capital expenditure budgets, which has and may continue to further decrease demand for equipment and parts, including our products. This decrease has had and may continue to have an adverse effect on the demand for fiber optic products and negatively impact the growth of our customer base.

We are exposed to risks and increased expenses and business risk as a result of Restriction on Hazardous Substances, or RoHS directives.

Following the lead of the European Union, or EU, various governmental agencies have either already put into place or are planning to introduce regulations that regulate the permissible levels of hazardous substances in products sold in various regions of the world. For example, the RoHS directive for EU took effect on July 1, 2006. The labeling provisions of similar legislation in China went into effect on March 1, 2007. Consequently, many suppliers of products sold into the EU 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. 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 consequences: loss of revenue, damaged reputation, diversion of resources, monetary penalties, and legal action.

The market for fiber optic components is increasingly competitive, and if we are unable to compete successfully our revenues could decline.

The market for fiber optic components is intensely competitive. We believe that our principal competitors are the major manufacturers of optical components and integrated modules, including vendors selling to third parties and business divisions within communications equipment suppliers. Our principal competitors in the components market include Oclaro Inc., JDS Uniphase Corp., Molex Inc, Senko Advanced Components and TE Connectivity. We believe that we primarily compete with diversified suppliers for the majority of our product line and to a lesser extent with niche companies that offer a more limited product line. Competitors in any portion of our business may also rapidly become competitors in other portions of our business.

Many of our current and potential competitors have significantly greater financial, technical, marketing, purchasing, manufacturing and other resources than we do. As a result, these competitors may be able to respond more quickly to new or emerging technologies and to changes in customer requirements, to devote greater resources to the development, promotion and sale of products, to negotiate lower prices on raw materials and components, or to deliver competitive products at lower prices.

Several of our existing and potential customers are also current and potential competitors of ours. These companies may develop or acquire additional competitive products or technologies in the future and subsequently reduce or cease their purchases from us. In light of the consolidation in the optical networking industry, we also believe that the size of suppliers will be an increasingly important part of a purchaser’s decision-making criteria in the future. We may not be able to compete successfully with existing or new competitors, and we cannot ensure that the competitive pressures we face will not result in lower prices for our products, loss of market share, or reduced gross margins, any of which could harm our business.

New and competing technologies are emerging due to increased competition and customer demand. The introduction of products incorporating new or competing technologies or the emergence of new industry standards could make our existing products noncompetitive. For example, there are technologies for the design of wavelength division multiplexers that compete with the technology that we incorporate in our products. If our products do not incorporate technologies demanded by customers, we could lose market share causing our business to suffer.

If we fail to effectively manage our operations, specifically given the past history of sudden and dramatic downturn in demand for our products, our operating results could be harmed.

As of December 31, 2015, we had 35 full-time employees in Sunnyvale, California, 389 full-time employees in Taiwan, and 1,152 full-time employees in China. Matching the scale of our operations with demand fluctuations, combined with the challenges of expanding and managing geographically dispersed operations, has placed, and will continue to place, a significant strain on our management and resources. To manage the expected fluctuations in our operations and personnel, we will be required to:

In addition, we must continue to coordinate our domestic and international operations and maintain the necessary infrastructure to implement our international strategy. If we are not able to manage our operations in an efficient and timely manner, our business will be severely harmed.

Our success also depends, to a large degree, on the efficient and uninterrupted operation of our facilities. We have expanded our manufacturing facilities in China and manufacture many of our products there. Our facility in Taiwan also houses a substantial portion of our manufacturing operations. There is significant political tension between Taiwan and China. If there is an outbreak of hostilities between Taiwan and China, our manufacturing operations may be disrupted or we may have to relocate our manufacturing operations. Relocating a portion of our employees could cause temporary disruptions in our operations and divert management’s attention.

Because of the time it takes to develop fiber optic components, we incur substantial expenses for which we may not earn associated revenues.

The development of new or enhanced fiber optic products is a complex and uncertain process. We may experience design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new products and enhancements. Development costs and expenses are incurred before we generate revenues from sales of products resulting from these efforts. Our research and development expenses were $4.4 million, $4.3 million and $3.7 million for the years ended December 31, 2015, 2014 and 2013, respectively. We intend to continue to invest in our research and product development efforts, which could have a negative impact on our earnings in future periods.

If we are unable to develop new products and product enhancements that achieve market acceptance, sales of our fiber optic components could decline, which could reduce our revenues.

The communications industry is characterized by rapidly changing technology, frequent new product introductions, changes in customer requirements, evolving industry standards and, more recently, significant variations in customer demand. Our future success depends on our ability to anticipate market needs and develop products that address those needs. As a result, our products could quickly become obsolete if we fail to predict market needs accurately or develop new products or product enhancements in a timely manner. Our failure to predict market needs accurately or to develop new products or product enhancements in a timely manner will harm market acceptance and sales of our products. If the development or enhancement of these products or any other future products takes longer than we anticipate, or if we are unable to introduce these products to market, our sales will not increase. Even if we are able to develop and commercially introduce them, these new products may not achieve the widespread market acceptance necessary to provide an adequate return on our investment.

Current and future demand for our products depends on the continued growth of the Internet and the communications industry, which is experiencing consolidation, realignment, and fluctuating demand for fiber optic products.

Our future success depends on the continued growth of the Internet as a widely used medium for communications and commerce, and the growth of optical networks to meet the increased demand for capacity to transmit data, or bandwidth. If the Internet does not continue to expand as a medium for communications and commerce, the need to significantly increase bandwidth across networks and the market for fiber optic components may not continue to develop. If this growth does not continue, sales of our products may decline, which would adversely affect our revenues. Our customers have experienced an oversupply of inventory due to fluctuating demand for their products that has resulted in inconsistent demand for our products. Future demand for our products is uncertain and will depend heavily on the continued growth and upgrading of optical networks, especially in the metropolitan, last mile, and enterprise access segments of the networks.

Inconsistent spending by telecommunication companies over the past several years has resulted in fluctuating demand for our products. The rate at which communication service providers and other fiber optic network users have built new fiber optic networks or installed new systems in their existing fiber optic networks has fluctuated in the past and these fluctuations may continue in the future. These fluctuations may result in reduced demand for new or upgraded fiber optic systems that utilize our products and therefore, may result in reduced demand for our products. Declines in the development of new networks and installation of new systems have resulted in the past in a decrease in demand for our products, an increase in our inventory, and erosion in the average selling prices of our products.

The communications industry is experiencing continued consolidation and realignment, as industry participants seek to capitalize on the rapidly changing competitive landscape developing around the Internet and new communications technologies such as fiber optic networks. As the communications industry consolidates and realigns to accommodate technological and other developments, our customers may consolidate or align with other entities in a manner that results in a decrease in demand for our products.

We have experienced fluctuations in market demand due to overcapacity in our industry and an economy that is stymied by current financial and economic conditions, international terrorism, war and political instability.

The United States economy has experienced and continues to experience significant fluctuations in consumption and demand. We have in the past and may in the future experience decreases in demand for our products due to a weak domestic and international economy as the fiber optics industry copes with the effects of oversupply of products, international terrorism, war and political and economic instability. Even if the general economy experiences a recovery, the activity of the United States telecommunications industry may lag behind the recovery of the overall United States economy.

The optical networking component industry often experiences declining average selling prices, and declines in average selling prices of products could cause our gross margins to decline.

The optical networking component industry often experiences declining average selling prices as a result of increasing competition and from pricing pressures resulting in greater unit volumes purchases as communication service providers continue to deploy fiber optic networks. We expect that average selling prices will continue to decrease over time in response to new product and technology introductions by us or competitors, price pressures from significant customers, greater manufacturing efficiencies achieved through increased automation in the manufacturing process and inventory build-up due to decreased demand. Average selling price declines may contribute to a decline in our gross margins which could harm our results of operations.

We will not attract new orders for our fiber optic components unless we can deliver sufficient quantities of our products to optical communications equipment manufacturers.

Communications service providers and optical systems manufacturers typically require that suppliers commit to provide specified quantities of products over a given period of time. If we are unable to commit to deliver quantities of our products to satisfy a customer’s anticipated needs, we will lose the order and the opportunity for significant sales to that customer for a lengthy period of time. In addition, we would be unable to fill large orders if we do not have sufficient manufacturing capacity to enable us to commit to provide customers with specified quantities of products. However, if we build our manufacturing capacity and inventory in excess of demand, as we have done in the past, we may produce excess inventory that may have to be reserved or written off.

Because we experience long lead times for materials and components, we may not be able to effectively manage our inventory levels or manufacturing capacity, which could harm our operating results.

Because we experience long lead times for materials and components and are often required to purchase significant amounts of materials and components far in advance of product shipments, we may not effectively manage our inventory levels, which could harm our operating results. Alternatively, if we underestimate our raw material requirements, we may have inadequate inventory, which could result in delays in shipments and loss of customers. If we purchase raw materials and increase production in anticipation of orders that do not materialize or that shift to another quarter, we will, as we have in the past, have to carry or write off excess inventory and our gross margins will decline. Both situations could cause our results of operations to be below the expectations of investors and public market analysts, which could, in turn, cause the price of our common stock to decline. The time our customers require to incorporate our products into their own can vary significantly and generally exceeds several months, which further complicates our planning processes and reduces the predictability of our forecasts. Even if we receive these orders, the additional manufacturing capacity that we add to meet our customer’s requirements may be underutilized in a subsequent quarter.

If we are unable to maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our reported financial information and the market price of our common stock may be negatively affected.

As a public company, we are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 which requires that we evaluate and determine the effectiveness of our internal control over financial reporting and provide a management report on our internal controls. We have implemented an ongoing program to perform the system and process evaluation and testing we believe to be necessary to comply with this requirement, however, we cannot assure you that we will be successful in our efforts. If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, our management will be unable to conclude that our internal control over financial reporting is effective.

Our independent registered public accounting firm is also required to issue an attestation report on the effectiveness of our internal control over financial reporting on an annual basis. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may conclude that there are material weaknesses with respect to our internal controls or the level at which our internal controls are documented, designed, implemented or reviewed. If we are unable to conclude that our internal control over financial reporting is effective or if our auditors were to express an adverse opinion on the effectiveness of our internal control over financial reporting because we had one or more material weaknesses, investors could lose confidence in the accuracy and completeness of our financial disclosures, which could cause the price of our common stock to decline. Internal control deficiencies could also result in a restatement of our financial results.

We depend on key personnel to operate our business effectively in the rapidly changing fiber optic components market, and if we are unable to hire and retain appropriate management and technical personnel, our ability to develop our business could be harmed.

Our success depends to a significant degree upon the continued contributions of the principal members of our technical sales, marketing, engineering and management personnel, many of whom perform important management functions and would be difficult to replace. We particularly depend upon the continued services of our executive officers, particularly Peter Chang, our President and Chief Executive Officer; David Hubbard, our Executive Vice President of Sales and Marketing; Anita Ho, our Acting Chief Financial Officer; and other key engineering, sales, marketing, finance, manufacturing and support personnel. In addition, we depend upon the continued services of key management personnel at our Taiwanese subsidiary and at our facility in China. None of our officers or key employees is bound by an employment agreement for any specific term, and may terminate their employment at any time. We do not have “key person” life insurance policies covering any of our employees.

Our ability to continue to attract and retain highly skilled personnel will be a critical factor in determining whether we will be successful in the future. We may have difficulty hiring skilled engineers at our manufacturing facilities in the United States, Taiwan, and China. If we are not successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs, our business may be harmed.

If we are not able to achieve acceptable manufacturing yields and sufficient product reliability in the production of our fiber optic components, we may incur increased costs and delays in shipping products to our customers, which could impair our operating results.

Complex and precise processes are required for the manufacture of our products. Changes in our manufacturing processes or those of our suppliers, or the inadvertent use of defective materials, could significantly reduce our manufacturing yields and product reliability. Because the majority of our manufacturing costs are relatively fixed, manufacturing yields are critical to our results of operations. Lower than expected production yields could delay product shipments, impair our operating results and harm our reputation. We may not obtain acceptable yields in the future.

In some cases, existing manufacturing techniques, which involve substantial manual labor, may not allow us to cost-effectively meet our production goals so that we maintain acceptable gross margins while meeting the cost targets of our customers. We may not achieve adequate manufacturing cost efficiencies.

Because we plan to introduce new products and product enhancements, we must effectively transfer production information from our product development department to our manufacturing group and coordinate our efforts with those of our suppliers to rapidly achieve volume production. In our experience, our yields have been lower during the early stages of introducing new product to manufacturing. If we fail to effectively manage this process or if we experience delays, disruptions or quality control problems in our manufacturing operations, our shipments of products to our customers could be delayed.

Because the qualification and sales cycle associated with fiber optic components is lengthy and varied, it is difficult to predict the timing of a sale or whether a sale will be made, which may cause us to have excess manufacturing capacity or inventory and negatively impact our operating results.

In the communications industry, service providers and optical systems manufacturers often undertake extensive qualification processes prior to placing orders for large quantities of products such as ours, because these products must function as part of a larger system or network. This process may range from three to six months and sometimes longer. Once they decide to use a particular supplier’s product or component, these potential customers design the product into their system, which is known as a design-in win. Suppliers whose products or components are not designed in are unlikely to make sales to that customer until at least the adoption of a future redesigned system. Even then, many customers may be reluctant to incorporate entirely new products into their new systems, as this could involve significant additional redesign efforts. If we fail to achieve design-in wins in our potential customers’ qualification processes, we will lose the opportunity for significant sales to those customers for a lengthy period of time.

In addition, some of our customers require that our products be subjected to standards-based qualification 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 development expenses, expend significant management efforts, increase manufacturing capacity and order long lead-time supplies. Even after the evaluation process, it is possible a potential customer will not purchase our products. In addition, product purchases are frequently subject to unplanned processing and other delays, particularly with respect to larger customers for which our products represent a very small percentage of their overall purchase activity. Accordingly, our revenues and operating results may vary significantly and unexpectedly from quarter to quarter.

If our customers do not qualify our manufacturing lines for volume shipments, our optical networking components may be dropped from supply programs and our revenues may decline.

Customers generally will not purchase any of our products, other than limited numbers of evaluation units, before they qualify our products, approve our manufacturing process and approve our quality assurance system. Our existing manufacturing lines, as well as each new manufacturing line, must pass through various levels of approval with our customers. For example, customers may require that we be registered under international quality standards. Our products may also have to be qualified to specific customer requirements. This customer approval process determines whether the manufacturing line achieves the customers’ quality, performance and reliability standards. Delays in product qualification may cause a product to be dropped from a long-term supply program and result in significant lost revenue opportunity over the term of that program.

Our fiber optic components are deployed in large and complex communications networks and may contain defects that are not detected until after our products have been installed, which could damage our reputation and cause us to lose customers.

Our products are designed for deployment in large and complex optical networks. Because of the nature of these products, they can only be fully tested for reliability when deployed in networks for long periods of time. Our fiber optic products may contain undetected defects when first introduced or as new versions are released, and our customers may discover defects in our products only after they have been fully deployed and operated under peak stress conditions. In addition, our products are combined with products from other vendors. As a result, should problems occur, it may be difficult to identify the source of the problem. If we are unable to fix defects or other problems, we could experience, among other things:

The occurrence of any one or more of the foregoing factors could negatively impact our revenues.

The market for fiber optic components is unpredictable, characterized by rapid technological changes, evolving industry standards, and significant changes in customer demand, which could result in decreased demand for our products, erosion of average selling prices, and could negatively impact our revenues.

The market for fiber optic components is characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. Because this market is new, it is difficult to predict its potential size or future growth rate. Widespread adoption of optical networks, especially in the metropolitan, last mile, enterprise access, and datacenter segments of the networks, is critical to our future success. Potential end-user customers who have invested substantial resources in their existing copper lines or other systems may be reluctant or slow to adopt a new approach, such as optical networks. Our success in generating revenues in this market will depend on:

If we fail to address changing market conditions, sales of our products may decline, which would adversely impact our revenues.

Disclosure requirements relating to “conflict minerals” could increase our costs and limit the supply of certain metals that may be used in our products and affect our reputation with customers and stockholders.

As required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the Securities and Exchange Commission promulgated final rules regarding annual disclosures by public companies of their use of certain minerals and metals, known as “conflict minerals,” which are mined from the Democratic Republic of the Congo (DRC), and adjoining countries, and their efforts to prevent the sourcing of such conflict minerals from these countries. These rules require us to engage in due diligence efforts to ascertain and disclose the origin of some of the raw materials used in the production process. Annual disclosures are required no later than May 31 of each year. We have and will continue to incur costs associated with complying with these disclosure requirements, including due diligence to determine the sources of conflict minerals, if any, used in our products and other potential changes to our products, processes, or sources of supply as a consequence of such due diligence activities. These rules and our compliance procedures could adversely affect the supply and pricing of materials used in our products. Not all suppliers offer “conflict free” conflict minerals, so we cannot be certain that we will be able to obtain sufficient quantities of conflict minerals from such suppliers or at competitive prices. Also, our reputation with our customers and stockholders could be damaged if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins of conflict minerals used in our products through the procedures we may implement. If we cannot determine that our products exclude conflict minerals sourced from the DRC or adjoining countries, some of our customers may discontinue, or materially reduce, purchases of our products, which could negatively affect our results of operations. In addition, our customers may require us to report to them on our conflict minerals compliance, and if we do not perform this function to a customer’s satisfaction, they may cease to do business with us.

We may be unable to successfully integrate acquired businesses or assets with our business, which may disrupt our business, divert management’s attention and slow our ability to expand the range of our proprietary technologies and products.

To expand the range of our proprietary technologies and products, we may acquire complementary businesses, technologies or products, if appropriate opportunities arise. We may be unable to identify other suitable acquisitions at reasonable prices or on reasonable terms, or consummate future acquisitions or other investments, any of which could slow our growth strategy. We may have difficulty integrating the acquired products, personnel or technologies of any company or acquisition that we may make. Similarly, we may not be able to attract or retain key management, technical or sales personnel of any other companies that we acquire or from which we acquire assets. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses.

If we fail to protect our intellectual property rights, competitors may be able to use our technologies, which could weaken our competitive position, reduce our revenues or increase our costs.

The fiber optic component market is a highly competitive industry in which we, and most other participants, rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and licensing arrangements to establish and protect proprietary rights. The competitive nature of our industry, rapidly changing technology, frequent new product introductions, changes in customer requirements and evolving industry standards heighten the importance of protecting proprietary technology rights. Since the United States Patent and Trademark Office keeps patent applications confidential until a patent is issued, our pending patent applications may attempt to protect proprietary technology claimed in a third party patent application. Our existing and future patents may not be sufficiently broad to protect our proprietary technologies as policing unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in foreign countries where the laws may not protect our proprietary rights as fully as United States laws. Our competitors and suppliers may independently develop similar technology, duplicate our products, or design around any of our patents or other intellectual property. If we are unable to adequately protect our proprietary technology rights, others may be able to use our proprietary technology without having to compensate us, which could reduce our revenues and negatively impact our ability to compete effectively.

Litigation may be necessary to enforce our intellectual property rights or to determine the validity or scope of the proprietary rights of others. As a result of any such litigation, we could lose our proprietary rights and incur substantial unexpected operating costs. Any action we take to protect our intellectual property rights could be costly and could absorb significant management time and attention. In addition, failure to adequately protect our trademark rights could impair our brand identity and our ability to compete effectively.

We may be subject to intellectual property infringement claims that are costly to defend and could limit our ability to use some technologies in the future.

Our industry is very competitive and is characterized by frequent intellectual property litigation based on allegations of infringement of intellectual property rights. Numerous patents in our industry have already been issued, and as the market further develops and participants in our industry obtain additional intellectual property protection, litigation is likely to become more frequent. From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies or rights that are important to our business. In addition, we have and we may continue to enter into agreements to indemnify our customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. Any litigation arising from claims asserting that our products infringe or may infringe the proprietary rights of third parties, whether the litigation is with or without merit, could be time-consuming, resulting in significant expenses and diverting the efforts of our technical and management personnel. We do not have insurance against our alleged or actual infringement of intellectual property of others. These claims could cause us to stop selling our products, which incorporate the challenged intellectual property, and could also result in product shipment delays or require us to redesign or modify our products or to enter into licensing agreements. These licensing agreements, if required, would increase our product costs and may not be available on terms acceptable to us, if at all.

Although we are not aware of any intellectual property lawsuits filed against us, we may be a party to litigation regarding intellectual property in the future. We may not prevail in any such actions, given their complex technical issues and inherent uncertainties. Insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. If there is a successful claim of infringement or we fail to develop non-infringing technology or license the proprietary rights on a timely basis, our business could be harmed.

We have significant manufacturing operations in China, which exposes us to risks inherent in doing business in China.

A significant portion of our manufacturing is conducted at our facilities in Shenzhen, China, and we also conduct research and development-related activities in Shenzhen. Employee turnover in China is high due to the intensely competitive and fluid market for skilled labor. We will need to continue to hire appropriate personnel, obtain and retain required legal authorization to hire such personnel, and expend time and financial resources to hire and train such personnel. In addition, we believe that salary inflation rates for the skilled personnel we hire and seek to retain in China are likely to be higher than inflation rates elsewhere.

Operating in China subjects us to political, legal and economic risks. In particular, the political, legal and economic climate in China, both nationally and regionally, is fluid and unpredictable. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations such as those related to, among other things, taxation, import and export tariffs, environmental regulations, land use rights, intellectual property, currency controls, employee benefits and other matters. In addition, we may not obtain or retain the requisite legal permits to continue to operate in China, and costs or operational limitations may be imposed in connection with obtaining and complying with such permits.

We intend to continue to export the products manufactured at our facilities in China. Under current regulations, upon application and approval by the relevant governmental authorities, we will not be subject to certain Chinese taxes and will be exempt from certain duties on imported materials that are used in the manufacturing process and subsequently exported from China as finished products. However, Chinese trade regulations are in a state of flux, and we may become subject to other forms of taxation and duties in China or may be required to pay export fees in the future. In the event that we become subject to new taxation or export fees in China, our business and results of operations could be materially adversely affected.

We are subject to anti-corruption laws in the jurisdictions in which we operate, including the U.S. Foreign Corrupt Practices Act. Our failure to comply with these laws could result in penalties which could harm our reputation and have a material adverse effect on our business, results of operations and financial condition.

Because of our worldwide operations, we are subject to risks associated with compliance with applicable anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, or FCPA, which generally prohibits U.S. companies and their employees and intermediaries from making payments to foreign officials for the purpose of obtaining or keeping business, securing an advantage, or directing business to another, and requires public companies to maintain accurate books and records and a system of internal accounting controls. Under the FCPA, U.S. companies may be held liable for actions taken by directors, officers, employees, agents, or other strategic or local partners or representatives. If we or our intermediaries fail to comply with the requirements of the FCPA or similar laws, governmental authorities in the United States and elsewhere could seek to impose civil and criminal fines and penalties which could have a material adverse effect on our business, results of operations and financial condition.

We are subject to complex taxation rules and practices, which may affect our results of operations.

As a multinational company, we are required to comply with increasingly complex taxation rules and practices in the U.S. and abroad. The development of our tax strategies requires expertise and may impact how we conduct our business. Our future effective tax rates could be unfavorably affected by changes in, or interpretations of, tax rules and regulations in the jurisdictions in which we do business, by lapses of the availability of the U.S. research and development tax credit or by changes in the valuation of our deferred tax assets and liabilities. Furthermore, we provide for certain tax liabilities that involve significant judgment. We are subject to the examination of our tax returns by federal, state and foreign tax authorities, which could focus on our intercompany transfer pricing methodology as well as other matters. If our tax strategies are ineffective or we are not in compliance with domestic and international tax laws, our financial position, operating results and cash flows could be adversely affected.

The distribution of any earnings of our foreign subsidiaries to the United States may be subject to United States income taxes, thus reducing our net income.

We hold a significant amount of cash and cash equivalents outside the United States in our foreign subsidiaries that may not be readily available to meet certain of our cash requirements in the United States. If we are unable to address our U.S. cash requirements through operations, through borrowings or from other sources of cash obtained at an acceptable cost, it may be necessary for us to consider repatriation of earnings that are deemed permanently reinvested, and we may be required to pay additional taxes under current tax laws, which could have a material effect on our results of operations and financial condition. We have not recorded a deferred tax liability of approximately $0.7 million related to U.S. federal and state income taxes and foreign withholding taxes on approximately $26.0 million of undistributed earnings of foreign subsidiaries indefinitely invested outside the United States. Except as required under U.S. tax law, we do not provide for U.S. taxes on our undistributed earnings of foreign subsidiaries that have not been previously taxed since we intend to invest such undistributed earnings outside of the U.S. Any such taxes would reduce our net income in the period in which these earnings are distributed. In addition, any significant change to the tax system in the U.S. or in other jurisdictions, including changes in the taxation of international income, could adversely affect our financial results.

We face risks associated with currency exchange rate fluctuations, which could adversely affect our operating results.

We are exposed to risks associated with the translation of Taiwan (NT) and China (RMB) denominated financial results and accounts into U.S. dollars for financial reporting purposes. The carrying value of the assets and liabilities held in our Taiwan and China subsidiaries will be affected by fluctuations in the value of the U.S. dollar as compared to the NT and RMB. Changes in the value of the U.S. dollar as compared to the NT and RMB could have an adverse effect on our reported results of operations and financial condition. As the net positions of our unhedged foreign currency transactions fluctuate, our earnings might be negatively affected. In addition, the reported carrying value of our NT and RMB denominated assets and liabilities held in our Taiwan and China subsidiaries will be affected by fluctuations in the value of the U.S. dollar compared to the NT and RMB. As of December 31, 2015, we had a net asset balance, excluding intercompany payables and receivables, in our Taiwan and China subsidiaries denominated in NT and RMB. If the NT and RMB were to weaken 10 percent against the dollar, our net asset balance would decrease by approximately $1.4 million as of this date. Although we have implemented hedging strategies designed to mitigate foreign currency risk, these strategies may not eliminate our exposure to foreign exchange rate fluctuations and involve costs and risks of their own, such as ongoing management time and expertise, external costs to implement the strategies and potential accounting implications.

In the United States, we lease a total of approximately 18,088 square feet of administrative, sales, marketing, product development and manufacturing space in one building located in Sunnyvale, California pursuant to a lease that expired in January 2016. In October 2015, we amended the lease to extend the term through July 31, 2017.

In Taiwan, we lease a total of 34,406 square feet in one facility located in Tu-Cheng City, Taiwan. This lease expires at various times from December 2016 to January 2017. We also own 10,623 square feet of space immediately adjacent to our leased facility. In December 2013, we purchased 6,960 square feet of space that we previously leased for $1.6 million. In April 2014, we also purchased 10,633 square feet of space we previously leased for $1.6 million, bringing the total square footage occupied in Taiwan to 62,622 square feet.

In China, we lease a 132,993 square foot facility in Shenzhen, pursuant to a lease which will expire in October 2019. In December 2014, we entered into two lease agreements for our manufacturing facilities next to our facility in Shenzhen, China. Each facility is 55,285 square feet and both leases expire in December 2019.

We believe that our facilities are adequate to meet our requirements for the near term and that additional or replacement space, when needed, will be available on commercially reasonable terms.

From time to time we may be involved in litigation relating to claims arising in the ordinary course of business. As of the date of this Form 10-K, there are no material legal proceedings pending against us or, to the best of our knowledge, threatened against us.

Peter C. Chang, 58, has served as our Chairman of the Board, Chief Executive Officer, President and Secretary since our formation in December 1995. From 1990 through 1995, Mr. Chang was Division Manager at Hon Hai Holding. From 1984 through 1988, he was an engineer at AlliedSignal Inc. and from 1988 through 1990 was a member of the technology staff at Lucent Bell Labs. Mr. Chang received a B.S. in Mechanical Engineering from the National Taiwan University and an M.S. in Mechanical Engineering from Notre Dame University.

David A. Hubbard, 56, has served as our Executive Vice President, Sales and Marketing since January 2011. Prior to that, Mr. Hubbard served as Vice President, Sales and Marketing since October 1996. From February 1995 to September 1996, Mr. Hubbard was Director of Marketing/Business Development at Tracor/AEL Industries. From 1985 to 1995, Mr. Hubbard held several product line and business management positions at Tyco Electronics/ AMP inc. Mr. Hubbard received his M.S. from University of Connecticut and his B.S. from State University of New York.

Anita K. Ho, 69, has served as our Acting Chief Financial Officer since July 2002. From October 2000 to July 2007, Ms. Ho has also served as our Corporate Controller. From 1998 to 2000, Ms. Ho was a Finance Manager at 3Com Corporation. From 1995 through 1998, Ms. Ho was a member of the finance staff at 3Com Corporation. Ms. Ho received a B.S. in Accounting from Soochow University in Taipei, Taiwan.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock, par value $0.001, is traded on The Nasdaq Global Market under the ticker symbol “AFOP”. The following table summarizes the high and low sale prices for our common stock for the periods indicated as reported on The Nasdaq Global Market:

As of March 2, 2016, our common stock was held by 32 stockholders of record (not including beneficial holders of common stock held in street name).

We did not declare a cash dividend in 2015. We declared a cash dividend of $0.15 per share in November 2014, which was paid in December 2014. We also declared a cash dividend of $0.15 per share in November 2013, which was paid in December 2013. The board of directors will determine future cash dividends, if any. The decision to declare future dividends is dependent upon a variety of factors related to our business and applicable law, among others, and we cannot assure you that we will pay dividends in the future. There are currently no contractual restrictions on our ability to pay dividends.

On August 24, 2015, October 29, 2014, and November 30, 2011 the Company announced programs to repurchase up to $25 million, $15 million, and $6 million, respectively, worth of the Company’s outstanding common stock. On November 20, 2015 the Company increased the 2015 program from $25 million to $35 million. Repurchases under the programs may be made in open market and privately negotiated transactions in compliance with Securities and Exchange Commission Rule 10b-18, subject to market conditions, applicable legal requirements and other factors. The Company is not required to repurchase any amount of common stock in any period and the programs may be modified or suspended at any time. The duration of the repurchase programs is open-ended.

The following table sets forth information with respect to purchases of our common stock pursuant to the August 2015 repurchase program during the periods indicated:

					Maximum
					Number of
				Total Number	Shares that
				of Shares	May Yet Be
				Purchased as	Purchased
	Total Number	Average		Part of Publicly	Under the
	of Shares	Price Paid		Announced	Plans or
Period	Purchased	Per Share		Programs	Programs *
October 1 - October 31, 2015	42,144	$	17.4210	42,144	$	14,695,209
November 1 - November 30, 2015	595,477	$	14.4460	595,477	$	16,049,415
December 1 - December 31, 2015	1,030,973	$	15.4005	1,030,973	$	149,556
Total	1,668,594	$	15.7558	1,668,594	$	149,556

* Represents dollar amount

Information regarding securities authorized for issuance under our equity compensation plans can be found under Item 12 of this Annual Report on Form 10-K.

The following information is not deemed to be ‘‘soliciting material’’ or to be ‘‘filed’’ with the Securities and Exchange Commission or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing.

The following graph shows the five-year cumulative total stockholder return (change in stock price plus reinvested dividends) assuming the investment of $100 on December 31, 2010 in each of our Common Stock, the Nasdaq Telecommunications Index, and the Nasdaq Composite Index. The comparisons in the table are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible future performance of our Common Stock.

The following data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and consolidated financial statements and notes thereto contained in Item 8, “Financial Statements and Supplementary Data” of this report. The selected consolidated balance sheet data at December 31, 2015 and 2014 and the selected consolidated statements of operations data for each of the years ended December 31, 2015, 2014 and 2013 have been derived from our audited consolidated financial statements that are included elsewhere in this report. The selected consolidated balance sheet data at December 31, 2013, 2012 and 2011 and the selected consolidated statements of operations data for each of the years ended December 31, 2012 and 2011 have been derived from our audited consolidated financial statements not included in this report. Historical results are not necessarily indicative of the results to be expected in the future.

(1) The per share information, including the number of shares used in basic and diluted net income per share, has been adjusted to reflect a two-for-one stock split on August 30, 2013.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto included elsewhere in this report.

See Note 1 to the Consolidated Financial Statements for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations and financial condition, which is incorporated herein by reference.

Management’s discussion and analysis of our financial condition and results of operations is based on our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, bad debt, inventories, asset impairments, income taxes, contingencies, and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values for assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect management’s more significant judgments and estimates used in the preparation of our Consolidated Financial Statements:

We recognize revenue upon shipment of our products to customers, provided that we have received a purchase order, the price is fixed, collection of the resulting receivable is reasonably assured and transfer of title and risk of loss has occurred. Subsequent to the sale of our products, we have no obligation to provide any modification or customization upgrades, enhancements or post contract customer support.

We measure and recognize compensation expense for stock options, RSUs and shares purchased pursuant to our Employee Stock Purchase Plan (ESPP) based on their estimated fair value and recognize the costs in the financial statements under Accounting Standards Codification (“ASC”) 718. The fair value of RSUs is equal to the market value of our common stock on the date the award is granted. We estimate the fair value of stock options and ESPP shares using the Black-Scholes valuation model. We expense the estimated fair value to earnings on a straight-line basis.

Allowances are provided for estimated returns and potential uncollectable trade receivables. Provisions for return allowances are recorded at the time revenue is recognized based on our historical product returns, current economic trends and changes in customer demand. Such allowances are adjusted periodically to reflect actual and anticipated experience. We also identify specific accounts considered to have a high risk of uncollectibility and reserve the full amount. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates.

We generally invest our cash in certificates of deposit and corporate bonds. Such investments are made in accordance with our investment policy, which establishes guidelines relative to diversification and maturities designed to maintain safety and liquidity. These guidelines are periodically reviewed and modified in light of trends in yields and interest rates.

We review the valuation of long-lived assets and assess the impairment of the assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable due to: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of our use of the assets or the strategy for the overall business; and significant negative industry or economic trends. When we determine that the carrying value of long-lived assets may not be recoverable based on the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. We did not record any asset impairment charge for the years ended December 31, 2015, 2014 or 2013.

We account for income taxes in accordance with ASC 740-10. ASC 740-10 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we considered the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income are reduced. As of December 31, 2015, 2014 and 2013, we did not have a valuation allowance recorded for deferred income tax assets.

ASC 740-10 also prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740-10. As of December 31, 2015, 2014 and 2013, the total amount of unrecognized tax benefits were $1.1 million, $1.1 million and $0.7 million respectively.

Deferred tax assets pertaining to windfall tax benefits on exercise of share awards and the corresponding credit to additional paid-in capital are recorded if the related tax deduction reduces tax payable. We have elected the “with-and-without approach excluding indirect tax effects” regarding ordering of windfall tax benefits to determine whether the windfall tax benefit did reduce taxes payable in the current year. Under this approach, the windfall tax benefits would be recognized in additional paid-in capital only if an incremental tax benefit is realized after considering all other tax benefits presently available to us.

We consider the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs. We have not recorded a deferred tax liability of approximately $0.7 million related to U.S. federal and state income taxes and foreign withholding taxes on approximately $26.0 million of undistributed earnings of foreign subsidiaries indefinitely invested outside the United States. Should we decide to repatriate the foreign earnings, we would have to adjust the income tax provision in the period we determined that the earnings will no longer be indefinitely invested outside the United States.

We were founded in December 1995 and commenced operations to design, manufacture and market fiber optic interconnect products, which we call our connectivity products. We broadened our connectivity product line to include attenuators, planar lightwave circuit splitters, and fused fiber products. We started selling our optical passive products and other wavelength management products in July 2000. Since introduction, sales of optical passive products have fluctuated with the overall market for these products.

We market and sell our products predominantly through our direct sales force. From our inception through December 31, 2015, we derived the majority of our revenues from our connectivity product line. Our optical passive products contributed as a percentage of revenues 24.5%, 24.7% and 24.2% for the years ended December 31, 2015, 2014 and 2013, respectively. Our cost of revenues consists of raw materials, components, direct labor, manufacturing overhead and production start-up costs. We expect that our cost of revenues as a percentage of revenues will fluctuate from period to period based on a number of factors including:

Research and development expenses consist primarily of salaries and related personnel expenses, fees paid to outside service providers, materials costs, test units, facilities, overhead and other expenses related to the design, development, testing and enhancement of our products. We expense our research and development costs as they are incurred. We believe that a significant level of investment for product research and development is required to remain competitive. We expect research and development expenses may increase as we intend to continue to invest in our research and product development efforts during 2016.

Sales, marketing, and administrative expenses consist of salaries, commissions and related expenses for personnel engaged in marketing, sales and technical support functions, as well as the costs associated with trade shows, promotional activities and travel expenses. It also consists of salaries and related expenses for executive, finance, administrative, accounting and human resources personnel, insurance and professional fees for legal and accounting support. We intend to continue to invest amounts similar to our spending levels in 2015 in our sales and marketing efforts, both domestically and internationally, in order to increase market awareness and to generate sales of our products. We expect administrative expenses will increase in absolute dollars to support our revenue growth, higher insurance premiums, and costs associated with compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

We cannot be certain that our expenditures will result in higher revenues. In addition, we believe our future success depends upon establishing and maintaining successful relationships with a variety of key customers.

We own all of the outstanding common stock of Transian Technology Ltd. Co., a Taiwan corporation, which we refer to as Alliance Fiber Optic Products Co. Ltd., through which we manufacture a majority of our connectivity products.

Through our wholly owned subsidiary, Unilite Limited, a British Virgin Islands limited liability company, we own 100% of Dong Yuan Optoelectronics Technology Ltd., a company formed under the laws of the People’s Republic of China. We refer to Dong Yuan as Alliance Fiber Optic Products China, which operates manufacturing facilities responsible for the production of a substantial majority of our filter-based and advanced product lines.

The following table sets forth the relationship between various components of operations, stated as a percentage of revenues, for the periods indicated.

	Years Ended December 31,
	2015		2014		2013
Revenues	100.0	%	100.0	%	100.0	%

Cost of revenues:	59.3		60.2		61.7
Gross profit	40.7		39.8		38.3

Operating expenses:
Research and development	5.4		5.1		4.9
Selling, marketing and administrative	11.6		9.6		10.9
Total operating expenses	17.0		14.7		15.8

Income from operations	23.7		25.1		22.5
Interest and other income, net	0.8		0.9		0.9
Income before for income taxes	24.5		26.0		23.4
Benefit (provision) for income taxes	(8.4	)	(9.1	)	1.3
Net income	16.1	%	16.9	%	24.7	%

Revenues. Revenues were $81.2 million, $86.0 million and $76.1 million for the years ended December 31, 2015, 2014 and 2013, respectively. Connectivity products revenues were $61.3 million, $64.8 million and $57.7 million for the years ended December 31, 2015, 2014 and 2013, respectively. Optical passive products revenues were $19.9 million, $21.2 million and $18.4 million for the years ended December 31, 2015, 2014 and 2013, respectively. Revenues decreased in 2015 mainly due to decreased orders for our products by our customers which resulted in lower volume shipments. Revenues increased in 2014 mainly due to increased orders for our products by our customers which resulted in higher volume shipments.

Cost of Revenues. Cost of revenues were $48.2 million, $51.8 million and $47.0 million for the years ended December 31, 2015, 2014 and 2013, respectively. Cost of revenues as a percentage of net revenues were 59.3%, 60.2% and 61.7% for the years ended December 31, 2015, 2014 and 2013, respectively. The lower cost of revenues in 2015 was due to lower order levels. The higher cost of revenues in 2014 was due to higher order levels. The lower cost of revenues as a percentage of net revenues in 2015 was due to favorable product mixes. The lower cost of revenues as a percentage of net revenue in 2014 was due to increased factory utilization for higher production levels.

Gross Profit. Gross profit was $33.0 million, $34.2 million and $29.1 million for the year ended December 31, 2015, 2014 and 2013, respectively. Gross profit as a percentage of net revenues was 40.7%, 39.8% and 38.3% for the years ended December 31, 2015, 2014 and 2013, respectively. For the year ended December 31, 2015, gross profit as a percentage of net revenues was higher due to favorable product mixes. For the year ended December 31, 2014, gross profit as a percentage of net revenues was higher than 2013 due to increased factory utilization for the increased volume shipments of our products.

Research and Development Expenses. Research and development expenses were $4.4 million, $4.3 million and $3.7 million for the years ended December 31, 2015, 2014 and 2013, respectively. As a percentage of revenues, research and development expenses were 5.4%, 5.1% and 4.9% for the years ended December 31, 2015, 2014 and 2013, respectively. The increase in dollars each year was mainly due to higher headcount and equipment expenses. The increase in 2015 and 2014 as a percentage of revenues was due to higher equipment expenses. We expect research and development expenses may increase as we intend to continue to invest in our research and product development efforts.

Sales, Marketing and Administrative Expenses. Sales, marketing and administrative expenses was $9.4 million for the year ended December 31, 2015 and $8.3 million for each of the years ended December 31, 2014 and 2013. As a percentage of revenues, sales, marketing and administrative expenses were 11.6%, 9.6% and 10.9% for the years ended December 31, 2015, 2014 and 2013, respectively. The increase in 2015 was mainly due to higher stock based compensation charges and increased salary and professional costs. The decrease as a percentage of revenues in 2014 over the previous year was due to increased revenues. We intend to continue to invest amounts similar to our spending levels in 2015 in our sales, marketing, and administrative efforts, both domestically and internationally, as we work to increase market awareness and to generate additional sales of our products.

Stock-Based Compensation. Total stock-based compensation was $2.9 million, $2.2 million and $1.9 million for the years ended December 31, 2015, 2014 and 2013, respectively. The increase each year was due to restricted stock units granted in 2011, 2013 and 2015 and stock options granted in 2013, 2014 and 2015, which resulted in higher stock-based compensation expense.

Interest and Other Income, Net. Interest and other income, net, was $0.6 million, $0.8 million and $0.7 million for the years ended December 31, 2015, 2014 and 2013, respectively. These amounts consisted primarily of interest income, which fluctuated based on investment balances and changes in interest rates.

Income Taxes. An income tax provision of $6.8 million and $7.9 million was recorded for the year ended December 31, 2015 and 2014, respectively. The income tax provision was recorded mainly due to increased profitability in Taiwan. An income tax benefit of $1.0 million was recorded for the year ended December 31, 2013. The benefit for the year ended December 31, 2013 was a result of reduction of valuation allowances for deferred tax assets which offset current taxes due.

As of December 31, 2015, we had approximately $1.0 million and $6.9 million of NOL carryforwards for federal and state tax purposes, respectively, which will expire after 2025 for federal and after 2018 for state purposes, if not utilized.

As of December 31, 2015, we had approximately $1.4 million and $1.0 million of research and development credit carryforwards for federal and state tax purposes, respectively, which will expire after 2019 for federal tax purposes. The state tax credit can be carried forward indefinitely.

Net cash provided by operating activities was $14.1 million in 2015. Net cash provided by operating activities in 2015 was primarily due to net income of $13.0 million, an increase in long-term tax and pension liabilities of $1.6 million, an increase of accrued expenses of $0.7 million, and adjustments for non-cash charges, including depreciation of $2.7 million and stock based compensation of $2.9 million. These were offset by a decrease in accounts payable of $2.8 million, an increase in inventory of $2.0 million, an increase in accounts receivable of $1.3 million, and an increase in prepaid expenses of $0.6 million.

Net cash provided by operating activities was $23.1 million in 2014. Cash provided by operating activities in 2014 was primarily due to net income of $14.5 million, a decrease in deferred tax assets of $2.3 million, an increase in accrued expenses of $1.6 million, a decrease in inventory of $1.3 million, and adjustments for non-cash charges, including depreciation of $2.8 million and stock based compensation of $2.2 million. These were offset by a decrease in accounts payable of $2.4 million.

Net cash provided by operating activities was $21.0 million in 2013. Cash provided by operating activities in 2013 was primarily due to net income of $18.8 million, an increase in accounts payable of $5.1 million, an increase in accrued expenses of $3.0 million, and adjustments for non-cash charges, including depreciation and stock based compensation of $4.1 million. These were offset by an increase in inventory of $3.7 million, an increase in accounts receivable of $3.5 million, an increase in deferred tax assets of $2.3 million, and an increase in prepaid expenses of $0.6 million.

Net cash provided by investing activities was $7.5 million for the year ended December 31, 2015. Net cash used in investing activities was $8.0 million and $7.6 million for the years ended December 31, 2014 and 2013, respectively. We spent $5.6 million, $4.0 million and $7.8 million to acquire property and equipment for the years ended December 31, 2015, 2014 and 2013, respectively. The net sale of short-term investments for the year ended December 31, 2015 generated proceeds of $13.3 million. The net purchase of short-term and long-term investments was $4.0 million and $0.2 million for the years ended December 31, 2014 and 2013, respectively.

Net cash used in financing activities was $38.1 million in 2015. Net cash used in financing activities was primarily due to $40.2 million used to repurchase common stock pursuant to our stock repurchase programs, which was offset by $0.7 million each from exercise of options to purchase shares of our common stock, tax withholding adjustments related to net share settlements of RSUs and common stock issued through our ESPP.

Net cash used in financing activities was $10.6 million in 2014. Net cash used in financing activities was primarily due to $9.7 million used to repurchase common stock pursuant to our stock repurchase programs and $2.7 million used to pay cash dividends, which was offset by $0.6 million from exercise of options to purchase shares of our common stock, $0.7 million from common stock issued through our ESPP and $0.5 million from tax withholdings adjustments related to net share settlements of RSUs.

Net cash generated by financing activities was $0.8 million in 2013. Cash generated by financing activities in 2013 was composed of $5.2 million proceeds from the exercise of options to purchase shares of our common stock and $0.5 million from common stock issued through our ESPP, which was offset by $2.8 million used to pay cash dividends, $1.3 million used to pay tax withholdings related to net share settlements of RSUs and $0.9 million used to repurchase common stock pursuant to our stock repurchase programs.

Our principal sources of liquidity as of December 31, 2015 consisted of $6.2 million in cash and cash equivalents, $17.8 million in interest bearing marketable securities, and $10.8 in long-term investments. We believe that our current cash, cash equivalents, short-term and long-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, our future growth, including potential acquisitions, may require additional funding. If cash generated from operations is insufficient to satisfy our long-term liquidity requirements, we may need to raise capital through additional equity or debt financings, credit facilities, strategic relationships or other arrangements. If additional funds are raised through the issuance of securities, these securities could have rights, preferences and privileges senior to those of the holders of our common stock, and the terms of any debt facility could impose restrictions on our operations. The sale of equity or debt securities could result in dilution to our stockholders, and additional financing may not be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain additional funding, we may be required to reduce our research and development and marketing expenses. Strategic arrangements, if necessary to raise additional funds, may require us to relinquish our rights to certain of our technologies or products. Our failure to raise capital when needed could harm our business, financial condition and operating results.

The lease on our corporate headquarters in Sunnyvale, California, had a six-year term commencing on July 22, 2004. In June 2010, we renewed the lease for an 18,088 square foot facility in the same building, which lease expired in January 2016. In October 2015, we amended the lease to extend the term through July 31, 2017.

In Taiwan, we lease a total of 34,406 square feet in one facility located in Tu-Cheng City. This lease expires at various times from December 2016 to January 2017.

In China, we renewed the lease for our 132,993 square foot facility in Shenzhen, China, which will expire in October 2019. In December 2014, we entered into two leases for our two new manufacturing facilities next to our facility in Shenzhen. Each facility has 55,285 square feet and both leases expire in December 2019.

The following summarizes our contractual obligations at December 31, 2015 (in thousands):

We do not have any off-balance sheet arrangements, as such term is defined in rules promulgated by the Securities and Exchange Commission, that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

We are exposed to risks associated with the translation of Taiwan (NT) and China (RMB) denominated financial results and accounts into U.S. dollars for financial reporting purposes. The carrying value of the assets and liabilities held in our Taiwan and China subsidiaries will be affected by fluctuations in the value of the U.S. dollar as compared to the NT and RMB. Changes in the value of the U.S. dollar as compared to the NT and RMB could have an adverse effect on our reported results of operations and financial condition. As the net positions of our unhedged foreign currency transactions fluctuate, our earnings might be negatively affected. In addition, the reported carrying value of our NT and RMB denominated assets and liabilities held in our Taiwan and China subsidiaries will be affected by fluctuations in the value of the U.S. dollar compared to the NT and RMB. As of December 31, 2015, we had a net asset balance, excluding intercompany payables and receivables, in our Taiwan and China subsidiaries denominated in NT and RMB. If the NT and RMB were to weaken 10% against the dollar, our net asset balance would decrease by approximately $1.4 million as of this date.

To the Audit Committee of the
Board of Directors and Shareholders
of Alliance Fiber Optic Products, Inc.

We have audited the accompanying consolidated balance sheets of Alliance Fiber Optic Products, Inc. (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income and comprehensive income, stockholders’ equity and cash flows for each of the years in the three year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alliance Fiber Optic Products, Inc., as of December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the years in the three year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Alliance Fiber Optic Products, Inc.’s internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Audit Committee of the
Board of Directors and Shareholders
of Alliance Fiber Optic Products, Inc.

We have audited Alliance Fiber Optic Products, Inc.’s (the "Company") internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying "Management Annual Report on Internal Control Over Financial Reporting". Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate.

In our opinion, Alliance Fiber Optic Products, Inc. maintained, in all material aspects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2015 and 2014 and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the years in the three year period ended December 31, 2015 of the Company and our report dated March 11, 2016 expressed an unqualified opinion on those financial statements.

ALLIANCE FIBER OPTIC PRODUCTS, INC.
Consolidated Balance Sheets
(in thousands, except share data)

The accompanying notes are an integral part of these Consolidated Financial Statements.

ALLIANCE FIBER OPTIC PRODUCTS, INC.
Consolidated Statements of Income and Comprehensive Income
(in thousands, except per share data)

The accompanying notes are an integral part of these Consolidated Financial Statements.

ALLIANCE FIBER OPTIC PRODUCTS, INC.
Consolidated Statements of Cash Flows
(in thousands)

The accompanying notes are an integral part of these Consolidated Financial Statements.

ALLIANCE FIBER OPTIC PRODUCTS, INC.
Consolidated Statements of Stockholders' Equity
(in thousands)

The accompanying notes are an integral part of these Consolidated Financial Statements.

Alliance Fiber Optic Products, Inc. (the “Company”) was incorporated in California on December 12, 1995 and reincorporated in Delaware on October 19, 2000. The Company designs, manufactures and markets fiber optic components for communications equipment manufacturers. The Company’s headquarters are located in Sunnyvale, California, and it has operations in Taiwan and China.

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates involve those required in the assessment of the allowances for sales returns, doubtful accounts, potential excess or obsolete inventory, the valuation of stock-based compensation and the valuation of deferred tax assets. Actual results could differ from those estimates.

The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

The Company’s operations through foreign subsidiaries use the local currency as their functional currency. All assets and liabilities of the subsidiaries are translated at rates of exchange as of the balance sheet date. Revenues and expenses are translated at the average rate of exchange for the period. Gains and losses resulting from foreign currency translation are recorded as a separate component of other comprehensive income in stockholders’ equity. Foreign currency transaction gains and losses are recorded in interest and other income and have not been material.

The Company considers all highly liquid instruments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash deposited in money market, certificate of deposit, and checking accounts.

The Company accounts for its investments under the provisions of Accounting Standards Codification (“ASC”) 320 “Investments - Debt and Equity Securities.” Investments in highly liquid financial instruments with remaining maturities greater than three months and maturities of less than one year are classified as short-term investments. Financial instruments with remaining maturities greater than one year are classified as long-term investments. All investments are classified as available-for-sale and are reported at fair value using the specific identification method with net unrealized gain/(loss) reported, net of tax as other comprehensive gain/(loss) in stockholders’ equity. The fair value of the Company’s available-for-sale securities are based on quoted market prices or other methodologies for those investments with no quoted market prices at the balance sheet dates.

The Company’s financial instruments also include accounts receivable, accounts payable and are carried at cost, which approximates the fair value of these instruments.

The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

The Company’s valuation techniques used to measure the fair value of money market funds and certain marketable equity securities were derived from quoted prices in active markets for identical assets or liabilities.

In accordance with the fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair value. The Company has not elected the fair value option for any eligible financial instruments.

The Company performs periodic credit evaluations of its customers’ financial condition. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of customers to make required payments. When the Company becomes aware that a specific customer is unable to meet its financial obligations, for example, as a result of bankruptcy or deterioration in the customer’s operating results or financial position, the Company records a specific allowance to reflect the level of credit risk in the customer’s outstanding receivable balance. The Company is not able to predict changes in the financial condition of customers, and if circumstances related to customers deteriorate, estimates of the recoverability of trade receivables could be materially affected and the Company may be required to record additional allowances. Alternatively, if the Company provides more allowances than the Company needs, the Company may reverse a portion of such provisions in future periods based on actual collection experience. In addition, the Company records additional allowances based on historical sales returns as explained under the revenue recognition section.

Inventories are stated at the lower of cost or market, with cost being determined using standard cost, which approximates actual cost on a first-in, first-out basis. Market value is determined as the lower of replacement cost or net realizable value. We regularly review our inventories for obsolescence and reserves are established when necessary. Provisions are made for excess and obsolete inventory based on historical usage and management’s estimates of future demand. Inventory reserves, once established, are only reversed upon sale or disposition of related inventory. Inventory reserves were $1.4 million, $2.4 million and $2.4 million as of December 31, 2015, 2014 and 2013, respectively.

Property and equipment is stated at cost less accumulated depreciation and impairment charges. Depreciation is computed using the straight-line method based on estimated useful lives of 25 years for buildings, two to 10 years for machinery and equipment and five years for furniture and fixtures. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the estimated life of the assets, generally two to four years, or the lease term. Depreciation and amortization expenses were $2.7 million, $2.8 million and $2.2 million for the years ended December 31, 2015, 2014 and 2013, respectively.

The Company reviews its long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted future cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value based on fair market values.

The Company recognizes revenue upon shipment of its products to its customers, provided that the Company has received a purchase order, the price is fixed, collection of the resulting receivable is reasonably assured and transfer of title and risk of loss has occurred. Subsequent to the sale of its products, the Company has no obligation to provide any modification or customization upgrades, enhancements or post contract customer support.

Allowances are provided for estimated returns. A provision for estimated sales return allowances is recorded at the time revenue is recognized based on historical returns, current economic trends and changes in customer demand. Such allowances are adjusted periodically to reflect actual and anticipated experience. Such adjustments, which are recorded against revenue in the period, have generally not been material. The Company accrued $0.07 million, $0.08 million and $0.06 million for warranty reserves as of December 31, 2015, 2014 and 2013, respectively.

Advertising costs are charged to expense as incurred and have not been material in 2015, 2014 and 2013.

The Company accounts for taxes charged to its customers and collected on behalf of taxing authorities on a net basis.

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.

The Company applies ASC 740 which utilizes a two-step approach wherein a tax benefit is recognized if a position is more-likely-than-not to be sustained. The amount of the benefit is then measured to be the highest tax benefit that is greater than 50% likely to be realized. The Company has elected to include interest and penalties related to its tax contingencies in income tax expense. The Company files a U.S. federal tax return and returns with the State of California and the State of Georgia. The Company has determined that its major tax jurisdictions are the United States, California, Georgia, Taiwan and China.

The Company follows the provisions of ASC 740-10-25, Income Taxes: Recognition ("ASC 740-10-25"). The total amount of unrecognized tax benefits as of December 31, 2015, 2014 and 2013 were $1.1 million, $1.1 million and $0.7 million respectively. The Company does not anticipate any significant change to its unrecognized tax positions over the next 12 months. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate were $0.7 million, $0.7 million and $0.3 million as of December 31, 2015, 2014 and 2013, respectively. The increases in unrecognized tax benefits during the years ended December 31, 2015 and 2014 were mainly due to the increase in additional state income tax liabilities. The increase in unrecognized tax benefits during the year ended December 31, 2013 was mainly due to the increase in the valuation of the Company’s research credit for federal and state income taxes purposes.

A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits for the years ended December 31, 2015 and 2014 are as follows:

Balance at December 31, 2013	$	683
Additions for tax positions of the prior year		280
Additions for tax positions of the current year		117
Balance at December 31, 2014	$	1,080
Additions for tax positions of the current year		10
Reductions for tax positions of the prior year		(18	)
Balance at December 31, 2015	$	1,072

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in the provision for income taxes. During the years ended December 31, 2015, 2014 and 2013, the Company recognized approximately $0.2 million, $0.1 million and $0.1 million, respectively, for interest and penalties.

Deferred tax assets pertaining to windfall tax benefits on the exercise of share awards and the corresponding credit to additional paid-in capital are recorded if the related tax deduction reduces tax payable. The Company has elected the “with-and-without approach excluding indirect tax effects” regarding ordering of windfall tax benefits to determine whether the windfall tax benefit reduced taxes payable in the current year. Under this approach, the windfall tax benefits would be recognized in additional paid-in capital only if an incremental tax benefit is realized after considering all other tax benefits presently available to the Company without considering available income tax credits. The Company’s deferred tax assets as of December 31, 2015, 2014 and 2013 do not include $0.7 million, $0.6 million and $1.8 million, respectively, of excess tax benefits from employee stock option exercises and vested RSUs that are a component of its net operating loss carryovers. Stockholders’ equity will be increased by the same amount if and when such excess tax benefits are ultimately realized.

The Company files income tax returns in the United States (federal), Taiwan, China and in various state and local jurisdictions. The Company is no longer subject to federal income tax examinations by tax authorities for years prior to 2012, California State and China income tax examination by tax authorities for years prior to 2011, and Taiwan income tax examinations by tax authorities for years prior to 2009. The Company is not currently under examination by any federal, state or local jurisdiction. It is not anticipated that unrecognized tax benefits will significantly change in the next twelve months.

The Company estimates the fair value of the share-based payment awards on the date of grant using an option pricing model. The value of awards that are ultimately expected to vest is recognized as an expense over the requisite employee service period.

Comprehensive income is defined as the change in equity of a company from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. Accumulated other comprehensive income consists of cumulative translation adjustments and unrealized gains on short-term investments and is disclosed in the consolidated statements of stockholders’ equity.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, "Leases (Topic 842)". The amendments under this pronouncement will change the way all leases with a duration of one year of more are treated. Under this guidance, lessees will be required to capitalize virtually all leases on the balance sheet as a right-of-use asset and an associated financing lease liability or capital lease liability. The right-of-use asset represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as financing leases or operating leases. Financing lease liabilities, those that contain provisions similar to capitalized leases, are amortized like capital leases are under current accounting, as amortization expense and interest expense in the statement of operations. Operating lease liabilities are amortized on a straight-line basis over the life of the lease as lease expense in the statement of operations. This update is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2018. The Company is currently evaluating the impact this standard will have on its policies and procedures pertaining to its existing and future lease arrangements, disclosure requirements and on its consolidated financial statements.

In July 2015, FASB issued new accounting guidance on simplifying the measurement of inventory which requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Prior to the issuance of the standard, inventory was measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin). The accounting guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2015, the FASB issued guidance which eliminates the concept of extraordinary items in an entity’s income statement. The changes in ASU 2015-01 are effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2014, FASB issued a new accounting standard which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for each annual and interim reporting period and to provide related footnote disclosures in certain circumstances. The accounting standard is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued a new financial accounting standard which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance. The accounting standard is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the impact of this accounting standard on its consolidated financial statements.

Preferred Stock. The Company is authorized to issue 5,000,000 shares of preferred stock, none of which was outstanding as of December 31, 2015. The Board of Directors may determine the rights, preferences and privileges of any preferred stock issued in the future.

Common Stock. On November 1, 2013, the Company amended its Amended and Restated Certificate of Incorporation to increase the number of shares of common stock authorized for issuance from 20,000,000 to 100,000,000.

On August 30, 2013, the Company effected a 2-for-1 split of its outstanding common stock, pursuant to previously obtained stockholder authorization. The number of authorized shares of common stock was not changed. The stock split increased the Company’s issued and outstanding shares of common stock as of August 30, 2013 from approximately 9,061,568 shares to approximately 18,123,136 shares. All share and per share numbers reflect the split and were applied on a retroactive basis.

Stock Repurchase Programs. On August 24, 2015, the Company announced a program to repurchase up to $25.0 million worth of the Company’s outstanding common stock. On November 20, 2015, the Company increased the program to repurchase up to $35 million of the Company’s common stock. Repurchases under the program may be made in open market and privately negotiated transactions in compliance with Securities and Exchange Commission Rule 10b-18, subject to market conditions, applicable legal requirements and other factors. The Company is not required to repurchase any amount of common stock in any period and the program may be modified or suspended at any time. The duration of the repurchase program is open-ended. For the year ended December 31, 2015, an aggregate of 2,196,632 shares of common stock had been repurchased under the program.

On October 29, 2014, the Company announced a program to repurchase up to $15 million worth of the Company’s outstanding common stock. For the years ended December 31, 2015 and 2014, an aggregate of 313,478 and 740,190 shares of common stock, respectively, had been repurchased under the October 2014 stock repurchase program.

On November 30, 2011, the Company announced a program to repurchase up to $6 million worth of the Company’s outstanding common stock. For the years ended December 31, 2015 and 2013, an aggregate of 1,081 and 158,798 shares of common stock, respectively, had been repurchased under the November 2011 stock repurchase program.

Dividends. On November 14, 2014, the Company announced it had declared a cash dividend of $0.15 per share, which was payable on December 24, 2014 to holders of record on December 8, 2014. On November 7, 2013, the Company announced it had declared a cash dividend of $0.15 per share, which was payable on December 23, 2013 to holders of record on December 6, 2013. The Company did not declare a cash dividend in 2015.

Stockholder Rights Plan. On March 10, 2011, the Board of Directors entered into an Amended and Restated Rights Agreement (the “Restated Rights Plan”), which amended and restated the original rights agreement dated as of May 29, 2001 (the “Original Agreement”). In connection with the adoption of the Original Agreement, one preferred stock purchase right (a “Right”) was distributed for each outstanding share of common stock. Since the occurrence of a one-for-five reverse split of the common stock at the close of business on August 7, 2010, five Rights had been associated with each outstanding share of common stock. The Restated Rights Plan restores the initial one Right per share of common stock ratio of the Original Agreement, but is also subject to adjustment as provided in the Restated Rights Plan. Rights continue to be attached to all outstanding shares of common stock, and no separate Rights certificates have been distributed.

Rights will separate from the common stock and a "Distribution Date" will occur upon the earliest of the following: (i) a public announcement that a person, entity or group of affiliated or associated persons and/or entities (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of fifteen percent (15%) or more of the outstanding shares of common stock (other than (A) as a result of repurchases of stock by the Company or certain inadvertent actions by institutional or certain other stockholders, (B) the Company, any subsidiary of the Company or any employee benefit plan of the Company or any subsidiary, (C) Foxconn Holding Limited (which owned in excess of fifteen percent (15%) of the outstanding shares of common stock when the Original Agreement was implemented), so long as such entity, together with its affiliated or associated persons and/or entities, does not increase its beneficial ownership by more than one percent (1%) of the outstanding shares of common stock above the percentage held in May 2001 (or such lesser percentage as may result following any transfer of securities after such date until Foxconn beneficially owns less than fifteen percent (15%) of the outstanding shares of common stock)) and (D) certain other instances set forth in the Restated Rights Plan); or (ii) ten (10) business days (unless such date is extended by the Board of Directors) following the commencement of a tender offer or exchange offer which would result in any person, entity or group of affiliated or associated persons and/or entities becoming an Acquiring Person (unless such tender offer or exchange offer is a Permitted Offer as defined in the Restated Rights Plan). As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Rights Certificates") will be mailed to holders of record of the common stock as of the close of business on the Distribution Date, and the separate Rights Certificates alone will evidence the Rights.

The Rights are not exercisable until the Distribution Date. The Rights will expire on the earliest of (i) May 29, 2021, (ii) consummation of a merger transaction with a person, entity or group who (x) acquired common stock pursuant to a Permitted Offer and (y) is offering in the merger the same price per share and form of consideration paid in the Permitted Offer or (iii) redemption or exchange of the Rights by the Company as described in the Amended Rights Plan.

ASC 718 - Compensation – Stock Compensation, requires companies to record compensation expense for stock options measured at fair value on the date of grant, using an option pricing model. The Company adopted the Black-Scholes valuation model for stock options granted and stock purchased pursuant to the ESPP after June 30, 2010.

Fair value for stock options was estimated at the date of grant using the Black-Scholes option pricing model, with the following weighted average assumptions:

	Years Ended December 31,
	2015		2014		2013
Risk-free interest rate	0.96	%	1.02	%	0.49	%
Time to maturity (in years)	3		4		4
Annualized volatility	57.59	%	69.67	%	30.30	%
Expected dividend rate	0.00	%	1.20	%	0.98	%

In November 2000, the Company adopted the 2000 Stock Incentive Plan (the “Stock Incentive Plan”) under which 300,000 shares of common stock were reserved for issuance to eligible employees, directors and consultants upon exercise of stock options and stock purchase rights. On October 21, 2013, the stockholders approved an increase by 900,000 in the number of shares of common stock available for issuance under the Stock Incentive Plan. The number of shares reserved for issuance under the Company’s 2000 Stock Incentive Plan may be increased on the first day of the Company’s fiscal year by the lesser of 680,000 shares, 5% of the fully diluted outstanding shares of the Company’s common stock on that date or a lesser amount determined by the Company’s Board of Directors. There was no increase on January 1, 2015, because the Board determined there were enough shares available for issuance in 2015 pursuant to the Plan. Stock options, restricted stock, restricted stock units (“RSUs”) or stock appreciation rights may be awarded under the 2000 Stock Incentive Plan.

The plan was amended and restated in 2010 to, among other things, extend the term under which awards may be granted under the plan until March 17, 2020, eliminate a 10 million share ceiling on the aggregate number of shares of common stock that may be issued under the plan, and to include certain qualifying performance criteria and annual award limits so that awards granted under the plan qualify as “performance-based compensation" under the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended.

Under the Stock Incentive Plan, participants may be granted RSUs, representing an unfunded, unsecured right to receive common stock on the date specified in the recipient’s award. The RSUs granted under the plan generally vest over a term of two to five years. The Company recognizes compensation expense on a straight-line basis over the applicable vesting term of the award.

During the year ended December 31, 2011, the Company granted 546,000 RSUs with a total grant-date fair value of $2.5 million. The resulting compensation expense recorded in the years ended December 31, 2014 and 2013 was approximately $0.4 million and $0.4 million, respectively. At December 31, 2015, there was $0.1 million of unrecognized compensation expense related to RSUs, which is expected to be realized over one year.

During the year ended December 31, 2013, the Company granted 342,000 RSUs with a total grant-date fair value of $2.3 million. The resulting compensation expense recorded in the year ended December 31, 2015 and 2014 was approximately $0.5 million and $0.8 million, respectively. At December 31, 2015, there was $0.1 million of unrecognized compensation expense related to RSUs, which is expected to be realized over one year.

During the year ended December 31, 2015, the Company granted 302,000 RSUs with a total grant-date fair value of $5.3 million. The resulting compensation expense recorded in the year ended December 31, 2015 was approximately $1.1 million. At December 31, 2015, there was $4.2 million of unrecognized compensation expense related to RSUs, of which $0.7 million is expected to be realized over two years and $3.5 million is expected to be realized over four years.

Options granted under the Stock Incentive Plan generally vest over four years and are exercisable for not more than ten years. However, most options granted in the past four years have been fully vested at the time of grant.

The following information relates to stock option activity for the year ended December 31, 2015:

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the closing stock price on the last trading day of the fourth quarter of fiscal 2015 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2015. This amount changes based on the fair market value of the Company’s common stock. The total intrinsic value of options exercised for the years ended December 31, 2015, 2014 and 2013 was $1.1 million, $1.3 million and $12.8 million, respectively.

Options to purchase 58,000 shares of common stock were granted during the year ended December 31, 2015. At December 31, 2015, there was $1.6 million of unrecognized compensation expense related to stock options, all of which is expected to be realized over four years.

The dividend rate was 0% and 0.15% for the years ended December 31, 2015 and 2014, respectively.

Information relating to stock options outstanding at December 31, 2015 is as follows:

	Options Outstanding		Options Exercisable
		Weighted
		Average	Weighted			Weighted
Range of	Number	Remaining	Average		Number	Average
Exercise	Outstanding	Contractual	Exercise		Exercisable	Exercise
Price	As of 12/31/15	Term	Price		As of 12/31/15	Price
$3.88 - $4.80	111,700	6.22	$	4.28	85,000	$	4.41
$5.05 - $6.03	22,500	1.46	$	5.32	22,500	$	5.32
$6.87 - $6.87	96,000	7.29	$	6.87	13,800	$	6.87
$8.17 - $12.32	82,000	8.51	$	11.22	600	$	8.17
$12.50 - $12.50	201,400	8.19	$	12.50	37,600	$	12.50
$13.61 - $18.36	58,000	11.25	$	14.74	4,667	$	16.32
	571,600	7.75	$	9.71	164,167	$	6.95

Options exercisable as of December 31, 2015 and 2014 were 164,167 and 118,161 at an average exercise price of $6.95 and $4.75 per share, respectively.

There were 487,824 shares available for future issuance under the Stock Incentive Plan as of December 31, 2015.

In November 2000, the Company adopted its ESPP. The Company reserved 600,000 shares of common stock for issuance under the ESPP. The ESPP was amended and restated in 2010. On April 29, 2011, the stockholders approved an increase by 600,000 in the number of shares of common stock available for issuance. On the first day of January of each year beginning January 1, 2001 through December 31, 2010, additional shares of common stock were reserved for issuance under the ESPP as determined by the Board of Directors. The ESPP limited the annual increase to the lesser of 1% of the Company’s issued and outstanding common stock or 400,000 shares. The ESPP provides eligible employees with the opportunity to acquire shares of common stock at a price of 85% of the lower of the fair market value of the common stock on the first day of the offering period or the last day of the offering period, whichever is lower. The ESPP is structured as a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. However, the ESPP is not intended to be a qualified pension, profit sharing or stock bonus plan under Section 401(a) of the 1986 Code and is not subject to the provisions of the Employee Retirement Security Act of 1974. The Board may amend, suspend, or terminate the Plan at any time without notice. A total of 59,781 and 50,759 shares were issued under the ESPP in 2015 and 2014, respectively.

There were 208,360 shares available for future issuance under the ESPP as of December 31, 2015.

	2015		2014		2013
Weighted average fair value per share of shares purchased	$	11.26	$	13.01	$	5.66
Total compensation expense for ESPP	$	324,250	$	461,980	$	409,079
Total amount of cash received from the purchase of stock through ESPP	$	672,899	$	660,621	$	521,308
Total intrinsic value of ESPP stock purchased at December 31	$	233,381	$	75,892	$	863,120

The following table summarizes employee stock-based compensation expense resulting from stock options, RSUs, and the ESPP (in thousands):

	Years Ended December 31,
	2015		2014		2013
Included in cost of revenue	$	513	$	491	$	373
Included in operating expenses:
Research and development		196		234		232
Sales, marketing and administrative		2,227		1,435		1,312
Total		2,423		1,669		1,544
Total stock-based compensation expenses	$	2,936	$	2,160	$	1,917

Basic net income per share is computed by dividing net income for the period by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the combination of dilutive common share equivalents, comprised of shares issuable under the Company’s stock-based compensation plans, and the weighted average number of common shares outstanding during the period.

The following table sets forth the computation of basic and diluted net income per share for the years indicated (in thousands, except per share amounts):

	Years Ended December 31,
	2015		2014		2013
Numerator:
Net income	$	13,038	$	14,508	$	18,808

Denominator:
Shares used in computing net income per share:
Weighted average of common shares outstanding
Basic		17,648		18,488		17,785
Diluted		17,945		18,935		18,481

Net income per share :
Basic	$	0.74	$	0.78	$	1.06
Diluted	$	0.73	$	0.77	$	1.02

As of December 31, 2015, options to purchase 12,000 shares were excluded from the computation of diluted net income per share as the effect would have been anti-dilutive.

	December 31,
	2015			2014
Cash and cash equivalents:
Cash	$	5,876		$	18,653
Money market instruments and funds		281			4,070
	$	6,157		$	22,723

Accounts receivable, net:
Accounts receivable	$	12,668		$	10,927
Less: Allowance for doubtful accounts and sales returns		(121	)		(121	)
	$	12,547		$	10,806

Allowance for doubtful accounts and sales returns:
Balance at beginning of year	$	121		$	121
Utilized		-			-
Balance at end of year	$	121		$	121

Inventories:
Finished goods	$	3,958		$	3,191
Work-in-process		4,705			3,430
Raw materials		3,667			5,052
	$	12,330		$	11,673

Inventory reserves:
Finished goods	$	520		$	647
Work-in-process	$	296		$	460
Raw materials		595			1,261
	$	1,411		$	2,368

Accrued expenses and other current liabilities:
Compensation costs	$	4,325		$	5,016
Professional fees		24			55
Outside commissions		146			143
Royalties		82			135
ESPP		147			138
Deferred rent		29			33
Warranty		70			82
Operating related (Taiwan and China)		483			417
Income tax		2,888			2,204
Stock buyback		851			-
Other		465			476
	$	9,510		$	8,699

Long-term liabilities:
Income tax payable	$	1,581		$	376
Accrued pension liability (Taiwan)		613			602
	$	2,194		$	978

Accumulated other comprehensive Income:
Cumulative translation adjustments	$	172		$	1,447
Unrealized loss on short-term investments		(1	)		(10	)
	$	171		$	1,437

	December 31,
(in thousands)	2015			2014
Machinery and equipment	$	22,116		$	20,315
Furniture and fixtures		883			686
Leasehold improvements		4,373			2,655
Building and equipment prepayments		4,283			3,804
	$	31,655		$	27,460
Less: Accumulated depreciation and amortization		(15,472	)		(13,592	)
Total property and equipment, net	$	16,183		$	13,868

	Years Ended December 31,
Current:	2015			2014		2013
Federal	$	1,323		$	2,663	$	382
State		171			75		1
Foreign		5,484			2,403		953
		6,978			5,141		1,336
Deferred:
Federal		(36	)		1,891		(1,450	)
State		(25	)		763		(232	)
Foreign		(138	)		69		(653	)
		(199	)		2,723		(2,335	)

Total provision (benefit) for income taxes	$	6,779		$	7,864	$	(999	)

	Years Ended December 31,
	2015			2014			2013
Deferred tax assets - current:
Net operating loss carryforwards	$	744		$	620		$	3,501
Windfall tax benefit carryforwards		(744	)		(620	)		(580	)
Federal/State credit carryforwards		2,692			2,536			2,260
Depreciation and amortization		146			24			6
Stock compensation		650			326			-
Accrued liabilities and allowances		1,098			1,508			1,532
Unrecognized tax benefits		(738	)		(704	)		(683	)

Total deferred tax assets	$	3,848		$	3,690		$	6,036

The following is a reconciliation of the effective tax rates and the United States statutory federal income tax rate:

	Years Ended December 31,
	2015		2014		2013
Tax at federal statutory rate	34.0	%	34.0	%	34.0	%
State, net of federal benefit	4.5		5.8		5.8
Effect of permanent differences	(1.8	)	3.8		1.1
Stock and deferred compensation	1.1		0.9		(7.2	)
Net operating loss carryover	0.4		5.6		-
Foreign tax differential	(9.3	)	(13.1	)	0.1
Minimum tax	-		0.6		1.7
Income tax credits	(1.3	)	(1.9	)	(0.9	)
Valuation allowance	-		-		(47.4	)
Stock compensation windfall	7.0		2.1		2.3
Other	(0.3	)	(2.6	)	4.9
Provision (benefit) for taxes	34.3	%	35.2	%	(5.6	)%

The Company’s effective tax rates in comparison to the U.S. statutory rates in 2015 and 2014 reflect differentials between the U.S. statutory rate and the foreign tax rates applied to the earnings of the Company’s foreign subsidiaries. The foreign tax differential accounted for a 9.3% and 13.1% decrease in the Company’s effective tax rates in 2015 and 2014, respectively. The Company’s effective tax rate was below the U.S. statutory rate in 2013 mainly because of the tax benefit arising from a reduction in the valuation allowance. The valuation allowance accounted for a 47.4% decrease in the Company’s effective tax rate in 2013. The net operating loss carryforward that resulted in 0.4% and 5.6% of increase in the Company’s effective tax rate in 2015 and 2014, respectively, was related to true-ups and amended prior years’ returns. The Company is subject to income tax in both the United States and various foreign jurisdictions. The effective tax rate is also affected by the taxable earnings in foreign jurisdictions with various different statutory tax rates. The Company reviews its expected annual effective income tax rates and makes changes on a quarterly basis as necessary based on certain factors such as forecasted annual operating income and valuation of deferred tax assets.

As of December 31, 2015, the Company has a net operating loss carryforward of approximately $1.0 million for federal and $6.9 million for state income tax purposes. If not utilized, these carryforwards will begin to expire after 2025 for federal and after 2018 for state purposes.

As of December 31, 2015, the Company has research credit carryforwards of approximately $1.4 million and $1.0 million for federal and state income tax purposes, respectively. If not utilized, the federal carryforwards will expire in various amounts beginning in 2019. The California tax credits can be carried forward indefinitely.

Internal Revenue Code Section 382 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. In the event the Company has had a change in ownership, utilization of the carryforwards could be restricted. The Company has concluded no change in stock ownership has occurred during 2015.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, short-term and long-term investments and accounts receivable. The Company limits the amount of deposits in any one financial institution and any one financial instrument. The Company invests its excess cash principally in certificates of deposit, debt instruments issued by high-credit quality financial institutions and corporations and money market accounts with financial institutions in the United States.

The Company performs periodic credit evaluations of its customers’ financial condition, and limits the amount of credit extended when deemed necessary, but generally does not require collateral.

One customer accounted for 15.1% and 26.9% of the Company’s accounts receivable at December 31, 2015 and 2014, respectively.

One customer accounted for 31.0%, 39.6% and 35.3% of revenues in the year ended December 31, 2015, 2014 and 2013, respectively.

Certain components used in manufacturing the Company’s products have relatively few alternative sources of supply, and establishing additional or replacement suppliers for such components may not be accomplished quickly.

The Company operates in a single industry segment. This industry segment is characterized by rapid technological change and significant competition.

The following is a summary of the Company’s revenues generated by geographic segments, revenues generated by product lines and identifiable assets located in these segments (in thousands):

From time to time, the Company may be involved in litigation in the normal course of business. As of the date of these financial statements, the Company is not aware of any material legal proceedings pending or threatened against the Company.

The Company had no off-balance sheet arrangements as of December 31, 2015 or 2014, respectively.

The Company indemnifies certain customers, suppliers and subcontractors for attorney fees and damages and costs awarded against these parties in certain circumstances in which products are alleged to infringe third party intellectual property rights, including patents, trade secrets, trademarks or copyrights. In all cases, there are limits on and exceptions to the potential liability for indemnification relating to intellectual property infringement claims. The Company cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these agreements. As of December 31, 2015, the Company has not paid any claim or been required to defend any action related to indemnification obligations, and accordingly, the Company has not accrued any amounts for such indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations.

The Company generally warrants products against defects in materials and workmanship and non-conformance to specifications for varying lengths of time. If there is a material increase in customer claims compared with historical experience, or if costs of servicing warranty claims are greater than expected, the Company may record a charge against cost of revenues. The Company accrued $0.07 million, $0.08 million and $0.06 million warranty reserves as of December 31, 2015, 2014 and 2013, respectively.

The Company leases certain office space under long-term operating leases expiring at various dates through 2019. Total rent expense under these operating leases was approximately $0.9 million for the year ended December 31, 2015 and $0.7 million for each of the years ended December 31, 2014 and 2013.

Total future minimum lease payments under operating leases as of December 31, 2015 are summarized below (in thousands):

As of December 31, 2015, and based on information filed with the Securities and Exchange Commission in February 2016, Foxconn Holding Limited (“Foxconn”) and Hon Hai Precision Industry Co. Ltd. (“Hon Hai”) held 15% of the Company’s common stock. In the normal course of business, the Company sells products to and purchases raw materials from Hon Hai, who is the parent company of Foxconn. These transactions were made at prices and terms consistent with those of unrelated third parties.

Sales of products to Hon Hai were $0.04 million, $0.07 million and $0.01 million in the years ended December 31, 2015, 2014 and 2013, respectively. No amounts were due from Hon Hai at December 31, 2015. Amounts due from Hon Hai were $0.05 million and $0.01 million at December 31, 2014 and 2013, respectively.

Purchases of raw materials from Hon Hai were $2.0 million, $1.8 million and $1.5 million in the years ended December 31, 2015, 2014 and 2013 respectively. Amounts due to Hon Hai were $0.3 million, $0.4 million and $0.3 million at December 31, 2015, 2014 and 2013, respectively.

U.S. GAAP defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact a purchase or sale and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability.

The Company uses a fair value hierarchy established by U.S. GAAP that established a three-tiered fair value hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable to prioritize inputs used to measure fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement. Those tiers are defined as follows:

The following table represents the fair value hierarchy for the Company’s financial assets (investments) measured at fair value on a recurring basis at December 31, 2015 and December 31, 2014 (in thousands):

	Fair Value Measurements at
	Reporting Date Using
			Quoted Prices		Significant
			in Active		Other		Significant
	Balance at		Markets for		Observable		Unobservable
	December 31,		Identical Assets		Inputs		Inputs
	2015		(Level 1)		(Level 2)		(Level 3)
Cash equivalents:
Money market mutual funds	$	281	$	281	$	-	$	-
Marketable Securities:
Time deposits		12,825		12,825		-		-
Corporate bonds		5,006		-		5,006		-
Long-term investments:
Time deposits		10,821		10,821		-		-
Total	$	28,933	$	23,927	$	5,006	$	-

	Fair Value Measurements at
	Reporting Date Using
			Quoted Prices		Significant
			in Active		Other		Significant
	Balance at		Markets for		Observable		Unobservable
	December 31,		Identical Assets		Inputs		Inputs
	2014		(Level 1)		(Level 2)		(Level 3)
Cash equivalents:
Money market mutual funds	$	4,070	$	4,070	$	-	$	-
Marketable Securities:
Time deposits		21,782		21,782		-		-
Corporate bonds		10,075		-		10,075		-
Long-term investments:
Time deposits		10,635		10,635		-		-
Total	$	46,562	$	36,487	$	10,075	$	-

As of December 31, 2015 and 2014, the Company held investments in corporate bonds, certificates of deposit, and money market securities. The Company’s cash and cash equivalents consist of investments with original maturities of 90 days or less from the date of purchase. The Company’s short-term investments consist of corporate bonds and certificates of deposit with original maturities of 91 days or more from the date of purchase. The Company’s long-term investments are comprised of certificates of deposit with original maturities of 365 days or more from the date of purchase.

The following table presents summary unaudited quarterly financial data (in thousands, except per share data):

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
2015
Revenues, net	$	21,663	$	25,045	$	18,060	$	16,421
Gross profit		8,792		10,495		7,097		6,651
Net income		3,558		5,040		3,653		787
Net income per share - basic		0.20		0.28		0.20		0.05
Net income per share - diluted		0.19		0.27		0.20		0.05

2014
Revenues, net	$	24,882	$	24,199	$	18,096	$	18,810
Gross profit		9,914		9,695		7,139		7,469
Net income		5,015		3,782		4,303		1,408
Net income per share - basic		0.27		0.20		0.23		0.08
Net income per share - diluted		0.26		0.20		0.23		0.08

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Acting Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Acting Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining internal control over our financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of the effectiveness of internal control to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

As of the end of the fiscal year, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Acting Chief Financial Officer, of the effectiveness of our internal control over financial reporting (as defined in Section 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, and sections 302 and 404 of the Sarbanes-Oxley Act) based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

As part of this evaluation, we analyzed and tested our processes for control effectiveness (controls which reasonably assure accurate and complete financial information in accordance with GAAP), prevention of acts of fraud and transactions being approved by management. When necessary, we confirmed that appropriate corrective action (including process improvements) had been undertaken.

Based on the evaluation as of the end of the fiscal year 2015, the Company’s Chief Executive Officer and Acting Chief Financial Officer have concluded that our internal controls over financial reporting were effective.

Our independent public accounting firm, Marcum LLP, audited the effectiveness of our internal control over financial reporting. Their report appears in Part II – Item 8. Financial Statements and Supplementary Data.

Changes in Internal Controls. There were no changes in our internal control over financial reporting that occurred in the fourth quarter of 2015 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The information required by this item is incorporated by reference from the information under the caption “Election of Directors” contained in the Company’s Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Company’s 2016 Annual Meeting of Stockholders to be held on May 20, 2016 (the “Proxy Statement”). Certain information required by this item concerning executive officers is set forth in Part I of this Report under the caption “Executive Officers of the Registrant.”

Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16(a) of the Exchange Act. This disclosure is contained in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement and is incorporated herein by reference.

The Company has a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are Richard Black (Chairperson), James C. Yeh and Ray Sun, all of whom meet the independence standards established by The Nasdaq Stock Market for serving on an audit committee. The Board of Directors has determined that Richard Black is an “audit committee financial expert” as defined by SEC regulations.

The Company’s Board of Directors has adopted a Code of Ethics for all of its directors and officers. The Company’s Code of Ethics is available on the Company’s website at http://www.afop.com. To date, there have been no waivers under the Company’s Code of Ethics. The Company will post certain waivers to or amendments of its Code of Ethics, as required by applicable law, on the Company’s website at http://www.afop.com.

The information required by this item is incorporated by reference from the information under the captions “Election of Directors — 2015 Director Compensation,” and “Executive Compensation,” contained in the Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated by reference from the information under the caption “Security Ownership of Certain Beneficial Owners and Management” contained in the Proxy Statement.

Set forth in the table below is certain information regarding the Company’s equity compensation plans as of December 31, 2015:

(1) Includes 571,600 shares issuable upon exercise of outstanding options and 448,000 shares issuable pursuant to unvested RSUs granted under the Stock Incentive Plan.

(i) 487,824 shares reserved for issuance under the Stock Incentive Plan. The number of shares reserved for issuance under the plan may be increased on the first day of the Company’s fiscal year by the lesser of 680,000 shares, 5% of the fully diluted outstanding shares of the Company’s common stock on that date or a lesser amount determined by the Company’s Board of Directors.

(ii) 208,360 shares reserved for issuance under the ESPP. The ESPP permits eligible employees to contribute up to 20% of cash compensation up to 1,000 shares maximum toward the semi-annual purchase of the Company’s common stock. The purchase price per share is 85% of the fair market value on the last trading day prior to the beginning of the six-month period at which an eligible employee is enrolled; or the fair market value on the last trading day of the month in which the six-month period expired, whichever is lower.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated by reference from the information contained under the caption “Election of Directors - Certain Relationships and Related Party Transactions”, and “Election of Directors – Board Structure, Independence, Meetings and Committees” contained in the Proxy Statement.

The information required by this item is incorporated by reference from the information set forth under the caption “Ratification of Independent Registered Public Accountant—Principal Accountant Fees and Services” and “ — Pre-Approval Policies and Procedures” in the Proxy Statement.

Reference is made to the index to Consolidated Financial Statements under Item 8 of Part II hereof.

Schedules have been omitted because they are not applicable or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.

See the Exhibit Index, which follows the signature pages of this report and is incorporated herein by reference.

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Peter C. Chang and Anita K. Ho, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

* In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-K and will not be deemed “filed” for purpose of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”). Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 (the “Securities Act”) or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

Copies of above exhibits not contained herein are available to any stockholder, upon payment of a reasonable per page fee, upon written request to: Acting Chief Financial Officer, Alliance Fiber Optic Products, Inc., 275 Gibraltar Drive, Sunnyvale, California 94089.

[X]		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

OR

[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

●	customer unwillingness to implement out products;
●	any delays or difficulties that we may incur in completing the development and introduction of our planned products or product enhancements;
●	the success of our customers;
●	excess inventory in the telecommunications industry;
●	new product introductions by our competitors;
●	any failure of our products to perform as expected; or
●	any difficulty we may incur in meeting customers’ delivery requirements or product specifications.

●	improve existing and implement new operational, financial and management controls, reporting systems and procedures;
●	hire, train, motivate and manage additional qualified personnel, especially if we experience a significant increase in demand for our products;
●	comply with numerous laws, rules and regulations related to our business both domestically and outside the United States;
●	effectively expand or reduce our manufacturing capacity, attempting to adjust it to customer demand; and
●	effectively manage relationships with our customers, suppliers, representatives and other third parties.

●	loss of customers;
●	damage to our reputation;
●	failure to attract new customers or achieve market acceptance;
●	diversion of development and engineering resources; and
●	legal actions by our customers.

			Page
PART I				1

	Item 1.	Business		1
	Item 1A.	Risk Factors		8
	Item 1B.	Unresolved Staff Comments		18
	Item 2.	Properties		18
	Item 3.	Legal Proceedings		18
	Item 4.	Mine Safety Disclosures		18
	Executive Officers of the Registrant			18

PART II				19

	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
		Purchases of Equity Securities		19
	Item 6.	Selected Financial Data		21
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of
		Operations		22
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		29
	Item 8.	Financial Statements and Supplementary Data		29
	Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial
		Disclosure		53
	Item 9A.	Controls and Procedures		53
	Item 9B.	Other Information		54

PART III				54

	Item 10.	Directors, Executive Officers and Corporate Governance		54
	Item 11.	Executive Compensation		54
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related
		Stockholder Matters		54
	Item 13.	Certain Relationships and Related Transactions, and Director Independence		55
	Item 14.	Principal Accounting Fees and Services		55

PART IV				56

	Item 15.	Exhibits and Financial Statement Schedules		56

SIGNATURES				57

EXHIBIT INDEX				58

●	the education of potential end-user customers and network service providers about the benefits of optical networks; and
●	the continued growth of the metropolitan, last mile, and enterprise access segments of the communications network.

		High		Low
2015
	First Quarter	$	16.33	$	15.85
	Second Quarter	$	19.45	$	18.86
	Third Quarter	$	19.25	$	18.45
	Fourth Quarter	$	16.01	$	15.44

2014
	First Quarter	$	14.37	$	13.61
	Second Quarter	$	19.36	$	18.37
	Third Quarter	$	15.22	$	14.60
	Fourth Quarter	$	13.29	$	12.73

	12/31/11		12/31/12		12/31/13		12/31/14		12/31/15
Alliance Fiber Optic Products	$	100.00	$	175.00	$	442.56	$	431.85	$	451.19
Nasdaq Telecommunications		100.00		102.00		126.50		137.77		127.44
Nasdaq Composite		100.00		115.91		160.32		181.80		192.21

●	changes in manufacturing volume;

●	costs incurred in establishing additional manufacturing lines and facilities;

●	inventory write-downs and impairment charges related to manufacturing assets;

●	mix of products sold;

●	changes in our pricing and pricing by our competitors;

●	mix of sales channels through which our products are sold; and

●	mix of domestic and international sales.

	Payments Due By Period
		Less than			More than
Contractual obligations	Total	1 year	1-3 Years	4-5 Years	5 Years
Operating Lease Obligations	2,507	1,048	1,083	376	-

		Page
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm		30
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting		31
Consolidated Balance Sheets		32
Consolidated Statements of Income and Comprehensive Income		33
Consolidated Statements of Cash Flows		34
Consolidated Statements of Stockholders’ Equity		35
Notes to Consolidated Financial Statements		36

											Retained			Accumulated
					Additional			Deferred			Earnings			Other
	Common Stock				Paid-in			Stock-based			(Accumulated			Comprehensive
	Shares		Amount		Capital			Compensation			Deficit)			Income/(Loss)			Total
Balance at December 31, 2012	17,265			18		109,485			2,406			(54,672	)		2,794			60,031
Deferred stock-based compensation	-			-		-			1,917			-			-			1,917
Issuance of stock on exercise of options and RSUs	1,210			-		5,239			(1,326	)		-			-			3,913
Issuance of stock purchased through ESPP	92			-		521			-			-			-			521
Issuance of cash dividends	-			-		-			-			(2,761	)		-			(2,761	)
Repurchase of common stock	(159	)		-		(873	)		-			-			-			(873	)
Net income for the year	-			-		-			-			18,808			-			18,808
Other comprehensive loss	-			-		-			-			-			(382	)		(382	)
Balance at December 31, 2013	18,408		$	18	$	114,372		$	2,997		$	(38,625	)	$	2,412		$	81,174
Deferred stock-based compensation	-			-		-			2,160			-			-			2,160
Issuance of stock on exercise of options and RSUs	224			-		2,491			(1,383	)		-			-			1,108
Issuance of stock purchased through ESPP	51			-		661			-			-			-			661
Issuance of cash dividends	-			-		-			-			(2,700	)		-			(2,700	)
Repurchase of common stock	(740	)		-		(9,676	)		-			-			-			(9,676	)
Net income for the year	-			-		-			-			14,508			-			14,508
Other comprehensive loss	-			-		-			-			-			(975	)		(975	)
Balance at December 31, 2014	17,943		$	18	$	107,848		$	3,774		$	(26,817	)	$	1,437		$	86,260
Deferred stock-based compensation	-			-		-			2,936			-			-			2,936
Issuance of stock on exercise of options and RSUs	295			-		4,293			(2,892	)		-			-			1,401
Issuance of stock purchased through ESPP	60			-		673			-			-			-			673
Repurchase of common stock	(2,511	)		(2)		(40,170	)		-			-			-			(40,172	)
Net income for the year	-			-		-			-			13,038			-			13,038
Other comprehensive loss	-			-		-			-			-			(1,266	)		(1,266	)
Balance at December 31, 2015	15,787		$	16	$	72,644		$	3,818		$	(13,779	)	$	171		$	62,870

Years ending December 31,
2016	$	1,048
2017		655
2018		428
2019		376
Total	$	2,507

Level 1	—	inputs are quoted prices in active markets for identical assets or liabilities.
Level 2	—	inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly.
Level 3	—	inputs are unobservable and shall be used to the extent that observable inputs are not available in the overall fair value measurement.

					Number of securities
					remaining available for
	Number of securities to		Weighted-average		future issuance under
	be issued upon exercise		exercise price of		equity compensation
	of outstanding options,		outstanding options,		plans (excluding securities
	units and rights		units and rights		reflected in column (a))
Plan category	(a)		(b)		(c)
Equity compensation plans
approved by security holders	1,019,600	(1)	$	9.71	696,184	(2)
Equity compensation plans not
approved by security holders	-			-	-
Total	1,019,600		$	9.71	696,184

	ALLIANCE FIBER OPTIC PRODUCTS, INC.


Date: March 11, 2016
	By	/s/ Peter C. Chang
		Peter C. Chang
		President and Chief Executive Officer

Name	Title	Date
/s/ Peter C. Chang	President, Chief Executive Officer	March 11, 2016
Peter C. Chang	(Principal Executive Officer) and
	Chairman

/s/ Anita K. Ho	Acting Chief Financial Officer	March 11, 2016
Anita K. Ho	(Principal Financial and Accounting
	Officer)

/s/ Richard Black	Director	March 11, 2016
Richard Black


/s/ Gwong-Yih Lee	Director	March 11, 2016
Gwong-Yih Lee


/s/ Ray Sun	Director	March 11, 2016
Ray Sun


/s/ James C. Yeh	Director	March 11, 2016
James C. Yeh

Exhibit
Number		Description of Document
	3(i).1	Integrated copy of the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3(i).1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014).
	3(i).2	Certificate of Designation of Series A Participating Preferred Stock of Alliance Fiber Optics Products, Inc. (incorporated by reference to Exhibit 3(i).2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).
	3(ii).1	Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3(ii).3 to the Company’s Registration Statement on Form S-1 (File No. 333-45482)).
	4.1	Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002).
	4.2	Amended and Restated Rights Agreement dated as of August 31, 2000 (Registration Rights) (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 (File No. 333-45482)).
	4.3	Amended and Restated Rights Agreement dated as of March 10, 2011 between the Company and American Stock Transfer and Trust Company, LLC (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-A/A (File No. 000-31857)).
	10.1#	Form of Indemnification Agreement between the Company and its officers and directors (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-1 (File No. 333-45482)).
	10.2#	Alliance Fiber Optic Products, Inc. 2000 Stock Incentive Plan, as amended and restated, (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010).
	10.3#	Alliance Fiber Optic Products, Inc. 2000 Employee Stock Purchase Plan (as amended and restated effective November 1, 2010) (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010).
	10.4#	Form of Restricted Stock Unit Agreement under the 2000 Stock Incentive Plan, as amended and restated, (incorporated by reference to Exhibit 10.5.2 to the Company’s Annual Report on Form 10-K for the year end December 31, 2011).
	10.5#	Form of Stock Option Agreement under the Alliance Fiber Optic Products, Inc. 2000 Stock Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010).
	10.6	Lease dated June 2, 2010 by and between Arden Realty Limited Partnership and Alliance Fiber Optic Products, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010).
	10.7**	First amendment to lease dated October 15, 2015 by and between Jbgcom Sunnyvale Investors, LLC and Alliance Fiber Optic Product, Inc.
	21.1**	Subsidiaries of the Company.