UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC. 20549

FORM 10-Q

(Mark One)

x		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended March 31, ~~2007~~2008

or

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from to

Commission File Number 000-24085

AXT, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		94-3031310
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)

4281 Technology Drive, Fremont, California 94538

(Address of principal executive offices) (Zip code)

(510) 683-5900

(Registrant’s telephone number, including area code)

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

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

Large accelerated filer o		Accelerated filer ox

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at April 30, ~~2007~~2008
Common Stock, $0.001 par value		~~29,894,949~~30,408,403

AXT, INC.
FORM 10-Q
TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION		3
Item 1. Financial Statements (unaudited)		3
Condensed Consolidated Balance Sheets as of March 31, ~~2007~~2008 and December 31, ~~2006~~2007		3
Condensed Consolidated Statements of Operations for the three months ended March 31, ~~2007~~2008 and ~~2006~~2007		4
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, ~~2007~~2008 and ~~2006~~2007		5
Notes To Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3. Quantitative and Qualitative Disclosures About Market Risk		2527
Item ~~4T.~~4. Controls and Procedures		2728
PART II. OTHER INFORMATION		2829
Item 1. Legal Proceedings		2829
Item 1A. Risk Factors		2829
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		2829
Item 3. Defaults Upon Senior Securities		2829
Item 4. Submission of Matters to a Vote of Security Holders		2829
Item 5. Other Information		2829
Item 6. Exhibits		2930
Signatures		3031

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AXT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share data)

March 31,

December 31,

2007

2006

Assets:

Current assets:

Cash and cash equivalents

$
15,064

$
16,116

Short-term investments

21,529

19,428

Accounts receivable, net of allowances of $110 and $140 as of March 31, 2007 and December 31, 2006, respectively

8,561

9,658

Inventories, net

24,389

20,263

Prepaid expenses and other current assets

3,630

3,985

Assets held for sale

4,659

4,659

Total current assets

77,832

74,109

Property, plant and equipment, net

13,757

12,775

Restricted deposits

7,000

7,150

Other assets

4,499

4,298

Total assets

$
103,088

$
98,332

Liabilities and stockholders’ equity:

Current liabilities:

Accounts payable

$
3,115

$
3,764

Accrued liabilities

4,052

3,358

Current portion of long-term debt

450

450

Income taxes payable

130

178

Total current liabilities

7,747

7,750

Long-term debt, net of current portion

6,611

6,839

Other long-term liabilities

2,099

2,543

Total liabilities

16,457

17,132

Commitments and contingencies (Note 11)

Stockholders’ equity:

Preferred stock, $0.001 par value per share; 2,000 shares authorized; 883 shares issued and outstanding as of March 31, 2007 and December 31, 2006.

3,532

3,532

Common stock, $0.001 par value per share; 70,000 shares authorized; 29,895 and 29,011 shares issued and outstanding as of March 31, 2007 and December 31, 2006, respectively

30

29

Additional paid-in capital

184,763

180,936

Accumulated deficit

(102,488
)
(103,832
)
Accumulated other comprehensive income

794

535

Total stockholders’ equity

86,631

81,200

Total liabilities and stockholders’ equity

$
103,088

$
98,332

	March 31,			December 31,
	2008			2007
Assets:
Current assets:
Cash and cash equivalents	$	23,225		$	18,380
Short-term investments	16,217			20,825
Accounts receivable, net of allowances of $187 and $379 as of March 31, 2008 and December 31, 2007, respectively	16,693			12,149
Inventories, net	29,077			24,781
Prepaid expenses and other current assets	5,405			3,569
Assets held for sale	—			5,140
Total current assets	90,617			84,844
Property, plant and equipment, net	17,120			15,986
Restricted deposits	6,550			6,700
Other assets	5,468			5,242
Total assets	$	119,755		$	112,772

Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable	$	8,973		$	4,328
Accrued liabilities	4,279			4,326
Current portion of long-term debt	735			450
Income taxes payable	633			390
Total current liabilities	14,620			9,494
Long-term debt, net of current portion	6,100			6,250
Other long-term liabilities	2,983			3,778
Total liabilities	23,703			19,522
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.001 par value per share; 2,000 shares authorized; 883 shares issued and outstanding as of March 31, 2008 and December 31, 2007.	3,532			3,532
Common stock, $0.001 par value per share; 70,000 shares authorized; 30,395 and 30,358 shares issued and outstanding as of March 31, 2008 and December 31, 2007, respectively	30			30
Additional paid-in capital	186,187			185,949
Accumulated deficit	(96,584		)	(98,543		)
Accumulated other comprehensive income	2,887			2,282
Total stockholders’ equity	96,052			93,250
Total liabilities and stockholders’ equity	$	119,755		$	112,772

See accompanying notes to condensed consolidated financial statements.

AXT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

Three Months Ended

March 31,

2007

2006

Revenue

$
12,526

$
8,471

Cost of revenue

7,121

6,961

Gross profit

5,405

1,510

Operating expenses:

Selling, general and administrative

3,703

3,230

Research and development

460

534

Restructuring charge

—

(2
)
Total operating expenses

4,163

3,762

Income (loss) from continuing operations

1,242

(2,252
)
Interest income, net

224

128

Other income (expense), net

(11
)
238

Income (loss) before provision for income taxes

1,455

(1,886
)
Provision for incomes taxes

111

318

Income (loss) from continuing operations

1,344

(2,204
)
Discontinued operations:

Gain from discontinued operations, net of tax

—

1

Net income (loss)

$
1,344

$
(2,203
)
Basic income (loss) per share:

Income (loss) from continuing operations

$
0.04

$
(0.10
)
Gain from discontinued operations, net of tax

—

—

Net income (loss)

$
0.04

$
(0.10
)
Shares used in computing basic net income (loss) per share

29,798

22,986

Diluted income (loss) per share:

Income (loss) from continuing operations

$
0.04

$
(0.10
)
Gain from discontinued operations, net of tax

—

—

Net income (loss)

$
0.04

$
(0.10
)
Shares used in computing diluted net income (loss) per share

31,324

22,986

	Three Months Ended
	March 31,
	2008		2007

Revenue	$	19,634	$	12,526
Cost of revenue	13,413		7,121
Gross profit	6,221		5,405
Operating expenses:
Selling, general and administrative	3,667		3,703
Research and development	504		460
Impairment on assets held for sale	83		—
Total operating expenses	4,254		4,163
Income from operations	1,967		1,242
Interest income, net	124		224
Other income (expense), net	428		(11		)
Income before provision for income taxes	2,519		1,455
Provision for incomes taxes	560		111
Net income	$	1,959	$	1,344

Net income per share:
Basic	$	0.06	$	0.04
Diluted	$	0.06	$	0.04

Shares used in computing net income per share:
Basic	30,367		29,798
Diluted	31,585		31,324

See accompanying notes to condensed consolidated financial statements.

AXT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

Three Months Ended

March 31,

2007

2006

Cash flows from operating activities:

Net income (loss)

$
1,344

$
(2,203
)
Adjustments to reconcile net income (loss) to net cash used in operations:

Depreciation

321

838

Accretion of marketable securities premium/discount

(29
)
(9
)
Loss on disposal of property, plant and equipment

—

48

Stock-based compensation

120

257

Realized loss (gain) on sale of investments

10

(376
)
Changes in assets and liabilities:

Accounts receivable, net

1,112

(691
)
Inventories

(4,096
)
354

Prepaid expenses

380

(1,058
)
Other assets

(191
)
147

Accounts payable

(658
)
(607
)
Accrued liabilities

684

(1,078
)
Income taxes

(49
)
471

Other long-term liabilities

(464
)
(254
)
Net cash used in operating activities

(1,516
)
(4,161
)

Cash flows from investing activities:

Purchases of property, plant and equipment

(1,167
)
(98
)
Proceeds from disposal of property, plant and equipment

—

159

Purchases of marketable securities

(5,113
)
(3,670
)
Proceeds from sale of marketable securities

3,060

3,382

Decrease in restricted deposits

150

—

Net cash used in investing activities

(3,070
)
(227
)

Cash flows from financing activities:

Proceeds from issuance of common stock, net

3,708

66

Long-term debt payments

(229
)
(168
)
Net cash provided by (used in) financing activities

3,479

(102
)
Effect of exchange rate changes on cash and cash equivalents

55

(129
)
Net decrease in cash and cash equivalents

(1,052
)
(4,619
)
Cash and cash equivalents at the beginning of the period

16,116

17,472

Cash and cash equivalents at the end of the period

$
15,064

$
12,853

	Three Months Ended
	March 31,
	2008			2007

Cash flows from operating activities:
Net income	$	1,959		$	1,344

Adjustments to reconcile net income to net cash used in operations:
Depreciation	478			321
Accretion of marketable securities premium/discount	—			(29		)
Impairment on assets held for sale	83			—
Stock-based compensation	170			120
Realized loss (gain) on sale of investments	(459		)	10
Changes in assets and liabilities:
Accounts receivable, net	(4,366		)	1,112
Inventories	(4,028		)	(4,096		)
Prepaid expenses	(1,701		)	380
Other assets	(185		)	(191		)
Accounts payable	4,469			(658		)
Accrued liabilities	(100		)	684
Income taxes	221			(49		)
Other long-term liabilities	(902		)	(464		)
Net cash used in operating activities	(4,361		)	(1,516		)

Cash flows from investing activities:
Purchases of property, plant and equipment	(986		)	(1,167		)
Proceeds from sale of assets held for sale	5,057			—
Purchases of marketable securities	(6,808		)	(5,113		)
Proceeds from sale of marketable securities	11,328			3,060
Decrease in restricted deposits	150			150
Net cash provided by (used in) investing activities	8,741			(3,070		)

Cash flows from financing activities:
Proceeds from issuance of common stock, net	68			3,708
Long-term debt payments	(150		)	(229		)
Long-term debt proceeds	274			—
Net cash provided by financing activities	192			3,479
Effect of exchange rate changes on cash and cash equivalents	273			55
Net increase (decrease) in cash and cash equivalents	4,845			(1,052		)
Cash and cash equivalents at the beginning of the period	18,380			16,116
Cash and cash equivalents at the end of the period	$	23,225		$	15,064

See accompanying notes to condensed consolidated financial statements.

AXT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~

(Unaudited)

Note 1. Basis of Presentation

The accompanying condensed consolidated financial statements of AXT, Inc. (“AXT”, the “Company”, “we,” “us,” and “our” refer to AXT, Inc. and all of its consolidated subsidiaries) are unaudited, and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the year-end condensed consolidated balance sheet data was derived from our audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of our management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary to present fairly the financial position, results of operations and cash flows of AXT and our subsidiaries for all periods presented.

Our management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ materially from those estimates.

The results of operations are not necessarily indicative of the results to be expected in the future or for the full fiscal year. It is recommended that these condensed consolidated financial statements be read in conjunction with our consolidated financial statements and the notes thereto included in our ~~2006~~2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March ~~23, 2007.~~14, 2008.

~~Note 2. Discontinued Operations~~

Our condensed consolidated financial statements have been presented to reflect the opto-electronics business as a discontinued operation for all periods presented. Operating results of the discontinued operation are as follows (in thousands):

Three Months Ended March 31,

2007

2006

Revenue

$
—

$
—

Cost of revenue

Gross profit

—

—

Operating expenses:

Selling, general and administrative

$

$
(1
)
Total operating expenses

—

(1
)
Gain from operations, net of tax

—

Gain on disposal, net of tax

—

—

Net income

$
—

$
1

In the three month period ended March 31, 2007, we dissolved the corporation that previously operated our discontinued operations and transferred the cash balance to our continuing operations. Accordingly, we no longer have discontinued operations. In the three month period ended March 31, 2006, the $1,000 in income was from interest on cash balances held in the discontinued operations.

~~The carrying value of the assets and liabilities of the discontinued opto-electronics business included in the condensed consolidated balance sheets was as follows (in thousands):~~

March 31, 2007

December 31,
2006

Current assets:

Cash

$
—

$
395

Total current assets

—

395

Total assets

$
—

$
395

Net assets

—

395

Total liabilities and net assets

$
—

$
395

Note 32. Accounting for Stock-Based Compensation

Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”). SFAS 123(R) establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period. All of our stock compensation is accounted for as an equity instrument. We previously applied Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations and provided the required pro forma disclosures of SFAS No. 123, “Accounting for Stock-Based Compensation”.

We elected the modified prospective transition method for adopting SFAS 123(R). Under this method, the provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption. The unrecognized expense of awards not yet vested at the date of adoption will be recognized in net income ~~(loss)~~ in the periods after the date of adoption using the same Black-Scholes valuation method and assumptions determined under the original provisions of SFAS No. 123, “ Accounting for Stock-Based Compensation,” as disclosed in our previous quarterly and annual reports.

~~Impact~~The effect of ~~the Adoption of SFAS 123(R)~~

~~Under the modified prospective application transition method as provided by SFAS 123(R),~~ ~~we recorded $120,000 and $257,000 of~~recording stock compensation ~~expense in our unaudited condensed consolidated statements of operations~~ for the three months ended March 31, 2008 and 2007 ~~and 2006, respectively. We elected not to capitalize any stock-based compensation to inventory~~was as of January 1, 2006 when the provisions of SFAS 123(R) were initially adopted. We utilized the Black-Scholes valuation model for estimating the fair value of the stock compensation granted both before and after the adoption of SFAS 123(R). The following table summarizes compensation costs related to our stock-based compensation planfollows (in thousands, except per share data):

Three Months Ended
March 31,

2007

2006

Stock-based compensation in the form of employee stock options, included in:

Cost of revenue

$
13

$
28

Selling, general and administrative

89

173

Research and development

18

56

Total stock-based compensation

120

257

Tax effect on stock-based compensation

—

Net effect on net income (loss)

$
120

$
257

Effect on basic net income (loss) per share

$
—

$
(0.01
)
Effect on diluted net income (loss) per share

$

$
(0.01
)

	Three Months Ended March 31,
	2008		2007
Stock-based compensation in the form of employee stock options, included in:

Cost of revenue	$	16	$	13
Selling, general and administrative	122		89
Research and development	32		18

Total stock-based compensation	170		120
Tax effect on stock-based compensation	—		—

Net effect on net income	$	170	$	120

Effect on basic net income per share	$	—	$	—
Effect on diluted net income per share	$	—	$	—

As of March 31, ~~2007 and 2006,~~2008, the total compensation costs related to unvested stock-based awards granted to employees under our stock option plan but not yet recognized was approximately ~~$ 995,000 and $1.2 million, respectively,~~$1,391,000 net of estimated forfeitures of ~~$33,000 and $158,000, respectively.~~$449,000. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 2.4 years and will be adjusted for subsequent

changes in estimated forfeitures. We elected not to capitalize any stock-based compensation to inventory as of March 31, ~~2007~~2008 and ~~2006,~~December 31, 2007, due to the immateriality of the amount.

The amortization of stock compensation under SFAS 123(R) for the period after our January 1, 2006 adoption is based on the single-option approach.

We estimate the fair value of stock options using a Black-Scholes valuation model, consistent with the provisions of SFAS 123(R), and Securities and Exchange Commission Staff Accounting Bulletin No. ~~107 and our prior period pro forma disclosures of net loss, including stock-based compensation (determined under a fair value method as prescribed by SFAS No. 123).~~107. There were no stock option grants made in the three months ended March 31, 2007. The fair value of our stock options granted to employees for the three months ended March 31, ~~2006~~2008 was estimated using the following weighted-average assumptions:

Three Months
Ended
March 31,

2006

Expected term (in years)

5.0

Volatility

86.20
%

Expected dividend

0
%

Risk-free interest rate

4.82
%

Estimated forfeitures

9.59
%

Weighted-average fair value

$
1.53

	Three Months Ended March 31,
	2008
Expected term (in years)	4.0

Volatility	60.79		%

Expected dividend	0		%

Risk-free interest rate	2.69		%

Estimated forfeitures	14.64		%

Weighted-average fair value	$	5.09

The following table summarizes the stock option transactions during the three months ended March 31, ~~2007~~2008 (in thousands, except per share data):

Shares

Weighted-
average
Exercise
Price

Weighted-
average
Remaining
Contractual
Life

Aggregate
Intrinsic
Value

(in years)

Options outstanding as of December 31, 2006

2,728

$
2.51

Granted

—

Exercised

(22
)
2.04

Canceled

(16
)
1.28

Options outstanding as of March 31, 2007

2,690

$
2.52

6.19

$
7,140

Options vested and expected to vest as of March 31, 2007

2,666

$
2.52

6.17

$
7,073

Options exercisable as of March 31, 2007

1,918

$
2.70

5.31

$
5,046

	Shares		Weighted- average Exercise Price		Weighted- average Remaining Contractual Life	Aggregate Intrinsic Value
	(in years)
Options outstanding as of December 31, 2007	2,477		$	2.95

Granted	2		5.09

Exercised	(38	)	1.82

Canceled	(34	)	7.00

Options outstanding as of March 31, 2008	2,407		2.91		6.79	$	5,732

Options vested and expected to vest as of March 31, 2008	2,164		$	2.83	6.61	$	5,351

Options exercisable as of March 31, 2008	1,650		$	2.45	6.00	$	4,677

As of December 31, 2007, options to purchase 1,638,139 shares at a weighted average exercise price of $2.56 per share were vested and exerciseable.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $4.77 as of March 31, 2008, which would have been received by the optionholder had all optionholders exercised their options as of that date. The total number of in-the-money options exerciseable as of March 31, 2008 was 1,919,444.

The options outstanding and exercisable as of March 31, ~~2007~~2008 were in the following exercise price ranges:

Options Outstanding as of March 31, 2007

Options Exercisable
as of March 31, 2007

Range of Exercise Price

Shares

Weighted-average
Exercise Price

Weighted-average
Remaining
Contractual Life

Shares

Weighted-Average
Exercise Price

$1.17 - $ 1.38

1,451,180

$
1.29

6.86

910,442

$
1.30

$1.39 - $ 1.44

11,500

$
1.41

8.14

5,167

$
1.41

$1.45 - $ 2.24

610,530

$
2.17

5.49

558,489

$
2.18

$2.25 - $ 5.00

499,723

$
4.00

5.91

326,490

$
3.65

$5.01 - $41.50

117,500

$
13.41

2.52

117,500

$
13.41

2,690,433

$
2.52

6.19

1,918,088

$
2.70

Options Outstanding as of March 31, 2008					Options Exercisable as of March 31, 2008
Range of Exercise Price	Shares	Weighted-average Exercise Price		Weighted-average Remaining Contractual Life	Shares	Weighted-Average Exercise Price
$ 1.17 - $ 1.38	1,213,281	$	1.28	6.66	936,458	$	1.29
$ 1.39 - $ 1.44	11,500	$	1.41	7.14	8,042	$	1.41
$ 1.45 - $ 2.24	445,863	$	2.17	5.09	430,571	$	2.17
$ 2.25 - $ 6.31	677,995	$	4.95	8.43	216,431	$	3.54
$ 6.32 - $41.50	58,500	$	19.17	3.35	58,500	$	19.17
	2,407,139	$	2.91	6.79	1,650,002	$	2.45

The total intrinsic value of options exercised for the three months ended March 31, 2008 and 2007, was ~~$70,000.~~$128,000 and $70,000, respectively. Cash received from option exercises for the three months ended March 31, 2008 and 2007 was ~~$45,000. The total fair value~~$68,000 and $45,000, respectively.

A summary of ~~options vested~~activity related to restricted stock awards for the three months ended March 31, ~~2007 was $314,000. The total intrinsic value~~2008 is presented below:

	Shares	Weighted-Average Grant Date Fair Value
Non-vested restricted stock shares outstanding at beginning of the quarter	23,480	$	4.26
Restricted stock shares granted	—	$	—
Restricted stock shares vested	—	$	—
Non-vested restricted stock shares outstanding as of March 31, 2008	23,480	$	4.26

As of ~~options exercised for~~March 31, 2008, we had $76,000 of unrecognized compensation expense, net of forfeitures, related to restricted stock awards, which will be recognized over the weighted average period of 2.43 years. During the three months ended March 31, ~~2006 was $66,000. Cash received from option exercises for the three months ended March 31, 2006 was $66,000. The total fair value~~2008, no shares of ~~options vested for the three months ended March 31, 2006 was $509,000.~~restricted stock vested.

Note ~~4. Cash, Cash Equivalents~~3. Investments and ~~Investments~~Fair Value Measurements

Our cash, cash equivalents and investments, and strategic investments in privately-held companies are classified as follows (in thousands):

March 31, 2007

December 31, 2006

Gross

Gross

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Amortized

Unrealized

Unrealized

Fair

Cost

Gain

(Loss)

Value

Cost

Gain

(Loss)

Value

Classified as:

Cash

$
8,630

$
—

$
—

$
8,630

$
6,892

$
—

$
—

$
6,892

Cash equivalents:

Money market fund

4,242

—

—

4,242

7,045

—

—

7,045

U.S. Treasury and agency securities

2,192

—

—

2,192

2,179

—

—

2,179

Commercial paper

—

—

—

—

—

—

—

—

Total cash equivalents

6,434

—

—

6,434

9,224

—

—

9,224

Total cash and cash equivalents

15,064

—

—

15,064

16,116

—

—

16,116

Investments:

U.S. Treasury and agency securities

12,773

—

(25
)
12,748

12,277

—

(39
)
12,238

Asset-backed securities

83

—

—

83

809

—

(1
)
808

Commercial paper

—

—

—

—

500

—

—

500

Corporate bonds

15,687

61

(50
)
15,698

13,035

—

(3
)
13,032

Total investments

28,543

61

(75
)
28,529

26,621

—

(43
)
26,578

Total cash, cash equivalents and investments

$
43,607

$
61

$
(75
)
$
43,593

$
42,737

$
—

$
(43
)
$
42,694

Contractual maturities on investments:

Due within 1 year

$
11,454

$
11,435

$
13,767

$
13,727

Due after 1 through 5 years

17,086

17,094

12,854

12,851

$
28,540

$
28,529

$
26,621

$
26,578

	March 31, 2008									December 31, 2007
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gain		(Loss)			Value		Cost		Gain		(Loss)			Value
Classified as:
Cash	$	8,308	$	—	$	—		$	8,308	$	10,818	$	—	$	—		$	10,818
Cash equivalents:
Money market fund	14,917		—		—			14,917		7,562		—		—			7,562

Total cash equivalents	14,917		—		—			14,917		7,562		—		—			7,562

Total cash and cash equivalents	23,225		—		—			23,225		18,380		—		—			18,380

Investments:
U.S. Treasury and agency securities	—		—		—			—		1,400		—		—			1,400
Asset-backed securities	—		—		—			—		3,820		—		(77		)	3,743
Commercial paper	3,300		—		(115		)	3,185		3,300		—		(115		)	3,185
Corporate bonds	20,060		—		(478		)	19,582		19,051		260		(114		)	19,197
Total investments	23,360		—		(593		)	22,767		27,571		260		(306		)	27,525
Total cash, cash equivalents and investments	$	46,585	$	—	$	(593	)	$	45,992	$	45,951	$	260	$	(306	)	$	45,905
Contractual maturities on investments:
Due within 1 year	$	—						$	—	$	2,050						$	2,050
Due after 1 through 5 years	23,360							22,767		25,521							25,475
	$	23,360						$	22,767	$	27,571						$	27,525

The investments include ~~$7.0~~$6.6 million and ~~$7.2~~$6.7 million recorded as restricted deposits on the condensed consolidated balance sheets as of March 31, ~~2007~~2008 and December 31, ~~2006,~~2007, respectively, as a result of the outstanding principal amount on our industrial revenue bonds.

We manage our investments as a single portfolio of highly marketable securities that is intended to be available to meet our current cash requirements. For the three months ended March 31, 2008, we had $459,000 in gross realized gains on sales of our available-for-sale securities. For the three months ended March 31, 2007 we had $10,000 in gross realized losses on sales of our available-for-sale securities. ~~For the three months ended March 31, 2006, we had $376,000 in gross realized gains on sales of our available-for-sale securities.~~

The gross unrealized losses related to our portfolio of available-for-sale securities were primarily due to a decrease in the fair value of debt securities as a result of an increase in interest rates during ~~2006~~2007 and the first three months of ~~2007.~~2008. We have determined that the gross unrealized losses on our available-for-sale securities as of March 31, ~~2007~~2008 are temporary in nature. We reviewed our investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include the magnitude of the decline in market value, the length of time the market value has been below cost (or adjusted cost), credit quality, and our ability

and intent to hold the securities for a period of time sufficient to allow for any anticipated recovery in market value. The

following table provides a breakdown of our available-for-sale securities with unrealized losses as of March 31, ~~2007~~2008 (in thousands):

In Loss Position

In Loss Position

Total In

< 12 months

> 12 months

Loss Position

Gross

Gross

Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

(Loss)

Value

(Loss)

Value

(Loss)

Investments:

U.S. Treasury and agency securities

$
9,398

$
(18
)
$
1,952

$
(7
)
$
11,350

$
(25
)
Corporate bonds

839

(1
)
3,301

(49
)
4,140

(50
)
Total in loss position

$
10,237

$
(19
)
$
5,253

$
(56
)
$
15,490

$
(75
)

	In Loss Position					In Loss Position				Total In
	< 12 months					> 12 months				Loss Position
	Fair		Gross			Fair		Gross		Fair		Gross
	Value		Unrealized			Value		Unrealized		Value		Unrealized
			(Loss)					(Loss)				(Loss)
Investments:
U.S. Treasury and agency securities	$	3,185	$	(115	)	$	—	$	—	$	3,185	$	(115	)
Corporate bonds	19,582		(478		)	—		—		19,582		(478		)
Total in loss position	$	22,767	$	(593	)	$	—	$	—	$	22,767	$	(593	)

Investments in Privately-held Companies

We have made strategic investments in private companies located in China in order to gain access at a competitive cost to raw materials that are critical to our substrate business. (See Note 9). At March 31, 2008 and December 31, 2007, our investments in privately-held companies had a carrying value of $5.1 million and $4.9 million, respectively. The investment balances for the two companies accounted for under the equity method are included in “other assets” in the condensed consolidated balance sheets. We own 25% of the ownership interests in each of these companies.

Fair Value Measurements

On January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. SFAS No. 157 applies whenever other statements require or permit assets or liabilities to be measured at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, except for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, for which application has been deferred for one year.

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis in accordance with SFAS No. 157 as of March 31, 2008 (in thousands):

	Balance as of March 31, 2008		Quoted Prices in Active Markets of Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Cash equivalents:
Money market funds .	$	14,917	$	14,917	$	—
Short-term investments:
Commercial paper	3,185		—		3,185
Corporate bonds	19,582		—		19,582
Total	$	37,684	$	14,917	$	22,767

Liabilities	$	—	$	—	$	—

Our financial assets and liabilities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily-available pricing sources for comparable instruments. As of March 31, 2008, the Company did not have any assets or liabilities without observable market values that would require a high level of judgment to determine fair value (Level 3 assets).

Items Measured at Fair Value on a Nonrecurring Basis

Certain assets that are subject to nonrecurring fair value measurement are not included in the table above. These assets include equity and cost method investments in private companies. We did not record other-than-temporary impairment charges for either of these investments during the first quarter of 2008.

Note 5.4. Inventories, Net

The components of inventories are summarized below (in thousands):

March 31,

December 31,

2007

2006

Inventories, net:

Raw materials

$
10,715

$
8,419

Work in process

12,963

11,222

Finished goods

711

622

$
24,389

$
20,263

	March 31,		December 31,
	2008		2007
Inventories, net:
Raw materials	$	13,325	$	11,154
Work in process	13,515		12,254
Finished goods	2,237		1,373
	$	29,077	$	24,781

Note ~~6. Restructuring Charges~~5. Impairment on Assets Held For Sale

During the three months ended March 31, ~~2007, there were~~2008, we completed the sale of our property in Fremont, California. The escrow established to pay the purchase price of the property closed on March 28, 2008. The final purchase price for the property was $5.3 million. We received net proceeds of $5.1 million after deducting commissions and selling expenses. We recorded an impairment charge upon the sale of the property of $83,000. There was no ~~restructuring charges. During~~impairment charge for the same three ~~months~~month period ended March 31, ~~2006, we recognized a $2,000 benefit related to an adjustment to a prior accrual.~~2007.

Note 7.6. Net Income ~~(Loss)~~ Per Share

Basic net income ~~(loss)~~ per common share is calculated by dividing net income ~~(loss)~~ available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income ~~(loss)~~ per common and common equivalent shares include the dilutive effect of common stock equivalents outstanding during the period calculated using the treasury stock method. Common stock equivalents consist of the shares ~~issueable~~issuable upon the exercise of stock options.

A reconciliation of the numerators and denominators of the basic and diluted net income ~~(loss)~~ per share calculations is as follows (in thousands, except per share data):

Three Months Ended

March 31,

2007

2006

Numerator:

Net income (loss)

$
1,344

$
(2,203
)
Less: Preferred stock dividends

(44
)
(44
)
Net income (loss) available to common stockholders

$
1,300

$
(2,247
)
Denominator:

Denominator for basic net loss per share - weighted average common shares

29,798

22,986

Effect of dilutive securities:

Common stock options

1,526

—

Denominator for dilutive net loss per common share

31,324

22,986

Basic net income (loss) per share

$
0.04

$
(0.10
)
Diluted net income (loss) per share

$
0.04

$
(0.10
)
Options excluded from diluted net loss per share as the impact is anti-dilutive

362

2,835

	Three Months Ended
	March 31,
	2008			2007
Numerator:
Net income	$	1,959		$	1,344
Less: Preferred stock dividends	(44		)	(44		)
Net income available to common stockholders	$	1,915		$	1,300
Denominator:
Denominator for basic net loss per share - weighted average common shares	30,367			29,798
Effect of dilutive securities:
Common stock options	1,218			1,526
Denominator for dilutive net loss per common share	31,585			31,324
Basic net income per share	$	0.06		$	0.04
Diluted net income per share	$	0.06		$	0.04
Options excluded from diluted net loss per share as the impact is anti-dilutive	511			362

Note 8.7. Comprehensive Income

The components of comprehensive ~~gain~~income are as follows (in thousands):

Three Months Ended

March 31,

2007

2006

Net income (loss)

$
1,344

$
(2,203
)
Foreign currency translation gain (loss)

230

(129
)
Unrealized gain on available for sale investments

29

3,311

Less: reclassification adjustment for realized gain included in net loss

—

(376
)
Comprehensive income

$
1,603

$
603

	Three Months Ended
	March 31,
	2008			2007

Net income	$	1,959		$	1,344

Change in foreign currency translation gain	1,152			230
Change in unrealized gain (loss) on available for sale investments	(547		)	29
Comprehensive income	$	2,564		$	1,603

Note 9.8. Segment Information and Foreign Operations

Segment Information

We operate in one segment for the design, development, manufacture and distribution of high-performance compound semiconductor substrates and sale of materials. In accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information” (“SFAS No. 131”), our chief operating decision-maker has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocating our resources and assessing our performance. All material operating units qualify for aggregation under SFAS No. 131 due to their identical customer base and similarities in economic characteristics, nature of products and services, and procurement, manufacturing and distribution processes. Since we operate in one segment, all financial segment and product line information required by SFAS No. 131 can be found in the condensed consolidated financial statements.

Geographical Information

The following table represents revenue amounts (in thousands) reported for products shipped to customers in the corresponding geographic region:

Three Months Ended

March 31,

2007

2006

Net revenues:

North America*

$
3,342

$
1,959

Europe

2,065

1,406

Japan

2,386

666

Taiwan

1,812

1,514

Asia Pacific

2,921

2,926

Consolidated total

$
12,526

$
8,471

	Three Months Ended
	March 31,
	2008		2007
Net revenues:
North America*	$	4,999	$	3,342
Europe	2,817		2,065
Japan	4,140		2,386
Taiwan	2,807		1,812
Asia Pacific	4,871		2,921
Consolidated total	$	19,634	$	12,526

*Primarily the United States

Long-lived assets consist primarily of property, plant and equipment, and are attributed to the geographic location in which they are located. Long-lived assets by geographic region were as follows (in thousands):

As of

March 31,

December 31,

2007

2006

Long-lived assets:

North America

$
264

$
426

China

13,493

12,349

$
13,757

$
12,775

	As of
	March 31,		December 31,
	2008		2007
Long-lived assets:
North America	$	149	$	149
China	16,971		15,837
	$	17,120	$	15,986

Significant Customers

No customer represented more than 10% of revenues for the three month ~~period~~periods ended March 31, ~~2007. Two customers represented 14.3%~~2008 and ~~12.1%, respectively, of revenues for the three month period ended March 31, 2006.~~2007. Our top five customers represented ~~34.0%~~33.2% and ~~45.8%~~34.0% of revenue for the three month periods ended March 31, 2008 and 2007, ~~and 2006,~~ respectively.

Note ~~10.~~9. Investments in Privately-held Companies

Investment Balance as of

Company

March 31,
2007

December 31,
2006

Accounting
Method

Ownership
Percentage

Beijing Ji Ya Semiconductor Material Co., Ltd

$
996

$
996

Consolidated

46
%
Nanjing Jin Mei Gallium Co., Ltd

592

592

Consolidated

83

Beijing BoYu Manufacturing Co., Ltd

410

410

Consolidated

70

Xilingol Tongli Ge Co. Ltd

1,516

1,304

Equity

25

Emeishan Jia Mei High Pure Metals Co., Ltd

662

670

Equity

25

	Investment Balance as of
Company	March 31, 2008		December 31, 2007		Accounting Method	Ownership Percentage
Beijing Ji Ya Semiconductor Material Co., Ltd	$	996	$	996	Consolidated	46	%
Nanjing Jin Mei Gallium Co., Ltd	592		592		Consolidated	83	%
Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd	410		410		Consolidated	70	%
Xilingol Tongli Germanium Co., Ltd	2,319		2,138		Equity	25	%
Emeishan Jia Mei High Purity Metals Co., Ltd	780		761		Equity	25	%

The investment balances for the two companies accounted for under the equity method are included in “other assets” in the condensed consolidated balance sheets. We own 25% of the ownership interests in each of these companies. These two companies are not considered variable interest entities because:

· ~~both companies have sustainable businesses of their own;~~

·		both companies have sustainable businesses of their own;

·		our voting power is proportionate to our ownership interests;

·		we only recognize our respective share of the losses and/or residual returns generated by the companies if they occur; and
	��
·		· ~~our voting power is proportionate to our ownership interests;~~ · ~~we only recognize our respective share of the losses and/or residual returns generated by the companies if they occur; and~~ ·we do not have a controlling financial interest in, do not maintain operational or management control of, do not control the board of directors of, and are not required to provide additional investment or financial support to, either company.

Undistributed retained earnings relating to our investments were ~~$5.0~~$8.9 million and ~~$4.4~~$7.8 million as of March 31, ~~2007~~2008 and December 31, ~~2006,~~2007, respectively. Net income recorded from our investments was ~~$611,000~~$1,035,000 and ~~$269,000~~$611,000 for the three months ended March ~~30,~~31, 2008 and 2007, ~~and 2006,~~ respectively.

The minority interest for those investments that are consolidated is included within “Other long-term liabilities” in the condensed consolidated balance sheets and within “Other income (expense), net” on the condensed consolidated statements of operations.

We also have investments in two privately-held companies which are accounted for under the cost method as we do not have the ability to exercise significant influence over their operations. As of March 31, 2008 and December 31, 2007, these investments totaled approximately $0.4 million and are included in “other assets” on the condensed consolidated balance sheets.

Note ~~11.~~10. Commitments and Contingencies

Indemnification Agreements

We enter into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, we indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, generally their business partners or customers, in connection with any U.S. patent, or any copyright or other intellectual property infringement claim by any third party with respect to our products. The term of these indemnification agreements is generally perpetual anytime after the execution of the agreement. The maximum potential amount of future payments we could be required to make under these agreements is unlimited. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal.

We have entered into indemnification agreements with our directors and officers that may require us to indemnify our directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of a culpable nature; to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified; and to obtain directors’ and officers’ insurance if available on reasonable terms, which we currently have in place.

Product Warranty

We warrant our products for a specific period of time, generally twelve months, against material defects. We provide for the estimated future costs of warranty obligations in cost of sales when the related revenue is recognized. The accrued warranty costs represent the best estimate at the time of sale of the total costs that we expect to incur to repair or replace product parts that fail while still under warranty. The amount of accrued estimated warranty costs are primarily based on historical experience as to product failures as well as current information on repair costs. On a quarterly basis, we review the accrued balances and update these based on the historical warranty cost trends. The following table reflects the change in our warranty accrual which is included in “accrued liabilities” on the condensed consolidated balance sheets, during the three months ended March 31, ~~2007~~2008 and ~~2006~~2007 (in thousands):

Three Months Ended March 31,

2007

2006

Beginning accrued warranty and related costs

$
459

$
120

Charged to cost of revenue

452

105

Actual warranty expenditures

(128
)
(41
)
Ending accrued warranty and related costs

$
783

$
184

	Three Months Ended March 31,
	2008			2007

Beginning accrued warranty and related costs	$	1,030		$	459
Charged to cost of revenue	29			452
Actual warranty expenditures	(63		)	(128		)
Ending accrued warranty and related costs	$	996		$	783

~~Purchase Commitment~~

On February 27, 2007, we entered into an agreement with Recapture Metals Limited of Ontario, Canada (“Recapture”), pursuant to which Recapture will supply our subsidiary in the PRC with one thousand kilograms per month of 99.99999% pure gallium, during the eighteen month period beginning July 1, 2007. Under the terms of the agreement, we are required to purchase a minimum of eighteen thousand kilograms of gallium, unless the agreement is terminated prior to the expiration of the eighteen month period on December 31, 2008. Our total commitment under this agreement is approximately $7.3 million.

Note ~~12.~~11. Foreign Exchange Transaction Gains/Losses

We incurred foreign currency transaction exchange gains of $189,000 and foreign exchange losses of $44,000 ~~and $36,000~~ for the three month periods ended March 31, ~~2007,~~2008, and ~~2006,~~2007, respectively. These amounts are included in other income (expense), net on the condensed consolidated statements of operations.

Note ~~13.~~12. Income Taxes

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“~~FIN”~~FIN48”) ~~48,~~ , “Accounting for Uncertainty in Income ~~Taxes”~~Taxes—an interpretation of FASB Statement No. 109),”., FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. We adopted FIN 48 effective January 1, 2007. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of March 31, ~~2007,~~2008, we do not have any gross unrecognized tax benefits, nor any accrued interest and penalties related to uncertain tax positions. As a result of the implementation of FIN 48, we identified ~~$14.4~~$16.4 million in unrecognized tax benefits. This amount decreased the tax loss carryforwards in the U.S. which are fully offset by a valuation allowance. We file income tax returns in the U.S. federal, various states and foreign jurisdictions. We have substantially concluded all U.S. federal and state income tax matters through December 31, 2006.

Note ~~14.~~13. Recent Accounting Pronouncements

In ~~June 2006,~~March 2008, the ~~FASB ratified the consensus reached by the Emerging Issues Task Force~~Financial Accounting Standards Board (“~~EITF”~~FASB”) ~~regarding EITF Issue~~issued Statement of Financial Accounting Standards (“SFAS”) SFAS No. ~~06-03,~~161, “~~How Taxes Collected from Customers~~Disclosures about Derivative Instruments and ~~Remitted~~Hedging Activities” (“SFAS 161”). SFAS 161 requires companies with derivative instruments to ~~Government Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation)”. This guidance requires~~disclose information that ~~companies disclose their accounting policy~~should enable financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related ~~to sales tax~~hedged items affect a company’s financial position, financial performance and ~~other similar taxes, which was~~cash flows. SFAS 161 is effective for usfinancial statements issued for fiscal years and interim periods beginning ~~January 1, 2007. We report these taxes~~after November 15, 2008. Based on our current

operations, we do not expect that the adoption of SFAS 161 will have a ~~net basis, excluding them from revenue.~~material impact on our consolidated financial position or results of operations.

In ~~September 2006,~~December 2007, the FASB issued SFAS No. ~~157,~~141 (revised 2007), “~~Fair Value Measurements”~~ Business Combinations(“”, (“SFAS ~~157”~~141R”). SFAS ~~157 defines fair value,~~141R establishes ~~a framework for measuring fair value in accordance with generally accepted accounting~~the principles and ~~expands disclosures about fair value measurements.~~requirements for how an acquirer in a business combination (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree, (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective beginning with the Company’s fiscal 2009. The ~~provisions~~impact of the adoption of SFAS ~~157 are~~141(R) on the Company’s results of operations and financial position will depend on the nature and extent of business combinations that the Company completes, if any, in or after fiscal 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 requires that minority interest be separately reported in the consolidated entity’s equity section and that no gain or loss shall be reported when transactions occur between the controlling interest and the non-controlling interests. Furthermore, the acquisition of non-controlling interest by the controlling interest is not treated as a business combination. SFAS 160 is effective for ~~the~~ fiscal ~~year~~years beginning after ~~November~~December 15, ~~2007.~~2008. We ~~are currently evaluating~~have not yet evaluated the impact of ~~the provisions of~~ SFAS ~~157~~160 on our consolidated financial position, results of operations or cash ~~flows and do not believe the impact of the adoption will be material.~~flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. ~~115” “~~115(” (“SFAS 159”). SFAS 159 ~~permits entities~~expands the use of fair value accounting to ~~choose to measure~~ many financial instruments and certain other ~~items at~~items. The fair value ~~with the objective of improving financial reporting by providing entities with the opportunity~~option is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to ~~mitigate volatility in reported earnings caused by measuring related assets and liabilities differently. The provisions of~~measure based on fair value. SFAS 159 ~~are~~is effective for ~~the~~ fiscal ~~year~~years beginning after November 15, 2007. We ~~are currently evaluating the impact~~do not have any instruments eligible for election of the ~~provisions~~fair value option. Therefore, the adoption of SFAS 159 onin the first quarter of fiscal 2008 did not impact our consolidated financial position, results of operations or cash ~~flows~~flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework and dogives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods of those fiscal years. In February 2008, the FASB released a FASB Staff Position (FSP FAS 157-2— Effective Date of FASB Statement No. 157 ) which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. These non-financial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and non-financial assets acquired and liabilities assumed in a business combination. The partial adoption of SFAS 157 as of January 1, 2008 for financial assets and liabilities did not ~~believe the~~have a material impact on our condensed consolidated financial position, results of operations or cash flows. See Note 3 of the ~~adoption will be material.~~Notes to Condensed Consolidated Financial Statements.

~~Note 15. Subsequent Events~~

On April 23, 2007, we reached a settlement in the lawsuit filed in the Superior Court of California, County of Alameda, Zhao et al. v. American Xtal Technology, et al., No. R 605215713. The total amount of the settlement payable is covered by our insurance carrier.

On April 24, 2007, we reached a settlement in the purported securities class action lawsuit filed against AXT C 04 4362 MJJ. Of the amount payable, we are responsible only for the amount remaining in our insurance retention. We accrued the remaining amount of the retention (approximately $350,000) as of March 31, 2007.15

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This quarterly report on Form 10-Q, including the following sections, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, particularly statements relating to our expectations regarding results of operations, customer demand, improvements in our product quality, our ability to expand our markets and increase sales, customer qualifications of our products, gross margins, favorable pricing, reliable supply and enhanced sourcing lead-times of raw materials, and our reserve balances. These forward-looking statements are based upon management’s current views with respect to future events and financial performance, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated in such forward-looking statements. Such risks and uncertainties include those set forth under the section entitled “Risk Factors” below, which identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. We caution investors that actual results may differ materially from those projected in the forward-looking statements as a result of certain risk factors identified in this Form 10-Q and other filings we have made with the Securities and Exchange Commission. Forward-looking statements may be identified by the use of terms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” and similar expressions. Statements concerning our future or expected financial results and condition, business strategy and plans or objectives for future operations are forward-looking statements.

These forward-looking statements are not guarantees of future performance. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. This discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, ~~2006~~2007 and the condensed consolidated financial statements included elsewhere in this report.

Overview

We are a leading worldwide developer and producer of high-performance compound and single element semiconductor substrates comprising gallium arsenide (GaAs), indium phosphide (InP) and germanium (Ge). We currently sell the following substrate ~~products:~~products in the sizes and for the applications indicated:

Product
Substrates	Diameter	Applications
GaAs (semi-insulating)	2”~~, 4”,~~ to 6”	· Power amplifiers and integrated circuits for wireless handsets
		· Direct broadcast television
		· High-performance transistors
		· Satellite communications

GaAs (semi-conducting)	2”, 3”, 4”	· High brightness LEDs
		· Lasers
		· Optical couplers

InP	2”, 4”3”, 6”4”	· Broadband and ~~Fiber~~fiber optic communications

Ge	2”, 4”	· Satellite and terrestrial solar cells
		· Optical applications

We manufacture compound semiconductor substrates using our proprietary vertical gradient freeze, or VGF, technology. Our in-house VGF technology enables us to add capacity quickly and cost efficiently. We manufacture all of our products in China, which generally has lower costs for facilities, labor and materials.

We also have three majority-owned and two minority-owned joint ventures in China which provide us favorable pricing, reliable supply and enhanced sourcing lead-times for key raw materials which are central to our final manufactured products. These joint ventures produce products including 99.99% pure gallium (4N Ga), high purity gallium, arsenic, germanium, germanium dioxide, paralytic boron nitride (pBN) crucibles and boron oxide. AXT’s ownership interest in these entities ranges from 25% to 83%. We consolidate the three ventures in which we own a majority or controlling financial interest and employ equity accounting for the two joint ventures in which we have a 25% interest. We purchase portions of the materials produced by these ventures for our own use and the joint ventures sell the remainder of their production to third parties.

Revenue increased ~~$4.1~~$7.1 million, or ~~47.9%~~56.7%, to ~~$12.5~~$19.6 million for the three months ended March 31, ~~2007~~2008 from ~~$8.5~~$12.5 million for the same period of ~~2006~~2007 primarily due to our improved quality, higher customer demands for six-inch diameter wafers, and an increase in raw material sales. On March 28, 2008, we completed the sale of our Fremont, California facility and received net proceeds of approximately $5.1 million after deducting commissions and selling expenses. As of March 31, ~~2007,~~2008, we had available cash, cash equivalents

and short-term investments of ~~$36.6~~$39.4 million, excluding restricted deposits.

~~Discontinued Opto-Electronics Business~~

In the three months ended March 31, 2007, we dissolved the corporation that operated our discontinued operations that related to our opto-electronics business and transferred the cash balance to our continuing operations. Accordingly, we no longer have discontinued operations. In the three month period ended March 31, 2006, the $1,000 in income was from interest income on cash balances held in the discontinued operations.

~~Restructuring Charges~~

During the three month period ended March 31, 2007, we incurred no restructuring charges. During the three month period ended March 31, 2006, we recognized a $2,000 benefit related to an adjustment to a prior accrual. As of March 31, 2007 and December 31, 2006, we had a zero balance for the restructuring accrual for workforce reduction and for future lease payments related to abandoned U.S. facilities located in California that are no longer required to support production, as these have all been paid.

Critical Accounting Policies and Estimates

We have prepared our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. As such, we have had to make estimates, assumptions and judgments that affect the amounts reported on our financial statements. These estimates, assumptions and judgments about future events and their effects on our results cannot be determined with certainty, and are made based upon our historical experience and on other assumptions that are believed to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. The discussion and analysis of our results of operations and financial condition are based upon these condensed consolidated financial statements.

We have identified the policies below as critical to our business operations and understanding of our financial condition and results of operations.

A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. They may require us to make assumptions about matters that are highly uncertain at the time of the estimate, and different estimates that we could have used, or changes in the estimate that are reasonably likely to occur, may have a material impact on our financial condition or results of operations.

We believe that the following are our critical accounting policies:

Revenue Recognition

We manufacture and sell high-performance compound ~~and single element~~ semiconductor substrates and sell certain raw materials including gallium, germanium dioxide, and pBN crucibles. After we ship our products, there are no remaining obligations or customer acceptance requirements that would preclude ~~recognition of the~~ revenue ~~earned on the sale.~~recognition. Our products are typically sold pursuant to a purchase order placed by our customers, and our terms and conditions of sale do not require customer acceptance. We recognize revenue upon shipment and transfer of title of products to our customers, which is ~~ordinarily~~either upon shipment from our dock, receipt at the customer’s dock, or removal from consignment inventory at the customer’s location, provided that we have received a signed purchase order, the price is fixed or determinable, title and risk of ownership have transferred, collection of resulting receivables is probable, and product returns are reasonably estimable. We do not provide training, installation or commissioning services. Additionally, we do not provide discounts or other incentives to customers.

We provide for future returns based on historical experience, current economic trends and changes in customer demand at the time revenue is recognized.

~~In June 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) regarding EITF Issue No. 06-03, “~~~~How Taxes Collected from Customers and Remitted to Government Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation)”~~~~. We have historically presented, and will continue to present sales tax, value added tax, and other similar taxes on a net basis, excluding them from revenue.~~

Allowance for Doubtful Accounts

We periodically review the likelihood of collection on our accounts receivable balances and provide an allowance for doubtful accounts receivable primarily based upon the age of these accounts. We provide a 100% allowance for receivables from U.S. customers in excess of 90 days and for receivables from customers located outside the U.S. in excess of 120 days. We assess the probability of collection based on a number of factors, including the length of time a receivable balance has been outstanding, our past history with the customer and their creditworthiness.

As of March 31, ~~2007~~2008 and December 31, ~~2006,~~2007, our accounts receivable, net, balance was ~~$8.6~~$16.7 million and ~~$9.7~~$12.1 million, respectively, which was net of an allowance for doubtful accounts of ~~$0.1 million~~$187,000 and ~~$0.1 million,~~$379,000, respectively. If actual uncollectible accounts differ substantially from our estimates, revisions to the estimated allowance for doubtful accounts would be required, which could have a material impact on our financial results for the period.

Warranty Reserve

We maintain a warranty reserve based upon our claims experience during the prior twelve months. Warranty costs are accrued at the time revenue is recognized. As of March 31, ~~2007~~2008 and December 31, ~~2006,~~2007, accrued product warranties totaled ~~$783,000 and $459,000, respectively.~~$1.0 million. If actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liability would be required, which could have a material impact on our financial condition and results of operations.

Inventory Valuation

Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost method. Our inventory consists of raw materials as well as finished goods and work-in-process that include material, labor and manufacturing overhead costs. Given the nature of our substrate products, and the materials used in the manufacturing process, the wafers and ingots comprising work-in-process may be held in inventory for up to two years and three years, respectively, as the risk of obsolescence for these materials is low. We routinely evaluate the levels of our inventory in light of current market conditions in order to identify excess and obsolete inventory, and we provide a valuation allowance for certain inventories based upon the age and quality of the product and the projections for sale of the completed products. As of March 31, ~~2007~~2008 and December 31, ~~2006,~~2007, we had an inventory reserve of ~~$14.5~~$13.5 million and ~~$15.4~~$13.6 million for excess and obsolete inventory, respectively. The majority of this inventory has not been scrapped, and accordingly, may be sold in future periods. If actual demand for our products were to be substantially lower than estimated, additional inventory adjustments for excess or obsolete inventory might be required, which could have a material impact on our business, financial condition and results of operations.

Impairment of Investments

We classify our investments in debt and equity securities as available-for-sale securities as prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. All available-for-sale securities with a quoted market value below cost (or adjusted cost) are reviewed in order to determine whether the decline is other-than-temporary. Factors considered in determining whether a loss is temporary include the magnitude of the decline in market value, the length of time the market value has been below cost (or adjusted cost), credit quality, and our ability and intent to hold the securities for a period of time sufficient to allow for any anticipated recovery in market value.

We invest in equity instruments of privately-held companies for business and strategic purposes. These investments are classified as other assets and are accounted for either under the cost method or under the equity method as we do not have the ability to exercise significant influence over their operations. We monitor our investments for impairment and would record reductions in carrying value when events or changes in circumstances indicate that the carrying value may not be recoverable. Determination of impairment is highly subjective and is based on a number of factors, including an assessment of the strength of the investee’s management, the length of time and extent to which the fair value has been less than our cost basis, the financial condition and near-term prospects of the investee, fundamental changes to the business prospects of the investee, share prices of subsequent offerings, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in our carrying value.

Impairment of Long-Lived Assets

We evaluate the recoverability of property, equipment and intangible assets in accordance with SFAS No. 144,

“Accounting for the Impairment or Disposal of Long-Lived Assets.” When events and circumstances indicate that long-lived assets may be impaired, we compare the carrying value of the long-lived assets to the projection of future undiscounted cash flows attributable to these assets. In the event that the carrying value exceeds the future undiscounted cash flows, we record an impairment charge against income equal to the excess of the carrying value over the assets’ fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets held for sale are carried at the lower of carrying value or estimated net realizable value.

Employee Stock Options

We grant options to substantially all management employees and believe that this program helps us to attract, motivate and retain high quality employees, to the ultimate benefit of our stockholders. Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS

123(R)”), using the modified prospective application transition method. Under this transition method, stock-based compensation cost was recognized in the condensed consolidated financial statements for all share-based payments after January 1, 2006. Compensation cost recognized includes the estimated expense for the portion of the vesting period after January 1, 2006 for share-based payments prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, “Accounting for Stock-Based Compensation.” We recognize these compensation costs net of an estimated forfeiture rate over the requisite service period of the award, which is generally the vesting term of four years for stock options. Results for prior periods have not been restated, as provided for under the modified prospective application transition method.

As of the date of the filing of this quarterly report, we believe there have been no material changes to our critical accounting policy on employee stock options during the three months ended March 31, ~~2007~~2008 compared to that disclosed in our Annual Report on Form 10K for the fiscal year ended December 31, ~~2006~~2007 filed with the ~~SEC~~Securities and Exchange Commission (“SEC”) on March ~~23, 2007.~~14, 2008. See Note 32 to our condensed consolidated financial statements.

Income Taxes

We account for income taxes in accordance with SFAS No. 109 (“SFAS 109”), “Accounting for Income ~~Taxes”~~ ~~(“SFAS 109”)~~,Taxes,” which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized.

We provide for income taxes based upon the geographic composition of worldwide earnings and tax regulations governing each ~~country, including~~region, particularly ~~the People’s Republic of~~ China. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws, particularly in foreign countries such as ~~the People’s Republic of~~ China.

~~In July 2006, the Financial Accounting Standards Board (“FASB”) issued~~Effective January 1, 2007, we adopted FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income ~~Taxes,~~ Taxes—an interpretation of FASB Statement No. ~~109” (“FIN 48”)~~109. ~~FIN 48 clarifies~~” See Note 12 — “Income Taxes” in the ~~accounting for uncertainty in income taxes recognized in an enterprise’s~~condensed consolidated financial statements ~~in accordance with SFAS 109. This interpretation prescribes a recognition threshold and measurement attribute~~ for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. We adopted FIN 48 effective January 1, 2007. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of March 31, 2007, we do not have any gross unrecognized tax benefits, nor any accrued interest and penalties related to uncertain tax positions. As a result of the implementation of FIN 48, we identified $14.4 million in unrecognized tax benefits. This amount decreased the tax loss carryforwards in the U.S. which are fully offset by a valuation allowance. We file income tax returns in the U.S. federal, various states and foreign jurisdictions. We have substantially concluded all U.S. federal and state income tax matters through December 31, 2006.additional information.

Results of Operations

Revenue

Three Months Ended

March 31,

Increase

2007

2006

(Decrease)

% Change

($ in thousands)

GaAs

$
8,792

$
6,755

$
2,037

30.2
%
InP

518

296

222

75.0
%
Ge

541

36

505

1,402.8
%
Raw materials

2,630

1,384

1,246

90.0
%
Other

45

—

45

NM

Total revenue

$
12,526

$
8,471

$
4,055

47.9
%

	March 31,				Increase
	2008		2007		(Decrease)			% Change
	($ in thousands)
GaAs	$	13,720	$	8,792	$	4,928		56.1	%
InP	478		518		(40		)	(7.7	)%
Ge	1,385		541		844			156.0	%
Raw materials	4,041		2,630		1,411			53.7	%
Other	10		45		(35		)	(77.8	)%
Total revenue	$	19,634	$	12,526	$	7,108		56.7	%

~~NM = % not meaningful~~

Revenue increased ~~$4.1~~$7.1 million, or ~~47.9%~~56.7%, to $19.6 million for the three months ended March 31, 2008 from $12.5 million for the three months ended March 31, ~~2007 from $8.5~~2007. Total GaAs substrate revenue increased $4.9 million, or 56.1%, to $13.7 million for the three months ended March 31, ~~2006. Total GaAs substrate revenue increased $2.0 million, or 30.2%, to~~2008 from $8.8 million for the three months ended March 31, ~~2007 from $6.8 million for the three months ended March 31, 2006.~~2007.

Sales of 5 inch and 6 inch diameter GaAs substrates were $6.9 million for the three months ended March 31, 2008 compared to $4.0 million for the three months ended March 31, ~~2007 compared to $2.8 million for the three months ended March 31, 2006.~~2007. The increase in larger diameter ~~substrate revenue was due to~~semi-insulating substrates came from the ~~fact that, while the GaAs device market grew~~growth in ~~strength~~demand for both cellular and ~~the~~ WLAN (Wide Local Area Network) ~~markets,~~markets. Our growth came particularly from IQE plc that awarded us a large production order during the compound semiconductor industry has been experiencing capacity constraints, particularly in 6 inch; with our excess capacity, we were able to benefit from the overflow business from our competition. In the three months ended March 31,fourth quarter of 2007 we experienced a decrease in 6-inch diameter wafer sales from the prior quarter which was primarily due to the delay in BIFET qualifications of certain customers and less than expected orders from a few handset market customers.for their 2008 requirements.

Sales of 2 inch, 3 inch and 4 inch diameter GaAs substrates were $6.9 million for the three months ended March 31, 2008 compared with $4.8 million for the three months ended March 31, ~~2007 compared with $3.8 million for the three months ended March 31, 2006.~~2007. The increase in revenue from smaller diameter substrates was due to the continued market growth generally of LED laser diodes and commercial epitaxy.

InP substrate revenue ~~increased $222,000,~~decreased $40,000, or ~~75.0%~~7.7%, to $478,000 for the three months ended March 31, 2008 from $518,000 for the three months ended March 31, ~~2007 from $296,000 for the three months ended March 31, 2006.~~2007. The ~~increase~~decrease in InP substrate revenue was due to ~~greater~~lower overall demand from customers in the optical networking industry.

Ge substrate revenue increased ~~$505,000,~~$844,000, or ~~1,402.8%~~156.0%, to $1.4 million for the three months ended March 31, 2008 from $541,000 for the three months ended March 31, ~~2007 from $36,000 for the three months ended March 31, 2006.~~2007. The increase in Ge substrate revenue was due to an increase in sales to customers in the People’s Republic of China and an increase in sales to a major customer in ~~Germany~~Europe who has now qualified our product, as demand for photovoltaic applications increases.

Raw materials revenue increased ~~$1.2~~$1.4 million, or ~~90.0%~~53.7%, to $4.0 million for the three months ended March 31, 2008 from $2.6 million for the three months ended March 31, ~~2007 from $1.4 million for the three months ended March 31, 2006.~~2007. The increase in raw materials revenue was primarily due to a combination of increased sales ~~of gallium~~ to ~~three new~~ customers ~~in Japan~~ as ~~the~~ demand ~~for gallium increases.~~increased and higher raw materials prices. We do not expect ~~this~~ demand to continue at this pace.

Revenue by Geographic Region

Three Months Ended

March 31,

Increase

2007

2006

(Decrease)

% Change

($ in thousands)

North America *

$
3,342

$
1,959

$
1,383

70.6
%
% of total revenue

27
%
23
%

Europe

2,065

1,406

659

46.9
%
% of total revenue

17
%
17
%

Japan

2,386

666

1,720

258.3
%
% of total revenue

19
%
8
%

Taiwan

1,812

1,514

298

19.7
%
% of total revenue

14
%
18
%

Asia Pacific (excluding Japan and Taiwan)

2,921

2,926

(5
)
(0.2
)%
% of total revenue

23
%
34
%

Total revenue

$
12,526

$
8,471

$
4,055

47.9
%

	Three Months Ended
	March 31,						Increase
	2008			2007			(Decrease)		% Change
	($ in thousands)
North America *	$	4,999		$	3,342		$	1,657	49.6	%
% of total revenue	26		%	27		%
Europe	2,817			2,065			752		36.4	%
% of total revenue	14		%	16		%
Japan	4,140			2,386			1,754		73.5	%
% of total revenue	21		%	19		%
Taiwan	2,807			1,812			995		54.9	%
% of total revenue	14		%	15		%
Asia Pacific (excluding Japan and Taiwan)	4,871			2,921			1,950		66.8	%
% of total revenue	25		%	23		%
Total revenue	$	19,634		$	12,526		$	7,108	56.7	%

*Primarily the United States

Revenue from customers in North America ~~revenue~~ increased by ~~$1.4~~$1.7 million, or ~~70.6%~~49.6%, to $5.0 million for the three months ended March 31, 2008 from $3.3 million for the three months ended March 31, 2007. We expected our North America revenue to increase substantially in 2008 based upon a supply agreement we signed in the fourth quarter of 2007 with IQE plc. Under the terms of the agreement, IQE plc shall purchase from ~~$2.0~~us a minimum of approximately $15.1 million of 4-inch and 6-inch semi-insulating gallium arsenide (GaAs) substrates. IQE plc has an option to purchase an additional $3.5 million of 6-inch substrates from us under the agreement. All substrates ordered pursuant to the agreement are to be shipped by the end of 2008.

Revenue from customers in Europe increased by $0.8 million, or 36.4%, to $2.8 million for the three months ended March 31, 2006. We believe our quality has improved as shown by customers that have qualified our products manufactured in the PRC as sales to existing customers increased by $0.8 million, while we gained $0.6 million in sales to new customers.

~~Europe revenue increased by $0.7 million, or 46.9%, to~~2008 from $2.1 million for the three months ended March 31, ~~2007 from $1.4 million for the three months ended March 31, 2006.~~2007. This increase came primarily from increased substrate sales to customers in Germany and France, and ~~Switzerland.~~from increased raw materials sales to a customer in the Netherlands.

Revenue from customers in Japan ~~revenue~~ increased by ~~$1.7~~$1.8 million, or ~~258.3%~~73.5%, to $4.1 million for the three months ended March 31, 2008 from $2.4 million for the three months ended March 31, ~~2007~~2007. The increase came mainly from ~~$0.7~~substrate sales to two major existing customers, particularly in large diameter wafers.

Revenue from customers in Taiwan increased by $1.0 million, or 54.9%, to $2.8 million for the three months ended March 31, ~~2006. The increase came~~2008 from ~~3 new customers for raw materials amounting to $1.2 million, while substrate sales to existing customers increased by $0.5 million.~~

~~Taiwan revenue increased by $0.3 million, or 19.7%, to~~ $1.8 million for the three months ended March 31, ~~2007~~2007. The increase of $1.0 million came mainly from ~~$1.5~~one major existing customer for large diameter wafers.

Revenue from customers in Asia Pacific (excluding Japan and Taiwan) increased by $2.0 million, or 66.8%, to $4.9 million for the three months ended March 31, ~~2006. The increase of $0.3 million was due to slightly higher demand~~2008 from ~~existing customers.~~

~~Asia Pacific (excluding Japan and Taiwan) revenue remained steady at~~ $2.9 million for the three months ended March 31, ~~2007 and 2006.~~2007. Sales to customers in the ~~PRC~~People’s Republic of China increased by ~~$0.3~~$1.7 million, of which raw materials was $0.7 million. The other $1.0 million increase was from $0.6 million from increased sales to existing customers for small diameter GaAs wafers, and $0.4 million from sales to ~~customers in Korea and Malaysia by $0.1 million, offset by~~ a ~~decrease in sales~~new customer for 4” Ge wafers. Sales to customers in Singapore increased by $0.2 million, mainly from a customer that is part of ~~$0.4 million.~~the IQE plc group with whom we signed a supply agreement in the fourth quarter of 2007.

Gross Margin

Three Months Ended

March 31,

Increase

2007

2006

(Decrease)

% Change

($ in thousands)

Gross profit

$
5,405

$
1,510

$
3,895

257.9
%
Gross Margin%

43.2
%
17.8
%

	Three Months Ended
	March 31,						Increase
	2008			2007			(Decrease)		% Change
	($ in thousands)
Gross profit	$	6,221		$	5,405		$	816	15.1	%
Gross Margin %	31.7		%	43.2		%

Gross margin ~~increased~~decreased to 31.7% of total revenue for the three months ended March 31, 2008 from 43.2% of total revenue for the three months ended March 31, ~~2007 from 17.8% of total revenue for the three months ended March 31, 2006.~~2007. Gross ~~margin~~margins in the three months ended March 31, 2008 and 2007 ~~was~~were positively impacted by sales of approximately $620,000 and $785,000, respectively, of gallium arsenide (GaAs) wafers that were previously fully ~~reserved.~~reserved.. Product mix ~~also~~ contributed to higher gross ~~margins~~profit for the three months ended March 31, 2008 as we sold a greater amount of ~~InP substrates, as well as~~ larger diameter GaAs wafers ~~both of~~ which contributed higher gross ~~margins.~~profit. In addition, we had manufacturing equipment that became fully depreciated since the third quarter of 2006, and the absence of depreciation expense for this equipment contributed approximately 2.6 percentage points to gross margin infor the three months ended March 31, 2007. Finally, higher substrate gross margins were also achieved through better slicing techniques, longer length ingot growth, shorter runtimes, and higher production ~~volumes, partially offset~~volumes. In the subsequent four quarters since March 31, 2007, gross margins were negatively impacted by ~~higher~~declining average selling prices and rising raw material costs, as well as an increase in depreciation as a result of ~~raw materials~~our purchase of equipment acquired for ~~gallium and arsenic. Gross margin in~~our capacity expansion. For the three months ended March 31, ~~2006 was positively impacted by sales~~2008, product mix also contributed to lower gross margins as we sold a lesser amount of ~~approximately $569,000 of GaAs~~InP substrates that have higher gross margins, and we sold more Ge wafers that ~~were previously fully reserved.~~have lower gross margins.

Selling, General and Administrative Expenses

Three Months Ended

March 31,

Increase

2007

2006

(Decrease)

% Change

($ in thousands)

Selling, general and administrative expenses

$
3,703

$
3,230

$
473

14.6
%
% of total revenue

29.6
%
38.1
%

	Three Months Ended
	March 31,						Increase
	2008			2007			(Decrease)			% Change
	($ in thousands)

Selling, general and administrative expenses	$	3,667		$	3,703		$	(36	)	-1.0	%
% of total revenue	18.7		%	29.6		%

Selling, general and administrative expenses ~~increased $0.5~~decreased $36,000 to $ 3.7 million tofor the three months ended March 31, 2008 from $3.7 million for the three months ended March 31, 2007. The decrease was primarily due to $378,000 lower legal and professional fees since we accrued $350,000 in legal fees in connection with the settlement reached in April 2007 of the securities class action lawsuit filed against us, and $184,000 lower bad debt expenses as we collected from ~~$3.2 million~~our slow-paying customers in Asia, partially offset by $436,000 from increases in general annual salary and related costs, $60,000 from increased sales commissions based on increased sales volumes, and $30,000 in additional decontamination expenses.

Research and Development

	Three Months Ended
	March 31,						Increase
	2008			2007			(Decrease)		% Change
	($ in thousands)
Research and development	$	504		$	460		$	44	9.6	%
% of total revenue	2.6		%	3.7		%

Research and development expenses increased $ 44,000, or 9.6% to $ 504,000 for the three months ended March 31, 2006. The increase was primarily due to $0.4 million in accrued legal fees, which is our portion of the settlement of the securities class action lawsuit reached on April 24, 2007. Of the total amount of the settlement, we are responsible only for the amount remaining in our insurance retention, approximately $0.4 million which we accrued as of March 31, 2007. The remaining $0.1 million increase in selling, general and administrative expenses in the quarter was due to increased consulting fees for compliance with the Sarbanes-Oxley Act of 2002.

~~Research and Development~~

Three Months Ended

March 31,

Increase

2007

2006

(Decrease)

% Change

($ in thousands)

Research and development

$
460

$
534

$
(74
)
(13.9
)%
% of total revenue

3.7
%
6.3
%

~~Research and development expenses decreased $0.1 million, or 13.9% to $0.5 million~~2008 from $460,000 for the three months ended March 31, ~~2007 from $0.5 million for the three months ended March 31, 2006, from savings~~2007. The increase was due to increases in salary and related costs as a result of the ~~retirement~~appointment of ~~Dr. Morris Young, our former Chief Technology Officer~~a new chief technology officer effective December 31, ~~2006.~~2007, and general annual salary and related cost increases partially offset by lower new products testing costs.

~~Restructuring Charges~~Impairment on Assets Held For Sale

Three Months Ended

March 31,

Increase

2007

2006

(Decrease)

% Change

($ in thousands)

Restructuring charges

$
—

$
(2
)
$
2

(100.0
)%
% of total revenue

0.0
%
(0.0
)%

	Three Months Ended
	March 31,						Increase
	2008			2007			(Decrease)		% Change
	($ in thousands)
Impairment on assets held for sale	$	83		$	—		$	83	NM
% of total revenue	0.4		%	0.0		%

NM = % not meaningful

During the three months ended March 31, ~~2007,~~2008, we ~~incurred~~completed the sale of our property in Fremont, California. The escrow established to pay the purchase price was closed on March 28, 2008 The final purchase price for the property was $5.3 million. We received net proceeds of $5.1 million after deducting commissions and selling expenses. We recorded an impairment charge upon the sale of the property of $83,000. There was no ~~restructuring charges. During~~impairment charge for the same three ~~months~~month period ended March 31, ~~2006, we recognized a $2,000 benefit related to an adjustment to a prior accrual.~~2007.

Interest Income, net

Three Months Ended

March 31,

Increase

2007

2006

(Decrease)

% Change

($ in thousands)

Interest income, net

$
224

$
128

$
96

75.0
%
% of total revenue

1.8
%
1.5
%

	Three Months Ended
	March 31,						Increase
	2008			2007			(Decrease)			% Change
	($ in thousands)
Interest income, net	$	124		$	224		$	(100	)	-44.6	%
% of total revenue	0.6		%	1.8		%

Interest income, net ~~increased $96,000~~decreased $100,000 to $124,000 for the three months ended March 31, 2008 from $224,000 for the three months ended March 31, 2007 ~~from $128,000 for the three months ended March 31, 2006~~ as a result of higher balances of our investments in the three months ended March 31, 2007, which came from the net proceeds of our public offering of common stock, completed in December 2006 and January 2007.

Other Income and Expense, net

Three Months Ended

March 31,

Increase

2007

2006

(Decrease)

% Change

($ in thousands)

Other income (expense) net

$
(11
)
$
238

$
(249
)
104.6
%
% of total revenue

(0.1
)%
2.8
%

	Three Months Ended
	March 31,						Increase
	2008			2007			(Decrease)		% Change
	($ in thousands)
Other income (expense) net	$	428		$	(11	)	$	439	3990.9	%
% of total revenue	2.2		%	(0.1		)%

Other income was $428,000 for the three months ended March 31, 2008 due to a realized gain of $459,000 on the sale of short-term investments held by us, partially offset by minority interests in our joint ventures. Other expense was $11,000 for the three months ended March 31, 2007 due to the minority interests in our joint ventures. Other income was $238,000 for the three months ended March 31, 2006 due to a realized gain of $376,000 on the sale of shares of common stock of Finisar Corporation held by us, partially offset by minority interests in our joint ventures.

Provision for Income Taxes

Three Months Ended

March 31,

Increase

2007

2006

(Decrease)

% Change

($ in thousands)

Provision for income taxes

$
111

$
318

$
(207
)
(65.1
%)
% of total revenue

0.9
%
3.8
%

	Three Months Ended
	March 31,						Increase
	2008			2007			(Decrease)		% Change
	($ in thousands)
Provision for income taxes	$	560		$	111		$	449	404.5	%
% of total revenue	2.9		%	0.9		%

We provided for income taxes of ~~$111,000~~$560,000 for our China operations for the three months ended March 31, ~~2007~~2008 compared to ~~$318,000~~$111,000 for ~~the three month period ended March 31, 2006. The decrease in provision is due to lower tax rates in one of our China joint ventures.~~

~~Gain from Discontinued Operations~~

Three Months Ended

March 31,

Increase

2007

2006

(Decrease)

% Change

($ in thousands)

Gain from discontinued operations

$
—

$
1

$
(1
)
100.0
%
% of total revenue

0.0
%
0.0
%

In the three months ended March 31, ~~2007,~~2007. Beginning in 2008, the tax provision was calculated based on the assumption that we ~~dissolved the corporation that operated our discontinued operations that related to our opto-electronics business and transferred the cash balance to our continuing operations. Accordingly, we~~will no longer ~~have discontinued operations. In the three months ended March 31, 2006, the $1,000~~receive refunds for profit reinvestments in ~~income was from interest income on cash balances held in the discontinued operations.~~China .

Liquidity and Capital Resources

As of March 31, ~~2007,~~2008, our principal sources of liquidity were ~~$36.6~~$39.4 million in cash and cash equivalents and short-term investments, excluding restricted deposits. We consider cash and cash equivalents and short-term investments as liquid and available for use. Short-term investments are comprised of government bonds and high-grade commercial debt instruments.

Cash and cash equivalents and short-term investments of $39.4 million increased ~~$1.1 million to $36.6~~ million as of March 31, 2007 compared with $35.5 million as of December 31, 2006. Included in this increase are the net proceeds of $3.7 million received from the public offering of 862,500 shares of our common stock in January 2007, partially offset by ~~the purchase of machinery and equipment of $1.2 million, payments of long-term debt of~~ $0.2 million ~~and~~in the ~~continual funding~~first quarter of ~~our operations.~~2008 compared to the fourth quarter of 2007.

Net cash used in operating activities of ~~$1.5~~$4.4 million for the three ~~month period~~months ended March 31, ~~2007~~2008 was primarily comprised of our net income of ~~$1.3~~$2.0 million, adjusted for non-cash items of depreciation of ~~$0.3~~$0.5 million, ~~and stock based~~stock-based compensation of ~~$0.1~~$0.2 million, partially offset by a realized gain on sale of investments of $0.5 million, and offset by a net increase of ~~$3.3~~$6.6 million in assets and liabilities. The $6.6 million net increase in assets and liabilities primarily resulted from a ~~$4.1~~$4.4 million increase in accounts receivable, $4.0 million increase in inventories, ~~$0.5~~$1.7 million increase in prepaid expenses, $0.9 million decrease in other long-term liabilities, ~~$0.7 million decrease in accounts payable,~~primarily minority interests, a $0.2 million increase in other assets, a $0.1 million decrease in accrued liabilities, partially offset by a ~~$1.1~~$4.5 million decrease in accounts ~~receivable, net, $0.7 million increase in accrued liabilities,~~payable, and a ~~$0.4~~$0.2 million decrease in ~~prepaid expenses.~~income taxes payable.

Inventories, net, increased by ~~$4.1~~$4.0 million, ~~or 20.4%, to $24.4 million as of March 31, 2007 compared with $20.3 million as of December 31, 2006,~~ as we increased inventory in raw materials and work-in-process to increase production in anticipation of increased forecast ~~sales.~~sales, and finished goods for consignment orders.

Accounts receivable, net ~~decreased~~increased by ~~$1.1~~$4.4 million, ~~or 11.4%, to $8.6 million~~ as ~~of March 31, 2007 compared with $9.7 million as of December 31, 2006. The decrease was primarily~~ a result of our ~~improved collections.~~increased sales volume. Our days sales outstanding is 6277 days as of March 31, ~~2007~~2008 compared to 6864 days as of December 31, ~~2006.~~2007.

Net cash ~~used in~~provided by investing activities of ~~$3.1~~$8.7 million for the three months ended March 31, ~~2007~~2008 was primarily ~~for~~from the ~~purchase~~proceeds from the sale of investments ~~totaling $5.1~~of $10.8 million, ~~the purchase of property, plant and equipment, of $1.2 million, partially offset by the~~ proceeds from sale of ~~investments~~assets held for sale of ~~$3.1~~$5.1 million and the decrease of restricted cash of $0.2 ~~million.~~million, partially offset by the purchase of investments totaling $6.4 million, and the purchase of property, plant and equipment, of $1.0 million,

We expect to invest approximately ~~$3.7~~$4.8 million in capital projects for the remainder of ~~2007.~~2008. We believe that our existing and planned facilities and equipment are sufficient to fulfill current and expected future orders.

Net cash provided by financing activities of ~~$3.5~~$0.2 million for the three months ended March 31, ~~2007~~2008 consisted of ~~$3.7~~$0.1 million ~~net~~from the proceeds from the ~~issuance~~exercise of ~~862,500 shares~~employee stock options, and $0.3 million from the proceeds of ~~common stock as~~ a ~~result~~long term borrowing in one of our ~~January 2007 follow-on stock offering,~~joint ventures, partially offset by ~~payments~~a scheduled payment of $0.2 million related to long-term borrowings.

Our main Fremont, California facility is financed by long-term borrowings, which were refinanced by taxable variable rate revenue bonds in 1998. These bonds mature in 2023 and bear interest at a variable rate that was ~~5.42%~~3.25% as of March 31, ~~2007.~~2008. The bonds are traded in the public market. Repayment of principal and interest under the bonds is supported by a letter of credit from our bank and is paid on a quarterly basis. We have the option to redeem the bonds in whole or in part during their term. As of March 31, ~~2007, $7.0~~2008, $6.6 million was outstanding under these bonds.

As of March 31, ~~2007~~2008, the credit facility maintained by us with a bank included a letter of credit supporting repayment of our revenue bonds with an outstanding amount of ~~$7.0~~$6.6 million. We have pledged and placed a like amount of investment securities with an affiliate of the bank as additional collateral for this facility. We completed the sale of our Fremont, California facility on March 28, 2008, and received net proceeds of approximately $5.1 million after deducting commissions and selling expenses. We plan to repay the outstanding principal and accrued interest on the revenue bond of approximately $6.6 million in July 2008, thereby releasing our restricted cash in such amount.

We believe that we have adequate cash and investments to meet our needs over the next 12 months. If our performance fails to improve, we will continue to use cash and may at some time be forced to seek additional capital. There can be no assurance that such additional capital will be available or, if available it will be at terms acceptable to us. Cash from operations could be affected by various risks and uncertainties, including, but not limited to those set forth below under Item 1A “Risks Factors.”

Outstanding contractual obligations as of March 31, ~~2007~~2008 are summarized as follows (in thousands):

Payments due by period

Contractual Obligations

Total

Less than
1 year

1 - 3
years

3 - 5
years

More than
5 years

Long-term debt

$
7,061

$
450

$
961

$
900

$
4,750

Operating leases

4,407

650

1,456

1,541

760

Purchase obligation

7,290

3,555

3,735

—

—

Total

$
18,758

$
4,655

$
6,152

$
2,441

$
5,510

	Payments due by period
Contractual Obligations	Total			Less than 1 year			1 - 3 years			3 - 5 years			More than 5 years
Long-term debt	$	6,835		$	735		$	900		$	900		$	4,300
Operating leases	3,756			$	719		$	1,496		$	1,541		—
Less: Sublease income	(1,004		)	$	(189	)	$	(395	)	$	(420	)	—
Purchase obligation	3,735			3,735			—			—			—
Total	$	13,322		$	5,000		$	2,001		$	2,021		$	4,300

We lease certain office space, manufacturing facilities and property under long-term operating leases expiring at various dates through March 2013. Total rent payments under these operating leases were approximately $0.2 million and ~~$0.3~~$0.2 million for the three month periods ended March 31, 2008 and 2007, ~~and 2006,~~ respectively.

Recent Accounting Pronouncements

In ~~June 2006,~~March 2008, the ~~FASB ratified the consensus reached by the Emerging Issues Task Force~~Financial Accounting Standards Board (“~~EITF”~~FASB”) ~~regarding EITF Issue~~issued Statement of Financial Accounting Standards (“SFAS”) SFAS No. ~~06-03,~~161, “~~How Taxes Collected from Customers~~Disclosures about Derivative Instruments and ~~Remitted~~Hedging Activities” (“SFAS 161”). SFAS 161 requires companies with derivative instruments to ~~Government Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation)”. This guidance requires~~disclose information that ~~companies disclose their accounting policy~~should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related ~~to sales tax~~hedged items affect a company’s financial position, financial performance and ~~other similar taxes, which was~~cash flows. SFAS 161 is effective for usfinancial statements issued for fiscal years and interim periods beginning ~~January 1, 2007. We report these taxes~~after November 15, 2008. Based on our current operations, we do not expect that the adoption of SFAS 161 will have a ~~net basis, excluding them from revenue.~~material impact on our consolidated financial position or results of operations.

beginning after November 15, 2007, and interim periods of those fiscal years. In February 2008, the FASB released a FASB Staff Position (FSP FAS 157-2— Effective Date of FASB Statement No. 157 ) which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. These non-financial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and non-financial assets acquired and liabilities assumed in a business combination. The partial adoption of SFAS 157 as of January 1, 2008 for financial assets and liabilities did not ~~believe the~~have a material impact on our condensed consolidated financial position, results of operations or cash flows. See Note 3 of the ~~adoption will be material.~~Notes to Condensed Consolidated Financial Statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency ~~Exchange Rate Exposure~~Risk

~~We operate~~

A significant portion of our business is conducted in currencies other than the U.S. dollar. The functional currency for our foreign operations is the Renminbi, the local currency of China, where our operating expenses are predominantly in the ~~United States, manufacture in the People’s Republic of China (“PRC”), and the substantial majority~~local currency. Since most of our ~~sales to date have been made~~operations are conducted in ~~U.S. dollars. Certain expenses from~~China, most of our ~~PRC operations~~costs are incurred in Chinese currency, which subjects us to fluctuations in the ~~PRC’s Renminbi. As a result, currency fluctuations~~exchange rates between the U.S. dollar and the ~~Renminbi could cause foreign currency~~Chinese Renminbi. We incur transaction gains or losses resulting from consolidation of expenses incurred in local currencies for these subsidiaries, as well as in translation of the assets and liabilities of these assets at each balance sheet date. These risks may be increased by the fluctuations and revaluations of the Chinese Renminbi. Our financial results could be adversely affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets, including the revaluation by China of the Renminbi, and any future adjustments that China may make to its currency such as any move it might make to a managed float systems with opportunistic interventions. In the future we may experience foreign exchange losses on our non-functional currency denominated receivables and payables to the extent that we ~~would recognize~~have not mitigated our exposure utilizing foreign currency forward exchange contracts. Foreign exchange losses could have a materially adverse effect on our operating results and cash flows.

We do not currently use short-term forward exchange contracts for hedging purposes to reduce the effects of adverse foreign exchange rate movements. We had previously purchased foreign exchange contracts to hedge against certain trade accounts receivable denominated in Japanese yen. The change in the ~~period incurred.~~ ~~For example, a 10%~~fair value of the forward contracts was recognized as part of the related foreign currency transactions as they occur. As of March 31, 2008, we had no outstanding commitments with respect to foreign exchange contracts.

During the first quarter of 2008, we recorded net realized foreign exchange gains of $189,000, included as part of other expense in our consolidated statements of operations. The foreign exchange gains were primarily due to fluctuation in the ~~dollar at March 31, 2007 would have an immaterial impact on our net dollar position in outstanding trade payables and receivables.~~

~~In July 2005, the PRC uncoupled the~~Chinese Renminbi ~~from~~versus the U.S. ~~dollar and began to permit it to float in a narrow band against a basket of foreign currencies. The move revalued Renminbi by 2.1% against the U.S. dollar; however, it~~dollar. It is uncertain ~~what further adjustments~~whether these currency trends will ~~follow. The Renminbi-U.S. dollar exchange rate could float, and~~continue. In the ~~Renminbi could appreciate relative to the U.S. dollar.~~

~~We expect our international revenues and expenses to continue to be denominated largely in U.S. dollars. We also believe that our PRC operations will likely expand in the~~ future ~~as our business continues to grow. As a result, we anticipate that~~ we may experience ~~increased exposure~~foreign exchange losses on our non-functional currency denominated receivables and payables to the ~~risks~~extent that we have not mitigated our exposure utilizing foreign currency forward exchange contracts. Foreign exchange losses could have a materially adverse effect on our operating results and cash flows. During the first quarter of ~~fluctuating currencies and may choose to engage~~2008, we recorded unrealized foreign currency gains of $1.2 million, in ~~currency hedging activities to reduce these risks. However, we cannot be certain that any such hedging activities will be effective, or available to us at commercially reasonable rates.~~cumulative other comprehensive income on our condensed consolidated balance sheets.

Interest Rate Risk

Cash and cash equivalents earning interest and certain variable rate debt instruments are subject to interest rate fluctuations. The following table sets forth the probable impact of a 10% change in interest rates (in thousands):

Instrument

Balance as of
March 31,
2007

Current
Interest
Rate

Projected Annual
Interest
Income/(Expense)

Proforma 10%
Interest Rate
Decline
Income/(Expense)

Proforma 10%
Interest Rate
Increase
Income/(Expense)

Cash

$
8,630

0.50
%
$
43

$
39

$
47

Cash equivalents

6,434

5.23

336

303

370

Investment in debt and equity instruments

28,529

4.84

1,381

1,243

1,519

Long-term debt

(7,000
)
5.42

(379
)
(341
)
(417
)

$
1,381

$
1,243

$
1,519

Instrument	Balance as of March 31, 2008			Current Interest Rate		Projected Annual Interest Income/(Expense)			Proforma 10% Interest Rate Decline Income/(Expense)			Proforma 10% Interest Rate Increase Income/(Expense)
Cash	$	8,308		0.50	%	$	41		$	46		$	37
Cash equivalents	14,917			3.00	%	448			492			403
Investment in debt and equity instruments	22,767812			3.19	%	726			799			654
Long-term debt	(6,550		)	3.25	%	(213		)	(192		)	(234		)
						$	1,002		$	1,145		$	860

The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash equivalents, short-term investments, and trade accounts receivable. We invest primarily in money market accounts, commercial paper instruments, and investment grade securities. We are exposed to credit risks in the event of default by the issuers to the extent of the amount recorded on the consolidated balance sheets. These securities are generally classified as available-for-sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income, net of estimated tax. Our cash, cash equivalents and short-term investments are in high-quality securities placed with major banks and financial institutions and commercial paper. We have no investments in auction rate securities.

Equity Risk

We maintain minority investments in privately-held companies. These investments are reviewed for other than temporary declines in value on a quarterly basis. These investments are classified as other assets in the condensed consolidated balance sheets and are accounted for either under the cost method or under the equity method as we do not have the ability to exercise significant influence over their operations. We monitor our investments for impairment and record reductions in carrying value when events or changes in circumstances indicate that the carrying value may not be recoverable. Reasons for other than temporary declines in value include whether the related company would have insufficient cash flow to operate for the next twelve months, significant changes in the operating performance and changes in market conditions. ~~The~~As of March 31, 2008, the minority investments accounted for under the cost method totaled $0.4 million, ~~as of December 31, 2006 and March 31, 2007.~~while minority investments accounted for under the equity method totaled $3.1 million.

ITEM 4T4. CONTROLS AND PROCEDURES

(a) Under the supervision and with the participation of our management, our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

(b) No change in our internal control over financial reporting was made during the quarter ended March 31, ~~2007,~~2008, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we may be involved in judicial or administrative proceedings concerning matters arising in the ordinary course of business. We do not expect that any of these matters, individually or in the aggregate, will have a material adverse effect on our business, financial condition, cash flows or results of operation.

On October 15, 2004, a purported securities class action lawsuit was filed in the United States Court for the Northern District of California, City of Harper Woods Employees Retirement System v. AXT, Inc. et al., No. C 04 4362 MJJ. The Court consolidated the case with a subsequent related case and appointed a lead plaintiff. On April 5, 2005, the lead plaintiff filed a consolidated complaint, captioned as Morgan v. AXT, Inc. et al., No. C 04 4362 MJJ. The lawsuit complaint names AXT, Inc. and our former chief technology officer as defendants, and is brought on behalf of a class of all purchasers of our securities from February 6, 2001 through April 27, 2004. The complaint alleges that we announced financial results during this period that were false and misleading. No specific amount of damages is claimed. On September 23, 2005, the Court granted our motion to dismiss the complaint, with leave to amend. The lead plaintiff filed an amended complaint, which we had moved to dismiss. On April 24, 2007, we reached a settlement of this ~~litigation for which we are responsible only for~~litigation. On February 27, 2008, the ~~amount remaining in our insurance retention.~~district court approved the settlement, and subsequently entered a judgment of dismissal.

A former employee, Steve X. Chen, has demanded arbitration of his claim that his position with AXT, Inc. was eliminated due to his race and national origin. We ~~accrued the remaining amount of the retention (approximately $350,000) as of March 31, 2007.~~

On June 1, 2005, a lawsuit was filed in the Superior Court of California, County of Alameda, Zhao et al. v. American Xtal Technology, et al., No. R 605215713. The lawsuit complaint names as defendants AXT, Inc., our chief technology officerbelieve there is no merit to this claim and one of our suppliers. The lawsuit was brought on behalf of two former employees and their minor child. The complaint alleged personal injury, general negligence, intentional tort, wage loss and other damages, including punitive damages, as a result of exposure of the child while in uterointend to high levels of gallium arsenide and methanol used in the production of gallium arsenide wafers. On April 23, 2007, we reached a settlement of this litigation, all of which is covered by our insurance carriers.contest it vigorously. An arbitrator has been selected, but discovery has not yet begun.

Item 1A. Risk Factors

There are no material changes from the risk factors set forth under Part I, Item 1A. ~~"Risk Factors"~~“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2006, provided, however, that the two litigation matters described under the risks disclosed under the captions “~~If we fail to comply with environmental and safety regulations, we may be subject to significant fines or forced to cease our operations; in addition, we could be subject to suits for personal injuries caused by hazardous materials” ~~and~~ ~~“Existing or future litigation could result in significant judgments against us, or cause us to incur costly settlements.”~~ These two settled matters comprise (i) the complaint filed against us and a current and former officer, alleging personal injury, general negligence, intentional tort, wage loss and other damages as a result of exposure of plaintiffs, who are former employees of AXT, including a minor child in utero, to high levels of gallium arsenide in gallium arsenide wafers, and methanol, and (ii) the ongoing securities litigation matter.2007.

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

~~Use of Proceeds~~

On December 19, 2006 and January 9, 2007, we sold 5,750,000 shares and 862,500 shares, respectively, of our common stock in a firmly underwritten public offering pursuant to a registration statement on Form S-3 (SEC file number 333-135474), which was declared effective by the SEC on August 3, 2006, and a registration statement on Form S-3MEF (SEC file number 333-139365), which was effective upon filing with the SEC on December 15, 2006. Needham & Company, LLC acted as the sole underwriter. The price per share to the public was $4.50. We received net proceeds of $24.1 million and $3.7 million, for aggregate net proceeds of $27.8 million. The net proceeds have been and will continue to be used for corporate and joint venture capacity expansion, research and development and working capital requirements, as well as potential acquisitions of complementary products, technologies or businesses.None

Item 3. Defaults upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits

a. Exhibits

Exhibit Number		Description
~~10.22(1)~~
3.1(1)		Restated Certificate of Incorporation

3.2(2)		Certificate of Designation, Preferences and Rights of Series A Preferred Stock (which is incorporated herein by reference to Exhibit 2.1 to the registrant’s form 8-K dated May 28, 1999).

3.3(2)		Second Amended and Restated By Laws

3.1(1)		Restated Certificate of Incorporation

3.1(1)		Restated Certificate of Incorporation

4.2(3)		Rights Agreement ~~with recapture Metals Limited~~ dated ~~February 27, 1007.~~April 24, 2001 by and between AXT, Inc. and ComputerShare Trust Company, Inc.

31.1		Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference to the exhibit as of the same number as filed with the SEC ~~with~~in our ~~Current~~Annual Report on Form 10-K for the year ended December 31, 1998.

(2) Incorporated by reference to the exhibit as of the same number as filed with the SEC in our Form 8-K on ~~March 5, 2007.~~June 14, 1999.

(3) Incorporated by reference to the exhibit as of the same number as filed with the SEC in our Form 8-K on May 30, 2001.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	AXT, INC.

Dated: May ~~11, 2007~~12, 2008	By:	/s/ Philip C. S. Yin
		Philip C. S. Yin
		Chief Executive Officer
		(Principal Executive Officer)

		/s/ Wilson W. Cheung
		Wilson W. Cheung
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

EXHIBIT INDEX

Exhibit Number		Description
~~10.22(1)~~
3.1(1)		Restated Certificate of Incorporation

3.2(2)		Certificate of Designation, Preferences and Rights of Series A Preferred Stock (which is incorporated herein by reference to Exhibit 2.1 to the registrant’s form 8-K dated May 28, 1999).

3.3(2)		Second Amended and Restated By Laws

3.1(1)		Restated Certificate of Incorporation

3.1(1)		Restated Certificate of Incorporation

4.2(3)		Rights Agreement ~~with Recapture Metals Limited~~ dated ~~February 27, 2007.~~April 24, 2001 by and between AXT, Inc. and ComputerShare Trust Company, Inc.

31.1		Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference to the exhibit as of the same number as filed with the SEC in our ~~Current~~Annual Report on Form 10-K for the year ended December 31, 1998.

(2) Incorporated by reference to the exhibit as of the same number as filed with the SEC in our Form 8-K on ~~March 5, 2007.~~June 14, 1999.

(3) Incorporated by reference to the exhibit as of the same number as filed with the SEC in our Form 8-K on May 30, 2001.

	Three Months Ended March 31,
	2007		2006

Revenue	$	—	$	—
Cost of revenue
Gross profit	—		—
Operating expenses:
Selling, general and administrative	$		$	(1	)
Total operating expenses	—		(1		)
Gain from operations, net of tax	—
Gain on disposal, net of tax	—		—
Net income	$	—	$	1

	March 31, 2007		December 31, 2006
Current assets:
Cash	$	—	$	395
Total current assets	—		395
Total assets	$	—	$	395

Net assets	—		395
Total liabilities and net assets	$	—	$	395

Options Outstanding as of March 31, 2007					Options Exercisable as of March 31, 2007
Range of Exercise Price	Shares	Weighted-average Exercise Price		Weighted-average Remaining Contractual Life	Shares	Weighted-Average Exercise Price
$1.17 - $ 1.38	1,451,180	$	1.29	6.86	910,442	$	1.30
$1.39 - $ 1.44	11,500	$	1.41	8.14	5,167	$	1.41
$1.45 - $ 2.24	610,530	$	2.17	5.49	558,489	$	2.18
$2.25 - $ 5.00	499,723	$	4.00	5.91	326,490	$	3.65
$5.01 - $41.50	117,500	$	13.41	2.52	117,500	$	13.41
	2,690,433	$	2.52	6.19	1,918,088	$	2.70

	March 31, 2007									December 31, 2006
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gain		(Loss)			Value		Cost		Gain		(Loss)			Value
Classified as:
Cash	$	8,630	$	—	$	—		$	8,630	$	6,892	$	—	$	—		$	6,892
Cash equivalents:
Money market fund	4,242		—		—			4,242		7,045		—		—			7,045
U.S. Treasury and agency securities	2,192		—		—			2,192		2,179		—		—			2,179
Commercial paper	—		—		—			—		—		—		—			—

Total cash equivalents	6,434		—		—			6,434		9,224		—		—			9,224
Total cash and cash equivalents	15,064		—		—			15,064		16,116		—		—			16,116

Investments:
U.S. Treasury and agency securities	12,773		—		(25		)	12,748		12,277		—		(39		)	12,238
Asset-backed securities	83		—		—			83		809		—		(1		)	808
Commercial paper	—		—		—			—		500		—		—			500
Corporate bonds	15,687		61		(50		)	15,698		13,035		—		(3		)	13,032
Total investments	28,543		61		(75		)	28,529		26,621		—		(43		)	26,578
Total cash, cash equivalents and investments	$	43,607	$	61	$	(75	)	$	43,593	$	42,737	$	—	$	(43	)	$	42,694

Contractual maturities on investments:
Due within 1 year	$	11,454						$	11,435	$	13,767						$	13,727
Due after 1 through 5 years	17,086							17,094		12,854							12,851
	$	28,540						$	28,529	$	26,621						$	26,578

	Investment Balance as of
Company	March 31, 2007		December 31, 2006		Accounting Method	Ownership Percentage
Beijing Ji Ya Semiconductor Material Co., Ltd	$	996	$	996	Consolidated	46	%
Nanjing Jin Mei Gallium Co., Ltd	592		592		Consolidated	83
Beijing BoYu Manufacturing Co., Ltd	410		410		Consolidated	70
Xilingol Tongli Ge Co. Ltd	1,516		1,304		Equity	25
Emeishan Jia Mei High Pure Metals Co., Ltd	662		670		Equity	25

Instrument	Balance as of March 31, 2007			Current Interest Rate		Projected Annual Interest Income/(Expense)			Proforma 10% Interest Rate Decline Income/(Expense)			Proforma 10% Interest Rate Increase Income/(Expense)
Cash	$	8,630		0.50	%	$	43		$	39		$	47
Cash equivalents	6,434			5.23		336			303			370
Investment in debt and equity instruments	28,529			4.84		1,381			1,243			1,519
Long-term debt	(7,000		)	5.42		(379		)	(341		)	(417		)
						$	1,381		$	1,243		$	1,519