**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC. 20549**

----

**FORM10-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**                                                                                                             |
| ** **                                                                                                                                                     |
| **or**                                                                                                                                                         |
| ** **                                                                                                                                                     |
| **o**                                                                                                                                                          |   | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
| ** **                                                                                                                                                     |   | ** **                                                                                    |
| **for the  transition period  from          to          ** |

 

**CommissionFile 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.) |

 

**4281Technology 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) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. YES  x  NO  o

Indicate by checkmark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Act. (Check one):
| Large accelerated filer o | Accelerated  filer o | Non-accelerated filer x |
|---------------------------|----------------------|-------------------------|

 

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

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

| **Class**                       |   | **Outstanding  at April 30, 2007** |
|---------------------------------|--------|------------------------------------|
| Common Stock,  $0.001 par value |   | 29,894,949                         |

 

 

----

AXT,INC.FORM 10-QTABLE OF CONTENTS
| PART I. FINANCIAL  INFORMATION                                                                       |   | 3  |
|------------------------------------------------------------------------------------------------------|--------|----|
| Item 1. Financial Statements  (unaudited)                                                            |   | 3  |
| Condensed Consolidated  Balance Sheets as of March 31, 2007 and December 31, 2006                    |   | 3  |
| Condensed Consolidated Statements  of Operations for the three months ended March 31, 2007 and 2006  |   | 4  |
| Condensed Consolidated  Statements of Cash Flows for the three months ended March 31, 2007 and 2006  |   | 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                                  |   | 25 |
| Item 4T. Controls  and Procedures                                                                    |   | 27 |
| PART II. OTHER  INFORMATION                                                                          |   | 28 |
| Item 1. Legal  Proceedings                                                                           |   | 28 |
| Item 1A. Risk Factors                                                                                |   | 28 |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                 |   | 28 |
| Item 3.  Defaults Upon Senior Securities                                                             |   | 28 |
| Item 4.  Submission of Matters to a Vote of Security Holders                                         |   | 28 |
| Item 5. Other  Information                                                                           |   | 28 |
| Item 6. Exhibits                                                                                     |   | 29 |
| Signatures                                                                                           |   | 30 |

 

2

----

**PART I.FINANCIAL INFORMATION**

**Item1. 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 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

3

----

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 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

4

----

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 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

5

----

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

**Note 1. Basis of Presentation**

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

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

The results of operationsare not necessarily indicative of the results to be expected in the future orfor the full fiscal year. It is recommended that these condensed consolidatedfinancial statements be read in conjunction with our consolidated financialstatements and the notes thereto included in our 2006 Annual Report on Form10-K filed with the Securities and Exchange Commission on March 23, 2007.

**Note 2. DiscontinuedOperations**

Our condensedconsolidated financial statements have been presented to reflect theopto-electronics business as a discontinued operation for all periodspresented. Operating results of the discontinued operation are as follows (inthousands):
|                                     | ** ** | **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 periodended March 31, 2007, we dissolved the corporation that previously operated ourdiscontinued operations and transferred the cash balance to our continuingoperations. Accordingly, we no longer have discontinued operations. In thethree month period ended March 31, 2006, the $1,000 in income was from intereston cash balances held in the discontinued operations.

6

----

The carrying value of theassets and liabilities of the discontinued opto-electronics business includedin 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****3. Accounting forStock-Based Compensation**

Effective January 1,2006, we adopted the provisions of Statement of Financial Accounting Standards(“SFAS”) No. 123 (revised 2004), “*Share-BasedPayment*,” (“SFAS 123(R)”). SFAS 123(R) establishesaccounting for stock-based awards exchanged for employee services. Accordingly,stock-based compensation cost is measured at grant date, based on the fairvalue of the award, and is recognized as expense over the employee requisiteservice period. All of our stock compensation is accounted for as an equityinstrument. We previously applied Accounting Principles Board (“APB”) OpinionNo. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations and provided the required pro forma disclosures of SFASNo. 123, “*Accounting for Stock-Based Compensation*”.

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

***Impact of theAdoption of SFAS 123(R)***

Under the modifiedprospective application transition method as provided by SFAS 123(R), we recorded $120,000 and $257,000 ofstock compensation expense in our unaudited condensed consolidated statementsof operations for the three months ended March  31, 2007, and 2006,respectively. We elected not to capitalize any stock-based compensation toinventory as of January 1, 2006 when the provisions of SFAS123(R) were initially adopted. Weutilized the Black-Scholes valuation model for estimating the fair value of thestock compensation granted both before and after the adoption of SFAS 123(R). Thefollowing table summarizes compensation costs related to our stock-basedcompensation plan (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 | ) |

 

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

7

----

changes in estimatedforfeitures. We elected not to capitalize any stock-based compensationto inventory as of March 31, 2007 and 2006, due to the immateriality ofthe amount.

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

We estimate the fairvalue of stock options using a Black-Scholes valuation model, consistent withthe provisions of SFAS 123(R), Securities and Exchange Commission StaffAccounting Bulletin No. 107 and our prior period pro forma disclosures of netloss, including stock-based compensation (determined under a fair value methodas prescribed by SFAS No. 123). There were no stock option grants made inthe three months ended March 31, 2007. The fair value of our stockoptions granted to employees for the three months ended March 31, 2006 wasestimated 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       |   |
|                             |            |                                              |            |  |

 

The followingtable summarizes the stock option transactions during the three months endedMarch 31, 2007 (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 |   |

 

The optionsoutstanding and exercisable as of March 31, 2007 were in the following exerciseprice ranges:

8

----

 
| **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 |   |

 

The total intrinsic value of options exercised for thethree months ended March 31, 2007 was $70,000. Cash received from optionexercises for the three months ended March 31, 2007 was $45,000. The totalfair value of options vested for the three months ended March 31, 2007 was$314,000. The total intrinsic value of options exercised for the three monthsended March 31, 2006 was $66,000. Cash received from option exercises for thethree months ended March 31, 2006 was $66,000. The total fair value of optionsvested for the three months ended March 31, 2006 was $509,000.

9

----

**Note 4. Cash, CashEquivalents and Investments**

Our cash, cashequivalents and investments 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 |   |

 

The investmentsinclude $7.0 million and $7.2 million recorded as restricted deposits on thecondensed consolidated balance sheets as of March 31, 2007 and December 31,2006, respectively, as a result of the outstanding principal amount on ourindustrial revenue bonds.

We manage ourinvestments as a single portfolio of highly marketable securities that isintended to be available to meet our current cash requirements. For the threemonths ended March 31, 2007, we had $10,000 in gross realized losses onsales of our available-for-sale securities. For the three months ended March31, 2006, we had $376,000 in gross realized gains on sales of ouravailable-for-sale securities.

The grossunrealized losses related to our portfolio of available-for-sale securitieswere primarily due to a decrease in the fair value of debt securities as aresult of an increase in interest rates during 2006 and the first three monthsof 2007. We have determined that the gross unrealized losses on ouravailable-for-sale securities as of March 31, 2007 are temporary in nature. Wereviewed our investment portfolio to identify and evaluate investments thathave indications of possible impairment. Factors considered in determiningwhether a loss is temporary include the magnitude of the decline in marketvalue, the length of time the market value has been below cost (or adjustedcost), credit quality, and our ability

10

----

and intent to hold the securities for a period of timesufficient to allow for any anticipated recovery in market value. The followingtable provides a breakdown of our available-for-sale securities with unrealizedlosses as of March 31, 2007 (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 | ) |

 

**Note 5. Inventories,Net**

The components ofinventories 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 |   |

 

**Note 6.Restructuring Charges**

During the threemonths ended March 31, 2007, there were no restructuring charges. During thethree months ended March 31, 2006, we recognized a $2,000 benefit related to anadjustment to a prior accrual.

**Note 7.Net Income (Loss) Per Share**

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

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

11

----

 
|                                                                                  | ** ** | **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 |   |

 

**Note 8.Comprehensive Income**

The components ofcomprehensive gain 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 |   |

**Note 9. Segment Information andForeign Operations**

***SegmentInformation***

Weoperate in one segment for the design, development, manufacture anddistribution of high-performance compound semiconductor substrates and sale ofmaterials. In accordance with SFAS No. 131, *“Disclosures About Segments of an Enterprise andRelated Information”* (“SFAS No. 131”), our chief operatingdecision-maker has been identified as the Chief Executive Officer, who reviewsoperating results to make decisions about allocating our resources andassessing our performance. All material operating units qualify for aggregationunder SFAS No. 131 due to their identical customer base and similaritiesin economic characteristics, nature of products and services, and procurement,manufacturing and distribution processes. Since we operate in one segment, allfinancial segment and product line information required bySFAS No. 131 can be found in the condensed consolidated financialstatements.

12

----

***GeographicalInformation***

Thefollowing table represents revenue amounts (in thousands) reported for productsshipped 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 |   |

 

----

*   Primarily the United States

Long-livedassets consist primarily of property, plant and equipment, and are attributedto the geographic location in which they are located. Long-lived assets bygeographic 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 |   |

 

***Significant Customers***

Nocustomer represented more than 10% of revenues for the three month period endedMarch 31, 2007. Two customers represented 14.3% and 12.1%, respectively, ofrevenues for the three month period ended March 31, 2006. Our top fivecustomers represented 34.0% and 45.8% of revenue for the three month periodsended March 31, 2007 and 2006, respectively.

**Note 10. Investments in Privately-held Companies**

Wehave made strategic investments in private companies located in China in orderto gain access at a competitive cost to raw materials that are critical to oursubstrate business. Our investments in these privately-held companies aresummarized below (in thousands):
| ** **                                     | ** ** | **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 |   |
|                                                |            |                                             |            |                             |            |                        |            |  |  |  |  |

 

Theinvestment balances for the two companies accounted for under the equity methodare included in “other assets” in the condensed consolidated balance sheets. Weown 25% of the ownership interests in each of these companies. These twocompanies are not considered variable interest entities because:

13

----

·                       both companies have sustainablebusinesses of their own;

·                       our voting power isproportionate to our ownership interests;

·                       we only recognize our respectiveshare of the losses and/or residual returns generated by the companies if theyoccur; and

·                       we do not have a controllingfinancial interest in, do not maintain operational or management control of, donot control the board of directors of, and are not required to provideadditional investment or financial support to, either company.

Undistributedretained earnings relating to our investments were $5.0 million and $4.4million as of March 31, 2007 and December 31, 2006, respectively. Netincome recorded from our investments was $611,000 and $269,000 for the threemonths ended March 30, 2007 and 2006, respectively.

The minorityinterest for those investments that are consolidated is included within “Otherlong-term liabilities” in the condensed consolidated balance sheets and within “Otherincome (expense), net” on the condensed consolidated statements of operations.

**Note 11.Commitments and Contingencies**

***Indemnification Agreements***

Weenter into standard indemnification arrangements in the ordinary course ofbusiness. Pursuant to these arrangements, we indemnify, hold harmless, andagree to reimburse the indemnified parties for losses suffered or incurred bythe indemnified party, generally their business partners or customers, inconnection with any U.S. patent, or any copyright or other intellectualproperty infringement claim by any third party with respect to our products.The term of these indemnification agreements is generally perpetual anytimeafter the execution of the agreement. The maximum potential amount of futurepayments we could be required to make under these agreements is unlimited. Wehave never incurred costs to defend lawsuits or settle claims related to theseindemnification agreements. As a result, we believe the estimated fair value ofthese agreements is minimal.

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

***ProductWarranty***

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

 

***Purchase Commitment***

OnFebruary 27, 2007, we entered into an agreement with Recapture MetalsLimited of Ontario, Canada (“Recapture”), pursuant to which Recapture willsupply our subsidiary in the PRC with one thousand kilograms per month of99.99999% pure gallium, during the eighteen month period beginning July 1,2007. Under the terms of the agreement, we are required to purchase a minimumof eighteen thousand kilograms of gallium, unless the agreement is terminatedprior 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.Foreign Exchange Transaction Gains/Losses**

Weincurred foreign currency transaction exchange losses of $44,000 and $36,000for the three month periods ended March 31, 2007, and 2006, respectively. Theseamounts are included in other income (expense), net on the condensedconsolidated statements of operations.

14

----

***Note13. Income Taxes***

In July 2006, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. (“FIN”) 48,“**Accountingfor Uncertainty in Income Taxes”**. FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with SFAS 109. This interpretationprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. FIN 48 also provides guidance on derecognition of taxbenefits, classification on the balance sheet, interest and penalties, accountingin interim periods, disclosure, and transition. We adopted FIN 48 effectiveJanuary 1, 2007. We recognize interest and penalties related to uncertaintax positions in income tax expense. As of March 31, 2007, we do not have anygross unrecognized tax benefits, nor any accrued interest and penalties relatedto uncertain tax positions. As a result of the implementation of FIN 48, weidentified $14.4 million in unrecognized tax benefits. This amountdecreased the tax loss carryforwards in the U.S. which are fully offset by avaluation allowance. We file income tax returns in the U.S. federal, variousstates and foreign jurisdictions. We have substantially concluded all U.S.federal and state income tax matters through December 31, 2006.

**Note 14.Recent Accounting Pronouncements**

In June 2006, the FASB ratified the consensusreached by the Emerging Issues Task Force (“EITF”) regarding EITF IssueNo. 06-03, “*How Taxes Collected fromCustomers and Remitted to Government Authorities Should be Presented in the IncomeStatement (That Is, Gross versus Net Presentation)”*. This guidancerequires that companies disclose their accounting policy related to sales taxand other similar taxes, which was effective for us beginning January 1,2007. We report these taxes on a net basis, excluding them from revenue.

In September 2006, the FASB issued SFASNo. 157, “*Fair Value Measurements”*(“SFAS157”). SFAS 157 defines fair value, establishes a framework for measuring fairvalue in accordance with generally accepted accounting principles and expandsdisclosures about fair value measurements. The provisions of SFAS 157 areeffective for the fiscal year beginning after November 15, 2007. We arecurrently evaluating the impact of the provisions of SFAS 157 on our financialposition, results of operations or cash flows and do not believe the impact ofthe adoption will be material.

InFebruary 2007, the FASB issued SFAS No. 159, “*The Fair Value Option for Financial Assets andFinancial Liabilities—Including an amendment of FASB Statement No. 115” “*(SFAS159”). SFAS 159 permits entities to choose to measure many financialinstruments and certain other items at fair value with the objective ofimproving financial reporting by providing entities with the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently. The provisions of SFAS 159 are effective for thefiscal year beginning after November 15, 2007. We are currently evaluatingthe impact of the provisions of SFAS 159 on our financial position, results ofoperations or cash flows and do not believe the impact of the adoption will bematerial.

**Note 15.Subsequent Events**

On April 23, 2007,we reached a settlement in the lawsuit filed in the Superior Court ofCalifornia, 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 ourinsurance carrier.

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

15

----

**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

This quarterly report on Form 10-Q, including thefollowing sections, contains forward-looking statements within the meaning of Section21E of the Securities Exchange Act of 1934, particularly statements relating to our expectations regardingresults of operations, customer demand, improvements in our product quality,our ability to expand our markets and increase sales, customer qualificationsof our products, gross margins, favorable pricing, reliable supply and enhancedsourcing lead-times of raw materials, and our reserve balances.  These forward-looking statements are basedupon management’s current views with respect to future events and financialperformance, and are subject to certain risks and uncertainties that couldcause actual results to differ materially from historical results or thoseanticipated in such forward-looking statements. Such risks and uncertaintiesinclude those set forth under the section entitled “Risk Factors” below,  which identifyimportant factors that could cause actual results to differ materially fromthose predicted in any such forward-looking statements. We caution investorsthat actual results may differ materially from those projected in theforward-looking statements as a result of certain risk factors identified inthis Form 10-Q and other filings we have made with the Securities and ExchangeCommission. Forward-looking statements may be identified by the use ofterms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” andsimilar expressions. Statements concerning our future or expected financialresults and condition, business strategy and plans or objectives for futureoperations are forward-looking statements.

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

**Overview**

We are a leadingworldwide developer and producer of high-performance compound and singleelement semiconductor substrates comprising gallium arsenide (GaAs), indiumphosphide (InP) and germanium (Ge). We currently sell the following substrateproducts:

| Product                | ** ** | ** **                |
|------------------------|------------|---------------------------|
| **Substrates**         | ** ** | **Diameter**              | ** ** | **Applications** |
| GaAs (semi-insulating) |       | 2”, 4”, 6” |   | ·  Power amplifiers and integrated circuits for  wireless handsets |
|                   |       |                      |   | ·  Direct broadcast television |
|                   |       |                      |   | ·  High-performance transistors |
|                   |       |                      |   | ·  Satellite communications |
| GaAs (semi-conducting) |       | 2”, 4”          |   | ·  LEDs |
|                   |       |                      |   | ·  Lasers |
|                   |       |                      |   | ·  Optical couplers |
| InP                    |       | 2”, 4”, 6” |   | ·  Broadband and Fiber optic communications |
| Ge                     |       | 2”, 4”          |   | ·  Satellite solar cells |

 

We manufacturecompound semiconductor substrates using our proprietary vertical gradientfreeze, or VGF, technology.  Our in-houseVGF 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 threemajority-owned and two minority-owned joint ventures in China which provide us favorable pricing, reliablesupply and enhanced sourcing lead-times for key raw materials which are centralto our final manufactured products.  These joint ventures produceproducts including 99.99% pure gallium (4N Ga), high purity gallium, arsenic,germanium, germanium dioxide, paralytic boron nitride (pBN) crucibles and boronoxide. AXT’s ownership interest in these entities ranges from 25% to 83%. Weconsolidate the three ventures in which we own a majority or controllingfinancial interest and employ equity accounting for the two joint ventures inwhich we have a 25% interest. We purchase portions of the materials produced bythese ventures for our own use and the joint ventures sell the remainder oftheir production to third parties.

Revenue increased$4.1 million, or 47.9%, to $12.5 million for the three months ended March 31,2007 from $8.5 million for the same period of 2006 primarily due to ourimproved quality, higher customer demands for six-inch diameter wafers, and anincrease in raw material sales. As of March 31, 2007, we had available cash,cash equivalents 

16

----

***and short-term investments of $36.6 million, excludingrestricted deposits.***

***DiscontinuedOpto-Electronics Business***

In the threemonths ended March 31, 2007, we dissolved the corporation that operated ourdiscontinued operations that related to our opto-electronics business andtransferred the cash balance to our continuing operations. Accordingly, we nolonger 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 inthe discontinued operations.

***RestructuringCharges***

During the threemonth period ended March 31, 2007, we incurred no restructuring charges. Duringthe three month period ended March 31, 2006, we recognized a $2,000 benefitrelated to an adjustment to a prior accrual. As of March 31, 2007 and December31, 2006, we had a zero balance for the restructuring accrual for workforcereduction and for future lease payments related to abandoned U.S. facilitieslocated in California that are no longer required to support production, asthese have all been paid.

**Critical Accounting Policies and Estimates**

We have preparedour condensed consolidated financial statements in accordance with accountingprinciples generally accepted in the United States of America. As such, we havehad to make estimates, assumptions and judgments that affect the amountsreported on our financial statements. These estimates, assumptions andjudgments about future events and their effects on our results cannot bedetermined with certainty, and are made based upon our historical experienceand on other assumptions that are believed to be reasonable under thecircumstances. These estimates may change as new events occur oradditional information is obtained, and we may periodically be faced withuncertainties, the outcomes of which are not within our control andmay not be known for a prolonged period of time. The discussion andanalysis of our results of operations and financial condition are based uponthese condensed consolidated financial statements.

We have identifiedthe policies below as critical to our business operations and understanding of ourfinancial condition and results of operations.

A criticalaccounting policy is one that is both material to the presentation of ourfinancial statements and requires us to make difficult, subjective or complexjudgments that could have a material effect on our financial condition andresults of operations. They may require us to make assumptions aboutmatters that are highly uncertain at the time of the estimate, and differentestimates that we could have used, or changes in the estimate that are reasonablylikely to occur, may have a material impact on our financial condition orresults of operations.

We believe thatthe following are our critical accounting policies:

***RevenueRecognition***

We manufacture andsell high-performance compound and single element semiconductor substrates andsell certain raw materials including gallium, germanium dioxide and pBNcrucibles. After we ship our products, there are no remaining obligations orcustomer acceptance requirements that would preclude recognition of the revenueearned on the sale. Our products are typically sold pursuant to a purchaseorder placed by our customers, and our terms and conditions of sale do notrequire customer acceptance. We recognize revenue upon shipment and transfer oftitle of products to our customers, which is ordinarily upon shipment from ourdock, receipt at the customer’s dock, or removal from consignment inventory atthe customer’s location, provided that we have received a signed purchaseorder, the price is fixed or determinable, title and risk of ownership havetransferred, collection of resulting receivables is probable, and productreturns are reasonably estimable. We do not provide training, installation orcommissioning services.

We provide forfuture returns based on historical experience, current economic trends andchanges 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, “*HowTaxes Collected from Customers and Remitted to Government Authorities Should bePresented in the Income Statement (That Is, Gross versus Net Presentation)”*.We have historically presented, and will continue to present sales tax, valueadded tax, and other similar taxes on a net basis, excluding them from revenue.

17

----

***Allowancefor Doubtful Accounts***

We periodicallyreview the likelihood of collection on our accounts receivable balances andprovide an allowance for doubtful accounts receivable primarily based upon theage of these accounts. We provide a 100% allowance for receivables from U.S.customers in excess of 90 days and for receivables from customers locatedoutside the U.S. in excess of 120 days. We assess the probability of collectionbased on a number of factors, including the length of time a receivable balancehas been outstanding, our past history with the customer and theircreditworthiness.

As ofMarch 31, 2007 and December 31, 2006, our accounts receivable, net,balance was $8.6 million and $9.7 million, respectively, which was net of anallowance for doubtful accounts of $0.1 million and $0.1 million, respectively.If actual uncollectible accounts differ substantially from our estimates,revisions to the estimated allowance for doubtful accounts would be required, whichcould have a material impact on our financial results for the period.

***WarrantyReserve***

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

***InventoryValuation***

Inventories arestated at the lower of cost or market. Cost is determined using the weightedaverage cost method. Our inventory consists of raw materials as well asfinished goods and work-in-process that include material, labor andmanufacturing overhead costs. Given the nature of our substrate products, andthe materials used in the manufacturing process, the wafers and ingotscomprising work-in-process may be held in inventory for up to two yearsand three years, respectively, as the risk of obsolescence for these materialsis low. We routinely evaluate the levels of our inventory in light of currentmarket conditions in order to identify excess and obsolete inventory, and weprovide a valuation allowance for certain inventories based upon the age andquality of the product and the projections for sale of the completed products.As of March 31, 2007 and December 31, 2006, we had an inventoryreserve of $14.5 million and $15.4 million for excess and obsolete inventory,respectively. The majority of this inventory has not been scrapped, andaccordingly, may be sold in future periods. If actual demand for our productswere to be substantially lower than estimated, additional inventory adjustmentsfor excess or obsolete inventory might be required, which could have a materialimpact on our business, financial condition and results of operations.

***Impairmentof Investments***

We classify ourinvestments in debt and equity securities as available-for-sale securities asprescribed by Statement of Financial Accounting Standards (“SFAS”)No. 115, *“Accounting for CertainInvestments in Debt and Equity Securities”.*All available-for-salesecurities with a quoted market value below cost (or adjusted cost) arereviewed in order to determine whether the decline is other-than-temporary.Factors considered in determining whether a loss is temporary include themagnitude of the decline in market value, the length of time the market value hasbeen below cost (or adjusted cost), credit quality, and our ability and intentto hold the securities for a period of time sufficient to allow for anyanticipated recovery in market value.

We invest inequity instruments of privately-held companies for business and strategicpurposes. These investments are classified as other assets and are accountedfor under the cost method as we do not have the ability to exercise significantinfluence over their operations. We monitor our investments for impairment andwould record reductions in carrying value when events or changes incircumstances indicate that the carrying value may not be recoverable.Determination of impairment is highly subjective and is based on a number offactors, 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 ourcost basis, the financial condition and near-term prospects of the investee,fundamental changes to the business prospects of the investee, share prices ofsubsequent offerings, and our intent and ability to hold the investment for aperiod of time sufficient to allow for any anticipated recovery in our carryingvalue.

***Impairmentof Long-Lived Assets***

We evaluate therecoverability of property, equipment and intangible assets in accordance withSFAS No. 144, 

18

----

*“Accountingfor the Impairment or Disposal of Long-Lived Assets.”* Whenevents and circumstances indicate that long-lived assets may be impaired,we compare the carrying value of the long-lived assets to the projection offuture undiscounted cash flows attributable to these assets. In the event thatthe carrying value exceeds the future undiscounted cash flows, we record animpairment charge against income equal to the excess of the carrying value overthe assets’ fair value. Fair values are determined based on quoted marketvalues, discounted cash flows or internal and external appraisals, asapplicable. Assets held for sale are carried at the lower of carrying value orestimated net realizable value.

***EmployeeStock Options***

We grant optionsto substantially all management employees and believe that this program helpsus to attract, motivate and retain high quality employees, to the ultimatebenefit of our stockholders. Effective January 1, 2006, we adopted thefair value recognition provisions of SFAS No. 123 (revised 2004), “*Share-Based Payment*” (“SFAS 123(R)”),using the modified prospective application transition method. Under thistransition method, stock-based compensation cost was recognized in thecondensed consolidated financial statements for all share-based payments afterJanuary 1, 2006. Compensation cost recognized includes the estimatedexpense for the portion of the vesting period after January 1, 2006 forshare-based payments prior to, but not vested as of January 1, 2006, basedon the grant date fair value estimated in accordance with the originalprovisions of SFAS 123, “*Accounting for Stock-BasedCompensation.”* Results for prior periods have not been restated, asprovided for under the modified prospective application transitionmethod. As of the date of the filing of this quarterly report, we believethere have been no material changes to our critical accounting policy onemployee stock options during the three months ended March 31, 2007 compared tothat disclosed in our Annual Report on Form 10K for the fiscal year endedDecember 31, 2006 filed with the SEC on March 23, 2007. See Note 3 to ourcondensed consolidated financial statements.

***IncomeTaxes***

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

We provide forincome taxes based upon the geographic composition of worldwide earnings andtax regulations governing each country, including particularly the People’sRepublic of China. The calculation of tax liabilities involves significantjudgment in estimating the impact of uncertainties in the application ofcomplex tax laws, particularly in foreign countries such as the People’sRepublic of China.

In July 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No.48, “**Accountingfor Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN48”)**. FIN 48 clarifies the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements in accordance withSFAS 109. This interpretation prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. FIN 48 also providesguidance on derecognition of tax benefits, classification on the balance sheet,interest and penalties, accounting in interim periods, disclosure, andtransition. We adopted FIN 48 effective January 1, 2007. We recognizeinterest and penalties related to uncertain tax positions in income taxexpense. As of March 31, 2007, we do not have any gross unrecognized taxbenefits, nor any accrued interest and penalties related to uncertain taxpositions. As a result of the implementation of FIN 48, we identified$14.4 million in unrecognized tax benefits. This amount decreased the taxloss 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 foreignjurisdictions. We have substantially concluded all U.S. federal and stateincome tax matters through December 31, 2006.

19

----

**Resultsof 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 | % |

 

----

NM = % notmeaningful

Revenue increased$4.1 million, or 47.9%, to $12.5 million for the three months endedMarch 31, 2007 from $8.5 million for the three months ended March 31,2006. Total GaAs substrate revenue increased $2.0 million, or 30.2%, to $8.8million for the three months ended March 31, 2007 from $6.8 million forthe three months ended March 31, 2006.

Sales of 5 inchand 6 inch diameter GaAs substrates were $4.0 million for the three monthsended March 31, 2007 compared to $2.8 million for the three months endedMarch 31, 2006. The increase in larger diameter substrate revenue was dueto the fact that, while the GaAs device market grew in strength for bothcellular and the WLAN (Wide Local Area Network) markets, the compoundsemiconductor industry has been experiencing capacity constraints, particularlyin 6 inch; with our excess capacity, we were able to benefit from the overflowbusiness from our competition.  In thethree months ended March 31, 2007, we experienced a decrease in 6-inch diameterwafer sales from the prior quarter which was primarily due to the delay inBIFET qualifications of certain customers and less than expected orders from afew handset market customers.

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

InP substraterevenue increased $222,000, or 75.0%, to $518,000 for the three months endedMarch 31, 2007 from $296,000 for the three months ended March 31, 2006.The increase in InP substrate revenue was due to greater overall demand fromcustomers in the optical networking industry.

Ge substraterevenue increased $505,000, or 1,402.8%, to $541,000 for the three months endedMarch 31, 2007 from $36,000 for the three months ended March 31,2006. The increase in Ge substrate revenue was due to an increase in customersin the People’s Republic of China and to a customer in Germany who has nowqualified our product, as demand for photovoltaic applications increases.

Raw materialsrevenue increased $1.2 million, or 90.0%, to $2.6 million for the three monthsended March 31, 2007 from $1.4 million for the three months endedMarch 31, 2006. The increase in raw materials revenue was primarily due tosales of gallium to three new customers in Japan as the demand for galliumincreases. We do not expect this demand to continue at this pace.

20

----

***Revenueby 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 | % |

 

----

*                                         Primarilythe United States

North Americarevenue increased by $1.4 million, or 70.6%, to $3.3 million for the threemonths ended March 31, 2007 from $2.0 million for the three months endedMarch 31, 2006. We believe our quality has improved as shown by customersthat have qualified our products manufactured in the PRC as sales to existingcustomers increased by $0.8 million, while we gained $0.6 million in sales tonew customers.

Europe revenueincreased by $0.7 million, or 46.9%, to $2.1 million for the three months endedMarch 31, 2007 from $1.4 million for the three months ended March 31,2006. This increase came primarily from increased substrate sales to customersin Germany, France and Switzerland.

Japan revenueincreased by $1.7 million, or 258.3%, to $2.4 million for the three monthsended March 31, 2007 from $0.7 million for the three months endedMarch 31, 2006. The increase came from 3 new customers for raw materialsamounting to $1.2 million, while substrate sales to existing customersincreased by $0.5 million.

Taiwan revenueincreased by $0.3 million, or 19.7%, to $1.8 million for the three months endedMarch 31, 2007 from $1.5 million for the three months ended March 31,2006. The increase of $0.3 million was due to slightly higher demand fromexisting customers.

Asia Pacific(excluding Japan and Taiwan) revenue remained steady at $2.9 million for thethree months ended March 31, 2007 and 2006. Sales to customers in the PRCincreased by $0.3 million, and to customers in Korea and Malaysia by $0.1million, offset by a decrease in sales to customers in Singapore of $0.4million.

21

----

***GrossMargin***

|                  | ** ** | **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         | %          |           |       |   |   |
|                  |            |                                  |            |              |            |                |            |  |  |  |  |  |

 

Gross margin increased to43.2% of total revenue for the three months ended March 31, 2007 from17.8% of total revenue for the three months ended March 31, 2006. Grossmargin in the three months ended March 31, 2007 was positively impacted bysales of approximately $785,000 of gallium arsenide (GaAs) wafers that werepreviously fully reserved. Product mix also contributed to higher gross marginsas we sold a greater amount of InP substrates, as well as larger diameter GaAswafers, both of which contributed higher gross margins. In addition, we hadmanufacturing equipment that became fully depreciated since the third quarterof 2006, and the absence of depreciation expense for this equipment contributedapproximately 2.6 percentage points to gross margin in the three months endedMarch 31, 2007. Finally, higher substrate gross margins were also achievedthrough better slicing techniques, longer length ingot growth, shorterruntimes, and higher production volumes, partially offset by higher prices ofraw materials for gallium and arsenic. Gross margin in the three months endedMarch 31, 2006 was positively impacted by sales of approximately $569,000of GaAs wafers that were previously fully reserved.

***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         | %          |           | * *   | * * |   |
|                                               |            |                                  |            |              |            |                |            |  |  |  |  |  |

 

Selling, generaland administrative expenses increased $0.5 million to $3.7 million for thethree months ended March 31, 2007 from $3.2 million for the three monthsended March 31, 2006. The increase was primarily due to $0.4 million inaccrued legal fees, which is our portion of the settlement of the securitiesclass action lawsuit reached on April 24, 2007. Of the total amount of thesettlement, we are responsible only for the amount remaining in our insuranceretention, approximately $0.4 million which we accrued as of March 31, 2007.The remaining $0.1 million increase in selling, general and administrativeexpenses in the quarter was due to increased consulting fees for compliancewith the Sarbanes-Oxley Act of 2002.

***Researchand 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 anddevelopment expenses decreased $0.1 million, or 13.9% to $0.5 million for thethree months ended March 31, 2007 from $0.5 million for the three months endedMarch 31, 2006, from savings in salary and related costs as a result of theretirement of Dr. Morris Young, our former Chief Technology Officer effectiveDecember 31, 2006.

22

----

***Restructuring Charges***

|                       | ** ** | **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         | )%         |           |       |   |   |
|                       |            |                                  |            |              |            |                |            |  |  |  |  |  |

 

Duringthe three months ended March 31, 2007, we incurred no restructuring charges.During the three months ended March 31, 2006, we recognized a $2,000 benefitrelated to an adjustment to a prior accrual.

***InterestIncome, 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          | %          |           |       |   |   |
|                      |            |                                  |            |              |            |                |            |  |  |  |  |  |

 

Interestincome, net increased $96,000 to $224,000 for the three months ended March 31,2007 from $128,000 for the three months ended March 31, 2006 as a result ofhigher balances of our investments which came from the net proceeds of ourpublic offering of common stock, completed in December 2006 and January2007.

***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          | %          |           |       |   |   |
|                             |            |                                  |            |              |            |                |            |  |  |  |  |  |

 

Otherexpense was $11,000 for the three months ended March 31, 2007 due to theminority interests in our joint ventures. Other income was $238,000 for thethree months ended March 31, 2006 due to a realized gain of $376,000 on thesale of shares of common stock of Finisar Corporation held by us, partiallyoffset by minority interests in our joint ventures.

***Provisionfor 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          | %          |           |       |   |   |
|                             |            |                                  |            |              |            |                |            |  |  |  |  |  |

 

Weprovided for income taxes of $111,000 for our China operations for the threemonths ended March 31, 2007 compared to $318,000 for the three month periodended March 31, 2006. The decrease in provision is due to lower tax rates inone of our China joint ventures.

23

----

***Gain from DiscontinuedOperations***

|                                    | ** ** | **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 thethree months ended March 31, 2007, we dissolved the corporation that operatedour discontinued operations that related to our opto-electronics business andtransferred the cash balance to our continuing operations. Accordingly, we nolonger have discontinued operations. In the three months ended March 31, 2006,the $1,000 in income was from interest income on cash balances held in thediscontinued operations.

**Liquidity and Capital Resources**

As ofMarch 31, 2007, our principal sources of liquidity were $36.6 million incash and cash equivalents and short-term investments, excluding restricteddeposits. We consider cash and cash equivalents and short-term investments asliquid and available for use. Short-term investments are comprised ofgovernment bonds and high-grade commercial debt instruments.

Cash and cash equivalentsand short-term investments increased $1.1 million to $36.6 million as of March 31, 2007compared with $35.5 million as of December 31, 2006. Included in this increaseare the net proceeds of $3.7 million received from the public offering of 862,500 shares of our common stock inJanuary 2007, partially offset by the purchase of machinery andequipment of $1.2 million, payments of long-term debt of$0.2 million, and the continual funding of our operations.

Netcash used in operating activities of $1.5 million for the three month periodended March 31, 2007 was primarily comprised of our net income of $1.3 million,adjusted for non-cash items of depreciation of $0.3 million, and stock basedcompensation of $0.1 million, and offset by a net increase of $3.3 million inassets and liabilities. The net increase in assets and liabilities resultedfrom a $4.1 million increase in inventories, $0.5 million decrease in otherlong-term liabilities, $0.7 million decrease in accounts payable, $0.2 millionincrease in other assets, partially offset by a $1.1 million decrease in accountsreceivable, net, $0.7 million increase in accrued liabilities, and a $0.4million decrease in prepaid expenses.

Inventories,increased by $4.1 million, or 20.4%, to $24.4 million as of March 31, 2007compared with $20.3 million as of December 31, 2006, as we increased inventoryin raw materials and work-in-process to increase production in anticipation ofincreased forecast sales.

Accountsreceivable, net decreased by $1.1 million, or 11.4%, to $8.6 million as ofMarch 31, 2007 compared with $9.7 million as of December 31, 2006. The decreasewas primarily a result of our improved collections. Our days sales outstandingis 62 days as of March 31, 2007 compared to 68 days as of December 31, 2006.

Netcash used in investing activities of $3.1 million for the three months endedMarch 31, 2007 was primarily for the purchase of investments totaling $5.1million, the purchase of property, plant and equipment, of $1.2 million,partially offset by the proceeds from sale of investments of $3.1 million andthe decrease of restricted cash of $0.2 million.

Weexpect to invest approximately $3.7 million in capital projects for theremainder of 2007. We believe that our existing and planned facilities andequipment are sufficient to fulfill current and expected future orders.

Netcash provided by financing activities of $3.5 million for the three monthsended March 31, 2007 consisted of $3.7 million net proceeds from the issuanceof 862,500 shares of common stock as a result of our January 2007follow-on stock offering, partially offset by payments of $0.2 millionrelated to long-term borrowings.

Ourmain Fremont, California facility is financed by long-term borrowings, whichwere refinanced by taxable variable rate revenue bonds in 1998. These bondsmature in 2023 and bear interest at a variable rate that was 5.42% as of March31, 2007. The bonds are traded in the public market. Repayment of principal andinterest under the bonds is supported by a letter of credit from our bank andis paid on a quarterly basis. We have the option to redeem the bonds in wholeor in part during their term. As of March 31, 2007, $7.0 million wasoutstanding under these bonds.

As ofMarch 31, 2007,the credit facility maintained by us with a bank included a letter of creditsupporting repayment of our revenue bonds with an outstanding amount of $7.0million. We have pledged and placed a like amount of investment securities withan affiliate of the bank as additional collateral for this facility.

24

----

Webelieve that we have adequate cash and investments to meet our needs over thenext 12 months. If our performance fails to improve, we will continue to usecash and may at some time be forced to seek additional capital. There can be noassurance that such additional capital will be available or, if available itwill be at terms acceptable to us. Cash from operations could be affected byvarious risks and uncertainties, including, but not limited to those set forthbelow under Item 1A “Risks Factors.”

Outstandingcontractual obligations as of March 31, 2007 are summarized as follows (inthousands):
| ** **                       | ** ** | **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 |   |

 

Welease certain office space, manufacturing facilities and property underlong-term operating leases expiring at various dates through March 2013. Totalrent payments under these operating leases were approximately $0.2 million and$0.3 million for the three month periods ended March 31, 2007 and 2006,respectively.

OnFebruary 27, 2007, we entered into an agreement with Recapture MetalsLimited of Ontario, Canada (“Recapture”), pursuant to which Recapture willsupply our subsidiary in the PRC with one thousand kilograms per month of99.99999% pure gallium, during the eighteen month period beginning July 1,2007. Under the terms of the agreement, we are required to purchase a minimumof eighteen thousand kilograms of gallium, unless the agreement is terminatedprior to the expiration of the eighteen month period on December 31, 2008.

**RecentAccounting Pronouncements**

InJune 2006, the FASB ratified the consensus reached by the Emerging IssuesTask Force (“EITF”) regarding EITF Issue No. 06-03, “*How Taxes Collected from Customers and Remitted toGovernment Authorities Should be Presented in the Income Statement (That Is,Gross versus Net Presentation)”*. This guidance requires thatcompanies disclose their accounting policy related to sales tax and othersimilar taxes, which was effective for us beginning January 1, 2007. Wereport these taxes on a net basis, excluding them from revenue.

In September 2006,the FASB issued SFAS No. 157, “*FairValue Measurements”*(“SFAS 157”). SFAS 157 defines fair value,establishes a framework for measuring fair value in accordance with generallyaccepted accounting principles and expands disclosures about fair valuemeasurements. The provisions of SFAS 157 are effective for the fiscal yearbeginning after November 15, 2007. We are currently evaluating the impactof the provisions of SFAS 157 on our financial position, results of operationsor cash flows and do not believe the impact of the adoption will be material.

InFebruary 2007, the FASB issued SFAS No. 159, “*The Fair Value Option for Financial Assets andFinancial Liabilities—Including an amendment of FASB Statement No. 115” “*(SFAS159”). SFAS 159 permits entities to choose to measure many financialinstruments and certain other items at fair value with the objective ofimproving financial reporting by providing entities with the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently. The provisions of SFAS 159 are effective for thefiscal year beginning after November 15, 2007. We are currently evaluatingthe impact of the provisions of SFAS 159 on our financial position, results ofoperations or cash flows and do not believe the impact of the adoption will bematerial.

**ITEM3*.*QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

**ForeignCurrency Exchange Rate Exposure**

We operate in theUnited States, manufacture in the People’s Republic of China (“PRC”), and thesubstantial majority of our sales to date have been made in U.S. dollars.Certain expenses from our PRC operations are incurred in the PRC’s Renminbi. Asa result, currency fluctuations between the U.S. dollar and the Renminbi couldcause foreign currency transaction gains or losses that we would recognize inthe period incurred. For example, a 10% fluctuation in the dollar atMarch 31, 2007 would have an immaterial impact on our net dollar position inoutstanding trade payables and receivables.

In July 2005,the PRC uncoupled the Renminbi from the U.S. dollar and began to permit it tofloat in a narrow band against a basket of foreign currencies. The moverevalued Renminbi by 2.1% against the U.S. dollar; however, it is uncertain whatfurther adjustments will follow. The Renminbi-U.S. dollar exchange rate couldfloat, and the Renminbi could appreciate relative to the U.S. dollar.

25

----

We expect ourinternational revenues and expenses to continue to be denominated largely inU.S. dollars. We also believe that our PRC operations will likely expand in thefuture as our business continues to grow. As a result, we anticipate that wemay experience increased exposure to the risks of fluctuating currencies andmay choose to engage in currency hedging activities to reduce these risks.However, we cannot be certain that any such hedging activities will beeffective, or available to us at commercially reasonable rates.

**InterestRate Risk**

Cashand cash equivalents earning interest and certain variable rate debtinstruments are subject to interest rate fluctuations. The following table setsforth 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 |   |
|                                            |            |                                                   |            |                             |            |                                                       |            |                                                                      |            |                                                                       |            |  |  |  |  |

 

**EquityRisk**

Wemaintain minority investments in privately-held companies. These investmentsare reviewed for other than temporary declines in value on a quarterly basis.These investments are classified as other assets in the consolidated balancesheets and are accounted for under the cost method as we do not have theability to exercise significant influence over their operations. We monitor ourinvestments for impairment and record reductions in carrying value when eventsor changes in circumstances indicate that the carrying value may not berecoverable. Reasons for other than temporary declines in value include whetherthe related company would have insufficient cash flow to operate for the nexttwelve months, significant changes in the operating performance and changes inmarket conditions. The minority investments totaled $0.4 million as ofDecember 31, 2006 and March 31, 2007.

26

----

**ITEM4T*.*CONTROLS AND PROCEDURES**

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

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

27

----

**PART II. OTHER INFORMATION**

**Item1. Legal Proceedings**

Fromtime to time we may be involved in judicial or administrative proceedingsconcerning matters arising in the ordinary course of business. We do not expectthat any of these matters, individually or in the aggregate, will have amaterial adverse effect on our business, financial condition, cash flows orresults of operation.

OnOctober 15, 2004, a purported securities class action lawsuit was filed in theUnited States Court for the Northern District of California, City of HarperWoods Employees Retirement System v. AXT, Inc. et al., No. C 04 4362 MJJ. TheCourt consolidated the case with a subsequent related case and appointed a leadplaintiff. 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 lawsuitcomplaint names AXT, Inc. and our chief technology officer as defendants, andis brought on behalf of a class of all purchasers of our securities fromFebruary 6, 2001 through April 27, 2004. The complaint alleges that weannounced financial results during this period that were false and misleading.No specific amount of damages is claimed. On September 23, 2005, the Courtgranted our motion to dismiss the complaint, with leave to amend. The leadplaintiff filed an amended complaint, which we had moved to dismiss. On April24, 2007, we reached a settlement of this litigation for which we areresponsible only for the amount remaining in our insurance retention. Weaccrued the remaining amount of the retention (approximately $350,000) as ofMarch 31, 2007.

OnJune 1, 2005, a lawsuit was filed in the Superior Court of California, Countyof Alameda, Zhao et al. v. American Xtal Technology, et al., No. R 605215713.The lawsuit complaint names as defendants AXT, Inc., our chief technologyofficer and one of our suppliers. The lawsuit was brought on behalf of twoformer employees and their minor child. The complaint alleged personal injury,general negligence, intentional tort, wage loss and other damages, includingpunitive damages, as a result of exposure of the child while in utero to highlevels of gallium arsenide and methanol used in the production of galliumarsenide wafers. On April 23, 2007, we reached a settlement of this litigation,all of which is covered by our insurance carriers.

**Item1A. Risk Factors**

There are no material changes from the risk factors set forthunder Part I, Item 1A. "Risk Factors" in our Annual Report onForm 10-K for the fiscal year ended December 31, 2006, provided,however, that the two litigation matters described under the risks disclosedunder the captions “***Ifwe fail to comply with environmental and safety regulations, we may besubject to significant fines or forced to cease our operations; in addition, wecould be subject to suits for personal injuries caused by hazardous materials”***and***“Existing or future litigationcould result in significant judgments against us, or cause us to incur costlysettlements.”***  These two settled matters comprise (i) thecomplaint filed against us and a current and former officer, allegingpersonal injury, general negligence, intentional tort, wage loss and otherdamages 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 galliumarsenide wafers, and methanol, and (ii) the ongoing securities litigationmatter.

**Item2. Unregistered Sales of Equity Securities and Use of Proceeds**

***Use of Proceeds***

On December 19, 2006 andJanuary 9, 2007, we sold 5,750,000 shares and 862,500 shares, respectively, ofour common stock in a firmly underwritten public offering pursuant to aregistration statement on Form S-3 (SEC file number 333-135474), which was declaredeffective by the SEC on August 3, 2006, and a registration statement on FormS-3MEF (SEC file number 333-139365), which was effective upon filing with theSEC 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 continueto be used for corporate and joint venture capacity expansion, research anddevelopment and working capital requirements, as well as potential acquisitionsof complementary products, technologies or businesses.

**Item 3. Defaults upon SeniorSecurities**

None

**Item4. Submission of Matters to a Vote of Security Holders**

None

**Item5. Other Information**

None

28

----

**Item6. Exhibits**

**a.Exhibits**
| Exhibit Number | ** ** | **Description**                                                                                                                                      |
|----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.22(1)       |       | Agreement with recapture Metals Limited dated  February 27, 1007.                                                                                    |
|           |       |                                                                                                                                                 |
| 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)          Incorporatedby reference to the exhibit of the same number filed with the SEC with ourCurrent Report on Form 8-K on March 5, 2007.

29

----

**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this Report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                      | AXT, INC. |
|----------------------|-----------|
|                 |      |   |
| Dated: May 11,  2007 | 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) |

 

30

----

**EXHIBIT INDEX**
| Exhibit  Number | ** ** | **Description**                                                                                                                                      |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.22(1)        |       | Agreement with Recapture Metals Limited dated  February 27, 2007.                                                                                    |
|            |       |                                                                                                                                                 |
| 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 byreference to the exhibit as of the same number as filed with the SEC in ourCurrent Report on Form 8-K on March 5, 2007.

31

----