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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC. 20549



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FORM 10-Q

(Mark One)

|     |  |                                                                                                          
|---- |  | ---------------------------------------------------------------------------------------------------------
|XBOX |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly
|     |  | period ended March 31, 2002                                                                              

or

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

Commission File Number 0-24085



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AXT, INC.

(Exact name of registrant as specified in its charter)


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

4281 Technology Drive, Fremont, California 94538
(Address of principal executive offices) (Zip code)
(510) 683-5900
(Registrants telephone number, including area code)



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

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

|                              |  |                              
|----------------------------- |  | -----------------------------
|Class                         |  | Outstanding at March 31, 2002
|                             
|                             
|                             
|                             
|Common Stock, $.001 par value |  | 22,432,192                   

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TABLE OF CONTENTS



|                              |                                                                                               |                                                             |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED INCOME STATEMENTS                   
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS       
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Qualitative and Quantitative Disclosures About Market Risk                           
|PART II OTHER INFORMATION    
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 6. Exhibits and reports on Form 8-K                                                     
|                              | SIGNATURES                                                                                   



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##### Table of Contents



AXT, INC.

TABLE OF CONTENTS

|        |  |                       |  |                                                                                                    |  |      
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|PART I  |  | FINANCIAL INFORMATION |  | Page                                                                                              
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|        |  | Item 1.               |  | Financial Statements                                                                               |  |      
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|        |  |                       |  | Condensed Consolidated Balance Sheets at March 31, 2002 and December 31, 2001                      |  | 3    
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Consolidated Income Statements for the three months ended March 31, 2002 and 2001        |  | 4    
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Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and 2001 |  | 5    
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|        |  |                       |  | Notes To Condensed Consolidated Financial Statements                                               |  | 6-11 
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|        |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 12-27
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|        |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 28   
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|PART II |  | OTHER INFORMATION     |  |                                                                                                   
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|        |  | Item 1.               |  | Legal Proceedings                                                                                  |  | 29   
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|        |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                                   |  | 29   
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|        |  |                       |  | Signatures                                                                                         |  | 30   

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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Financial Statements

AXT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share data)

|                                      |                                          |                                                                                                                    |                            |        |             |         |              |        |         |         | 
|------------------------------------- | ---------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------ | ----------- | ------- | ------------ | ------ | ------- | ------- | 
|                                      |                                          |                                                                                                                    |                            |        | March 31,   |         | December 31,
|                                      |                                          |                                                                                                                    |                            |        | 2002        |         | 2001        
|                                      |                                          |                                                                                                                    |                            |        |             |         |             
|                                      |                                          |                                                                                                                    |                            |        | (Unaudited) |         |              |        |        
|Assets:                               |                                          |                                                                                                                    |                            |        |             |         |              |       
|                                     
|                                     
|                                     
|                                     
|                                      | Current assets
Cash and cash equivalents |                                                                                                                    | $                          | 37,745 |             |         | $            | 37,538 |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                          | Short-term investments                                                                                             |                            |        | 19,473      |         |              |        | 25,673  |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                          | Accounts receivable                                                                                                |                            |        | 14,409      |         |              |        | 15,684  |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                          | Inventories                                                                                                        |                            |        | 52,453      |         |              |        | 55,587  |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                          | Prepaid expenses and other current assets                                                                          |                            |        | 3,322       |         |              |        | 3,577   |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                          | Deferred income taxes                                                                                              |                            |        | 3,695       |         |              |        | 2,458   |        
|                                      |                                          |                                                                                                                    |                            |        |             |         |              |       
|                                      |                                          |                                                                                                                    | Total current assets       |        |             | 131,097 |              |        |         | 140,517 | 
|                                     
|                                     
|                                     
|                                     
|                                      | Property, plant and equipment            |                                                                                                                    |                            | 82,282 |             |         |              | 82,573 |        
|                                     
|                                     
|                                     
|                                     
|                                      | Other assets                             |                                                                                                                    |                            | 5,411  |             |         |              | 4,511  |        
|                                     
|                                     
|                                     
|                                     
|                                      | Goodwill                                 |                                                                                                                    |                            | 1,107  |             |         |              | 1,107  |        
|                                     
|                                     
|                                     
|                                     
|                                      | Long-term investments                    |                                                                                                                    |                            | 8,102  |             |         |              | 6,552  |        
|                                      |                                          |                                                                                                                    |                            |        |             |         |              |       
|                                      |                                          |                                                                                                                    | Total assets               |        | $           | 227,999 |              |        | $       | 235,260 | 
|                                      |                                          |                                                                                                                    |                            |        |             |         |              |       
|Liabilities and Stockholders Equity: |                                          |                                                                                                                    |                            |        |             |         |              |       
|                                     
|                                     
|                                     
|                                     
|                                      | Current liabilities
Accounts payable     |                                                                                                                    | $                          | 3,950  |             |         | $            | 2,943  |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                          | Accrued liabilities                                                                                                |                            |        | 11,858      |         |              |        | 13,670  |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                          | Current portion of long-term debt                                                                                  |                            |        | 2,180       |         |              |        | 2,336   |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                          | Current portion of capital lease obligation                                                                        |                            |        | 4,485       |         |              |        | 4,372   |        
|                                      |                                          |                                                                                                                    |                            |        |             |         |              |       
|                                      |                                          |                                                                                                                    | Total current liabilities  |        |             | 22,473  |              |        |         | 23,321  | 
|                                     
|                                     
|                                     
|                                     
|                                      |                                          | Long-term debt, net of current portion                                                                             |                            |        | 14,169      |         |              |        | 14,342  |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                          | Long-term capital lease, net of current portion                                                                    |                            |        | 8,720       |         |              |        | 10,002  |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                          | Other long-term liabilities                                                                                        |                            |        | 1,218       |         |              |        | 1,273   |        
|                                      |                                          |                                                                                                                    |                            |        |             |         |              |       
|                                      |                                          |                                                                                                                    | Total liabilities          |        |             | 46,580  |              |        |         | 48,938  | 
|                                      |                                          |                                                                                                                    |                            |        |             |         |              |       
|                                      | Stockholders equity:                    |                                                                                                                    |                            |        |             |         |              |        |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                          | Preferred stock, $.001 par value; 2,000 shares authorized; 883
shares issued and outstanding                       |                            |        | 3,532       |         |              |        | 3,532   |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                          | Common stock, $.001 par value per share; 70,000 shares authorized;
22,432 and 22,383 shares issued and outstanding |                            |        | 154,064     |         |              |        | 153,635 |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                          | Retained earnings                                                                                                  |                            |        | 25,426      |         |              |        | 28,984  |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                          | Other comprehensive income (loss)                                                                                  |                            |        | (1,603      | )       |              |        | 171     |        
|                                      |                                          |                                                                                                                    |                            |        |             |         |              |       
|                                      |                                          |                                                                                                                    | Total stockholders equity |        |             | 181,419 |              |        |         | 186,322 | 
|                                      |                                          |                                                                                                                    |                            |        |             |         |              |       
|                                      |                                          | Total liabilities and stockholders equity                                                                         |                            | $      | 227,999     |         |              | $      | 235,260 |        
|                                      |                                          |                                                                                                                    |                            |        |             |         |              |        |        

See accompanying notes to these unaudited condensed consolidated financial statements.

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##### Table of Contents



AXT, INC.




CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)
(In thousands, except per share data)

|                                                |                                     |                          |        |                    |       |      |        |        |       | 
|----------------------------------------------- | ----------------------------------- | ------------------------ | ------ | ------------------ | ----- | ---- | ------ | ------ | ----- | 
|                                                |                                     |                          |        | Three Months Ended
|                                                |                                     |                          |        | March 31,         
|                                                |                                     |                          |        |                   
|                                                |                                     |                          |        | 2002               |       | 2001
|                                                |                                     |                          |        |                    |       |     
|Revenue                                         |                                     | $                        | 16,777 |                    |       | $    | 40,103 |       
|                                               
|                                               
|                                               
|                                               
|Cost of revenue                                 |                                     |                          | 16,484 |                    |       |      | 23,810 |       
|                                                |                                     |                          |        |                    |       |      |        |       
|Gross profit                                    |                                     |                          | 293    |                    |       |      | 16,293 |       
|                                               
|                                               
|                                               
|                                               
|Operating expenses:                             |                                     |                          |        |                    |       |      |        |       
|                                               
|                                               
|                                               
|                                               
|                                                | Selling, general and administrative |                          |        | 5,202              |       |      |        | 5,867  |      
|                                               
|                                               
|                                               
|                                               
|                                                | Research and development            |                          |        | 1,353              |       |      |        | 2,703  |      
|                                                |                                     |                          |        |                    |       |      |        |       
|                                                |                                     | Total operating expenses |        |                    | 6,555 |      |        |        | 8,570 | 
|                                                |                                     |                          |        |                    |       |      |        |       
|Income (loss) from operations                   |                                     |                          | (6,262 | )                  |       |      | 7,723  |       
|                                               
|                                               
|                                               
|                                               
|Interest expense                                |                                     |                          | 385    |                    |       |      | 629    |       
|                                               
|                                               
|                                               
|                                               
|Other (income)/expense                          |                                     |                          | (717   | )                  |       |      | (709   | )     
|                                                |                                     |                          |        |                    |       |      |        |       
|Income (loss) before provision for income taxes |                                     |                          | (5,930 | )                  |       |      | 7,803  |       
|                                               
|                                               
|                                               
|                                               
|Provision (benefit) for income taxes            |                                     |                          | (2,372 | )                  |       |      | 2,809  |       
|                                                |                                     |                          |        |                    |       |      |        |       
|Net income (loss)                               |                                     | $                        | (3,558 | )                  |       | $    | 4,994  |       
|                                                |                                     |                          |        |                    |       |      |        |       
|Basic income (loss) per share                   |                                     |                          | (0.16  | )                  |       |      | 0.23   |       
|                                               
|                                               
|                                               
|                                               
|Diluted income (loss) per share                 |                                     |                          | (0.16  | )                  |       |      | 0.22   |       
|                                               
|                                               
|                                               
|                                               
|Shares used in per share calculations:          |                                     |                          |        |                    |       |      |        |       
|                                               
|                                               
|                                               
|                                               
|                                                | Basic                               |                          |        | 22,414             |       |      |        | 22,097 |      
|                                               
|                                               
|                                               
|                                               
|                                                | Diluted                             |                          |        | 22,414             |       |      |        | 22,790 |      

See accompanying notes to these unaudited condensed consolidated financial statements.

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##### Table of Contents



AXT, INC.




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)

|                                                         |                                                                     |                                                     |                             |                                                     |        |                    |         |         |       |        |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------- | --------------------------------------------------- | --------------------------- | --------------------------------------------------- | ------ | ------------------ | ------- | ------- | ----- | ------ | ------- | -
|                                                         |                                                                     |                                                     |                             |                                                     |        | Three Months Ended
|                                                         |                                                                     |                                                     |                             |                                                     |        | March 31,         
|                                                         |                                                                     |                                                     |                             |                                                     |        |                   
|                                                         |                                                                     |                                                     |                             |                                                     |        | 2002               |         | 2001   
|                                                         |                                                                     |                                                     |                             |                                                     |        |                    |         |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                    |                                                                     |                                                     |                             |                                                     |        |                    |         |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Net income (loss):                                                  |                                                     | $                           | (3,558                                              | )      |                    | $       | 4,994   |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Adjustments to reconcile net income to cash provided by operations: |                                                     |                             |                                                     |        |                    |         |         |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     | Depreciation                                        |                             |                                                     | 2,582  |                    |         |         | 1,778 |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     | Amortization of goodwill and other non-cash charges |                             |                                                     | 66     |                    |         |         | 99    |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     | Non-cash (gain)/loss on marketable securities       |                             |                                                     | (251   | )                  |         |         |      |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     | Loss on disposal of Property, plant and equipment   |                             |                                                     | 296    |                    |         |         |      |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     | Changes in assets and liabilities:                  |                             |                                                     |        |                    |         |         |       |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     |                                                     | Accounts receivable         |                                                     |        | 1,275              |         |         |       | 1,390  |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     |                                                     | Inventories                 |                                                     |        | 3,134              |         |         |       | (6,041 | )      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     |                                                     | Prepaid expenses            |                                                     |        | 255                |         |         |       | (1,707 | )      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     |                                                     | Other assets                |                                                     |        | (432               | )       |         |       | 355    |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     |                                                     | Accounts payable            |                                                     |        | 1,007              |         |         |       | 1,865  |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     |                                                     | Accrued liabilities         |                                                     |        | (1,812             | )       |         |       | 5,800  |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     |                                                     | Other long-term liabilities |                                                     |        | (55                | )       |         |       | 127    |        
|                                                         |                                                                     |                                                     |                             |                                                     |        |                    |         |        
|                                                         |                                                                     |                                                     |                             | Net cash provided by operating activities           |        |                    | 2,507   |         |       |        | 8,660   |  
|                                                         |                                                                     |                                                     |                             |                                                     |        |                    |         |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                    |                                                                     |                                                     |                             |                                                     |        |                    |         |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Purchases of property, plant and equipment                          |                                                     |                             | (2,760                                              | )      |                    |         | (7,215  | )    
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Investment in marketable securities                                 |                                                     |                             | (1,911                                              | )      |                    |         | (18,722 | )    
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Proceeds from sale of marketable securities                         |                                                     |                             | 3,632                                               |        |                    |         | 1,034   |      
|                                                         |                                                                     |                                                     |                             |                                                     |        |                    |         |        
|                                                         |                                                                     |                                                     |                             | Net cash used in investing activities               |        |                    | (1,039  | )       |       |        | (24,903 | )
|                                                         |                                                                     |                                                     |                             |                                                     |        |                    |         |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                    |                                                                     |                                                     |                             |                                                     |        |                    |         |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Proceeds from (payments of):                                        |                                                     |                             |                                                     |        |                    |         |         |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     | Issuance of common stock                            |                             |                                                     | 429    |                    |         |         | 2,233 |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     | Capital leases payments                             |                             |                                                     | (1,169 | )                  |         |         | (712  | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     | Short-term bank borrowings                          |                             |                                                     |       |                    |         |         | 121   |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     | Long-term debt payments                             |                             |                                                     | (624   | )                  |         |         | (881  | )     
|                                                         |                                                                     |                                                     |                             |                                                     |        |                    |         |        
|                                                         |                                                                     |                                                     |                             | Net cash provided by (used in) financing activities |        |                    | (1,364  | )       |       |        | 761     |  
|                                                        
|                                                        
|                                                        
|                                                        
|Effect of exchange rate changes                          |                                                                     |                                                     | 103                         |                                                     |        |                    | (465    | )      
|                                                         |                                                                     |                                                     |                             |                                                     |        |                    |         |        
|Net increase (decrease) in cash and cash equivalents     |                                                                     |                                                     | 207                         |                                                     |        |                    | (15,947 | )      
|                                                        
|                                                        
|                                                        
|                                                        
|Cash and cash equivalents at the beginning of the period |                                                                     |                                                     | 37,538                      |                                                     |        |                    | 68,585  |        
|                                                         |                                                                     |                                                     |                             |                                                     |        |                    |         |        
|Cash and cash equivalents at the end of the period       |                                                                     | $                                                   | 37,745                      |                                                     |        | $                  | 52,638  |        
|                                                         |                                                                     |                                                     |                             |                                                     |        |                    |         |        
|Non cash activity:                                       |                                                                     |                                                     |                             |                                                     |        |                    |         |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Purchase of PP&E through financing                                  |                                                     | $                           | 295                                                 |        |                    | $       | 1,442   |      
|                                                         |                                                                     |                                                     |                             |                                                     |        |                    |         |        

See accompanying notes to these unaudited condensed consolidated financial statements.

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##### Table of Contents



AXT, INC.




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The accompanying condensed consolidated financial statements for the three
months ended March 31, 2002 and 2001 are unaudited. The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited condensed consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, considered necessary to present fairly the financial position,
results of operations and cash flows of AXT, Inc. (AXT or the Company) and
its subsidiaries for all periods presented. Certain prior period
reclassifications have been made to conform to the current period presentation.

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

The results of operations are not necessarily indicative of the results to
be expected in the future or for the full fiscal year. It is recommended that
these condensed consolidated financial statements be read in conjunction with
the Companys consolidated financial statements and the notes thereto included
in its 2001 Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 26, 2002.

Note 2. Gain on Demeter Warrants

The Company received approximately 1.1 million shares of Finisar
Corporation common stock as a result of the acquisition by Finisar Corporation
of all of the outstanding capital stock of Demeter Technologies. AXT held a
warrant in Demeter that it received in exchange for certain leases and
transferred technology. On November 21, 2000, a gain of $27.3 million was
recorded in other income as a result of the transaction. On December 10, 2001,
the Company received approximately 86,000 additional shares of common stock of
Finisar Corporation that had been held in escrow in accordance with the terms
of the acquisition agreement between Demeter and Finisar. A gain of $1.1
million was recorded in other income as a result of receiving these additional
shares. On December 31, 2001, the Company wrote its investment in Finisar
Corporation down to current market value, in accordance with SFAS 115,
resulting in a realized loss of $16.7 million recorded in other income. On
February 4, 2002, the Company received approximately 24,000 additional shares
of common stock of Finisar Corporation that had been held in escrow in
accordance with the terms of the acquisition agreement between Demeter and
Finisar. A gain of $251,000 was recorded in other income as a result of
receiving these additional shares. The investment in the Finisar Corporation
common stock is accounted for as available for sale and classified as a
short-term investment.

6



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Note 3. Investments

The Company classifies its investment securities as available-for-sale
securities as prescribed by Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. All
investments are carried at fair market value, which is determined based on
quoted market prices, with net unrealized gains and losses included in
comprehensive income, net of tax. The components of investments at March 31,
2002 are summarized below (in thousands):

|                            |  |      |        |            |  |             |        |            |  |   |        |  
|--------------------------- |  | ---- | ------ | ---------- |  | ----------- | ------ | ---------- |  | - | ------ | -
|                            |  |      |        |            |  | Aggregate   |        | Unrealized
|Available for sale          |  | Cost |        | Fair value |  | Gain/(loss)
|                            |  |      |        |            |  |            
|Money market                |  | $    | 7,552  |            |  | $           | 7,552  |            |  |   |       |  
|                           
|                           
|                           
|                           
|Corporate bonds             |  |      | 14,713 |            |  |             | 14,713 |            |  |   |       |  
|                           
|                           
|                           
|                           
|Government agency bonds     |  |      | 3,825  |            |  |             | 3,822  |            |  |   | (3     | )
|                           
|                           
|                           
|                           
|Corporate equity securities |  |      | 11,943 |            |  |             | 9,040  |            |  |   | (2,903 | )
|                            |  |      |        |            |  |             |        |            |  |   |        |  
|                            |  | $    | 38,033 |            |  | $           | 35,127 |            |  | $ | (2,906 | )
|                            |  |      |        |            |  |             |        |            |  |   |        |  
|Recorded as:                |  |      |        |            |  |             |        |            |  |   |        |  
|                           
|                           
|                           
|                           
|Cash equivalents            |  | $    | 7,552  |            |  |             |        |            |  |   |        |  
|                           
|                           
|                           
|                           
|Short-term investments      |  |      | 19,473 |            |  |             |        |            |  |   |        |  
|                           
|                           
|                           
|                           
|Long-term investments       |  |      | 8,102  |            |  |             |        |            |  |   |        |  
|                            |  |      |        |            |  |             |        |            |  |   |        |  
|                            |  | $    | 35,127 |            |  |             |        |            |  |   |        |  
|                            |  |      |        |            |  |             |        |            |  |   |        |  

Note 4. Inventories

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

|                  |                 |                      |        |           |         |              |        |        |         |  
|----------------- | --------------- | -------------------- | ------ | --------- | ------- | ------------ | ------ | ------ | ------- | -
|                  |                 |                      |        | March 31, |         | December 31,
|                  |                 |                      |        | 2002      |         | 2001        
|                  |                 |                      |        |           |         |             
|Inventories, net: |                 |                      |        |           |         |              |        |       
|                 
|                 
|                 
|                 
|                  | Raw materials   |                      | $      | 22,030    |         |              | $      | 21,308 |        
|                 
|                 
|                 
|                 
|                  | Work in process |                      |        | 28,904    |         |              |        | 30,265 |        
|                 
|                 
|                 
|                 
|                  | Finished goods  |                      |        | 12,556    |         |              |        | 17,368 |        
|                 
|                 
|                 
|                 
|                  |                 | Valuation allowances |        |           | (11,037 | )            |        |        | (13,354 | )
|                  |                 |                      |        |           |         |              |        |       
|                  |                 |                      |        |           |         |              |        |       
|                  |                 | $                    | 52,453 |           |         | $            | 55,587 |       
|                  |                 |                      |        |           |         |              |        |       

During the three months ended March 31, 2002, the gross value of HBLED
work in process and finished goods inventory was written down to current cost
and the valuation allowance associated with this inventory was released. The
decrease in gross inventory offset by the decrease in the valuation allowance
had no effect on gross profit for the three months ended March 31, 2002.

Note 5. Net Income (loss) Per Share

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

7



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A reconciliation of the numerators and denominators of the basic and
diluted earnings per share calculations is summarized below (in thousands
except per share data):

|                                                                                 |                                                                           |                      |        |                    |   |      |        |        |     | 
|-------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | -------------------- | ------ | ------------------ | - | ---- | ------ | ------ | --- | 
|                                                                                 |                                                                           |                      |        | Three Months Ended
|                                                                                 |                                                                           |                      |        | March 31,         
|                                                                                 |                                                                           |                      |        |                   
|                                                                                 |                                                                           |                      |        | 2002               |   | 2001
|                                                                                 |                                                                           |                      |        |                    |   |     
|Numerator:                                                                       |                                                                           |                      |        |                    |   |      |        |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Net income (loss)                                                         |                      | $      | (3,558             | ) |      | $      | 4,994  |    
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Less: Preferred stock dividends                                           |                      |        | (44                | ) |      |        |       |    
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Net income (loss) available to common stockholders                        |                      | $      | (3,602             | ) |      | $      | 4,994  |    
|                                                                                 |                                                                           |                      |        |                    |   |      |        |       
|Denominator:                                                                     |                                                                           |                      |        |                    |   |      |        |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Denominator for basic earnings per share  weighted
average common shares |                      |        | 22,414             |   |      |        | 22,097 |    
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Effect of dilutive securities:                                            |                      |        |                    |   |      |        |        |    
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 |                                                                           | Common stock options |        |                    |  |      |        |        | 693 | 
|                                                                                 |                                                                           |                      |        |                    |   |      |        |       
|Denominator for dilutive earnings per share                                      |                                                                           | $                    | 22,414 |                    |   | $    | 22,790 |       
|                                                                                 |                                                                           |                      |        |                    |   |      |        |       
|Basic earnings per share                                                         |                                                                           | $                    | (0.16  | )                  |   | $    | 0.23   |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Diluted earnings per share                                                       |                                                                           | $                    | (0.16  | )                  |   | $    | 0.22   |       
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Options excluded from diluted net income per share as the impact is antidilutive |                                                                           |                      | 2,981  |                    |   |      | 818    |       

Note 6. Comprehensive Income

The components of comprehensive income are summarized below (in thousands):

|                                                         |  |                    |        |      |  |   |         |  
|-------------------------------------------------------- |  | ------------------ | ------ | ---- |  | - | ------- | -
|                                                         |  | Three Months Ended
|                                                         |  | March 31,         
|                                                         |  |                   
|                                                         |  | 2002               |        | 2001
|                                                         |  |                    |        |     
|Net Income (loss)                                        |  | $                  | (3,558 | )    |  | $ | 4,994   |  
|                                                        
|                                                        
|                                                        
|                                                        
|Foreign currency translation gain (loss)                 |  |                    | 103    |      |  |   | (465    | )
|                                                        
|                                                        
|                                                        
|                                                        
|Unrealized gain (loss) on available for sale investments |  |                    | (1,877 | )    |  |   | (12,839 | )
|                                                         |  |                    |        |      |  |   |         |  
|Comprehensive income (loss)                              |  | $                  | (5,332 | )    |  | $ | (8,310  | )
|                                                         |  |                    |        |      |  |   |         |  

Note 7. Segment Information

The Company has three reportable segments: substrates, opto-electronics
and discontinued consumer products. The segments in which the Company operates
are subject to rapid technological change and significant competition. Also,
the number of suppliers of certain materials used by the Company and the number
of customers are limited.

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Selected industry segment information is summarized below (in thousands):

|                                        |                                      |  |                    |         |      |  |   |         |  
|--------------------------------------- | ------------------------------------ |  | ------------------ | ------- | ---- |  | - | ------- | -
|                                        |                                      |  | Three Months Ended
|                                        |                                      |  | March 31,         
|                                        |                                      |  |                   
|                                        |                                      |  | 2002               |         | 2001
|                                        |                                      |  |                    |         |     
|Substrates Division                     |                                      |  |                    |         |      |  |   |        
|                                       
|                                       
|                                       
|                                       
|                                        | Net revenues from external customers |  | $                  | 11,739  |      |  | $ | 38,821  |  
|                                       
|                                       
|                                       
|                                       
|                                        | Gross profit                         |  |                    | 206     |      |  |   | 17,934  |  
|                                       
|                                       
|                                       
|                                       
|                                        | Operating income (loss)              |  |                    | (4,709  | )    |  |   | 12,037  |  
|                                       
|                                       
|                                       
|                                       
|                                        | Identifiable assets                  |  |                    | 183,617 |      |  |   | 211,047 |  
|                                       
|                                       
|                                       
|                                       
|Opto-electronics Division               |                                      |  |                    |         |      |  |   |        
|                                       
|                                       
|                                       
|                                       
|                                        | Net revenues from external customers |  | $                  | 5,038   |      |  | $ | 1,282   |  
|                                       
|                                       
|                                       
|                                       
|                                        | Gross profit (loss)                  |  |                    | 87      |      |  |   | (1,641  | )
|                                       
|                                       
|                                       
|                                       
|                                        | Operating income (loss)              |  |                    | (1,553  | )    |  |   | (4,314  | )
|                                       
|                                       
|                                       
|                                       
|                                        | Identifiable assets                  |  |                    | 44,382  |      |  |   | 36,960  |  
|                                       
|                                       
|                                       
|                                       
|Discontinued Consumer Products Division |                                      |  |                    |         |      |  |   |        
|                                       
|                                       
|                                       
|                                       
|                                        | Identifiable assets                  |  | $                  |        |      |  | $ | 1,193   |  
|                                       
|                                       
|                                       
|                                       
|Total                                   |                                      |  |                    |         |      |  |   |        
|                                       
|                                       
|                                       
|                                       
|                                        | Net revenues from external customers |  | $                  | 16,777  |      |  | $ | 40,103  |  
|                                       
|                                       
|                                       
|                                       
|                                        | Gross profit                         |  |                    | 293     |      |  |   | 16,293  |  
|                                       
|                                       
|                                       
|                                       
|                                        | Operating income (loss)              |  |                    | (6,262  | )    |  |   | 7,723   |  
|                                       
|                                       
|                                       
|                                       
|                                        | Identifiable assets                  |  |                    | 227,999 |      |  |   | 249,200 |  

The Company sells its substrates in the United States and in other parts
of the world. Also, the Company has operations in Japan and China. Revenues by
geographic location based on the country of the customer were as follows (in
thousands):

|              |                        |  |                    |        |      |  |   |        | 
|------------- | ---------------------- |  | ------------------ | ------ | ---- |  | - | ------ | 
|              |                        |  | Three Months Ended
|              |                        |  | March 31,         
|              |                        |  |                   
|              |                        |  | 2002               |        | 2001
|              |                        |  |                    |        |     
|Net revenues: |                        |  |                    |        |      |  |   |       
|             
|             
|             
|             
|              | United States          |  | $                  | 7,332  |      |  | $ | 20,802 | 
|             
|             
|             
|             
|              | Europe                 |  |                    | 1,081  |      |  |   | 7,480  | 
|             
|             
|             
|             
|              | Canada                 |  |                    | 690    |      |  |   | 1,254  | 
|             
|             
|             
|             
|              | Japan                  |  |                    | 451    |      |  |   | 4,001  | 
|             
|             
|             
|             
|              | Malaysia               |  |                    | 2,545  |      |  |   |       | 
|             
|             
|             
|             
|              | Taiwan                 |  |                    | 1,496  |      |  |   |       | 
|             
|             
|             
|             
|              | Asia Pacific and other |  |                    | 3,182  |      |  |   | 6,566  | 
|              |                        |  |                    |        |      |  |   |       
|              | Consolidated           |  | $                  | 16,777 |      |  | $ | 40,103 | 
|              |                        |  |                    |        |      |  |   |       

Note 8. Corporate Affiliates

The Companys corporate affiliates are summarized below (in thousands):

|                                               |  |            |       |              |  |            |       |            |  |              |  |  |    |   |  | 
|---------------------------------------------- |  | ---------- | ----- | ------------ |  | ---------- | ----- | ---------- |  | ------------ |  |  | -- | - |  | 
|                                               |  | Investment |       | Investment   |  |            |       |            |  |              |  | 
|                                               |  | Balance    |       | Balance      |  |            |       |            |  |              |  | 
|                                               |  | March 31,  |       | December 31, |  | Accounting |       | Ownership 
|Affiliate                                      |  | 2002       |       | 2001         |  | Method     |       | Percentage
|                                               |  |            |       |              |  |            |       |           
|Xilingol Tongli Ge Co. Ltd.                    |  | $          | 800   |              |  | $          | 810   |            |  | Equity       |  |  | 25 | %
|                                              
|                                              
|                                              
|                                              
|Emeishan Jia Mei High Pure Metals Co., Ltd.    |  |            | 624   |              |  |            | 629   |            |  | Equity       |  |  | 25 | %
|                                              
|                                              
|                                              
|                                              
|Beijing Ji Ya Semiconductor Material Co., Ltd. |  |            | 1,599 |              |  |            | 1,599 |            |  | Consolidated |  |  | 51 | %
|                                              
|                                              
|                                              
|                                              
|Nanjing Jin Mei Gallium Co., Ltd.              |  |            | 700   |              |  |            | 700   |            |  | Consolidated |  |  | 88 | %

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Undistributed retained earnings relating to the Companys corporate
affiliates was $515,000 at March 31, 2002. Net loss recorded from the
Companys corporate affiliates was $164,000 for the three months ended March
31, 2002.

Note 9. Restructuring Costs

On December 14, 2000, the Companys Board of Directors approved
managements plan to exit its unprofitable 650 nm laser diode product line
within its opto-electronics division. As a result, during the fourth quarter
of 2000, the Company recorded a pre-tax restructuring charge of $8.2 million.
The restructuring charge included $2.1 million for incremental costs and
contractual obligations for such items as leasehold termination payments and
other facility exit costs incurred as a direct result of this plan.

Certain information with respect to restructuring costs is summarized
below (in thousands):

|                                        |  |         |       |      |  |          |     |                |  |   |       |  |  |   |       | 
|--------------------------------------- |  | ------- | ----- | ---- |  | -------- | --- | -------------- |  | - | ----- |  |  | - | ----- | 
|                                        |  |         |       |      |  | Utilized |     | Balance       
|                                        |  | Reserve |       | Cash |  | Non-cash |     | March 31, 2002
|                                        |  |         |       |      |  |          |     |               
|Inventory write-off                     |  | $       | 1,844 |      |  | $        |    |                |  | $ | 1,844 |  |  | $ |      | 
|                                       
|                                       
|                                       
|                                       
|Property, plant and equipment write-off |  |         | 3,436 |      |  |          |    |                |  |   | 3,436 |  |  |   |      | 
|                                       
|                                       
|                                       
|                                       
|Goodwill write-off                      |  |         | 848   |      |  |          |    |                |  |   | 848   |  |  |   |      | 
|                                       
|                                       
|                                       
|                                       
|Other restructuring costs               |  |         | 2,124 |      |  |          | 484 |                |  |   | 121   |  |  |   | 1,519 | 
|                                        |  |         |       |      |  |          |     |                |  |   |       |  |  |   |       | 
|                                        |  | $       | 8,252 |      |  | $        | 484 |                |  | $ | 6,249 |  |  | $ | 1,519 | 
|                                        |  |         |       |      |  |          |     |                |  |   |       |  |  |   |       | 

The fair value of assets determined to be impaired in accordance with the
guidance for assets to be disposed of in SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,
were the result of management estimates. The above noted exit costs were
determined in accordance with EITF No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity. The
restructuring actions, as outlined by the plan, are substantially complete.
The remaining costs, which relate to clean up of a leased facility, are
expected to be executed to completion in 2002.

Note 10. Commitments

From time to time the Company is involved in litigation in the normal
course of business. Management believes that the outcome of matters to date
will not have a material adverse effect on the Companys financial position or
results of operations.

On May 1, 2001, the Santa Clara Center for Occupational Safety and Health
filed a complaint for injunctive relief and civil penalties against AXT in the
Superior Court of California, County of Alameda, Hayward Division, Case No.
H218237-5. The complaint alleges violations of California Business and
Professions Code section 17200 et seq., and violations under Proposition 65 and
California Health and Safety Code section 25249 et seq. as a result of AXTs
use of arsenic and inorganic arsenic compounds in its workplace. The complaint
seeks injunctive relief, an order requiring the Company to set up and pay for a
medical surveillance program for individuals exposed to arsenic compounds, an
order requiring the Company provide warnings, information and training to
workers exposed to arsenic compounds, and for civil penalties and attorneys
fees. Mediation has been scheduled for June 24, 2002, and a trial date of
October 25, 2002 has been set. We believe that we have meritorious defenses
against the alleged claims, and intend to defend ourselves vigorously.
However, due to the nature of litigation and fact that the case is still in its
early stages, we cannot determine the possible loss, if any, that may
ultimately be incurred either in the context of a trial or as a result of a
negotiated settlement. We may also incur substantial legal fees in this
matter. However, we do not believe that this action is likely to have a
material adverse effect on our business, financial condition or results of
operation.

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The Company has entered into contracts to supply several large customers
with GaAs wafers. The contracts guarantee the delivery of a certain number of
wafers between January 1, 2001 and December 31, 2002 with a current contract
value of $15.7 million. The contract sales prices are subject to review
quarterly and can be adjusted in the event that raw material prices change. In
the event of non-delivery of the determined wafer quantities in any monthly
delivery period, the Company could be subject to non-performance penalties of
between 5% and 10% of the value of the delinquent monthly deliveries. Partial
prepayments received for these supply contracts totaling $5.7 million are
included in accrued liabilities at March 31, 2002. As of March 31, 2002 the
Company has met all of its delivery obligations under these contracts and
expects to do so for the remainder of the contract terms.

Note 11. Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 and No. 142, or SFAS 141,
Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets.
Under SFAS 141, all business combinations must be accounted for using the
purchase method of accounting; use of the pooling-of-interests (pooling) method
is prohibited. The provisions of the statement will apply to all business
combinations initiated after June 30, 2001. SFAS 142 will apply to all
acquired intangible assets whether acquired singly, as a part of a group, or in
a business combination. The statement will supersede APB Opinion No. 17,
Intangible Assets, and will carry forward provisions in APB Opinion No. 17
relating to internally developed intangible assets. Adoption of SFAS 142 will
result in ceasing amortization of goodwill. All of the statement should be
applied in fiscal years beginning after December 31, 2001 to all goodwill and
other intangible assets recognized in an entitys statement of financial
position at that date, regardless of when those assets were initially
recognized. We have tested all goodwill and intangible assets for impairment
upon adoption of SFAS 142 and have determined that as of March 31, 2002, no
impairment charge is necessary. As a result of adopting SFAS 142, $81,000 of
goodwill amortization was not recorded for the three months ended March 31,
2002. Adoption of the provisions of SFAS 141 and SFAS 142 has not had a
material effect on the Companys financial position or results of operations.

In October 2001, the FASB issued Statement of Accounting Standards No.
144, Accounting for Impairment or Disposal of Long-Lived Assets (SFAS 144).
SFAS 144 supercedes SFAS 121 Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of. SFAS 144 applies to all
long-lived assets (including discontinued operations) and consequently amends
Accounting Principles Board Opinion No. 30 (APB 30), Reporting Results of
Operations Reporting the Effects of Disposal of a Segment of a Business.SFAS
144 develops one accounting model for long-lived assets that are to be disposed
of by sale. SFAS 144 requires the long-lived assets that are to be disposed of
by sale be measured at the lower of book value or fair value less cost to sell.
Additionally, SFAS 144 expands the scope of discontinued operations to include
all components of the entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the ongoing operations
of the entity in a disposal transaction. SFAS 144 is effective for the Company
for all financial statements issued in fiscal 2002. We believe adoption of the
provisions of SFAS 144 has not had a material effect on the Companys financial
position or results of operations.

Note 12. Foreign Exchange Contracts and Transaction Losses

Since our Japanese and some Taiwanese invoices are denominated in Japanese
yen, doing business in Japan subjects us to fluctuations in exchange rates
between the U.S. dollar and the Japanese yen. We incurred a foreign transaction
exchange gain of $40,000 for the three months ended March 31, 2002 and a loss
of $223,000 for the three months ended March 31, 2001. We purchase foreign
exchange contracts to hedge against certain trade accounts receivable in
Japanese yen. Under these contracts, increases or decreases in currency
commitments and balance sheet positions, as translated into U.S. dollars, are
primarily offset by realized gains or losses on the hedging contracts. The
outstanding commitments with respect to such foreign exchange contracts had a
total contract value of approximately $4.7 million as of March 31, 2002. Many
of the contracts were entered into six months prior to the due date and the
dates coincide with the receivable terms on customer invoices. By matching the
receivable collection date and contract due date, we attempt to economically
minimize the impact of foreign exchange fluctuations.

11



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

This Managements Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements that
reflect current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical results or
those anticipated. In this report, the words anticipates,
believes,
expects, future, intends, and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date hereof.
This discussion should be read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2001 and
the condensed consolidated financial statements included elsewhere in this
report.

Overview

We were founded in 1986 to commercialize and enhance our proprietary VGF
technique for producing high-performance compound semiconductor substrates. We
currently operate two divisions: our substrate division and our
opto-electronics division. We made our first substrate sales in 1990 and our
substrate division currently sells GaAs and InP substrates to manufacturers of
semiconductor devices for use in applications such as fiber optic and wireless
telecommunications, LEDs and lasers. We also sell germanium substrates for use
in satellite solar cells. We acquired Lyte Optronics, Inc., on May 28, 1999,
and currently operate part of Lytes historical business as our
opto-electronics division. The opto-electronics division manufactures HBLEDs,
VCSELs and laser diodes for the illumination markets, including full-color
displays, automobile lighting and traffic signals, as well as fiber optic
communications. We previously operated the consumer products division,
discontinued in December 2000, which had focused on the design and manufacture
of laser-pointing and alignment products for the consumer, commercial and
industrial markets.

Critical Accounting Policies and Estimates

We have prepared our consolidated financial statements in accordance with
accounting principles generally accepted in the United States. As such, we
have made estimates and judgments that affect the preparation of these
statements based upon historical experience and on other assumptions that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. The discussion
and analysis of our results of operations and financial condition are based
upon these statements. We have identified the policies below as critical to our
business operations and understanding of our financial condition and results of
operations.

We recognize revenue upon shipment of products to our customers provided
that we have received a signed purchase order, the price is fixed, title has
transferred, collection of resulting receivables is probable, product returns
are reasonably estimable, there are no customer acceptance requirements and
there are no remaining significant obligations. We assess the probability of
collection based on a number of factors including past history with the
customer and credit worthiness. We provide for future returns at the time
revenue is recognized based on historical experience, current economic trends
and changes in customer demand. Except for sales in Japan and some sales in
Taiwan, which in both cases are denominated in Japanese yen, we denominate and
collect our international sales in U.S. dollars.

We periodically review the collectability of our accounts receivable
balances and provide an allowance for doubtful accounts receivable based upon
the age of these accounts. We provide a 100% allowance for U.S. receivables in
excess of 90 days and for foreign receivables in excess of 120 days. At March
31, 2002 our accounts receivable balance was $14.4 million net of an allowance
for doubtful accounts of $7.6 million.

Inventories are stated at the lower of cost or net realizable value. Cost
is determined using the weighted average cost method. Finished goods and
work-in-process inventories include material, labor and manufacturing overhead
costs. We routinely evaluate the levels of our inventory in light of current
market conditions in order to identify excess and obsolete inventory and we
provide a valuation allowance for certain inventories based upon the

12



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##### Table of Contents



age and quality of the product. The lives of our substrate products are
relatively long and accordingly, obsolescence has historically not been a
significant factor. We also review our inventory to ensure costs can be
realized upon ultimate sale to our customers. If we determine that the value of
any items in ending inventory plus any related selling costs exceeds the sales
value, a reserve is established for the difference.

Our industry requires substantial investments in property and equipment in
order to meet demand and changes in technology. In addition, we occasionally
make investments in companies, which are developing promising relevant
technologies. We review the carrying value of our long-lived assets and
investments in order to identify any impairment. Long-lived assets are written
down when the carrying value of an asset exceeds their related undiscounted
future cash flows. Key assumptions in estimating future cash flows include
estimates of sales volumes, changes in selling prices, cost of materials, etc.
It is possible that actual results will differ from these estimates and such
differences may be material and require future adjustments to the carrying
value of our long-lived assets. We have not recorded long-lived asset
impairment charges during Q1 2002. We record investment impairment charges when
we believe that an investment has experienced a decline in market value that is
other than temporary.

Results of Operations

The following table sets forth certain information relating to the
operations of the Company expressed as a percentage of total revenues for the
periods indicated:

|                                                |                                     |                          |       |                    |      |      |       |      |      | 
|----------------------------------------------- | ----------------------------------- | ------------------------ | ----- | ------------------ | ---- | ---- | ----- | ---- | ---- | 
|                                                |                                     |                          |       | Three Months Ended
|                                                |                                     |                          |       | March 31,         
|                                                |                                     |                          |       |                   
|                                                |                                     |                          |       | 2002               |      | 2001
|                                                |                                     |                          |       |                    |      |     
|Revenues                                        |                                     |                          | 100.0 | %                  |      |      | 100.0 | %   
|                                               
|                                               
|                                               
|                                               
|Cost of revenues                                |                                     |                          | 98.3  |                    |      |      | 59.4  |     
|                                                |                                     |                          |       |                    |      |      |       |     
|Gross profit                                    |                                     |                          | 1.7   |                    |      |      | 40.6  |     
|                                               
|                                               
|                                               
|                                               
|Operating expenses:                             |                                     |                          |       |                    |      |      |       |     
|                                               
|                                               
|                                               
|                                               
|                                                | Selling, general and administrative |                          |       | 31.0               |      |      |       | 14.6 |     
|                                               
|                                               
|                                               
|                                               
|                                                | Research and development            |                          |       | 8.1                |      |      |       | 6.7  |     
|                                                |                                     |                          |       |                    |      |      |       |     
|                                                |                                     | Total operating expenses |       |                    | 39.1 |      |       |      | 21.3 | 
|                                                |                                     |                          |       |                    |      |      |       |     
|Income (loss) from operations                   |                                     |                          | (37.4 | )                  |      |      | 19.3  |     
|                                               
|                                               
|                                               
|                                               
|Interest expense                                |                                     |                          | 2.3   |                    |      |      | 1.6   |     
|                                               
|                                               
|                                               
|                                               
|Other (income)/expense                          |                                     |                          | (4.3  | )                  |      |      | (1.8  | )   
|                                                |                                     |                          |       |                    |      |      |       |     
|Income (loss) before provision for income taxes |                                     |                          | (35.4 | )                  |      |      | 19.5  |     
|                                               
|                                               
|                                               
|                                               
|Provision (benefit) for income taxes            |                                     |                          | (14.1 | )                  |      |      | 7.0   |     
|                                                |                                     |                          |       |                    |      |      |       |     
|Net Income (loss)                               |                                     |                          | (21.3 | )%                 |      |      | 12.5  | %   

Three months ended March 31, 2002 compared to three months ended March 31, 2001

Revenue.Revenue decreased $23.3 million, or 58.2%, to $16.8 million for
the three months ended March 31, 2002 compared to $40.1 million for the three
months ended March 31, 2001. Revenue from our substrate division, which
represents 70.0% of total revenue for the three months ended March 31, 2002,
decreased $27.0 million, or 69.8%, to $11.8 million compared to $38.8 million
for the three months ended March 31, 2001. Total GaAs substrate revenue
decreased $23.0 million, or 75.2%, to $7.6 million for the three months ended
March 31, 2002 compared to $30.6 million for the three months ended March 31,
2001. Sales of 5 and 6 GaAs subtrates decreased $9.2 million, or 87.6%, to
$1.3 million for the three months ended March 31, 2002 compared to $10.5
million for the three months ended March 31, 2001. InP substrate revenue
decreased $4.5 million, or 60.0%, to $3.0 million for the three months ended
March 31, 2002 compared to $7.5 million for the three months ended March 31,
13Table of Contents

2001.     The decrease in GaAs and InP substrate sales was due to a decline in
the wireless and fiber optic telecommunication markets.

Revenue from our opto-electronics division, which represents 30% of total
revenue for the three months ended March 31, 2002, increased $3.7 million, or
293.0% to $5.0 million compared to $1.3 million for the three months ended
March 31, 2001. The increase was a result of higher sales volume of high
brightness light emitting diode (HBLED) products. HBLED revenue increased
$3.8 million, or 578.8%, to $4.4 million for the three months ended March 31,
2002 compared to $651,000 for the three months ended March 31, 2001. Vertical
cavity surface emitting laser (VCSEL) revenue decreased $63,000, or 28.3%, to
$160,000 for the three months ended March 31, 2002 compared to $223,000 for the
three months ended March 31, 2001. LD revenue increased $50,000, or 12.2%, to
$459,000 for the three months ended March 31, 2002 compared to $409,000 for the
three months ended March 31, 2001.

International revenue increased to 56.3% of total revenue for the three
months ended March 31, 2002 compared to 48.1% of total revenue for the three
months ended March 31, 2001. The increase was primarily due to increased sales
of HBLED products to customers in Asia.

Gross margin.Gross margin decreased to 1.75% of total revenue for the
three months ended March 31, 2002 compared to 40.6% of total revenue for the
three months ended March 31, 2001. Gross margin at the substrate division
decreased to 1.75% of substrate revenue for the three months ended March 31,
2002 compared to 46.2% of substrate revenue for the three months ended March
31, 2001. The decrease was primarily due to lower unit sales and lower average
sales prices of GaAs substrates spread over a relatively fixed manufacturing
overhead base. As a result, we have initiated manufacturing costs reductions
in order to align our costs with lower expected sales volumes and prices. We
are currently shifting much of our substrate manufacturing to China, where
costs are lower, and reducing capacity at our Fremont, California facility.
Gross margin at the opto-electronics division increased to 1.73% of
opto-electronics revenue for the three months ended March 31, 2002 compared to
negative 128.0% of opto-electronics revenue for the three months ended March
31, 2001. The increase was primarily due to increased unit sales of our HBLED
products.

Selling, general and administrative expenses.Selling, general and
administrative expenses decreased $665,000, or 11.3%, to $5.2 million for the
three months ended March 31, 2002 compared to $5.9 million for the three months
ended March 31, 2001. As a percentage of total revenue, selling, general and
administrative expenses were 31.0% for the three months ended March 31, 2002
compared to 14.6% for the three months ended March 31, 2001. The increase in
selling, general and administrative expenses as a percentage of total revenue
was primarily due to revenue decreasing faster than the decrease in our fixed
costs associated with selling, general and administrative expenses. As we
adjust our fixed costs in line with our lower expected sales volumes, we expect
this percentage to decrease.

Research and development expenses.Research and development expenses
decreased $1.3 million, or 49.9%, to $1.4 million for the three months ended
March 31, 2002 compared to $2.7 million for the three months ended March 31,
2001. As a percentage of total revenue , research and development expenses
were 8.1% for the three months ended March 31, 2002 compared to 6.7% for the
three months ended March 31, 2001. The decrease in research and development
expenses was primarily the result of our decision to reduce expenses in line
with lower revenues. We feel that this decrease will not compromise our
efforts to remain a leading supplier of GaAs and InP substrates in the future
or to make further enhancements in our opto-electronic products.

Interest expense.Interest expense decreased $244,000, or 38.8%, to
$385,000 for the three months ended March 31, 2002 compared to $629,000 for the
three months ended March 31, 2001 due to the repayment of debt and a reduction
of rates on our variable interest rate debt.

Other income and expense.Other income increased $8,000 to $717,000 for
the three months ended March 31, 2002 compared to $709,000 for the three months
ended March 31, 2001. The balance for the three months ended March 31, 2002
includes a non-cash gain of $251,000 from the receipt of additional shares of
Finisar Corporation common stock that were held in escrow.

14



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##### Table of Contents



Provision for income taxes.The effective tax rate increased to 40.0% for
the three months ended March 31, 2002 compared to 36.0% for the three months
ended March 31, 2001. The 40.0% effective tax rate is due to the tax benefit
of the Companys projected losses increased by the benefit of tax credits.

Liquidity and Capital Resources

Cash and cash equivalents increased $207,000 to $37.7 million at March 31,
2002 compared to $37.5 million at December 31, 2001.

Net cash provided by operating activities of $2.5 million for the three
months ended March 31, 2002 was comprised primarily of our net loss adjusted
for non-cash items of $2.7 million, consisting primarily of depreciation
expense, and by a $3.4 million net change in assets and liabilities. The net
change in assets and liabilities resulted primarily from a decrease in accounts
receivable and inventory, and an increase in accounts payable, offset by a
decrease in accrued liabilities.

Accounts receivable decreased $1.3 million, or 8.1%, to $14.4 million at
March 31, 2002 compared to $15.7 million at December 31, 2001. The change
reflects lower sales volume, collections of $17.1 million and an increase in
our allowance for doubtful accounts of $1.0 million. Inventories decreased
$3.1million, or 5.6% to $52.5 million at March 31, 2002 compared to $55.6
million at December 31, 2001. The decrease in inventory is due to a reduction
in manufacturing output during the current period as a result of reduced demand
caused by the economic downturn affecting our industry.

If our sales continue to decrease, our ability to generate cash from
operations will be adversely affected which could adversely affect our future
liquidity and cause us to seek additional capital, if available on acceptable
terms.

Net cash used in investing activities of $1.0 million for the three months
ended March 31, 2002 includes purchases of property and equipment of $2.7
million primarily used to increase wafer processing capacity in China for the
substrate division, and to increase HBLED and VCSEL epitaxy growth and wafer
processing capacity at the opto-electronics division. It also includes $1.9
million in purchases of high grade investment securities with maturities of
less than two years offset by $3.6 million in sales of these securities.

We are currently investing in certain equipment to expand HBLED
production. We are also constructing minor improvements to our existing
production facilities in China and California. We expect to invest
approximately $12.0 million in additional facilities and equipment over the
next 9 months.

Net cash used in financing activities of $1.4 million for the three months
ended March 31, 2002 includes proceeds of $429,000 from the sale of common
stock through our employee stock compensation programs, offset by payments of
$624,000 for payments on long-term debt and $1.2 million for capital lease
payments.

We have a $5.0 million bank line of credit that expires on September 30,
2003. The line of credit is secured by our operating assets, excluding assets
in China. Borrowings bear interest at 2.25% above LIBOR which was 4.93% at
March 31, 2002. The interest rate for future borrowings compared to LIBOR is
dependent on our financial performance. No amounts were outstanding under the
line of credit at March 31, 2002.

We generally finance equipment purchases through secured equipment loans
and capital leases over four or five-year terms at interest rates ranging from
5.6% to 8.8% per annum. Our main Fremont, California manufacturing facility is
financed by long-term borrowings, which were refinanced by taxable variable
rate revenue bonds in 1998. These bonds mature in 2023 and bear interest at
2.0% below the prime rate. The bonds are traded in the public market. Repayment
of principal and interest under the bonds is supported by a letter of credit
from our bank and is paid on a quarterly basis. We have the option to redeem
the bonds in whole or in part during their term. At March 31, 2002, $9.6
million was outstanding under these bonds.

The credit facility that we have with our bank includes the line of
credit, term loans in the amount of $5.0 million and the letter of credit
supporting repayment of our bonds. The credit facility is subject to certain
financial
15Table of Contents

covenants regarding current financial ratios and cash flow requirements
that have all been met as of March 31, 2002. If we fail to comply with these
covenants in the future and are unable to obtain a waiver from our bank, the
amounts due under this credit facility would become immediately due and
payable. The total amount outstanding under the credit facility at March 31,
2002 was $14.6 million.

Risks Related to Our Business

The semiconductor industry is cyclical and is currently experiencing a severe
and prolonged downturn which has adversely impacted our operating results.

Our business depends in significant part upon manufacturers of electronic
and opto-electronic semiconductor devices, as well as the current and
anticipated market demand for such devices and products using such devices. The
semiconductor industry is highly cyclical. The industry has in the past, and
will likely in the future, experience periods of oversupply that result in
significantly reduced demand for semiconductor devices and components,
including our products, both as a result of general economic changes and
overcapacity. When these periods occur, our operating results and financial
condition are adversely affected. Inventory buildups in telecommunications
products and slower than expected sales of computer equipment have resulted in
overcapacity and led to reduced sales by our customers. During periods of
declining demand such as those experienced over the past year, customers
typically reduce purchases, delay delivery of products and/or cancel orders of
component parts such as our products. Increased price competition may result,
causing pressure on our net sales, gross margin and net income. We have over
the past year experienced cancellations, delays and push outs of orders, which
have resulted in reduced revenues. If the economic downturn continues, further
order cancellations, reductions in order size or delays in orders will
materially adversely affect our business and results of operations. Although we
have taken actions to reduce our costs, if our actions are insufficient to
align our structure with prevailing business conditions, we may be required to
undertake additional cost-cutting measures, and may be unable to invest in
marketing, research and development and engineering at the levels we believe
are necessary to maintain our competitive position. Our failure to make these
investments could seriously harm our business.

The impact of changes in global economic conditions on our customers may cause
us to fail to meet expectations, which would negatively impact the price of our
stock.

Our operating results can vary significantly based upon the impact of
changes in global economic conditions on our customers. More specifically, the
macro-economic environment that we have faced in the second half of 2001 and
are continuing to face in 2002 is more uncertain than in prior periods and has
materially and adversely affected us and our operating results and may continue
to do so. The revenue growth and profitability of our business depends on the
overall demand for our substrates, light-emitting diodes and laser diodes, and
we are particularly dependant on the market conditions for the fiber optics and
telecommunications industries. Because our sales are primarily to major
corporate customers whose businesses fluctuate with general economic and
business conditions, a softening of demand for products that use our
substrates, LEDs and laser diodes caused by a weakening economy may result in
decreased revenues. Customers may find themselves facing excess inventory from
earlier purchases, and may defer or reconsider purchasing products due to the
downturn in their business and in the general economy.

Unpredictable fluctuations in our operating results could disappoint analysts
or our investors, which could cause our stock price to decline.

We have not over the past year been able to sustain our historical growth
rate, and may not be able to return to historic growth levels in the current
economic environment. We have and may continue to experience significant
fluctuations in our revenue and earnings. Our quarterly and annual revenue and
operating results have varied significantly in the past and may vary
significantly in the future due to a number of factors, including:



| |  |  | decline in general economic conditions or downturns in the industry in which we compete;
| | - |  | ----------------------------------------------------------------------------------------
|
| |  |  | fluctuations in demand for our products;                                                

16



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| |  |  | expansion of our manufacturing capacity;                                                                       
| | - |  | ---------------------------------------------------------------------------------------------------------------
|
| |  |  | expansion of our operations in China;                                                                          
|
| |  |  | limited availability and increased cost of raw materials;                                                      
|
| |  |  | the volume and timing of orders from our customers, and
cancellations, push outs and delays of customer orders;
|
| |  |  | fluctuation of our manufacturing yields;                                                                       
|
| |  |  | decreases in the prices of our competitors products;                                                          
|
| |  |  | costs incurred in connection with any future acquisitions of businesses or technologies;                       
|
| |  |  | increases in our expenses, including expenses for research and development; and                                
|
| |  |  | our ability to develop, manufacture and deliver high quality products
in a timely and cost-effective manner.   

Due to these factors, we believe that period-to-period comparisons of our
operating results may not be a meaningful indicator of our future performance.
Our operating results have over the past year at times been below the
expectations of securities analysts or investors. If this occurs again in
future periods, the price of our common stock would likely decline or
fluctuate.

A substantial percentage of our operating expenses are fixed in the short
term and we may be unable to adjust spending to compensate for an unexpected
shortfall in revenues. As a result, any delay in generating revenue could cause
our operating results to be below the expectations of market analysts or
investors, which could also cause our stock price to fall.

The lead-time for customer orders is generally shorter than it was a year
ago. As a result, our visibility regarding future financial performance is
uncertain and we may provide investors with financial guidance that we cannot
meet. As a result, our operating results could be below the expectations of
market analysts or investors, which could also cause our stock price to fall.

If the economy recovers and we are again in a period of high demand for our
products, if we fail to expand our manufacturing capacity, we may not be able
to meet increased demand, lower our costs or increase revenue.

Although we are currently in a period of overcapacity, if the economy
recovers, demand may increase rapidly as it has in prior years. In order to
meet increased demand and maintain our market share, we may need to increase
production, which could require us to build new facilities, expand our existing
facilities, purchase additional manufacturing equipment, and add qualified
staff. If we do not expand our manufacturing capacity, we will be unable to
increase production, adversely impacting our ability to reduce unit costs,
margins and improve our operating results.

We are currently constructing facilities in California and China. Our
construction activities subject us to a number of risks, including:



| |  |  | unforeseen environmental or engineering problems;       
| | - |  | --------------------------------------------------------
|
| |  |  | unavailability or late delivery of production equipment;
|
| |  |  | delays in completing new facilities;                    
|
| |  |  | delays in bringing production equipment on-line;        

17



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| |  |  | work stoppages or delays;                                                                                            
| | - |  | ---------------------------------------------------------------------------------------------------------------------
|
| |  |  | inability to recruit and train qualified staff;                                                                      
|
| |  |  | unanticipated cost increases and restrictions imposed by requirements
of local, state or federal regulatory agencies.

If any of these risks occurs, construction may be costlier than
anticipated and completion could be delayed, which could hurt our ability to
expand capacity and increase our sales. In addition, if we experience delays in
expanding our manufacturing capacity, we might not be able to timely meet
customer requirements, and we could lose future sales. We are also making
substantial investments in equipment and facilities as part of our capacity
expansion. To offset the additional fixed operating expenses, we must increase
our revenue by increasing production and improving yields. If demand for our
products does not grow or if our yields do not improve as anticipated, we may
be unable to offset these costs against increased revenue, which would
adversely impact our operating results.

Our results of operations may suffer if we do not effectively manage our
inventory.

To achieve commercial success with our products, we will need to manage
our inventory of component parts and finished goods effectively to meet
changing customer requirements. Some of our products and supplies have in the
past and may in the future become obsolete while in inventory due to changing
customer specifications, excess inventory or decreased demand for our products.
We have in the past had to take inventory valuation and impairment charges. If
we are not successfully able to manage our inventory, we may need to write off
unsaleable, obsolete or excess inventory, which could adversely affect our
results of operations.

Our HBLED and VCSEL products are in their early stages, and we may not be able
to achieve anticipated sales of these products.

We are continuing to ramp production and sale of our HBLED and VCSEL
products, and we may be unable to successfully market and increase sales of
these products. To market and increase sales of our HBLED and VCSEL products,
we will have to continue to develop additional distribution channels. We must
also continue our research and development efforts to apply our proprietary VGF
technique to new substrate products and successfully introduce and market new
opto-electronic semiconductor devices, including enhancements to our HBLED and
VCSEL products.

If we do not successfully develop new products to respond to rapidly changing
customer requirements, our ability to generate sales and obtain new customers
may suffer.

Our success depends on our ability to offer new products that incorporate
leading technology and respond to technological advances. In addition, our new
products must meet customer needs and compete effectively on quality, price and
performance. The life cycles of our products are difficult to predict because
the markets for our products are characterized by rapid technological change,
changing customer needs and evolving industry standards. If our competitors
introduce products employing new technologies, our existing products could
become obsolete and unmarketable. If we fail to offer new products, we may not
generate sufficient revenue to offset our development costs and other expenses
or meet our customers requirements. Other companies, including IBM and
Motorola, are actively developing substrate materials that could be used to
manufacture devices that could provide the same high-performance, low-power
capabilities as GaAs-based devices at competitive prices. If these substrate
materials are successfully developed and semiconductor device manufacturers
adopt them, demand for our GaAs substrates could decline and our revenue could
suffer.

The development of new products can be a highly complex process, and we
may experience delays in developing and introducing new products. Any
significant delays could cause us to fail to timely introduce and gain market
acceptance of new products. Further, the costs involved in researching,
developing and engineering new products could be greater than anticipated.

18



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##### Table of Contents



Our operating results depend in large part on further customer acceptance of
our existing substrate products and on our ability to develop new products
based on our core VGF technology.

A large share of GaAs substrates are manufactured from crystals grown
using the traditional Liquid Encapsulated Czochralski, or LEC, or
Horizontal-Bridgeman, or HB, techniques. In order to expand sales of our
products, we must continue to promote our VGF technique as a preferred process
for producing substrates, and we must offer products with superior prices and
performance on a timely basis and in sufficient volumes. If we fail to gain
increased market acceptance of our VGF technique, we may not achieve
anticipated revenue growth.

To shift more of our substrate manufacturing operations to China
successfully, we will need our customers to qualify products manufactured in
China. If we are unable to achieve qualifications for these products, our
China facility will be underutilized, our investments in China will not be
recouped and we will be unable to lower our costs by moving to China. All of
these events could reduce our revenue but increase our cost structure.

Intense competition in the markets for our products could prevent us from
increasing revenue and sustaining profitability.

The markets for our products are intensely competitive. We face
competition for our substrate products from other manufacturers of substrates,
such as Freiberger, Hitachi Cable, Japan Energy and Sumitomo Electric and from
semiconductor device manufacturers that produce substrates for their own use,
and from companies, such as IBM and Motorola, that are actively developing
alternative materials to GaAs and some semiconductor devices are being marketed
using these materials. We believe that at least one of our competitors is
shipping GaAs substrates manufactured using a technique similar to our VGF
technique. Other competitors may develop and begin using similar technology. If
we are unable to compete effectively, our revenue may not increase and we may
be unable to be profitable. We face many competitors that have a number of
significant advantages over us, particularly in our compound semiconductor
device products, including:



| |  |  | greater experience in the business;                                
| | - |  | -------------------------------------------------------------------
|
| |  |  | more manufacturing experience;                                     
|
| |  |  | extensive intellectual property;                                   
|
| |  |  | broader name recognition; and                                      
|
| |  |  | significantly greater financial, technical and marketing resources.

Our competitors could develop new or enhanced products that are more
effective than the products that we have developed or may develop. For example,
some competitors in the HBLED market offer devices that are brighter than our
HBLEDs. Some of our competitors may also develop technologies that enable the
production of commercial products with characteristics similar to or better
than ours, but at a lower cost.

The level and intensity of competition has increased over the past year
and we expect competition to continue to increase in the future. Competitive
pressures caused by the current economic conditions have resulted in reductions
in the prices of some of our products, and continued or increased competition
could reduce our market share, require us to further reduce the prices of our
products, affect our ability to recover costs or result in reduced gross
margins.

If we have low product yields, the shipment of our products may be delayed and
our operating results may be adversely impacted.

Our products are manufactured using complex technologies, and the number
of usable substrates and devices we can produce can fluctuate as a result of
many factors, including:



| |  |  | impurities in the materials used;
| | - |  | ---------------------------------

19



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| |  |  | contamination of the manufacturing environment;                                 
| | - |  | --------------------------------------------------------------------------------
|
| |  |  | substrate breakage;                                                             
|
| |  |  | equipment failure, power outages or variations in the manufacturing process; and
|
| |  |  | performance of personnel involved in the manufacturing process.                 

Because many of our manufacturing costs are fixed, our revenue could
decline if our yields decrease. We have experienced product shipment delays and
difficulties in achieving acceptable yields on both new and older products, and
delays and poor yields have adversely affected our operating results. We may
experience similar problems in the future and we cannot predict when they may
occur or their severity. In addition, many of our manufacturing processes are
new and are still being refined, which can result in lower yields, particularly
as we focus on producing higher diameter substrates and new opto-electronic
semiconductor devices. For example, we recently made substantial investments in
equipment and facilities to manufacture blue, green and cyan HBLEDs and VCSELs.
If we are unable to produce adequate quantities of our high-brightness LEDs and
VCSELs, we may not be able to meet customer demand and our revenue may
decrease.

Demand for our products may decrease if our customers experience difficulty
manufacturing, marketing or selling their products.

Our products are used as components in our customers products.
Accordingly, demand for our products is subject to factors affecting the
ability of our customers to successfully introduce and market their products,
including:



| |  |  | the competition our customers face in their particular industries;                                              
| | - |  | ----------------------------------------------------------------------------------------------------------------
|
| |  |  | the technical, manufacturing, sales and marketing and management capabilities of our customers;                 
|
| |  |  | the financial and other resources of our customers; and                                                         
|
| |  |  | the inability of our customers to sell their products if they infringe third party intellectual property rights.

If demand for the products offered by our customers decreases, our customers
may reduce purchases of our products.

As inventory of telecommunication products and computer equipment has
increased in the past year, resulting in overcapacity in the market, our
customers have reduced sales of their products, causing them to reduce
purchases of our products. As a result, our revenues have declined and may fail
to recover until the overcapacity has been depleted and demand for our
customers products once again increase.

We purchase critical raw materials from single or limited sources, and could
lose sales if these sources fail to fill our needs.

We depend on a limited number of suppliers for certain raw materials,
components and equipment used in manufacturing our products, including key
materials such as gallium, arsenic and quartz. We generally purchase these
materials through standard purchase orders and not pursuant to long-term supply
contracts and none of our suppliers guarantees supply of raw materials to us.
If we lose any of our key suppliers, our manufacturing efforts could be
significantly hampered and we could be prevented from timely producing and
delivering products to our customers. We have experienced delays obtaining
critical raw materials, including gallium, due to shortages of these materials.
We may experience delays due to shortages of materials and may be unable to
obtain an adequate supply of materials. These shortages and delays could result
in higher materials costs and cause us to delay or reduce production of our
products. If we have to delay or reduce production, we could fail to meet
customer delivery schedules, and our revenue and operating results could
suffer.

20



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##### Table of Contents



If we fail to comply with environmental and safety regulations, we may be
subject to significant fines or cessation of our operations.

We are subject to federal, state and local environmental and safety laws
and regulations. These laws, rules and regulations govern the use, storage,
discharge and disposal of hazardous chemicals during manufacturing, research
and development and sales demonstrations. If we fail to comply with applicable
regulations, we could be subject to substantial liability for clean-up efforts,
personal injury and fines or suspension or cessation of our operations. In
March 2001, we settled a claim made by the California Occupational Safety and
Health Administration, or Cal-OSHA, in an investigation primarily regarding
impermissible levels of potentially hazardous materials in certain areas of our
manufacturing facility in Fremont, California for $204,415. Although we have
put in place engineering, administrative and personnel protective equipment
programs to address these issues, our ability to expand or continue to operate
our present locations could be restricted or we could be required to acquire
costly remediation equipment or incur other significant expenses. In addition,
existing or future changes in laws or regulations may require us to incur
significant expenditures or liabilities, or may restrict our operations.

On May 1, 2001, the Santa Clara Center for Occupational Safety and Health
filed a complaint for injunctive relief and civil penalties against AXT in the
Superior Court of California, County of Alameda, Hayward Division, Case No.
H218237-5. The complaint alleges violations of California Business and
Professions Code section 17200 et seq., and violations under Proposition 65 and
California Health and Safety Code section 25249 et seq. as a result of AXTs
use of arsenic and inorganic arsenic compounds in its workplace. The complaint
seeks injunctive relief, an order requiring the Company to set up and pay for a
medical surveillance program for individuals exposed to arsenic compounds, an
order requiring the Company provide warnings, information and training to
workers exposed to arsenic compounds, and for civil penalties and attorneys
fees. Mediation has been scheduled for June 24, 2002, and a trial date of
October 25, 2002 has been set. We believe that we have meritorious defenses
against the alleged claims, and intend to defend ourselves vigorously.
However, due to the nature of litigation and fact that the case is still in its
early stages, we cannot determine the possible loss, if any, that may
ultimately be incurred either in the context of a trial or as a result of a
negotiated settlement. We may also incur substantial legal fees in this
matter. However, we do not believe that this action is likely to have a
material adverse effect on our business, financial condition or results of
operation.

The loss of one or more of our key substrate customers would significantly hurt
our operating results.

A small number of substrate customers have historically accounted for a
substantial portion of our total revenue. Five customers accounted for 38.9%
of our total revenue for the three months ended March 31, 2002 and 32.9% for
the three months ended March 31, 2001. One HBLED customer accounted for
greater than 10% of total revenue for the three months ended March 31, 2002 and
no one customer accounted for greater then 10% of total revenue for the three
months ended March 31, 2001. Our substrate revenue accounted for 70.0% of our
total revenue for the three months ended March 31, 2002 and 96.8% for the three
months ended March 31, 2001. We expect that a significant portion of our
future revenue will continue to be derived from a limited number of substrate
customers. Our HBLED revenue is currently concentrated with a few customers.
Our customers are not obligated to purchase a specified quantity of our
products or to provide us with binding forecasts of product purchases. In
addition, our customers may reduce, delay or cancel orders at any time without
any significant penalty, and during the past year, we have experienced slower
bookings, significant push outs and cancellation of orders. If we lose a major
customer or if a customer cancels, reduces or delays orders, our revenue would
decline. In addition, customers that have accounted for significant revenue in
the past may not continue to generate revenue for us in any future period. Any
delay in scheduled shipments of our products could cause net sales to fall
below our expectations and the expectations of market analysts or investors,
causing our stock price to decline.

Defects in our products could diminish demand for our products.

Our products are complex and may contain defects. In the past we have
experienced quality control problems with some of our products, which caused
customers to return products to us. If we continue to experience quality
control problems, or experience these problems in new products, customers may
cancel or reduce orders or purchase
21Table of Contents

products from our competitors. Defects in our products could cause us to
incur higher manufacturing costs and suffer product returns and additional
service expenses, all of which could adversely impact our operating results.

We are also developing new products and product enhancements, including
substrates and compound semiconductor device products. If our new products
contain defects when released, our customers may be dissatisfied and we may
suffer negative publicity or customer claims against us, lose sales or
experience delays in market acceptance of our new products.

Our substrate and opto-electronic semiconductor device products have a long
sales cycle that makes it difficult to plan our expenses and forecast our
results.

Customers typically place orders with us for our substrate and
opto-electronic semiconductor device products three months to a year or more
after our initial contact with them. The sale of our products may be subject to
delays due to our customers lengthy internal budgeting, approval and
evaluation processes. During this time, we may incur substantial expenses and
expend sales, marketing and management efforts while the customers evaluate our
products. These expenditures may not result in sales of our products. If we do
not achieve anticipated sales in a period as expected, we may experience an
unplanned shortfall in our revenue. As a result, we may not be able to cover
expenses, causing our operating results to vary. In addition, if a customer
decides not to incorporate our products into its initial design, we may not
have another opportunity to sell products to this customer for many months or
even years. In this difficult economic climate, the average sales cycle for our
products has lengthened even further and is expected to continue to make it
difficult to accurately forecast our future sales. We anticipate that sales of
any future substrate and opto-electronic semiconductor device products under
development will also have lengthy sales cycles and will, therefore, be subject
to risks substantially similar to those inherent in the lengthy sales cycle of
our current substrate and opto-electronic semiconductor device products.

As our business matures, we may need to upgrade our systems.

In the past, periods of rapid growth and expansion has strained our
management and other resources. The expansion of our manufacturing capacity
and the shift of manufacturing operations to China has placed and continues to
place a significant strain on our operations and management resources. If we
fail to manage these changes effectively, our operations may be disrupted. To
manage our business effectively, we may need to implement additional and
improved management information systems, further develop our operating,
administrative, financial and accounting systems and controls, add experienced
senior level managers, and maintain close coordination among our executive,
engineering, accounting, marketing, sales and operations organizations.

If necessary, we will spend substantial sums to support our future growth
and shift to China and may incur additional unexpected costs. Our systems,
procedures or controls may not be adequate to support our operations, and we
may be unable to expand quickly enough to exploit potential market
opportunities. Our future operating results will also depend on expanding sales
and marketing, research and development and administrative support. If we
cannot attract qualified people or manage growth effectively, our business and
operating results could be adversely affected.

If we fail to manage periodic contractions, we may utilize our cash balances.

We have experienced a period of rapid contraction in our business that
caused us to reduce our costs in order to conserve our cash resources. If we
fail to manage our contractions successfully we may draw down our cash
reserves, which would reduce our value and may impinge our ability to raise
debt and equity funding in the future. As part of our effort to reduce costs,
we may lose key staff, production resources, and technology that we will need
to grow when end markets recover. These events could reduce our ability to
grow profitably as markets recover.

As a result of the difficult economic conditions, we have implemented
restructuring and workforce reductions, which may adversely affect the moral
and performance of our personnel and our ability to hire new personnel.

In connection with our efforts to streamline operations, reduce costs and
bring staffing and structure in line with current demand for our products, we
implemented a corporate restructuring last year and reduced our
22Table of Contents

workforce, shifted production activities to China and reduced capital
expenditures. Our restructuring may yield unanticipated consequences, such as
attrition beyond our planned reduction in workforce and loss of employee moral
and decreased performance. In addition, the recent trading levels of our stock
have decreased the value of our stock options granted to employees under our
stock option plan. As a result of these factors, our remaining personnel may
seek employment with larger, more established companies or companies that they
perceive as having less volatile stock prices. Continuity of personnel can be
very important factors in the sales and production of our products and
completion of our research and development efforts.

Any future acquisitions may disrupt our business, dilute stockholder value or
distract management attention.

As part of our strategy, we may consider acquisitions of, or significant
investments in, businesses that offer products, services and technologies
complementary to ours, such as our acquisition of Lyte Optronics in May 1999.
Acquisitions entail numerous risks, including:



| |  |  | we may have difficulty assimilating the operations, products and personnel of the acquired businesses;                                   
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ongoing business may be disrupted;                                                                                                   
|
| |  |  | we may incur unanticipated costs;                                                                                                        
|
| |  |  | our management may be unable to manage the financial and strategic
position of acquired or developed products, services and technologies;
|
| |  |  | we may be unable to maintain uniform standards, controls and procedures and policies; and                                                
|
| |  |  | our relationships with employees and customers may be impaired as a result of any integration.                                           

For example, we incurred substantial costs in connection with our
acquisition of Lyte Optronics, including the assumption of approximately $10.0
million of debt, much of which has been repaid or renegotiated, resulting in a
decline of cash available. We incurred one-time charges and merger-related
expenses of $2.8 million and an extraordinary item of $508,000 relating to the
early extinguishment of debt in the quarter ended September 30, 1999 as a
result of the acquisition.

To the extent that we issue shares of our stock or other rights to
purchase stock in connection with any future acquisitions, dilution to our
existing stockholders will result and our earnings per share may suffer. Any
future acquisitions may not generate additional revenue or provide any benefit
to our business.

If any of our facilities is damaged by actions such as fire, explosion, or
natural disaster, we may not be able to manufacture our products.

The ongoing operation of our manufacturing and production facilities in
California and China is critical to our ability to meet demand for our
products. If we are not able to use all or a significant portion of our
facilities for prolonged periods for any reason, we will not be able to
manufacture products for our customers. For example, a natural disaster, fire
or explosion caused by our use of combustible chemicals and high temperatures
during our manufacturing processes would render some or all of our facilities
inoperable for an indefinite period of time. Actions outside of our control,
such as earthquakes, could also damage our facilities, rendering them
inoperable. All of our crystal growth is currently performed at our Fremont,
California facilities, which are located near an active seismic fault line. If
we are unable to operate our facilities and manufacture our products, we will
lose customers and revenue and our business will be harmed.

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If we lose key personnel or are unable to hire additional qualified personnel
as necessary, we may not be able to successfully manage our business or achieve
our objectives.

Our success depends upon the continued service of Morris S. Young, Ph.D.,
our president, chairman of the board and chief executive officer, as well as
other key management and technical personnel. We do not have long-term
employment contracts with, or key person life insurance on, any of our key
personnel.

We believe our future success will also depend in large part upon our ability
to attract and retain highly skilled managerial, engineering, sales and
marketing, finance and manufacturing personnel. The competition for these
employees is intense, especially in Silicon Valley, and we cannot assure you
that we will be successful in attracting and retaining new personnel. The loss
of the services of any of our key personnel, the inability to attract or retain
qualified personnel in the future or delays in hiring required personnel,
particularly engineers, could make it difficult for us to manage our business
and meet key objectives, including the timely introduction of new products.

If we are unable to protect our intellectual property, we may lose valuable
assets or incur costly litigation.

We rely on a combination of patents, copyrights, trademark and trade
secret laws, non-disclosure agreements and other intellectual property
protection methods to protect our proprietary technology. However, we believe
that, due to the rapid pace of technological innovation in the markets for our
products, our ability to establish and maintain a position of technology
leadership also depends on the skills of our development personnel.

Despite our efforts to protect our intellectual property, a third party
could develop products or processes similar to ours. Our means of protecting
our proprietary rights may not be adequate and our competitors may
independently develop similar technology, duplicate our products or design
around our patents. We believe that at least one of our competitors has begun
to ship GaAs substrates produced using a process similar to our VGF technique.
Our competitors may also develop and patent improvements to the VGF, LED and
VCSEL technologies upon which we rely, and thus may limit any exclusivity we
enjoy by virtue of our patents.

It is possible that pending or future United States or foreign patent
applications made by us will not be approved, that our issued patents will not
protect our intellectual property, or that third parties will challenge the
ownership rights or the validity of our patents. In addition, the laws of some
foreign countries may not protect our proprietary rights to as great an extent
as do the laws of the United States and it may be more difficult to monitor the
use of our intellectual property. Our competitors may be able to legitimately
ascertain non-patented proprietary technology embedded in our systems. If this
occurs, we may not be able to prevent the development of technology
substantially similar to ours.

We may have to resort to costly litigation to enforce our intellectual
property rights, to protect our trade secrets or know-how or to determine their
scope, validity or enforceability. Enforcing or defending our proprietary
technology is expensive, could cause us to divert resources and may not prove
successful. Our protective measures may prove inadequate to protect our
proprietary rights, and if we fail to enforce or protect our rights, we could
lose valuable assets.

We might face intellectual property infringement claims that may be costly to
resolve and could divert management attention.

Other companies may hold or obtain patents on inventions or may otherwise
claim proprietary rights to technology necessary to our business. The markets
in which we compete are comprised of competitors who in some cases hold
substantial patent portfolios covering aspects of products that could be
similar to ours. We could become subject to claims that we are infringing
patent, trademark, copyright or other proprietary rights of others, and are
currently in discussions with one company concerning alleged patent
infringement. Litigation to determine the validity of alleged claims could be
time-consuming and result in significant expense to us and divert the efforts
of our technical and management personnel, whether or not the litigation is
ultimately determined in our favor. If a lawsuit is decided against us, we
could be subject to significant liabilities, requiring us to seek costly
licenses or preventing us from manufacturing and selling our products. We may
not be able to obtain required licensing agreements on terms acceptable to us
or at all.

24



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##### Table of Contents



We derive a significant portion of our revenue from international sales, and
our ability to sustain and increase our international sales involves
significant risks.

Our revenue growth depends in part on the expansion of our international
sales and operations. International sales represented 56.3% of our total
revenue for the three months ended March 31, 2002 and 48.12% for the three
months ended March 31, 2001. We expect that sales to customers outside the U.S.
will continue to represent a significant portion of our revenue.

Our dependence on international sales involves a number of risks,
including:



| |  |  | changes in tariffs, import or export restrictions and other trade barriers;
| | - |  | ---------------------------------------------------------------------------
|
| |  |  | unexpected changes in regulatory requirements;                             
|
| |  |  | longer periods to collect accounts receivable;                             
|
| |  |  | changes in export license requirements;                                    
|
| |  |  | political and economic instability;                                        
|
| |  |  | unexpected changes in diplomatic and trade relationships; and              
|
| |  |  | foreign exchange rate fluctuations.                                        

Our sales are denominated in U.S. dollars, except for sales to our
Japanese and some Taiwanese customers, which are denominated in Japanese yen.
Thus, increases in the value of the U.S. dollar could increase the price of our
products in non-U.S. markets and make our products more expensive than
competitors products in these markets. Also, denominating some sales in
Japanese yen subjects us to fluctuations in the exchange rates between the U.S.
dollar and the Japanese yen. The functional currencies of our Japanese and
Chinese subsidiaries are the local currencies. We incur transaction gains or
losses resulting from consolidation of expenses incurred in local currencies
for these subsidiaries, as well as in translation of the assets and liabilities
of these assets at each balance sheet date. If we do not effectively manage the
risks associated with international sales, our revenue, cash flows and
financial condition could be adversely affected.

If our expansion in China is more costly than we expect, our operating results
will suffer.

As part of our planned expansion of our manufacturing capacity, we are
building new facilities and expanding existing facilities in China. If we are
unable to build and expand our Chinese facilities in a timely manner, we may
not be able to increase production of our products and increase revenue as
planned. If our expansion in China proves more costly than we anticipate or we
incur greater ongoing costs than we expect, our operating results would be
adversely affected. If we do not realize expected cost savings once our
expansion is complete in China, our margins may be negatively impacted and our
operating results may suffer.

Changes in Chinas political, social and economic environment may affect our
financial performance.

Our financial performance may be affected by changes in Chinas political,
social and economic environment. The role of the Chinese central and local
governments in the Chinese economy is significant. Chinese policies toward
economic liberalization, and laws and policies affecting technology companies,
foreign investment, currency exchange rates and other matters could change,
resulting in greater restrictions on our ability to do business and operate our
manufacturing facilities in China. Any imposition of surcharges or any increase
in Chinese tax rates could hurt our operating results. The Chinese government
could revoke, terminate or suspend our license for national security and
similar reasons without compensation to us. If the government of China were to
take any of these actions, we would be prevented from conducting all or part of
our business. Any failure on our part to comply with governmental regulations
could result in the loss of our ability to manufacture our products in China.

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##### Table of Contents



China has from time to time experienced instances of civil unrest and
hostilities. Confrontations have occurred between the military and civilians.
Events of this nature could influence the Chinese economy, result in
nationalization of foreign-owned operations such as ours, and could negatively
affect our ability to operate our facilities in China.

The effect of terrorist threats on the general economy could decrease our
revenues.

On September 11, 2001, the United States was subject to terrorist attacks
at the World Trade Center buildings in New York and the Pentagon in Washington
D.C. The potential near- and long-term impact these attacks may have in regards
to our suppliers, customers and markets for our products and the U.S. economy,
are uncertain. There may be other potential adverse effects on our operating
results due to this significant event that we cannot foresee.

Our stock price has been and may continue to be volatile.

Our stock price has fluctuated significantly since we began trading on the
Nasdaq National Market. For the three months ended March 31, 2002, the high and
low closing sales prices of our common stock were $16.89 and $8.85
respectively. A number of factors could cause the price of our common stock to
continue to fluctuate substantially, including:



| |  |  | actual or anticipated fluctuations in our quarterly or annual
operating results;                                        
| | - |  | ------------------------------------------------------------------------------------------------------------------------
|
| |  |  | changes in expectations about our future financial performance or
changes in financial estimates of securities analysts;
|
| |  |  | announcements of technological innovations by us or our competitors;                                                    
|
| |  |  | new product introduction by us or our competitors;                                                                      
|
| |  |  | large customer orders or order cancellations; and                                                                       
|
| |  |  | the operating and stock price performance of comparable companies.                                                      

In addition, the stock market in general has experienced extreme
volatility that often has been unrelated to the operating performance of
particular companies. These broad market and industry fluctuations may
adversely affect the trading price of our common stock, regardless of our
actual operating performance.

We may need additional capital to fund expansion of our manufacturing capacity
and our future operations, which may not be available.

We may need additional capital to fund expansion of our manufacturing and
production capacity and our future operations or acquisitions. If we raise
additional capital through the sale of equity or debt securities, the issuance
of such securities could result in dilution to existing stockholders. These
securities could have rights, preferences and privileges that are senior to
those of holders of our common stock. For example, in December 1998 we issued
debt securities for the purchase and improvement of our facilities in Fremont,
California.

If we require additional capital in the future, it might not be available
on acceptable terms, or at all. If we are unable to obtain additional capital
when needed, we may be required to reduce the scope of our planned expansion of
our manufacturing capacity or of our product development and marketing efforts,
which could adversely affect our business and operating results.

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##### Table of Contents



Provisions in our charter, bylaws or Delaware law may delay or prevent a change
in control of our company.

Provisions in our amended and restated certificate of incorporation and
bylaws may have the effect of delaying or preventing a merger, acquisition or
change of control of us, or changes in our management. These provisions
include:



| |  |  | the division of our board of directors into three separate classes,
each with three year terms;                                             
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the right of our board to elect a director to fill a space created by
a board vacancy or the expansion of the board;                        
|
| |  |  | the ability of our board to alter our bylaws;                                                                                               
|
| |  |  | the ability of our board to authorize the issuance of up to 2,000,000
shares of blank check preferred stock; and                            
|
| |  |  | the requirement that only our board or the holders of at least 10% of
our outstanding shares may call a special meeting of our stockholders.

Furthermore, because we are incorporated in Delaware, we are subject to
the provisions of Section 203 of the Delaware General Corporation Law. These
provisions prohibit large stockholders, in particular those owning 15% or more
of the outstanding voting stock, from consummating a merger or combination with
a corporation unless:



| |  |  | 66 2/3% of the shares of voting stock not owned by these large
stockholders approve the merger or combination, or                                                       
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the board of directors approves the merger or combination or the
transaction which resulted in the large stockholder owning 15% or more
of our outstanding voting stock.

We have adopted certain anti-takeover measures that may make it more difficult
for a third party to acquire us.

Our board of directors has the authority to issue up to 2,000,000 shares
of preferred stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of common stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. The issuance of shares of preferred stock,
while potentially providing desirable flexibility in connection with possible
acquisitions and for other corporate purposes, could have the effect of making
it more difficult for a third party to acquire a majority of our outstanding
voting stock. We have no present intention to issue shares of preferred stock.
Further, on April 24, 2001, our board of directors adopted a preferred stock
purchase rights plan intended to guard against certain takeover tactics. The
adoption of this plan was not in response to any proposal to acquire us, and
the board is not aware of any such effort. The existence of this plan could
also have the effect of making it more difficult for a third party to acquire a
majority of our outstanding voting stock. In addition, certain provisions of
our certificate of incorporation may have the effect of delaying or preventing
a change of control, which could adversely affect the market price of our
common stock.

The financial condition of our customers may affect their ability to pay
amounts owed to us.

Many of our customers are facing business downturns that have reduced
their cash balances and their prospects. We frequently allow our customers to
pay for products we ship to them within 30 to 90 days after delivery.
Subsequent to our shipping a product some customers have been unable to make
payments as due, reducing our cash balances and causing us to incur charges to
allow for a possibility that some accounts might not be paid. At least one
customer that owed us a significant amount has filed for bankruptcy protection
and we are unlikely to receive a substantial portion of the amount owed to us
as part of a bankruptcy settlement. Other customers may also be forced to file
for bankruptcy. If our customers do not pay their accounts when due, we will be
required to incur charges that would reduce our earnings.

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Item 3.Qualitative and Quantitative Disclosures About Market Risk

Foreign Currency Risk

Since our Japanese and some Taiwanese invoices are denominated in Japanese
yen, doing business in Japan subjects us to fluctuations in exchange rates
between the U.S. dollar and the Japanese yen. We incurred a foreign transaction
exchange gain of $40,000 for the three months ended March 31, 2002 and a loss
of $223,000 for the three months ended March 31, 2001. We purchase foreign
exchange contracts to hedge against certain trade accounts receivable in
Japanese yen. Under these contracts, increases or decreases in currency
commitments and balance sheet positions, as translated into U.S. dollars, are
primarily offset by realized gains or losses on the hedging contracts. The
outstanding commitments with respect to such foreign exchange contracts had a
total contract value of approximately $4.7 million as of March 31, 2002. Many
of the contracts were entered into six months prior to the due date and the
dates coincide with the receivable terms on customer invoices. By matching the
receivable collection date and contract due date, we attempt to economically
minimize the impact of foreign exchange fluctuations.

Interest Rate Risk

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

|                          |  |           |        |          |  |           |      |                  |  |                  |      |   |  |   |      |   |  |   |      |  
|------------------------- |  | --------- | ------ | -------- |  | --------- | ---- | ---------------- |  | ---------------- | ---- | - |  | - | ---- | - |  | - | ---- | -
|Instrument                |  | Balance   |        | Current  |  | Current   |      | Proforma         |  | Proforma        
|                          |  | March 31, |        | Interest |  | Interest  |      | 10% Interest     |  | 10% Interest    
|                          |  | 2002      |        | Rate     |  | Income/   |      | Rate Decline     |  | Rate Increase   
|                          |  |           |        |          |  | (Expense) |      | Income/(Expense) |  | Income/(Expense)
|                          |  |           |        |          |  |           |      |                  |  |                  |      |   |  |  
|Cash and cash equivalents |  | $         | 37,745 |          |  |           | 2.00 | %                |  | $                | 755  |   |  | $ | 679  |   |  | $ | 830  |  
|                         
|                         
|                         
|                         
|Bonds                     |  |           | 9,550  |          |  |           | 1.96 | %                |  |                  | (187 | ) |  |   | (168 | ) |  |   | (206 | )
|                         
|                         
|                         
|                         
|Notes                     |  |           | 4,990  |          |  |           | 6.02 | %                |  |                  | (300 | ) |  |   | (270 | ) |  |   | (330 | )
|                          |  |           |        |          |  |           |      |                  |  |                  |      |   |  |   |      |   |  |   |      |  
|                          |  |           |        |          |  |           |      |                  |  | $                | 267  |   |  | $ | 241  |   |  | $ | 294  |  
|                          |  |           |        |          |  |           |      |                  |  |                  |      |   |  |   |      |   |  |   |      |  

Equity Risk

We also maintain minority investments in private and publicly traded
companies. These investments are reviewed for other than temporary declines in
value on a quarterly basis. Reasons for other than temporary declines in value
include whether the related company would have insufficient cash flow to
operate for the next twelve months, significant changes in the operating
performance and changes in market conditions. As of March 31, 2002, the
minority investments we continue to hold totaled $12.8 million at estimated
fair value.

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##### Table of Contents






PART II OTHER INFORMATION




Item 1. Legal Proceedings

From time to time the Company is involved in litigation in the normal
course of business. Management believes that the outcome of matters to date
will not have a material adverse effect on the Companys financial position or
results of operations.

On May 1, 2001, the Santa Clara Center for Occupational Safety and Health
filed a complaint for injunctive relief and civil penalties against AXT in the
Superior Court of California, County of Alameda, Hayward Division, Case No.
H218237-5. The complaint alleges violations of California Business and
Professions Code section 17200 et seq., and violations under Proposition 65 and
California Health and Safety Code section 25249 et seq. as a result of AXTs
use of arsenic and inorganic arsenic compounds in its workplace. The complaint
seeks injunctive relief, an order requiring the Company to set up and pay for a
medical surveillance program for individuals exposed to arsenic compounds, an
order requiring the Company provide warnings, information and training to
workers exposed to arsenic compounds, and for civil penalties and attorneys
fees. Mediation has been scheduled for June 24, 2002, and a trial date of
October 25, 2002 has been set. We believe that we have meritorious defenses
against the alleged claims, and intend to defend ourselves vigorously.
However, due to the nature of litigation and fact that the case is still in its
early stages, we cannot determine the possible loss, if any, that may
ultimately be incurred either in the context of a trial or as a result of a
negotiated settlement. We may also incur substantial legal fees in this
matter. However, we do not believe that this action is likely to have a
material adverse effect on our business, financial condition or results of
operation.

Item 2. Changes in Securities and Use of Proceeds



| |     
| | ----
| | None

Item 3. Defaults upon Senior Securities



| |     
| | ----
| | None

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



| |     
| | ----
| | None

Item 5. Other Information



| |     
| | ----
| | None

Item 6. Exhibits and reports on Form 8-K




a. Exhibits



| |     
| | ----
| | None

b. Reports on Form 8-K



| |     
| | ----
| | None

29



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##### Table of Contents






SIGNATURES

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



| | AXT, INC.
| | ---------

|                     |  |  |  |  |                               
|-------------------- |  |  |  |  | ------------------------------
|Dated:   May 3, 2002 |  |  |  |  | By:/s/         Morris S. Young

| | Morris S. Young
Chief Executive Officer
| | ---------------------------------------

|                    |  |  |  |  |                                   
|------------------- |  |  |  |  | ----------------------------------
|Dated:  May 3, 2002 |  |  |  |  | By:/s/            Donald L. Tatzin

| | Donald L. Tatzin
  Chief Financial Officer
| | ------------------------------------------

|                     |  |  |  |  |                                      
|-------------------- |  |  |  |  | -------------------------------------
|Dated:   May 3, 2002 |  |  |  |  | By:/s/                     John Drury

| | John Drury
    Corporate Controller
| | -----------------------------------

30