**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC. 20549**

----

**FORM10-Q**

| **(Mark One)**                                    |   | ** **                                                                                    |
|---------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
| ** **                                        |   | ** **                                                                                    |
| **x**                                             |   | **Quarterly report pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934**  |
| ** **                                        |   | ** **                                                                                    |
| **for the  quarterly period ended June 30, 2007** |
| ** **                                        |   | ** **                                                                                    |
| **or**                                            |
| ** **                                        |   | ** **                                                                                    |
| **o**                                             |   | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |

 

**for thetransition periodfrom          to          **

**CommissionFile Number 000-24085**

----

**AXT,INC.**

(Exact name of registrant as specified in its charter)

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

 

**4281Technology Drive, Fremont, California 94538**

(Address of principal executive offices) (Zip code)

**(510)683-5900**

(Registrant’s telephone number, including area code)

----

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

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

| Large accelerated filer o |   | Accelerated  filer o |   | Non-accelerated filer x |
|--------------------------------|--------|---------------------------|--------|------------------------------|

 

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

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

| Class                           | ** ** | **Outstanding at July 31, 2007** |
|---------------------------------|------------|------------------------------------------------------|
| Common Stock,  $0.001 par value |       | 30,021,987                                           |

 

 

----

AXT, INC.FORM 10-QTABLE OF CONTENTS
| PART I. FINANCIAL INFORMATION                                                                               |   | 3  |
|-------------------------------------------------------------------------------------------------------------|--------|----|
| Item 1. Financial Statements  (unaudited)                                                                   |   | 3  |
| Condensed  Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006                            |   | 3  |
| Condensed  Consolidated Statements of Operations for the three and six months ended June  30, 2007 and 2006 |   | 4  |
| Condensed  Consolidated Statements of Cash Flows for the six months ended June 30, 2007  and 2006           |   | 5  |
| Notes To  Condensed Consolidated Financial Statements                                                       |   | 6  |
| Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations         |   | 15 |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                         |   | 28 |
| Item 4T. Controls  and Procedures                                                                           |   | 29 |
| PART II. OTHER INFORMATION                                                                                  |   | 30 |
| Item 1. Legal Proceedings                                                                                   |   | 30 |
| Item 1A. Risk Factors                                                                                       |   | 30 |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                        |   | 30 |
| Item 3.  Defaults Upon Senior Securities                                                                    |   | 30 |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                |   | 31 |
| Item 5. Other Information                                                                                   |   | 31 |
| Item 6. Exhibits                                                                                            |   | 32 |
| Signatures                                                                                                  |   | 33 |

 

2

----

**PART I. FINANCIAL INFORMATION**

**Item 1.Financial Statements**

AXT, INC.CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited,in thousands, except per share data)
| ** **                                                                                                                                                                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Assets:                                                                                                                                                                                  |       |              |       |                  |       |
| Current assets:                                                                                                                                                                          |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                               |       | $                 | 15,416     |                  | $          | 16,116 |   |
| Short-term  investments                                                                                                                                                                  |       | 18,262            |       | 19,428                |       |
| Accounts  receivable, net of allowances of $674 and $140 as of June 30, 2007 and  December 31, 2006, respectively                                                              |       | 9,882             |       | 9,658                 |       |
| Inventories, net                                                                                                                                                                         |       | 24,953            |       | 20,263                |       |
| Prepaid expenses  and other current assets                                                                                                                                               |       | 4,121             |       | 3,985                 |       |
| Assets held for  sale                                                                                                                                                                    |       | 5,140             |       | 4,659                 |       |
| Total current  assets                                                                                                                                                                    |       | 77,774            |       | 74,109                |       |
| Property, plant  and equipment, net                                                                                                                                                      |       | 14,814            |       | 12,775                |       |
| Restricted  deposits                                                                                                                                                                     |       | 6,850             |       | 7,150                 |       |
| Other assets                                                                                                                                                                             |       | 4,843             |       | 4,298                 |       |
| Total assets                                                                                                                                                                             |       | $                 | 104,281    |                  | $          | 98,332 |   |
|                                                                                                                                                                                     |       |              |       |                  |       |
| Liabilities and  stockholders’ equity:                                                                                                                                              |       |              |       |                  |       |
| Current  liabilities:                                                                                                                                                                    |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                         |       | $                 | 2,141      |                  | $          | 3,764 |   |
| Accrued  liabilities                                                                                                                                                                     |       | 3,426             |       | 3,358                 |       |
| Current portion  of long-term debt                                                                                                                                                       |       | 450               |       | 450                   |       |
| Income taxes  payable                                                                                                                                                                    |       | 335               |       | 178                   |       |
| Total current  liabilities                                                                                                                                                               |       | 6,352             |       | 7,750                 |       |
| Long-term debt,  net of current portion                                                                                                                                                  |       | 6,456             |       | 6,839                 |       |
| Other long-term  liabilities                                                                                                                                                             |       | 2,592             |       | 2,543                 |       |
| Total  liabilities                                                                                                                                                                       |       | 15,400            |       | 17,132                |       |
| Commitments and  contingencies (Note 11)                                                                                                                                            |       |              |       |                  |       |
| Stockholders’  equity:                                                                                                                                                              |       |              |       |                  |       |
| Preferred stock,  $0.001 par value per share; 2,000 shares authorized; 883 shares issued and  outstanding as of June 30, 2007 and December 31, 2006.                                |       | 3,532             |       | 3,532                 |       |
| Common stock,  $0.001 par value per share; 70,000 shares authorized; 29,975 and 29,011  shares issued and outstanding as of June 30, 2007 and December 31,  2006, respectively |       | 30                |       | 29                    |       |
| Additional  paid-in capital                                                                                                                                                              |       | 184,988           |       | 180,936               |       |
| Accumulated  deficit                                                                                                                                                                     |       | (101,275          | )          | (103,832              | )          |
| Accumulated  other comprehensive income                                                                                                                                                  |       | 1,606             |       | 535                   |       |
| Total  stockholders’ equity                                                                                                                                                         |       | 88,881            |       | 81,200                |       |
| Total liabilities and  stockholders’ equity                                                                                                                                         |       | $                 | 104,281    |                  | $          | 98,332 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

3

----

AXT, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited,in thousands, except per share data)
| ** **                                                | ** ** | **Three Months Ended   June 30, ** | ** ** | **Six Months Ended   June 30, ** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                                    | ** ** | **2006**                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                      |       |                                                        |       |                                                      |       |   |   |   |   |
| Revenue                                                   |       | $                                                           | 13,639     |                                                      | $          | 10,355 |   | $ | 26,165 |   | $ | 18,826 |   |
| Cost of revenue                                           |       | 8,607                                                       |       | 7,596                                                     |       | 15,728 |   | 14,557 |   |
| Gross profit                                              |       | 5,032                                                       |       | 2,759                                                     |       | 10,437 |   | 4,269 |   |
| Operating  expenses:                                      |       |                                                        |       |                                                      |       |   |   |   |   |
| Selling, general and administrative                       |       | 3,743                                                       |       | 3,853                                                     |       | 7,446 |   | 7,083 |   |
| Research and development                                  |       | 348                                                         |       | 571                                                       |       | 808 |   | 1,105 |   |
| Recovery of impairment on assets held for sale            |       | (481                                                        | )          | —                                                    |       | (481 | ) | — |   |
| Restructuring benefit                                     |       | —                                                      |       | —                                                    |       | — |   | (2 | ) |
| Total operating expenses                                  |       | 3,610                                                       |       | 4,424                                                     |       | 7,773 |   | 8,186 |   |
| Income (loss)  from continuing operations                 |       | 1,422                                                       |       | (1,665                                                    | )          | 2,664 |   | (3,917 | ) |
| Interest income,  net                                     |       | 225                                                         |       | 111                                                       |       | 449 |   | 239 |   |
| Other income  (expense), net                              |       | (272                                                        | )          | 814                                                       |       | (283 | ) | 1,052 |   |
| Income (loss)  before provision for income taxes          |       | 1,375                                                       |       | (740                                                      | )          | 2,830 |   | (2,626 | ) |
| Provision for  income taxes                               |       | 162                                                         |       | 138                                                       |       | 273 |   | 456 |   |
| Income (loss)  from continuing operations                 |       | 1,213                                                       |       | (878                                                      | )          | 2,557 |   | (3,082 | ) |
| Discontinued  operations:                                 |       |                                                        |       |                                                      |       |   |   |   |   |
| Gain from discontinued operations, net of tax             |       | —                                                      |       | 2                                                         |       | — |   | 3 |   |
| Net income (loss)                                         |       | $                                                           | 1,213      |                                                      | $          | (876 | ) | $ | 2,557 |   | $ | (3,079 | ) |
| Basic income  (loss) per share:                           |       |                                                        |       |                                                      |       |   |   |   |   |
| Income (loss) from continuing operations                  |       | $                                                           | 0.04       |                                                      | $          | (0.04 | ) | $ | 0.08 |   | $ | (0.14 | ) |
| Gain from discontinued operations, net of tax             |       | —                                                      |       | —                                                    |       | — |   | — |   |
| Net income (loss)                                         |       | $                                                           | 0.04       |                                                      | $          | (0.04 | ) | $ | 0.08 |   | $ | (0.14 | ) |
|                                                      |       |                                                        |       |                                                      |       |   |   |   |   |
| Shares used in  computing basic income (loss) per share   |       | 29,943                                                      |       | 23,052                                                    |       | 29,871 |   | 23,019 |   |
| Diluted income  (loss) per share:                         |       |                                                        |       |                                                      |       |   |   |   |   |
| Income (loss) from continuing operations                  |       | $                                                           | 0.04       |                                                      | $          | (0.04 | ) | $ | 0.08 |   | $ | (0.14 | ) |
| Gain from discontinued operations, net of tax             |       | —                                                      |       | —                                                    |       | — |   | — |   |
| Net income (loss)                                         |       | $                                                           | 0.04       |                                                      | $          | (0.04 | ) | $ | 0.08 |   | $ | (0.14 | ) |
|                                                      |       |                                                        |       |                                                      |       |   |   |   |   |
| Shares used in  computing diluted income (loss) per share |       | 31,142                                                      |       | 23,052                                                    |       | 31,233 |   | 23,019 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

4

----

AXT, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited,in thousands)
| ** **                                                                  | ** ** | **Six  Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                  | ** ** | **June 30,**          | ** ** |
| ** **                                                                  | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                      |       |                       |       |   |   |
| Net income (loss)                                                           |       | $                          | 2,557      |   | $ | (3,079 | ) |
| Adjustments to reconcile net income (loss) to net  cash used in operations: |       |                       |       |   |   |
| Depreciation                                                                |       | 686                        |       | 1,761 |   |
| Accretion of marketable securities premium/discount                         |       | (48                        | )          | (30 | ) |
| Loss on disposal of property, plant and equipment                           |       | —                     |       | 67 |   |
| Stock-based compensation                                                    |       | 211                        |       | 443 |   |
| Realized loss (gain) on sale of investments                                 |       | 29                         |       | (1,438 | ) |
| Recovery of impairment on assets held for sale                              |       | (481                       | )          | — |   |
| Changes in assets and liabilities:                                          |       |                       |       |   |   |
| Accounts receivable, net                                                    |       | (183                       | )          | (2,203 | ) |
| Inventories                                                                 |       | (4,590                     | )          | (36 | ) |
| Prepaid expenses                                                            |       | (36                        | )          | (1,801 | ) |
| Other assets                                                                |       | (512                       | )          | 89 |   |
| Accounts payable                                                            |       | (1,656                     | )          | 383 |   |
| Accrued liabilities                                                         |       | 51                         |       | (975 | ) |
| Income taxes payable                                                        |       | 149                        |       | 13 |   |
| Other long-term liabilities                                                 |       | (26                        | )          | 61 |   |
| Net cash used in operating activities                                       |       | (3,849                     | )          | (6,745 | ) |
|                                                                        |       |                       |       |   |   |
| Cash flows from  investing activities:                                      |       |                       |       |   |   |
| Purchases of property, plant and equipment                                  |       | (2,298                     | )          | (1,331 | ) |
| Proceeds from disposal of property, plant and  equipment                    |       | —                     |       | 161 |   |
| Purchases of marketable securities                                          |       | (10,254                    | )          | (4,697 | ) |
| Proceeds from sale of marketable securities                                 |       | 11,911                     |       | 5,985 |   |
| Decrease in restricted deposits                                             |       | 300                        |       | 150 |   |
| Net cash used in investing activities                                       |       | (341                       | )          | 268 |   |
|                                                                        |       |                       |       |   |   |
| Cash flows from  financing activities:                                      |       |                       |       |   |   |
| Proceeds from issuance of common stock, net                                 |       | 3,842                      |       | 298 |   |
| Long-term debt payments                                                     |       | (387                       | )          | (318 | ) |
| Net cash provided by (used in) financing activities                         |       | 3,455                      |       | (20 | ) |
| Effect of  exchange rate changes on cash and cash equivalents               |       | 35                         |       | 78 |   |
| Net decrease in  cash and cash equivalents                                  |       | (700                       | )          | (6,419 | ) |
| Cash and cash  equivalents at the beginning of the period                   |       | 16,116                     |       | 17,472 |   |
| Cash and cash  equivalents at the end of the period                         |       | $                          | 15,416     |   | $ | 11,053 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

5

----

AXT, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

**Note 1. Basis of Presentation**

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

Our management has made anumber of estimates and assumptions relating to the reporting of assets andliabilities and the disclosure of contingent assets and liabilities to preparethese condensed consolidated financial statements in conformity with accountingprinciples generallyaccepted in the United States of America. Actual results could differmaterially from those estimates.

The results of operationsare not necessarily indicative of the results to be expected in the future orfor the full fiscal year. It is recommended that these condensed consolidatedfinancial statements be read in conjunction with our consolidated financialstatements and the notes thereto included in our 2006 Annual Report on Form10-K filed with the Securities and Exchange Commission (“SEC”) on March 23,2007 and our Quarterly Report on Form 10-Q filed with the SEC onMay 11, 2007.

**Note 2. DiscontinuedOperations**

Our condensed consolidated financial statements havebeen presented to reflect the opto-electronics business as a discontinuedoperation for all periods presented. Operating results of the discontinuedoperation are as follows (in thousands):
| ** **                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                              |       | $                                               | —     |                                          | $          | — |   | $ | — |   | $ | — |   |
| Cost of revenue                      |       | —                                          |       | —                                        |       | — |   | — |   |
| Gross profit                         |       | —                                          |       | —                                        |       | — |   | — |   |
| Operating expenses:                  |       |                                            |       |                                          |       |   |   |   |   |
| Selling, general  and administrative |       | —                                          |       | (2                                            | )          | — |   | (3 | ) |
| Total operating  expenses            |       | —                                          |       | —                                        |       | — |   | — |   |
| Gain from operations,  net of tax    |       | —                                          |       | 2                                             |       | — |   | 3 |   |
| Net income                           |       | $                                               | —     |                                          | $          | 2 |   | $ | — |   | $ | 3 |   |

 

In the first quarter of2007, we dissolved the corporation that previously operated our discontinuedoperations and transferred the cash balance to our continuing operations.Accordingly, we no longer have discontinued operations. In the three and sixmonths ended June 30, 2006, the $2,000 and $3,000, respectively, in income wasinterest earned on cash balances held in the discontinued operations.

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

 
| ** **                        | ** ** | **June 30, 2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Current assets:                   |       |                        |       |                        |       |
| Cash                              |       | $                           | —     |                        | $          | 395 |   |
| Total current assets              |       | —                      |       | 395                         |       |
| Total assets                      |       | $                           | —     |                        | $          | 395 |   |
|                              |       |                        |       |                        |       |
| Net assets                        |       | —                      |       | 395                         |       |
| Total liabilities and  net assets |       | $                           | —     |                        | $          | 395 |   |

 

6

----

**Note****3. Accounting forStock-Based Compensation**

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

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

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

Under the modifiedprospective application transition method as provided by SFAS 123(R), we recorded $91,000 and $186,000 ofstock compensation expense in our unaudited condensed consolidated statementsof operations for the three months ended June 30, 2007, and 2006,respectively, and $211,000 and $443,000 of stock compensation expense in ourunaudited condensed consolidated statements of operations for the six monthsended June 30, 2007, and 2006, respectively. Weelected not to capitalize any stock-based compensation to inventory as ofJanuary 1, 2006 when the provisions of SFAS 123(R) were initiallyadopted. We utilized theBlack-Scholes valuation model for estimating the fair value of the stockcompensation granted both before and after the adoption of SFAS 123(R). Thefollowing table summarizes the compensation expense related to our stock-basedcompensation plan (in thousands, except per share data):
|                                                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Stock-based  compensation in the form of employee stock options, included in: |       |                                            |       |                                          |       |   |   |   |   |
|                                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Cost of revenue                                                                    |       | $                                               | 13         |                                          | $          | 32 |   | $ | 26 |   | $ | 60 |   |
| Selling, general  and administrative                                               |       | 60                                              |       | 91                                            |       | 149 |   | 264 |   |
| Research and  development                                                          |       | 18                                              |       | 63                                            |       | 36 |   | 119 |   |
|                                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Total stock-based  compensation                                                    |       | 91                                              |       | 186                                           |       | 211 |   | 443 |   |
| Tax effect on  stock-based compensation                                            |       | —                                          |       | —                                        |       | — |   | — |   |
|                                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Net effect on  net income (loss)                                                   |       | $                                               | 91         |                                          | $          | 186 |   | $ | 211 |   | $ | 443 |   |
|                                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Effect on basic  net income (loss) per share                                       |       | $                                               | 0.00       |                                          | $          | (0.01 | ) | $ | 0.01 |   | $ | (0.02 | ) |
| Effect on diluted net  income (loss) per share                                     |       | $                                               | 0.00       |                                          | $          | (0.01 | ) | $ | 0.01 |   | $ | (0.02 | ) |

 

***Stock options***

As of June 30, 2007 and 2006, the totalcompensation costs related to unvested stock-based awards granted to employeesunder our stock option plan but not yet recognized was approximately $851,000and $1.0 million, respectively, net of estimated forfeitures of $60,000 and$44,000, respectively, and will be adjusted for subsequent changes in estimatedforfeitures. This cost will be amortized on a straight-line basis over aweighted-average period of approximately 2.2 years. We elected not tocapitalize any stock-based compensation to inventory as of June 30, 2007and 2006, due to the immateriality of the amount.

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

7

----

We estimate the fairvalue of stock options using a Black-Scholes valuation model, consistent withthe provisions of SFAS 123(R), Securities and Exchange Commission StaffAccounting Bulletin No. 107 and our prior period pro forma disclosures of netloss, including stock-based compensation (determined under a fair value methodas prescribed by SFAS No. 123). There were no stock option grants made inthe three and six months ended June 30, 2007. The fair value of our stockoptions granted to employees for the three and six months ended June 30, 2006was estimated using the following weighted-average assumptions:
|                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                        | ** ** | **2006**                                      | ** ** |
| Expected term (in years)    |       | 5.0                                             |       | 5.0                                           |       |
|                        |       |                                            |       |                                          |       |
| Volatility                  |       | 83.95                                           | %          | 85.91                                         | %          |
|                        |       |                                            |       |                                          |       |
| Expected dividend           |       | 0                                               | %          | 0                                             | %          |
|                        |       |                                            |       |                                          |       |
| Risk-free interest rate     |       | 5.10                                            | %          | 4.86                                          | %          |
|                        |       |                                            |       |                                          |       |
| Estimated forfeitures       |       | 2.90                                            | %          | 9.59                                          | %          |
|                        |       |                                            |       |                                          |       |
| Weighted-average fair value |       | $                                               | 2.67       |                                          | $          | 1.68 |   |
|                             |            |                                                 |            |                                               |            |  |  |

 

The following table summarizes the stock optiontransactions during the six months ended June 30, 2007 (in thousands, exceptper share data):
| ** **                                                    | ** ** | **Shares** | ** ** | **Weighted-  average  Exercise  Price** | ** ** | **Weighted-  average  Remaining  Contractual  Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | ** ** | ** ** | ** **                              | ** ** | **(in years**)                                  | ** ** | ** **                      | ** ** |
| Options  outstanding as of December 31, 2006                  |       | 2,728      |       | $                                       | 2.51       |                                                 |       |                            |       |   |
|                                                          |       |       |       |                                    |       |                                                 |       |                            |       |
| Granted                                                       |       | —     |       | —                                  |       |                                                 |       |                            |       |
|                                                          |       |       |       |                                    |       |                                                 |       |                            |       |
| Exercised                                                     |       | (91        | )          | 2.49                                    |       |                                                 |       |                            |       |
|                                                          |       |       |       |                                    |       |                                                 |       |                            |       |
| Canceled                                                      |       | (17        | )          | 1.36                                    |       |                                                 |       |                            |       |
|                                                          |       |       |       |                                    |       |                                                 |       |                            |       |
| Options  outstanding as of June 30, 2007                 |       | 2,620      |       | $                                       | 2.52       |                                                 | 6.04       |                            | $          | 5,949 |   |
|                                                          |       |       |       |                                    |       |                                                 |       |                            |       |
| Options vested  and expected to vest as of June 30, 2007 |       | 2,575      |       | $                                       | 2.53       |                                                 | 6.00       |                            | $          | 5,843 |   |
|                                                          |       |       |       |                                    |       |                                                 |       |                            |       |
| Options exercisable as  of June 30, 2007                 |       | 1,926      |       | $                                       | 2.65       |                                                 | 5.27       |                            | $          | 4,365 |   |

 

The options outstanding and exercisable as of June 30,2007 were in the following exercise price ranges:
| **Options Outstanding as of June 30, 2007** | ** ** | **Options Exercisable  as of June 30, 2007** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **Range of Exercise Price**                                | ** ** | **Shares**                                                            | ** ** | **Weighted-average  Exercise Price** | ** ** | **Weighted-average  Remaining  Contractual Life** | ** ** | **Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
| $1.17 - $ 1.38                                                       |       | 1,436,169                                                             |       | $ | 1.29 |   | 6.60 |   | 961,148 |   | $ | 1.30 |   |
| $1.39 - $ 1.44                                                       |       | 11,500                                                                |       | $ | 1.41 |   | 7.89 |   | 5,886 |   | $ | 1.41 |   |
| $1.45 - $ 2.24                                                       |       | 602,530                                                               |       | $ | 2.17 |   | 5.23 |   | 559,896 |   | $ | 2.18 |   |
| $2.25 - $ 5.00                                                       |       | 452,005                                                               |       | $ | 4.09 |   | 6.27 |   | 281,754 |   | $ | 3.74 |   |
| $5.01 - $41.50                                                            |       | 117,500                                                               |       | $ | 13.41 |   | 2.27 |   | 117,500 |   | $ | 13.41 |   |
|                                                                      |       | 2,619,704                                                             |       | $ | 2.52 |   | 6.04 |   | 1,926,184 |   | $ | 2.65 |   |

 

8

----

Thetotal intrinsic value of options exercised for the three and six months endedJune 30, 2007 was $90,000 and $160,000, respectively. Cash received fromoption exercises for the three and six months ended June 30, 2007 was$183,000 and $228,000, respectively. The total intrinsic value of optionsexercised for the three and six months ended June 30, 2006 was $167,000 and$233,000, respectively. Cash received from option exercises for the three andsix months ended June 30, 2006 was $232,000 and $298,000, respectively.

***Restrictedstock awards***

A summary of activity related to restrictedstock awards for the three months ended June 30, 2007 is presented below:
|                                                                          | ** ** | **Shares** | ** ** | **Weighted-Average  Grant Date Fair Value** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
| Non-vested  restricted stock shares outstanding at beginning of the year |       | —     |       | $                                                          | —     |   |
| Restricted stock  shares granted                                         |       | 10,608     |       | $                                                          | 3.77       |   |
| Restricted stock  shares vested                                          |       | —     |       | $                                                          | —     |   |
| Non-vested  restricted stock shares outstanding at June 30, 2007         |       | 10,608     |       | $                                                          | 3.77       |   |

 

AtJune 30, 2007, we had $39,000 of unrecognized compensation expense, net offorfeitures, related to restricted stock awards, which will be recognized overthe weighted average period of 2.9 years. During the three and six months endedJune 30, 2007 no shares of restricted stock vested.

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

Our cash, cash equivalents and investments areclassified as follows (in thousands):
| ** **                                    | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | ** **                  | ** ** | **Gross**                       | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Amortized**               | ** ** | **Unrealized**                  | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                    | ** ** | **Cost**                    | ** ** | **Gain**                        | ** ** | **(Loss)** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Gain** | ** ** | **(Loss)** | ** ** | **Value** | ** ** |
| **Classified  as:**                           | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash                                          |       | $                           | 6,427      |                            | $          | — |   | $ | — |   | $ | 6,427 |   | $ | 6,892 |   | $ | — |   | $ | — |   | $ | 6,892 |   |
| Cash  equivalents:                            |       |                        |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market fund                             |       | 6,797                       |       | —                          |       | — |   | 6,797 |   | 7,045 |   | — |   | — |   | 7,045 |   |
| U.S. Treasury and agency securities           |       | 2,192                       |       | —                          |       | — |   | 2,192 |   | 2,179 |   | — |   | — |   | 2,179 |   |
|                                          |       |                        |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total cash  equivalents                       |       | 8,989                       |       | —                          |       | — |   | 8,989 |   | 9,224 |   | — |   | — |   | 9,224 |   |
| Total cash and  cash equivalents              |       | 15,416                      |       | —                          |       | — |   | 15,416 |   | 16,116 |   | — |   | — |   | 16,116 |   |
|                                          |       |                        |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments:                                  |       |                        |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasury and agency securities           |       | 4,613                       |       | —                          |       | (18 | ) | 4,595 |   | 12,277 |   | — |   | (39 | ) | 12,238 |   |
| Asset-backed securities                       |       | 22                          |       | —                          |       | — |   | 22 |   | 809 |   | — |   | (1 | ) | 808 |   |
| Commercial paper                              |       | —                      |       | —                          |       | — |   | — |   | 500 |   | — |   | — |   | 500 |   |
| Corporate bonds                               |       | 20,048                      |       | 484                             |       | (37 | ) | 20,495 |   | 13,035 |   | — |   | (3 | ) | 13,032 |   |
| Total investments                             |       | 24,683                      |       | 484                             |       | (55 | ) | 25,112 |   | 26,621 |   | — |   | (43 | ) | 26,578 |   |
| Total cash, cash  equivalents and investments |       | $                           | 40,099     |                            | $          | 484 |   | $ | (55 | ) | $ | 40,528 |   | $ | 42,737 |   | $ | — |   | $ | (43 | ) | $ | 42,694 |   |
| **Contractual  maturities on investments:**   | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Mature within 1 year                          |       | $                           | 12,694     |                            |       |   |   |   | $ | 12,770 |   | $ | 13,767 |   |   |   |   |   | $ | 13,727 |   |
| Mature after 1 through 5 years                |       | 11,989                      |       |                            |       |   |   | 12,342 |   | 12,854 |   |   |   |   |   | 12,851 |   |
|                                          |       | $                           | 24,683     |                            |       |   |   |   | $ | 25,112 |   | $ | 26,621 |   |   |   |   |   | $ | 26,578 |   |

 

9

----

The investments include $6.9 million and $7.2 millionrecorded as restricted deposits on the condensed consolidated balance sheets asof June 30, 2007 and December 31, 2006, respectively, as a result of theoutstanding principal amount on our industrial revenue bonds.

We manage our investments as a single portfolio ofhighly marketable securities that is intended to be available to meet ourcurrent cash requirements. For the three and six months ended June 30,2007, we had $19,000 and $29,000, respectively, in gross realized losses onsales of our available-for-sale securities. For the three and six months endedJune 30, 2006, we had $0.4 million and $1.4 million, respectively, in grossrealized gains on sales of our available-for-sale securities.

The gross unrealized losses related to our portfolioof available-for-sale securities were primarily due to a decrease in the fairvalue of debt securities as a result of an increase in interest rates during2006 and the first six months of 2007. We have determined that the grossunrealized losses on our available-for-sale securities as of June 30, 2007 aretemporary in nature. We reviewed our investment portfolio to identify andevaluate investments that have indications of possible impairment. Factorsconsidered in determining whether a loss is temporary include the magnitude ofthe decline in market value, the length of time the market value has been belowcost (or adjusted cost), credit quality, and our ability and intent to hold thesecurities for a period of time sufficient to allow for any anticipatedrecovery in market value. The following table provides a breakdown of ouravailable-for-sale securities with unrealized losses as of June 30, 2007 (inthousands):
|                                     | ** ** | **In Loss Position** | ** ** | **In Loss Position** | ** ** | **Total In**      | ** ** |
|-------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **< 12 months**   | ** ** | **> 12 months**   | ** ** | **Loss Position** | ** ** |
| ** **                          | ** ** | ** **                     | ** ** | **Gross**                      | ** ** | ** **             | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                          | ** ** | **Fair**                       | ** ** | **Unrealized**                 | ** ** | **Fair**               | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                          | ** ** | **Value**                      | ** ** | **(Loss)**                     | ** ** | **Value**              | ** ** | **(Loss)** | ** ** | **Value** | ** ** | **(Loss)** | ** ** |
| Investments:                        |       |                           |       |                           |       |                   |       |   |   |   |   |   |   |
| U.S. Treasury and agency securities |       | $                              | 2,644      |                           | $          | (4                     | )          | $ | 1,951 |   | $ | (14 | ) | $ | 4,595 |   | $ | (18 | ) |
| Corporate bonds                     |       | 5,811                          |       | (37                            | )          | —                 |       | — |   | 5,811 |   | (37 | ) |
| Total in loss  position             |       | $                              | 8,455      |                           | $          | (41                    | )          | $ | 1,951 |   | $ | (14 | ) | $ | 10,406 |   | $ | (55 | ) |

 

**Note 5. Inventories, Net**

The components ofinventories are summarized below (in thousands):
|                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|-------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Inventories,  net: |       |              |       |                  |       |
| Raw materials      |       | $                 | 11,081     |                  | $          | 8,419 |   |
| Work in process    |       | 12,059            |       | 11,222                |       |
| Finished goods     |       | 1,813             |       | 622                   |       |
|               |       | $                 | 24,953     |                  | $          | 20,263 |   |

 

***Note 6.***Recovery of Impairment on Assets Held for Sale

During the three months ended June 30, 2007, webenefited from a recovery of impairment on assets held for sale in connectionwith our adjustment of the fair value of our U.S. property located in Fremont,California, which has been decontaminated and is being prepared for sale  We recorded a $481,000 market valueadjustment after we entered into an agreement with an independent third partypurchaser in June 2007 to purchase the property for estimated net proceeds of$5.1 million, after deducting estimated commission and selling expenses. Weexpect the sale to be completed in the third quarter of 2007. This property hasbeen classified as “assets held for sale” in the amount of $5.1 million on thecondensed consolidated balance sheet as of June 30, 2007.

10

----

**Note7. Net Income (Loss) Per Share**

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

A reconciliation of thenumerators and denominators of the basic and diluted net income (loss) pershare calculations is as follows (in thousands, except per share data):
|                                                                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                          | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Numerator:                                                                          |       |                             |       |                           |       |   |   |   |   |
| Net income (loss)                                                                   |       | $                                | 1,213      |                           | $          | (876 | ) | $ | 2,557 |   | $ | (3,079 | ) |
| Less: Preferred stock dividends                                                     |       | (44                              | )          | (44                            | )          | (88 | ) | (88 | ) |
|                                                                                |       |                             |       |                           |       |   |   |   |   |
| Net income (loss) available to common stockholders                                  |       | $                                | 1,169      |                           | $          | (920 | ) | $ | 2,469 |   | $ | (3,167 | ) |
| Denominator:                                                                        |       |                             |       |                           |       |   |   |   |   |
| Denominator for basic net income (loss) per share -  weighted average common shares |       | 29,943                           |       | 23,052                         |       | 29,871 |   | 23,019 |   |
| Effect of dilutive securities:                                                      |       |                             |       |                           |       |   |   |   |   |
| Common stock options                                                                |       | 1,199                            |       | —                         |       | 1,362 |   | — |   |
| Denominator for  dilutive net income (loss) per common share                        |       | 31,142                           |       | 23,052                         |       | 31,233 |   | 23,019 |   |
| Basic net income  (loss) per share                                                  |       | $                                | 0.04       |                           | $          | (0.04 | ) | $ | 0.08 |   | $ | (0.14 | ) |
| Diluted net  income (loss) per share                                                |       | $                                | 0.04       |                           | $          | (0.04 | ) | $ | 0.08 |   | $ | (0.14 | ) |
| Options excluded from  diluted net loss per share as the impact is anti-dilutive    |       | 372                              |       | 2,722                          |       | 362 |   | 2,722 |   |

 

**Note 8. Comprehensive Income**

The components ofcomprehensive income (loss) are as follows (in thousands):
|                                                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| Net income  (loss)                                                        |       | $                                | 1,213      |                           | $          | (876 | ) | $ | 2,557 |   | $ | (3,079 | ) |
| Foreign currency  translation gain                                        |       | 369                              |       | 207                            |       | 599 |   | 78 |   |
| Unrealized gain  (loss) on available-for-sale investments                 |       | 443                              |       | (1,409                         | )          | 472 |   | 1,902 |   |
| Less:  reclassification adjustment for realized gain included in net loss |       | —                           |       | (1,062                         | )          | — |   | (1,438 | ) |
| Comprehensive income  (loss)                                              |       | $                                | 2,025      |                           | $          | (3,140 | ) | $ | 3,628 |   | $ | (2,537 | ) |

 

**Note 9. Segment Information andForeign Operations**

***Segment Information***

We operate in one segmentfor the design, development, manufacture and distribution of high-performancecompound semiconductor substrates and sale of materials. In accordance withSFAS No. 131, *“Disclosures AboutSegments of an Enterprise and Related Information”* (“SFAS No. 131”),our chief operating decision-maker has been identified as the Chief ExecutiveOfficer, who reviews operating results to make decisions about allocating ourresources and assessing our performance. All material operating units qualifyfor aggregation under SFAS No. 131 due to their identical customerbase and similarities in economic characteristics, nature of products andservices, and procurement, manufacturing and distribution processes. Since weoperate in one segment, all financial segment and product line informationrequired by SFAS No. 131 can be found in the condensed consolidatedfinancial statements.

11

----

***Geographical Information***

The following tablerepresents revenue amounts (in thousands) reported for products shipped duringthe respective periods to customers in the corresponding geographic region:
|                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **     | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **     | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net revenues:  |       |                             |       |                           |       |   |   |   |   |
| North America* |       | $                                | 2,756      |                           | $          | 2,703 |   | $ | 6,098 |   | $ | 4,662 |   |
| Europe         |       | 2,606                            |       | 2,258                          |       | 4,671 |   | 3,664 |   |
| Japan          |       | 3,012                            |       | 1,130                          |       | 5,398 |   | 1,796 |   |
| Taiwan         |       | 2,228                            |       | 1,415                          |       | 4,040 |   | 2,929 |   |
| Asia Pacific   |       | 3,037                            |       | 2,849                          |       | 5,958 |   | 5,775 |   |
| Consolidated   |       | $                                | 13,639     |                           | $          | 10,355 |   | $ | 26,165 |   | $ | 18,826 |   |

 

----

*   Primarily the United States

Long-lived assets consistprimarily of property, plant and equipment, and are attributed to thegeographic location in which they are located. Long-lived assets by geographicregion were as follows (in thousands):
|                     | ** ** | **As of**    | ** ** |
|---------------------|------------|-------------------|------------|
| ** **          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| ** **          | ** ** | **2007**          | ** ** | **2006** | ** ** |
| Long-lived  assets: |       |              |       |   |   |
| North America       |       | $                 | 208        |   | $ | 426 |   |
| China               |       | 14,606            |       | 12,349 |   |
|                |       | $                 | 14,814     |   | $ | 12,775 |   |

 

***Significant Customers***

Nocustomer represented more than 10% of revenue for the three months ended June30, 2007. One customer represented 11.4% of revenue for the three months endedJune 30, 2006. No customer represented more than 10% of revenue for the sixmonths ended June 30, 2007. One customer represented 12.7% of revenue for thesix months ended June 30, 2006. Our top five customers represented 35.2% and40.6% of revenue for the three months ended June 30, 2007, and 2006,respectively. Our top five customers represented 33.6% and 38.5% of revenue forthe six months ended June 30, 2007, and 2006, respectively.

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

We have made strategicinvestments in private companies located in China in order to gain access at acompetitive cost to raw materials that are critical to our substrate business.Our investments in these privately-held companies are summarized below (inthousands):
| ** **                                     | ** ** | **Investment Balance as of** | ** ** | ** **                  | ** ** | ** **             | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|------------------------|------------|
| **Company**                                    | ** ** | **June 30,  2007**                     | ** ** | **December 31,  2006** | ** ** | **Accounting  Method** | ** ** | **Ownership  Percentage** | ** ** |
| Beijing Ji Ya  Semiconductor Material Co., Ltd |       | $                                           | 996        |                        | $          | 996                    |       | Consolidated |   | 46 | % |
| Nanjing Jin Mei  Gallium Co., Ltd              |       | 592                                         |       | 592                         |       | Consolidated           |       | 83 |   |
| Beijing BoYu  Manufacturing Co., Ltd           |       | 410                                         |       | 410                         |       | Consolidated           |       | 70 |   |
| Xilingol Tongli  Ge Co. Ltd                    |       | 1,839                                       |       | 1,304                       |       | Equity                 |       | 25 |   |
| Emeishan Jia Mei High  Pure Metals Co., Ltd    |       | 680                                         |       | 670                         |       | Equity                 |       | 25 |   |
|                                                |            |                                             |            |                             |            |                        |            |  |  |  |  |

 

12

----

The investment balancesfor the two companies accounted for under the equity method are included in “otherassets” in the condensed consolidated balance sheets. We own 25% of theownership interests in each of these companies. These two companies are notconsidered variable interest entities because:

·                       bothcompanies have sustainable businesses of their own;

·                       ourvoting power is proportionate to our ownership interests;

·                       weonly recognize our respective share of the losses and/or residual returnsgenerated by the companies if they occur; and

·                       wedo not have a controlling financial interest in, do not maintain operational ormanagement control of, do not control the board of directors of, and are notrequired to provide additional investment or financial support to, eithercompany.

Undistributed retainedearnings relating to our investments were $6.0 million and $4.4 million as ofJune 30, 2007 and December 31, 2006, respectively. Net income recordedfrom our investments was $955,000 and $455,000 for the three months endedJune 30, 2007 and 2006, respectively. Net income recorded from ourinvestments was $1.6 million and $724,000 for the six months endedJune 30, 2007 and 2006, respectively.

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

**Note 11. Commitments andContingencies**

***Indemnification Agreements***

Included in our standardterms and conditions of sale that we enter into in the ordinary course ofbusiness with our customers are standard indemnification arrangements. Pursuantto these arrangements, we indemnify, hold harmless, and agree to reimburse theindemnified parties for losses suffered or incurred by the indemnified party inconnection with any claim by a third party that our products violate orinfringe any U.S. patent, or any copyright or other intellectual propertyright. The term of these indemnification provisions is generally perpetual fromthe date of the execution of the agreement. The maximum potential amount offuture payments we could be required to make under these agreements isunlimited. We have never incurred costs to defend lawsuits or settle claimsrelated to these indemnification agreements. As a result, we believe theestimated fair value of these agreements is minimal.

We have entered intoindemnification agreements with our directors, officers and key employees thatmay require us to indemnify our directors, officers and key employees againstliabilities that may arise by reason of their status or service as directors orofficers or key employees, other than liabilities arising from willfulmisconduct of a culpable nature; to advance their expenses incurred as a resultof any proceeding against them as to which they could be indemnified; and toobtain directors’ and officers’ insurance if available on reasonable terms,which we currently have in place.

13

----

***Product Warranty***

We warrant our products for a specific period of time,generally twelve months, against material defects. We provide for the estimatedfuture costs of warranty obligations in cost of sales when the related revenueis recognized. The accrued warranty costs represent the best estimate at thetime of sale of the total costs that we expect to incur to repair or replaceproduct parts that fail while still under warranty. The amount of accruedestimated warranty costs are primarily based on historical experience as toproduct failures as well as current information on repair costs. On a quarterlybasis, we review the accrued balances and update these based on the historicalwarranty cost trends. The following table reflects the change in our warrantyaccrual, which is included in “accrued liabilities” on the condensedconsolidated balance sheets, during the three months and six months ended June30, 2007 and 2006 (in thousands):

 
| ** **                                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                          |       |                                                |       |                                              |       |   |   |   |   |
| Beginning  accrued warranty and related costs |       | $                                                   | 783        |                                              | $          | 184 |   | $ | 459 |   | $ | 120 |   |
| Charged to cost  of revenue                   |       | 244                                                 |       | 41                                                |       | 696 |   | 146 |   |
| Actual warranty  expenditures                 |       | (78                                                 | )          | (21                                               | )          | (206 | ) | (62 | ) |
| Ending accrued  warranty and related costs    |       | $                                                   | 949        |                                              | $          | 204 |   | $ | 949 |   | $ | 204 |   |

 

***Purchase Commitment***

On February 27,2007, we entered into an agreement with Recapture Metals Limited of Ontario,Canada (“Recapture”), pursuant to which Recapture will supply our subsidiary inthe People’s Repiblic of China with one thousand kilograms per month of99.99999% pure gallium, during the eighteen month period beginning July 1,2007. Under the terms of the agreement, we are required to purchase a minimumof eighteen thousand kilograms of gallium, unless the agreement is terminatedprior to the expiration of the eighteen month period on December 31, 2008.Our total commitment under this agreement is approximately $7.3 million.

**Note 12. Foreign Exchange TransactionGains/Losses**

We incurred foreigncurrency transaction exchange losses of $246,000 and $47,000 for the threemonths ended June 30, 2007, and 2006, respectively. We incurred foreigncurrency transaction exchange losses of $290,000 and gains of $11,000 for thesix months ended June 30, 2007, and 2006, respectively. These amounts areincluded in other income (expense), net on the condensed consolidatedstatements of operations.

***Note13. Income Taxes***

In July 2006, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. (“FIN”) 48,“**Accountingfor Uncertainty in Income Taxes”**. FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with SFAS 109. This interpretationprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. FIN 48 also provides guidance on derecognition of taxbenefits, classification on the balance sheet, interest and penalties,accounting in interim periods, disclosure, and transition. We adopted FIN 48effective January 1, 2007. We recognize interest and penalties related touncertain tax positions in income tax expense. As of June 30, 2007, we do nothave any gross unrecognized tax benefits, nor any accrued interest andpenalties related to uncertain tax positions. As a result of the implementationof FIN 48, we identified $16.4 million in unrecognized tax benefits. Thisamount decreased the tax loss carryforwards in the U.S. which are fully offsetby a valuation allowance. We file income tax returns in the U.S. federal,various states and foreign jurisdictions. We have substantially concluded allU.S. federal and state income tax matters through December 31, 2006.

14

----

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

This quarterly report on Form 10-Q, including thefollowing sections, contains forward-looking statements within the meaning of Section21E of the Securities Exchange Act of 1934, particularly statements relating to our expectations regardingresults of operations, customer demand, improvements in our product quality,our ability to expand our markets and increase sales, customer qualificationsof our products, gross margins, favorable pricing, reliable supply and enhancedsourcing lead-times of raw materials, and our reserve balances.  These forward-looking statements are basedupon management’s current views with respect to future events and financialperformance, and are subject to certain risks and uncertainties that couldcause actual results to differ materially from historical results or thoseanticipated in such forward-looking statements. Such risks and uncertaintiesinclude those set forth under Item 1A “Risk Factors” below,  which identifyimportant factors that could cause actual results to differ materially fromthose predicted in any such forward-looking statements. We caution investorsthat actual results may differ materially from those projected in theforward-looking statements as a result of certain risk factors identified inthis Form 10-Q and other filings we have made with the Securities and ExchangeCommission. Forward-looking statements may be identified by the use ofterms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” andsimilar expressions. Statements concerning our future or expected financialresults and condition, business strategy and plans or objectives for future operationsare forward-looking statements.

These forward-lookingstatements are not guarantees of future performance. Readers are cautioned notto place undue reliance on these forward-looking statements, which speak onlyas of the date hereof. This discussion should be read in conjunction withManagement’s Discussion and Analysis of Financial Condition and Results ofOperations included in our Annual Report on Form 10-K for the year endedDecember 31, 2006 and the condensed consolidated financial statements includedelsewhere in this report.

**Overview**

We are a leadingworldwide developer and producer of high-performance compound and singleelement semiconductor substrates comprising gallium arsenide (GaAs), indiumphosphide (InP) and germanium (Ge). We currently sell the following substrateproducts:
| Product                 | ** ** | ** **                |
|-------------------------|------------|---------------------------|
| **Substrates**          | ** ** | **Diameter**              | ** ** | **Applications** |
| GaAs  (semi-insulating) |       | 2”, 4”, 6” |   | ·  Power amplifiers and integrated circuits for  wireless handsets |
|                    |       |                      |   | ·  Direct broadcast television |
|                    |       |                      |   | ·  High-performance transistors |
|                    |       |                      |   | ·  Satellite communications |
| GaAs  (semi-conducting) |       | 2”, 4”          |   | ·  LEDs |
|                    |       |                      |   | ·  Lasers |
|                    |       |                      |   | ·  Optical couplers |
| InP                     |       | 2”, 4”, 6” |   | ·  Broadband and Fiber optic communications |
| Ge                      |       | 2”, 4”          |   | ·  Satellite solar cells |

 

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

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

15

----

Revenue increased $7.3million, or 39.0%, to $26.2 million for the six months ended June 30, 2007 from$18.8 million for the same period of 2006 primarily due to our improved productquality, higher customer demands for larger diameter wafers, and an increase inraw material sales. As of June 30, 2007, we had available cash, cashequivalents and short-term investments of $33.7 million, excluding restricteddeposits.

***Recovery of Impairment on Assets Held for Sale***

During the three months ended June 30, 2007, webenefited from a recovery of impairment on assets held for sale in connectionwith our adjustment of the fair value of our U.S. property located in Fremont,California, which has been decontaminated and is being prepared for sale, tomarket value. We recorded a $481,000 market value adjustment after we enteredinto an agreement with an independent third party purchaser in June 2007 topurchase the property for estimated net proceeds of $5.1 million, afterdeducting estimated commission and selling expenses. We expect the sale to becompleted in the third quarter of 2007. This property has been classified as “assetsheld for sale” in the amount of $5.1 million on the condensed consolidatedbalance sheet as of June 30, 2007.

**CriticalAccounting Policies and Estimates**

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

A critical accountingpolicy is one that is both material to the presentation of our financialstatements and requires us to make difficult, subjective or complex judgmentsthat could have a material effect on our financial condition and results ofoperations. They may require us to make assumptions about matters that arehighly uncertain at the time of the estimate, and different estimates that wecould have used, or changes in the estimate that are reasonably likely tooccur, may have a material impact on our financial condition or results ofoperations.

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

***Revenue Recognition***

We manufacture and sellhigh-performance compound and single element semiconductor substrates and sellcertain raw materials including gallium, germanium dioxide and pBN crucibles.After we ship our products, there are no remaining obligations or customeracceptance requirements that would preclude recognition of the revenue earnedon the sale. Our products are typically sold pursuant to a purchase orderplaced by our customers, and our terms and conditions of sale do not requirecustomer acceptance. We recognize revenue upon shipment and transfer of titleof products to our customers, which is ordinarily upon shipment from our dock,receipt at the customer’s dock, or removal from consignment inventory at thecustomer’s location, provided that we have received a signed purchase order,the price is fixed or determinable, title and risk of ownership havetransferred, collection of resulting receivables is probable, and productreturns are reasonably estimable. We do not provide training, installation orcommissioning services.

We provide for futurereturns based on historical experience, current economic trends and changes incustomer demand at the time revenue is recognized.

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

16

----

***Allowancefor Doubtful Accounts***

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

As of June 30, 2007and December 31, 2006, our accounts receivable, net, balance was $9.9million and $9.7 million, respectively, which was net of an allowance fordoubtful accounts of $0.7 million and $0.1 million, respectively. The increasein the allowance for doubtful accounts was mainly for our slow-paying customersin Asia. If actual uncollectible accounts differ substantially from ourestimates, revisions to the estimated allowance for doubtful accounts would berequired, which could have a material impact on our financial results for theperiod.

***WarrantyReserve***

We maintain a warrantyreserve based upon our claims experience during the prior twelve months.Warranty costs are accrued at the time revenue is recognized. As ofJune 30, 2007 and December 31, 2006, accrued product warrantiestotaled $949,000 and $459,000, respectively. The increase in accrued warrantiesis attributable to increased claims experienced as well as to an increase inrevenue. If actual warranty costs differ substantially from our estimates,revisions to the estimated warranty liability would be required, which couldhave a material impact on our financial condition and results of operations.

***InventoryValuation***

Inventories are stated atthe lower of cost or market. Cost is determined using the weighted average costmethod. Our inventory consists of raw materials as well as finished goods andwork-in-process that include material, labor and manufacturing overhead costs.Given the nature of our substrate products, and the materials used in themanufacturing process, the wafers and ingots comprising work-in-processmay be held in inventory for up to two years and three years,respectively, as the risk of obsolescence for these materials is low. Weroutinely evaluate the levels of our inventory in light of current marketconditions in order to identify excess and obsolete inventory, and we provide avaluation allowance for certain inventories based upon the age and quality ofthe product and the projections for sale of the completed products. As ofJune 30, 2007 and December 31, 2006, we had an inventory reserve of$12.7 million and $15.4 million for excess and obsolete inventory,respectively. The majority of this inventory has not been scrapped, andaccordingly, may be sold in future periods. If actual demand for our productswere to be substantially lower than estimated, additional inventory adjustmentsfor excess or obsolete inventory might be required, which could have a materialimpact on our business, financial condition and results of operations.

***Impairmentof Investments***

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

We invest in equityinstruments of privately-held companies for business and strategic purposes.These investments are classified as other assets and, other than companies thatwe consolidate, are accounted for under the cost method as we do not have the abilityto exercise significant influence over their operations. We monitor ourinvestments for impairment and would record reductions in carrying value whenevents or changes in circumstances indicate that the carrying valuemay not be recoverable. Determination of impairment is highly subjectiveand is based on a number of factors, including an assessment of the strength ofthe investee’s management, the length of time and extent to which the fairvalue has been less than our cost basis, the financial condition and near-termprospects of the investee, fundamental changes to the business prospects of theinvestee, share prices of subsequent offerings, and our intent and ability tohold the investment for a period of time sufficient to allow for any anticipatedrecovery in our carrying value.

17

----

***Impairmentof Long-Lived Assets***

We evaluate therecoverability of property, equipment and intangible assets in accordance withSFAS No. 144, *“Accounting for theImpairment or Disposal of Long-Lived Assets.”* When events andcircumstances indicate that long-lived assets may be impaired, we comparethe carrying value of the long-lived assets to the projection of futureundiscounted cash flows attributable to these assets. In the event that thecarrying value exceeds the future undiscounted cash flows, we record animpairment charge against income equal to the excess of the carrying value overthe assets’ fair value. Fair values are determined based on quoted marketvalues, discounted cash flows or internal and external appraisals, asapplicable. Assets held for sale are carried at the lower of carrying value orestimated net realizable value.

***EmployeeStock Options***

We grant options topurchase our common stock to substantially all management employees and believethat this program helps us to attract, motivate and retain high qualityemployees, to the ultimate benefit of our stockholders. EffectiveJanuary 1, 2006, we adopted the fair value recognition provisions of SFASNo. 123 (revised 2004), “*Share-BasedPayment*” (“SFAS 123(R)”), using the modified prospectiveapplication transition method. Under this transition method, stock-basedcompensation cost was recognized in the condensed consolidated financialstatements for all share-based payments after January 1, 2006. Compensationcost recognized includes the estimated expense for the portion of the vestingperiod after January 1, 2006 for share-based payments granted prior to,but not vested as of January 1, 2006, based on the grant date fair valueestimated in accordance with the original provisions of SFAS No. 123, “*Accounting for Stock-Based Compensation.”* Results for priorperiods have not been restated, as provided for under the modified prospectiveapplication transition method. As of the date of the filing of thisquarterly report, we believe there have been no material changes to ourcritical accounting policy on employee stock options during the three monthsand six months ended June 30, 2007 compared to that disclosed in our AnnualReport on Form 10K for the fiscal year ended December 31, 2006 filed withthe SEC on March 23, 2007 and our Quarterly Report on Form 10-Q filedwith the SEC on May 11, 2007. See Note 3 to our condensed consolidatedfinancial statements.

***IncomeTaxes***

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

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

In July 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No.48, “**Accountingfor Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN48”)**. FIN 48 clarifies the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements in accordance withSFAS 109. This interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. FIN 48 alsoprovides guidance on derecognition of tax benefits, classification on thebalance sheet, interest and penalties, accounting in interim periods,disclosure, and transition. We adopted FIN 48 effective January 1, 2007.We recognize interest and penalties related to uncertain tax positions inincome tax expense. As of June 30, 2007, we do not have any gross unrecognizedtax benefits, nor any accrued interest and penalties related to uncertain taxpositions. As a result of the implementation of FIN 48, we identified$16.4 million in unrecognized tax benefits. This amount decreased the taxloss carryforwards in the U.S. which are fully offset by a valuation allowance.We file income tax returns in the U.S. federal, various states and foreignjurisdictions. We have substantially concluded all U.S. federal and stateincome tax matters through December 31, 2006.

18

----

**Results of Operations**

**Revenue**
|               | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|---------------|------------|----------------------------------|------------|--------------|------------|----------------|------------|
| ** **    | ** ** | **June 30,**                | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **    | ** ** | **2007**                         | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **    | ** ** | **($ in thousands)**   | ** ** | ** **   | ** ** | ** **     | ** ** |
| GaAs          |       | $                                | 9,296      |         | $          | 8,125          |       | $ | 1,171 |   | 14.4 | % |
| InP           |       | 660                              |       | 613          |       | 47             |       | 7.7 | % |
| Ge            |       | 402                              |       | 169          |       | 233            |       | 137.9 | % |
| Raw materials |       | 3,281                            |       | 1,448        |       | 1,833          |       | 126.6 | % |
| Total revenue |       | $                                | 13,639     |         | $          | 10,355         |       | $ | 3,284 |   | 31.7 | % |

 

Revenue increased $3.3million, or 31.7%, to $13.6 million for the three months ended June 30,2007 from $10.4 million for the three months ended June 30, 2006. TotalGaAs substrate revenue increased $1.2 million, or 14.4%, to $9.3 million forthe three months ended June 30, 2007 from $8.1 million for the threemonths ended June 30, 2006.

Sales of 5 inch and 6inch diameter GaAs substrates were $4.0 million for the three months ended June 30,2007 compared to $3.3 million for the three months ended June 30, 2006.The increase in larger diameter substrate revenue was due to the fact that,while the GaAs device market grew in strength for both cellular and the WLAN(Wide Local Area Network) markets, the compound semiconductor industry has beenexperiencing capacity constraints, particularly in 6 inch; with our excesscapacity, we were able to benefit from the overflow business from ourcompetition.

Sales of 2 inch, 3 inchand 4 inch diameter GaAs substrates were $5.3 million for the three monthsended June 30, 2007 compared with $4.9 million for the three months endedJune 30, 2006. The increase in revenue from smaller diameter substrateswas due to the continued market growth generally of LED laser diodes andcommercial epitaxy.

InP revenue increased$47,000, or 7.7%, to $660,000 for the three months ended June 30, 2007 from$613,000 for the three months ended June 30, 2006. The increase in InPrevenue was primarily due to a one-time sale of $251,000 indium scrap metal.Excluding the impact of the one-time sale, InP substrate revenue decreased dueto a fall in demand from customers in the optical networking industry.

Ge substrate revenueincreased $233,000, or 137.9%, to $402,000 for the three months ended June 30,2007 from $169,000 for the three months ended June 30, 2006. The increasein Ge substrate revenue was due to a customer in Germany who has now qualifiedour product, as demand for photovoltaic applications increases.

Raw materials revenueincreased $1.8 million, or 126.6%, to $3.3 million for the three months endedJune 30, 2007 from $1.4 million for the three months ended June 30, 2006.The increase in raw materials revenue was primarily due to sales of gallium tonew customers in Europe as the demand for gallium increases, as well as anincrease in raw materials pricing. We expect this demand for gallium tocontinue at this pace.
|               | ** ** | **Six Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|---------------|------------|--------------------------------|------------|--------------|------------|----------------|------------|
| ** **    | ** ** | **June 30,**              | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **    | ** ** | **2007**                       | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **    | ** ** | **($ in thousands)** | ** ** | ** **   | ** ** | ** **     | ** ** |
| GaAs          |       | $                              | 18,088     |         | $          | 14,880         |       | $ | 3,208 |   | 21.6 | % |
| InP           |       | 1,178                          |       | 909          |       | 269            |       | 29.6 | % |
| Ge            |       | 943                            |       | 205          |       | 738            |       | 360.0 | % |
| Raw materials |       | 5,911                          |       | 2,832        |       | 3,079          |       | 108.7 | % |
| Other         |       | 45                             |       | —       |       | 45             |       | NM |   |
| Total revenue |       | $                              | 26,165     |         | $          | 18,826         |       | $ | 7,339 |   | 39.0 | % |

 

----

NM = % not meaningful

19

----

Revenue increased $7.3million, or 39.0%, to $26.2 million for the six months ended June 30, 2007from $18.8 million for the six months ended June 30, 2006. Total GaAs substraterevenue increased $3.2 million, or 21.6%, to $18.1 million for the six monthsended June 30, 2007 from $14.9 million for the six months endedJune 30, 2006.

Sales of 5 inch and 6inch diameter GaAs substrates were $8.0 million for the six months endedJune 30, 2007 compared to $6.0 million for the six months endedJune 30, 2006. The increase in larger diameter substrate revenue was dueto the fact that, while the GaAs device market grew in strength for bothcellular and the WLAN (Wide Local Area Network) markets, the compoundsemiconductor industry has been experiencing capacity constraints, particularlyin 6 inch; with our excess capacity, we were able to benefit from the overflowbusiness from our competition.

Sales of 2 inch, 3 inchand 4 inch diameter GaAs substrates were $10.1 million for the six months endedJune 30, 2007 compared to $8.7 million for the six months ended June 30,2006. The increase in revenue from smaller diameter substrates was due to thecontinued market growth generally of LED laser diodes and commercial epitaxy.

InP revenue increased $269,000,or 29.6%, to $1.2 million for the six months ended June 30, 2007 from $0.9million for the six months ended June 30, 2006. The increase in InPrevenue was primarily due to a one-time sale of $251,000 indium scrap metal,while InP substrate revenue was flat from customers in the optical networkingindustry.

Ge substrate revenueincreased $738,000, or 360.0%, to $943,000 for the six months ended June 30,2007 from $205,000 for the six months ended June 30, 2006. The increase inGe substrate revenue was due to an increase in customers in the People’sRepublic of China and to a customer in Germany who has now qualified ourproduct, as demand for photovoltaic applications continues to increase.

Raw materials revenueincreased $3.1 million, or 108.7%, to $5.9 million for the six months endedJune 30, 2007 from $2.8 million for the six months ended June 30, 2006.The increase in raw materials revenue was primarily due to sales of gallium tonew customers in Japan and Europe as the demand for gallium increases, as wellas an increase in raw materials pricing. We expect this demand for gallium tocontinue at this pace.

20

----

***Revenue by Geographic Region***
|                                            | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|--------------|------------|----------------|------------|
| ** **                                 | ** ** | **June 30,**                | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **                                 | ** ** | **2007**                         | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **                                 | ** ** | **($ in thousands)**   | ** ** | ** **   | ** ** | ** **     | ** ** |
| North America *                            |       | $                                | 2,756      |         | $          | 2,703          |       | $ | 53 |   | 2.0 | % |
| *% of total revenue*                       |       | 20                               | %          | 26           | %          |           |       |   |   |
| Europe                                     |       | 2,606                            |       | 2,258        |       | 348            |       | 15.4 | % |
| *% of total revenue*                       |       | 19                               | %          | 22           | %          |           |       |   |   |
| Japan                                      |       | 3,012                            |       | 1,130        |       | 1,882          |       | 166.5 | % |
| *% of total revenue*                       |       | 22                               | %          | 11           | %          |           |       |   |   |
| Taiwan                                     |       | 2,228                            |       | 1,415        |       | 813            |       | 57.5 | % |
| *% of total revenue*                       |       | 16                               | %          | 14           | %          |           |       |   |   |
| Asia Pacific  (excluding Japan and Taiwan) |       | 3,037                            |       | 2,849        |       | 188            |       | 6.6 | % |
| *% of total revenue*                       |       | 22                               | %          | 27           | %          |           |       |   |   |
| Total revenue                              |       | $                                | 13,639     |         | $          | 10,355         |       | $ | 3,284 |   | 31.7 | % |

 

----

*                                        Primarilythe United States

North America revenueincreased by $53,000, or 2.0%, to $2.8 million for the three months endedJune 30, 2007 from $2.7 million for the three months ended June 30,2006.

Europe revenue increasedby $0.3 million, or 15.4%, to $2.6 million for the three months endedJune 30, 2007 from $2.3 million for the three months ended June 30, 2006.This increase came primarily from increased raw materials sales to customers inthe Netherlands.

Japan revenue increasedby $1.9 million, or 166.5%, to $3.0 million for the three months endedJune 30, 2007 from $1.1 million for the three months ended June 30, 2006.The increase came from 2 new customers for raw materials amounting to $1.1million, while sales to existing customers increased by $0.8 million, of which$0.7 million was from raw material sales.

Taiwan revenue increasedby $0.8 million, or 57.5%, to $2.2 million for the three months endedJune 30, 2007 from $1.4 million for the three months ended June 30,2006. $0.7 million of this increase came from existing customers for an evenmix of small diameter wafers and large diameter wafers, while $0.1 million camefrom sales to a new customer for smaller diameter wafers.

Asia Pacific (excludingJapan and Taiwan) revenue increased by $0.2 million, or 6.6%, to $3.0 millionfor the three months ended June 30, 2007 from $2.8 million for the threemonths ended June 30, 2006. Sales to customers in Singapore increased by$0.7 million mainly from large diameter wafers, partially offset by $0.2million decreased sales in the People’s Republic of China (“PRC”) mainly fromdecreased raw materials sales.

21

----

 
|                                            | ** ** | **Six Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|--------------|------------|----------------|------------|
| ** **                                 | ** ** | **June 30,**              | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **                                 | ** ** | **2007**                       | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **                                 | ** ** | **($ in thousands)** | ** ** | ** **   | ** ** | ** **     | ** ** |
| North America *                            |       | $                              | 6,098      |         | $          | 4,662          |       | $ | 1,436 |   | 30.8 | % |
| *% of total revenue*                       |       | 23                             | %          | 25           | %          |           |       |   |   |
| Europe                                     |       | 4,671                          |       | 3,664        |       | 1,007          |       | 27.5 | % |
| *% of total revenue*                       |       | 18                             | %          | 19           | %          |           |       |   |   |
| Japan                                      |       | 5,398                          |       | 1,796        |       | 3,602          |       | 200.6 | % |
| *% of total revenue*                       |       | 21                             | %          | 10           | %          |           |       |   |   |
| Taiwan                                     |       | 4,040                          |       | 2,929        |       | 1,111          |       | 37.9 | % |
| *% of total revenue*                       |       | 15                             | %          | 16           | %          |           |       |   |   |
| Asia Pacific  (excluding Japan and Taiwan) |       | 5,958                          |       | 5,775        |       | 183            |       | 3.2 | % |
| *% of total revenue*                       |       | 23                             | %          | 31           | %          |           |       |   |   |
| Total revenue                              |       | $                              | 26,165     |         | $          | 18,826         |       | $ | 7,339 |   | 39.0 | % |

 

----

*                                        Primarilythe United States

North America revenueincreased by $1.4 million, or 30.8%, to $6.1 million for the six months endedJune 30, 2007 from $4.7 million for the six months ended June 30,2006. We believe our quality has improved as shown by customers that havequalified our products manufactured in the PRC as substrate sales increased by$1.1 million, while raw material sales increased by $0.3 million.

Europe revenue increasedby $1.0 million, or 27.5%, to $4.7 million for the six months endedJune 30, 2007 from $3.7 million for the six months ended June 30,2006. This increase came primarily from increased raw materials sales tocustomers in the Netherlands, and increased substrate sales to customers in Germany,partially offset by decreased substrate sales to customers in France.

Japan revenue increasedby $3.6 million, or 200.6%, to $5.4 million for the six months endedJune 30, 2007 from $1.8 million for the six months ended June 30,2006. The increase came from 5 new customers for raw materials amounting to$2.3 million, while sales to existing customers increased by $1.3 million, ofwhich $0.7 million was from increased substate sales, while $0.6 million wasfrom increased raw material sales.

Taiwan revenue increasedby $1.1 million, or 37.9%, to $4.0 million for the six months endedJune 30, 2007 from $2.9 million for the six months ended June 30,2006. $1.0 million of this increase came from existing customers for an evenmix of small diameter wafers and large diameter wafers, while $0.1 million camefrom sales to 2 new customers for smaller diameter wafers.

Asia Pacific (excludingJapan and Taiwan) revenue increased by $0.2 million, or 3.2%, to $6.0 millionfor the six months ended June 30, 2007 from $5.8 million for the sixmonths ended June 30, 2006. Substrate sales to customers in the PRCincreased by $0.5 million mainly from small diameter wafers, while substratesales to customers in Singapore increased by $0.4 million mainly from large diametersales, partially offset by $0.7 million decreased raw materials sales in thePRC mainly from large one-time raw materials sales in 2006.

22

----

***GrossMargin***
|                  | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|------------------|------------|----------------------------------|------------|--------------|------------|----------------|------------|
| ** **       | ** ** | **June 30,**                | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **       | ** ** | **2007**                         | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **       | ** ** | **($ in thousands)**   | ** ** | ** **   | ** ** | ** **     | ** ** |
| Gross profit     |       | $                                | 5,032      |         | $          | 2,759          |       | $ | 2,273 |   | 82.4 | % |
| *Gross Margin %* |       | 36.9                             | %          | 26.6         | %          |           |       |   |   |
|                  |            |                                  |            |              |            |                |            |  |  |  |  |  |

 

*Gross margin.*Gross margin increased to 36.9% of total revenue for the three months endedJune 30, 2007 from 26.6% of total revenue for the three months endedJune 30, 2006. Gross margin for the three months ended June 30, 2007was positively impacted by sales of approximately $0.4 million of galliumarsenide (“GaAs”) wafers that were previously fully reserved. Product mix alsocontributed to higher gross margins as we sold a greater amount of largerdiameter GaAs wafers, InP scrap metal, as well as raw materials, all of whichcontributed higher gross margins. In addition, we had manufacturing equipmentthat has become fully depreciated since the third quarter of 2006, and theabsence of depreciation expense for this equipment, partially offset bydepreciation on property, plant and equipment additions, contributedapproximately 3.3 percentage points to gross margin in the three months ended June30, 2007. Finally, higher substrate gross margins were also achieved throughbetter slicing techniques, longer length ingot growth, shorter runtimes, andhigher production volumes, partially offset by higher prices of raw materialsfor gallium and arsenic. Gross margin for the three months ended June 30,2006 was positively impacted by sales of approximately $802,000 of GaAs waferswhich were previously fully reserved.
|                  | ** ** | **Six Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|------------------|------------|--------------------------------|------------|--------------|------------|----------------|------------|
| ** **       | ** ** | **June 30,**              | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **       | ** ** | **2007**                       | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **       | ** ** | **($ in thousands)** | ** ** | ** **   | ** ** | ** **     | ** ** |
| Gross profit     |       | $                              | 10,437     |         | $          | 4,269          |       | $ | 6,168 |   | 144.5 | % |
| *Gross Margin %* |       | 39.9                           | %          | 22.7         | %          |           |       |   |   |
|                  |            |                                |            |              |            |                |            |  |  |  |  |  |

 

*Grossmargin.*Gross margin increased to 39.9% of total revenue forthe six months ended June 30, 2007 from 22.7% of total revenue for the sixmonths ended June 30, 2006. Gross margin for the six months endedJune 30, 2007 was positively impacted by sales of approximately $1.1million of GaAs wafers that were previously fully reserved. Product mix alsocontributed to higher gross margins as we sold a greater amount of largerdiameter GaAs wafers, InP scrap metal, as well as raw materials, all of whichcontributed higher gross margins. In addition, we had manufacturing equipmentthat has become fully depreciated since the third quarter of 2006, and theabsence of depreciation expense for this equipment, partially offset bydepreciation on property, plant and equipment additions, contributedapproximately 3.2 percentage points to gross margin in the six months endedJune 30, 2007. Finally, higher substrate gross margins were also achievedthrough better slicing techniques, longer length ingot growth, shorterruntimes, and higher production volumes, partially offset by higher prices ofraw materials for gallium and arsenic. Gross margin for the six months endedJune 30, 2006 was positively impacted by sales of approximately $1.4million of GaAs wafers, which were previously fully reserved, and byapproximately $53,000 as a result of a reversal of a sales return reserve establishedin 2004 as we favorably resolved an outstanding matter with a customer.

***Selling,General and Administrative Expenses***
|                                               | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------|------------|----------------|------------|
| ** **                                    | ** ** | **June 30,**                | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **                                    | ** ** | **2007**                         | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **                                    | ** ** | **($ in thousands)**   | ** ** | ** **   | ** ** | ** **     | ** ** |
| Selling, general and  administrative expenses |       | $                                | 3,743      |         | $          | 3,853          |       | $ | (110 | ) | (2.9 | )% |
| *% of total revenue*                          |       | 27.4                             | %          | 37.2         | %          |           |       |   |   |
|                                               |            |                                  |            |              |            |                |            |  |  |  |  |  |

 

Selling, general andadministrative expenses decreased $0.1 million to $3.7 million for the threemonths ended June 30, 2007 from $3.9 million for the three months endedJune 30, 2006. The decrease was primarily due to the absence in 2007 of$0.3 million decontamination fees on our property owned in Fremont, California,and $0.2 million sales compensation expenses given to customers as compensationfor their epitaxial costs on defective wafers supplied to them. We also had$0.1 million lower professional fees, and $0.1 million lower severancepayments, partially offset by $0.6 million higher bad debt expenses mainly forour slow-paying customers in Asia.

23

----

 
|                                               | ** ** | **Six Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|--------------|------------|----------------|------------|
| ** **                                    | ** ** | **June 30,**              | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **                                    | ** ** | **2007**                       | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **                                    | ** ** | **($ in thousands)** | ** ** | ** **   | ** ** | ** **     | ** ** |
| Selling, general and  administrative expenses |       | $                              | 7,446      |         | $          | 7,083          |       | $ | 363 |   | 5.1 | % |
| *% of total revenue*                          |       | 28.5                           | %          | 37.6         | %          |           |       |   |   |
|                                               |            |                                |            |              |            |                |            |  |  |  |  |  |

 

Selling, general andadministrative expenses increased $0.4 million to $7.4 million for the sixmonths ended June 30, 2007 from $7.1 million for the six months endedJune 30, 2006. The increase was primarily due to $0.5 million higher baddebt expenses mainly for our slow-paying customers in Asia, $0.2 million higherlegal expenses which was mainly our portion of the settlement of the securitiesclass action lawsuit reached on April 24, 2007, $0.1 million higher overseastravel expenses, and $0.1 million higher sales commission due to increasedsales volume, partially offset by the absence in 2007 of $0.3 million sales compensationexpenses given to customers as compensation for their epitaxial costs ondefective wafers supplied to them and $0.2 million decontamination fees on ourproperty owned in Fremont, California.

***Researchand Development***
|                           | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|---------------------------|------------|----------------------------------|------------|--------------|------------|----------------|------------|
| ** **                | ** ** | **June 30,**                | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **                | ** ** | **2007**                         | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **                | ** ** | **($ in thousands)**   | ** ** | ** **   | ** ** | ** **     | ** ** |
| Research and  development |       | $                                | 348        |         | $          | 571            |       | $ | (223 | ) | (39.1 | )% |
| *% of total revenue*      |       | 2.6                              | %          | 5.5          | %          |           |       |   |   |
|                           |            |                                  |            |              |            |                |            |  |  |  |  |  |

 

Research and developmentexpenses decreased $0.2 million, or 39.1% to $0.3 million for the three monthsended June 30, 2007 from $0.6 million for the three months ended June 30, 2006,mainly from $0.1 million savings in salary and related costs as a result of theretirement of Dr. Morris Young, our former Chief Technology Officer effectiveDecember 31, 2006. New products testing expenses decreased by $0.1 million.
|                           | ** ** | **Six Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|---------------------------|------------|--------------------------------|------------|--------------|------------|----------------|------------|
| ** **                | ** ** | **June 30,**              | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **                | ** ** | **2007**                       | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **                | ** ** | **($ in thousands)** | ** ** | ** **   | ** ** | ** **     | ** ** |
| Research and  development |       | $                              | 808        |         | $          | 1,105          |       | $ | (297 | ) | (26.9 | )% |
| *% of total revenue*      |       | 3.1                            | %          | 5.9          | %          |           |       |   |   |
|                           |            |                                |            |              |            |                |            |  |  |  |  |  |

 

Research and developmentexpenses decreased $0.3 million, or 26.9% to $0.8 million for the six monthsended June 30, 2007 from $1.1 million for the six months ended June 30, 2006,mainly from $0.2 million savings in salary and related costs as a result of theretirement of Dr. Morris Young, our former Chief Technology Officer effectiveDecember 31, 2006. New products testing expenses and severance pay decreased by$0.1 million.

***Recoveryof impairment on assets held for sale***
|                                                 | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|--------------|------------|----------------|------------|
| ** **                                      | ** ** | **June 30,**                | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **                                      | ** ** | **2007**                         | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **                                      | ** ** | **($ in thousands)**   | ** ** | ** **   | ** ** | ** **     | ** ** |
| Recovery of impairment  on assets held for sale |       | $                                | (481       | )            | $          | —         |       | $ | 481 |   | NA | % |
| *% of total revenue*                            |       | (3.5                             | )%         | NA           |       |           |       |   |   |
|                                                 |            |                                  |            |              |            |                |            |  |  |  |  |  |

 

During the three months ended June 30, 2007, webenefited from a recovery of impairment on assets held for sale in connectionwith our adjustment of the fair value of our U.S. property located in Fremont,California, which has been decontaminated and is being prepared for sale. Werecorded a $481,000 market value adjustment after we entered into an agreementwith an independent third party purchaser in June 2007 to purchase the propertyfor estimated net proceeds of $5.1 million, after deducting estimatedcommission and selling expenses.
|                                                 | ** ** | **Six Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|--------------|------------|----------------|------------|
| ** **                                      | ** ** | **June 30,**              | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **                                      | ** ** | **2006**                       | ** ** | **2005**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **                                      | ** ** | **($ in thousands)** | ** ** | ** **   | ** ** | ** **     | ** ** |
| Recovery of impairment  on assets held for sale |       | $                              | (481       | )            | $          | —         |       | $ | 481 |   | NA |   |
| *% of total revenue*                            |       | (1.8                           | )%         | NA           |       |           |       |   |   |
|                                                 |            |                                |            |              |            |                |            |  |  |  |  |  |

 

24

----

During the six months ended June 30, 2007, webenefited from a recovery of impairment on assets held for sale in connectionwith our adjustment of the fair value of our U.S. property located in Fremont,California, which has been decontaminated and is being prepared for sale. We recordeda $481,000 market value adjustment after we entered into an agreement with anindependent third party purchaser in June 2007 to purchase the property forestimated net proceeds of $5.1 million, after deducting estimated commissionand selling expenses.

***InterestIncome, net***
|                      | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|----------------------|------------|----------------------------------|------------|--------------|------------|----------------|------------|
| ** **           | ** ** | **June 30,**                | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **           | ** ** | **2007**                         | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **           | ** ** | **($ in thousands)**   | ** ** | ** **   | ** ** | ** **     | ** ** |
| Interest income, net |       | $                                | 225        |         | $          | 111            |       | $ | 114 |   | 102.7 | % |
| *% of total revenue* |       | 1.6                              | %          | 1.1          | %          |           |       |   |   |
|                      |            |                                  |            |              |            |                |            |  |  |  |  |  |

 

Interestincome, net increased $0.1 million to $0.2 million for the three months endedJune 30, 2007 from $0.1 million for the three months ended June 30, 2006 as aresult of higher balances of our investments which came from the net proceedsof our public offering of common stock, completed in December 2006 andJanuary 2007.
|                      | ** ** | **Six Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|----------------------|------------|--------------------------------|------------|--------------|------------|----------------|------------|
| ** **           | ** ** | **June 30,**              | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **           | ** ** | **2007**                       | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **           | ** ** | **($ in thousands)** | ** ** | ** **   | ** ** | ** **     | ** ** |
| Interest income, net |       | $                              | 449        |         | $          | 239            |       | $ | 210 |   | 87.9 | % |
| *% of total revenue* |       | 1.7                            | %          | 1.3          | %          |           |       |   |   |
|                      |            |                                |            |              |            |                |            |  |  |  |  |  |

 

Interestincome, net increased $0.2 million to $0.4 million for the six months endedJune 30, 2007 from $0.2 million for the six months ended June 30, 2006 as aresult of higher balances of our investments which came from the net proceedsof our public offering of common stock, completed in December 2006 andJanuary 2007.

***Other Income and Expense,net***
|                             | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|-----------------------------|------------|----------------------------------|------------|--------------|------------|----------------|------------|
| ** **                  | ** ** | **June 30,**                | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **                  | ** ** | **2007**                         | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **                  | ** ** | **($ in thousands)**   | ** ** | ** **   | ** ** | ** **     | ** ** |
| Other income (expense)  net |       | $                                | (272       | )            | $          | 814            |       | $ | (1,086 | ) | (1,334.2 | )% |
| *% of total revenue*        |       | (2.0                             | )%         | 7.9          | %          |           |       |   |   |
|                             |            |                                  |            |              |            |                |            |  |  |  |  |  |

 

Otherexpense was $0.3 million for the three months ended June 30, 2007 due to theminority interests in our joint ventures. Other income was $814,000 for thethree months ended June 30, 2006 due to a realized gain of $1.1 million on thesale of shares of common stock of Finisar Corporation held by us, partiallyoffset by minority interests in our joint ventures.
|                             | ** ** | **Six Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|-----------------------------|------------|--------------------------------|------------|--------------|------------|----------------|------------|
| ** **                  | ** ** | **June 30,**              | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **                  | ** ** | **2007**                       | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **                  | ** ** | **($ in thousands)** | ** ** | ** **   | ** ** | ** **     | ** ** |
| Other income (expense)  net |       | $                              | (283       | )            | $          | 1,052          |       | $ | (1,335 | ) | (126.9 | )% |
| *% of total revenue*        |       | (1.1                           | )%         | 5.6          | %          |           |       |   |   |
|                             |            |                                |            |              |            |                |            |  |  |  |  |  |

 

Otherexpense was $0.3 million for the six months ended June 30, 2007 due to theminority interests in our joint ventures. Other income was $1.1 million for thesix months ended June 30, 2006 due to a realized gain of $1.4 million on thesale of shares of common stock of Finisar Corporation held by us, partiallyoffset by minority interests in our joint ventures.

25

----

***Provisionfor Income Taxes***
|                             | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|-----------------------------|------------|----------------------------------|------------|--------------|------------|----------------|------------|
| ** **                  | ** ** | **June 30,**                | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **                  | ** ** | **2007**                         | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **                  | ** ** | **($ in thousands)**   | ** ** | ** **   | ** ** | ** **     | ** ** |
| Provision for income  taxes |       | $                                | 162        |         | $          | 138            |       | $ | 24 |   | 17.4 | % |
| *% of  total revenue*       |       | 1.2                              | %          | 1.3          | %          |           |       |   |   |
|                             |            |                                  |            |              |            |                |            |  |  |  |  |  |

 

We provided forincome taxes of $0.2 million for our China operations for the three monthsended June 30, 2007 compared to $0.1 million for the three month period endedJune 30, 2006. The increase in provision is due to higher income in two of ourChina joint ventures.
|                             | ** ** | **Six Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|-----------------------------|------------|--------------------------------|------------|--------------|------------|----------------|------------|
| ** **                  | ** ** | **June 30,**              | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **                  | ** ** | **2007**                       | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **                  | ** ** | **($ in thousands)** | ** ** | ** **   | ** ** | ** **     | ** ** |
| Provision for income  taxes |       | $                              | 273        |         | $          | 456            |       | $ | (183 | ) | (40.1 | )% |
| *% of total revenue*        |       | 1.0                            | %          | 2.4          | %          |           |       |   |   |
|                             |            |                                |            |              |            |                |            |  |  |  |  |  |

 

Weprovided for income taxes of $0.3 million for our China operations for the sixmonths ended June 30, 2007 compared to $0.5 million for the six month periodended June 30, 2006. The decrease in provision in 2007 compared to 2006 is dueto an overprovision in the first three months of 2006 in our China subsidiary.

***Gain from DiscontinuedOperations***
|                                    | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|------------------------------------|------------|----------------------------------|------------|--------------|------------|----------------|------------|
| ** **                         | ** ** | **June 30,**                | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **                         | ** ** | **2007**                         | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **                         | ** ** | **($ in thousands)**   | ** ** | ** **   | ** ** | ** **     | ** ** |
| Gain from discontinued  operations |       | $                                | —     |         | $          | 2              |       | $ | (2 | ) | (100.0 | )% |
| *% of total revenue*               |       | NA                               |       | 0.0          | %          |           |       |   |   |
|                                    |            |                                  |            |              |            |                |            |  |  |  |  |  |

 

InJanuary, 2007, we dissolved the corporation that operated our discontinuedoperations that related to our opto-electronics business and transferred thecash balance to our continuing operations. Accordingly, we no longer havediscontinued operations. For the three months ended June 30, 2006, the $2,000in income was from interest income earned on cash balances held in thediscontinued operations.
|                                    | ** ** | **Six Months Ended** | ** ** | ** **   | ** ** | ** **     | ** ** |
|------------------------------------|------------|--------------------------------|------------|--------------|------------|----------------|------------|
| ** **                         | ** ** | **June 30,**              | ** ** | **Increase** | ** ** | ** **     | ** ** |
| ** **                         | ** ** | **2007**                       | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **                         | ** ** | **($ in thousands)** | ** ** | ** **   | ** ** | ** **     | ** ** |
| Gain from discontinued  operations |       | $                              | —     |         | $          | 3              |       | $ | (3 | ) | (100.0 | )% |
| *% of total revenue*               |       | NA                             |       | 0.0          | %          |           |       |   |   |
|                                    |            |                                |            |              |            |                |            |  |  |  |  |  |

 

InJanuary 2007, we dissolved the corporation that operated our discontinuedoperations that related to our opto-electronics business and transferred thecash balance to our continuing operations. Accordingly, we no longer havediscontinued operations. For the six months ended June 30, 2006, the $3,000 inincome was from interest income earned on cash balances held in thediscontinued operations.

**Liquidityand Capital Resources**

As ofJune 30, 2007, our principal sources of liquidity were $33.7 million incash and cash equivalents and short-term investments, excluding restricteddeposits. We consider cash and cash equivalents and short-term investments asliquid and available for use. Short-term investments are comprised ofgovernment bonds and high-grade commercial debt instruments.

Cash and cash equivalentsand short-term investments decreased $1.9 million to $33.7 million as of June 30, 2007 comparedwith $35.5 million as of December 31, 2006. Included in this decrease are the purchase of machinery andequipment of $2.3 million, payments of long-term debt of$0.4 million, and the continual funding of our operations, partially offset by the netproceeds of $3.7 million received from the public offering of 862,500 shares of our common stock inJanuary 2007.

26

----

Netcash used in operating activities of $3.9 million for the six months ended June30, 2007 was primarily comprised of our net income of $2.6 million, adjustedfor non-cash items of depreciation of $0.7 million, stock based compensation of$0.2 million, partially offset by a recovery of impairment on assets held forsale of $0.5 million, and offset by a net increase of $6.8 million in assetsand liabilities. The net increase in assets and liabilities resulted from a $4.6million increase in inventories, $1.7 million decrease in accounts payable,$0.5 million increase in other assets and a $0.2 million increase in accountsreceivable, net, partially offset by a $0.2 million decrease in income taxespayable.

Inventories,increased by $4.7 million, or 23.1%, to $24.9 million as of June 30, 2007compared with $20.3 million as of December 31, 2006, as we increased inventoryin raw materials and work-in-process to increase production in anticipation ofincreased forecast sales. The value of finished goods increased by $0.7 millionwith respect to consignment inventory as we increased our number of consigneesfrom four to six.

Accountsreceivable, net increased by $0.2 million, or 2.3%, to $9.9 million as of June30, 2007 compared to $9.7 million as of December 31, 2006. Gross accountsreceivable increased by $0.8 million from $9.8 million to $10.6 million asrevenue increased. The allowance for doubtful accounts increased by $0.6million from $0.1 million to $0.7 million mainly for some slow-paying customersin Asia. We continue to pursue collections on slow-paying customers. Our dayssales outstanding is 66 days as of June 30, 2007 compared to 68 days as ofDecember 31, 2006.

Netcash used in investing activities of $0.3 million for the six months ended June30, 2007 was primarily for the purchase of investments totaling $10.3 million,the purchase of property, plant and equipment of $2.3 million, partially offsetby the proceeds from sale of investments of $11.9 million and the decrease ofrestricted cash of $0.3 million.

Weexpect to invest approximately $2.6 million in capital projects for theremainder of 2007. We believe that our existing and planned facilities andequipment are sufficient to fulfill current and expected future orders.

Netcash provided by financing activities of $3.5 million for the six months endedJune 30, 2007 consisted of $3.7 million net proceeds from the issuance of862,500 shares of common stock as a result of our January 2007 closing ofour public offer of our common stock and $0.2 million from employee stockoptions exercised, partially offset by payments of $0.4 million related tolong-term borrowings.

Ourmain Fremont, California facility is financed by long-term borrowings, whichwere refinanced by taxable variable rate revenue bonds in 1998. These bondsmature in 2023 and bear interest at a variable rate that was 5.42% as of June30, 2007. The bonds are traded in the public market. Repayment of principal andinterest under the bonds is supported by a letter of credit from our bank andis paid on a quarterly basis. We have the option to redeem the bonds in wholeor in part during their term. As of June 30, 2007, $6.9 million was outstandingunder these bonds.

As ofJune 30, 2007,the credit facility maintained by us with a bank included a letter of creditsupporting repayment of our revenue bonds with an outstanding amount of $6.9million. We have pledged and placed a like amount of investment securities withan affiliate of the bank as additional collateral for this facility.

OnJune 15, 2007, weentered into a sales agreement with an independent third party to sell our mainFremont, California facility. We estimate our net proceeds will beapproximately $5.1 million after deducting sales commission and other sellingexpenses. We expect to close escrow in the third quarter, pending timely signoff on the closure report by the local fire department.

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

Outstandingcontractual obligations as of June 30, 2007 are summarized as follows (inthousands):
| ** **                       | ** ** | **Payments due by period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1 - 3  years** | ** ** | **3 - 5  years** | ** ** | **More than  5 years** | ** ** |
| Debt                             |       | $                                         | 6,906      |   | $ | 450 |   | $ | 956 |   | $ | 900 |   | $ | 4,600 |   |
| Operating leases                 |       | 4,232                                     |       | 655 |   | 1,466 |   | 1,553 |   | 558 |   |
| Purchase  obligation             |       | 7,290                                     |       | 4,800 |   | 2,490 |   | — |   | — |   |
| Total                            |       | $                                         | 18,428     |   | $ | 5,905 |   | $ | 4,912 |   | $ | 2,453 |   | $ | 5,158 |   |

 

27

----

Welease certain office space, manufacturing facilities and property underlong-term operating leases expiring at various dates through March 2013. Totalrent payments under these operating leases were approximately $0.2 million and$0.3 million for the six month periods ended June 30, 2007 and 2006,respectively.

OnFebruary 27, 2007, we entered into an agreement with Recapture MetalsLimited of Ontario, Canada (“Recapture”), pursuant to which Recapture willsupply our subsidiary in the People’s Republic of China with one thousandkilograms per month of 99.99999% pure gallium, during the eighteen month periodbeginning July 1, 2007. Under the terms of the agreement, we are requiredto purchase a minimum of eighteen thousand kilograms of gallium, unless theagreement is terminated prior to the expiration of the eighteen month period onDecember 31, 2008.

**ITEM 3*.*QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

**ForeignCurrency Exchange Rate Exposure**

We operate in theUnited States, manufacture in the People’s Republic of China (“PRC”), and thesubstantial majority of our sales to date have been made in U.S. dollars.Certain expenses from our PRC operations are incurred in the PRC’s Renminbi. Asa result, currency fluctuations between the U.S. dollar and the Renminbi couldcause foreign currency transaction gains or losses that we would recognize inthe period incurred. However, a 10% fluctuation in the dollar at June30, 2007 would have an immaterial impact on our net dollar position inoutstanding trade payables and receivables.

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

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

**Interest Rate Risk**

Cashand cash equivalents earning interest and certain variable rate debtinstruments are subject to interest rate fluctuations. The following table setsforth the probable impact of a 10% change in interest rates (in thousands):
| **Instrument**                             | ** ** | **Balance as of  June 30,  2007** | ** ** | **Current  Interest  Rate** | ** ** | **Projected Annual  Interest  Income/(Expense)** | ** ** | **Proforma 10%  Interest Rate  Decline  Income/(Expense)** | ** ** | **Proforma 10%  Interest Rate  Increase  Income/(Expense)** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| Cash                                       |       | $                                                | 6,427      |                        | 0.50       | %                                                     | $          | 32                                                                   |       | $                                                                     | 29         |   | $ | 35 |   |
| Cash equivalents                           |       | 8,989                                            |       | 5.21                        |       | 468                                                   |       | 421                                                                  |       | 515                                                                   |       |
| Investment in  debt and equity instruments |       | 25,112                                           |       | 4.71                        |       | 1,183                                                 |       | 1,064                                                                |       | 1,301                                                                 |       |
| Taxable variable  rate revenue bonds       |       | (6,850                                           | )          | 5.42                        |       | (371                                                  | )          | (334                                                                 | )          | (408                                                                  | )          |
|                                       |       |                                             |       |                        |       |                                                  |       |                                                                 |       |                                                                  |       |
|                                       |       |                                             |       |                        |       | $                                                     | 1,312      |                                                                 | $          | 1,180                                                                 |       | $ | 1,443 |   |
|                                            |            |                                                  |            |                             |            |                                                       |            |                                                                      |            |                                                                       |            |  |  |  |  |

 

**Equity Risk**

Wemaintain minority investments in privately-held companies. These investmentsare reviewed for other than temporary declines in value on a quarterly basis.These investments are classified as other assets in the consolidated balancesheets and are accounted for under the cost method as we do not have theability to exercise significant influence over their operations. We monitor ourinvestments for impairment and record reductions in carrying value when eventsor changes in circumstances indicate that the carrying value may not berecoverable. Reasons for other than temporary declines in value include whetherthe related company would have insufficient cash flow to operate for the nexttwelve months, significant changes in the operating performance and changes inmarket conditions. The minority investments totaled $0.4 million as ofDecember 31, 2006 and June 30, 2007.

28

----

**ITEM 4T*.*CONTROLS AND PROCEDURES**

(a) Under the supervision and with the participationof our management, our Chief Executive Officer and Chief Financial Officer haveevaluated the effectiveness of our disclosure controls and procedures, as suchterm is defined under Rule 13a-15(e) promulgated under the Securities ExchangeAct of 1934, as amended. Based upon that evaluation, our Chief ExecutiveOfficer and our Chief Financial Officer concluded that the our disclosurecontrols and procedures were effective as of the end of the period covered bythis quarterly report.

(b) No change in our internal control over financialreporting was made during the quarter ended June 30, 2007, that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

29

----

**PART II. OTHER INFORMATION**

**Item 1.Legal Proceedings**

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

OnOctober 15, 2004, a purported securities class action lawsuit was filed in theUnited States Court for the Northern District of California, City of HarperWoods Employees Retirement System v. AXT, Inc. et al., No. C 04 4362 MJJ. TheCourt consolidated the case with a subsequent related case and appointed a leadplaintiff. On April 5, 2005, the lead plaintiff filed a consolidated complaint,captioned as Morgan v. AXT, Inc. et al., No. C 04 4362 MJJ. The lawsuitcomplaint names AXT, Inc. and our chief technology officer as defendants, andis brought on behalf of a class of all purchasers of our securities fromFebruary 6, 2001 through April 27, 2004. The complaint alleges that weannounced financial results during this period that were false and misleading.No specific amount of damages is claimed. On September 23, 2005, the Courtgranted our motion to dismiss the complaint, with leave to amend. The leadplaintiff filed an amended complaint, which we had moved to dismiss. On April24, 2007, we reached a settlement of this litigation for which we areresponsible only for the amount remaining in our insurance retention. We paidthe remaining amount of the retention (approximately $350,000) as of June 30,2007.

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

**Item 1A.Risk Factors**

There are nomaterial changes from the risk factors set forth under Part I, Item 1A. “RiskFactors” in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2006, provided, however, that the two litigation mattersdescribed under the risks disclosed under the captions “***If we fail to comply withenvironmental and safety regulations, we may be subject to significantfines or forced to cease our operations; in addition, we could be subject tosuits for personal injuries caused by hazardous materials”***and***“Existing or future litigationcould result in significant judgments against us, or cause us to incur costlysettlements.”***  These two settled matters comprise (i) thecomplaint filed against us and a current and former officer, allegingpersonal injury, general negligence, intentional tort, wage loss and otherdamages as a result of exposure of plaintiffs, who are former employees of AXT,including a minor child in utero, to high levels of gallium arsenide in galliumarsenide wafers, and methanol, and (ii) the ongoing securities litigationmatter.

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

***Use of Proceeds***

On December 19, 2006 andJanuary 9, 2007, we sold 5,750,000 shares and 862,500 shares, respectively, ofour common stock in a firmly underwritten public offering pursuant to aregistration statement on Form S-3 (SEC file number 333-135474), which wasdeclared effective by the SEC on August 3, 2006, and a registration statementon Form S-3MEF (SEC file number 333-139365), which was effective upon filingwith the SEC on December 15, 2006. Needham & Company, LLC acted as the sole underwriter.  The price per share to the public was$4.50.  We received net proceeds of $24.1million and $3.7 million, for aggregate net proceeds of $27.8 million.  The net proceeds have been and will continueto be used for corporate and joint venture capacity expansion, research and developmentand working capital requirements, as well as potential acquisitions ofcomplementary products, technologies or businesses.

**Item 3. Defaults upon Senior Securities**

None

30

----

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

AXT held its annualmeeting of stockholders at its headquarters in Fremont, California onMay 22, 2007. Of the 29,894,949 shares outstanding as of the record date,20,778,717 shares were represented in person or by proxy at the meeting.Proxies were solicited by the Company pursuant to Regulation 14A under theSecurities Exchange Act of 1934, as amended. At the meeting, AXT’s stockholdersvoted on the following matters:

(1)               Proposal to elect aclass III director to hold office for a three-year term, and until thesuccessor is elected and qualified.
| Class III directors | ** ** | **For**    | ** ** | **Abstain** | ** ** |
|-------------------------------|------------|------------|------------|-------------|------------|
| Leonard J.  LeBlanc           |       | 20,667,345 |       | 5,688,543   |       |

 

In addition, theterm of office as directors of Dr. Morris Young, Mr. Leonard Le Blanc and Dr.David Chang continued after the meeting.

(2)               Proposal to ratifythe appointment of Burr, Pilger & Mayer LLP as our independentregistered public accounting firm for the fiscal year ending December 31,2007.
|                                    | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|
| Burr,  Pilger & Mayer LLP |       | 20,769,270 |       | 28,774      |       | 683,901     |       |

 

(3)               Proposal to restatethe AXT, Inc. 1997 Stock Option Plan as the AXT, Inc. 2007 EquityIncentive Plan.
|                                            | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|--------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|
| AXT, Inc.  2007 Equity Incentive Plan |       | 10,460,637 |       | 5,500,658   |       | 77,350      |       |

 

Accordingly, allthree proposals were approved by the stockholders.

**Item 5.Other Information**

None

31

----

**Item 6.Exhibits**

**a. Exhibits**
| Exhibit Number | ** ** | **Description**                                                                                                                                      |
|----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |       |                                                                                                                                                 |
| 31.1           |       | Certification by Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                 |
|           |       |                                                                                                                                                 |
| 31.2           |       | Certification by Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                 |
|           |       |                                                                                                                                                 |
| 32.1           |       | Certification by Chief Executive Officer Pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|           |       |                                                                                                                                                 |
| 32.2           |       | Certification by Chief Financial Officer Pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

32

----

**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this Report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                         | AXT, INC. |
|-------------------------|-----------|
|                    |      |   |
| Dated: August  13, 2007 | By:       | /s/ Philip C. S. Yin |
|                    |      | Philip C. S. Yin |
|                    |      | Chief Executive Officer |
|                    |      | (Principal Executive Officer) |
|                    |      |   |
|                    |      | /s/ Wilson W. Cheung |
|                    |      | Wilson W. Cheung |
|                    |      | Chief Financial Officer |
|                    |      | (Principal Financial and Accounting Officer) |

 

33

----

**EXHIBITINDEX**
| Exhibit  Number | ** ** | **Description**                                                                                                                                      |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                 |
| 31.1            |       | Certification by  Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                |
|            |       |                                                                                                                                                 |
| 31.2            |       | Certification by  Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                |
|            |       |                                                                                                                                                 |
| 32.1            |       | Certification by  Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|            |       |                                                                                                                                                 |
| 32.2            |       | Certification by  Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

34

----