Use these links to rapidly review the documentTABLE OF CONTENTS PART IV



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2008ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                             to


Commission file number: 000-24085

AXT, INC.(Exact name of registrant as specified in its charter)

Delaware

94-3031310(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)4281 Technology Drive, Fremont, California

94538(Address of principal executive offices)

(Zip Code)


Registrant's telephone number, including area code:(510) 683-5900Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registeredCommon Stock, $0.001 par value

The NASDAQ Stock Market LLC


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

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act o Yes ý No

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. o Yes ý No

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

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o

Accelerated filer ý

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

Smaller reporting company o


Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). o Yes ý No

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the common stock on
June 30, 2008 as reported on the Nasdaq Global Market, was approximately $104,478,383. Shares of common stock held by each officer, director and by each person who owns 5% or more of the
outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not a conclusive determination for other purposes.

As
of February 27, 2009, 30,512,899 shares, $0.001 par value, of the registrant's common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the definitive proxy statement for the registrant's 2009 annual meeting of stockholders to be filed with the Commission pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this form are incorporated by reference into Part III of this Form 10-K report. Except for those portions
specifically incorporated by reference herein, such document shall not be deemed to be filed with the Commission as part of this Form 10-K.



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PART IItem 1.

Business

2Item 1A.

Risk Factors

13Item 1B.

Unresolved Staff Comments

29Item 2.

Properties

30Item 3.

Legal Proceedings

31Item 4.

Submission of Matters to a Vote of Security Holders

31PART IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

32Item 6.

Selected Consolidated Financial Data

34Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

35Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

53Item 8.

Consolidated Financial Statements and Supplementary Data

55Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

55Item 9A.

Controls and Procedures

55Item 9B.

Other Information

56PART IIIItem 10.

Directors, Executive Officers and Corporate Governance

58Item 11.

Executive Compensation

58Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

58Item 13.

Certain Relationships and Related Transactions and Director Independence

58Item 14.

Principal Accountant Fees and Services

58PART IVItem 15.

Exhibits and Financial Statement Schedules

59


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PART I

This Annual Report (including the following section regarding Management's Discussion and Analysis of Financial Condition and Results
of Operations) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking
statements in this Annual Report. Additionally, statements concerning future matters such as the development of new products, enhancements or technologies, sales levels, expense levels and other
statements regarding matters that are not historical are forward-looking statements.

Although
forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us.
Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under the heading "Risk
Factors" in Item 1A below, as well as those discussed elsewhere in this Annual Report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of
the date of this Annual
Report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report. Readers are
urged to carefully review and consider the various disclosures made in this Annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial
condition, results of operations and prospects.

Item 1.Business

AXT, Inc. ("AXT", "we," "us," and "our" refer to AXT, Inc. and all of its subsidiaries) is a leading developer and
producer of high-performance compound and single element semiconductor substrates, including substrates made from gallium arsenide (GaAs), indium phosphide (InP) and germanium (Ge). We
currently sell the following substrate products in the sizes and for the applications indicated:

Substrates

Substrate
Diameter

ApplicationsGaAs (semi-insulating)

2", 3", 4", 5", 6"



Power amplifiers and radio frequency integrated circuits for wireless handsets (cell phones)

Direct broadcast television

High-performance transistors

Satellite communicationsGaAs (semi-conducting)

2", 3", 4"



High brightness light emitting diodes

Lasers

Optical couplersInP

2", 3", 4"



Broadband and fiber optic communicationsGe

2", 4"



Satellite and terrestrial solar cells

Optical applications


We
manufacture all of our semiconductor substrates using our proprietary vertical gradient freeze (VGF) technology. Most of our revenue is from sales of GaAs substrates. We manufacture
all of our products in the People's Republic of China (PRC or China), which generally has favorable costs for facilities and labor compared to comparable facilities in the United States or Europe. We
also have five joint ventures in China that provide us favorable pricing, reliable supply and shorter lead-times for raw materials central to our final manufactured products. We
consolidate, for accounting purposes, three of

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these
joint ventures and have equity interests of 25% in each of the other two. We use our direct sales force in the United States and independent sales representatives in Europe and Asia to market
our substrates. Our ten largest customers for 2008 were: IQE group, Osram Opto Semiconductors GmbH, Sumitomo Chemical Co., Ltd., MAC Corporation, Xiamen
Xinde Co., Ltd., Visual Photonics Epitaxy Co., Ltd., MCP UK, Picogiga International SAS, and Avago Technologies Manufacturing (Singapore) Pte. Ltd. We believe that,
as the demand for compound semiconductor substrates is expected to increase, we are positioned to leverage our PRC-based manufacturing capabilities and access to favorably priced raw
materials to increase our market share. However, the economic downturn in 2008 coupled with inventory overhang in the industry put pressure on our financial performance and will continue to have an
impact on our results in 2009.

On
March 17, 2009, our chief executive officer resigned as chairman of our board and as chief executive officer. While the volatile business and financial markets are prompting us
to continue to take a conservative approach to our business, we remain optimistic about our business. Positive industry trends, coupled with our competitive manufacturing and cost advantages give us
confidence in our ability to continue to drive future businesses in 2009. On March 28, 2008, we completed the sale of our Fremont, California facility and received net proceeds of approximately
$5.1 million after deducting commissions and selling expenses. On July 1, 2008, we exercised our right to redeem the taxable variable rate revenue bond and repaid all outstanding
indebtedness and accrued interest under the terms of the revenue bond of approximately $6.4 million. Accordingly, all of our remaining obligations under the revenue bond have terminated and the
related restricted deposits have been released. In September 2008, we obtained an express line of credit from our bank and drew down $3.0 million and classified the same amount as restricted
deposits as of December 31, 2008. The proceeds from the express line of credit were used in operations. The $3.0 million restricted cash carries an annual interest rate of approximately
4% as of December 31, 2008. Also as of December 31, 2008, we had available cash, cash equivalents and short-term investments of $31.3 million, excluding restricted
deposits.

We
were incorporated in California in December 1986 and reincorporated in Delaware in May 1998. We changed our name from American Xtal Technology, Inc. to AXT, Inc. in July
2000. Our principal corporate office is located at 4281 Technology Drive, Fremont, California 94538, and our telephone number at this address is (510) 683-5900.

Industry Background

Certain electronic and opto-electronic applications have performance requirements that exceed the capabilities of
conventional silicon substrates and often require high-performance compound or single element substrates. Examples of higher performance non-silicon based substrates include
GaAs, InP, gallium nitride (GaN), silicon carbide (SiC) and Ge.

For
example, power amplifiers and radio frequency integrated circuits for wireless handsets are made with semi-insulating GaAs substrates. Semi-conducting GaAs
substrates are used to create opto-electronic products including high brightness light emitting diodes (HBLEDs) which are often used to backlight wireless handsets and liquid crystal
display (LCD) TVs and for automotive and general illumination applications. InP is a high performance semiconductor substrate used in broadband and fiber optic applications. Ge substrates are used in
emerging applications such as solar cells for space and terrestrial photovoltaic applications.

Our
business and operating results depend in significant part upon capital expenditures of semiconductor designers and manufacturers, which in turn depend upon the current and
anticipated market demand for products incorporating semiconductors from these designers and manufacturers and our business depends in part on worldwide economic conditions. The current period of
severe recession being experienced by the United States and other key international economies, has been characterized

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by
falling demand for a variety of goods and services, including those related to the semiconductor industry. These conditions have adversely affected the timing and volume of our customers' purchase
of our products, particularly commencing with the fourth quarter of 2008, and delays in customer purchasing decisions is likely .to continue to impact our results in the beginning of 2009.

Despite
the challenging environment, however, we believe that there are some bright spots of opportunity as we move into 2009. One of the most interesting is the projected growth of
WCDMA and CDMA 2000 handsets to support the new 3G and 3G+ networks around the world. We expect to see particular growth in China as the government has begun to issue 3G licenses and has also
broadened the subsidy policy for consumer electronic purchases. Global smart phone sales are also expected to grow throughout the year as many new phones have been released by manufacturers such as
Apple, Motorola, Nokia, RIM and Samsung, among others. These phones are expected to comprise more than 30 percent of the market by 2013. The benefit to AXT from the sales of more
feature-rich, sophisticated handsets is that they require a greater content of gallium arsenide in order to meet the speed and functionality requirements that consumers have come to
expect. Even with the steep decline in spending associated with 2G legacy networks, carriers continue to invest in 3G in order to remain competitive and attract new subscribers. This network upgrade
enables full performance capability of the video, gaming and Internet browsing capabilities of these next generation handsets.

Driven
by rising demand for LCD televisions and other consumer products, it appears that the light emitting diodes (LED) market may also grow in 2009 by up to 3 percent, a sharp
contrast to the expected 9.4 percent decrease in the overall semiconductor market over this same time period. The recent declines in average selling prices of HBLEDs have allowed
LED-backlit sets to become more price-competitive with comparable cold cathode fluorescent lamp (CCFL) sets. In addition, while individual markets for LED may decline in 2009, the number
of applications continues to broaden across a wide array of consumer, industrial and automotive products.

The
concentrator photovoltaic (CPV) market for germanium is also continuing to grow, albeit from a smaller base. Growth in the global solar industry is expected in 2009 as there is
increasing interest in the replacement of fossil fuel resources with sustainable alternatives such as solar power and solar modules and a renewed interest in focus on investment in renewable energy
technology in the United States and Europe. At the same time, we believe that improvements in conversion efficiency for germanium are occurring, which we believe will enable this technology to become
more affordable and therefore, more widely utilized, in the future.

The AXT Advantage

We believe that we benefit from the following advantages:



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Given
these advantages, we believe that, when the worldwide economies begin to improve and the current period of United States and international recession begins to lessen, the demand
for compound semiconductor substrates may again increases. Once demand begins to recover, we believe that we are
positioned to leverage our PRC-based manufacturing capabilities and access to favorably priced raw materials to begin to increase our market share.

Strategy

Our goal is to become the leading worldwide supplier of high-performance compound and single element semiconductor
substrates. Key elements of our strategy include:

Continue to provide customers high and consistent quality products and service.We seek to improve our manufacturing processes
continually in order
to meet and exceed our customers' high product quality standards, ensure on-time delivery of our products and optimize the cost of ownership. We expect to continue to improve our
manufacturing processes in 2009 by adding some additional equipment, automating additional processes, and streamlining performance. In addition, we plan to continue to enhance our support functions,
including service and applications engineering.

Increase market share.We intend to leverage our product quality, competitive pricing and lead times both to establish relationships
with new
customers and to increase our market share with current customers in the integrated circuits for wireless handsets and HBLED markets.

Add capacity to meet customers' increasing demand for substrates.Since 2007, we have added additional capacity in order to meet our
customers'
increased demands, specifically in 6" GaAs substrates. However, the current economic downturn has caused a cessation of our capacity expansion, and we have placed any additional expansion of our China
facilities on hold. We continue to monitor our capacity utilization and believe our flexible manufacturing infrastructure will allow us to ramp up production and capacity when the GaAs substrate
market improves.

Establish leadership in emerging substrate applications.We intend to expand our served markets by exploring new opportunities for our
substrates.
For example, due to Ge's inherent high efficiency and the increasing supply constraints of traditional poly-silicon, some customers have begun to use Ge substrates for terrestrial solar
cell applications. Also, we continue to monitor the market for
GaAs in concentrator photovoltaics where triple junction solar cells are grown on GaAs substrates, representing a potentially new market for AXT.

Technology enhancements.We continue to focus on technology development in the areas of VGF technology enhancements and Czochralski (CZ)
crystal
growth for Ge substrates. We also continue to focus on applying our technological expertise to the design of our manufacturing processes, to upgrade and improve these processes and deliver high
quality products to our customers more efficiently and in higher volumes.

Technology

There are basically three technologies for crystal growth in our business: Vertical Gradient Freeze (VGF), Liquid Encapsulated
Czochralski (LEC), and Czochralski (CZ). Our core technologies include our proprietary VGF technique used to produce high quality crystals that are processed into compound substrates, and the
technologies of our joint venture companies, which enable us to manufacture a

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range
of products that are used in the manufacture of compound semiconductor substrates or can be sold as raw materials to third parties.

LOGO

Our
VGF technique is designed to control the crystal-growth process with minimal temperature variation and is the current technique we use to produce our GaAs, InP and Ge substrates.
Unlike traditional techniques, our VGF technique places the hot compound melt above the cool crystal, and minimizes the temperature gradient between the crystal and the melt which reduces the
turbulence at the interface of the melt and the solid crystal. In comparison, in the LEC technique the melt and crystal are inverted, there is a higher temperature gradient between the melt and the
crystal, and more turbulence at the interface of the melt and solid crystal. These aspects of the VGF technique enable us to grow crystals that have a relatively low defect density and high
uniformity. The crystal and the resulting substrate are mechanically strong, resulting in lower breakage rates during a customer's manufacturing process. Since the temperature gradient is controlled
electronically rather than by
physical movement, the sensitive crystal is not disturbed as it may be during some competitors' VGF-like growth processes. In addition, the melt and growing crystal are contained in a
closed chamber, which isolates the crystal from the outside environment to reduce potential contamination. This substrate isolation allows for more precise control of the
gallium-to-arsenic ratio, resulting in better consistency and uniformity of the crystals.

Although
we are exploring the use of other methods to control the crystal-growth process, including the CZ and LEC methods for select applications, for our traditional GaAs substrates,
our VGF technique offers several benefits for producing our GaAs substrates when compared to traditional crystal growing technologies. The Horizontal Bridgman (HB) technique is the traditional method
for producing semi-conducting GaAs substrates for opto-electronic applications, but because of the techniques used to hold the GaAs melt, the HB technique cannot be used
cost-effectively to produce substrates greater than three inches in diameter. In addition, the HB technique houses the GaAs melt in a quartz container during the growth process, which can
contaminate the GaAs melt with silicon impurities, making it unsuitable for producing semi-insulating GaAs substrates.

Our
VGF technique also offers advantages over the LEC technique for producing semi-insulating GaAs substrates for wireless applications. Unlike the VGF technique, the LEC
technique can result in greater turbulence in the melt, and at a temperature gradient that is significantly higher than the VGF technique, which can cause LEC-grown crystals to have a
higher dislocation density than VGF-grown crystals, resulting in a higher rate of breakage during the device manufacturing process. However, the LEC technique can be useful for GaAs
semi-conducting substrates since the LED application specifications and requirements are less stringent than those of wireless applications.

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Products

We design, develop, manufacture and distribute high-performance semiconductor substrates. We make
semi-insulating GaAs substrates used in applications such as amplifiers and switches for wireless handsets, and semi-conducting GaAs substrates used to create
opto-electronic products including HBLEDs, which are often used to backlight wireless handsets and LCD TVs and for automotive and general illumination applications. InP is a high
performance semiconductor substrate used in broadband and fiber optic applications. Ge substrates are used in emerging applications such as triple junction solar cells for space and terrestrial
photovoltaic applications and for optical applications.

The
table below sets forth our products and selected applications:

Product

ApplicationsSubstrates

Electronic

Opto-electronicGaAs



Cellular phones



LEDs

Direct broadcast television



Lasers

High-performance transistors



Optical couplers

Satellite communicationsInP



Fiber optic communications



Lasers

Satellite communications

High-performance transistors

Automotive collision avoidance radarGe



Satellite and terrestrial solar cells



Optical applications


Substrates.We currently sell compound substrates manufactured from GaAs and InP, as well as single-element substrates manufactured
from Ge. We
supply GaAs substrates in two-, three-, four-, five- and six-inch diameters. We manufacture InP substrates in two-, three- and
four-inch diameters, and Ge substrates in two- and four-inch diameters.

Materials.We participate in five joint ventures in China that sell raw materials used by us in substrate manufacturing and by others.
These joint
ventures produce products including 99.99% pure gallium (4N Ga), high purity gallium, arsenic, and germanium, germanium dioxide, paralytic boron nitride (pBN) crucibles, and boron oxide (B2O3). In
2008 and 2007, sales of raw materials to parties other than us were approximately $17.2 million and $13.8 million, respectively, which comprised of all of these products.

The
primary costs of manufacturing compound semiconductor substrates are labor, raw materials and manufacturing equipment such as crystal growing furnaces. Accordingly, substrate
manufacturers, including us, are continuing to shift production to larger wafers to reduce manufacturing costs.

Customers

We sell our compound semiconductor substrates and materials worldwide. Our top revenue producing customers include:



Avago Technologies Manufacturing (Singapore) Pte. Ltd.



MCP UK



Sumitomo Chemical Co., Ltd.

Beijing Compound Crystal Technology Ltd.



Osram Opto Semiconductors GmbH



Tekcore Co., Ltd.

IQE, Inc.



Picogiga International SAS



Tokyo Supply Ltd., Japan

IQE RF, LLC



Recapture Metals Limited



Visual Photonics Epitaxy Co., Ltd.

MAC Japan



Richwin Co., Nanjing PRC



Xiamen Xinde Co., Ltd.

MBE Technology Pte. Ltd.



Sumika Epi Solution Co., Ltd.

MCP (Asia) Limited



Sumika Electronic Materials Co., Ltd.


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Historically, we have sold a significant portion of our products in any particular period to a limited number of customers. IQE group
(IQE, Inc., IQE RF, LLC, IQE (Europe) Limited, and MBE Technology Pte. Ltd.) represented 19% of revenue for the year ended December 31, 2008, one customer represented
greater than 10% of revenue for the year ended December 31, 2007, totaling 12%, and two customers represented greater than 10% of revenue, totaling 16% and 13%, for the year ended
December 31, 2006. Our top five customers represented 46% of our revenue for the year ended December 31, 2008, 40% of our revenue for the year ended December 31, 2007, and 42% of
our revenue for the year ended December 31, 2006. We expect that sales to a small number of customers will continue to comprise a significant portion of our revenue in the future.

There
have been no third party customers for our raw materials that account for greater than 10% of revenue from raw materials sales for the years ended December 31, 2008, 2007
and 2006. Our joint ventures are a key strategic benefit for us as they give us a strong competitive advantage of allowing our customers to work with one supplier for all their substrate and raw
material requirements. Our raw
materials customers include chemical companies; additionally, we sell raw materials to some of our competitors of our substrate business.

Manufacturing, Raw Materials and Supplies

We believe that our results are partially due to our manufacturing efficiency and high product yields and we continually emphasize
quality and process control throughout our manufacturing operations. We manufacture all of our products at our facilities in Beijing, China, which generally has favorable costs for facilities and
labor. We believe that our capital investment and subsequent operating costs are lower for our manufacturing facilities in China relative to the U.S. Although some of our manufacturing operations are
fully automated and computer monitored or controlled, enhancing reliability and yield, we expect to continue to improve our processes and increase the number of automated processes in 2009, despite
some cutback on our capital budget. We use proprietary equipment in our substrate manufacturing operations to protect our intellectual property and control the timing and pace of capacity additions.
All of our manufacturing facilities are ISO 9001 or 9002 certified. In January 2006, our Beijing facility successfully passed the ISO 14001 certification audit.

We
have five joint ventures in China that provide us favorable pricing, reliable supply and shorter lead-times for raw materials central to our manufactured products
including gallium, arsenic, germanium, germanium dioxide, pyrolitic boron nitride crucibles, and boron oxide. We believe that these joint ventures and investments will be advantageous in procuring
materials to support our growth and cost management goals. In addition, we purchase supply parts, components and raw materials from several other domestic and international suppliers. We depend on a
single or limited number of suppliers for certain critical materials used in the production of our substrates, such as quartz tubing, and polishing solutions. We generally purchase these materials
through standard purchase orders and not pursuant to long-term supply contracts. Although we seek to maintain sufficient inventory levels of certain materials to guard against
interruptions in supply and to meet our near term needs, and have to date been able to obtain sufficient supplies of materials in a timely manner, there may be shortages of certain key materials, such
as gallium.

These
five joint ventures include three companies included in our consolidated financial statements as consolidated entities: Beijing JiYa Semiconductor Material Co., Ltd.
(JiYa), Nanjing Jin Mei Gallium Co., Ltd. (Jin Mei), and Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd (BoYu). Our ownership in JiYa is 46%. We continue
to consolidate JiYa as we have significant influence in management and have a majority control of the board. Our chief financial officer is chairman of the board, while our chief operating officer,
and our president of joint venture operations are members of the board. Our former chief executive officer, formerly a member of this board of directors, resigned from this board on March 17,
2009. Our ownership of Jin Mei is 83%. We continue to consolidate Jin Mei as we have significant influence in management and have a majority control of

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the
board. Our chief operating officer is chairman of the board, while our president of joint venture operations is a member of the board. Our former chief executive officer, formerly a member of this
board, resigned from this board on March 17, 2009. We have significant influence over management of BoYu, have a controlling financial interest of 70%, and have a majority control of the board.
Our chief operating officer and our president of joint venture operations are members of the board. Our former chief executive officer has resigned as chairman of the board of BoYu effective
March 17, 2009.

Although
we have representation on the boards of directors of each of these companies, the daily operations of each of these companies, are managed by local management and not by us.
Decisions concerning their respective short term strategy and operations, any capacity expansion and annual capital expenditures, and decisions concerning sales of finished product, are made by local
management without input from us.

JiYa
is housed in and receives services from an affiliated aluminum plant and has in the past had, to source finished products from another independent third party supplier in order to
meet customer supply obligations when operations of its affiliated aluminum plant have been suspended or curtailed, resulting in a loss of supplies to the joint venture. In addition, even when
capacity has been fully utilized, JiYa has had to source finished products from an independent third party supplier when demand has exceeded the joint venture's capacity, and will continue to source
finished products from this independent third party supplier, if it experiences supply shortages or if customer demand again exceeds its capacity.

The
investment balances for the two companies accounted for under the equity method are included in other assets in the consolidated balance sheets and totaled $3.7 million and
$2.9 million as of December 31, 2008 and 2007, respectively. We own 25% of the ownership interests in each of these companies.

Sales and Marketing

We advertise in trade publications, distribute promotional materials, conduct marketing and sales programs, and participate in industry
trade shows and conferences in order to raise market awareness of our products.

We
sell our substrate products direct to customers through our direct sales force in the U.S. and through independent sales representatives in France, Germany, Japan, South Korea, Taiwan
and the United Kingdom. Our direct sales force is knowledgeable in the use of compound and single-element substrates. Our applications engineers work with customers during all stages of the substrate
manufacturing process, from developing the precise composition of the substrate through manufacturing and processing the substrate to the customer's specifications. We believe that maintaining a close
relationship with customers and providing them with ongoing engineering support improves customer satisfaction and will provide us with a competitive advantage in selling other substrates to our
customers.

International Sales.International sales are an important part of our business. Sales to customers outside North America (primarily
United States)
accounted for 74% of our revenue in 2008, 80% of our revenue in 2007, and 71% of our revenue in 2006. The primary markets for sales of our substrate products outside of the United States are to
customers located in Asia and Western Europe.

We
also sell through our joint ventures raw materials including 4N, 6N, and 7N gallium, boron oxide, germanium, arsenic, germanium dioxide, paralytic boron nitride crucibles used in
crystal growth and parts for MBE (Molecular Beam Epitaxy). Our joint ventures are a key strategic benefit for us as they give us a strong competitive advantage of allowing our customers to work with
one supplier for all their substrate and raw material requirements. Our joint ventures have their own separate sales force where they also sell direct to their own customers in addition to their
supply of raw materials to us.

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Research and Development

To maintain and improve our competitive position, we focus our research and development efforts on designing new proprietary processes
and products, improving the performance of existing products and reducing manufacturing costs. We have assembled a multi-disciplinary team of skilled scientists, engineers and technicians to meet our
research and development objectives.

Our
current substrate research and development activities focus on continued development and enhancement of GaAs, InP and Ge substrates, including haze reduction, improved yield,
enhanced surface and electrical characteristics and uniformity, greater substrate strength and increased crystal length. During 2008, we continued to spend some research and development resources to
reduce surface quality problems we experienced with our GaAs and InP substrates for some customers, particularly related to surface morphology. We continue to work on issues related to surface
quality, and expect that research and development in this area will continue in 2009.

Research
and development expenses were $2.2 million in 2008, compared with $1.7 million in 2007 and $2.4 million in 2006. Given the current economic climate, we
expect our rate of expenditure on research and development costs in 2009 to remain flat while exploring other methods to grow our crystals and improve on haze reduction. Research and development at
our joint ventures has been minimal.

Competition

The semiconductor substrate industry is characterized by rapid technological change and price erosion, as well as intense foreign and
domestic competition. We believe we currently have a leading position in the market for GaAs substrates for HBLED applications primarily as a result of our expertise in VGF technology, overall product
quality, response times and prices. However, we face actual and potential competition from a number of established domestic and international companies who may have advantages not available to us
including substantially greater financial, technical and marketing resources; greater name recognition; and more established relationships in the industry and may utilize these advantages to expand
their product offerings more quickly, adapt to new or emerging technologies and changes in customer requirements more quickly, and devote greater resources to the marketing and sale of their products.

We
believe that the primary competitive factors in the markets in which our substrate products compete are:



Our
ability to compete in target markets also depends on factors such as:



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A
compound semiconductor substrate customer typically has two or three substrates suppliers that it has qualified for the production of its products. These qualified suppliers must meet
industry-standard specifications for quality, on-time delivery and customer support. Once a substrate supplier has qualified with a customer, price, consistent quality and current and
future product delivery lead times become the most important competitive factors. A supplier that cannot meet customers' current lead times or that a customer perceives will not be able to meet future
demand and provide consistent quality can lose current market share. Our primary competition in the market for compound semiconductor substrates includes China Crystal Technologies, Freiberger
Compound Materials, Japan Energy, Mitsubishi Chemical Corporation, and Sumitomo Electric Industries. We believe that at least two of our competitors are shipping high volumes of GaAs substrates
manufactured using a technique similar to our VGF technique. In addition, as a result of quality problems that we have experienced, we believe that some customers have allocated some of their
requirements for VGF grown substrates across more competitors and we believe that we may have lost revenue and market share as a result of these customer decisions. In addition, we also face
competition from compound semiconductor device manufacturers that produce substrates for their own internal use, including Hitachi, and from companies such as IBM that are actively developing
alternative compound semiconductor materials.

Suppliers
of compound semiconductor substrates typically compete on product quality, product lead-time, price, device performance, meeting customer specifications and
providing customer support. A compound semiconductor substrate customer typically has two or three substrate suppliers that it has qualified for the production of its products. These qualified
suppliers must meet industry-standard specifications for quality, on-time delivery and customer support. Once a substrate supplier has qualified with a customer, price, consistent quality
and current and future product delivery lead times become the most important competitive factors. A supplier that cannot meet customers' current lead times or that a customer perceives will not be
able to meet future demand and provide consistent quality can lose current market share.

We
are the only compound semiconductor substrate supplier to offer a full suite of raw materials and we believe that it gives us a strong competitive advantage in our marketplace.

Protection of our Intellectual Property

Our success and the competitive position of our VGF technique depend on our ability to maintain trade secrets and other intellectual
property protections. We rely on a combination of patents, trademark and trade secret laws, non-disclosure agreements and
other intellectual property protection methods to protect our proprietary technology. We believe that, due to the rapid pace of technological innovation in the markets for our products, our ability to
establish and maintain a position of technology leadership depends as much on the skills of our development personnel as upon the legal protections afforded our existing technologies. To protect our
trade secrets, we take certain measures to ensure their secrecy, such as executing non-disclosure agreements with our employees, customers and suppliers. However, reliance on trade secrets
is only an effective business practice insofar as trade secrets remain undisclosed and a proprietary product or process is not reverse engineered or independently developed.

To
date, we have been issued four patents that relate to our VGF products and processes, two U.S., one Japanese and one Chinese, which expire in 2016 (1st U.S.), 2017 (JP), 2018
(CN), and 2022 (2nd U.S.). We have three U.S. patent applications pending, fifteen foreign patent applications pending (in Patent Cooperation Treaty ("PCT")/national stage process) in Europe,
Canada, China, Japan and South Korea which are based on our US patents or pertain to our VGF/related wafer manufacturing processes.

In
the normal course of business, we periodically receive and make inquiries regarding possible patent infringement. In dealing with such inquiries, it may become necessary or useful for
us to obtain

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or
grant licenses or other rights. However, there can be no assurance that such licenses or rights will be available to us on commercially reasonable terms. If we are not able to resolve or settle
claims, obtain necessary licenses on commercially reasonable terms and/or successfully prosecute or defend its position, our business, financial condition and results of operations could be materially
and adversely affected.

Environmental Regulations

We are subject to federal, state and local environmental laws and regulations, including laws in China as well as the U.S. These laws,
rules and regulations govern the use, storage, discharge and disposal of hazardous chemicals during manufacturing, research and development and sales demonstrations. We maintain a number of
environmental, health and safety programs that are primarily preventive in nature. As part of these programs, we regularly monitor ongoing compliance. If we fail to comply with applicable regulations,
we could be subject to substantial liability for clean-up efforts, personal injury and fines or suspension or cessation of our operations.

Employees

As of December 31, 2008, we had 1,120 employees including employees of our consolidating joint ventures, of whom 902 were
principally engaged in manufacturing, 125 in sales and administration, and 93 in research and development. Of these employees, 39 are located in the U.S., and 1,081 in China. As of December 31,
2007, we had 1,057 employees, of whom 857 were principally engaged in manufacturing, 116 in sales and administration, and 84 in research and development. Of these employees, 38 were located in the
U.S., and 1,019 in China.

Some
of our employees in China are represented by a union, but we have never experienced a work stoppage. We consider our relations with our employees to be good.

Available Information

Our principal executive offices are located at 4281 Technology Drive, Fremont, CA 94538, and our main telephone number at this address
is (510) 683-5900. The public may read and copy any material we file with the Securities and Exchange Commission, or SEC, at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington D.C., 20549. The public may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet sitehttp://www.sec.govthat contains reports, proxy and information statements and other information regarding issuers that file
electronically with the SEC.

Our
web site is www.axt.com. We make available, free of charge, on or through our web site, our annual, quarterly and current reports, and any amendments to those reports as soon as
reasonably practicable after those reports are filed with the SEC. The information on our web site does not constitute a part of this Annual Report on Form 10-K and is not
incorporated herein.

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Item 1A.Risk Factors

For ease of reference, we have divided these risks and uncertainties into the following general categories:



Risks Related to Our General Business

The operation of our business could be adversely affected by the departure of our Chief Executive Officer and the search for a permanent Chief Executive Officer.

Our Chief Executive Officer has recently resigned as an officer and director of AXT, and we have not yet appointed anyone to act as an
interim chief executive officer. Although we have commenced our search for a permanent Chief Executive Officer, it will take time to identify and hire a Chief Executive Officer. Mr. Jesse Chen,
a member of the Board of Directors since 1998 and our Lead Independent Director, has been appointed Chairman of the Board as a result of Dr. Yin's resignation. Although our board of directors
has agreed to provide additional support to our management during this transition, they are available to assist on a periodic basis only. While we do not believe that our business has been adversely
affected by the departure of our Chief Executive Officer, it is important to our success that we appoint a permanent Chief Executive Officer. Our failure to manage this transition, or to find and
retain an experienced Chief Executive Officer, could adversely affect the management of our business, our ability to compete effectively and our operating results.

Our common stock may be delisted from The Nasdaq Global Market, which could negatively impact the price of our common stock and our ability to access the capital markets.

Our common stock is listed on The Nasdaq Global Market. The bid price of our common stock has recently closed below the $1.00 minimum
per share bid price required for continued inclusion on The Nasdaq Global Market under Marketplace Rule 4450(a)(5). Although Nasdaq has suspended the requirement to comply with the minimum bid
price through July 6, 2009, if Nasdaq reinstates the rule, and if following any such reinstatement, the bid price of our common stock remains below $1.00 per share for thirty consecutive
business days, we could be subject to delisting from the Nasdaq Global Market.

Any
delisting from The Nasdaq Global Market could have an adverse effect on our business and on the trading of our common stock. If a delisting of our common stock were to occur, our
common stock would trade on the OTC Bulletin Board or on the "pink sheets" maintained by the National Quotation Bureau, Inc. Such alternatives are generally considered to be less efficient markets,
and our stock price, as well as the liquidity of our common stock, may be adversely impacted as a result. Delisting from The Nasdaq Global Market could also have other negative results, including the
potential loss of confidence by suppliers and employees, the loss of institutional investor interest and fewer business development opportunities, as well as the loss of liquidity for our
stockholders.

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Current global economic conditions may have an impact on our business and financial condition in ways that we currently cannot predict.

Our operations and financial results depend on worldwide economic conditions and their impact on levels of business spending, which
have deteriorated significantly in many countries and regions and may remain depressed for the foreseeable future. Uncertainties in the financial and credit markets have caused our customers to
postpone deliveries of ordered systems and placement of new orders. Continued uncertainties may reduce future sales of our products and services. The revenue growth and profitability of our business
depends on the overall demand for our substrates, and we are particularly dependent on the market conditions for the wireless, solid-state illumination, fiber optics and telecommunications industries.
Because our sales are primarily to major corporate customers whose businesses fluctuate with general economic and business conditions, a softening of demand for products that use our substrates,
caused by a weakening economy, may result in decreased revenue. Customers may find themselves facing excess inventory from earlier purchases, and may defer or reconsider purchasing products due to the
downturn in their business and in the general economy. If
the current market conditions continue to deteriorate, we may experience increased collection times and greater write-offs, either of which could have a material adverse effect on our cash
flow.

In
addition, the recent tightening of credit markets and concerns regarding the availability of credit may make it more difficult for our customers to raise capital, whether debt or
equity, to finance their purchases of capital equipment, including the products we sell. Delays in our customers' ability to obtain such financing, or the unavailability of such financing, would
adversely affect our product sales and revenues and therefore harm our business and operating results. We cannot predict the timing, duration of or effect on our business of the economic slowdown or
the timing or strength of a subsequent recovery.

Ongoing financial market volatility and adverse changes in the domestic and global economic environment could have a significant adverse impact on our business, financial
condition and operating results.

Our business and operating results have been significantly impacted by general economic conditions, and we expect to continue to
experience significant adverse effects from the continued decline in worldwide markets and the overall economic difficulties. In recent months, the U.S. and global economy has experienced a
significant downturn due to the effects of the credit market crisis, slower economic activity and a generally negative economic outlook, a decrease in consumer and business confidence and liquidity
concerns. Global market and economic conditions continue to be disruptive and volatile. The possible duration and severity of this adverse economic cycle is unknown. Although the Company remains
well-capitalized and has not suffered any liquidity issues as a result of these recent events, the cost and availability of funds may be adversely affected by illiquid credit markets.
Continued turbulence in U.S. and international markets and economies may adversely affect the Company's liquidity, financial condition and profitability. A severe or prolonged economic downturn could
result in a variety of risks to our business, including:



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We
have experienced and expect to continue to experience delays in customer purchasing decisions or disruptions in normal volume of customer orders that we believe are in part due to the
uncertainties in the global economy and an adverse impact on consumer spending. To the extent that the current economic downturn worsens or persists, or any of the above risks occur, our business and
operating results could be significantly and adversely affected.

The average selling prices of our products may decline over relatively short periods, which may reduce our gross margins.

The market for our products is characterized by declining average selling prices resulting from factors such as increased competition,
overcapacity, the introduction of new products and decreased sales of products incorporating our products and average selling prices for our products may decline over relatively short time periods. We
have in the past experienced, and in the future may experience, substantial period-to-period fluctuations in operating results due to declining average selling prices. On
average, we have experienced average selling price declines over the course of the last twelve months of anywhere from approximately 5 to 20% per year depending on the product. It is also possible for
the pace of average selling price declines to accelerate beyond these levels for certain products in a commoditizing market. We anticipate that average selling prices will decrease in the future in
response to the current difficult economic environment, product introductions by competitors or us, or by other factors, including pricing pressures from significant customers. When our average
selling prices decline, our gross profits decline
unless we are able to sell more products or reduce the cost to manufacture our products. We generally attempt to combat average selling price declines by improving yields, manufacturing efficiency and
working to reduce the costs of our raw materials and of manufacturing our products. We have in the past and may in the future experience declining sales prices, which could negatively impact our
revenues, gross profits and financial results. We therefore need to sell our current products in increasing volumes to offset any decline in their average selling prices, and introduce new products,
which we may not be able to do, or do on a timely basis.

We
may be unable to reduce the cost of our products sufficiently to enable us to compete with others. Our cost reduction efforts may not allow us to keep pace with competitive pricing
pressures and could adversely affect our margins. In order to remain competitive, we must continually reduce the cost of manufacturing our products through design and engineering changes. We may not
be successful in delivering our products to market in a timely manner. We cannot assure you that any changes effected by us will result in sufficient cost reductions to allow us to reduce the price of
our products to remain competitive or improve our gross margins.

Shifts in our product mix may result in declines in gross margins.

Our gross profit margins vary among our product families, and are generally higher on our larger diameter wafers. In addition,
historically our gross margins have been higher on our raw materials sales. Accordingly, our overall gross margins have fluctuated from period to period as a result of shifts in product mix, the
introduction of new products, decreases in average selling prices for products and our ability to reduce product costs, and these fluctuations are expected to continue in the future.

We
do not control the prices at which our joint venture companies sell their raw materials products to other third parties. However, as we consolidate the results of three of these
companies with our own, any reduction in their gross margins could have a significant, adverse impact on our overall gross margins. One or more of our joint venture companies has in the past and may
in the future sell raw materials at significantly reduced prices in order to gain volume sales, or sales to new customers. In such an event, our gross margin may be adversely impacted. In addition,
one of our joint venture companies has in the past been subject to capacity constraints requiring it to source product from other third party suppliers in order to meet customer demand, resulting in
decreased gross margin and adversely impacting our gross margin. This joint venture may in the future continue to experience such

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capacity
restraints, causing our gross margin, and consequently our operating results, to be adversely impacted.

The cyclical nature of the semiconductor industry may limit our ability to maintain or increase net sales and operating results during industry downturns.

The semiconductor industry is highly cyclical and periodically experiences significant economic downturns characterized by diminished
product demand, resulting in production overcapacity and excess inventory in the markets we serve. A downturn can result in lower unit volumes and rapid erosion of average selling prices. The
semiconductor industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles of both semiconductor companies' and their customers' products or
a decline in general economic conditions. We have experienced these conditions in our business in the past and may experience renewed, and possibly more severe and prolonged, downturns in the future
as a result of such cyclical changes. This may reduce our results of operations and the value of our business.

Our
continuing business depends in significant part upon manufacturers of electronic and opto-electronic compound semiconductor devices, as well as the current and
anticipated market demand for these devices and products using these devices. As a supplier to the compound semiconductor industry, we are subject to the business cycles that characterize the
industry. The timing, length and volatility of these cycles are difficult to predict. The compound semiconductor industry has historically been cyclical because of sudden changes in demand, the amount
of manufacturing capacity and changes in the technology employed in compound semiconductors. The rate of changes in demand, including end demand, is high, and the effect of these changes upon us
occurs quickly, exacerbating the volatility of these cycles. These changes have affected the timing and amounts of customers' purchases and investments in new technology. These industry cycles create
pressure on our revenue, gross margin and net income (loss).

The
industry has in the past experienced periods of oversupply that result in significantly reduced demand and prices for compound semiconductor devices and components, including our
products, both as a result of general economic changes and overcapacity. When these periods occur and our operating results and financial condition are adversely affected, oversupply creates pressure
on our revenue, gross margins and net income (loss). Inventory buildups in telecommunications products and slower than expected sales of computer equipment resulted in overcapacity and led to reduced
sales by our customers, and therefore reduced purchases of our products. During periods of weak demand such as those experienced historically, customers typically reduce purchases, delay delivery of
products and/or cancel orders of component parts such as our products. Increased price competition has resulted, causing pressure on our net sales, gross margin and net income (loss). We experienced
cancellations, price reductions, delays and push-outs of orders, which have resulted in reduced revenue. If the economic downturn occurred again, further order cancellations, reductions in
order size or delays in orders could occur and would materially adversely affect our business and results of operations. Actions to reduce our costs, such as those we have recently taken, may be
insufficient to align our structure with prevailing business conditions. We may be required to undertake additional cost-cutting measures, and may be unable to invest in marketing,
research and development and engineering at the levels we believe are necessary to maintain our competitive position. Our failure to make these investments could seriously harm our business.

We
base our planned operating expenses in part on our expectations of future revenue, and a significant portion of our expenses is relatively fixed in the short term. If revenue for a
particular quarter is lower than we expect, we likely will be unable to proportionately reduce our operating expenses for that quarter, which would harm our operating results for that quarter.

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We depend on high utilization of our manufacturing capacity.

An important factor in our success is the extent to which we are able to utilize the available capacity in our Beijing facility. As
many of our costs are fixed, a reduction in capacity utilization, as well as changes in other factors such as reduced yield or unfavorable product mix, could reduce our profit margins and adversely
affect our operating results. A number of factors and circumstances may reduce utilization rates, including periods of industry overcapacity, low levels of customer orders, operating inefficiencies,
mechanical failures and disruption of operations due to expansion, power interruptions, fire, flood or other natural disasters or calamities.

The Chinese Government has previously imposed manufacturing restrictions that, if imposed again in the future on our facilities, could materially and adversely impact our
results of operations and our financial condition.

The Chinese government has in the past imposed restrictions on manufacturing facilities, such as the restrictions imposed on polluting
factories for the 2008 Olympics and Paralympics, including a shut down of material transportation and power plants to clean the air. If, in the future, restrictions are imposed on our operations, our
ability to meet customer demand or supply current or new orders would be significantly impacted. Customers could then be required to purchase product from our competitors, causing our competitors to
take market share from us, and could result in our customers supplying future needs from our competitors. Restrictions on material transport could limit our ability to transport our product, and could
result in bottlenecks at shipping ports, limiting our ability to deliver products to our customers. During periods of such restrictions, we may increase our stock of critical materials (such as
arsenic, gallium, and other chemicals) for use during the period that these restrictions are likely to last, which will increase our use of cash and increase in inventory level, such as occurred
during 2008. Any of these restrictions could materially and adversely impact our results of operations and our financial condition.

Defects in our products could diminish demand for our products.

Our products are complex and may contain defects. We have experienced quality control problems with many of our products, which caused
customers to return products to us, reduce orders for our products, or both. Although our quality has improved, resulting in some increases in product sales, we believe that we continue to experience
some reduction in orders as a result of our prior product quality problems. If we continue to experience quality control problems, or experience these or other problems in new products, customers may
cancel or reduce orders or purchase products from our competitors, we may be unable to maintain or increase sales to our customers and sales of our products could decline. Defects in our products
could cause us to incur higher manufacturing costs and suffer product returns and additional service expenses, all of which could adversely impact our operating results.

If
new products developed by us contain defects when released, our customers may be dissatisfied and we may suffer negative publicity or customer claims against us, lose sales or
experience delays in market acceptance of our new products.

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

A small number of substrate customers have historically accounted for a substantial portion of our total revenue. Our top five
customers represented 46% of revenue for the year ended December 31, 2008, 40% of revenue for the year ended December 31, 2007, and 42% of revenue for the year ended December 31,
2006. We expect that a significant portion of our future revenue will continue to be derived from a limited number of substrate customers. Most of our customers are not obligated to purchase a
specified quantity of our products or to provide us with binding forecasts of product purchases. In addition, our customers may reduce, delay or cancel orders at any time without any

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significant
penalty. In the past, we have experienced slower bookings, significant push-outs and cancellation of orders from customers. If we lose a major customer or if a customer
cancels, reduces or delays orders, our revenue would decline. In addition, customers that have accounted for significant revenue in the past may not continue to generate revenue for us in any future
period. Any delay in scheduled shipments of our products could cause revenue to fall below our expectations and the expectations of market analysts or investors, causing our stock price to decline.

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

We must manage our inventory of component parts, work-in-process and finished goods effectively to meet
changing customer requirements, while keeping inventory costs down and improving gross margins. Some of our products and supplies have in the past and may in the future become obsolete while in
inventory due to changing customer specifications, or become excess inventory due to decreased demand for our products and an inability to sell the inventory within a foreseeable period. Furthermore,
if current costs of production increase or sales prices drop below the standard prices at which we value inventory, we may need to take a charge for a reduction in inventory values. We have in the
past had to take inventory valuation and impairment charges. Any future unexpected changes in demand or increases in costs of production that cause us to take additional charges for
un-saleable, obsolete or excess inventory, or to reduce inventory values, could adversely affect our results of operations.

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

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



If
our yields decrease, our revenue could decline if we are unable to produce needed product on time. At the same time, our manufacturing costs could remain fixed, or could increase. We
have experienced product shipment delays and difficulties in achieving acceptable yields on both new and older products, and delays and poor yields have adversely affected our operating results. We
may experience similar problems in the future and we cannot predict when they may occur or their severity. In particular, many of our manufacturing processes are new and are still being refined, which
can result in lower yields.

If
our manufacturing processes result in defects in our products making them unfit for use by our customers, our products would be rejected, resulting in compensation costs paid to our
customers, and possible disqualification. This could lead to revenue loss and market share loss.

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

Our success depends on our ability to offer new products and product features that incorporate leading technology and respond to
technological advances. In addition, our new products must meet customer needs and compete effectively on quality, price and performance. The life cycles of our products are difficult to predict
because the markets for our products are characterized by rapid

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technological
change, changing customer needs and evolving industry standards. If our competitors introduce products employing new technologies or performance characteristics, our existing products
could become obsolete and unmarketable. During the past three years, we have seen our competitors selling more substrates manufactured using a crystal growth technology similar to ours, which has
eroded our technological differentiation. Other companies, including TriQuint Semiconductors, are actively developing substrate materials that could be used to manufacture devices that could provide
the same high-performance, low-power capabilities as GaAs- and InP-based devices at competitive prices. If these substrate
materials or VGF-derived products are successfully developed and semiconductor device manufacturers adopt them, demand for our GaAs substrates could decline and our revenue could suffer.

The
development of new products can be a highly complex process, and we may experience delays in developing and introducing new products. Any significant delays could cause us to fail to
timely introduce and gain market acceptance of new products. Further, the costs involved in researching, developing and engineering new products could be greater than anticipated. If we fail to offer
new products or product enhancements or fail to achieve higher quality products, we may not generate sufficient revenue to offset our development costs and other expenses or meet our customers'
requirements.

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

The markets for our products are intensely competitive. We face competition for our substrate products from other manufacturers of
substrates, such as Freiberger Compound Materials, Hitachi Cable and Sumitomo Electric, from semiconductor device manufacturers that produce substrates for their own use, and from companies, such as
TriQuint Semiconductors, that are actively developing alternative materials to GaAs and marketing semiconductor devices using these alternative materials. We believe that at least two of our major
competitors are shipping high volumes of GaAs substrates manufactured using a technique similar to our VGF technique. Other competitors may develop and begin using similar technology. If we are unable
to compete effectively, our revenue may not increase and we may be unable to become profitable. We face many competitors that have a number of significant advantages over us,
including:



Our
competitors could develop new or enhanced products that are more effective than our products are.

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

In
addition, new competitors have and may continue to emerge, such as a small crystal growing company established by a former employee of ours in China that is supplying ingots to the
market. While new competitors such as this company currently do not appear to be fully competitive,

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competition
from sources such as this could increase, particularly if these competitors are able to obtain large capital investments.

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

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



If
demand for the end-user applications for which our products are used decreases, or our customers are unable to develop, market and sell their products, demand for our
products will decrease.

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

Many of our customers are facing business downturns that have reduced their cash balances and their prospects. We frequently allow our
customers extended payment terms after shipping products to them. Subsequent to our shipping a product, some customers have been unable to make payments when due, reducing our cash balances and
causing us to incur charges to allow for a possibility that some accounts might not be paid. Customers may also be forced to file for bankruptcy. If our customers do not pay their accounts when due,
we will be required to incur charges that would reduce our earnings.

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

We depend on a limited number of suppliers for certain raw materials, components and equipment used in manufacturing our products,
including key materials such as quartz tubing, polishing solutions and paralytic boron nitride. Although several of these raw materials are
purchased from suppliers in which we hold an ownership interest, we generally purchase these materials through standard purchase orders and not pursuant to long-term supply contracts and
no supplier guarantees supply of raw materials or equipment to us. If we lose any of our key suppliers, our manufacturing efforts could be significantly hampered and we could be prevented from timely
producing and delivering products to our customers. Prior to investing in our raw material joint ventures, we sometimes experienced delays obtaining critical raw materials and spare parts, including
gallium, due to shortages of these materials and could experience such delays again in the future due to shortages of materials and may be unable to obtain an adequate supply of materials. These
shortages and delays could result in higher materials costs and cause us to delay or reduce production of our products. If we have to delay or reduce production, we could fail to meet customer
delivery schedules and our revenue and operating results could suffer.

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We have made and may continue to make strategic investments in raw materials suppliers, which may not be successful and may result in the loss of all or part of our
investment.

We have made investments through our five joint ventures in raw material suppliers in China, which provide us with opportunities to
gain supplies of key raw materials that are important to our substrate business. These affiliates each have a market beyond that provided by us. We do not have influence over all of these companies,
each of which is located in China, and in some we have made only a strategic, minority investment. We may not be successful in achieving the financial, technological or commercial advantage upon which
any given investment is premised, and we could end up losing all or part of our investment.

Our substrate products have a long qualification cycle that makes it difficult to plan our expenses and forecast our results.

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

Problems incurred by our joint ventures or venture partners could result in a material adverse impact on our financial condition or results of operations.

We have invested in five joint venture operations in China that produce products including 99.99% pure gallium (4N Ga), high purity
gallium, arsenic, germanium, germanium dioxide, paralytic boron nitride (pBN) crucibles and boron oxide. We purchase a portion of the materials produced by these ventures for our use and sell the
remainder of their production to third parties. Our ownership interest in these entities ranges from 25% to 83%. We consolidate the three ventures in which we own a majority or controlling financial
interest and employ equity accounting for the two joint ventures in which we have a 25% interest. Several of these ventures occupy space within larger facilities owned and/or operated by one of the
other venture partners. Several of these venture partners are engaged in other manufacturing activities at or near the same facility. In some facilities, we share access to certain functions,
including water, hazardous waste treatment or air quality treatment. If any of our joint venture partners in any of these five ventures experiences problems with its operations, disruptions of our
joint venture operations could result, having a material adverse effect on the financial condition and results of operation of our joint ventures, and correspondingly on our financial condition or
results of operations. For example, during 2008, our gallium joint venture in China, which is housed in and receives services from an affiliated aluminum plant, ceased production for five weeks during
the fourth quarter of 2008 as a result of supply shortage from the aluminum plant which had reduced production and halted operations due to dropping aluminum prices in the second half of 2008.
Accordingly, in order to meet customer supply obligations, our joint venture had to source finished products from another independent third party supplier, resulting in low gross margin for the
quarter. Our joint venture may in the future continue to experience shortages in supply from the aluminum plant, requiring it to again source finished products from a third party, adversely impacting
our gross margins.

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In
addition, if any of our joint ventures or venture partners with which our joint ventures share facilities is deemed to have violated applicable laws, rules or regulations governing
the use, storage, discharge or disposal of hazardous chemicals during manufacturing, research and development, or sales demonstrations, the operations of our joint ventures could be adversely affected
and we could be subject to substantial liability for clean-up efforts, personal injury and fines or suspension or cessation of our joint venture operations as a result of the actions of
the joint ventures or other venture partners. Employees working for our joint ventures or any of the other venture partners could bring litigation against us as a result of actions taken at the joint
venture or venture partner facilities, even though we are not directly controlling the operations, including actions for exposure to chemicals or other hazardous materials at the facilities of our
joint ventures or the facilities of any venture partner that are shared by our joint ventures. If litigation is brought against us, litigation is inherently uncertain and, while we would expect to
defend ourselves vigorously, it is possible that our business, financial condition, results of operations or cash flows could be affected in any particular period by any litigation if brought against
us, particularly if litigation with us, as a non-Chinese company, is deemed advantageous. Even if we are not deemed responsible for the actions of the joint ventures or venture partners,
litigation could be costly, time consuming to defend and divert management attention; in addition, pursuit of us could occur if we are deemed to be the most financially viable of the partners.

Going
forward, we believe that investing in additional joint ventures will be important to remaining competitive in our marketplace and ensuring a supply of critical raw materials.
However, we may not be able to identify complementary joint venture opportunities or, even once opportunities are identified, we may not be able to reach agreement on the terms of the venture with the
other venture partners. Additional joint ventures could cause us to incur contingent liabilities or other expenses, any of which could adversely affect our financial condition and operating results.

Since
all of our joint venture activity is expected to occur in China, these activities could subject us to a number of risks associated with conducting operations internationally,
including:



The effect of terrorist threats and actions on the general economy could decrease our revenue.

The United States continues to be on alert for terrorist activity. The potential near- and long-term impact
terrorist activities may have in regards to our suppliers, customers and markets for our products and the U.S. economy is uncertain. There may be embargos of ports or products, or destruction of
shipments or our facilities, or attacks that affect our personnel. There may be other potentially adverse effects on our operating results due to a significant event that we cannot foresee. Since we
perform all

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of
our manufacturing operations in China, and a significant portion of our customers are located outside of the United States, terrorist activity or threats against U.S.-owned enterprise are a
particular concern to us.

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

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

Risks Related to International Aspects of Our Business

Changes in tariffs, import restrictions, export restrictions or other trade barriers may reduce gross margins.

We may incur increases in costs due to changes in tariffs, import or export restrictions, or other trade barriers, or unexpected
changes in regulatory requirements, any of which could reduce our gross margins. For example, in 2006, tax authorities in the PRC changed the treatment of refunds of value-added taxes that companies
pay when they purchase certain raw materials, including gallium and arsenic. The cumulative effect is that our PRC joint venture companies no longer receive a refund of value-added tax for exports of
gallium or arsenic, including certain shipments to our wholly-owned PRC subsidiary that are treated as exports under PRC tax regulations. Given the relatively fluid regulatory environment in the PRC,
there could be additional tax or other regulatory changes in the future. Any such changes could directly and materially adversely impact our financial results and general business condition.

Our operating results depend in large part on continued customer acceptance of our substrate products manufactured in China and continued improvements in product quality.

We manufacture all of our products in China, and source most of our raw materials in China. Accordingly, we continue to seek customer
qualification of our China-manufactured products. In addition, we have in the past experienced quality problems with our China-manufactured products. Our previous quality problems caused us to lose
market share to our competitors, as some customers reduced their orders from us until our surface quality was as good and consistent as that offered by competitors and customers allocated their
requirements for compound semiconductor substrates across more competitors. We have continued to experience some issues relating to haze reduction. If we are unable to continue to achieve customer
qualifications for our products, or if continue to experience quality problems, customers may not increase purchases of our products, our China facility will become underutilized, and we will be
unable to achieve expected revenue growth. We may again lose sales of our products to competitors and experience loss of market share. If we are unable to recover and retain our market share, we may
be unable to grow our business.

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

Our revenue growth depends in part on the expansion of our international sales and operations. International sales represented 74%, 80%
and 71% of our total revenue for the years ended

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December 31,
2008, 2007 and 2006, respectively. We expect that sales to customers outside the U.S., particularly sales to customers in Asia, will continue to represent a significant portion of
our revenue.

Currently,
an increasing percentage of our sales is to customers headquartered in Asia. All of our manufacturing facilities and some of our suppliers are also located outside the U.S.
Managing our overseas operations presents challenges, including periodic regional economic downturns, trade balance issues, varying business conditions and demands, political instability, variations
in enforcement of intellectual property and contract rights in different jurisdictions, differences in the ability to develop relationships with suppliers and other local businesses, changes in U.S.
and international laws and regulations including U.S. export restrictions, fluctuations in interest and currency exchange rates, the ability to provide sufficient levels of technical support in
different locations, cultural differences, shipping delays and terrorist acts or acts of war, among other risks. Many of these challenges are present in China, which represents a large potential
market for semiconductor devices and where we anticipate significant opportunity for growth. Global uncertainties with respect to: (i) economic growth rates in various countries;
(ii) sustainability of demand for electronics products; (iii) capital spending by semiconductor manufacturers; (iv) price weakness for certain semiconductor devices; and
(v) political instability in regions where we have operations may also affect our business, financial condition and results of operations.

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



Our
sales are denominated in U.S. dollars, except for sales to our Japanese and some Taiwanese customers, which are denominated in Japanese yen. Thus, increases in the value of the U.S.
dollar could increase the price of our products in non-U.S. markets and make our products more expensive than competitors' products in these markets.

Also,
denominating some sales in Japanese yen subjects us to fluctuations in the exchange rates between the U.S. dollar and the Japanese yen. The functional currency of our Chinese
subsidiary and joint ventures is the local currency. We incur transaction gains or losses resulting from consolidation of expenses incurred in local currencies for these entities, as well as in
translation of the assets and liabilities of their assets at each balance sheet date. If we do not effectively manage the risks associated with international sales, our revenue, cash flows and
financial condition could be adversely affected.

If there are power shortages in the PRC, we may have to temporarily close our China operations, which would adversely impact our ability to manufacture our products and meet
customer orders, and would result in reduced revenue.

In the past, the Chinese government has faced a power shortage resulting in power demand outstripping supply in peak periods.
Instability in electrical supply in past years has caused sporadic outages among residential and commercial consumers causing the Chinese government to implement tough measures to ease the energy
shortage, and as a result, we closed most of our operations for a week in late July 2004 in conformance with this policy.

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In
2006 we were able to switch the electrical supply for our manufacturing facility onto the same power grid as that used by vital PRC government services such as hospitals and police.
However, if even despite this switch, further problems with power shortages are incurred in the future, and we are required to make temporary closures of our subsidiary and joint venture operations,
we may be unable to manufacture our products, and would then be unable to meet customer orders except from inventory on hand. As a result, our revenue could be adversely impacted, and our
relationships with our customers could suffer, impacting our ability to generate future revenue. In addition, if power is shut off at our Beijing subsidiary at any time, either voluntarily or as a
result of unplanned brownouts, during certain phases of our manufacturing process including our crystal growth phase, the work in process may be ruined and rendered unusable, causing us to incur
expense that will not be covered by revenue, and negatively impacting our cost of revenue and gross margins.

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

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

An outbreak of contagious disease such as Severe Acute Respiratory Syndrome (SARS) or the Avian Flu may adversely impact our manufacturing operations and some of our key
suppliers and customers.

Any reoccurrence of SARS or an outbreak of a contagious disease, such as Avian Flu may cause us to temporarily close our manufacturing
operations. Similarly, if one of our key suppliers is required to close for an extended period, we might not have enough raw material inventory to continue manufacturing operations. In addition, while
we possess management skills among our China staff that enable us to maintain our manufacturing operations with minimal on-site supervision from our U.S.-based staff, our business could
also be harmed if travel to or from Asia and the United States is restricted or inadvisable. None of our substrate competitors is as dependent on manufacturing facilities in China as we are. If our
manufacturing operations were closed for a significant period, we could lose revenue and market share during that period, which would depress our financial performance and could be difficult to
recapture. Finally, if one of our key customers is required to close for an extended period, we might not be able to ship product to them, our revenue would decline and our financial performance would
suffer.

Risks Related to Our Financial Results and Capital Structure

If we fail to manage periodic contractions, we may utilize our cash balances, resulting in the decline of our existing cash, cash equivalents and investment balances.

We anticipate that our existing cash resources will fund our operations and purchases of capital equipment, as well as provide adequate
working capital for the next twelve months. However, our liquidity is affected by many factors including, among others, the extent to which we pursue additional capital expenditures, the level of our
production, and other factors related to the uncertainties of the industry and global economies. If we fail to manage our contractions successfully we may draw down our cash reserves, which would
adversely affect our operating results and financial condition, reduce

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our
value and possibly impinge our ability to raise debt and equity funding in the future, at a time when we might be required to raise additional cash. Accordingly, there can be no assurance that
events in the future will not require us to seek additional capital or, if required, that such capital would be available on terms acceptable to us, if at all. As part of our effort to reduce costs,
we may lose key staff, production resources and technology that we will need to grow when end markets recover. These events could reduce our ability to grow profitably as markets recover.

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

We have experienced and may continue to experience significant fluctuations in our revenue and earnings. Our quarterly and annual
revenue and operating results have varied significantly in the past and may vary significantly in the future due to a number of factors, including:



Due
to these factors, we believe that period-to-period comparisons of our operating results may not be meaningful indicators of our future performance.

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

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

Our board of directors has the authority to issue up to 2,000,000 shares of preferred stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that may be issued in the future. The issuance of shares of preferred stock could have the effect of making it more difficult for a third party to acquire
a majority of our outstanding voting stock. We have no present intention to issue additional shares of preferred stock.

We
have adopted a preferred stock purchase rights plan intended to guard against certain takeover tactics. The adoption of this plan was not in response to any proposal to acquire us,
and the board is

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not
aware of any such effort. The existence of this plan could also have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock.

In
addition, provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a merger, acquisition or
change of control, or changes in our management, which could adversely affect the market price of our common stock. The following are some examples of these provisions:



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



Risks Related to Our Intellectual Property

Intellectual property infringement claims may be costly to resolve and could divert management attention.

Other companies may hold or obtain patents on inventions or may otherwise claim proprietary rights to technology necessary to our
business. The markets in which we compete are comprised of competitors that in some cases hold substantial patent portfolios covering aspects of products that could be similar to ours. We could become
subject to claims that we are infringing patent, trademark, copyright or other proprietary rights of others. For example, we have in the past been involved in two separate lawsuits alleging patent
infringement, and could in the future be involved in similar litigation.

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

We rely on a combination of patents, copyrights, trademark and trade secret laws, non-disclosure agreements and other
intellectual property protection methods to protect our proprietary technology. However, we believe that, due to the rapid pace of technological innovation in the markets for our products, our ability
to establish and maintain a position of technology leadership also depends on the skills of our development personnel. Despite our efforts to protect our intellectual property, third parties can
develop products or processes similar to ours. Our means of protecting our proprietary rights may not be adequate, and our competitors may independently develop similar technology, duplicate our
products or design around our patents. We believe that at least two of our competitors have begun to ship GaAs substrates produced using a process similar to our VGF technique. Our competitors may
also develop and patent improvements to the VGF technology upon which we rely, and thus may limit any exclusivity we enjoy by virtue of our patents or trade secrets.

It
is possible that pending or future United States or foreign patent applications made by us will not be approved, that our issued patents will not protect our intellectual property, or
that third parties will challenge the ownership rights or the validity of our patents. In addition, the laws of some foreign

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countries
may not protect our proprietary rights to as great an extent as do the laws of the United States and it may be more difficult to monitor the use of our intellectual property. Our competitors
may be able to legitimately ascertain non-patented proprietary technology embedded in our systems. If this occurs, we may not be able to prevent the development of technology substantially
similar to ours.

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

For
example, we are currently in negotiations to renew a cross-license entered into with Sumitomo Electric Industries, Ltd. in Japan in connection with the settlement of prior
litigation. There can be no assurance that the cross-license expiring on December 31, 2008 will be renewed, or on terms acceptable to us.

Risks Related to Compliance and Other Legal Matters

We need to continue to improve or implement our systems, procedures and controls.

The shift of our manufacturing operations to China and growth of our business has placed and continues to place a significant strain on
our operations and management resources. We have upgraded our inventory control systems, but continue to rely on certain manual processes in our operations and in connection with consolidation of our
financial results. If we fail to manage these changes effectively, our operations may be disrupted.

To
manage our business effectively, we may need to implement additional and improved management information systems, further develop our operating, administrative, financial and
accounting systems and controls, add experienced senior level managers, and maintain close coordination among our executive, engineering, accounting, marketing, sales and operations organizations.

We are subject to internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we must include in our Annual Report on Form 10-K
a report of management on the effectiveness of our internal control over financial reporting. Ongoing compliance with this requirement is complex, costly and time-consuming. If:
(1) we fail to maintain effective internal control over financial reporting; (2) our management does not timely assess the adequacy of such internal control; or (3) our
independent registered public accounting firm does not timely deliver an unqualified opinion as to the effectiveness of our internal controls, we could be subject to regulatory sanctions and the
public's perception of us may decline.

If we fail to comply with environmental and safety regulations, we may be subject to significant fines or forced to cease our operations; in addition, we could be subject to
suits for personal injuries caused by hazardous materials.

We are subject to federal, state and local environmental and safety laws and regulations in all of our operating locations, including
laws and regulations of China, such as laws and regulations related to the development, manufacture and use of our products, the operation of our facilities, and the use of our real property. These
laws and regulations govern the use, storage, discharge and disposal of hazardous chemicals during manufacturing, research and development, and sales demonstrations. If we fail to comply with
applicable regulations, we could be subject to substantial liability for clean-up efforts, personal injury and fines or suspension or be forced to cease our operations, and/or suspend or

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terminate
the development, manufacture or use of certain of our products, the use of our facilities, or the use of our real property, each of which could have a material adverse effect on our
business, financial condition and results of operations.

We
have in the past been the subject of claims made by the California Occupational Safety and Health Administration, or Cal-OSHA, in an investigation primarily regarding
impermissible levels of potentially hazardous materials in certain areas of our manufacturing facility in Fremont, California. We were also previously the target of press allegations and
correspondence purportedly on behalf of current and/or former employees concerning our environmental compliance programs and exposure of our employees to hazardous materials. In addition, a complaint
was previously filed against us and two current officers, alleging personal injury, general negligence, intentional tort, wage loss and other damages, including punitive damages, as a result of
exposure of plaintiffs to high levels of gallium arsenide in gallium arsenide wafers, and methanol. Other current and/or former employees could bring
litigation against us in the future. Although we have put in place engineering, administrative and personnel protective equipment programs to address these issues, our ability to expand or continue to
operate our present locations could be restricted or we could be required to acquire costly remediation equipment or incur other significant expenses if we were found liable for failure to comply with
environmental and safety regulations. Existing or future changes in laws or regulations in the United States and China may require us to incur significant expenditures or liabilities, or may restrict
our operations. In addition, our employees could be exposed to chemicals or other hazardous materials at our facilities and we may be subject to lawsuits seeking damages for wrongful death or personal
injuries allegedly caused by exposure to chemicals or hazardous materials at our facilities.

Litigation
is inherently uncertain and while we would expect to defend ourselves vigorously, it is possible that our business, financial condition, results of operations or cash flows
could be affected in any particular period by litigation pending and any additional litigation brought against us. In addition, future litigation could divert management's attention from our business
and operations, causing our business and financial results to suffer. We could incur defense or settlement costs in excess of the insurance covering these litigation matters, or that could result in
significant judgments against us or cause us to incur costly settlements, in excess of our insurance limits.

Item 1B.Unresolved Staff Comments

None.

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Table of Contents

Item 2.Properties

Our principal properties as of February 28, 2009 are as follows:

Location

Square
Feet

Principal Use

OwnershipFremont, CA


27,760

Administration

Operating lease, expires November 2015Beijing, China


31,000

Production and Administration

OwnedBeijing, China


31,000

Production

OwnedBeijing, China


32,000

Production

OwnedBeijing, China


16,000

Housing

OwnedBeijing, China


34,000

Production

OwnedBeijing, China


48,000

Production

OwnedBeijing, China


22,000

Production and

OwnedAdministrationBeijing, China


53,000

Production

OwnedXianxi, China


56,500

Production

Owned by Beijing Ji Ya Semiconductor Material, Co., Ltd.*Xianxi, China


7,500

Administration

Owned by Beijing Ji Ya Semiconductor Material, Co., Ltd.*Beijing, China


2,000

Administration

Operating lease by Beijing Ji Ya Semiconductor Material, Co., Ltd., expires February 2011Nanjing, China


22,000

Production

Owned by Nanjing Jin Mei Gallium Co., Ltd.*Nanjing, China


5,700

R&D and Administration

Owned by Nanjing Jin Mei Gallium Co., Ltd.*Nanjing, China


3,900

Production

Owned by Nanjing Jin Mei Gallium Co., Ltd.*Beijing, China


7,600

Production and Administration

Owned by Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd.*


---

We
consider each facility to be in good operating condition and adequate for its present use, and believe that each facility has sufficient plant capacity to meet its current and
anticipated operating requirements.

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Table of Contents

Item 3.    Legal Proceedings

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

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

The
claims of a former employee, Steve X. Chen, that his employment termination was due to his race and national origin were resolved without cost to us.

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

None.

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Table of Contents

PART II

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

Our common stock has been trading publicly on the NASDAQ Global Market, (NASDAQ) under the symbol "AXTI" since May 20, 1998, the
date we consummated our initial public offering. The following table sets forth the range of high and low sales prices of the common stock for the periods indicated, as reported by NASDAQ.

High

Low2008First Quarter

$
7.20

$
4.22Second Quarter

$
5.11

$
4.11Third Quarter

$
4.76

$
1.85Fourth Quarter

$
2.09

$
0.862007First Quarter

$
5.45

$
4.16Second Quarter

$
5.05

$
3.53Third Quarter

$
6.20

$
4.18Fourth Quarter

$
6.84

$
3.83


As
of December 31, 2008, there were 88 holders of record of our common stock. Because many shares of AXT's common stock are held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of beneficial owners of our common stock.

We
have never paid or declared any cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. Dividends accrue on our outstanding
Series A preferred stock at the rate of $0.20 per annum per share of Series A preferred stock.

Issuer Purchases of Equity Securities

During the years ended December 31, 2008 and 2007, we did not repurchase any shares of our common stock.

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Table of Contents

Comparison of Stockholder Return

Set forth below is a line graph comparing the annual percentage change in the cumulative total return to the stockholders of the
Company on our common stock with the CRSP Total Return Index for the Nasdaq Stock Market (U.S. Companies) and the Nasdaq Electronic Components Index for the period commencing December 31, 2003,
and ending December 31, 2008.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among AXT, Inc., The NASDAQ Composite Index
And The NASDAQ Electronic Components Index

LOGO

12/03

12/04

12/05

12/06

12/07

12/08AXT, Inc.


100.00


50.80


68.81


151.77


199.36


43.41NASDAQ Composite


100.00


110.08


112.88


126.51


138.13


80.47NASDAQ Electronic Components


100.00


78.30


84.93


79.38


92.16


47.68


33

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Table of Contents

Item 6.Selected Consolidated Financial Data

The following selected consolidated financial data is derived from and should be read in conjunction with our consolidated financial
statements and related notes set forth in Item 8 below, and in our previously filed reports on Form 10-K. See also Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further information relating to items reflecting our results of operations and financial condition.

Years Ended December 31,2008

2007

2006

2005

2004(in thousands, except per share data)Statements of Operations Data:Revenue

$
73,075

$
58,203

$
44,445

$
26,536

$
35,454Cost of revenue


55,115


37,942


31,709


24,337


35,705Gross profit (loss)


17,960


20,261


12,736


2,199


(251
)Operating expenses:Selling, general, and administrative


15,751


13,746


12,650


12,955


11,561Research and development


2,164


1,699


2,351


1,723


1,479Impairment (recovery of impairment) on assets held for sale


83


(481
)

1,417





210Restructuring charge (benefit)








(2
)

836


1,308Total operating expenses


17,998


14,964


16,416


15,514


14,558Income (loss) from continuing operations


(38
)

5,297


(3,680
)

(13,315
)

(14,809
)Interest income, net


513


704


443


516


262Other income (expense), net


(141
)

16


2,709


(910
)

94Income (loss) from continuing operations before provision (benefit) for income taxes


334


6,017


(528
)

(13,709
)

(14,453
)Provision (benefit) for income taxes


1,023


728


(1,454
)

(950
)

71Income (loss) from continuing operations


(689
)

5,289


926


(12,759
)

(14,524
)Discontinued operations:Gain (loss) from discontinued operations, net of tax








18


(59
)

472Gain from disposal, net of tax











603


419Gain from discontinued operations, net of taxes








18


544


891Net income (loss)

$
(689
)
$
5,289

$
944

$
(12,215
)
$
(13,633
)Basic income (loss) per share:Income (loss) from continuing operations

$
(0.03
)
$
0.17

$
0.03

$
(0.56
)
$
(0.64
)Gain from discontinued operations, net of tax











0.02


0.04Net income (loss)

$
(0.03
)
$
0.17

$
0.03

$
(0.54
)
$
(0.60
)Diluted income (loss) per share:Income (loss) from continuing operations

$
(0.03
)
$
0.16

$
0.03

$
(0.56
)
$
(0.64
)Gain from discontinued operations, net of tax











0.02


0.04Net income (loss)

$
(0.03
)
$
0.16

$
0.03

$
(0.54
)
$
(0.60
)Shares used in per share calculations:Basic


30,400


30,035


23,303


23,047


23,063Diluted


30,400


31,348


24,600


23,047


23,063


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Years Ended December 31,2008

2007

2006

2005

2004(in thousands)Balance Sheet Data:Cash and cash equivalents

$
13,566

$
18,380

$
16,116

$
17,472

$
12,117Short-term investments


17,756


20,825


19,428


5,555


20,062Working capital


66,836


75,350


66,359


36,347


46,141Restricted deposits


3,013


6,700


7,150


7,450


8,215Total assets


111,662


112,772


98,332


74,798


87,540Long-term debt, net of current portion


496


6,250


6,839


7,420


7,880Stockholders' equity


93,664


93,250


81,200


55,618


68,017


All
periods have been restated to reflect the accounting for discontinued operations. As a result, the discontinued opto-electronics and consumer products divisions have been
eliminated from continuing operations in the statements of operations.

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

In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled Item 1A.
"Risk Factors" and elsewhere in this Annual Report. This discussion should be read in conjunction with Item 6. "Selected Consolidated Financial Data" and our consolidated financial statements
and related notes included elsewhere in this Form 10-K.

Critical Accounting Policies and Estimates

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

We
have identified the policies below as critical to our business operations and understanding of our financial condition and results of operations. A critical accounting policy is one
that is both material to
the presentation of our consolidated financial statements and requires us to make difficult, subjective or complex judgments that could have a material impact on our consolidated financial statements.
Different estimates that we could have used, or changes in the estimates that are reasonably likely to occur, may have a material impact on our financial condition or results of operations. We also
refer you to our "The Company and Summary of Significant Accounting Policies" discussed in the accompanying notes to our consolidated financial statements included elsewhere in this
Form 10-K.

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Revenue Recognition

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

We
provide for future returns based on historical experience, current economic trends and changes in customer demand at the time revenue is recognized. In the first quarter of 2004, we
recorded a reserve for sales returns of $0.7 million related to our failure to follow certain testing requirements and provision of testing data and information to certain customers. This
reserve was based on discussions with some of the affected customers and review of specific shipments. As of December 31, 2008, this
reserve was zero since approximately $0.5 million had been utilized and approximately $0.2 million had been reversed to revenue in 2006 as we favorably resolved an outstanding matter
with a customer.

Allowance for Doubtful Accounts

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

As
of December 31, 2006, our allowance for doubtful accounts was $0.1 million. During 2007, we increased this allowance by $0.3 million primarily for
slow-paying customers in Asia, resulting in the allowance for doubtful accounts of $0.4 million as of December 31, 2007. As of December 31, 2007, our accounts
receivable balance was $12.1 million, which was net of an allowance for doubtful accounts of $0.4 million. As of December 31, 2008, our accounts receivable balance was
$11.5 million, which was net of an allowance for doubtful accounts of $0.6 million. The increase of $0.2 million in allowance for doubtful accounts from prior year was mainly for
one slow-paying customer in the United States in the amount of $0.4 million, offset by subsequent collections from an Asian customer in the amount of $0.2 million. No amounts
have been written off. If actual uncollectible accounts differ substantially from our estimates, revisions to the estimated allowance for doubtful accounts would be required, which could have a
material impact on our financial results for the period.

The
allowance for sales returns is also deducted from gross accounts receivable. The total allowance deducted from gross accounts receivable as of December 31, 2008 and 2007 were
$133,000 and $3,000, respectively.

Warranty Reserve

We maintain a warranty reserve based upon our claims experience during the prior twelve months. Warranty costs are accrued at the time
revenue is recognized. As of December 31, 2008 and 2007, accrued product warranties totaled $1.6 million and $1.0 million, respectively. The increase in accrued product warranties
is primarily attributable to increased claims for quality issues experienced by some

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customers
as well as an increase in revenues. If actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liability would be required.

Inventory Valuation

Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost method. Our inventory
consists of raw materials as well as finished goods and work-in-process that include material, labor and manufacturing overhead costs. Given the nature of our substrate
products, and the materials used in the manufacturing process, the wafers and ingots comprising work-in-process may be held in inventory for up to two years and three years,
respectively, as the risk of obsolescence for these materials is low. We routinely evaluate the levels of our inventory in light of current market conditions in order to identify excess and obsolete
inventory and adjust the carrying value of certain inventories based upon the age and quality of the product and the projections for sale of the completed products. If actual demand for our products
were to be substantially lower than estimated, additional inventory adjustments for excess or obsolete inventory might be required, which could have a material impact on our business, financial
condition and results of operations.

Impairment of Investments

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

We
invest in equity instruments of privately-held companies for business and strategic purposes. These investments are classified as other assets and are accounted for under
the cost method as we do not have the ability to exercise significant influence over their operations. We monitor our investments for impairment and record reductions in carrying value when events or
changes in circumstances indicate that the carrying value may not be recoverable. Determination of impairment is highly subjective and is based on a number of factors, including an assessment of the
strength of investee's management, the length of time and extent to which the fair value has been less than our cost basis, the financial condition and near-term prospects of the investee,
fundamental changes to the business prospects of the investee, share prices of subsequent offerings, and our intent and ability to hold the investment for a period of time sufficient to allow for any
anticipated recovery in our carrying value. We had no write-downs in 2008, 2007 or 2006.

Fair Value of Investments

In the current market environment, the assessment of the fair value of debt instruments can be difficult and subjective. The volume of
trading activity of certain debt instruments has declined, and the rapid changes occurring in today's financial markets can lead to changes in the fair value of financial instruments in relatively
short periods of time. SFAS No. 157 establishes three levels of inputs that may be used to measure fair value.

Level 1
instruments represent quoted prices in active markets. Therefore, determining fair value for Level 1 instruments does not require significant management judgment,
and the estimation is not difficult. Level 2 instruments include observable inputs other than Level 1 prices, such as quoted prices for identical instruments in markets with insufficient
volume or infrequent transactions (less active markets), issuer credit ratings, non-binding market consensus prices that can be corroborated with

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observable
market data, model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the
full term of the assets or liabilities, or quoted prices for similar assets or liabilities. These Level 2 instruments require more management judgment and subjectivity compared to
Level 1 instruments, including:



Level 3
instruments include unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. The determination of
fair value for Level 3 instruments requires the most management judgment and subjectivity. As of December 31, 2008, we did not have any assets or liabilities without observable market
values that would require a high level of judgment to determine fair value (Level 3 assets).

Impairment of Long-Lived Assets

We evaluate the recoverability of property, plant and equipment, and intangible assets in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."When events and circumstances indicate that long-lived assets
may be impaired, we compare the carrying value of the long-lived assets to the projection of future undiscounted cash flows attributable to such assets. In the event that the carrying
value exceeds the future undiscounted cash flows, we record an impairment charge against income equal to the excess of the carrying value over the asset's fair value. Fair value is generally
determined by calculating the discounted future cash flows using a discount rate based upon our weighted average cost of capital, and specific appraisal in certain instances. Significant judgments and
assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows, including long-term forecasts of the amounts and timing of
overall market growth and our percentage of that market, groupings of assets, discount rate and terminal growth rates. Changes in these estimates could have a material adverse effect on the assessment
of long-lived assets, thereby requiring us to write down the assets. In the third quarter of 2006, we incurred an impairment charge of $1.4 million to write down our U.S. property
in Fremont, California, which was being decontaminated and was being prepared for sale. In the second quarter of 2007, we benefited from a recovery of impairment on this asset held for sale in
connection with our adjustment of the fair value. We recorded a $481,000 market value adjustment after we entered into an agreement with an independent third party purchaser in June 2007 to purchase
the property for estimated net proceeds of $5.1 million, after deducting estimated commission and selling expenses. In the fourth quarter of 2007, that agreement was terminated and we entered
into a new sales agreement with another independent third party purchaser to purchase this property for a similar amount. The

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sale
of the property was consummated in March 2008 and we recorded an $83,000 adjustment due to the final sales price of the property. We no longer have "Assets held for sale" on the consolidated
balance sheet.

Stock Based Compensation

We grant options to substantially all management employees and believe that this program helps us to attract, motivate and retain high
quality employees, to the ultimate benefit of our stockholders. We account for stock based compensation costs in accordance with the provisions of SFAS No. 123 (revised 2004),
"Share-Based Payment," ("SFAS No. 123(R)"). Stock compensation expense for all stock-based compensation awards granted after January 1,
2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). We recognize these compensation costs net of an estimated forfeiture rate
over the
requisite service period of the award, which is generally the vesting term of four years for stock options.

In
March 2005, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 107 ("SAB 107") regarding the SEC's interpretation of SFAS
No. 123(R) and the valuation of share-based payments for public companies. We have applied the provisions of SAB 107 in the adoption of SFAS No. 123(R). Stock compensation expense
recorded in cost of revenue, research and development, and selling, general and administrative expenses is the amortization of the fair value of share-based payments made to employees and members of
our board of directors, primarily in the form of stock options and restricted stock (see Note 1Summary of Significant Accounting PoliciesStock-Based Compensation). All
of our stock compensation is accounted for as an equity instrument.

We
account for stock compensation costs in accordance with SFAS No. 123(R) and apply the provisions of SAB 107. We utilize the Black-Scholes option pricing model to
estimate the grant date fair value of employee stock compensation awards, which requires the input of highly subjective assumptions, including expected volatility and expected term. Historical and
implied volatility were used in estimating the fair value of our stock compensation awards, while the expected term for our options was estimated based on historical trends. Further, as required under
SFAS No. 123(R), we now estimate forfeitures for stock compensation awards that are not expected to vest. Changes in these inputs and assumptions can materially affect the measure of estimated
fair value of our stock compensation. We charge the estimated fair value to earnings on a straight-line basis over the vesting period of the underlying awards, which is generally four
years for our stock option awards.

The
Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. As our stock
option awards have characteristics that differ significantly from traded options, and as changes in the subjective assumptions can materially affect the estimated value, our estimate of fair value may
not accurately represent the value assigned by a third party in an arms-length transaction. There currently is no market-based mechanism to verify the reliability and accuracy of the
estimates derived from the Black-Scholes option pricing model or other allowable valuation models, nor is there a means to compare and adjust the estimates to actual values. While our estimate of fair
value and the associated charge to earnings materially affects our results of operations, it has no impact on our cash position.

The
guidance in SFAS No. 123(R) and SAB 107 is relatively new and the application of these principles may be subject to further interpretation and guidance. There are
significant variations among allowable valuation models, and there is a possibility that we may adopt a different valuation model or refine the inputs and assumptions under our current valuation model
in the future resulting in a lack of consistency in future periods. Our current or future valuation model and the inputs and assumptions we make may also lack comparability to other companies that use
different models, inputs, or assumptions, and the resulting differences in comparability could be material.

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Income Taxes

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

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

Effective
January 1, 2007, we adopted FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement No. 109." See Note 13"Income Taxes" in the consolidated financial statements for additional information.

Results of Operations

Overview

We were founded in 1986 to commercialize and enhance our proprietary vertical gradient freeze (VGF) technique for producing
high-performance compound
semiconductor substrates. We have one operating segment: our substrate business, with limited additional raw materials sales. We recorded our first substrate sales in 1990 and our substrate division
currently sells gallium arsenide (GaAs) and indium phosphide (InP) substrates to manufacturers of semiconductor devices for use in applications such as fiber optic and wireless telecommunications,
light emitting diodes (LEDs) and lasers. We also sell raw materials including gallium and germanium through our participation in majority- and minority-owned joint ventures. During 2008, we continue
to qualify our germanium substrates with satellite and terrestrial solar cell system manufacturers in the U.S. and Europe.

Continuing Operations

We manufacture all of our semiconductor substrates using our proprietary vertical gradient freeze (VGF) technology. Most of our revenue
is from sales of GaAs substrates. We manufacture all of our products in the People's Republic of China (PRC or China), which generally has favorable costs for facilities and labor compared to
comparable facilities in the United States or Europe. We also have five joint ventures in China that provide us favorable pricing, reliable supply and shorter lead-times for raw materials
central to our final manufactured products.

Our
business and operating results depend in significant part upon capital expenditures of semiconductor designers and manufacturers, which in turn depend upon the current and
anticipated market demand for products incorporating semiconductors from these designers and manufacturers and our business depends in part on worldwide economic conditions. The current period of
severe recession being experienced by the United States and other key international economies, has been characterized by falling demand for a variety of goods and services, including those related to
the semiconductor industry. These conditions have adversely affected the timing and volume of our customers' purchase of our products, particularly commencing with the fourth quarter of 2008, and
delays in customer purchasing decisions is likely to continue to impact our results in the beginning of 2009. Should the worldwide economic downturn begin to lessen, and purchasing again increase, we
believe that, demand for compound semiconductor substrates will also increase, and we believe that we are positioned to leverage our PRC-based manufacturing capabilities and access to
favorably priced raw materials to increase our market share if such improvements occur. However, the economic downturn in 2008

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coupled
with inventory overhang in the industry put pressure on our financial performance and will continue to have an impact on our results in 2009.

While
the volatile business and financial markets are prompting us to continue to take a conservative approach to our business, we remain optimistic about our business. Positive industry
trends, coupled with our competitive manufacturing and cost advantages give us confidence in our ability to continue to drive future businesses in 2009. On March 28, 2008, we completed the sale
of our Fremont, California
facility and received net proceeds of approximately $5.1 million after deducting commissions and selling expenses. On July 1, 2008, we exercised our right to redeem the taxable variable
rate revenue bond and repaid all outstanding indebtedness and accrued interest under the terms of the revenue bond of approximately $6.4 million. Accordingly, all of our remaining obligations
under the revenue bond have terminated and the related restricted deposits have been released. In September 2008, we obtained an express line of credit from our bank and drew down $3.0 million
and classified the same amount as restricted deposits as of December 31, 2008. The proceeds from the express line of credit were used in operations. The $3.0 million restricted cash
carries an annual interest rate of approximately 4% as of December 31, 2008. Also as of December 31, 2008, we had available cash, cash equivalents and short-term investments
of $31.3 million, excluding restricted deposits.

Dr. Philip
C.S. Yin, our former Chairman and Chief Executive Officer, resigned as an executive officer and as a member of the Board of Directors, effective March 17, 2009.
The Board of Directors has invested Wilson W. Cheung, the Company's Chief Financial Officer, with the responsibility of administering day-to-day operations. Mr. Cheung is expected to
perform the functions of principal executive officer in addition to his function as Chief Financial Officer during this transition period, and pending the appointment of an interim chief executive
officer to serve until a successor Chief Executive Officer is named.

In
addition, Mr. Jesse Chen, a director since 1998 and our Lead Independent Director, has been named non-executive Chairman of the Board of Directors.

Revenue

2007 to 2008

2006 to 2007Year Ended Dec. 31,Increase
(Decrease)



Increase
(Decrease)($ in thousands)

2008

2007

2006

% Change

% ChangeGaAs

$
49,610

$
40,219

$
36,511

$
9,391


23.3
%
$
3,708


10.2
%InP


1,935


1,916


1,705


19


1.0


211


12.4Ge


4,248


2,225


909


2,023


90.9


1,316


144.8Raw Materials


17,232


13,790


5,293


3,442


25.0


8,497


160.5Other


50


53


27


(3
)

(5.7
)

26


96.3Total revenue

$
73,075

$
58,203

$
44,445

$
14,872


25.6
%
$
13,758


31.0
%


Revenue
increased by $14.9 million or 25.6%, to $73.1 million in 2008 from $58.2 million in 2007. Total GaAs substrate revenue increased $9.4 million, or
23.3%, to $49.6 million in 2008 from $40.2 million in 2007. Sales of 5 inch and 6 inch diameter GaAs substrates were $21.6 million in 2008 compared to $16.3 million in
2007. The net increase of $5.3 million was primarily due to our 6 inch supply agreement with IQE group which commenced in January 2008, partially offset by a small decline on 5 inch substrates
due to lesser demand from one customer.

Revenue
increased by $13.8 million or 31.0%, to $58.2 million in 2007 from $44.4 million in 2006. Total GaAs substrate revenue increased $3.7 million, or
10.2%, to $40.2 million in 2007 from $36.5 million in 2006. Sales of 5 inch and 6 inch diameter GaAs substrates were $16.3 million in 2007 compared to $16.7 million in
2006. The decrease of $0.4 million in larger diameter substrate revenue

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was
due to less than expected orders from a few handset market customers, inventory overhang and certain push-out of customer shipments particularly during the fourth quarter of 2008 due
to the decline in overall worldwide market conditions.

Sales
of 2 inch, 3 inch and 4 inch diameter GaAs substrates were $28.0 million in 2008 compared to $23.9 million in 2007. The increase in revenue from smaller diameter
substrates was primarily due to our supply agreement with IQE group on 4 inch diameter substrates which commenced in January 2008, offset by lesser demand for 2 inch substrates from several large
semi-conducting customers as the economy softens in the second half of 2008. Sales of 2 inch, 3 inch and 4 inch diameter GaAs substrates were $23.9 million in 2007 compared with
$19.7 million in 2006. The increase in revenue from smaller diameter substrates was generally due to the continued market growth of LED laser diodes and commercial epitaxy.

InP
substrate revenue increased by $19,000, or 1.0%, to $1.9 million in 2008 compared to $1.9 million in 2007 as the demand for specialized automotive applications and
overall optical communications applications have remained flat. InP revenue increased by $211,000, or 12.4%, to $1.9 million in 2007 compared to $1.7 million in 2006. The increase in InP
revenue was primarily due to a one-time sale of $251,000 indium scrap metal, while InP substrate revenue from customers in the optical networking industry decreased slightly. We do not
expect significant near term changes in the InP market.

Ge
substrate revenue increased by $2.0 million, or 90.9%, to $4.2 million in 2008 from $2.2 million in 2007. The increase in germanium substrate revenue was due to
the continuing increased demand for space and terrestrial based applications from our German and Chinese customers. Ge substrate revenue increased by $1.3 million, or 144.8%, to
$2.2 million in 2007 from $0.9 million in 2006. The increase in Ge substrate revenue was mainly due to a customer in Germany who has now qualified our product, as demand for photovoltaic
and opto-electronic applications continues to increase.

Raw
materials revenue increased by $3.4 million, or 25.0%, to $17.2 million in 2008 from $13.8 million in 2007 as a result of increased demand of 4N raw gallium. Raw
materials revenue increased by $8.5 million, or 160.5%, to $13.8 million in 2007 from $5.3 million in 2006. The increase in raw materials revenue was primarily due to sales of
gallium to new customers in Japan and Europe, and increased demand by a customer in North America as the demand for gallium increased, as well as an increase in sales prices of raw materials. Our raw
materials business has increasingly become an important part of our business, both in terms of providing us protection against raw materials pricing increases and supply constraints. Since we are able
to supply raw materials necessary for the production of our substrates at favorable prices, our ability to sell such materials in the open market, at market prices, also provides us with pricing
protection. We expect to continue to expand our raw materials sales efforts. However, as our contracted supply of high purity gallium with an independent third party expired in December 2008, we
expect to increase our needed supply from our joint ventures, resulting in less raw materials available for sale to third parties going forward, and we expect the percentage of revenue from sales of
raw materials to remain flat or decline in 2009.

One
customer represented greater than 10% of our total revenue, totaling 19% for the year ended December 31, 2008, one customer represented greater than 10% of our total revenue,
totaling 12% for the year ended December 31, 2007, and two customers represented greater than 10% of our total revenue, totaling 16% and 13% for the year ended December 31, 2006. Our top
five customers represented 46%, 40%, and 42% of revenue for the years ended December 31, 2008, 2007, and 2006, respectively.

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Revenue by Geographic Region

2007 to 2008

2006 to 2007Years Ended Dec. 31,Increase
(Decrease)



Increase
(Decrease)2008

2007

2006

% Change

% Change($ in thousands)North America*

$
19,181

$
11,839

$
13,029

$
7,342


62.0
%
$
(1,190
)

(9.1
)%% of total revenue


26
%

20
%

29
%Europe


14,524


9,930


8,365


4,594


46.3


1,565


18.7% of total revenue


20
%

17
%

19
%Japan


14,685


13,280


3,347


1,405


10.6


9,933


296.8% of total revenue


20
%

23
%

8
%Taiwan


7,806


9,329


7,647


(1,523
)

(16.3
)

1,682


22.0% of total revenue


11
%

16
%

17
%Asia Pacific (excluding Japan and Taiwan)


16,879


13,825


12,057


3,054


22.1


1,768


14.7% of total revenue


23
%

24
%

27
%Total revenue

$
73,075

$
58,203

$
44,445

$
14,872


25.5
%
$
13,758


31.0
%


---

Sales
to customers located outside of North America represented approximately 74%, 80%, and 71% of our revenue during 2008, 2007 and 2006, respectively.

Revenue
from customers located in North America increased by $7.3 million, or 62.0%, to $19.2 million in 2008 from $11.8 million in 2007. This increase in 2008 was
primarily due to our 4 inch and 6 inch supply agreements with IQE group which commenced in January 2008. Our 4 inch and 6 inch supply agreements with IQE group has been renewed in December 2008, and
expires in March 2010 for a total contract price of up to $14.3 million.

Revenue
from customers located in Europe increased by $4.6 million, or 46.3%, to $14.5 million in 2008 from $9.9 million in 2007. This increase resulted mainly from
$2.9 million in increased sales of raw materials to customers in the United Kingdom, $0.7 million in increased sales to customers in Germany, which was mainly in Ge substrate sales,
$0.6 million in increased sales of 6 inch diameter GaAs substrates to customers in France, and $0.4 million increase in 4N gallium sales to customers in the Netherlands.

Revenue
from customers in Japan increased by $1.4 million, or 10.6%, to $14.7 million in 2008 from $13.3 million in 2007. The increase mainly came from large
diameter substrates amounting to $2.8 million, while raw material sales to existing customers decreased by approximately $1.4 million as customers' inventory level increased towards the
end of 2008.

Revenue
from customers in Taiwan decreased by $1.5 million, or 16.3%, to $7.8 million in 2008 from $9.3 million in 2007. We had approximately $3.9 million
less revenues from four existing small diameter LED customers in Taiwan, partially offset by a $2.4 million increase in revenues from a few customers, including a new LED customer.

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Revenue from customers in the Asia Pacific (excluding Japan and Taiwan) increased by $3.1 million, or 22.1%, to $16.9 million in 2008 from
$13.8 million in 2007. Of this increase, sales to customers in the PRC increased by $2.5 million due to an increase in demand for raw materials and substrates, and sales to customers in
Korea increased by $0.3 million, while sales to customers in Malaysia and Singapore also increased by $0.3 million from a large customer.

Gross Margin

2007 to 2008

2006 to 2007Years Ended Dec. 31,Increase
(Decrease)



Increase
(Decrease)2008

2007

2006

% Change

% Change($ in thousands)Gross profit

$
17,960

$
20,261

$
12,736

$
(2,301
)

(11.4
)%
$
7,525


59.1
%Gross Margin %


24.6
%

34.8
%

28.7
%


Gross
margin decreased to 24.6% of total revenue in 2008 from 34.8% of total revenue in 2007. Gross margin in 2008 was positively impacted by sales of approximately $2.8 million
of GaAs wafers that were previously written off. In addition to modest declines in average selling prices during 2008, the deterioration in our gross margin began in the third quarter of 2008 while
the most significant drop in gross margin happened during the fourth quarter of 2008 when our gallium joint venture in China, which is housed in and receives services from an affiliated aluminum
plant, ceased production for five weeks during the fourth quarter as a result of supply shortage of raw materials from the aluminum plant which had reduced production and halted operations due to
falling aluminum prices in the second half of 2008. Accordingly, in order to meet customer supply obligations, our joint venture had to source finished products from another independent third party
supplier, resulting in low gross margin for the quarter. Our joint venture has also sourced finished products from this independent third party supplier when demand has exceeded the joint venture's
capacity, and will continue to source finished products from this independent third party supplier, despite lower gross margins, if it again experiences supply shortages or if customer demand again
exceeds its capacity. In addition, gross margin was negatively impacted as a result of lower production volume (less overhead recoveries), higher warranty expense as a result of warranty reserves from
certain customers resulting from our failure to meet specification requirements, and higher unfavorable variances due to lower yields from our GaAs production line. We expect gross margins to remain
in the 20% range for 2009.

Gross
margin increased to 34.8% of total revenue in 2007 from 28.7% of total revenue in 2006. Gross margin in 2007 was positively impacted by sales of approximately $2.2 million
of GaAs wafers that were previously written off. Product mix also contributed to higher gross margins as we sold InP scrap metal, as well as raw materials, both of which contributed higher gross
margins. In addition, we had manufacturing equipment that has become fully depreciated since the third quarter of 2006, and the absence of depreciation expense for this equipment, partially offset by
depreciation on property, plant and equipment additions, contributed approximately 2.5 percentage points to gross margin for the twelve months ended December 31, 2007.

Selling, General and Administrative Expenses

2007 to 2008

2006 to 2007Years Ended Dec. 31,Increase
(Decrease)



Increase
(Decrease)2008

2007

2006

% Change

% Change($ in thousands)Selling, general and administrative expenses

$
15,751

$
13,746

$
12,650


2,005


14.6
%

1,096


8.7
%% of total revenue


21.6
%

23.6
%

28.5
%


44

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Table of Contents

Selling,
general and administrative expenses increased $2.0 million to $15.7 million for 2008 compared to $13.7 million for 2007. The increase was primarily due to
(i) $1.1 million higher compensation and related expenses, (ii) $0.7 million higher rental expense as a result of our forfeiture of the rental deposit with the termination
of an old lease, (iii) $0.3 million for increased health insurance and other insurance costs, (iv) $0.1 million for higher bank fees as we paid off the taxable revenue bond
in July 2008, (v) $0.1 million for higher joint venture labor related and consulting costs, (vi) $0.1 million higher utility costs, and (vii) $0.1 million
higher stock compensation expenses as a result of annual option grants, partially offset by (viii) $0.4 million lower legal expenses due to a refund from our insurance carrier, and
(ix) $0.1 million lower bad debt expense as aging improved from collections.

Selling,
general and administrative expenses increased $1.1 million to $13.8 million for 2007 compared to $12.7 million for 2006. The increase was primarily due to
(i) $0.6 million higher legal expenses in 2007,
including $0.3 million paid by us in connection with the settlement of the securities class action lawsuit reached on April 24, 2007, offset by our receipt in 2006 of a
$0.3 million refund from insurance, (ii) $0.5 million higher bad debt expenses, mainly from a $0.1 million increase to bad debt expense in 2007 for our
slow-paying customers in Asia, compared to a $0.4 million bad debt recovery in 2006 following recovery of an expense in 2005 provided for an Asian customer,
(iii) $0.4 million for increased consulting and audit fees for compliance with the Sarbanes-Oxley Act of 2002, (iv) $0.4 million for higher joint venture labor related
costs, and (v) $0.2 million higher sales commission due to increased sales volume, partially offset by (vi) the absence in 2007 of $0.6 million decontamination fees on our
property owned in Fremont, California incurred during 2006, (vii) $0.3 million sales compensation expenses given to customers as compensation for their epitaxial costs on defective
wafers supplied to them, and (viii) $0.1 million reduced depreciation and other expenses.

Research and Development Expenses

2007 to 2008

2006 to 2007Years Ended Dec. 31,Increase
(Decrease)



Increase
(Decrease)2008

2007

2006

% Change

% Change($ in thousands)Research and development expenses

$
2,164

$
1,699

$
2,351

$
465


27.4
%
$
(652
)

(27.7
)%% of total revenue


3.0
%

2.9
%

5.3
%


Research
and development expenses increased $0.5 million, or 27.4%, to $2.2 million for 2008, from $1.7 million for 2007 mainly from increases of $0.3 million
in salary and related costs as a result of the appointment of our chief technology officer since late 2007 and increases of approximately $0.2 million in new product testing costs.

Research
and development expenses decreased $0.7 million, or 27.7%, to $1.7 million for 2007, from $2.4 million for 2006 mainly from $0.4 million in savings
in salary and related costs as a result of the retirement of Dr. Morris Young, our former chief technology officer. We only appointed a new chief technology officer in the fourth quarter of
2007. In 2007, we also had the absence of $0.4 million in severance payments that we incurred in 2006, partially offset by $0.1 million increased consulting fees to enhance our
production facilities at one of our joint ventures.

Given
the current economic climate, we expect our rate of expenditure on research and development costs in 2009 to remain flat.

45

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Table of Contents

Impairment (recovery of impairment) on Assets Held for Sale, and Restructuring Charges (Benefit)

2006 to 2007

2006 to 2007Years Ended Dec. 31,Increase
(Decrease)



Increase
(Decrease)2008

2007

2006

% Change

% Change($ in thousands)Impairment (recovery of impairment) on assets held for sale

$
83

$
(481
)
$
1,417

$
564


117.3
%
$
(1,898
)

(133.9
)%% of total revenue


0.1
%

(0.8
)%

3.2
%Restructuring charge (benefit)

$


$


$
(2
)

N/A


N/A

$
2


NM% of total revenue



%


%

0.0
%


---

In
the third quarter of 2006, we incurred an impairment charge of $1.4 million to write down our U.S. property in Fremont, California, which was being decontaminated and was being
prepared for sale. In the second quarter of 2007, we benefited from a recovery of impairment on this asset held for sale in connection with our adjustment of the fair value. We recorded a $481,000
market value adjustment after we entered into an agreement with an independent third party purchaser in June 2007 to purchase the property for estimated net proceeds of $5.1 million, after
deducting estimated commission and selling expenses. In the fourth quarter of 2007, that agreement was terminated and we entered into a new sales agreement with another independent third party
purchaser to purchase this property for a similar amount. The sale of the property was consummated in March 2008 and we recorded an $83,000 impairment charge due to the final sales price of the
property.

During
2007 and 2008, we had no restructuring charges. In 2006, we recognized a $2,000 benefit related to an adjustment to a prior accrual.

Interest Income, Net

2006 to 2007

2006 to 2007Years Ended Dec. 31,Increase
(Decrease)



Increase
(Decrease)2008

2007

2006

% Change

% Change($ in thousands)Interest income, net

$
513

$
704

$
443

$
(191
)

(27.1
)%
$
261


58.9
%% of total revenue


0.7
%

1.2
%

1.0
%


Interest
income, net decreased $0.2 million to $0.5 million for 2008 from $0.7 million for 2007 as a result of lower balances of our cash and investments used in
operations, and lower interest rate yields compared to 2007.

Interest
income, net increased $0.3 million to $0.7 million for 2007 from $0.4 million for 2006 as a result of higher balances of our investments which came from the
net proceeds of our public offering of common stock, completed in December 2006 and January 2007.

46

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Table of Contents

Other Income and (Expense), Net, and Minority Interests

2007 to 2008

2006 to 2007Years Ended Dec. 31,Increase
(Decrease)



Increase
(Decrease)2008

2007

2006

% Change

% Change($ in thousands)Other income and (expense), net

$
1,290

$
1,912

$
3,672

$
(622
)

(32.5
)%
$
(1,760
)

(47.9
)%% of total revenue


1.8
%

3.3
%

6.1
%Minority interests

$
(1,431
)
$
(1,896
)
$
(963
)
$
465


24.5
%
$
(933
)

(96.9
)%% of total revenue


(2.0
)%

(3.3
)%

(2.2
)%


Other
income and expense, net, was $1.3 million in 2008 compared to other income and expense, net, of $1.9 million in 2007. Other income, net was $1.3 million for
2008 primarily due to a realized gain of $0.4 million on the sale of investments and other income, and investment gains of $0.9 million from our minority-owned
non-consolidated joint ventures.

Other
income and expense, net, was $1.9 million in 2007 compared to other income and expense, net, of $3.7 million in 2006. Other income, net was $1.9 million for
2007 primarily due to a realized gain of $1.0 million on the sale of investments, investment gains of $0.9 million from our minority-owned non-consolidating joint ventures,
receipt of $0.3 million mainly comprised of insurance proceeds and sale of fully depreciated assets, partially offset by a $0.3 million expense for foreign exchange losses primarily
related to the Japanese yen.

Minority
interest in earnings of consolidated subsidiaries for the years ended December 31, 2008, 2007, and 2006 were ($1.4) million ($1.9) million, and ($1.0) million,
respectively. The decrease in minority interest from 2007 to 2008 was due to the overall decrease in profitability from our majority-owned consolidated subsidiaries, particularly our gallium joint
venture in China. The increase in minority interest from 2006 to 2007 was due to the increase in profitability from our majority-owned consolidated subsidiaries as they had benefited from increased
sales due to increased capacity.

Provision (benefit) for Income Taxes

2007 to 2008

2006 to 2007Years Ended Dec. 31,Increase
(Decrease)



Increase
(Decrease)2008

2007

2006

% Change

% Change($ in thousands)Provision (benefit) for income taxes

$
1,023

$
728

$
(1,454
)
$
295


40.5
%
$
2,182


150.1
%% of total revenue


1.4
%

1.3
%

3.3
%


Provision
for income taxes for 2008 was $1.0 million, which was related to our foreign subsidiaries. The increase in provision for income taxes from 2007 to 2008 was due to the
phasing out of Chinese tax holidays from some of our consolidated subsidiaries beginning 2008. Due to our uncertainty regarding our future profitability, we recorded a full valuation allowance against
our net deferred tax assets of $54.4 million in 2008, $53.7 million in 2007, and $49.9 million in 2006.

Provision
for income taxes for 2007 was $728,000, which was related to our foreign subsidiaries. In 2005, the Internal Revenue Service closed its examination of our tax return for the
2002 tax year, including the calculation of our 1999 and 2000 net operating loss carry back. As a result, we reversed approximately $2.1 million of income tax payable accrued for potential
exposures relating to 2006. This amount is shown as a benefit for income taxes in 2006.

47

---



Table of Contents

Gain from Discontinued Operations

2007 to 2008

2006 to 2007Years Ended December 31,Increase
(Decrease)

% Change

Increase
(Decrease)

% Change2008

2007

2006($ in thousands)Gain from discontinued operations, net of tax

$


$


$
18

N/A

N/A

$
(18
)
NM


---

NM:
percentage not meaningful

In
the first quarter of 2007, we dissolved the corporation that previously operated our discontinued operations and transferred the cash balance to our continuing operations.
Accordingly, we no longer have discontinued operations. In 2006, we recorded $18,000 in interest income on cash balances held in discontinued operations.

Liquidity and Capital Resources

Years Ended December 31,2008

2007

2006($ in thousands)Net cash provided by (used in):Operating activities

$
(5,717
)
$
1,320

$
(10,263
)Investing activities


3,832


(3,514
)

(15,809
)Financing activities


(3,522
)

3,924


24,248Effect of exchange rate changes


593


534


468Net change in cash and cash equivalents


(4,814
)

2,264


(1,356
)Cash and cash equivalentsbeginning period


18,380


16,116


17,472Cash and cash equivalentsend of period


13,566


18,380


16,116Short-term investmentsend of period


17,756


20,825


19,428Total cash, cash equivalents and short-term investments

$
31,322

$
39,205

$
35,544


We
consider cash and cash equivalents, and short-term investments as liquid and available for use. Short-term investments are comprised of government bonds and
high-grade commercial debt instruments. Also historically included in
short-term investments was our investment in common stock of Finisar Corporation, a United States publicly-traded company (Nasdaq: FNSR). During 2006 we sold all of our shares of common
stock of Finisar Corporation generating net proceeds of $4.4 million and recorded a gain of $3.3 million, which was included in other income (expense). In December 2006 and January 2007,
we generated approximately $29 million in total proceeds as a result of our follow-on stock offering, and we utilized some of the proceeds in 2007 and 2008 mainly for working
capital purposes. As of December 31, 2008, our principal sources of liquidity were $31.3 million in cash and cash equivalents and short-term investments, excluding restricted
deposits.

Cash
and cash equivalents and short-term investments, decreased $7.9 million to $31.3 million as of December 31, 2008 from $39.2 million as of
December 31, 2007. The combined decrease in cash and cash equivalents and short-term investments was primarily due to the use of net cash in operating activities of
$5.7 million, and net cash used in financing activities of $3.5 million, partially offset by net cash provided by investing activities of $3.8 million, and $0.6 million for
the effects of exchange rate changes.

Net
cash used in operating activities of $5.7 million for 2008 was primarily comprised of our net loss of $0.7 million, adjusted for non-cash items of
depreciation of $2.2 million, stock-based compensation of $0.6 million, a $0.1 million charge for impairment on assets held for sale, partially

48

---



Table of Contents

offset
by a realized gain on sale of investments of $0.3 million and offset by a net increase of $7.6 million in assets and liabilities. The $7.6 million net increase in assets
and liabilities primarily resulted from a $10.0 million increase in inventories, a $0.6 million decrease in other long-term liabilities, a $0.3 million decrease in
income taxes payable and a $0.1 million increase in other assets, partially offset by a $2.2 million increase in accounts payable, a $0.8 million decrease in accounts receivable,
and a $0.5 million decrease in prepaid expenses. Inventories, net, increased by $10.0 million, as we increased inventory in raw materials and work-in-process to
increase production in anticipation of increased forecast sales, and finished goods for consignment orders.

Net
cash provided by operating activities of $1.3 million for 2007 was primarily comprised of our net income of $5.3 million, adjusted for non-cash items of
depreciation of $1.5 million, stock-based compensation of $0.5 million, partially offset by a realized gain on sale of investments of $1.0 million, a recovery of impairment on
assets held for sale of $0.5 million, and by a net increase of $4.4 million in assets and liabilities. The net increase in assets and liabilities of $4.4 million resulted from a
$4.3 million increase in inventories, net, a $2.4 million increase in accounts receivable, net, and a $0.9 million increase in other assets, partially offset by a
$1.0 million increase in other long-term liabilities, primarily minority interests, a $0.9 million increase in accrued liabilities, primarily for warranty reserves and
accounting fees, a $0.6 million decrease in prepaid expenses, primarily for insurance premiums, a $0.5 million increase in accounts payable, and a $0.2 million increase in income
taxes payable.

Net
cash provided by investing activities of $3.8 million for the year ended December 31, 2008 was primarily from the proceeds from the sale of investments of
$24.5 million, proceeds from sale of assets held for sale of $5.1 million and the decrease of restricted cash of $3.7 million, partially offset by the purchase of investments
totaling $22.6 million, and the purchase of property, plant and equipment of $6.8 million.

Net
cash used in investing activities of $3.5 million for the year ended December 31, 2007 included net purchases of investment securities totaling $0.3 million, net
purchases of property and equipment of $3.7 million, partially offset by a decrease in our restricted deposits of $0.5 million.

In
2008 we expanded capacity at our China facilities. In 2009, we expect to invest up to approximately $3.7 million in other projects at our China facilities, having decided to
delay certain other expansion activities as a result of the impact of the current worldwide economic conditions.

Net
cash used in financing activities of $3.5 million for the year ended December 31, 2008 consisted of a payment of $6.7 million related to long term debt,
partially offset by $3.0 million from the proceeds of a line of credit and $0.2 million from the proceeds from the exercise of employee stock options.

Net
cash provided by financing activities of $3.9 million for the year ended December 31, 2007 consisted of $3.6 million net proceeds from the issuance of 862,500
shares of common stock as a result of our December 2006 public stock offering, $0.9 million from the proceeds from the exercise of employee stock options, partially offset by payments of
$0.6 million related to long-term borrowings.

We
believe that we have adequate cash and investments to meet our needs over the next 12 months. If our sales decrease, however, our ability to generate cash from operations will
be adversely affected which could adversely affect our future liquidity, require us to use cash at a more rapid rate than expected, and require us to seek additional capital. There can be no assurance
that such additional capital will be available or, if available it will be at terms acceptable to us. Cash from operations could be affected by various risks and uncertainties, including, but not
limited to those set forth below under Item 1A. "Risk Factors" above.

49

---





Table of Contents

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements and have never established any special purpose entities. We
have not entered into any options on non-financial assets.

Contractual Obligations

As of December 31, 2008, the credit facility maintained by us with a bank included a line of credit with an outstanding amount
of $3.0 million. We have pledged the same amount in cash as collateral for this facility. Accordingly, $3.0 million of our cash and short-term investments are restricted.

We
lease certain office space, manufacturing facilities and property under long-term operating leases expiring at various dates through November 2013. On July 2, 2008,
we entered into a new lease agreement with the landlord of the facility at 4281 Technology Drive, Fremont, California with approximately 27,760 square feet. The new lease commenced December 1,
2008 for a term of seven years, with an option by us to cancel the new lease after five years, upon forfeiture of the security deposit and payment of one-half of the fifth year's rent.
Total rent expenses under these operating leases were approximately $1.7 million (including a $0.7 million forfeiture of rental deposit in terminating the old lease), $0.5 million
and $0.9 million for years ended December 31, 2008, 2007 and 2006, respectively.

The
following table summarizes our contractual obligations as of December 31, 2008 (in thousands):

Payments due by periodContractual Obligations

Total

Less than 1 year

1-3
years

3-5
years

More than
5 yearsLine of credit

$
3,013

$
3,013

$


$


$
Tenant improvement loan


569


73


155


167


174Operating leases


2,017


294


575


562


586Total

$
5,599

$
3,380

$
730

$
729

$
760


Selected Quarterly Results of Operations

The following table sets forth unaudited quarterly results for the eight quarters ended December 31, 2008. We believe that all
necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly such quarterly

50

---



Table of Contents

information.
The operating results for any quarter are not necessarily indicative of results for any subsequent period.

Quarters EndedDec. 31,
2008

Sept. 30,
2008

June 30,
2008

Mar. 31,
2008

Dec. 31,
2007

Sept. 30,
2007

June 30,
2007

Mar. 31,
2007Revenue

$
15,646

$
17,863

$
19,932

$
19,634

$
17,564

$
14,474

$
13,639

$
12,526Cost of revenue


14,888


13,326


13,488


13,413


12,270


9,944


8,607


7,121Gross profit


758


4,537


6,444


6,221


5,294


4,530


5,032


5,405Operating expenses:Selling, general and administrative


3,605


4,901


3,578


3,667


3,218


3,082


3,743


3,703Research and development


529


562


569


504


508


383


348


460Impairment (recovery of impairment) on assets held for sale











83








(481
)

Total operating expenses


4,134


5,463


4,147


4,254


3,726


3,465


3,610


4,163Income (loss) from operations


(3,376
)

(926
)

2,297


1,967


1,568


1,065


1,422


1,242Interest income, net


80


68


241


124


153


102


225


224Other income and (expense), net


576


21


(1,166
)

428


455


(156
)

(272
)

(11
)Income (loss) before provision (benefit) for income taxes


(2,720
)

(837
)

1,372


2,519


2,176


1,011


1,375


1,455Provision (benefit) for income taxes


(349
)

177


635


560


302


153


162


111Net income (loss)

$
(2,371
)
$
(1,014
)
$
737

$
1,959

$
1,874

$
858

$
1,213

$
1,344Income (loss) per sharebasic

$
(0.08
)
$
(0.03
)
$
0.02

$
0.06

$
0.06

$
0.03

$
0.04

$
0.04Income (loss) per sharediluted

$
(0.08
)
$
(0.03
)
$
0.02

$
0.06

$
0.06

$
0.03

$
0.04

$
0.04Shares used in computing income (loss) per sharebasic


30,434


30,455


30,421


30,367


30,337


30,150


29,943


29,798Shares used in computing income (loss) per sharediluted


30,434


30,455


31,562


31,585


31,550


31,464


31,142


31,324


Recent Accounting Pronouncements

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

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Table of Contents

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of
FASB Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair value accounting to many financial instruments and certain other items. The fair
value option is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair
value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We have not elected the fair value option. Therefore, the adoption of SFAS 159 in the first
quarter of fiscal 2008 did not impact our consolidated financial position, results of operations or cash flows.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations", ("SFAS 141R"). SFAS 141R
establishes the principles and requirements for how an acquirer in a business combination (1) recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree, (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase
and (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) will be
applicable beginning with our fiscal 2009. The impact of the adoption of SFAS 141(R) on our results of operations and financial position will depend on the nature and extent of business
combinations that we complete, if any, in or after fiscal 2009.

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

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161").
SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how
derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. Based on our current operations, we do not expect that the adoption of SFAS 161 will have a material impact on our
consolidated financial position or results of operations.

In
June 2008, the FASB issued FASB Staff Position ("FSP") Emerging Issues Task Force (EITF) 03-6-1, "Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities" (FSP EITF 03-6-1). FSP EITF 03-6-1 provides that unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to
the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim
periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and
selected financial data) to conform with the provisions in FSP EITF 03-6-1. Early application of FSP EITF 03-6-1 is prohibited. We do not
expect that the adoption of FSP EITF 03-6-1 will have a material impact on our consolidated financial position, results of operations or cash flows.

On
October 10, 2008, the FASB issued FSP No. 157-3 ("FSP 157-3"), "Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active"("FSP 157-3"), to clarify the

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Table of Contents

application
of SFAS 157 in a market that is not active, providing an example to illustrate key considerations in determining the fair value of a financial asset when the market for that
financial asset is not active. This FSP applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurement in accordance with SFAS 157 and
is effective upon issuance. We have determined there is no impact from adopting the provisions of FSP 157-3 on our consolidated financial position, results of operations or cash flows.

In
various areas, including revenue recognition, stock option accounting, accounting standards and practices continue to evolve. Additionally, the SEC and the FASB's Emerging Issues Task
Force continue to address revenues, stock option accounting related accounting issues. We believe that we are in compliance with all of the rules and related guidance as they currently exist. However,
any changes to accounting principles generally accepted in the United States of America in these areas could impact the future accounting of our operations.

Item 7A.Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Risk

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

We
do not currently use short-term forward exchange contracts for hedging purposes to reduce the effects of adverse foreign exchange rate movements. We had previously
purchased foreign exchange contracts to hedge against certain trade accounts receivable denominated in Japanese yen. The change in the fair value of the forward contracts was recognized as part of the
related foreign currency transactions as they occur. As of December 31, 2008 and 2007, we had no outstanding commitments with respect to foreign exchange contracts.

During
2008, we recorded a net realized foreign exchange gain of $2,000, included as part of other income in our consolidated statements of operations. We incurred foreign currency
transaction exchange gains and losses due to operations in general. It is uncertain whether these currency trends will continue. In the future we may experience foreign exchange losses on our
non-functional currency denominated receivables and payables to the extent that we have not mitigated our exposure utilizing foreign currency forward exchange contracts. Foreign exchange
losses could have a materially adverse effect on our operating results and cash flows. During 2008, we recorded unrealized foreign currency gains of $1.8 million, included in the balance of
accumulated other comprehensive income on our consolidated balance sheet.

In
July 2005, China agreed to a shift in Chinese currency policy. It established a 2% revaluation of the renminbi and referenced the renminbi to a basket of currencies, with a daily
trading band of

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+/-0.3%.
Depending on market conditions and the state of the Chinese economy, it is possible that China will make more adjustments in the future. Over the next five to ten years, China may
move to a managed float system, with opportunistic interventions. This reserve diversification may negatively impact the United States dollar and U.S. interest rates, which, in turn, could negatively
impact our operating results and financial condition. The functional currency of our Chinese subsidiary, including our joint ventures, is the local currency; since most of our operations are conducted
in China, most of our costs are incurred in Chinese currency, which subjects us to fluctuations in the exchange rates between the U.S. dollar and the Chinese renminbi. We incur transaction gains or
losses resulting from consolidation of expenses incurred in local currencies for these subsidiaries, as well as in translation of the assets and liabilities of these assets at each balance sheet date.
These risks may be increased by the fluctuation and revaluation of the Chinese renminbi. If we do not effectively manage the risks associated with this currency risk, our revenue, cash flows and
financial condition could be adversely affected.

Interest Rate Risk

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

Instrument

Balance as of
December 31,
2008

Current
Interest
Rate

Projected Annual
Interest
Income/(Expense)

Proforma 10%
Interest Rate
Decline
Income/(Expense)

Proforma 10%
Interest Rate
Increase
Income/(Expense)Cash

$
13,385


0.50
%
$
67

$
60

$
74Cash equivalents


181


1.74


3


3


3Investment in debt and equity instruments


20,769


4.61


957


862


1,053Line of credit


(3,013
)

1.58


(48
)

(43
)

(52
)Tenant improvement loan


(569
)

4.00


(23
)

(20
)

(25
)$
957

$
862

$
1,053


The
primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Financial instruments that potentially subject
us to concentration of credit risk consist primarily of cash and cash equivalents, short-term investments, and trade accounts receivable. We invest primarily in money market accounts,
commercial paper instruments, and investment grade securities. We are exposed to credit risks in the event of default by the issuers to the extent of the amount recorded on the consolidated balance
sheets. These securities are generally classified as available-for-sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses
reported as a separate component of accumulated other comprehensive income (loss), net of estimated tax. Our cash, cash equivalents and short-term investments are in
high-quality securities placed with major banks and financial institutions and commercial paper. We have no investments in auction rate securities. As of December 31, 2008, we have
approximately $22.3 million in principal protected notes with Citicorp Smith Barney with a fair value of approximately $20.8 million. We expect to decrease our exposure to Citicorp Smith
Barney as these principal protected notes come due and the underlying assets are placed into diversified securities.

We
perform periodic credit evaluations of our customers' financial condition and generally do not require collateral. Four customers each accounted for 10% or more of our trade accounts
receivable balance as of December 31, 2008 one at 34%, two at 11%, and one at 10%, respectively. Four customers each accounted for 10% or more of our trade accounts receivable balance as of
December 31, 2007 one at 17%, one at 13% and two at 10%, respectively.

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Equity Risk

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

Item 8.Consolidated Financial Statements and Supplementary Data

The consolidated financial statements, related notes thereto and financial statement schedule required by this item are listed and set
forth beginning on page 59, and is incorporated by reference here. Supplementary financial information regarding quarterly financial information required by this item is set forth under the
caption "Selected Quarterly Results of Operations" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," and is incorporated by reference here.

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.Controls and Procedures

Evaluation of disclosure controls and procedures.Disclosure controls and procedures are those controls and procedures designed
to ensure that
information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to our management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required
disclosure.

As
of the end of the period covered by this report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the rules and
regulations promulgated under the Securities Exchange Act of 1934, as amended. This evaluation was done under the supervision and with the participation of our principal executive officer and
principal financial officer and other management. Based upon this evaluation, our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures were effective as of December 31, 2008 to provide a reasonable level of assurance that the financial information we
are required to disclose in the reports we file or submit under the Exchange Act was recorded, processed, summarized and reported accurately within the time periods specified in the SEC's rules and
forms.



Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our
principal executive officer and principal financial officer, and implemented by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with

55

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accounting
principles generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that:



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

Our
management, under the supervision and with the participation of our principal executive officer and principal financial officer, has assessed the effectiveness of our internal
control over financial reporting as of December 31, 2008 based on the criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management has concluded that our internal control over financial reporting was effective as of
December 31, 2008.

The
effectiveness of our internal control over financial reporting as of December 31, 2008 has been audited by Burr, Pilger & Mayer LLP, an independent registered
public accounting firm, as stated in their report which is included in this Annual Report on Form 10-K.

Changes in internal control over financial reporting.There were no changes in our internal control over financial reporting
that occurred during the
quarter ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.Other Information

None.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders of AXT, Inc.

We
have audited the internal control over financial reporting of AXT, Inc. and its subsidiaries (the "Company") as of December 31, 2008, based on criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.

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

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

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

In
our opinion, AXT, Inc. and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on
the COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of AXT, Inc. and its
subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended
December 31, 2008 and our report dated March 31, 2009 expressed an unqualified opinion thereon.

/s/
Burr, Pilger & Mayer LLP

San
Jose, California
March 31, 2009

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PART III

The United States Securities and Exchange Commission ("SEC") allows us to include information required in this report by referring to
other documents or reports we have already or will soon be filing. This is called "Incorporation by Reference." We intend to file our definitive proxy statement pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this report, and certain information therein is incorporated in this report by reference.

Item 10.Directors, Executive Officers and Corporate Governance

The information required by this item with respect to identification of directors is incorporated by reference to the information
contained in the section captioned "Information About our Board of Directors" in the Proxy Statement. The information with respect to our executive officers, is incorporated by reference to the
information contained in the section captioned "Executive Officers" in the Proxy Statement. Information with respect to Items 405 of Regulation S-K is incorporated by
reference to the information contained in the sections of the Proxy Statement captioned "Section 16(a) Beneficial Ownership Reporting Compliance." There will be no disclosure under
Item 407(c)(3). Information with respect to Items 407(d)(4) and 407(d)(5) is incorporated by reference to the information contained in the sections of the Proxy Statement captioned
"Corporate GovernanceCommittees of the Board of Directors."

The
Board of Directors of AXT, Inc. has adopted a Code of Conduct and Ethics (the "Code") that applies to our principal executive officers, principal financial officer, and
corporate controller, as well as other employees. A copy of this Code has been posted on our Internet website atwww.axt.com. Any amendments to, or
waivers from, a provision of our Code that applies to our principal executive officer, principal financial officer, controller, or persons performing similar functions and that relates to any element
of the Code enumerated in paragraph (b) of Item 406 of Regulation S-K shall be disclosed by posting such information on our website.

Item 11.Executive Compensation

The information required by this Item is incorporated herein by reference to information set forth in our definitive Proxy statement to
be filed in connection with our annual meeting of stockholders to be held on May 26, 2009, under the section entitled "Executive Compensation and Other Matters."

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

The information required by this Item is incorporated herein by reference to information set forth in our definitive Proxy statement to
be filed in connection with our annual meeting of stockholders to be held on May 26, 2009, under the section entitled "Security Ownership of Certain Beneficial Owners and Management and Equity
Compensation Plan Information."

Item 13.Certain Relationships and Related Transactions and Director Independence

Information required by this item will be set forth in the Proxy Statement for the 2009 Annual Meeting of Stockholders under the
headings "Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions," which information is incorporated herein by reference.

Item 14.Principal Accountant Fees and Services

The information required by this Item is incorporated herein by reference to information set forth in our definitive Proxy statement to
be filed in connection with our annual meeting of stockholders to be held on May 26, 2009, under the section entitled "Principal Accounting Firm Fees."

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PART IV

Item 15.Exhibits and Financial Statement Schedules

(a)   The
following documents are filed as part of this report:

(1)   Financial
Statements:

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Report of Independent Registered Public Accounting Firm, Burr, Pilger & Mayer LLP


60Consolidated Balance Sheets


61Consolidated Statements of Operations


62Consolidated Statements of Stockholders' Equity


63Consolidated Statements of Cash Flows


64Notes to Consolidated Financial Statements


65


(2)   Financial
Statement Schedules

All
schedules have been omitted because the required information is not applicable or because the information required is included in the consolidated financial statements or notes
thereto.

(b)   Exhibits

See
Index to Exhibits attached elsewhere to this Form 10-K. The exhibits listed in the accompanying Index to Exhibits are filed as part of, or incorporated by
reference into, this report on Form 10-K.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders of AXT, Inc.

We
have audited the accompanying consolidated balance sheets of AXT, Inc. and its subsidiaries (the "Company") as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2008. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AXT, Inc. and its subsidiaries as of
December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over
financial reporting as of December 31, 2008, based on criteria established inInternal ControlIntegrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 31, 2009 expressed an unqualified opinion thereon.

/s/
Burr, Pilger & Mayer LLP

San
Jose, California
March 31, 2009

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AXT, INC.        CONSOLIDATED BALANCE SHEETS

December 31,2008

2007(In thousands, except per share data)ASSETSCurrent assetsCash and cash equivalents

$
13,566

$
18,380Short-term investments


17,756


20,825Accounts receivable, net of allowances of $663 and $379 as of December 31, 2008 and 2007, respectively


11,497


12,149Inventories


35,082


24,781Prepaid expenses and other current assets


3,131


3,569Assets held for sale





5,140Total current assets


81,032


84,844Property, plant and equipment, net


22,184


15,986Restricted deposits


3,013


6,700Other assets


5,433


5,242Total assets

$
111,662

$
112,772LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilitiesAccounts payable

$
6,657

$
4,328Accrued liabilities


1,967


2,330Accrued compensation and related charges


764


966Accrued product warranty


1,640


1,030Line of credit


3,013


Current portion of long-term debt


73


450Income taxes payable


82


390Total current liabilities


14,196


9,494Long-term debt, net of current portion


496


6,250Other long-term liabilities


3,306


3,778Total liabilities


17,998


19,522Commitments and contingencies (Note 18)Stockholders' equity:Preferred stock, $0.001 par value; 2,000 shares authorized; 883 shares issued and outstanding as of December 31, 2008 and 2007


3,532


3,532Common stock, $0.001 par value; 70,000 shares authorized; 30,513 and 30,358 shares issued and outstanding as of December 31, 2008 and 2007,
respectively


30


30Additional paid-in-capital


186,754


185,949Accumulated deficit


(99,232
)

(98,543
)Other comprehensive income


2,580


2,282Total stockholders' equity


93,664


93,250Total liabilities and stockholders' equity

$
111,662

$
112,772


The
accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

AXT, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,2008

2007

2006(In thousands, except per share data)Revenue

$
73,075

$
58,203

$
44,445Cost of revenue


55,115


37,942


31,709Gross profit


17,960


20,261


12,736Operating expenses:Selling, general, and administrative


15,751


13,746


12,650Research and development


2,164


1,699


2,351Impairment (recovery) on assets held for sale


83


(481
)

1,417Restructuring benefit








(2
)Total operating expenses


17,998


14,964


16,416Income (loss) from continuing operations


(38
)

5,297


(3,680
)Interest income, net


513


704


443Minority interests


(1,431
)

(1,896
)

(963
)Other income, net


1,290


1,912


3,672Income (loss) from continuing operations before provision (benefit) for income taxes


334


6,017


(528
)Provision (benefit) for income taxes


1,023


728


(1,454
)Income (loss) from continuing operations


(689
)

5,289


926Discontinued operations:Gain from discontinued operations, net of tax








18Gain from discontinued operations, net of tax








18Net income (loss)

$
(689
)
$
5,289

$
944Basic income (loss) per share:Income (loss) from continuing operations

$
(0.03
)
$
0.17

$
0.03Gain from discontinued operations, net of tax








Net income (loss)

$
(0.03
)
$
0.17

$
0.03Shares used in computing basic net income (loss) per share


30,400


30,035


23,303Diluted income (loss) per share:Income (loss) from continuing operations

$
(0.03
)
$
0.16

$
0.03Gain from discontinued operations, net of tax








Net income (loss)

$
(0.03
)
$
0.16

$
0.03Shares used in computing diluted net income (loss) per share


30,400


31,348


24,600


The
accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

AXT, INC.        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Common StockPreferred StockAdditional
Paid In Capital

Accumulated
Deficit

Other
Comprehensive
Income/(loss)



Comprehensive
Income/(loss)Shares

Amount

Shares

Amount

Total(In thousands)Balance as of
December 31, 2005


883

$
3,532


22,977

$
23

$
155,441

$
(104,776
)
$
1,398

$
55,618

$
(12,409
)Common stock options exercised








284





556








556Stock-based compensation














822








822Issuance of common stock, net of stock issuance costs of $1,752








5,750


6


24,117








24,123Comprehensive income:Net income

















944





944

$
944Change in unrealized (loss) gain on marketable securities




















(1,331
)

(1,331
)

(1,331
)Currency translation adjustment




















468


468


468Balance as of
December 31, 2006


883


3,532


29,011


29


180,936


(103,832
)

535


81,200

$
81Common stock options exercised








461





902








902Stock-based compensation














498








498Issuance of common stock, net of stock issuance costs of $60








863


1


3,613








3,614Issuance of common stock in the form of restricted stock








23Comprehensive income:Net income

















5,289





5,289

$
5,289Change in unrealized (loss) gain on marketable securities




















(3
)

(3
)

(3
)Currency translation adjustment




















1,750


1,750


1,750Balance as of
December 31, 2007


883


3,532


30,358


30


185,949


(98,543
)

2,282


93,250

$
7,036Common stock options exercised








92





171








171Stock-based compensation














634








634Issuance of common stock in the form of restricted stock








63Comprehensive loss:Net loss

















(689
)




(689
)
$
(689
)Change in unrealized (loss) gain on marketable securities




















(1,533
)

(1,533
)

(1,533
)Currency translation adjustment




















1,831


1,831


1,831Balance as of
December 31, 2008


883

$
3,532


30,513

$
30

$
186,754

$
(99,232
)
$
2,580

$
93,664

$
(391
)


The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

AXT, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,2008

2007

2006(In thousands)Cash flows from operating activities:Net income (loss)

$
(689
)
$
5,289

$
944Adjustments to reconcile net income (loss) to cash provided by (used in) operations:Depreciation


2,194


1,473


2,625Amortization (accretion) of marketable securities premium/discount


(9
)

(52
)

(79
)Stock-based compensation


634


498


822Impairment (recovery of impairment) on assets held for sale


83


(481
)

1,417Realized gain on sale of investments


(326
)

(1,028
)

(3,301
)Loss (gain) on disposal of property, plant and equipment


8


(16
)

115Changes in assets and liabilities:Accounts receivable, net


805


(2,351
)

(4,432
)Inventories


(10,047
)

(4,269
)

(4,107
)Prepaid expenses


544


591


(2,184
)Other assets


(135
)

(874
)

(466
)Accounts payable


2,162


461


694Accrued liabilities


4


893


(640
)Income taxes


(312
)

188


(2,317
)Other long-term liabilities


(633
)

998


646Net cash provided by (used in) operating activities


(5,717
)

1,320


(10,263
)Cash flows from investing activities:Purchases of property, plant and equipment


(6,788
)

(3,706
)

(4,458
)Proceeds from disposal of property, plant and equipment


5


62


173Purchases of marketable securities


(22,624
)

(36,105
)

(27,346
)Proceeds from sale of marketable securities


24,495


35,785


15,522Proceeds from sale of assets held for sale


5,057





Decrease in restricted deposits


3,687


450


300Net cash provided by (used in) investing activities


3,832


(3,514
)

(15,809
)Cash flows from financing activities:Proceeds from issuance of common stock


171


4,516


24,679Proceeds from line of credit


3,013





Long-term debt payments


(6,706
)

(592
)

(431
)Net cash provided by (used in) financing activities


(3,522
)

3,924


24,248Effect of exchange rate changes


593


534


468Net increase (decrease) in cash and cash equivalents


(4,814
)

2,264


(1,356
)Cash and cash equivalents at the beginning of the year


18,380


16,116


17,472Cash and cash equivalents at the end of the year

$
13,566

$
18,380

$
16,116Supplemental disclosures:Interest paid

$
227

$
382

$
372Income taxes paid

$
1,492

$
483

$
1,978Supplemental non-cash investing and financing activities:Property, plant and equipment acquired through the issuance of debt

$
575

$


$



The accompanying notes are an integral part of these consolidated financial statements.

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AXT, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and Summary of Significant Accounting Policies

The Company

AXT, Inc. ("AXT", "we," "us," and "our" refer to AXT, Inc. and all of its subsidiaries) designs, develops, manufactures
and distributes high-performance compound semiconductor substrates. Our substrate products are used primarily in wireless communications, lighting display applications, and fiber optic
communications. We believe our vertical gradient freeze, or VGF, technique for manufacturing semiconductor substrates provides significant benefits over other methods and enabled us to become a
leading manufacturer of such substrates. We pioneered the commercial use of VGF technology to manufacture gallium arsenide (GaAs) substrates and subsequently used VGF technology to manufacture
substrates from indium phosphide (InP), and germanium (Ge). We also manufacture and sell raw materials related to our substrate business through five joint ventures located in China. These joint
ventures produce products including 99.99% pure gallium (4N Ga), high purity gallium, arsenic, and germanium, germanium dioxide, paralytic boron nitride (pBN) crucibles, and boron oxide. AXT's
ownership interest in these entities ranges from 25 percent to 83 percent. We consolidate the three ventures in which we own a majority or controlling share and employ equity accounting
for the two joint ventures in which we have a 25 percent interest. We purchase the materials produced by these ventures for our use and sell other portions of their production to third parties.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of AXT and our majority-owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated. Investments in business entities in which we do not have control, but have the ability to exercise significant influence over operating and financial
policies (generally 20-50% ownership), are accounted for by the equity method.

Fair Value of Financial Instruments

The carrying amounts of certain of our financial instruments including cash and cash equivalents, accounts receivable,
short-term investments, accounts payable and accrued liabilities approximate fair value due to their short maturities. The carrying amounts of short-term and
long-term debt approximate fair value due to the market interest rates that these debts bear and interest rates currently available to us.

Reclassifications

Certain reclassifications have been made to the prior years' consolidated financial statements to conform to current year presentation.
These reclassifications had no impact on previously reported total assets, stockholders' equity or net income (loss).

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Foreign Currency Translation

The functional currencies of our Chinese subsidiaries are the local currencies. Transaction gains and losses resulting from
transactions denominated in currencies other than the U.S. dollar or in the functional currencies of our subsidiaries are included in other income, net for the periods presented.

The
assets and liabilities of the subsidiaries are translated at the rates of exchange on the balance sheet date. Revenue and expense items are translated at the average rate of exchange
for the period. Gains and losses from foreign currency translation are included in other comprehensive income (loss) in stockholders' equity.

Revenue Recognition

We recognize revenue upon the shipment of our products to customers when:



We
do not provide training, installation or commissioning services. Our terms and conditions of sale do not require customer acceptance. We assess the probability of collection based on
a number of factors including past history with the customer and credit worthiness. We provide for future returns based on historical experience, current economic trends and changes in customer demand
at the time revenue is recognized. Additionally, we do not provide discounts or other incentives to customers. We present our revenue net of any taxes assessed by any governmental authority.

Accounting for Sales Taxes in Net Revenues

We report sales taxes collected on sales of our products as a component of net revenues and as accrued liabilities on our consolidated
balance sheets. The amount is immaterial for fiscal years 2008, 2007 and 2006.

Concentration of Credit Risk

Our business is very dependant on the semiconductor industry, which is highly cyclical and has historically experienced downturns as a
result of economic changes, overcapacity, and technological advancements. Significant technological changes in the industry or customer requirements, or the emergence of competitive products with new
capabilities or technologies, could adversely affect operating results. In addition, a significant portion of our revenues and net income (loss) is derived from international sales. Fluctuations of
the United States dollar against foreign currencies and changes in local regulatory or economic conditions, particularly in an emerging market such as China, could adversely affect operating results.

We
depend on a single or limited number of suppliers for certain critical materials used in the production of our substrates, such as quartz tubing, and polishing solutions. We generally
purchase these materials through standard purchase orders and not pursuant to long-term supply contracts.

Financial
instruments that potentially subject us to concentration of credit risk consist primarily of cash equivalents, short-term investments, and trade accounts
receivable. We invest primarily in money market accounts, commercial paper instruments, and investment grade securities with high quality

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financial
institutions. The composition and maturities are regularly monitored by management. Such deposits are in excess of the amount of the insurance provided by the federal government on such
deposits. We are exposed to credit risks in the event of default by the issuers to the extent of the amount recorded on the consolidated balance sheets. As of December 31, 2008, we have
approximately $22.3 million in principal protected notes with Citicorp Smith Barney, which had a fair value of approximately $20.8 million.

We
perform ongoing credit evaluations of our customers' financial condition, and limit the amount of credit extended when deemed necessary, but generally do not require collateral. The
credit risk in our accounts receivable is substantially mitigated by our credit evaluation process, reasonably short collection terms and the geographical dispersion of sales transactions. One
customer represented greater than 10% of revenue for the year ended December 31, 2008, totaling 19%, one customer represented greater than 10% of revenue for the year ended December 31,
2007, totaling 12%, while two customers represented greater than 10% of revenue, totaling 16% and 13%, for the year ended December 31, 2006. Our top five customers represented 46% of revenue
for the year ended December 31, 2008, 40% of revenue for the year ended December 31, 2007, and 42% of revenue for the year ended December 31, 2006. We expect that sales to a small
number of customers will continue to comprise a significant portion of our revenue in the future. Four customers each accounted for 10% or more of our trade accounts receivable balance as of
December 31, 2008 at 34%, 11%, 11% and 10%, respectively. Four customers each accounted for 10% or more of our trade accounts receivable balance as of December 31, 2007 at 17%, 13%, 10%
and 10%, respectively.

Cash Equivalents and Short-Term Investments

We classify our investments in debt and equity securities as available-for-sale securities as prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 115,"Accounting for Certain Investments in Debt and Equity Securities."We consider
investments in highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. Our short-term investments are reported at fair value as of the
respective balance sheet dates with unrealized gains and losses included in accumulated other comprehensive income (loss) within stockholders' equity on the consolidated balance sheets. The amortized
cost of securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in other income, net in the consolidated statements of operations.
Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are also included in other income, net in the consolidated
statements of operations. The cost of securities sold is based upon the specific identification method.

All
available-for-sale securities with a quoted market value below cost (or adjusted cost) are reviewed in order to determine whether the decline is
other-than-temporary. Factors considered in determining whether a loss is temporary include the magnitude of the decline in market value, the length of time the market value
has been below cost (or adjusted cost), credit quality, and our ability and intent to hold the securities for a period of time sufficient to allow for any anticipated recovery in market value.

We
maintain in restricted deposits an amount equal to the amount of the line of credit withdrawn.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount and are not interest bearing. We maintain an allowance for doubtful accounts to
reserve for potentially uncollectible trade receivables. We also review our trade receivables by aging category to identify specific customers with known disputes or collectibility issues. We exercise
judgment when determining the adequacy of these reserves as we evaluate historical bad debt trends, general economic conditions in the United States and

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internationally,
and changes in customer financial conditions. Uncollectible receivables are recorded as bad debt expense when all efforts to collect have been exhausted and recoveries are recognized
when they are received.

As
of December 31, 2006, our allowance for doubtful accounts was $0.1 million. During 2007, we increased this allowance by $0.3 million primarily for
slow-paying customers in Asia, resulting in the allowance for doubtful accounts of $0.4 million as of December 31, 2007. As of December 31, 2007, our accounts
receivable balance was $12.1 million, which was net of an allowance for doubtful accounts of $0.4 million. As of December 31, 2008, our accounts receivable balance was
$11.5 million, which was net of an allowance for doubtful accounts of $0.6 million. The increase of $0.2 million in allowance for doubtful accounts from prior year was mainly for
one slow-paying customer in the United States in the amount of $0.4 million, offset by subsequent collections from an Asian customer in the amount of $0.2 million. No amounts
have been written off. If actual uncollectible accounts differ substantially from our estimates, revisions to the estimated allowance for doubtful accounts would be required, which could have a
material impact on our financial results for the period.

The
allowance for sales returns is also deducted from gross accounts receivable. Our allowance for sales returns was $48,000 as of December 31, 2006. During 2007, we utilized
$45,000 resulting in the allowance for sales returns of $3,000 as of December 31, 2007. During 2008, we charged an additional $130,000 in sales returns resulting in the allowance for sales
returns of $133,000 as of December 31, 2008.

Inventories

Inventories are stated at the lower of cost (approximated by standard cost) or market. Cost is determined using the weighted average
cost method. Our inventory consists of
raw materials as well as finished goods and work-in-process that include material, labor and manufacturing overhead costs. Provision for potentially obsolete or slow moving
inventory is made based on management's analysis of inventory levels and sales forecasts.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation computed using the straight-line method over
the estimated economic lives of the assets, which vary from 3 to 27.5 years. Leasehold improvements are amortized over the shorter of the estimated useful life or the term of the lease. We
generally depreciate computers and software over 3 years, office equipment, furniture and fixtures over 3 years, automobiles over 5 years, leasehold improvements over
10 years, and buildings over 27.5 years. Repairs and maintenance costs are expensed as incurred.

Impairment of Long-Lived Assets

We evaluate the recoverability of property, plant and equipment, and intangible assets with definite lives in accordance with SFAS
No. 144,"Accounting for the Impairment or Disposal of Long-Lived Assets."When events and circumstance indicate that
long-lived assets may be impaired, management compares the carrying value of the long-lived assets to the projection of future undiscounted cash flows attributable to such
assets and in the event that the carrying value exceeds the future undiscounted cash flows, we record an impairment charge against income equal to the excess of the carrying value over the asset's
fair value. In the third quarter of 2006, we incurred an impairment charge of $1.4 million to write down our U.S. property in Fremont, California, which was being decontaminated and was being
prepared for sale. In the second quarter of 2007, we benefited from a recovery of impairment on this asset held for sale in connection with our adjustment of the fair value. We recorded a $481,000
market value adjustment after we entered into an agreement with an independent third party purchaser in June 2007 to purchase the property for estimated net proceeds of $5.1 million, after

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deducting
estimated commission and selling expenses. In the fourth quarter of 2007, that agreement was terminated and we entered into a new sales agreement with another independent third party
purchaser to purchase this property for a similar amount. The sale of the property was consummated in March 2008 and we recorded an $83,000 impairment charge due to the final sales price of the
property. We no longer have "Assets held for sale" on the consolidated balance sheet.

Segment Reporting

Our business is conducted in a single operating segment. Our principal executive officer reviews a single set of financial data that
encompasses our entire operations for purposes of making operating decisions and assessing financial performance. Our principal executive officer manages our Company based primarily on broad
functional categories of sales, manufacturing, product development and engineering and marketing and strategy. While we obtain financial statements from all of our joint ventures in order to prepare
our consolidated financial statements, we do not review them either individually or in the aggregate when making operating decisions for our business. We manage the Company on a consolidated basis
with a review of revenue by product. We discuss revenue and capacity for both AXT and our joint ventures collectively, when determining capacity constraints and need for raw materials in our business,
and consider their capacity when determining our strategic and product marketing and advertising strategies. While we consolidate three of the joint ventures we do not allocate resources to any of
them, nor allocate any portion of overhead, interest and other income, interest expense or taxes to them. We therefore have determined that our joint venture operations do not constitute an operating
segment.

Investments

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

Stock-Based Compensation

We have employee stock option plans, which are described more fully in Note 11Employee Benefit Plans. We account
for stock-based compensation in accordance with the provisions of SFAS No. 123 (revised 2004), "Share-Based Payment," ("SFAS 123(R)"),
which established accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at each grant date, based on the fair value of
the award, and is recognized as expense over the employee's requisite service period of the award. All of the Company's stock compensation is accounted for as an equity instrument. The provisions of
SFAS 123(R) apply to all awards granted or modified after the date of adoption which was January 1, 2006. The unrecognized expense of awards not yet vested at the date of adoption will
be recognized in net income (loss) in the periods after the date of adoption using the same Black-Scholes valuation method and assumptions determined under the original provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation."

We
recorded $634,000, $498,000 and $822,000 in our consolidated statements of operations for the years ended December 31, 2008, 2007 and 2006, respectively. We elected not to
capitalize any stock-based compensation to inventory as of January 1, 2007 when the provisions of SFAS 123(R) were

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initially
adopted. We utilized the Black-Scholes valuation model for estimating the fair value of the stock compensation granted both before and after the adoption of SFAS 123(R). The following
table summarizes compensation costs related to our stock-based compensation awards (in thousands, except per share data):

Years Ended December 31,2008

2007

2006Stock-based compensation in the form of employee stock options and restricted stock, included in:Cost of revenue

$
53

$
53

$
96Selling, general and administrative


467


360


539Research and development


114


85


187Total stock-based compensation


634


498


822Tax effect on stock-based compensation








Net effect on net income

$
634

$
498

$
822Shares used in computing basic net income per share


30,400


30,035


23,303Shares used in computing diluted net income per share


30,400


31,348


24,600Effect on basic net income per share

$
(0.02
)
$
(0.02
)
$
(0.04
)Effect on diluted net income per share

$
(0.02
)
$
(0.02
)
$
(0.03
)


As
of December 31, 2008, the total compensation cost related to unvested stock-based awards granted to employees under our stock option plans but not yet recognized was
approximately $1.1 million, net of estimated forfeitures of $139,000. This cost will be amortized on a straight-line basis over a weighted-average period of approximately
2.79 years and will be adjusted for subsequent changes in estimated forfeitures. As of December 31, 2007, the total compensation cost related to unvested stock-based awards granted to
employees under our stock option plans but not yet recognized was approximately $1.5 million, net of estimated forfeitures of $53,000. This cost is being amortized on a
straight-line basis over a weighted-average period of approximately 2.55 years and will be adjusted for subsequent changes in estimated forfeitures. We elected not to capitalize any
stock-based compensation to inventory as of December 31, 2008 and 2007, as the amounts are not significant.

We
estimate the fair value of stock options using a Black-Scholes valuation model, consistent with the provisions of SFAS 123(R) and Securities and Exchange Commission Staff
Accounting Bulletin No. 107. The weighted-average grant date fair value of our stock options granted to employees during 2008, 2007, and 2006 was $0.77, $2.60, and $2.89 per share,
respectively. The fair value of options granted was estimated at the date of grant using the following weighted-average assumptions:

Years Ended December 31,2008

2007

2006Risk-free interest rate


2.30
%

3.11
%

4.7
%Expected life (in years)


4.0


3.9


3.9Dividend yield








Estimated forfeitures


4.3
%

5.7
%

12.4
%Volatility


60.5
%

59.8
%

78.2
%


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The dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. Expected volatility is
based on the combination of historical volatility of the Company's common stock and the expected future volatility over the period commensurate with the expected life of the options. The
risk-free interest rates are taken from the Daily Federal Yield Curve Rates as of the grant dates as published by the Federal Reserve and represent the yields on actively traded Treasury
securities for terms equal to the expected term of the options. The expected term calculation for stock options is based on the observed historical option exercise behavior and
post-vesting forfeitures of options by our employees. Assumptions related to the Employee Stock Purchase Plan are not presented as the related compensation expense amounts are
insignificant. The Employee Stock Purchase Plan was suspended in February 2006.

Research and Development

Research and development costs consist primarily of salaries including stock compensation expense and related personnel costs,
depreciation and product testing and are expensed as incurred.

Advertising Costs

Advertising costs, included in selling, general and administrative, are expensed as incurred. Advertising costs for the years ended
December 31, 2008, 2007, and 2006 were $76,000, $75,000 and $52,000, respectively.

Shipping and Handling costs

We include fees billed to customers and costs incurred for shipping and handling as a component of cost of sales.

Income Taxes

We account for deferred income taxes using the liability method, under which the expected future tax consequences of timing differences
between the book and tax basis of assets and liabilities are recognized as deferred tax assets and liabilities. Valuation allowances are established when necessary to reduce net deferred tax assets
when management estimates, based on available objective evidence, that it is more likely than not that the future income tax benefit represented by the net deferred tax asset will not be realized.

We
adopted FASB Interpretation No. 48 ("FIN 48"),"Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement
No. 109),"on January 1, 2007. FIN 48 is an interpretation of SFAS No. 109 ("SFAS 109"),"Accounting for Income
Taxes,"and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes
a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax provision that an entity takes or expects to take in a tax return. Additionally,
FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. Under FIN 48, an entity may
only recognize or continue to recognize tax positions that meet a "more likely than not" threshold. In accordance with our accounting policy, we recognize accrued interests and penalties related to
unrecognized tax benefits as a component of income tax expense. The impact on adoption of FIN 48 is more fully described in Note 13.

Comprehensive Income (Loss)

We report comprehensive income or loss in accordance with the provisions of SFAS No. 130, "Reporting
Comprehensive Income,"which establishes standards for reporting comprehensive income or loss and its components in the financial statements. The components of other
comprehensive income

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(loss)
consist of unrealized gains and losses on marketable securities and foreign currency translation adjustments. Comprehensive income (loss) is presented in the accompanying consolidated
statements of stockholders' equity. The balance of accumulated other comprehensive income is as follows (in thousands):

As of December 31,2008

2007Accumulated other comprehensive income:Unrealized loss on investments, net

$
(1,579
)
$
(46
)Cumulative translation adjustment


4,159


2,328$
2,580

$
2,282


Net Income (Loss) Per Share

Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the periods.
Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding and potentially dilutive common shares outstanding during the periods. Potentially
dilutive common shares consist of common shares issuable upon the exercise of stock options. Potentially dilutive common shares are excluded in net loss periods, as their effect would be
anti-dilutive.

Recent Accounting Pronouncements

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

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of
FASB Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair value accounting to many financial instruments and certain other items. The fair
value option is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair
value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We have not elected the fair value option. Therefore, the adoption of SFAS 159 in
the first quarter of fiscal 2008 did not impact our consolidated financial position, results of operations or cash flows.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations", ("SFAS 141R"). SFAS 141R
establishes the principles and requirements for how an acquirer in a business combination (1) recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree, (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase
and (3) determines what information to disclose to enable users of the financial statements to evaluate the

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nature
and financial effects of the business combination. SFAS 141(R) will be applicable beginning with our fiscal 2009. The impact of the adoption of SFAS 141(R) on our results of
operations and financial position will depend on the nature and extent of business combinations that we complete, if any, in or after fiscal 2009.

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

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161").
SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how
derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. Based on our current operations, we do not expect that the adoption of SFAS 161 will have a material impact on our
consolidated financial position or results of operations.

In
June 2008, the FASB issued FASB Staff Position ("FSP") Emerging Issues Task Force (EITF) 03-6-1, "Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities" (FSP EITF 03-6-1). FSP EITF 03-6-1 provides that unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to
the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim
periods within
those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial
data) to conform with the provisions in FSP EITF 03-6-1. Early application of FSP EITF 03-6-1 is prohibited. We do not expect that the
adoption of FSP EITF 03-6-1 will have a material impact on our consolidated financial position, results of operations or cash flows.

On
October 10, 2008, the FASB issued FSP No. 157-3 ("FSP 157-3"), "Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active"("FSP 157-3"), to clarify the application of SFAS 157 in a market that is not active, providing an example to illustrate
key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP applies to financial assets within the scope of accounting
pronouncements that require or permit fair value measurement in accordance with SFAS 157 and is effective upon issuance. We have determined there is no impact from adopting the provisions of
FSP 157-3 on our consolidated financial position, results of operations or cash flows.

Note 2. Discontinued Operations

In June 2003, we announced the discontinuation of our opto-electronics division, which we had established as part of our
acquisition of Lyte Optronics, Inc. in May 1999, and thereafter segregated the results of operations of the opto-electronics division from continuing operations and reported them
separately as discontinued operations in our consolidated statements of operations for all periods presented.

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In
September 2003, we completed the sale of substantially all of the assets of our opto-electronics business to Lumei Optoelectronics Corp. (Lumei) and Dalian Luming Science
and Technology Group, Co., Ltd. for the Chinese Renminbi (RMB) equivalent of $9.6 million. A portion of the purchase price equal to $1.0 million was held in escrow to
satisfy any claims that the purchasers might make for breaches of representations or warranties by us. After resolution of all claims made against the escrow, approximately $0.2 million was
received from escrow in 2004, while the remaining $0.6 million was received in 2005. For the year ended December 31, 2005, we recorded a $0.6 million gain from escrow refund, a
$0.1 million gain in property tax refunds and gain on disposal of properties, offset by $0.2 million in expenses totaling a net gain of $0.5 million.

In
June 2005, we completed the sale of a building located in Monterey Park, California. We received net proceeds on the sale of the property of approximately $1.3 million and
accordingly recorded a gain on disposal of $0.1 million.

In
2006, the $18,000 in income was from interest on cash balances held in the discontinued operations.

In
the first quarter of 2007, we dissolved the corporation that previously operated our discontinued operations and transferred the cash balance to our continuing operations.
Accordingly, we no longer have discontinued operations.

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

Years Ended December 31,2008

2007

2006Revenue

$


$


$
Cost of revenue








Gross profit








Operating expenses:Selling, general and administrative








Total operating expenses








Gain from operations








Other income, net








18Gain from discontinued operations before gain on disposal








18Gain on disposal








Net gain from discontinued operations

$


$


$
18


The
carrying value of the assets and liabilities of the discontinued opto-electronics business is zero.

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Note 3. Cash, Cash Equivalents and Investments

Our cash, cash equivalents and investments are classified as follows (in thousands):

December 31, 2008

December 31, 2007Amortized
Cost

Gross
Unrealized
Gain

Gross
Unrealized
(Loss)

Fair
Value

Amortized
Cost

Gross
Unrealized
Gain

Gross
Unrealized
(Loss)

Fair
ValueClassified as:Cash

$
13,385

$


$


$
13,385

$
10,818

$


$


$
10,818Cash equivalents:Money market fund


181








181


7,562








7,562US Treasury and agency securities























Total cash equivalents


181








181


7,562








7,562Total cash and cash equivalents


13,566








13,566


18,380








18,380Investments:US Treasury and agency securities














1,400








1,400Asset-backed securities














3,820





(77
)

3,743Commercial paper














3,300





(115
)

3,185Corporate bonds


22,348





(1,579
)

20,769


19,051


260


(114
)

19,197Total investments


22,348





(1,579
)

20,769


27,571


260


(306
)

27,525Total cash, cash equivalents and investments

$
35,914

$


$
(1,579
)
$
34,335

$
45,951

$
260

$
(306
)
$
45,905Contractual maturities on investments:Due within 1 year

$
4,060







$
3,822

$
2,050







$
2,050Due after 1 through 5 years


18,286








16,947


25,521








25,475$
22,346







$
20,769

$
27,571







$
27,525


The investments include $3.0 million and $6.7 million recorded as restricted deposits on the consolidated balance sheets as of
December 31, 2008 and 2007. The $3.0 million restricted deposit was a drawdown of our line of credit facility, with an annual interest rate of approximately 4% as of December 31,
2008.

We
manage our investments as a single portfolio of highly marketable securities that is intended to be available to meet our current cash requirements. We have no investments in auction
rate securities. For the year ended December 31, 2008, we had $0.3 million of gross realized gains on sales of our available-for-sale securities. For the year
ended December 31, 2007, we had $1.0 million of gross realized gains on sales of our available-for-sale securities.

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

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

In Loss Position
< 12 months

In Loss Position
> 12 months

Total In
Loss Position2008

Fair
Value

Gross
Unrealized
(Loss)

Fair
Value

Gross
Unrealized
(Loss)

Fair
Value

Gross
Unrealized
(Loss)Investments:Asset-backed securities

$


$


$


$


$


$
Commercial paper

















Corporate bonds


17,583


(1,365
)

3,186


(214
)

20,769


(1,579
)Total in loss position

$
17,583

$
(1,365
)
$
3,186

$
(214
)
$
20,769

$
(1,579
)




In Loss Position
< 12 months

In Loss Position
> 12 months

Total In
Loss Position2007

Fair
Value

Gross
Unrealized
(Loss)

Fair
Value

Gross
Unrealized
(Loss)

Fair
Value

Gross
Unrealized
(Loss)Investments:US Treasury and agency securities

$
3,743

$
(77
)
$


$


$
3,743

$
(77
)Asset-backed securities


3,185


(115
)







3,185


(115
)Corporate bonds


13,286


(114
)







13,286


(114
)Total in loss position

$
20,214

$
(306
)
$


$


$
20,214

$
(306
)


Investments in Privately-held Companies

We have made strategic investments in private companies located in China in order to gain access at a competitive cost to raw materials
that are critical to our substrate business (see Note 6). As of December 31, 2008 and December 31, 2007, our investments in unconsolidated privately-held companies had
a carrying value of $4.1 million and $3.3 million, respectively, and are included in "other assets" in the condensed consolidated balance sheets.

Fair Value Measurements

On January 1, 2008, we adopted SFAS 157 which defines fair value, establishes a framework for using fair value to measure
assets and liabilities, and expands disclosures about fair value measurements. SFAS 157 applies whenever other statements require or permit assets or liabilities to be measured at fair value.
SFAS 157 is effective for fiscal years beginning after November 15, 2007, except for non-financial assets and liabilities that are recognized or disclosed at fair value in
the financial statements on a nonrecurring basis, for which application has been deferred for one year.

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The
following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordance with SFAS 157 as of December 31, 2008 (in
thousands):

Balance as of
December 31, 2008

Quoted Prices in
Active Markets of
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)Assets:Short-term investments:Money market fund

$
181

$
181

$
Corporate bonds


20,769





20,769Total

$
20,950

$
181

$
20,769Liabilities

$


$


$



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

Items Measured at Fair Value on a Nonrecurring Basis

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

Note 4. Inventories, Net

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

As of December 31,2008

2007Inventories:Raw materials

$
17,863

$
11,154Work in process


12,961


12,254Finished goods


4,258


1,373$
35,082

$
24,781


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Table of Contents

Note 5. Property, Plant and Equipment, Net

The components of our property, plant and equipment are summarized below (in thousands):

As of December 31,2008

2007Property, plant and equipment:Building

$
16,100

$
12,642Machinery and equipment


26,225


22,835Leasehold improvements


1,961


861Construction in progress


2,207


2,29046,493


38,628Less: accumulated depreciation and amortization


(24,309
)

(22,642
)$
22,184

$
15,986


Depreciation
expense was $2.2 million, $1.5 million, and $2.6 million for the years ended 2008, 2007, and 2006, respectively.

Note 6. Investments in Privately-held Companies

We have made strategic investments in private companies located in China in order to gain access to raw materials at a competitive cost
that are critical to our substrate business.

Our
investments are summarized below (in thousands):

Investment Balance
As of December 31,Accounting
Method

Ownership
PercentageCompany

2008

2007Beijing JiYa Semiconductor Material Co., Ltd

$
996

$
996

Consolidated


46
%Nanjing Jin Mei Gallium Co., Ltd


592


592

Consolidated


83
%Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd


410


410

Consolidated


70
%Xilingol Tongli Germanium Co. Ltd


2,906


2,138

Equity


25
%Emeishan Jia Mei High Purity Metals Co., Ltd


843


761

Equity


25
%


Our
ownership of Beijing Ji Ya Semiconductor Material Co., Ltd. (JiYa) is 46%. We continue to consolidate JiYa as we have significant influence in management and have a
majority control of the board. Our chief financial officer is chairman of the board, while our chief operating officer, and our president of joint venture operations are members of the board. Our
former chief executive officer, formerly a member of this board of directors, resigned from this board on March 17, 2009.

Our
ownership of Nanjing Jin Mei Gallium Co., Ltd. (Jin Mei) is 83%. We continue to consolidate Jin Mei as we have significant influence in management and have a majority
control of the board. Our chief operating officer is chairman of the board, while our president of joint venture operations is a member of the board. Our former chief executive officer, formerly a
member of this board of directors, resigned from this board on March 17, 2009.

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Table of Contents

We have significant influence over management of Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd (BoYu), have a controlling
financial interest of 70%, and have a majority control of the board. Our chief operating officer and our president of joint venture operations are members of the board. Our former chief executive
officer has resigned as chairman of the board of BoYu effective March 17, 2009.

Although
we have representation on the boards of directors of each of these companies, the daily operations of each of these companies, are managed by local management and not by us.
Decisions concerning their respective short term strategy and operations, any capacity expansion and annual capital expenditures, and decisions concerning sales of finished product, are made by local
management without input from us.

The
investment balances for the two companies accounted for under the equity method are included in other assets in the consolidated balance sheets and totaled $3.7 million and
$2.9 million as of December 31, 2008 and 2007, respectively. We own 25% of the ownership interests in each of these companies. These two companies are not considered variable interest
entities because:



During
2008, 2007 and 2006, the three consolidated joint ventures generated $3.8 million, $4.4 million and $2.5 million of income, respectively, of which
$1.4 million, $1.9 million and $1.0 million, respectively was allocated to minority interests, resulting in $2.4 million, $2.5 million and $1.5 million,
respectively to our net income. Our equity earnings from the two-minority owned joint ventures that are not consolidated are recorded as other income (loss), net and totaled
$0.9 million, $1.0 million and $0.2 million for 2008, 2007 and 2006, respectively. Undistributed retained earnings relating to our investments in these companies were
$11.1 million, $7.8 million, and $4.4 million, respectively as of December 31, 2008, 2007 and 2006. Net income recorded from our investments was $3.3 million,
$3.5 million, and $1.8 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Note 7. Other Investments

As of December 31, 2008 we maintain minority investments in two private companies. During 2006 we sold all of our shares of
common stock of the only publicly traded company we held, Finisar Corporation (Nasdaq: FNSR), generating net proceeds of $4.4 million and recording a gain of $3.3 million, which is
included in other income, net. Our investments in these private companies are reviewed for other than temporary declines in value on a quarterly basis. These investments are classified as other assets
in the consolidated balance sheets and are accounted for under the cost method as we do not have the ability to exercise significant influence over their operations. We monitor our investments for
impairment and record reductions in carrying value when events or changes in circumstances indicate that the carrying value may not be recoverable. Reasons for other than temporary declines in value
include whether the related company would have insufficient cash flow to operate for the next twelve months, significant changes in the operating performance and changes in
market conditions. As of December 31, 2008 and 2007, the minority investments totaled approximately $0.4 million for both years.

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Table of Contents

Note 8. Impairment (recovery) on Assets Held for Sale

In the third quarter of 2006, we incurred an impairment charge of $1.4 million to write down our U.S. property in Fremont,
California, which was being decontaminated and was being prepared for sale. In the second quarter of 2007, we benefited from a recovery of impairment on this asset held for sale in connection with our
adjustment of the fair value. We recorded a $481,000 market value adjustment after we entered into an agreement with an independent third party purchaser in June 2007 to purchase the property for
estimated net proceeds of $5.1 million, after deducting estimated commission and selling expenses. In the fourth quarter of 2007, that agreement was terminated and we entered into a new sales
agreement with another independent third party purchaser to purchase this property for a similar amount. In the first quarter of 2008, we completed the sale of our U.S. property in Fremont, California
for $5.3 million in gross proceeds and $5.1 million in net proceeds after deducting commissions and selling expenses. We recorded an $83,000 impairment charge upon the sale of the
property.

Note 9. Debt

Credit Facility

As of December 31, 2008, the credit facility maintained by us with a bank included a line of credit with an outstanding amount
of $3.0 million and carries an annual interest rate of approximately 4%. We have pledged this amount as collateral for this facility. Accordingly, $3.0 million of cash and
short-term investments are restricted.

Long-Term Debt

The components of long-term debt are summarized below (in thousands):

As of December 31,2008

2007Taxable revenue bonds, collateralized by a letter of credit from a bank, bearing interest at the H15 30 day bond yield for commercial paper which
was 5.16% as of December 31, 2007, maturing December 2023

$


$
6,700Tenant improvement loan at 4.00%


569


569


6,700Less current portion


(73
)

(450
)$
496

$
6,250Maturities of long-term debt as of December 31, 2008 were as follows:2009

$
732010


762011


792012


822013


85Thereafter


174$
569


Note 10. Stockholders' Equity

In August 2004, we announced the adoption of a stock repurchase program in accordance with Rule 10b5-1 of the
Securities Exchange Act of 1934 to provide for the repurchase of up to $2 million of our common stock. This plan was extended for one year in July 2005. Repurchases were made from

80

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Table of Contents

time
to time in the open market during the twelve-month period ended July 31, 2006, at prevailing market prices using our own cash resources. As of December 31, 2008, we had 30,512,899
shares of common stock outstanding and no shares were repurchased in 2007 and 2008 under this program, which has now expired.

The
883,000 shares of $0.001 par value Series A preferred stock issued and outstanding as of December 31, 2008 and 2007, valued at $3,532,000 are non-voting and
non-convertible preferred stock with a 5.0% cumulative annual dividend rate payable when declared by the board of directors and $4 per share liquidation preference over common stock. These
preferred shares were issued to Lyte Optronics, Inc. stockholders in connection with the completion of our acquisition of Lyte Optronics, Inc. on May 28, 1999.

Note 11. Employee Benefit Plans

Stock Option Plans and Equity Incentive Plans

In July 1997, our board of directors approved the 1997 Stock Option Plan ("1997 Plan"), which provides for the grant of incentive and
non-qualified stock options to our employees, consultants and directors. Under the 1997 Plan, 5,423,583 shares of common stock have been authorized for issuance. Options granted under the
1997 Plan are generally for periods not to exceed ten years (five years if the option is granted to a 10% stockholder) and are granted at the fair market value of the stock at the date of grant as
determined by the board of directors. Options granted under the 1997 Plan generally vest 25% at the end of one year and 2.1% each month thereafter, with full vesting after four years.

In
May 2007, our shareholders approved our 2007 Equity Incentive Plan (the "2007 Plan"). The 2007 Plan is a restatement of the 1997 Plan which was scheduled to expire in 2007. The share
reserve of the 1997 Plan became the reserve of the 2007 Plan, together with 1,300,000 additional shares approved for issuance under the 2007 Plan. As of December 31, 2008, approximately
2.5 million shares remained available for grant under the 2007 Plan. Awards may be made under the 2007 Plan of stock options, stock appreciation rights, restricted stock, restricted stock
units, performance shares, performance units, deferred compensation awards and other stock-based awards. Stock options and stock appreciation rights awarded under the 2007 Plan may not be repriced
without stockholder approval. Stock options and stock appreciation rights may not be granted below fair market value. Stock options or stock appreciation rights generally shall not be fully vested
over a period of less than three years from the date of grant and cannot be exercised more than 10 years from the date of grant. Restricted stock, restricted stock units, and performance awards
generally shall not vest faster than over a three-year period (or a twelve-month period if vesting is based on a performance measure). In December 2008, the 2007 Plan was amended to comply
with the applicable requirements under Section 409A of the Internal Revenue Code.

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Table of Contents

The
following summarizes our stock option activity under the 1997 Plan and the 2007 Plan, and the related weighted average exercise price within each category for each of the years ended
December 31, 2006, 2007, and 2008 (in thousands, except per share data):

Available
for Grant

Number of
Options
Outstanding

Weighted-
average
Exercise
Price

Weighted-
average
Remaining
Contractual
Life

Aggregate
Intrinsic
Value(in years)Balance as of December 31, 2005


2,008


2,917

$
2.30Granted


(180
)

180


4.52Exercised





(284
)

1.96Canceled


85


(85
)

1.50Balance as of December 31, 2006


1,913


2,728


2.51


6.37

$
7,091Additional shares authorized


1,300Plan shares expired


(124
)Granted


(354
)

354


5.89Exercised





(461
)

1.95Canceled


144


(144
)

5.04Balance as of December 31, 2007


2,879


2,477


2.95


6.93

$
8,858Plan shares expired


(34
)Granted


(413
)

413


1.60Exercised





(92
)

1.85Canceled


34


(34
)

7.00Balance as of December 31, 2008


2,466


2,764

$
2.74


6.61

$
92Options vested and expected to vest as of December 31, 2008





2,710

$
2.73


6.54

$
92Options exercisable as of December 31, 2008





1,914

$
2.58


5.57

$
85


The
options outstanding and exercisable as of December 31, 2008 were in the following exercise price ranges (in thousands, except per share data):

Options Outstanding as of
December 31, 2008

Options Vested and
Exercisable as of
December 31, 2008Range of
Exercise Price

Shares

Weighted-average
Exercise Price

Weighted-average
Remaining
Contractual Life

Shares

Weighted-Average
Exercise Price$1.17 - $  1.38


1,199

$
1.28


5.90


1,093

$
1.28$1.39 - $  1.44


5

$
1.43


6.64


4

$
1.43$1.45 - $  2.24


824

$
1.88


7.03


407

$
2.17$2.25 - $  6.31


678

$
4.95


7.63


351

$
4.34$6.32 - $41.50


58

$
19.17


2.60


58

$
19.172,764

$
2.74


6.61


1,914

$
2.58


The
total intrinsic value of options exercised for the years ended December 31, 2008, 2007 and 2006 were $0.3 million, $1.4 million and $0.4 million,
respectively. Cash received from option exercises for the years ended December 31, 2008, 2007 and 2006 were $0.2 million, $0.9 million, and $0.6 million, respectively.

As
of December 31, 2007 and 2006, options to purchase 1,638,000 shares and 1,857,000 shares at weighted average exercise prices of $2.56 and $2.74 per share were vested and
exercisable, respectively.

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Table of Contents

Restricted stock awards

A summary of activity related to restricted stock awards for the year ended December 31, 2008 is presented below:

Shares

Weighted-Average
Grant Date
Fair ValueNon-vested restricted stock shares outstanding as of
December 31, 2006


Restricted stock shares granted


23,480

$
4.26Restricted stock shares vested


Non-vested restricted stock shares outstanding as of
December 31, 2007


23,480

$
4.26Restricted stock shares granted


62,892

$
1.59Restricted stock shares vested


(7,828
)
$
4.26Non-vested restricted stock shares outstanding as of
December 31, 2008


78,544

$
2.12


As
of December 31, 2008, we had $145,000 of unrecognized compensation expense, net of forfeitures, related to restricted stock awards, which will be recognized over the weighted
average period of 2.47 years. During the year ended December 31, 2008, 7,828 shares of restricted stock were vested. No shares of restricted stock were vested during 2007.

Retirement Savings Plan

We have a 401(k) Savings Plan ("Savings Plan") which qualifies as a thrift plan under Section 401(k) of the Internal Revenue
Code. All full-time U.S. employees are eligible to participate in the Savings Plan after 90 days from the date of hire. In 2006 we amended the savings plan to allow all
full-time participants (as defined) to contribute up to 10% of their earnings to the Savings Plan with a discretionary matching amount provided by us. Our contributions to the Savings Plan
were $0.4 million, $0.4 million, and $0.4 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Note 12. Guarantees

Indemnification Agreements

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

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

83

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Table of Contents

Product Warranty

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

Years Ended December 31,2008

2007Beginning accrued warranty and related costs

$
1,030

$
459Charged to cost of revenue


1,022


792Actual warranty expenditures


(412
)

(221
)Ending accrued warranty and related costs

$
1,640

$
1,030


Note 13. Income Taxes

Consolidated (loss) income before provision for income taxes includes non-U.S. loss of approximately $4.8 million
for the year ended December 31, 2008 and non-U.S. income of approximately $4.5 million and $7.2 million for the years ended December 31, 2007 and 2006,
respectively. The Company recorded a current tax provision (benefit) of $1.0 million, $0.7 million, and $(1.5) million for the years ended December 31, 2008, 2007 and 2006,
respectively. The components of the provision (benefit) for income taxes are summarized below (in thousands):

Years Ended December 31,2008

2007

2006Current:Federal

$


$


$
(2,064
)State


52


9


4Foreign


971


719


606Total current


1,023


728


(1,454
)Deferred:Federal








State








Total deferred








Total net provision (benefit) for income taxes

$
1,023

$
728

$
(1,454
)


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Table of Contents

A reconciliation of the effective income tax rates and the U.S. statutory federal income tax rate is summarized below:

Years Ended December 31,2008

2007

2006Statutory federal income tax rate


35.0
%

35.0
%

35.0
%State income taxes, net of federal tax benefits


1.9


0.1


0.5Change in valuation allowance


60.1


(3.8
)

50.3Stock compensation


8.6


1.6


60.8Foreign rate differences


(71.9
)

(19.7
)

(470.7
)Dividend from PRC investee


38.1





45.0Net loss from privately-held PRC investments


(17.5
)

(4.2
)

(15.3
)Other


3.6


0.2


3.4Effective tax rate


57.9
%

9.2
%

(291.0
)%


Deferred
tax assets and liabilities are summarized below (in thousands):

As of December 31,2008

2007Deferred tax assets:Net operating loss

$
49,737

$
48,925Accruals and reserves not yet deductible


3,988


3,960Credits


1,944


1,97255,669


54,857Deferred tax liabilities:Unrepatriated foreign earnings


(1,239
)

(1,239
)(1,239
)

(1,239
)Net deferred tax assets


54,430


53,618Valuation allowance


(54,430
)

(53,618
)Net deferred tax assets

$


$



As
of December 31, 2008, we have federal and state net operating loss carryforwards of approximately $140.4 million and $41.2 million, respectively, which will
expire beginning in 2022 and 2015, respectively. In addition, we have federal tax credit carryforwards of approximately $1.6 million, which will expire beginning in 2019. We also have state tax
credit carryforwards of approximately $596,000, of which $286,000 is manufacturing investment credit that will expire beginning in 2010.

The
deferred tax assets valuation allowance as of December 31, 2008 is attributed to U.S. federal, and state deferred tax assets, which result primarily from future deductible
accruals, reserves and tax depreciation expense, net operating loss carryforwards, and tax credit carryforwards. The Company believes that, based on a number of factors, the available objective
evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance has been recorded. These factors include the Company's history of
losses, and the lack of carryback capacity to realize deferred tax assets. The valuation allowance increased by $0.8 million, increased by $3.7 million, and decreased by
$1.0 million, for the years ended December 31, 2008, 2007 and 2006, respectively.

Our
consolidated subsidiaries in China have been granted various tax holidays since 2000. Benefits under the tax holidays vary by jurisdiction. Some of our consolidated subsidiaries' tax
holidays have expired on December 31, 2007.

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In
accordance with Section 382 of the Internal Revenue Code, the amounts of and benefits from net operating loss and tax credit carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of net operating losses or credits that we may utilize in any one year include, but are not limited to, a cumulative ownership change of
more that 50% as defined, over a three year period.

As
a result of the implementation of Interpretation 48, we recognized $16.4 million in the liability for unrecognized tax benefits. Of this amount, none was accounted for as a
reduction to the January 1, 2007 balance of retained earnings. The amount decreased tax loss carryforwards in the U.S., which are fully offset by a valuation allowance.

We
recognize interest and penalties related to uncertain tax positions in income tax expense. Income tax expense for the year ended December 31, 2008 includes no interest and
penalties. As of December 31, 2008, we have no accrued interest and penalties related to uncertain tax positions.

We
file income tax returns in the U.S. federal, various states and foreign jurisdictions. We have substantially concluded all U.S. federal and state income tax matters through
December 31, 2007.

A
reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows (in thousands):

Gross unrecognized tax benefits balance as of December 31, 2007

$
16,403Add:Additions based on tax positions related to the current year


Additions for tax positions of prior years


Gross unrecognized tax benefits balance as of December 31, 2008

$
16,403


Excluding
the effects of recorded valuation allowances for deferred tax assets, $16.4 million of the unrecognized tax benefit would favorably impact the effective tax rate in
future periods if recognized.

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Note 14. Net income (loss) per Share

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

Years Ended December 31,2008

2007

2006Numerator:Income (loss) from continuing operations

$
(689
)
$
5,289

$
926Gain from discontinued operations, net of tax








18Less: Preferred stock dividends


(177
)

(177
)

(177
)Net income (loss) to common stockholders

$
(866
)
$
5,112

$
767Denominator:Denominator for basic net income (loss) per shareweighted average common shares


30,400


30,035


23,303Effect of dilutive securities:Common stock options





1,310


1,297Restricted stock awards





3


Denominator for dilutive net income (loss) per share


30,400


31,348


24,600Basic net income (loss) per share:Income (loss) from continuing operations

$
(0.03
)
$
0.17

$
0.03Net income (loss) to common stockholders

$
(0.03
)
$
0.17

$
0.03Diluted net income (loss) per share:Income (loss) from continuing operations

$
(0.03
)
$
0.16

$
0.03Net income (loss) to common stockholders

$
(0.03
)
$
0.16

$
0.03Options excluded from diluted net income (loss) per share as the impact is anti-dilutive


2,764


360


362Restricted stock excluded from diluted net income (loss) per share as the impact is anti-dilutive


79








Note 15. Segment Information and Foreign Operations

Segment Information

We operate in one segment for the design, development, manufacture and distribution of high-performance compound
semiconductor substrates and sale of materials. In accordance with SFAS No. 131,"Disclosures about Segments of an Enterprise and Related
Information,"our chief operating decision-maker has been identified as the principal executive officer, who reviews operating results to make decisions about allocating
resources and assessing performance for the company. Since we operate in one segment, all financial segment and product line information can be found in the consolidated financial statements.

87

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Table of Contents

Note 15. Segment Information and Foreign Operations (Continued)

Product Type

The following table represents revenue amounts (in thousands) by type:

Years Ended December 31,2008

2007

2006Product type:GaAs

$
49,610

$
40,219

$
36,511InP


1,935


1,916


1,705Ge


4,248


2,225


909Raw materials


17,232


13,790


5,293Other


50


53


27$
73,075

$
58,203

$
44,445


Geographical Information

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

Years Ended December 31,2008

2007

2006Product revenue:North America*

$
19,181

$
11,839

$
13,029Europe


14,524


9,930


8,365Japan


14,685


13,280


3,347Taiwan


7,806


9,329


7,647Asia Pacific (excluding Japan and Taiwan)


16,879


13,825


12,057$
73,075

$
58,203

$
44,445


---

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

As of December 31,2008

2007Long-lived assets:United States of America

$
867

$
149China


21,317


15,837$
22,184

$
15,986


Note 16. Foreign Exchange Contracts and Transaction Gains/Losses

As of December 31, 2008, and 2007, we had no outstanding commitments with respect to foreign exchange contracts.

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Note 16. Foreign Exchange Contracts and Transaction Gains/Losses (Continued)

We
incurred foreign currency transaction exchange gains (losses) of $2,000, $(320,000), and $(123,000) for the years ended December 31, 2008, 2007, and 2006, respectively.

Note 17. Related Party Transactions

Our executive officers retain board seats on the Board of Directors of the companies in which we have invested in our China joint ventures. See Note 6 for further details.

Note 18. Commitments and Contingencies

Legal Matters

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

The
claims of a former employee, Steve X. Chen, that his employment termination was due to his race and national origin were resolved without cost to the Company.

Leases

We lease certain office space, manufacturing facilities and property under long-term operating leases expiring at various
dates through November 2015. On July 2, 2008, we entered into a new lease agreement with the landlord of the facility at 4281 Technology Drive, Fremont, California with approximately 27,760
square feet. The new lease commenced December 1, 2008 for a term of seven years, with an option by us to cancel the new lease after five years, upon forfeiture of the security deposit and
payment of one-half of the fifth year's rent. Total rent expenses under these operating leases were $1.7 million (including a $0.7 million forfeiture of rental deposit in
terminating the old lease), $0.5 million and $0.7 million for the years ended December 31, 2008, 2007 and 2006, respectively, which were net of sublease income of
$0.3 million, $0.2 million and $0.2 million, respectively. Our sublease income was terminated in December 2008. Total minimum lease payments under these leases as of
December 31, 2008 are summarized below (in thousands):

Lease Payment2009

$
2942010


3032011


2722012


2752013


287Thereafter


586$
2,017


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Table of Contents

Note 18. Commitments and Contingencies (Continued)

Purchase Obligations

Through the normal course of business, we purchase or place orders for the necessary materials of our products from various suppliers
and we commit to purchase products where it may incur a penalty if the agreement was canceled. Our purchase agreement to purchase eighteen thousand kilograms of gallium was terminated on
December 31, 2008. As of December 31, 2008 we do not have any material purchase obligations.

Note 19. Unaudited Quarterly Consolidated Financial Data

QuarterFirst

Second

Third

Fourth(in thousands, except per share data)2007:Revenue

$
12,526

$
13,639

$
14,474

$
17,564Gross profit


5,405


5,032


4,530


5,294Net income


1,344


1,213


858


1,874Net income per share, basic

$
0.04

$
0.04

$
0.03

$
0.06Net income per share, diluted

$
0.04

$
0.04

$
0.03

$
0.062008:Revenue

$
19,634

$
19,932

$
17,863

$
15,646Gross profit


6,221


6,444


4,537


758Net income (loss)


1,959


737


(1,014
)

(2,371
)Net income (loss) per share, basic

$
0.06

$
0.02

$
(0.03
)
$
(0.08
)Net income (loss) per share, diluted

$
0.06

$
0.02

$
(0.03
)
$
(0.08
)


Note 20. Subsequent Event

Dr. Philip C.S. Yin, our former Chairman and Chief Executive Officer, resigned as an executive officer and as a member of the Board of Directors, effective March 17, 2009.
The Board of Directors has invested Wilson W. Cheung, the Company's Chief Financial Officer, with the responsibility of administering day-to-day operations. Mr. Cheung is expected to
perform the functions of principal executive officer in addition to his function as Chief Financial Officer during this transition period, and pending the appointment of an interim chief executive
officer to serve until a successor Chief Executive Officer is named.

In
addition, Mr. Jesse Chen, a director since 1998 and our Lead Independent Director, has been named non-executive Chairman of the Board of Directors.

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereto duly authorized.

AXT, Inc.By:

/s/ WILSON W. CHEUNG Wilson W. Cheung Chief Financial Officer and Corporate Secretary
(Principal Executive Officer and
Principal Financial Officer)Date: March 31, 2009


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Jesse Chen and
Wilson W. Cheung, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution, each with power to act alone, to sign and execute on behalf
of the undersigned any and all amendments to this Report on Form 10-K, and to perform any acts necessary in order to file the same, with all exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act
and thing requested and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or their or his or her substitutes, shall do or cause to be done by virtue hereof.

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

Signature

Title

Date/s/ WILSON W. CHEUNG Wilson W. Cheung

Chief Financial Officer and Corporate Secretary (Principal Executive Officer and
Principal Financial Officer)

March 31, 2009/s/ RAYMOND A. LOW Raymond A. Low

Vice President, Corporate Controller (Principal Accounting Officer)

March 31, 2009/s/ JESSE CHEN Jesse Chen

Chairman of the Board of Directors

March 31, 2009/s/ DAVID C. CHANG David C. Chang

Director

March 31, 2009/s/ LEONARD LEBLANC Leonard LeBlanc

Director

March 31, 2009/s/ MORRIS S. YOUNG Morris S. Young

Director

March 31, 2009


91

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AXT, Inc.        EXHIBITS        TO        FORM 10-K ANNUAL REPORT        For the Year Ended December 31, 2008

Exhibit
Number

Description3.1(3)

Restated Certificate of Incorporation3.2(4)

Certificate of Designation, Preferences and Rights of Series A Preferred Stock (which is incorporated herein by reference to Exhibit 2.1 to the registrant's form 8-K dated May 28, 1999).3.3(5)

Second Amended and Restated By Laws3.1(3)

Restated Certificate of Incorporation3.1(3)

Restated Certificate of Incorporation4.2(5)

Rights Agreement dated April 24, 2001 by and between AXT, Inc. and ComputerShare Trust Company, Inc.10.1(1)

Form of Indemnification Agreement for directors and officers.*10.2(1)

1993 Stock Option Plan and forms of agreements thereunder.*10.3(1)

1997 Stock Option Plan and forms of agreements thereunder.*10.5(1)

1998 Employee Stock Purchase Plan and forms of agreements thereunder.*10.6(1)

2007 Stock Option Plan and forms of agreements thereunder.*10.7(2)

Purchase and Sale Agreement by and between Limar Realty Corp #23 and AXT, Inc. dated April 1998.10.10(3)

Bond Purchase Contract between Dain Rauscher Incorporated and AXT, Inc. dated December 1, 1998.10.11(3)

Remarketing Agreement between Dain Rauscher Incorporated and AXT, Inc. dated December 1, 1998.10.15(6)

Reimbursement Agreement between Wells Fargo Bank National Association and AXT, Inc. dated April 7, 2003.10.16(7)

Asset purchase agreements dated September 4, 2003 by and between Dalian Luming Science and Technology Group, Ltd and AXT, Inc. and by and between Lumei Optoelectronics Corp., AXT, Inc., Lyte Optronics,
 Inc., Beijing Tongmei Xtal Technology and Xiamen Advanced Semiconductor Co., Ltd.10.17(8)

Offer letter to Mr. Philip C.S. Yin.*10.18(9)

Offer letter to Mr. Minsheng Lin.*10.19(10)

Employment agreement between the Company and Mr. Wilson W. Cheung.*10.20(11)

Agreement respecting severance payment between the Company and Dr. Morris S. Young.*10.21(12)

Employment agreement between the Company and Mr. Davis Zhang.*10.27(13)

Purchase and Sale Agreement by and between Car West Auto Body, Inc., a California corporation and AXT, Inc. dated February 19, 2008.10.28(14)

Lease agreement dated July 2, 2008 between AXT, Inc. and T. Drive Partners, L.P., a California partnership10.29(15)

6-inch Supply Agreement dated December 31, 2008 between AXT, Inc. and IQE plc.**10.30(15)

4-inch Supply Agreement dated December 31, 2008 between AXT, Inc. and IQE plc.**10.31

2007 Equity Incentive Plan (amended December 8, 2008).10.32

2009 Executive Bonus Plan.*21.1(16)

List of Subsidiaries.23.1

Consent of Independent Registered Public Accounting Firm, Burr, Pilger & Mayer LLP.24.1

Power of Attorney (see signature page).31.1

Certification by principal executive officer and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


---



Exhibit
Number

Description32.1

Certification by principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


---

---