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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

|           |  |                                                                                            
|---------- |  | -------------------------------------------------------------------------------------------
|(Mark one) |  |                                                                                            
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934     
|           |  | For the fiscal year ended December 31,
	2001                                               
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
	OR 15(d)
	 OF THE SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
	from            to                                              

Commission file Number: 0-24085

AXT, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                    |  |                                                
|----------------------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware(State or other jurisdiction of
	incorporation or organization)             |  | 94-3031310(I.R.S. Employer
	Identification No.)
|                                                                                   
|4281 Technology Drive, Fremont, California(Address of principal executive
	offices) |  | 94538(Zip Code)                                

Registrants telephone number, including
area code: (510) 683-5900

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

Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $.001 par
value

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.     Yes
þ          No
o

Indicate by checkmark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K 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.     þ

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 December 31, 2001 as reported
on the Nasdaq National Market, was approximately $272,076,813.
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 January 31, 2002, 22,386,622 shares,
$.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 2002 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.



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TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                             
|              | Item 2. Properties                                                                           
|              | Item 3. Legal Proceedings                                                                    
|              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II      
|              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|              | Item 6. Selected Consolidated Financial Data                                                 
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7A.Qualitative and Quantitative Disclosures About Market Risk                           
|              | Item 8. Consolidated Financial Statements and Supplementary Data                             
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant.                                 
|              | Item 11. Executive Compensation.                                                             
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management.                     
|              | Item 13. Certain Relationships and Related Transactions                                      
|PART IV      
|              | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|EXHIBIT 10.13



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PART I

This report includes forward-looking
statements that reflect our current views with respect to future
events and our potential financial performance. These
forward-looking statements are subject to certain risks and
uncertainties, including those discussed in
Business, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
and elsewhere in this report, that could cause actual results to
differ materially from historical results or those anticipated.
In this report, the words anticipates,
believes, expects, intends,
future and similar expressions identify
forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak
only as of the date of this report.




Item 1.     Business

Overview

We design, develop, manufacture and distribute
high-performance compound semiconductor substrates, as well as
opto-electronic semiconductor devices, such as high-brightness
light emitting diodes, or HBLEDs, and laser diodes including
vertical cavity surface emitting lasers, or VCSELs, and
edge-emitting laser diodes. Our substrate products are used
primarily in fiber optic communications, wireless communications
and lighting display applications. We believe our proprietary
vertical gradient freeze, or VGF, technique for manufacturing
compound semiconductor substrates provides significant benefits
over traditional methods and has enabled us to become a leading
manufacturer of compound semiconductor substrates. We pioneered
the commercial use of VGF technology to manufacture gallium
arsenide, or GaAs, substrates and have used VGF technology to
manufacture substrates from other materials, such as indium
phosphide, or InP, and germanium, or Ge. Customers for our
substrates include Alpha Industries, Agilent Technologies,
EMCORE, Nortel Networks, RF Micro Devices, SDL and Sumitomo
Chemical. Our acquisition of Lyte Optronics provided us with
expertise in epitaxial processes for manufacturing
opto-electronic semiconductor devices. We have used these
capabilities to make blue, green and cyan HBLEDs and laser
diodes. Our opto-electronic semiconductor devices are used in a
wide range of applications, such as solid-state lighting and
fiber optic communications. We have recently undertaken an
initiative to reduce the cost of our substrate manufacturing
operations by moving much of our manufacturing operations to
China and by investing in sources of low cost raw materials. We
are also expanding our HBLED manufacturing capacity in response
to an increase in customer demand.

We were incorporated in California in December
1986 and reincorporated in Delaware in May 1988. We changed our
name from American Xtal technology, Inc. to AXT, Inc. in July
2000. Our principal offices are located at 4281 Technology
Drive, Fremont, California 94538, and our telephone number at
this address is (510) 683-5900. Our web site is
www.axt.com; however, the information on our web site does not
constitute a part of this annual report on Form 10-K and is
not incorporated herein.

Industry Background

Historically, most semiconductor devices were
created on a single crystal base material, or substrate, of
silicon. Today, however, a growing number of electronic and
opto-electronic devices are being developed with requirements
that exceed the capabilities of silicon. Many of these devices
address the continually increasing demand to send, receive and
display information on high-speed wireless and wireline
networks. This demand has created a growing need for
power-efficient high-performance systems that can operate at
high frequencies and can be produced cost-effectively in high
volumes. These systems enable the growth and development of a
wide range of end-user applications. For example, Dataquest,
Inc., expects worldwide cellular/PCS handset production to grow
from 347 million units in 2001 to approximately
681 million units by 2005.

Other examples of applications for these systems
include:



| |   |                                                                 
| | - | ----------------------------------------------------------------
| |  | fiber optic networks and optical systems within
	these networks;
|
| |  | new voice and high-speed wireless data systems;                 
|
| |  | infrared emitters and optical detectors in
	computer systems;   

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| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | solid-state lighting, including exterior and
	interior automobile lighting; and
|
| |  | satellite communications systems.                                              

As a result of the limitations of silicon-based
technologies, semiconductor device manufacturers are
increasingly using compound semiconductor substrates to improve
the performance of semiconductor devices and to enable these new
applications. This shift is occurring even though these compound
semiconductor substrates are more expensive. Compound
semiconductor substrates are composed of multiple elements that
include a metal, such as gallium, aluminum or indium, and a
non-metal, such as arsenic, phosphorus or nitrogen. The
resulting compounds include gallium arsenide, indium phosphide
and gallium nitride. Advantages of devices manufactured on
compound substrates over devices manufactured using silicon
substrates include:



| |   |                                                                          
| | - | -------------------------------------------------------------------------
| |  | operation at higher speeds;                                              
|
| |  | lower power consumption;                                                 
|
| |  | less noise and distortion; and                                           
|
| |  | opto-electronic properties that enable devices to
	emit and detect light.

A key step in producing a compound semiconductor
substrate is to grow a crystal of the materials. Historically,
two processes have been used to grow crystals: the Liquid
Encapsulated Czochralski, or LEC, technique and the
Horizontal-Bridgeman, or HB, technique. We believe two trends
are reducing the appeal of these techniques: more semiconductor
devices are being formed using an epitaxial process and
semiconductor device manufacturers are switching their
production lines to six-inch diameter substrates. The LEC and HB
techniques each have difficulties producing six-inch, high
quality, low-cost compound semiconductor substrates for
epitaxial processing. We introduced our VGF technique in 1986 to
respond to the limitations inherent in the LEC and HB techniques.

Compound semiconductor substrates enable the
development of a wide range of electronic products including
power amplifiers and radio frequency integrated circuits used in
wireless handsets. Compound substrates can also be used to
create opto-electronic products including HBLEDs and VCSELs used
in solid-state lighting and fiber optic communications.

HBLEDs are solid-state compound semiconductor
devices that emit light. The global demand for HBLEDs is
experiencing rapid growth because HBLEDs have a long useful
life, consume approximately 10% of the power consumed by
incandescent or halogen lighting and improve display visibility.
Applications where HBLEDs are increasingly used include wireless
handset displays, automotive displays, full color video
displays, traffic lights and various consumer applications.
According to Strategies Unlimited, an independent industry
analyst, the market for HBLEDs is expected to grow from
$1.2 billion in 2001 to approximately $3.0 billion by
2006.

VCSELs are semiconductor lasers that emit light
in a cylindrical beam and offer significant advantages over
traditional laser diodes, including greater control over beam
size and wavelength, reduced manufacturing complexity and
packaging costs, lower power consumption and higher frequency
performance. Electronics and computing systems manufacturers are
using VCSELs in a broad range of end-market applications,
including fiber optic switching and routing, such as Gigabit
Ethernet for communications networks and Fibre Channel for
storage area networks. According to ElectroniCast, an
independent industry analyst, the market for VCSELs is expected
to grow from 5.0 million units in 2000 to approximately
50.0 million units, with a value of $4.9 billion, in
2005.

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The AXT Advantage

We are a leading developer and supplier of
high-performance compound semiconductor substrates and
opto-electronic semiconductor devices, including HBLEDs and
VCSELs. There are four key causes of our success:

Our VGF technology is a competitive advantage
for our substrate business.We
pioneered the commercial use of VGF technology to manufacture
GaAs substrates and we believe that through the use of VGF we
have become the leading worldwide supplier of GaAs substrates.
Our VGF process produces substrates with high mechanical
strength and physical and chemical uniformity, as well as a low
defect rate. The following changes in our customers
technologies are increasing demand for substrates with these
features:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Greater use of epitaxy rather than ion
	implantation.Many of the newest
	generation of high-performance semiconductor devices for fiber
	optic and wireless communications applications, including
	heterojunction bipolar transistors, or HBTs, and pseudomorphic
	high electron mobility transistors, or PHEMTs, are popular
	because they offer lower power consumption and better device
	linearity than their predecessors. These devices are created
	using epitaxial processed substrates. Our VGF substrates are
	more suitable for these applications than are our
	competitors products manufactured using LEC and HB
	technologies.
|
| |  | Switch to six-inch diameter wafers.Many of our semiconductor device
	manufacturing customers are switching their GaAs production
	lines to six-inch diameter substrates in order to reduce unit
	costs and increase capacity. Our VGF technique is better suited
	to developing six-inch substrates than are competing methods.                                                                                                                                                                                                                                                                                                                
|
| |  | Introduction of InP substrates.Even GaAs cannot meet the requirements
	for increasing system performance and network bandwidth of some
	applications, including SONET OC-768 applications that will
	operate at speeds up to 40 gigabits per second.
	Manufacturers of these devices are turning to Indium Phosphide
	(InP) substrates that can support these features. We have
	successfully used our VGF technique to develop InP and we were
	among the first to offer four-inch diameter InP substrates.                                                                                                                                   

In addition, VGF technology gives us further
benefits.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Customer technology independence.Our semiconductor device manufacturing
	customers often compete among themselves. For example, several
	of our customers compete for technological leadership in the
	wireless handset market. These customers or end-users all
	require devices made on GaAs substrates. We are, therefore,
	largely immune from the effects of such competition and benefit
	from an overall need for faster, more power efficient electronic
	and opto-electronic devices.                                                                                      
|
| |  | Faster and less expensive capacity expansion.We build our own crystal growing
	equipment rather than ordering it from third-party vendors. This
	capability, coupled with the fact that our equipment is less
	expensive and simpler to manufacture than LEC equipment, enables
	us to increase our capacity faster and at lower cost than our
	competitors. This ability is particularly beneficial in periods
	of rapid growth for six-inch GaAs and all InP substrates.
	Retaining the equipment manufacturing process within AXT also
	helps protect our proprietary technology.

Some customers specify VGF substrates.Our wafers are qualified with most of
the key suppliers of GaAs and InP semiconductor devices. The
qualification process, which is lengthy and must be repeated for
each customer, can be a barrier to entry for a new material or
supplier. Furthermore, certain of our customers now specify that
they will only accept VGF-grown substrates for their
manufacturing processes. As the businesses of these customers
grow, we are well positioned to grow with them as a key supplier.

Our low-cost manufacturing is an advantage.We use our technology and economics of
scale to be a low-cost manufacturer. Our current effort to move
much of our substrate manufacturing operations to China and our
investment in sources of raw materials provides us with a
combination of lower costs for facilities, labor and materials
than we encounter in the United States.

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We entered the opto-electronic semiconductor
device market quickly through our acquisition of Lyte Optronics.Our acquisition of Lyte Optronics
provided us with expertise in epitaxial processes for
manufacturing high-volumes of opto-electronic semiconductor
devices. High-quality epitaxy is a key requirement for most of
todays advanced opto-electronic semiconductor devices,
such as HBLEDs and VCSELs. Since acquiring Lyte Optronics, we
have developed opto-electronic products that are among the more
difficult to create using epitaxy, including blue and green
HBLEDs and VCSELs. We have filed five patent applications for
our approach to fabricating HBLEDs. We believe that we can be an
important additional domestic source of these devices.

The AXT Strategy

Our goals are to strengthen our position as the
leading developer and supplier of high-performance compound
semiconductor substrates and to develop a leading position in
the market for opto-electronic semiconductor devices. Key
elements of our strategy include:

Decreasing our substrate manufacturing cost
structure.We are moving much of our
substrate manufacturing operations to China and investing in
sources of key raw material supplies in order to lower unit
production costs.

Strengthen our leadership position in the InP
market.We believe that there will be
growth in demand for the next generation of high-speed fiber
optic devices, such as devices used in SONET OC-768
applications. These products are manufactured on InP substrates
and we are positioning ourselves to be the leading supplier of
InP substrates. Our sales of InP substrates during the year
ended December 31, 2001 grew 102.0% compared to our sales
of InP substrates during 2000.

Advance VGF technology leadership.We believe that our ability to produce
high-quality substrates using VGF technology continues to
provide us with a competitive advantage in the compound
semiconductor substrate markets. We intend to continue our
investment in research and development in order to expand our
leadership position in the commercial use of VGF technology. For
example, we intend to leverage our existing knowledge in growing
six-inch GaAs substrates to grow longer crystals, which will
further reduce our costs. We are also launching an effort to
develop six-inch diameter InP substrates in response to customer
requests.

Enhance our opto-electronic semiconductor
devices.We intend to further
penetrate the HBLED market through continued investment in
research and development and expansion of production capacity.
We expanded our manufacturing capacity by adding metal-organic
chemical vapor deposition, or MOCVD, reactors and are modifying
our epitaxial process to improve device performance and yield.
We have invested in the research and infrastructure required to
grow our own sapphire substrates, which are used in producing
blue, green and cyan LEDs.

Leverage existing customer relationships.We currently sell our GaAs substrates
to more than 400 customers and believe that we are a
qualified provider to most of the significant users worldwide of
GaAs substrates. We intend to capitalize on our relationships
with our customers in order to both expand sales of GaAs
substrates and sell other compound substrates, such as InP. We
also intend to establish alliances and joint development
arrangements with customers in emerging high growth markets to
develop new products, increase manufacturing efficiencies and
more effectively serve our customers needs.

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Technology

Our core technologies include our proprietary VGF
technique used to produce high quality crystals that are
processed into compound substrates, and our epitaxy technologies
that enable us to manufacture blue, green and cyan HBLEDs,
VCSELs and edge-emitting laser diodes.

(SCHEMATIC DIAGRAM)

Our VGF technique is designed to control the
crystal-growth process with minimal temperature variation and is
the 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, thereby reducing the
turbulence at the interface of the melt and the solid crystal,
compared with the LEC technique in which the melt and crystal
are inverted. The temperature gradient between the melt and the
crystal in the VGF technique is significantly lower than in
traditional techniques. 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. 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.

Our VGF technique offers several benefits when
compared to traditional crystal growing technologies. The Liquid
Encapsulated Czochralski, or LEC, technique is the traditional
method for producing semi-insulating GaAs substrates for
electronic applications. During the LEC process, the crystal is
grown by dipping a seed crystal through molten boric oxide into
a melt and slowly pulling the seed up into the cool zone above
the boric oxide where the crystal hardens. Unlike the VGF
technique, the LEC technique is designed so that the hotter GaAs
melt is located beneath the cooler crystal, resulting in greater
turbulence in the melt, and at a temperature gradient that is
significantly higher than the VGF technique. The turbulence and
high temperature 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.
As an open process, the LEC technique also results in greater
propensity for contamination and difficulty controlling the
ratio of gallium to arsenic. It requires large, complex
electro-mechanical systems that are expensive and require highly
skilled personnel to operate.

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Our VGF technique also offers advantages over the
Horizontal-Bridgeman, or HB, technique, for producing
semi-conducting GaAs substrates for opto-electronic
applications. The HB technique holds the GaAs melt in a
semi-cylindrical container, causing crystals grown using the HB
method to have a semi-circular, or D-shaped, cross-section.
Accordingly, more crystal material is discarded when the
D-shaped substrate is subsequently trimmed to a round shape. In
addition, crystals grown using the HB technique have a higher
defect density than VGF-grown crystals. The HB technique cannot
be used cost-effectively to produce substrates greater than
three inches in diameter. 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.

The following table provides a comparison of
these three techniques:

|                                    |  |     |                 |    |  |     |                 |  |  |  |                | 
|----------------------------------- |  | --- | --------------- | -- |  | --- | --------------- |  |  |  | -------------- | 
|                                    |  | VGF |                 | HB |  | LEC
|                                    |  |     |                 |    |  |    
|Substrate applications              |  |     | Electronic and  |    |  |     | Opto-electronic |  |  |  | Electronic     | 
|                                    |  |     | opto-electronic |    |  |     |                 |  |  |  |                | 
|Largest wafer size available        |  |     | 6              |    |  |     | 3              |  |  |  | 6             | 
|Stress/defect levels                |  |     | Very Low        |    |  |     | Low             |  |  |  | High           | 
|Crystal purity                      |  |     | Good            |    |  |     | Poor            |  |  |  | Good           | 
|Applicability to multiple materials |  |     | GaAs, InP, Ge   |    |  |     | GaAs            |  |  |  | GaAs, InP, GaP | 
|Equipment and labor cost            |  |     | Very Low        |    |  |     | Low             |  |  |  | High           | 
|Amount of waste material            |  |     | Very Low        |    |  |     | High            |  |  |  | Low            | 
|Equipment flexibility               |  |     | Versatile       |    |  |     | Limited         |  |  |  | Limited        | 
|Equipment downtime                  |  |     | Minimal         |    |  |     | Moderate        |  |  |  | High           | 
|Number of competitors               |  |     | Several         |    |  |     | Many            |  |  |  | Many           | 

VCSEL devices include single lasers as well as
one- and two-dimensional arrays of lasers. Array products are
more highly valued than single lasers because they provide
greater bandwidth, but are harder to form because they require
epitaxial structures that possess very high uniformity in
chemical composition and low variation in thickness. These
features are hard to achieve because the epitaxial process used
to make a VCSEL device places approximately 200 layers of
epitaxial structure on a substrate, as compared to the less than
10 layers of material deposited on a substrate to make an
HBLED. Our epitaxial process, which includes proprietary in situ
monitoring techniques, allows us to manufacture highly reliable
VCSEL wafers that demonstrate comparatively low threshold
currents and high output power and are sufficiently uniform to
produce one- and two-dimensional VCSEL devices. We employ both
ion implantation and oxidation processes to produce VCSEL
devices from our wafers.

We create our opto-electronic semiconductor
devices using MOCVD, which is an epitaxial technique to
synthesize compound semiconductor thin films onto substrates.
MOCVD reactors are available from multiple sources and wafers
fabricated using MOCVD generally possess a better combination of
uniformity and optical and electronic properties and are easier
to produce cost-effectively in high volumes than wafers
manufactured by other methods, such as molecular beam epitaxy,
vapor phase epitaxy or liquid phase epitaxy. As a result, MOCVD
reactors have become the choice of the opto-electronic industry
for fabricating devices such as LEDs, VCSELs and laser diodes.
We modify our MOCVD reactors to improve their performance and
use a proprietary growth recipe that controls temperature,
material impurity, defect density, material thickness and layer
composition while allowing for multiple wafer batch replication.

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Products

We design, develop, manufacture and distribute
high-performance semiconductor substrates, as well as
opto-electronic devices, such as HBLEDs, VCSELs and laser
diodes. The table below sets forth our products and selected
applications:

|                 |                             |                                                                                                                        |                                                                                                                                                                                                        |                                                                 |                                       
|---------------- | --------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------- | --------------------------------------
|Product          |                             |                                                                                                                        |                                                                                                                                                                                                        |                                                                
|                 |                             |                                                                                                                        |                                                                                                                                                                                                        |                                                                
|                 |                             |                                                                                                                       
|                 |                             | Applications                                                                                                          
|                 |                             |                                                                                                                       
|SubstratesGaAs   |                             | Electronic Cellular phones
	 Direct broadcast television
	 High-performance transistors
	 Satellite communications |                                                                                                                                                                                                        | Opto-electronic LEDs
	 Lasers
	 Optical couplers
	 Displays
|                 | InP                         |                                                                                                                        |  Fiber optic communications
	 Satellite communications
	 High-performance transistors
	 Automotive collision avoidance radars                                                                      |                                                                 |  Fiber optic communications
	 Lasers
|                 | Ge                          |                                                                                                                        |  Satellite solar cells                                                                                                                                                                                |                                                                 |                                       
|Opto-electronics |                             |                                                                                                                        |                                                                                                                                                                                                        |                                                                
|                 | Blue, green and cyan HBLEDs |                                                                                                                        |  Full color displays
	 Lighting for the interior and exterior of
	automobiles
	 Traffic signals
	 Back lighting for cellular phones and instrument
	panels
	 White light for general illumination
|                 | VCSELs                      |                                                                                                                        |  Fiber optic and wireless
	communications                                                                                                                                                            
|                 | Laser Diodes                |                                                                                                                        |  Fiber optic and wireless
	communications                                                                                                                                                            

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
four-inch diameters. We developed and intend to initiate
production of sapphire substrates.

Opto-electronics.We
sell blue, green and cyan HBLED products in wafer and chip form.
We began selling blue HBLED products in the first quarter of
2000 and in 2001 began shipping green and cyan HBLEDs. We
introduced our first VSCEL product in August 2000.

Customers

We sell our compound semiconductor substrates
worldwide to leading semiconductor device manufacturers. Our
substrate customers include:

|                                                                                                        |  |                                                                                                    |  |                                                                                                    
|------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------
|Agilent Technologies
	Alpha Industries
	Alpha Photonics
	EMCORE
	Epistar
	Eptaxial Products
	Epitronics |  | Kopin
	Motorola
	Nortel Networks
	Osram
	Picogiga
	Precision Opto Wafer
	Quantum Epitaxial Designs |  | RF Micro Devices
	SDL
	Spectrolab
	Sumitomo Chemical
	TRW Space & Defense
	Visual Photonics Epitaxy

We sell our HBLED products primarily to customers
that incorporate them into lighting products. Our HBLED
customers include Agilent, Harvatek, Liteon, Kindwin, and King
Brite.

Historically, we have sold a significant portion
of our products in any particular period to a limited number of
customers. Our five largest customers accounted for 28.3% of our
total revenue from continuing operations in 2001, 26.1% in 2000
and 24.8% in 1999. No customer accounted for more than 10% of
our total revenue in 2001, 2000 or 1999. We expect that sales to
certain customers will continue to comprise a significant
portion of our net sales in the future.

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Manufacturing, Raw Materials and
Supplies

We believe that our success is partially due to
our manufacturing efficiency and high product yields and we
continually emphasize quality and process control throughout our
manufacturing operations. We perform our substrate manufacturing
operations at our facilities in Fremont, California and Beijing,
China. As part of our plan to reduce manufacturing costs, we are
shifting most of our processes to our facilities in China, where
costs are generally lower. We intend to transfer much of our
substrate manufacturing operations to China by the end of 2002.
We believe that our capital investment and subsequent operating
costs are lower for our manufacturing facilities in China
relative to the U.S. Many of our manufacturing operations are
fully automated and computer monitored or controlled, enhancing
reliability and yield. We use proprietary equipment in our
substrate manufacturing operations to protect our intellectual
property and control the timing and pace of capacity additions.
By assembling our own substrate manufacturing equipment, we can
quickly increase capacity without incurring delays caused by
ordering additional equipment or converting older equipment to
new technologies. Our epitaxial wafer production is located in
El Monte, California. All of our manufacturing facilities are
ISO 9001 or 9002 certified.

Although we purchase supply parts, components and
raw materials from several 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. 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.
Accordingly, to help ensure continued supply of materials, we
have formed strategic alliances with suppliers of key raw
materials required to manufacture our products. We believe that
these alliances will be advantageous in procuring materials to
support our growth.

We use MOCVD equipment to manufacture our
opto-electronic devices. We installed several new MOCVD reactors
during the past twelve months and may add additional capacity as
demand warrants. The substrate materials and raw wafers used in
our visible emitter products are purchased from our substrate
division and other sources.

Sales and Marketing

Each of our divisions is responsible for its own
sales and marketing activities, and each maintains its own sales
and marketing personnel. In addition, each of our divisions
advertises in trade publications, distributes promotional
materials, publishes technical articles, conducts marketing
programs and participates in industry trade shows and
conferences in order to raise market awareness of our products.

Substrates.We sell
our substrate products through our direct sales force in the
U.S. and Japan and through independent sales representatives in
France, Japan, South Korea, Taiwan and the United Kingdom. Our
direct sales force consists of sales engineers who are
knowledgeable in the manufacture and use of compound and
single-element substrates. Our sales 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 exact specifications. We believe that
maintaining a close relationship with customers and providing
them with ongoing technical support improves customer
satisfaction and will provide us with a competitive advantage in
selling other substrates to our customers. The substrate
division launched a program in late 2000 with selected customers
in which we guaranteed that certain volumes of six-inch GaAs and
other substrates will be delivered on specific dates and the
customer made a prepayment for part of the value of its order.
Several major customers participate in this program which we
expect will conclude during 2002.

Opto-electronics.We
sell our HBLED products through our direct sales force in the
U.S. and Taiwan and through independent sales representatives to
lamp package manufacturers in Asia. We intend to expand sales of
these products in the U.S. and Europe primarily using our direct
sales force. We sell our VCSEL and edge emitting laser diodes
through our direct sales force and through independent sales
representatives.

8



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##### Table of Contents



International Sales.International sales are an important
part of our business. In the year ended December 31, 2001,
sales to customers outside of the United States accounted for
50.4% of our revenue, as compared to 48.2% in 2000 and 51.6% in
1999. The primary markets for sales of our products outside of
the United States include countries in Asia and Western Europe.
Our ability to sustain and increase our international sales
involves significant risks, including volatile political, social
and economic instabilities abroad, possible fluctuations in
currency exchange rates, and changes in tariffs, import
restrictions or other trade barriers.

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 highly skilled
scientists, engineers and technicians to meet our research and
development objectives. As a result of our ongoing research and
development activities, we believe that we offer superior
quality products. For example, some customers now qualify
substrates manufactured using our VGF technique as the only
acceptable material in their design specifications.

Our current substrate research and development
activities focus on continued development and enhancement of
six-inch GaAs crystals, including improved yield, greater
substrate strength and increased crystal length. We continue to
develop other compound substrates, such as InP and a low boron
version of our standard GaAs substrates and are initiating
research into development of six-inch InP products. We developed
and intend to initiate production of sapphire substrates.

We are focusing on all three major stages of
HBLED development: epitaxy, wafer fabrication and die
fabrication. Our goal is to improve brightness and yield, create
specific colors and enhance uniformity of product, both within
and across production runs. Specific colors are created by
controlling the indium content of the epitaxial layers, which we
achieve, in part, from modifications that we make to our MOCVD
reactors. The wafer and die fabrication experience we gained in
our Lyte Optronics laser diode operation has helped us develop
similar techniques for HBLEDs.

We began research in 1999 to develop VCSEL
devices with uniform epitaxy structures on three-inch wafers and
announced VCSEL wafer products in August 2000. We continue to
improve their performance characteristics and developed
one-dimensional VCSEL arrays. We also developed edge-emitting
laser diodes with emission wavelengths of 980nm,
1.3 microns and 1.5 microns.

We historically funded a significant portion of
our research and development efforts through contracts with the
U.S. government and customer funded research projects,
although we do not have any projects underway currently. Under
our contracts, we retain rights to the VGF and wafer fabrication
technology that we have developed. The U.S. government
retains the rights to utilize the technologies we develop for
government purposes only. In 1999 these contracts amounted to
$1.6 million. Currently, our research and development is
internally funded.

Research and development expenses were
$8.2 million in 2001, as compared to $8.8 million in
2000 and $2.6 million in 1999.

9



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Competition

The semiconductor 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 existing markets for compound
semiconductor substrates primarily as a result of our expertise
in VGF technology. However, we believe we face actual and
potential competition from a number of established domestic and
international companies.

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



| |   |                                               
| | - | ----------------------------------------------
| |  | quality;                                      
|
| |  | price;                                        
|
| |  | performance;                                  
|
| |  | meeting customer specifications;              
|
| |  | customer support and satisfaction; and        
|
| |  | customer investment in competing technologies.

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



| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | the timing and success of the development and
	introduction of new products by us and our competitors;     
|
| |  | the availability of adequate sources of raw
	materials; and                                                
|
| |  | protection of our products by effective use of
	intellectual property laws and general economic conditions.

Our primary competition in the market for
compound semiconductor substrates includes Freiberger, Hitachi
Cable, Japan Energy and Sumitomo Electric. In addition, we also
face competition from compound semiconductor device
manufacturers that produce substrates for their own internal
use, and from companies such as IBM and Motorola that are
actively developing alternative compound semiconductor materials.

Our primary competition in the market for HBLED
products include Cree, LumiLED, Nichia Chemicals, Toyoda Gosei
and United Epitaxy. In general, HBLED manufacturers in Taiwan
and China have a competitive pricing advantage due to low
overhead and small research and development investments. Cree,
Nichia Chemicals, Sony and Toyoda Gosei have significant patent
portfolios that other competitors, including us, must either
design around or license.

We primarily compete with EMCORE, Honeywell,
Trulight, Picolight, Zarlink, Infineon, Cielo and E2O in the
market for VCSEL devices and with Mitsubishi for edge-emitting
laser diodes.

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, copyrights, 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
U.S. patents and have two patent applications pending,
which relate to our VGF products and processes. We have
five U.S. patent applications pending which relate to our
HBLED or laser diode technology, and have patent applications
pending in Europe, Canada, China, Japan and Korea which are
based on one of our U.S. patents that relates to our VGF
processes. We have no issued foreign patents.

10



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Environmental Regulations

We are subject to federal, state and local
environmental laws and regulations. These laws, rules and
regulations govern the use, storage, discharge and disposal of
hazardous chemicals during manufacturing, research and
development and sales demonstrations. If we fail to comply with
applicable regulations, we could be subject to substantial
liability for clean-up efforts, personal injury and fines or
suspension or cessation of our operations. We cooperated with
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. In May 2000,
Cal-OSHA levied a fine against us in the amount of $313,655 for
alleged health and safety violations. In March 2001, we settled
this claim in the amount of $200,415, and have put in place
engineering, administrative and personnel protective equipment
programs to address these issues. On May 1, 2001, the Santa
Clara Center for Occupational Safety and Health filed a
complaint for injunctive relief and civil penalties against us
alleging violations of California Business Professions
Code 17200 et seq., and Health and Safety Code
section 25249 et seq. as a result of our use of
arsenic and inorganic arsenic compounds in our workplace. See
Legal Proceedings below.

Employees

As of December 31, 2001, we had
1,308 full-time employees, of whom 1,107 were principally
engaged in manufacturing, 161 in sales and administration
and 40 in research and development. Of these employees,
641 are located in the U.S., 666 in China and
1 in Japan. As a result of shifting more of our substrate
manufacturing to China, we have implemented headcount reductions
in our Fremont, California facilities. Our success is in part
dependent on our ability to attract and retain highly skilled
workers. Our employees are not represented by a union and we
have never experienced a work stoppage. Although moral has been
affected by our workforce reductions, we consider our relations
with our employees to be good.




Item 2.     Properties

Our principal properties as of March 15,
2002 are as follows:

|                  |  |        |        |               |  |           |                               |  |  |  |                                    | 
|----------------- |  | ------ | ------ | ------------- |  | --------- | ----------------------------- |  |  |  | ---------------------------------- | 
|                  |  | Square |        |               |  |          
|Location          |  | Feet   |        | Principal Use |  | Ownership
|                  |  |        |        |               |  |          
|Fremont, CA       |  |        | 58,000 |               |  |           | Production and Administration |  |  |  | Owned                              | 
|Fremont, CA       |  |        | 80,000 |               |  |           | Production                    |  |  |  | Owned                              | 
|Fremont, CA       |  |        | 20,292 |               |  |           | Administration                |  |  |  | Operating lease, expires May 2005  | 
|Fremont, CA       |  |        | 9,280  |               |  |           | Warehouse                     |  |  |  | Operating lease, expires June 2005 | 
|Fremont, CA       |  |        | 24,100 |               |  |           | Warehouse                     |  |  |  | Operating lease, expires July 2006 | 
|Monterey Park, CA |  |        | 22,000 |               |  |           | Production and Administration |  |  |  | Owned                              | 
|Torrance, CA      |  |        | 6,674  |               |  |           | Administration                |  |  |  | Operating lease, expires May 2003  | 
|Torrance, CA      |  |        | 15,027 |               |  |           | Production                    |  |  |  | Operating lease, expires May 2003  | 
|El Monte, CA      |  |        | 26,652 |               |  |           | Production                    |  |  |  | Owned                              | 
|El Monte, CA      |  |        | 6,281  |               |  |           | Production                    |  |  |  | Operating lease, expires Dec. 2006 | 
|Beijing, China    |  |        | 31,000 |               |  |           | Production and Administration |  |  |  | Owned                              | 
|Beijing, China    |  |        | 31,000 |               |  |           | Production                    |  |  |  | Owned                              | 
|Beijing, China    |  |        | 32,000 |               |  |           | Production                    |  |  |  | Owned                              | 
|Beijing, China    |  |        | 16,000 |               |  |           | Housing                       |  |  |  | Owned                              | 
|Xiamen, China     |  |        | 14,000 |               |  |           | Production                    |  |  |  | Operating lease, expires Dec. 2002 | 

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.

11



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##### Table of Contents






Item 3.     Legal
Proceedings

On May 1, 2001, the Santa Clara Center for
Occupational Safety and Health filed a complaint for injunctive
relief and civil penalties against us in the Superior Court of
California, County of Alameda, Hayward Division, Case
No. H218237-5. The Complaint alleges violations of
California Business and Professions Code section 17200
et seq., and Health and Safety Code section 25249
et seq. as a result of our use of arsenic and inorganic
arsenic compounds in our workplace. Mediation is scheduled for
June 2002. We believe that we have meritorious defenses against
the alleged claims, and intend to defend ourselves vigorously.
However, due to the nature of litigation and fact that the case
is still in its early stages, we cannot determine the possible
loss, if any, that may ultimately be incurred either in the
context of a trial or as a result of a negotiated settlement. We
may also incur substantial legal fees in this matter. However,
we do not believe that this action is likely to have a material
adverse effect on our business, financial condition, cash flows
or results of operation.

From time to time we are involved in judicial or
administrative proceedings concerning matters arising in the
ordinary course of our 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.




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

None




PART II




Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters

Our common stock has been trading publicly on the
Nasdaq National Market under the symbol AXTI since
May 20, 1998, the date we consummated our initial public
offering. The following table sets forth, for the periods
indicated, the range of quarterly high and low closing sales
prices for our common stock on the Nasdaq National Market.

|            |                                        |      |   |        |  |  |   |        | 
|----------- | -------------------------------------- | ---- | - | ------ |  |  | - | ------ | 
|            |                                        | High |   | Low   
|            |                                        |      |   |       
|Fiscal 2001 |                                        |      |   |        |  |  |   |       
|            | First Quarter ended March 31, 2001     |      | $ | 44.560 |  |  | $ | 14.500 | 
|            | Second Quarter ended June 30, 2001     |      | $ | 40.670 |  |  | $ | 13.720 | 
|            | Third Quarter ended September 30, 2001 |      | $ | 26.700 |  |  | $ | 10.200 | 
|            | Fourth Quarter ended December 31, 2001 |      | $ | 16.850 |  |  | $ | 10.300 | 
|Fiscal 2000 |                                        |      |   |        |  |  |   |       
|            | First Quarter ended March 31, 2000     |      | $ | 45.750 |  |  | $ | 14.500 | 
|            | Second Quarter ended June 30, 2000     |      | $ | 46.000 |  |  | $ | 21.250 | 
|            | Third Quarter ended September 30, 2000 |      | $ | 44.375 |  |  | $ | 31.125 | 
|            | Fourth Quarter ended December 31, 2000 |      | $ | 41.688 |  |  | $ | 24.500 | 

As of December 31, 2001, there were 93
registered 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 stockholders represented by these
registered holders.

We have never paid or declared any cash dividends
on our common stock and do not anticipate paying cash dividends
in the foreseeable future. We are restricted in our ability to
pay dividends under the terms of our credit facility with our
bank. Dividends accrue on our preferred stock at the rate of
$0.20 per annum.

12



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##### Table of Contents






Item 6.     Selected
Consolidated Financial Data

The following selected consolidated financial
data should be read in conjunction with, and are referenced to,
our consolidated financial statements and related notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations.

|                                                                            |                                                         |                                       |         |        |        |      |         |        |        |      |        |        |        |   |        |        |       |   |        |        |       | 
|--------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                                                                            |                                                         |                                      
|                                                                            |                                                         | Years Ended December 31,             
|                                                                            |                                                         |                                      
|                                                                            |                                                         | 2001                                  |         | 2000   |        | 1999 |         | 1998   |        | 1997
|                                                                            |                                                         |                                       |         |        |        |      |         |        |        |     
|                                                                            |                                                         |                                      
|                                                                            |                                                         | (In thousands, except per share data)
|Income Statement Data:                                                      |                                                         |                                       |         |        |        |      |         |        |        |      |        |        |        |   |        |        |       |   |        |       
|Revenue                                                                     |                                                         | $                                     | 119,530 |        |        | $    | 121,503 |        |        | $    | 75,372 |        |        | $ | 49,074 |        |       | $ | 25,335 |       
|Cost of revenue, including restructuring costs of
	$1,844 in 2000           |                                                         |                                       | 82,191  |        |        |      | 73,684  |        |        |      | 50,026 |        |        |   | 29,003 |        |       |   | 15,227 |       
|                                                                            |                                                         |                                       |         |        |        |      |         |        |        |      |        |        |        |   |        |        |       |   |        |       
|Gross profit                                                                |                                                         |                                       | 37,339  |        |        |      | 47,819  |        |        |      | 25,346 |        |        |   | 20,071 |        |       |   | 10,108 |       
|Operating expenses:                                                         |                                                         |                                       |         |        |        |      |         |        |        |      |        |        |        |   |        |        |       |   |        |       
|                                                                            | Selling, general, and administrative                    |                                       |         | 21,487 |        |      |         | 18,041 |        |      |        | 10,474 |        |   |        | 6,019  |       |   |        | 2,959  |      
|                                                                            | Research and development                                |                                       |         | 8,204  |        |      |         | 8,769  |        |      |        | 2,566  |        |   |        | 2,504  |       |   |        | 1,289  |      
|                                                                            | Restructuring costs                                     |                                       |         |       |        |      |         | 6,409  |        |      |        |       |        |   |        |       |       |   |        |       |      
|                                                                            | Acquisition costs                                       |                                       |         |       |        |      |         |       |        |      |        | 2,810  |        |   |        |       |       |   |        |       |      
|                                                                            |                                                         |                                       |         |        |        |      |         |        |        |      |        |        |        |   |        |        |       |   |        |       
|                                                                            |                                                         | Total operating expenses              |         |        | 29,691 |      |         |        | 33,219 |      |        |        | 15,850 |   |        |        | 8,523 |   |        |        | 4,248 | 
|                                                                            |                                                         |                                       |         |        |        |      |         |        |        |      |        |        |        |   |        |        |       |   |        |       
|Income from operations                                                      |                                                         |                                       | 7,648   |        |        |      | 14,600  |        |        |      | 9,496  |        |        |   | 11,548 |        |       |   | 5,860  |       
|Interest expense                                                            |                                                         |                                       | 2,081   |        |        |      | 3,616   |        |        |      | 2,201  |        |        |   | 875    |        |       |   | 570    |       
|Other (income) and expense                                                  |                                                         |                                       | 13,373  |        |        |      | (28,432 | )      |        |      | (1,423 | )      |        |   | (715   | )      |       |   | 34     |       
|                                                                            |                                                         |                                       |         |        |        |      |         |        |        |      |        |        |        |   |        |        |       |   |        |       
|Income (loss) from continuing operations
	before provision for income taxes |                                                         |                                       | (7,806  | )      |        |      | 39,416  |        |        |      | 8,718  |        |        |   | 11,388 |        |       |   | 5,256  |       
|Provision for income taxes                                                  |                                                         |                                       | (2,810  | )      |        |      | 14,978  |        |        |      | 4,380  |        |        |   | 4,668  |        |       |   | 1,216  |       
|                                                                            |                                                         |                                       |         |        |        |      |         |        |        |      |        |        |        |   |        |        |       |   |        |       
|Income (loss) from continuing operations                                    |                                                         |                                       | (4,996  | )      |        |      | 24,438  |        |        |      | 4,338  |        |        |   | 6,720  |        |       |   | 4,040  |       
|Discontinued operations:                                                    |                                                         |                                       |         |        |        |      |         |        |        |      |        |        |        |   |        |        |       |   |        |       
|                                                                            | Loss from discontinued operations, net of tax
	benefits |                                       |         |       |        |      |         | (1,487 | )      |      |        | (3,658 | )      |   |        | (2,436 | )     |   |        | (3,220 | )    
|                                                                            | Loss on disposal, net of tax benefits                   |                                       |         |       |        |      |         | (1,341 | )      |      |        |       |        |   |        |       |       |   |        |       |      
|Extraordinary item, net of tax benefits                                     |                                                         |                                       |        |        |        |      |        |        |        |      | (508   | )      |        |   |       |        |       |   |       |       
|                                                                            |                                                         |                                       |         |        |        |      |         |        |        |      |        |        |        |   |        |        |       |   |        |       
|Net income (loss)                                                           |                                                         | $                                     | (4,996  | )      |        | $    | 21,610  |        |        | $    | 172    |        |        | $ | 4,284  |        |       | $ | 820    |       
|                                                                            |                                                         |                                       |         |        |        |      |         |        |        |      |        |        |        |   |        |        |       |   |        |       
|Basic income (loss) per share:                                              |                                                         |                                       |         |        |        |      |         |        |        |      |        |        |        |   |        |        |       |   |        |       
|                                                                            | Income (loss) from continuing operations                |                                       | $       | (0.23  | )      |      | $       | 1.24   |        |      | $      | 0.23   |        |   | $      | 0.42   |       |   | $      | 1.09   |      
|                                                                            | Loss from discontinued operations                       |                                       |         |       |        |      |         | (0.14  | )      |      |        | (0.19  | )      |   |        | (0.15  | )     |   |        | (0.87  | )    
|                                                                            | Extraordinary item                                      |                                       |         |       |        |      |         |       |        |      |        | (0.03  | )      |   |        |       |       |   |        |       |      
|                                                                            | Net income (loss)                                       |                                       |         | (0.23  | )      |      |         | 1.10   |        |      |        | 0.01   |        |   |        | 0.27   |       |   |        | 0.22   |      
|Diluted income (loss) per share:                                            |                                                         |                                       |         |        |        |      |         |        |        |      |        |        |        |   |        |        |       |   |        |       
|                                                                            | Income (loss) from continuing operations                |                                       | $       | (0.23  | )      |      | $       | 1.16   |        |      | $      | 0.22   |        |   | $      | 0.41   |       |   | $      | 0.30   |      
|                                                                            | Loss from discontinued operations                       |                                       |         |       |        |      |         | (0.13  | )      |      |        | (0.18  | )      |   |        | (0.15  | )     |   |        | (0.24  | )    
|                                                                            | Extraordinary item                                      |                                       |         |       |        |      |         |       |        |      |        | (0.03  | )      |   |        |       |       |   |        |       |      
|                                                                            | Net income (loss)                                       |                                       |         | (0.23  | )      |      |         | 1.03   |        |      |        | 0.01   |        |   |        | 0.26   |       |   |        | 0.06   |      
|Shares used in per share calculations:                                      |                                                         |                                       |         |        |        |      |         |        |        |      |        |        |        |   |        |        |       |   |        |       
|                                                                            | Basic                                                   |                                       |         | 22,278 |        |      |         | 19,677 |        |      |        | 18,655 |        |   |        | 16,076 |       |   |        | 3,697  |      
|                                                                            | Diluted                                                 |                                       |         | 22,278 |        |      |         | 21,059 |        |      |        | 19,771 |        |   |        | 16,325 |       |   |        | 13,598 |      

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|                                                |  |                |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |        | 
|----------------------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------ | 
|                                                |  |               
|                                                |  | December 31,  
|                                                |  |               
|                                                |  | 2001           |         | 2000 |  | 1999 |         | 1998 |  | 1997
|                                                |  |                |         |      |  |      |         |      |  |     
|                                                |  |               
|                                                |  | (In thousands)
|Balance Sheet Data:                             |  |                |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |        | 
|Cash and cash equivalents                       |  | $              | 37,538  |      |  | $    | 68,585  |      |  | $    | 6,062   |  |  | $ | 16,438  |  |  | $ | 3,199  | 
|Working capital                                 |  |                | 117,196 |      |  |      | 140,387 |      |  |      | 40,462  |  |  |   | 41,644  |  |  |   | 12,612 | 
|Total assets                                    |  |                | 235,260 |      |  |      | 250,220 |      |  |      | 115,762 |  |  |   | 102,983 |  |  |   | 37,796 | 
|Long-term capital lease, net of current portion |  |                | 10,002  |      |  |      | 7,278   |      |  |      | 6,853   |  |  |   | 3,854   |  |  |   |       | 
|Long-term debt, net of current portion          |  |                | 14,342  |      |  |      | 15,123  |      |  |      | 15,254  |  |  |   | 18,416  |  |  |   | 7,728  | 
|Stockholders equity                            |  |                | 186,322 |      |  |      | 185,347 |      |  |      | 62,459  |  |  |   | 61,164  |  |  |   | 17,387 | 

Income statement data from our substrate division
and discontinued consumer products division is included in all
periods presented. Income statement data from our
opto-electronics division is included from the time of the
acquisition of Alpha Photonics by Lyte Optronics on
September 29, 1998. All periods have been restated to
reflect the accounting for discontinued operations. As a result,
the discontinued consumer products division has been eliminated
from continuing operations in the income statements.




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

The following discussion and analysis of our
financial condition and results of operations should be read in
conjunction with Selected Consolidated Financial
Data and our consolidated financial statements and related
notes included elsewhere in this Form 10-K. In addition to
historical information, the discussion in this Form 10-K
contains forward-looking statements that involve risks and
uncertainties that could cause our actual results to differ
materially from those projected. The statements contained in the
Report on Form 10-K that are not purely historical are
forward looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of
the Exchange Act, including, without limitation, statements
regarding our expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in
this Report on Form 10-K are based on information available
to us on the date hereof, and we assume no obligation to update
any such forward-looking statements. These statements involve
known and unknown risks, uncertainties and other factors, which
may cause our actual results to differ materially from those
implied by the forward-looking statements. In some cases, you
can identify forward-looking statements by terminology such as
may, will, should,
expects, plans, anticipates,
believes, estimates,
predicts, potential, or
continue or the negative of these terms or other
comparable terminology. Factors that might cause or contribute
to such differences include, but are not limited to, those set
forth under Risk Factors and elsewhere in this
Form 10-K.

Overview

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

Our total revenue from continuing operations was
$119.5 million for 2001, $121.5 million for 2000 and
$75.4 million for 1999. In 2001 we incurred a loss from
continuing operations of $5.0 million compared to income of
$24.4 million for 2000 and income of $4.3 million for
1999.

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Several non-recurring events occurred that had a
substantial impact on our performance and financial results for
the quarters and years-ended December 31, 2001 and 2000. In
2001, we realized a net $15.6 million non-cash loss as a
result of writing down our investment in Finisar Corporation
common stock. This loss is included in other expense. In 2000,
we realized a $27.3 million non-cash gain as a result of
acquiring Finisar Corporation common stock in connection with
Finisar Corporations acquisition of Demeter Technologies,
a company in which we held warrants to purchase preferred stock.
This gain is included in other income. On December 14,
2000, the Board of Directors approved our plan to discontinue
our unprofitable consumer products division. As a result of
discontinuing the consumer products division, we incurred a
pre-tax loss on disposal of $2.2 million. The results of
operations of the consumer products division have been
segregated from continuing operations and are reported
separately as discontinued operations in the income statements.
In 2000 we exited our unprofitable 650nm laser diode product
line at the opto-electronics division. As a result of exiting
this product line, we incurred a restructuring charge of
$8.2 million, of which $1.8 million has been
classified as cost of goods sold and $6.4 million has been
classified as operating expense.

Our business, particularly sales of our substrate
products, are dependant on the semiconductor industry, which is
highly cyclical and has historically experienced downturns both
as a result of economic changes and of overcapacity. Following a
strong period during the first half of 2001, we are now in the
midst of a significant and prolonged downturn, and, together
with other industry participants, have experienced lower
revenues, slower bookings, push outs and cancellation of orders.
We cannot predict the severity or duration of the downturn, but
it has impacted our ability to sell our products and operate
profitably. If demand for our products remains depressed for an
extended period, our business will be harmed as a result.

In the second half of 2001, we experienced a
$43.2 million, or 53.1% decrease in revenue compared to the
first half as a result of the rapid decline in the mobile and
fiber optic telecommunications markets. As such, we recorded
losses in the third and fourth quarters. In reaction to the
economic downturn, we have initiated an aggressive effort to
reduce substrate manufacturing costs. This includes moving much
of our substrate manufacturing operations to China, reducing
capacity in our Fremont, CA facility and developing and
investing in key low cost raw material sources. We expect that
the cost reduction efforts should allow us to operate profitably
again by the end of 2002 and will position us well for future
growth. During the second half of 2001, we obtained orders from
several large customers for HBLEDs at the opto-electronics
division. As a result, the division is operating at full
capacity for some critical functions. We expect to expand the
HBLED manufacturing operations in 2002 as a result of the
increased demand for these products. We expect that this product
line will also be profitable by the end of 2002.

During 2001, we raised approximately
$4.8 million from the sale of common stock through our
employee stock compensation programs. During 2000, we raised
approximately $96.0 million from the sale of common stock
in a private offering, a registered public offering and employee
stock compensation programs.

Our five largest customers accounted for 28.3% of
our total revenue from continuing operations in 2001, 26.1% in
2000 and 24.8% in 1999. No customer accounted for more than 10%
of our total revenue in 2001, 2000 or 1999.

In connection with our acquisition of Lyte
Optronics and its subsidiaries, we issued approximately
2,023,000 shares of common stock and 883,000 shares of preferred
stock, with a 5.0% annual dividend rate and $4 per share
liquidation preference over common stock, as adjusted for claims
made against shares held in escrow, in exchange for all of the
issued and outstanding shares of capital stock of Lyte
Optronics. The acquisition was accounted for as a pooling of
interests. In connection with the acquisition, we reported a
charge of $2.8 million in the second quarter of 1999 to reflect
transaction costs and other one-time charges.

Each of our divisions is responsible for its own
sales and marketing activities, and each maintains its own sales
and marketing personnel. We sell our substrate products through
our direct sales force in the U.S. and through independent sales
representatives in France, Japan, South Korea, Taiwan and the
United Kingdom. We sell our HBLED and laser diode products
through our direct sales force and through independent sales
representatives.

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Critical Accounting Policies and
Estimates

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

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

We periodically review the collectability of our
accounts receivable balances and provide an allowance for
doubtful accounts receivable based primarily upon the age of
these accounts. We provide a 100% allowance for
U.S. receivables in excess of 90 days and for foreign
receivables in excess of 120 days. At December 31,
2001 our accounts receivable balance was $15.7 million net
of an allowance for doubtful accounts of $6.7 million.

Inventories are stated at the lower of cost or
net realizable value. Cost is determined using the weighted
average cost method. Finished goods and work-in-process
inventories include material, labor and manufacturing overhead
costs. We routinely evaluate the levels of our inventory in
light of current market conditions in order to identify excess
and obsolete inventory and we provide a valuation allowance for
certain inventories based upon the age and quality of the
product. The lives of our substrate products are relatively long
and accordingly, obsolescence has historically not been a
significant factor. We also review our inventory to ensure costs
can be realized upon ultimate sale to our customers. If we
determine that the value of any items in ending inventory
exceeds the estimated sales value plus any estimated selling
costs, a reserve is established for the difference.

Our industry requires substantial investments in
property and equipment in order to meet demand and changes in
technology. In addition, we occasionally make investments in
companies, which are developing promising relevant technologies.
We review the carrying value of our long-lived assets and
investments in order to identify any impairment. Long-lived
assets are written down when the carrying value of an asset
exceeds their related undiscounted future cash flows. Key
assumptions in estimating future cash flows include estimates of
sales volumes, changes in selling prices, cost of materials,
etc. It is possible that actual results will differ from these
estimates and such differences may be material and require
future adjustments to the carrying value of our long-lived
assets. We have not recorded long-lived asset impairment charges
during 2001. We record investment impairment charges when we
believe that an investment has experienced a decline in market
value that is other than temporary. A net impairment charge of
$15.6 million to write-down our investment in Finisar
Corporation common stock is included in the income statement for
the period ended December 31, 2001.

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Results of Operations

The following table sets forth certain operating
data as a percentage of total revenues for the periods indicated.

|                                                                            |                                                         |                          |       |      |      |      |       |      |      |   |       |      |      |  
|--------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------------ | ----- | ---- | ---- | ---- | ----- | ---- | ---- | - | ----- | ---- | ---- | -
|                                                                            |                                                         |                         
|                                                                            |                                                         | Years Ended December 31,
|                                                                            |                                                         |                         
|                                                                            |                                                         | 2001                     |       | 2000 |      | 1999
|                                                                            |                                                         |                          |       |      |      |     
|Revenue                                                                     |                                                         |                          | 100.0 | %    |      |      | 100.0 | %    |      |   | 100.0 | %   
|Cost of revenue, including restructuring costs in
	2000                     |                                                         |                          | 68.8  | %    |      |      | 60.6  | %    |      |   | 66.4  | %   
|                                                                            |                                                         |                          |       |      |      |      |       |      |      |   |       |     
|Gross profit                                                                |                                                         |                          | 31.2  | %    |      |      | 39.4  | %    |      |   | 33.6  | %   
|Operating expenses:                                                         |                                                         |                          |       |      |      |      |       |      |      |   |       |     
|                                                                            | Selling, general, and administrative                    |                          |       | 18.0 | %    |      |       | 14.8 | %    |   |       | 13.9 | %   
|                                                                            | Research and development                                |                          |       | 6.9  | %    |      |       | 7.2  | %    |   |       | 3.4  | %   
|                                                                            | Restructuring costs                                     |                          |       | 0.0  | %    |      |       | 5.3  | %    |   |       | 0.0  | %   
|                                                                            | Acquisition costs                                       |                          |       | 0.0  | %    |      |       | 0.0  | %    |   |       | 3.7  | %   
|                                                                            |                                                         |                          |       |      |      |      |       |      |      |   |       |     
|                                                                            |                                                         | Total operating expenses |       |      | 24.9 | %    |       |      | 27.3 | % |       |      | 21.0 | %
|                                                                            |                                                         |                          |       |      |      |      |       |      |      |   |       |     
|Income from operations                                                      |                                                         |                          | 6.3   | %    |      |      | 12.1  | %    |      |   | 12.6  | %   
|Interest expense                                                            |                                                         |                          | 1.7   | %    |      |      | 3.0   | %    |      |   | 2.9   | %   
|Other (income) and expense                                                  |                                                         |                          | 11.2  | %    |      |      | (23.4 | )%   |      |   | (1.9  | )%  
|                                                                            |                                                         |                          |       |      |      |      |       |      |      |   |       |     
|Income (loss) from continuing operations
	before provision for income taxes |                                                         |                          | (6.6  | )%   |      |      | 32.5  | %    |      |   | 11.6  | %   
|Provision for income taxes                                                  |                                                         |                          | (2.4  | )%   |      |      | 12.3  | %    |      |   | 5.8   | %   
|                                                                            |                                                         |                          |       |      |      |      |       |      |      |   |       |     
|Income (loss) from continuing operations                                    |                                                         |                          | (4.2  | )%   |      |      | 20.2  | %    |      |   | 5.8   | %   
|Discontinued operations:                                                    |                                                         |                          |       |      |      |      |       |      |      |   |       |     
|                                                                            | Loss from discontinued operations, net of tax
	benefits |                          |       | 0.0  | %    |      |       | (1.2 | )%   |   |       | (4.9 | )%  
|                                                                            | Loss on disposal, net of tax benefits                   |                          |       | 0.0  | %    |      |       | (1.1 | )%   |   |       | 0.0  | %   
|Extraordinary item, net of tax benefits                                     |                                                         |                          | 0.0   | %    |      |      | 0.0   | %    |      |   | (0.7  | )%  
|                                                                            |                                                         |                          |       |      |      |      |       |      |      |   |       |     
|Net income (loss)                                                           |                                                         |                          | (4.2  | )%   |      |      | 17.9  | %    |      |   | 0.2   | %   
|                                                                            |                                                         |                          |       |      |      |      |       |      |      |   |       |     

Year Ended December 31, 2001 Compared to
Year Ended December 31, 2000

Revenue from continuing operations.Revenue decreased $2.0 million,
or 1.6%, to $119.5 million in 2001 compared to
$121.5 million in 2000. Revenue from our substrate
division, which represents 91.0% of total revenue for the year
ended 2001, decreased $4.6 million, or 4.0%, to
$108.8 million compared to $113.4 million in 2000.
Total GaAs substrate revenue decreased $22.6 million, or
23.1%, to $75.3 million in 2001 compared to
$97.9 million in 2000. Sales of 5 and 6
diameter GaAs substrates was unchanged at $19.8 million for
2001 and 2000. InP substrate revenue increased
$14.3 million, or 102.0%, to $28.3 million in 2001 compared
to $14.0 million in 2000. While our substrate division
experienced sequential quarter over quarter revenue growth
during the first half of 2001, substrate revenue declined
substantially in the second half due to a decline in the
wireless and fiber optic telecommunication markets. Substrate
revenue in the first half of 2001 was $76.9 million
compared to $31.9 million in the second half of 2001. While
we cannot predict the duration or severity of this downturn, we
expect substrate revenues to remain at current levels in the
near term.

Revenue from our opto-electronics division, which
represents 9.0% of total revenue for 2001, increased
$2.6 million, or 32.0%, to $10.7 million in 2001,
compared to $8.1 million in 2000. The increase was a result
of higher sales volume of HBLED products. HBLED revenue
increased $5.4 million, or 263.9%, to $7.4 million in
2001 compared to $2.0 million in 2000. VCSEL revenue
increased $816,000, or 418.5% to $1.0 million in 2001
compared to $195,000 in 2000. Laser diode sales decreased
$3.8 million, or 61.9%, to $2.4 million in 2001
compared to $6.2 million in 2000. The decrease in laser
diode sales was primarily due to the exit of our unprofitable
650 nm laser diode product line.

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International revenue increased to 50.4% of total
revenue in 2001 compared to 48.2% of total revenue in 2000. The
increase was primarily due to increased sales of HBLED products
to customers in Asia.

Gross margin.Gross
margin decreased to 31.2% of revenue in 2001 compared to 39.4%
in 2000. Gross margin at the substrate division decreased to
38.0% of revenue in 2001 compared to 45.9% in 2000. The decrease
was primarily due to lower unit sales and average sales prices
of GaAs substrates in the second half of 2001. As a result, we
have initiated manufacturing cost reductions in order to align
our costs with lower expected sales volumes and prices. We are
currently shifting much of our substrate manufacturing to China
and reducing capacity in our Fremont, California facility. Gross
margin at the opto-electronics division increased to negative
37.0% of revenue for 2001 compared to negative 51.6% for 2000.
The increase was primarily due to increased unit sales of blue
HBLED products.

Selling, general and administrative expenses.Selling, general and administrative
expenses increased $3.5 million, or 19.1%, to
$21.5 million in 2001 compared to $18.0 million in
2000. As a percentage of total revenue, selling, general and
administrative expenses were 18.0% in 2001 compared to 14.8% in
2000. The increase was due to the addition of personnel and
facilities in anticipation of increased revenues. Due to the
decline in substrate revenue in the second half of 2001, we have
initiated cost reductions in this area.

Research and development expenses.Research and development expenses
decreased $565,000, or 6.4%, to $8.2 million in 2001
compared to $8.8 million in 2000. As a percentage of total
revenue, research and development expenses were 6.9% in 2001
compared to 7.2% in 2000. We believe that continued investment
in product development is critical to attaining our strategic
objectives of maintaining and increasing our technology
leadership, and as a result, we expect research and development
expenses to remain at current levels.

Interest expense.Interest expense decreased
$1.5 million, or 42.5%, to $2.1 million in 2001
compared to $3.6 million in 2000. The decrease was
primarily due to the repayment of outstanding short-term debt
with equity financing proceeds in September 2000.

Other income and expense.Other expense was $13.4 million
in 2001 compared to income of $28.4 million in 2000. The
balance in 2001 includes the realization of a net
$15.6 million non-cash loss from the write-down to market
value of our investment in Finisar common stock in accordance
with SFAS 115. The balance in 2000 includes the realization
of a $27.3 million non-cash gain on Demeter Technology
warrants that were exchanged for Finisar Corporation common
stock as a result of Finisar Corporations acquisition of
Demeter Technology in 2000.

Provision for income taxes.Our effective tax rate decreased to
36.0% in 2001 compared to 38.0% in 2000. The decrease was
primarily the result of shifting certain substrate manufacturing
operations to China.

Year Ended December 31, 2000 Compared to
Year Ended December 31, 1999

Revenue from continuing operations.Revenue increased $46.1 million,
or 61.2%, to $121.5 million in 2000 compared to
$75.4 million in 1999. Revenue from our substrate division
which represents 93.3% of total revenue for the year ended 2000,
increased $56.6 million, or 99.8%, to $113.4 million
compared to $56.7 million in 1999. Total GaAs substrate
revenue increased $52.0 million, or 113.3%, to
$97.9 million in 2000 compared to $45.9 million in
1999. Sales of 5 and 6 diameter GaAs substrates
increased $19.2 million, or 3,308.8%, to $19.8 million
in 2000 compared to $581,000 in 1999. InP substrate revenue
increased $11.1 million, or 373.8%, to $14.0 million
in 2000 compared to $3.0 million in 1999. The increase in
GaAs and InP substrate sales was a result of increased sales
volume to existing and new customers due in part to strong
growth in the fiber optic and wireless telecommunication
markets. Revenue from our opto-electronics division, which
represents 6.7% of total revenue for 2000, decreased
$10.5 million, or 56.4%, to $8.1 million in 2000,
compared to $18.6 million in 1999. The decrease was a
result of lower laser diode sales volume and a decrease in
prices. HBLED revenue increased $773,000, or 80.6%, to
$1.7 million compared to $959,000 in 1999. In the second
half of 2000, we introduced our first VCSEL products that
generated $189,000 in revenue.

International revenue decreased to 48.2% of total
revenue in 2000 compared to 51.6% of total revenue in 1999.

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Gross margin.Gross
margin increased to 39.4% of revenue in 2000 compared to 33.6%
in 1999. The gross margin at the substrate division increased to
45.9% of revenue in 2000 compared to 41.0% in 1999. The increase
was primarily due to higher sales volume and the realization of
lower labor and manufacturing costs as a result of expanding our
wafer production capacity in China. The gross margin at the
opto-electronics division decreased to negative 51.6% of revenue
for 2000 compared to 11.1% for 1999. The decrease was primarily
due to increased costs associated with the start-up of blue
HBLED and VCSEL product production, lower laser diode sales
prices and volume and a restructuring charge to write-off
obsolete laser diode inventory as part of our plan to exit the
unprofitable 650nm laser diode product line.

Selling, general and administrative expenses.Selling, general and administrative
expenses increased $7.6 million, or 72.2%, to
$18.0 million in 2000 compared to $10.5 million in
1999. The increase in selling, general and administrative
expenses was primarily due to increases in personnel and related
expenses required to support current and future increases in
sales volume. As a percentage of total revenue, selling, general
and administrative expenses were 14.8% in 2000 compared to 13.9%
in 1999.

Research and development expenses.Research and development expenses
increased $6.2 million, or 241.7%, to $8.8 million in
2000 compared to $2.6 million in 1999. The increase was
primarily the result of increases in personnel and related
expenses and materials to support HBLED and VCSEL research and
development at the opto-electronics division. As a percentage of
total revenue, research and development expenses were 7.2% in
2000 compared to 3.4% in 1999.

Restructuring costs.On December 14, 2000, our board
of directors approved managements plan to exit our
unprofitable 650 nm laser diode product line within our
opto-electronics division. As a result, during the fourth
quarter of 2000, we recorded a pre-tax restructuring charge of
$8.2 million. The restructuring charge includes
$1.8 million to write-off laser diode inventory, which has
been classified as a component of cost of goods sold. The
restructuring charge also includes $3.4 million to
write-off net assets included in property, plant and equipment.
These assets consist of laser diode processing equipment that
could not be utilized for HBLED or VCSEL processing. These
assets have been taken out of service and will be sold or
discarded. The restructuring charge also includes $848,000 to
write-down a portion of goodwill attributable to the laser diode
product line. The restructuring charge also includes
$2.1 million for incremental costs and contractual
obligations for such items as leasehold termination payments and
other facility exit costs incurred as a direct result of this
plan.

Interest expense.Interest expense increased
$1.4 million, or 64.3%, to $3.6 million in 2000
compared to $2.2 million in 1999. The increase was
primarily due to using short-term debt to finance the short-term
liquidity needs resulting from our increased sales volume as
well as the addition of certain capital leases to finance
equipment purchases.

Other income and expense.Other income and expense increased
$27.0 million to $28.4 million in 2000 compared to
$1.4 million in 1999. The increase was primarily the result
of a $27.3 million non-cash gain on Demeter Technology
warrants that were exchanged for Finisar Corporation common
stock as a result of Finisar Corporations acquisition of
Demeter Technology.

Provision for income taxes.The effective tax rate was 38.0% in
2000. In 1999, the effective tax rate was 38% adjusted for the
non-deductible acquisition costs of approximately
$2.8 million.

Liquidity and Capital Resources

Cash and cash equivalents decreased
$31.1 million to $37.5 million at December 31,
2001 compared to $68.6 million at December 31, 2000.

Net cash provided by operating activities of
$17.1 million for the year ended December 31, 2001 was
comprised primarily of our net loss adjusted for non-cash items
of $23.1 million, consisting primarily of the write-down of
our investment in Finisar, and by a $1.0 million net change
in assets and liabilities. The net change in assets and
liabilities resulted primarily from an increase in inventory, a
decrease in accounts payable and accrued liabilities, offset by
decreases in accounts receivable and prepaid expenses.

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Accounts receivable decreased $12.1 million,
or 43.5%, to $15.7 million at December 31, 2001
compared to $27.8 million at December 31, 2000. The
change reflects lower sales volume, a decrease in gross accounts
receivable of $7.6 million and an increase in our allowance
for doubtful accounts of $4.5 million. Inventories
increased $3.7 million, or 6.7% to $55.6 million at
December 31, 2001 compared to $51.8 million at
December 31, 2000. The increase in inventory was due to
lower substrate unit sales in the second half of 2001. Due to
the decline in unit sales in the second half of 2001 and an
uncertain outlook for 2002, we have initiated plans to reduce
inventory levels.

During 2001 a significant portion of our cash
inflows were generated by our operations. If our sales continue
to decrease, our ability to generate cash from operations will
be adversely affected which could adversely affect our future
liquidity and cause us to seek additional capital, if available.

Net cash used in investing activities of
$47.7 million for the year ended December 31, 2001
includes purchases of property and equipment of
$25.8 million primarily used to increase wafer processing
capacity in China for the substrate division and to increase
HBLED and VCSEL epitaxy growth and wafer processing capacity at
the opto-electronics division. It also includes
$20.6 million in purchases of high grade investment
securities with maturities of less than two years. We also
invested $1.3 million in joint ventures in China to provide
certain key raw materials and other investments.

We are currently investing in certain equipment
to expand HBLED production. We are also constructing minor
improvements to our existing production facilities in China and
California. We expect to invest approximately $16.0 million
in additional facilities and equipment over the next
12 months.

Net cash used in financing activities of $522,000
consisted of proceeds of $4.8 million from the sale of
common stock through our employee stock compensation programs
and $3.1 million from new capital leases, offset by
payments of $1.4 million to reduce our short-term
borrowings, $2.8 million for principal and interest
payments on long-term debt and $4.3 million for capital
lease payments.

We have a $5.0 million bank line of credit
that expires on September 30, 2003. The line of credit is
secured by our operating assets, excluding assets in China.
Borrowings bear interest at 2.25% above LIBOR that was 4.13% at
December 31, 2001. The interest rate for future borrowings
compared to LIBOR is dependent on the companys financial
performance. No amounts were outstanding under the line of
credit at December 31, 2001 and 2000.

We generally finance equipment purchases through
secured equipment loans and capital leases over four or
five-year terms at interest rates ranging from 5.6% to 8.8% per
annum. Our main Fremont manufacturing facility is financed by
long-term borrowings, which were refinanced by taxable variable
rate revenue bonds in 1998. These bonds mature in 2023 and bear
interest at 2.0% below the prime rate. The bonds are traded in
the public market. Repayment of principal and interest under the
bonds is supported by a letter of credit from our bank and is
paid on a quarterly basis. We have the option to redeem the
bonds in whole or in part during their term. At
December 31, 2001, $9.7 million was outstanding under
these bonds.

The credit facility that we have with our bank
includes the line of credit, term loans in the amount of
$5.2 million and the letter of credit supporting repayment
of our bonds. The credit facility is subject to certain
financial covenants regarding current financial ratios and cash
flow requirements that have all been met as of December 31,
2001. If we fail to comply with these covenants in the future
and are unable to obtain a waiver from our bank, the amounts due
under this credit facility would become immediately due and
payable. The total amount outstanding under the credit facility
at December 31, 2001 was $14.9 million.

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Outstanding contractual obligations as of
December 31, 2001 are summarized below (in thousands):

|           |  |      |        |         |  |           |        |       |  |   |       |  |  |   |        | 
|---------- |  | ---- | ------ | ------- |  | --------- | ------ | ----- |  | - | ----- |  |  | - | ------ | 
|           |  |      |        | Capital |  | Operating |        |      
|           |  | Debt |        | Leases  |  | Leases    |        | Total
|           |  |      |        |         |  |           |        |      
|2002       |  | $    | 2,336  |         |  | $         | 5,369  |       |  | $ | 991   |  |  | $ | 8,696  | 
|2003       |  |      | 1,548  |         |  |           | 5,267  |       |  |   | 906   |  |  |   | 7,721  | 
|2004       |  |      | 1,277  |         |  |           | 3,307  |       |  |   | 855   |  |  |   | 5,439  | 
|2005       |  |      | 1,240  |         |  |           | 1,908  |       |  |   | 591   |  |  |   | 3,739  | 
|2006       |  |      | 1,238  |         |  |           | 550    |       |  |   | 220   |  |  |   | 2,008  | 
|Thereafter |  |      | 9,039  |         |  |           |       |       |  |   |      |  |  |   | 9,039  | 
|           |  |      |        |         |  |           |        |       |  |   |       |  |  |   |        | 
|           |  | $    | 16,678 |         |  | $         | 16,401 |       |  | $ | 3,563 |  |  | $ | 36,642 | 
|           |  |      |        |         |  |           |        |       |  |   |       |  |  |   |        | 

We anticipate that the combination of existing
working capital and the borrowings available under our current
credit agreements will be sufficient to fund working capital and
capital expenditure requirements for the next 12 months.
However, our future capital requirements will be dependent on
many factors including the rate of revenue growth, our
profitability, the timing and extent of spending to support
research and development programs, the expansion of our
manufacturing facilities, the expansion of our selling and
marketing and administrative activities and market acceptance of
our products. We may need to obtain additional equity and debt
financing in the future, which may not be available on
acceptable terms or at all.

Recent Accounting Pronouncements

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

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

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Risks Related to Our Business



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

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



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

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



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

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



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | decline in general economic conditions or
	downturns in the industry in which we compete;
|
| |  | fluctuations in demand for our products;                                                 
|
| |  | expansion of our manufacturing capacity;                                                 
|
| |  | expansion of our operations in China;                                                    
|
| |  | limited availability and increased cost of raw
	materials;                               

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

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

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

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



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

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

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



| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | unforeseen environmental or engineering problems;                                                                      
|
| |  | unavailability or late delivery of production
	equipment;                                                              
|
| |  | delays in completing new facilities;                                                                                   
|
| |  | delays in bringing production equipment on-line;                                                                       
|
| |  | work stoppages or delays;                                                                                              
|
| |  | inability to recruit and train qualified staff;                                                                        
|
| |  | unanticipated cost increases and restrictions
	imposed by requirements of local, state or federal regulatory
	agencies.

If any of these risks occurs, construction may be
costlier than anticipated and completion could be delayed, which
could hurt our ability to expand capacity and increase our
sales. In addition, if we experience delays in expanding our
manufacturing capacity, we might not be able to timely meet
customer requirements, and we could lose future sales. We are
also making substantial investments in equipment and facilities
as part

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of our capacity expansion. To offset the
additional fixed operating expenses, we must increase our
revenue by increasing production and improving yields. If demand
for our products does not grow or if our yields do not improve
as anticipated, we may be unable to offset these costs against
increased revenue, which would adversely impact our operating
results.




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

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



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

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



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

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

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



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

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

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##### Table of Contents



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



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

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



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

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

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



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

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



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

Because many of our manufacturing costs are
fixed, our revenue could decline if our yields decrease. We have
experienced product shipment delays and difficulties in
achieving acceptable yields on both new and older products, and
delays and poor yields have adversely affected our operating
results. We may experience

25



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##### Table of Contents



similar problems in the future and we cannot
predict when they may occur or their severity. In addition, many
of our manufacturing processes are new and are still being
refined, which can result in lower yields, particularly as we
focus on producing higher diameter substrates and new
opto-electronic semiconductor devices. For example, we recently
made substantial investments in equipment and facilities to
manufacture blue, green and cyan HBLEDs and VCSELs. If we are
unable to produce adequate quantities of our high-brightness
LEDs and VCSELs, we may not be able to meet customer demand and
our revenue may decrease.




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

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



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

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

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



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

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



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

We are subject to federal, state and local
environmental and safety laws and regulations. These laws, rules
and regulations govern the use, storage, discharge and disposal
of hazardous chemicals during manufacturing, research and
development and sales demonstrations. If we fail to comply with
applicable regulations, we could be subject to substantial
liability for clean-up efforts, personal injury and fines or
suspension or cessation of our operations. In March 2001, we
settled a claim made by the California Occupational Safety and
Health Administration, or Cal-OSHA, in an investigation
primarily regarding impermissible levels of potentially
hazardous materials in certain areas of our manufacturing
facility in Fremont, California for $200,415. Although we have
put in place engineering, administrative and personnel
protective equipment programs to

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address these issues, our ability to expand or
continue to operate our present locations could be restricted or
we could be required to acquire costly remediation equipment or
incur other significant expenses. In addition, existing or
future changes in laws or regulations may require us to incur
significant expenditures or liabilities, or may restrict our
operations.


On May 1, 2001 the Santa Clara Center for
Occupational Safety and Health filed a complaint for injunctive
relief and civil penalties against us in the Superior Court of
California, alleging violations of California Business and
Professions Code section 17200 et seq., and Health and
Safety Code section 25249 et seq. as a result of our use of
arsenic and inorganic arsenic compounds in our workplace. We
believe that we have meritorious defenses against the alleged
claims, and intend to defend ourselves vigorously. However, due
to the nature of the litigation and fact that the case is still
in its early stages, we cannot determine the possible loss, if
any, that may ultimately be incurred either in the context of a
trial or as a result of a negotiated settlement. We may also
incur substantial legal fees in this matter. However, we do not
believe that this action is likely to have a material adverse
effect on our business, financial condition or results of
operations.



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

A small number of substrate customers have
historically accounted for a substantial portion of our total
revenue. Five customers accounted for 28.3% of our total revenue
for 2001, 26.1% in 2000 and 24.8% in 1999. No one customer
accounted for greater than 10% of total revenue in 2001, 2000
and 1999. Our substrate revenue accounted for 91.0% of our total
revenue in 2001, 93.3% in 2000 and 75.3% in 1999. We expect that
a significant portion of our future revenue will continue to be
derived from a limited number of substrate and HBLED customers.
Our HBLED revenue is currently concentrated with one customer.
Our customers are not obligated to purchase a specified quantity
of our products or to provide us with binding forecasts of
product purchases. In addition, our customers may reduce, delay
or cancel orders at any time without any significant penalty,
and during the past year, we have experienced slower bookings,
significant push outs and cancellation of orders. If we lose a
major customer or if a customer cancels, reduces or delays
orders, our revenue would decline. In addition, customers that
have accounted for significant revenue in the past may not
continue to generate revenue for us in any future period. Any
delay in scheduled shipments of our products could cause net
sales to fall below our expectations and the expectations of
market analysts or investors, causing our stock price to decline.



| |                                                                 
| | ----------------------------------------------------------------
| | Defects in our products could diminish
	demand for our products.

Our products are complex and may contain defects.
In the past we have experienced quality control problems with
some of our products, which caused customers to return products
to us. If we continue to experience quality control problems, or
experience these problems in new products, customers may cancel
or reduce orders or purchase products from our competitors.
Defects in our products could cause us to incur higher
manufacturing costs and suffer product returns and additional
service expenses, all of which could adversely impact our
operating results.

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



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

Customers typically place orders with us for our
substrate and opto-electronic semiconductor device products
three months to a year or more after our initial contact with
them. The sale of our products may be subject to delays due to
our customers lengthy internal budgeting, approval and
evaluation processes. During this time, we may incur substantial
expenses and expend sales, marketing and management efforts
while the customers evaluate our products. These expenditures
may not result in sales of our products. If we do not achieve
anticipated sales in a period as expected, we may experience an
unplanned shortfall in our revenue. As

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a result, we may not be able to cover expenses,
causing our operating results to vary. In addition, if a
customer decides not to incorporate our products into its
initial design, we may not have another opportunity to sell
products to this customer for many months or even years. In this
difficult economic climate, the average sales cycle for our
products has lengthened even further and is expected to continue
to make it difficult to accurately forecast our future sales. We
anticipate that sales of any future substrate and
opto-electronic semiconductor device products under development
will also have lengthy sales cycles and will, therefore, be
subject to risks substantially similar to those inherent in the
lengthy sales cycle of our current substrate and opto-electronic
semiconductor device products.




| |                                                                             
| | ----------------------------------------------------------------------------
| | If we fail to manage our potential growth,
	our operations may be disrupted.

In the past, we have experienced periods of rapid
growth and expansion that have strained our management and other
resources, and we may experience rapid growth in the future. Our
acquisition of Lyte Optronics, together with expansion of our
manufacturing capacity, has placed and continues to place a
significant strain on our operations and management resources.
If we fail to manage our growth effectively, our operations may
be disrupted. To manage our growth effectively, we must
implement additional and improved management information
systems, further develop our operating, administrative,
financial and accounting systems and controls, add experienced
senior level managers, and maintain close coordination among our
executive, engineering, accounting, marketing, sales and
operations organizations.

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



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

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



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

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

28



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

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



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

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

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



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

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



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

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

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

29



---



##### Table of Contents





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

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

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

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

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



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

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



| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 50.4% of our total revenue in
2001, 48.2% in 2000 and 51.6% in 1999. We expect that sales to
customers outside the U.S. will continue to represent a
significant portion of our revenue.

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



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | changes in tariffs, import or export restrictions
	and other trade barriers;
|
| |  | unexpected changes in regulatory requirements;                              
|
| |  | longer periods to collect accounts receivable;                              

30



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| |   |                                                               
| | - | --------------------------------------------------------------
| |  | changes in export license requirements;                       
|
| |  | political and economic instability;                           
|
| |  | unexpected changes in diplomatic and trade
	relationships; and
|
| |  | foreign exchange rate fluctuations.                           

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



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

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



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

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

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



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

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



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

Our stock price has fluctuated significantly
since we began trading on the Nasdaq National Market. For the
12 months ended December 31, 2001, the high and low
closing sales prices of our common stock were

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$44.56 and $10.20. A number of factors could
cause the price of our common stock to continue to fluctuate
substantially, including:




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

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



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

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

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



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

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



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

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



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | 66 2/3% of the shares of voting stock not
	owned by these large stockholders approve the merger or
	combination, or

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| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the board of directors approves the merger or
	combination or the transaction which resulted in the large
	stockholder owning 15% or more of our outstanding voting stock.



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

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



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

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




Item 7A.       Qualitative
and Quantitative Disclosures About Market Risk

Foreign
Currency Risk

Since our Japanese and some Taiwanese invoices
are denominated in Japanese yen, doing business in Japan
subjects us to fluctuations in exchange rates between the U.S.
dollar and the Japanese yen. We incurred a foreign transaction
exchange loss of $357,000 in 2001, a loss of $552,000 in 2000,
and a gain of $652,000 in 1999. We purchase foreign exchange
contracts to hedge against certain trade accounts receivable in
Japanese yen. Under these contracts, increases or decreases in
currency commitments and balance sheet positions, as translated
into U.S. dollars, are primarily offset by realized gains or
losses on the hedging contracts. The outstanding commitments
with respect to such foreign exchange contracts had a total
contract value of approximately $1.5 million as of
December 31, 2001. Many of the contracts were entered into
six months prior to the due date and the dates coincide with the
receivable terms on customer invoices. By matching the
receivable collection date and contract due date, we attempt to
economically minimize the impact of foreign exchange
fluctuations.

33



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##### Table of Contents



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):

|                          |  |              |        |          |  |           |      |                  |  |                  |       |   |  |   |       |   |  |   |       |  
|------------------------- |  | ------------ | ------ | -------- |  | --------- | ---- | ---------------- |  | ---------------- | ----- | - |  | - | ----- | - |  | - | ----- | -
|                          |  |              |        |          |  | Current   |      | Proforma         |  | Proforma        
|                          |  | Balance      |        | Current  |  | Interest  |      | 10% Interest     |  | 10% Interest    
|                          |  | December 31, |        | Interest |  | Income/   |      | Rate Decline     |  | Rate Increase   
|Instrument                |  | 2001         |        | Rate     |  | (Expense) |      | Income/(Expense) |  | Income/(Expense)
|                          |  |              |        |          |  |           |      |                  |  |                 
|Cash and cash equivalents |  | $            | 37,538 |          |  |           | 3.80 | %                |  | $                | 1,426 |   |  | $ | 1,284 |   |  | $ | 1,569 |  
|Bonds (see Note 10)       |  |              | 9,720  |          |  |           | 5.60 | %                |  |                  | (544  | ) |  |   | (490  | ) |  |   | (599  | )
|Notes (see Note 10)       |  |              | 5,185  |          |  |           | 5.75 | %                |  |                  | (298  | ) |  |   | (268  | ) |  |   | (328  | )
|                          |  |              |        |          |  |           |      |                  |  |                  |       |   |  |   |       |   |  |   |       |  
|                          |  |              |        |          |  |           |      |                  |  | $                | 584   |   |  | $ | 526   |   |  | $ | 642   |  
|                          |  |              |        |          |  |           |      |                  |  |                  |       |   |  |   |       |   |  |   |       |  

Equity
Risk

We also maintain minority investments in private
and publicly traded companies. These investments are reviewed
for other than temporary declines in value on a quarterly basis.
Reasons for other than temporary declines in value include
whether the related company would have insufficient cash flow to
operate for the next twelve months, significant changes in the
operating performance and changes in market conditions. As of
December 31, 2001, the minority investments we continue to
hold totaled $15.4 million at estimated fair value. In
2001, we realized a net $15.6 million non-cash loss as a
result of writing down our investment in Finisar Corporation
common stock. This loss is included in other expense. In 2000,
we realized a $27.3 million non-cash gain as a result of
acquiring Finisar Corporation common stock in connection with
Finisar Corporations acquisition of Demeter Technologies,
a company in which we held warrants to purchase preferred stock.




Item 8.     Consolidated
Financial Statements and Supplementary Data

Selected
Quarterly Results of Operations

The following table sets forth unaudited
quarterly results in dollars and percentages for the eight
quarters ended December 31, 2001. We believe that all
necessary adjustments, consisting only of normal recurring

34



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##### Table of Contents



adjustments, have been included in the amounts
stated below to present fairly such quarterly information. The
operating results for any quarter are not necessarily indicative
of results for any subsequent period.


|                                                                            |                                                         |                          |         |           |       |          |        |          |       |          |        |           |       |          |        |          |       |   |         |        |        |   |        |       |       |   |        |       |       |   |        |       |       | 
|--------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------------ | ------- | --------- | ----- | -------- | ------ | -------- | ----- | -------- | ------ | --------- | ----- | -------- | ------ | -------- | ----- | - | ------- | ------ | ------ | - | ------ | ----- | ----- | - | ------ | ----- | ----- | - | ------ | ----- | ----- | 
|                                                                            |                                                         |                         
|                                                                            |                                                         | Quarters ended          
|                                                                            |                                                         |                         
|                                                                            |                                                         | Dec. 31,                 |         | Sept. 30, |       | June 30, |        | Mar. 31, |       | Dec. 31, |        | Sept. 30, |       | June 30, |        | Mar. 31,
|                                                                            |                                                         | 2001                     |         | 2001      |       | 2001     |        | 2001     |       | 2000     |        | 2000      |       | 2000     |        | 2000    
|                                                                            |                                                         |                          |         |           |       |          |        |          |       |          |        |           |       |          |        |         
|Revenue                                                                     |                                                         | $                        | 15,371  |           |       | $        | 22,783 |          |       | $        | 41,272 |           |       | $        | 40,104 |          |       | $ | 38,167  |        |        | $ | 33,132 |       |       | $ | 27,939 |       |       | $ | 22,265 |      
|Cost of revenue                                                             |                                                         |                          | 15,892  |           |       |          | 17,423 |          |       |          | 25,067 |           |       |          | 23,810 |          |       |   | 25,072  |        |        |   | 18,435 |       |       |   | 16,883 |       |       |   | 13,294 |      
|                                                                            |                                                         |                          |         |           |       |          |        |          |       |          |        |           |       |          |        |          |       |   |         |        |        |   |        |       |       |   |        |       |       |   |        |      
|Gross profit                                                                |                                                         |                          | (521    | )         |       |          | 5,360  |          |       |          | 16,205 |           |       |          | 16,294 |          |       |   | 13,095  |        |        |   | 14,697 |       |       |   | 11,056 |       |       |   | 8,971  |      
|Operating expenses:                                                         |                                                         |                          |         |           |       |          |        |          |       |          |        |           |       |          |        |          |       |   |         |        |        |   |        |       |       |   |        |       |       |   |        |      
|                                                                            | Selling, general and administrative                     |                          |         | 4,382     |       |          |        | 5,826    |       |          |        | 5,412     |       |          |        | 5,867    |       |   |         | 5,414  |        |   |        | 5,134 |       |   |        | 4,286 |       |   |        | 3,207 |      
|                                                                            | Research and development                                |                          |         | 1,370     |       |          |        | 1,701    |       |          |        | 2,430     |       |          |        | 2,703    |       |   |         | 1,793  |        |   |        | 3,267 |       |   |        | 1,800 |       |   |        | 1,909 |      
|                                                                            | Restructuring costs                                     |                          |         |          |       |          |        |         |       |          |        |          |       |          |        |         |       |   |         | 6,409  |        |   |        |      |       |   |        |      |       |   |        |      |      
|                                                                            |                                                         |                          |         |           |       |          |        |          |       |          |        |           |       |          |        |          |       |   |         |        |        |   |        |       |       |   |        |       |       |   |        |      
|                                                                            |                                                         | Total operating expenses |         |           | 5,752 |          |        |          | 7,527 |          |        |           | 7,842 |          |        |          | 8,570 |   |         |        | 13,616 |   |        |       | 8,401 |   |        |       | 6,086 |   |        |       | 5,116 | 
|                                                                            |                                                         |                          |         |           |       |          |        |          |       |          |        |           |       |          |        |          |       |   |         |        |        |   |        |       |       |   |        |       |       |   |        |      
|Income (loss) from operations                                               |                                                         |                          | (6,273  | )         |       |          | (2,167 | )        |       |          | 8,363  |           |       |          | 7,724  |          |       |   | (521    | )      |        |   | 6,296  |       |       |   | 4,970  |       |       |   | 3,855  |      
|Interest expense                                                            |                                                         |                          | 444     |           |       |          | 493    |          |       |          | 515    |           |       |          | 629    |          |       |   | 936     |        |        |   | 762    |       |       |   | 1,149  |       |       |   | 769    |      
|Other (income) and expense                                                  |                                                         |                          | 14,915  |           |       |          | (488   | )        |       |          | (345   | )         |       |          | (709   | )        |       |   | (27,964 | )      |        |   | 16     |       |       |   | (298   | )     |       |   | (186   | )    
|                                                                            |                                                         |                          |         |           |       |          |        |          |       |          |        |           |       |          |        |          |       |   |         |        |        |   |        |       |       |   |        |       |       |   |        |      
|Income (loss) from continuing operations
	before provision for income taxes |                                                         |                          | (21,632 | )         |       |          | (2,172 | )        |       |          | 8,193  |           |       |          | 7,804  |          |       |   | 26,507  |        |        |   | 5,518  |       |       |   | 4,119  |       |       |   | 3,272  |      
|Provision for income taxes                                                  |                                                         |                          | (7,788  | )         |       |          | (782   | )        |       |          | 2,949  |           |       |          | 2,810  |          |       |   | 10,062  |        |        |   | 2,097  |       |       |   | 1,575  |       |       |   | 1,244  |      
|                                                                            |                                                         |                          |         |           |       |          |        |          |       |          |        |           |       |          |        |          |       |   |         |        |        |   |        |       |       |   |        |       |       |   |        |      
|Income (loss) from continuing operations                                    |                                                         |                          | (13,844 | )         |       |          | (1,390 | )        |       |          | 5,244  |           |       |          | 4,994  |          |       |   | 16,445  |        |        |   | 3,421  |       |       |   | 2,544  |       |       |   | 2,028  |      
|Discontinued operations:                                                    |                                                         |                          |         |           |       |          |        |          |       |          |        |           |       |          |        |          |       |   |         |        |        |   |        |       |       |   |        |       |       |   |        |      
|                                                                            | Loss from discontinued operations, net of tax
	benefits |                          |         |          |       |          |        |         |       |          |        |          |       |          |        |         |       |   |         | (721   | )      |   |        | (519  | )     |   |        | (191  | )     |   |        | (56   | )    
|                                                                            | Loss on disposal, net of tax benefits                   |                          |         |          |       |          |        |         |       |          |        |          |       |          |        |         |       |   |         | (1,341 | )      |   |        |      |       |   |        |      |       |   |        |      |      
|                                                                            |                                                         |                          |         |           |       |          |        |          |       |          |        |           |       |          |        |          |       |   |         |        |        |   |        |       |       |   |        |       |       |   |        |      
|Net income (loss)                                                           |                                                         | $                        | (13,844 | )         |       | $        | (1,390 | )        |       | $        | 5,244  |           |       | $        | 4,994  |          |       | $ | 14,383  |        |        | $ | 2,902  |       |       | $ | 2,353  |       |       | $ | 1,972  |      
|                                                                            |                                                         |                          |         |           |       |          |        |          |       |          |        |           |       |          |        |          |       |   |         |        |        |   |        |       |       |   |        |       |       |   |        |      

|                                                                            |                                                         |                          |        |           |      |          |       |          |      |          |       |           |      |          |       |          |      |   |       |      |      |   |       |      |      |   |       |      |      |   |       |      |      |  
|--------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------------ | ------ | --------- | ---- | -------- | ----- | -------- | ---- | -------- | ----- | --------- | ---- | -------- | ----- | -------- | ---- | - | ----- | ---- | ---- | - | ----- | ---- | ---- | - | ----- | ---- | ---- | - | ----- | ---- | ---- | -
|                                                                            |                                                         |                         
|                                                                            |                                                         | Quarters ended          
|                                                                            |                                                         |                         
|                                                                            |                                                         | Dec. 31,                 |        | Sept. 30, |      | June 30, |       | Mar. 31, |      | Dec. 31, |       | Sept. 30, |      | June 30, |       | Mar. 31,
|                                                                            |                                                         | 2001                     |        | 2001      |      | 2001     |       | 2001     |      | 2000     |       | 2000      |      | 2000     |       | 2000    
|                                                                            |                                                         |                          |        |           |      |          |       |          |      |          |       |           |      |          |       |         
|Revenue                                                                     |                                                         |                          | 100.0  | %         |      |          | 100.0 | %        |      |          | 100.0 | %         |      |          | 100.0 | %        |      |   | 100.0 | %    |      |   | 100.0 | %    |      |   | 100.0 | %    |      |   | 100.0 | %   
|Cost of revenue                                                             |                                                         |                          | 103.4  | %         |      |          | 76.5  | %        |      |          | 60.7  | %         |      |          | 59.4  | %        |      |   | 65.7  | %    |      |   | 55.6  | %    |      |   | 60.4  | %    |      |   | 59.7  | %   
|                                                                            |                                                         |                          |        |           |      |          |       |          |      |          |       |           |      |          |       |          |      |   |       |      |      |   |       |      |      |   |       |      |      |   |       |     
|Gross profit                                                                |                                                         |                          | (3.4   | )%        |      |          | 23.5  | %        |      |          | 39.3  | %         |      |          | 40.6  | %        |      |   | 34.3  | %    |      |   | 44.4  | %    |      |   | 39.6  | %    |      |   | 40.3  | %   
|Operating expenses:                                                         |                                                         |                          |        |           |      |          |       |          |      |          |       |           |      |          |       |          |      |   |       |      |      |   |       |      |      |   |       |      |      |   |       |     
|                                                                            | Selling, general and administrative                     |                          |        | 28.5      | %    |          |       | 25.6     | %    |          |       | 13.1      | %    |          |       | 14.6     | %    |   |       | 14.2 | %    |   |       | 15.5 | %    |   |       | 15.3 | %    |   |       | 14.4 | %   
|                                                                            | Research and development                                |                          |        | 8.9       | %    |          |       | 7.5      | %    |          |       | 5.9       | %    |          |       | 6.7      | %    |   |       | 4.7  | %    |   |       | 9.9  | %    |   |       | 6.4  | %    |   |       | 8.6  | %   
|                                                                            | Restructuring costs                                     |                          |        | 0.0       | %    |          |       | 0.0      | %    |          |       | 0.0       | %    |          |       | 0.0      | %    |   |       | 16.8 | %    |   |       | 0.0  | %    |   |       | 0.0  | %    |   |       | 0.0  | %   
|                                                                            |                                                         |                          |        |           |      |          |       |          |      |          |       |           |      |          |       |          |      |   |       |      |      |   |       |      |      |   |       |      |      |   |       |     
|                                                                            |                                                         | Total operating expenses |        |           | 37.4 | %        |       |          | 33.0 | %        |       |           | 19.0 | %        |       |          | 21.4 | % |       |      | 35.7 | % |       |      | 25.4 | % |       |      | 21.8 | % |       |      | 23.0 | %
|                                                                            |                                                         |                          |        |           |      |          |       |          |      |          |       |           |      |          |       |          |      |   |       |      |      |   |       |      |      |   |       |      |      |   |       |     
|Income (loss) from operations                                               |                                                         |                          | (40.8  | )%        |      |          | (9.5  | )%       |      |          | 20.3  | %         |      |          | 19.3  | %        |      |   | (1.4  | )%   |      |   | 19.0  | %    |      |   | 17.8  | %    |      |   | 17.3  | %   
|Interest expense                                                            |                                                         |                          | 2.4    | %         |      |          | 2.2   | %        |      |          | 1.2   | %         |      |          | 1.6   | %        |      |   | 2.4   | %    |      |   | 2.3   | %    |      |   | 4.1   | %    |      |   | 3.5   | %   
|Other (income) and expense                                                  |                                                         |                          | 97.0   | %         |      |          | (2.1  | )%       |      |          | (0.8  | )%        |      |          | (1.8  | )%       |      |   | (73.3 | )%   |      |   | 0.0   | %    |      |   | (1.1  | )%   |      |   | (0.8  | )%  
|                                                                            |                                                         |                          |        |           |      |          |       |          |      |          |       |           |      |          |       |          |      |   |       |      |      |   |       |      |      |   |       |      |      |   |       |     
|Income (loss) from continuing operations
	before provision for income taxes |                                                         |                          | (140.7 | )%        |      |          | (9.5  | )%       |      |          | 19.9  | %         |      |          | 19.5  | %        |      |   | 69.5  | %    |      |   | 16.7  | %    |      |   | 14.7  | %    |      |   | 14.7  | %   
|Provision for income taxes                                                  |                                                         |                          | (50.7  | )%        |      |          | (3.4  | )%       |      |          | 7.1   | %         |      |          | 7.0   | %        |      |   | 26.4  | %    |      |   | 6.3   | %    |      |   | 5.6   | %    |      |   | 5.6   | %   
|                                                                            |                                                         |                          |        |           |      |          |       |          |      |          |       |           |      |          |       |          |      |   |       |      |      |   |       |      |      |   |       |      |      |   |       |     
|Income (loss) from continuing operations                                    |                                                         |                          | (90.1  | )%        |      |          | (6.1  | )%       |      |          | 12.7  | %         |      |          | 12.5  | %        |      |   | 43.1  | %    |      |   | 10.3  | %    |      |   | 9.1   | %    |      |   | 9.1   | %   
|Discontinued operations:                                                    |                                                         |                          |        |           |      |          |       |          |      |          |       |           |      |          |       |          |      |   |       |      |      |   |       |      |      |   |       |      |      |   |       |     
|                                                                            | Loss from discontinued operations, net of tax
	benefits |                          |        | 0.0       | %    |          |       | 0.0      | %    |          |       | 0.0       | %    |          |       | 0.0      | %    |   |       | (1.9 | )%   |   |       | (1.6 | )%   |   |       | (0.7 | )%   |   |       | (0.3 | )%  
|                                                                            | Loss on disposal, net of tax benefits                   |                          |        | 0.0       | %    |          |       | 0.0      | %    |          |       | 0.0       | %    |          |       | 0.0      | %    |   |       | (3.5 | )%   |   |       | 0.0  | %    |   |       | 0.0  | %    |   |       | 0.0  | %   
|                                                                            |                                                         |                          |        |           |      |          |       |          |      |          |       |           |      |          |       |          |      |   |       |      |      |   |       |      |      |   |       |      |      |   |       |     
|Net income (loss)                                                           |                                                         |                          | (90.1  | )%        |      |          | (6.1  | )%       |      |          | 12.7  | %         |      |          | 12.5  | %        |      |   | 37.7  | %    |      |   | 8.8   | %    |      |   | 8.4   | %    |      |   | 8.9   | %   
|                                                                            |                                                         |                          |        |           |      |          |       |          |      |          |       |           |      |          |       |          |      |   |       |      |      |   |       |      |      |   |       |      |      |   |       |     

Other Consolidated Financial Statements and
Supplementary Data required by this item are set forth at the
pages indicated at Item 14(a).

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

None.




PART III

The 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
and Executive Officers of the Registrant.

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 21, 2002,
under the section entitled Proposal No. 1 
Election of Directors.

The information required by this Item with
respect to compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated herein by reference to
information set forth in the definitive Proxy statement to be
filed in connection with our annual meeting of stockholders to
be held on May 21, 2002, under the heading Executive
Compensation and Other matters.

We have revised our Insider Trading Policy to
allow our directors, officers and other employees covered under
the policy to establish, under limited circumstances
contemplated by Rule 10b5-1 under the Securities Exchange
Act of 1934, written programs that permit automatic trading of
our stock or trading of our stock by an independent person (such
as an investment bank) who is not aware of material inside
information at the time of the trade. As of January 31,
2002, none of our officers have adopted Rule 10b5-1 trading
plans. The Company believes that some of our directors or
officers may establish such programs in future periods.




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 21, 2002,
under the section entitled Executive Compensation and
Other matters.




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management.

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 21, 2002,
under the section entitled Security Ownership of Certain
Beneficial Owners and Management.




Item 13.     Certain
Relationships and Related Transactions

Since January 1999, there has not been, nor is
there currently proposed, any transaction or series of similar
transactions to which we were or are to be a party in which the
amount involved exceeds $60,000, and in which any director,
executive officer or holder of more than 5% of any class of our
voting securities or members of that persons immediate
family had or will have a direct or indirect material interest
other than the transactions described below.

Equipment & Materials, a California
corporation engaged in international trading and quartzware
fabrication, supplies us with various raw materials from China
and has manufactured quartzware for us. Christina X. Li, the
sole shareholder and president of Equipment & Materials, is
the wife of Davis Zhang, the president of our substrate
division. Purchases from Equipment & Materials were
approximately $4.7 million for the year ended
December 31, 2001, $8.9 million for 2000 and
$3.6 million for 1999. There was no balance due to
Equipment & Materials at December 31, 2001.

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We have entered into an operating lease for
warehouse space in Fremont, CA with 4160 Business Center, LLC, a
real estate holding company, in which Davis Zhang, the president
of our substrate division, is the sole shareholder. Lease
payments to 4160 Business Center, LLC were approximately
$188,000 for the year ended December 31, 2001.

In August 2000, we entered into a business
transfer and acquisition agreement with Demeter Technologies,
Inc., a Delaware corporation founded by Theodore S. Young, the
former president of our fiber optic division and a former member
of our board of directors, and Robert Shih, the former chief
technology officer of our opto-electronics division. Under this
agreement, we agreed to transfer certain non-core rights to
Demeter relating to our research and development activities in
the field of fiber optics. We have entered into non-compete
agreements with Messrs. Shih and Young that prohibit them
from certain activities, including the manufacture of certain
VCSEL devices. We have leased to Demeter a portion of our owned
facility in El Monte, California, subleased a portion of
our rented facility in El Monte, California, leased certain
equipment, including an MOCVD machine, and sold certain
inventory relating to fiber optics. In exchange, Demeter granted
to us a warrant to purchase up to 4.5 million shares of its
Series A convertible preferred stock at a price of $0.5714
per share which we exercised in November 2000.




PART IV




Item 14.     Exhibits,
Financial Statement Schedules, and Reports on Form
8-K

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

(1) Financial Statements:

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                 |  |      |       | 
|------------------------------------------------ |  | ---- | ----- | 
|                                                 |  | Page
|                                                 |  |     
|Report of Independent Accountants                |  |      | 38    | 
|Consolidated Balance Sheets                      |  |      | 39    | 
|Consolidated Income Statements                   |  |      | 40    | 
|Consolidated Statements of Stockholders
	Equity |  |      | 41    | 
|Consolidated Statements of Cash Flows            |  |      | 42    | 
|Notes to Consolidated Financial Statements       |  |      | 43-59 | 



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) Financial Statement Schedules                                                                                                                                                                                                                                         
|
| | All schedules have been omitted because the
	required information is not present or not present in amounts
	sufficient to require submission of the schedules or because the
	information required is included in the Consolidated Financial
	Statements or Notes thereto.
|
| | (3) Exhibits                                                                                                                                                                                                                                                              
|
| | See Index to Exhibits on pages 61 and 62 hereof.
	The exhibits listed in the accompanying Index to Exhibits are
	filed as part of, or incorporated by reference into, this report
	on Form 10K.                                                                           

(b) Reports on Form 8-K

None

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REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, based on our audits, the
accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders equity
and of cash flows present fairly, in all material respects, the
financial position of AXT, Inc. and its subsidiaries at
December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
the Companys management; our responsibility is to express
an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

San Jose, California

February 8, 2002


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AXT, INC.

CONSOLIDATED BALANCE SHEETS

|                                                |                                                                                                           |                                            |        |         |         |  |        |         |         | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------- | ------- |  | ------ | ------- | ------- | 
|                                                |                                                                                                           |                                           
|                                                |                                                                                                           | December 31,                              
|                                                |                                                                                                           |                                           
|                                                |                                                                                                           | 2001                                       |        | 2000   
|                                                |                                                                                                           |                                            |        |        
|                                                |                                                                                                           |                                           
|                                                |                                                                                                           | (In thousands, except                     
|                                                |                                                                                                           | per share data)                           
|ASSETS                                         
|Current assets                                  |                                                                                                           |                                            |        |         |         |  |        |        
|                                                | Cash and cash equivalents                                                                                 |                                            | $      | 37,538  |         |  | $      | 68,585  |        
|                                                | Short-term investments                                                                                    |                                            |        | 25,673  |         |  |        | 30,852  |        
|                                                | Accounts receivable                                                                                       |                                            |        | 15,684  |         |  |        | 27,773  |        
|                                                | Inventories                                                                                               |                                            |        | 55,587  |         |  |        | 51,846  |        
|                                                | Prepaid expenses and other current assets                                                                 |                                            |        | 3,577   |         |  |        | 3,603   |        
|                                                | Deferred income taxes                                                                                     |                                            |        | 2,458   |         |  |        |        |        
|                                                |                                                                                                           |                                            |        |         |         |  |        |        
|                                                |                                                                                                           | Total current assets                       |        |         | 140,517 |  |        |         | 182,659 | 
|Property, plant and equipment                   |                                                                                                           |                                            | 82,573 |         |         |  | 63,401 |        
|Other assets                                    |                                                                                                           |                                            | 4,511  |         |         |  | 3,312  |        
|Goodwill                                        |                                                                                                           |                                            | 1,107  |         |         |  | 848    |        
|Long term investments                           |                                                                                                           |                                            | 6,552  |         |         |  |       |        
|                                                |                                                                                                           |                                            |        |         |         |  |        |        
|                                                |                                                                                                           | Total assets                               |        | $       | 235,260 |  |        | $       | 250,220 | 
|                                                |                                                                                                           |                                            |        |         |         |  |        |        
|                                               
|LIABILITIES AND STOCKHOLDERS
	EQUITY          
|Current liabilities                             |                                                                                                           |                                            |        |         |         |  |        |        
|                                                | Short-term bank borrowing                                                                                 |                                            | $      |        |         |  | $      | 1,353   |        
|                                                | Accounts payable                                                                                          |                                            |        | 2,943   |         |  |        | 10,009  |        
|                                                | Accrued liabilities                                                                                       |                                            |        | 13,670  |         |  |        | 16,651  |        
|                                                | Deferred income taxes                                                                                     |                                            |        |        |         |  |        | 3,847   |        
|                                                | Current portion of long-term debt                                                                         |                                            |        | 2,336   |         |  |        | 4,355   |        
|                                                | Current portion of capital lease obligation                                                               |                                            |        | 4,372   |         |  |        | 6,057   |        
|                                                |                                                                                                           |                                            |        |         |         |  |        |        
|                                                |                                                                                                           | Total current liabilities                  |        |         | 23,321  |  |        |         | 42,272  | 
|Long-term debt, net of current portion          |                                                                                                           |                                            | 14,342 |         |         |  | 15,123 |        
|Long-term capital lease, net of current portion |                                                                                                           |                                            | 10,002 |         |         |  | 7,278  |        
|Other long-term liabilities                     |                                                                                                           |                                            | 1,273  |         |         |  | 200    |        
|                                                |                                                                                                           |                                            |        |         |         |  |        |        
|                                                |                                                                                                           | Total liabilities                          |        |         | 48,938  |  |        |         | 64,873  | 
|                                                |                                                                                                           |                                            |        |         |         |  |        |        
|Commitments and Contingencies (Note 17)         |                                                                                                           |                                            |        |         |         |  |        |        
|Stockholders equity:                           |                                                                                                           |                                            |        |         |         |  |        |        
|                                                | Preferred stock, $.001 par value; 2,000 shares
	authorized; 883 shares issued and outstanding             |                                            |        | 3,532   |         |  |        | 3,532   |        
|                                                | Common stock, $.001 par value; 70,000 shares
	authorized; 22,383 and 21,952 shares issued and outstanding |                                            |        | 153,635 |         |  |        | 145,748 |        
|                                                | Deferred compensation                                                                                     |                                            |        |        |         |  |        | (107    | )      
|                                                | Retained earnings                                                                                         |                                            |        | 28,984  |         |  |        | 33,980  |        
|                                                | Other comprehensive income                                                                                |                                            |        | 171     |         |  |        | 2,194   |        
|                                                |                                                                                                           |                                            |        |         |         |  |        |        
|                                                |                                                                                                           | Total stockholders equity                 |        |         | 186,322 |  |        |         | 185,347 | 
|                                                |                                                                                                           |                                            |        |         |         |  |        |        
|                                                |                                                                                                           | Total liabilities and stockholders equity |        | $       | 235,260 |  |        | $       | 250,220 | 
|                                                |                                                                                                           |                                            |        |         |         |  |        |        

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

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AXT, INC.

CONSOLIDATED INCOME STATEMENTS

|                                                                            |                                                                            |                                       |         |        |        |      |         |        |        |   |        |        |        | 
|--------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                            |                                                                            |                                      
|                                                                            |                                                                            | Years Ended December 31,             
|                                                                            |                                                                            |                                      
|                                                                            |                                                                            | 2001                                  |         | 2000   |        | 1999
|                                                                            |                                                                            |                                       |         |        |        |     
|                                                                            |                                                                            |                                      
|                                                                            |                                                                            | (In thousands, except per share data)
|Revenue                                                                     |                                                                            | $                                     | 119,530 |        |        | $    | 121,503 |        |        | $ | 75,372 |       
|Cost of revenue, including restructuring costs of
	$1,844 in 2000           |                                                                            |                                       | 82,191  |        |        |      | 73,684  |        |        |   | 50,026 |       
|                                                                            |                                                                            |                                       |         |        |        |      |         |        |        |   |        |       
|Gross profit                                                                |                                                                            |                                       | 37,339  |        |        |      | 47,819  |        |        |   | 25,346 |       
|Operating expenses:                                                         |                                                                            |                                       |         |        |        |      |         |        |        |   |        |       
|                                                                            | Selling, general and administrative                                        |                                       |         | 21,487 |        |      |         | 18,041 |        |   |        | 10,474 |       
|                                                                            | Research and development                                                   |                                       |         | 8,204  |        |      |         | 8,769  |        |   |        | 2,566  |       
|                                                                            | Restructuring costs                                                        |                                       |         |       |        |      |         | 6,409  |        |   |        |       |       
|                                                                            | Acquisition costs                                                          |                                       |         |       |        |      |         |       |        |   |        | 2,810  |       
|                                                                            |                                                                            |                                       |         |        |        |      |         |        |        |   |        |       
|                                                                            |                                                                            | Total operating expenses              |         |        | 29,691 |      |         |        | 33,219 |   |        |        | 15,850 | 
|                                                                            |                                                                            |                                       |         |        |        |      |         |        |        |   |        |       
|Income from operations                                                      |                                                                            |                                       | 7,648   |        |        |      | 14,600  |        |        |   | 9,496  |       
|Interest expense                                                            |                                                                            |                                       | 2,081   |        |        |      | 3,616   |        |        |   | 2,201  |       
|Other (income)/expense, net                                                 |                                                                            |                                       | 13,373  |        |        |      | (28,432 | )      |        |   | (1,423 | )     
|                                                                            |                                                                            |                                       |         |        |        |      |         |        |        |   |        |       
|Income (loss) from continuing operations
	before provision for income taxes |                                                                            |                                       | (7,806  | )      |        |      | 39,416  |        |        |   | 8,718  |       
|Provision for income taxes                                                  |                                                                            |                                       | (2,810  | )      |        |      | 14,978  |        |        |   | 4,380  |       
|                                                                            |                                                                            |                                       |         |        |        |      |         |        |        |   |        |       
|Income (loss) from continuing operations                                    |                                                                            |                                       | (4,996  | )      |        |      | 24,438  |        |        |   | 4,338  |       
|Discontinued operations:                                                    |                                                                            |                                       |         |        |        |      |         |        |        |   |        |       
|                                                                            | Loss from discontinued operations, net of tax
	benefits of $912 and $2,241 |                                       |         |       |        |      |         | (1,487 | )      |   |        | (3,658 | )     
|                                                                            | Loss on disposal, net of tax benefits of $822                              |                                       |         |       |        |      |         | (1,341 | )      |   |        |       |       
|Extraordinary item, net of tax benefits of $311                             |                                                                            |                                       |        |        |        |      |        |        |        |   | (508   | )     
|                                                                            |                                                                            |                                       |         |        |        |      |         |        |        |   |        |       
|Net income (loss)                                                           |                                                                            | $                                     | (4,996  | )      |        | $    | 21,610  |        |        | $ | 172    |       
|                                                                            |                                                                            |                                       |         |        |        |      |         |        |        |   |        |       
|Basic income (loss) per share:                                              |                                                                            |                                       |         |        |        |      |         |        |        |   |        |       
|                                                                            | Income (loss) from continuing operations                                   |                                       | $       | (0.23  | )      |      | $       | 1.24   |        |   | $      | 0.23   |       
|                                                                            | Loss from discontinued operations                                          |                                       |         |       |        |      |         | (0.14  | )      |   |        | (0.19  | )     
|                                                                            | Extraordinary item                                                         |                                       |         |       |        |      |         |       |        |   |        | (0.03  | )     
|                                                                            | Net income (loss)                                                          |                                       |         | (0.23  | )      |      |         | 1.10   |        |   |        | 0.01   |       
|Diluted income (loss) per share:                                            |                                                                            |                                       |         |        |        |      |         |        |        |   |        |       
|                                                                            | Income (loss) from continuing operations                                   |                                       | $       | (0.23  | )      |      | $       | 1.16   |        |   | $      | 0.22   |       
|                                                                            | Loss from discontinued operations                                          |                                       |         |       |        |      |         | (0.13  | )      |   |        | (0.18  | )     
|                                                                            | Extraordinary item                                                         |                                       |         |       |        |      |         |       |        |   |        | (0.03  | )     
|                                                                            | Net income (loss)                                                          |                                       |         | (0.23  | )      |      |         | 1.03   |        |   |        | 0.01   |       
|Shares used in per share calculations:                                      |                                                                            |                                       |         |        |        |      |         |        |        |   |        |       
|                                                                            | Basic                                                                      |                                       |         | 22,278 |        |      |         | 19,677 |        |   |        | 18,655 |       
|                                                                            | Diluted                                                                    |                                       |         | 22,278 |        |      |         | 21,059 |        |   |        | 19,771 |       

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

40



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AXT, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS
EQUITY

|                                                                                                                        |                                                  |                                          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   |         |        |        |   |        |        |        |  
|----------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ---------------------------------------- | --- | ------------ |  | -------- | ----- | -------- |  | ------------- | ------ | -------- |  | ------------- | ------- | ----- |  | ------------- | ---- | - |  | - | ------ | ------ | ------ | - | ----- | ------ | ----- | - | ------- | ------ | ------ | - | ------ | ------ | ------ | -
|                                                                                                                        |                                                  |                                          |     |              |  |          |       |          |  |               |        |          |  |              
|                                                                                                                        |                                                  | Preferred Stock                          |     | Common Stock |  |          |       |          |  | Other         |        |          |  |              
|                                                                                                                        |                                                  |                                          |     |              |  | Deferred |       | Retained |  | Comprehensive |        |          |  | Comprehensive
|                                                                                                                        |                                                  | Shares                                   |     | Amount       |  | Shares   |       | Amount   |  | Compensation  |        | Earnings |  | Income        |         | Total |  | Income/(loss)
|                                                                                                                        |                                                  |                                          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |              
|                                                                                                                        |                                                  |                                         
|                                                                                                                        |                                                  | (In thousands)                          
|Balance at December 31, 1998                                                                                            |                                                  |                                          | 981 |              |  | $        | 4,000 |          |  |               | 18,393 |          |  | $             | 45,266  |       |  | $             | (327 | ) |  | $ | 12,198 |        |        | $ | 27    |        |       | $ | 61,164  |        |        | $ | 4,508  |       
|                                                                                                                        |                                                  |                                          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   |         |        |        |   |        |       
|Common stock options exercised                                                                                          |                                                  |                                          |     |              |  |          |       |          |  |               | 201    |          |  |               | 648     |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   | 648     |        |        |   |        |       
|Repurchase of shares of common stock in
	connection with the early extinguishment of debt                               |                                                  |                                          |     |              |  |          |       |          |  |               | (21    | )        |  |               | (211    | )     |  |               |      |   |  |   |        |        |        |   |       |        |       |   | (211    | )      |        |   |        |       
|Acquisition costs paid by shareholders                                                                                  |                                                  |                                          |     |              |  |          | (10   | )        |  |               |        |          |  |               | (139    | )     |  |               |      |   |  |   |        |        |        |   |       |        |       |   | (149    | )      |        |   |        |       
|Issuance of Employee Stock Purchase Plan stock                                                                          |                                                  |                                          |     |              |  |          |       |          |  |               | 86     |          |  |               | 776     |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   | 776     |        |        |   |        |       
|Amortization of deferred compensation                                                                                   |                                                  |                                          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               | 110  |   |  |   |        |        |        |   |       |        |       |   | 110     |        |        |   |        |       
|Comprehensive income                                                                                                    |                                                  |                                          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   |         |        |        |   |        |       
|                                                                                                                        |                                                  | Net income                               |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        |        | 172    |   |       |        |       |   |         |        | 172    |   |        |        | 172    |  
|                                                                                                                        |                                                  | Currency translation adjustment          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        |        |        |   |       |        | (51   | ) |         |        | (51    | ) |        |        | (51    | )
|                                                                                                                        |                                                  |                                          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   |         |        |        |   |        |       
|Balance at December 31, 1999                                                                                            |                                                  |                                          | 981 |              |  | $        | 3,990 |          |  |               | 18,659 |          |  | $             | 46,340  |       |  | $             | (217 | ) |  | $ | 12,370 |        |        | $ | (24   | )      |       | $ | 62,459  |        |        | $ | 121    |       
|                                                                                                                        |                                                  |                                          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   |         |        |        |   |        |       
|Common stock options exercised                                                                                          |                                                  |                                          |     |              |  |          |       |          |  |               | 711    |          |  |               | 6,038   |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   | 6,038   |        |        |   |        |       
|Issuance of Employee Stock Purchase Plan stock                                                                          |                                                  |                                          |     |              |  |          |       |          |  |               | 63     |          |  |               | 648     |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   | 648     |        |        |   |        |       
|Reacquisition and retirement on common stock and
	Series A preferred stock in connection with merger of Lyte
	Optronics |                                                  |                                          | (98 | )            |  |          | (458  | )        |  |               | (225   | )        |  |               | 458     |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   |        |        |        |   |        |       
|Issuance of common stock in private placement                                                                           |                                                  |                                          |     |              |  |          |       |          |  |               | 234    |          |  |               | 8,507   |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   | 8,507   |        |        |   |        |       
|Issuance of common stock in follow on public
	offering                                                                  |                                                  |                                          |     |              |  |          |       |          |  |               | 2,510  |          |  |               | 80,812  |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   | 80,812  |        |        |   |        |       
|Income tax benefit from stock option exercises                                                                          |                                                  |                                          |     |              |  |          |       |          |  |               |        |          |  |               | 2,945   |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   | 2,945   |        |        |   |        |       
|Amortization of deferred compensation                                                                                   |                                                  |                                          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               | 110  |   |  |   |        |        |        |   |       |        |       |   | 110     |        |        |   |        |       
|Comprehensive income                                                                                                    |                                                  |                                          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   |        |        |        |   |        |       
|                                                                                                                        |                                                  | Net income                               |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        |        | 21,610 |   |       |        |       |   |         |        | 21,610 |   |        |        | 21,610 |  
|                                                                                                                        |                                                  | Unrealized gain on marketable securities |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        |        |        |   |       |        | 2,185 |   |         |        | 2,185  |   |        |        | 2,185  |  
|                                                                                                                        |                                                  | Currency translation adjustment          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        |        |        |   |       |        | 33    |   |         |        | 33     |   |        |        | 33     |  
|                                                                                                                        |                                                  |                                          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   |         |        |        |   |        |       
|Balance at December 31, 2000                                                                                            |                                                  |                                          | 883 |              |  | $        | 3,532 |          |  |               | 21,952 |          |  | $             | 145,748 |       |  | $             | (107 | ) |  | $ | 33,980 |        |        | $ | 2,194 |        |       | $ | 185,347 |        |        | $ | 23,828 |       
|                                                                                                                        |                                                  |                                          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   |         |        |        |   |        |       
|Common stock options exercised                                                                                          |                                                  |                                          |     |              |  |          |       |          |  |               | 388    |          |  |               | 3,862   |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   | 3,862   |        |        |   |        |       
|Issuance of Employee Stock Purchase Plan stock                                                                          |                                                  |                                          |     |              |  |          |       |          |  |               | 43     |          |  |               | 900     |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   | 900     |        |        |   |        |       
|Income tax benefit from stock option exercises                                                                          |                                                  |                                          |     |              |  |          |       |          |  |               |        |          |  |               | 3,125   |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   | 3,125   |        |        |   |        |       
|Amortization of deferred compensation                                                                                   |                                                  |                                          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               | 107  |   |  |   |        |        |        |   |       |        |       |   | 107     |        |        |   |        |       
|Comprehensive income (loss)                                                                                             |                                                  |                                          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   |        |        |        |   |        |       
|                                                                                                                        | Net income (loss)                                |                                          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        | (4,996 | )      |   |       |        |       |   |         | (4,996 | )      |   |        | (4,996 | )     
|                                                                                                                        | Unrealized gain (loss) on marketable
	securities |                                          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        |        |        |   |       | (2,052 | )     |   |         | (2,052 | )      |   |        | (2,052 | )     
|                                                                                                                        | Currency translation adjustment                  |                                          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        |        |        |   |       | 29     |       |   |         | 29     |        |   |        | 29     |       
|                                                                                                                        |                                                  |                                          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   |         |        |        |   |        |       
|Balance at December 31, 2001                                                                                            |                                                  |                                          | 883 |              |  | $        | 3,532 |          |  |               | 22,383 |          |  | $             | 153,635 |       |  | $             |     |   |  | $ | 28,984 |        |        | $ | 171   |        |       | $ | 186,322 |        |        | $ | (7,019 | )     
|                                                                                                                        |                                                  |                                          |     |              |  |          |       |          |  |               |        |          |  |               |         |       |  |               |      |   |  |   |        |        |        |   |       |        |       |   |         |        |        |   |        |       

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

41



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AXT, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                          |                                                                    |                                                                                       |                                                           |                             |                                                      |        |        |         |        |         |         |         |        |       |         |         |  
|--------------------------------------------------------- | ------------------------------------------------------------------ | ------------------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------- | ---------------------------------------------------- | ------ | ------ | ------- | ------ | ------- | ------- | ------- | ------ | ----- | ------- | ------- | -
|                                                          |                                                                    |                                                                                      
|                                                          |                                                                    | Years Ended December 31,                                                             
|                                                          |                                                                    |                                                                                      
|                                                          |                                                                    | 2001                                                                                  |                                                           | 2000                        |                                                      | 1999  
|                                                          |                                                                    |                                                                                       |                                                           |                             |                                                      |       
|                                                          |                                                                    |                                                                                      
|                                                          |                                                                    | (In thousands)                                                                       
|Cash flows from operating
	activities:                    |                                                                    |                                                                                       |                                                           |                             |                                                      |        |        |         |        |         |         |        
|                                                          | Net income (loss)                                                  |                                                                                       | $                                                         | (4,996                      | )                                                    |        | $      | 21,610  |        |         | $       | 172     |       
|                                                          |                                                                    | Adjustments to reconcile net income
	(loss) to cash provided by (used in) operations: |                                                           |                             |                                                      |        |        |         |        |         |         |         |        |      
|                                                          |                                                                    |                                                                                       | Depreciation                                              |                             |                                                      | 8,538  |        |         |        | 6,854   |         |         |        | 5,444 |        
|                                                          |                                                                    |                                                                                       | Deferred income taxes                                     |                             |                                                      | (5,041 | )      |         |        | 5,718   |         |         |        | (758  | )      
|                                                          |                                                                    |                                                                                       | Amortization of goodwill                                  |                             |                                                      | 324    |        |         |        | 548     |         |         |        | 599   |        
|                                                          |                                                                    |                                                                                       | Stock compensation                                        |                             |                                                      | 107    |        |         |        | 110     |         |         |        | 110   |        
|                                                          |                                                                    |                                                                                       | Stock option tax benefits                                 |                             |                                                      | 3,125  |        |         |        | 2,945   |         |         |        |      |        
|                                                          |                                                                    |                                                                                       | Non cash restructuring costs                              |                             |                                                      |       |        |         |        | 6,249   |         |         |        |      |        
|                                                          |                                                                    |                                                                                       | Non cash (gain)/loss on marketable securities             |                             |                                                      | 15,636 |        |         |        | (27,328 | )       |         |        |      |        
|                                                          |                                                                    |                                                                                       | Bond premium/discount amortization                        |                             |                                                      | 230    |        |         |        |        |         |         |        |      |        
|                                                          |                                                                    |                                                                                       | Loss (gain) on disposal of property, plant
	and equipment |                             |                                                      | 229    |        |         |        | (183    | )       |         |        |      |        
|                                                          |                                                                    |                                                                                       | Changes in assets and liabilities:                        |                             |                                                      |        |        |         |        |         |         |         |        |       |        
|                                                          |                                                                    |                                                                                       |                                                           | Accounts receivable         |                                                      |        | 11,939 |         |        |         | (10,212 | )       |        |       | (4,433  | )      
|                                                          |                                                                    |                                                                                       |                                                           | Inventories                 |                                                      |        | (3,741 | )       |        |         | (18,220 | )       |        |       | (10,170 | )      
|                                                          |                                                                    |                                                                                       |                                                           | Prepaid expenses            |                                                      |        | 1,240  |         |        |         | 5,282   |         |        |       | (5,674  | )      
|                                                          |                                                                    |                                                                                       |                                                           | Other assets                |                                                      |        | (454   | )       |        |         | (369    | )       |        |       | 522     |        
|                                                          |                                                                    |                                                                                       |                                                           | Accounts payable            |                                                      |        | (7,013 | )       |        |         | 1,715   |         |        |       | 444     |        
|                                                          |                                                                    |                                                                                       |                                                           | Accrued liabilities         |                                                      |        | (2,967 | )       |        |         | 9,187   |         |        |       | 2,222   |        
|                                                          |                                                                    |                                                                                       |                                                           | Other long-term liabilities |                                                      |        | (12    | )       |        |         | (210    | )       |        |       | (194    | )      
|                                                          |                                                                    |                                                                                       |                                                           |                             |                                                      |        |        |         |        |         |         |        
|                                                          |                                                                    |                                                                                       |                                                           |                             | Net cash provided by (used in) operating
	activities |        |        | 17,144  |        |         |         | 3,696   |        |       |         | (11,716 | )
|                                                          |                                                                    |                                                                                       |                                                           |                             |                                                      |        |        |         |        |         |         |        
|Cash flows from investing
	activities:                    |                                                                    |                                                                                       |                                                           |                             |                                                      |        |        |         |        |         |         |        
|                                                          | Purchases of property, plant and equipment                         |                                                                                       |                                                           | (25,834                     | )                                                    |        |        | (26,278 | )      |         |         | (2,758  | )     
|                                                          | Investment in marketable securities                                |                                                                                       |                                                           | (21,591                     | )                                                    |        |        |        |        |         |         |        |       
|                                                          | Investment in other assets                                         |                                                                                       |                                                           | (1,307                      | )                                                    |        |        | (1,599  | )      |         |         |        |       
|                                                          | Proceeds from sale of marketable securities                        |                                                                                       |                                                           | 1,034                       |                                                      |        |        |        |        |         |         |        |       
|                                                          | Proceeds from sale of property plant and equipment                 |                                                                                       |                                                           |                            |                                                      |        |        | 1,805   |        |         |         |        |       
|                                                          |                                                                    |                                                                                       |                                                           |                             |                                                      |        |        |         |        |         |         |        
|                                                          |                                                                    |                                                                                       |                                                           |                             | Net cash used in investing activities                |        |        | (47,698 | )      |         |         | (26,072 | )      |       |         | (2,758  | )
|                                                          |                                                                    |                                                                                       |                                                           |                             |                                                      |        |        |         |        |         |         |        
|Cash flows from financing
	activities:                    |                                                                    |                                                                                       |                                                           |                             |                                                      |        |        |         |        |         |         |        
|                                                          | Proceeds from (payments of):                                       |                                                                                       |                                                           |                             |                                                      |        |        |         |        |         |         |         |       
|                                                          |                                                                    | Issuance of common stock                                                              |                                                           |                             | 4,762                                                |        |        |         | 96,005 |         |         |         | 1,064  |      
|                                                          |                                                                    | Capital lease payments                                                                |                                                           |                             | (4,274                                               | )      |        |         | (3,850 | )       |         |         | (1,958 | )    
|                                                          |                                                                    | Capital lease borrowings                                                              |                                                           |                             | 3,143                                                |        |        |         |       |         |         |         |       |      
|                                                          |                                                                    | Short-term bank borrowings                                                            |                                                           |                             | (1,353                                               | )      |        |         | (9,945 | )       |         |         | 9,370  |      
|                                                          |                                                                    | Long-term debt borrowings                                                             |                                                           |                             |                                                     |        |        |         | 6,000  |         |         |         |       |      
|                                                          |                                                                    | Long-term debt payments                                                               |                                                           |                             | (2,800                                               | )      |        |         | (3,344 | )       |         |         | (4,327 | )    
|                                                          |                                                                    |                                                                                       |                                                           |                             |                                                      |        |        |         |        |         |         |        
|                                                          |                                                                    |                                                                                       |                                                           |                             | Net cash provided by (used in) financing
	activities |        |        | (522    | )      |         |         | 84,866  |        |       |         | 4,149   |  
|                                                          |                                                                    |                                                                                       |                                                           |                             |                                                      |        |        |         |        |         |         |        
|Effect of exchange rate changes                           |                                                                    |                                                                                       | 29                                                        |                             |                                                      |        | 33     |         |        |         | (51     | )      
|                                                          |                                                                    |                                                                                       |                                                           |                             |                                                      |        |        |         |        |         |         |        
|Net increase (decrease) in cash and cash
	equivalents     |                                                                    |                                                                                       | (31,047                                                   | )                           |                                                      |        | 62,523 |         |        |         | (10,376 | )      
|Cash and cash equivalents at the beginning of the
	period |                                                                    |                                                                                       | 68,585                                                    |                             |                                                      |        | 6,062  |         |        |         | 16,438  |        
|                                                          |                                                                    |                                                                                       |                                                           |                             |                                                      |        |        |         |        |         |         |        
|Cash and cash equivalents at the end of the period        |                                                                    | $                                                                                     | 37,538                                                    |                             |                                                      | $      | 68,585 |         |        | $       | 6,062   |        
|                                                          |                                                                    |                                                                                       |                                                           |                             |                                                      |        |        |         |        |         |         |        
|Non cash activity:                                        |                                                                    |                                                                                       |                                                           |                             |                                                      |        |        |         |        |         |         |        
|                                                          | Purchases of property, plant and equipment
	through capital leases |                                                                                       | $                                                         | 2,170                       |                                                      |        | $      | 8,170   |        |         | $       | 5,927   |       
|                                                          | Exchange of Finisar shares for Demeter shares                      |                                                                                       | $                                                         |                            |                                                      |        | $      | 27,328  |        |         | $       |        |       
|Supplemental Disclosures:                                 |                                                                    |                                                                                       |                                                           |                             |                                                      |        |        |         |        |         |         |        
|                                                          | Interest paid                                                      |                                                                                       | $                                                         | 2,081                       |                                                      |        | $      | 3,597   |        |         | $       | 2,288   |       
|                                                          | Income taxes paid                                                  |                                                                                       | $                                                         | 305                         |                                                      |        | $      | 4,645   |        |         | $       | 6,268   |       

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

42



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##### Table of Contents



AXT, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1.     The
Company and Summary of Accounting Policies



| |            
| | -----------
| | The Company

AXT, Inc. designs, develops, manufactures, and
distributes high-performance compound semiconductor substrates,
as well as opto-electronic semiconductor devices, such as
high-brightness light-emitting diodes, or HBLEDs, laser diodes
including vertical cavity surface emitting lasers, or VCSELs,
and edge-emitting laser diodes for telecommunications
applications.

AXT expanded its markets in 1999 through the
acquisition of Lyte Optronics, Inc., (see Note 4). Lyte
Optronics operates as the Opto-electronics division, which
focuses on manufacturing HBLEDs and laser diodes.

The Company officially changed its name from
American Xtal Technology, Inc. to AXT, Inc. on July 7, 2000.



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
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 from these estimates.



| |                            
| | ---------------------------
| | Principles of Consolidation

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



| |                             
| | ----------------------------
| | Foreign Currency Translation

The functional currencies of the Companys
Japanese and Chinese subsidiaries are the local currencies.
Transaction gains and losses resulting from transactions
denominated in currencies other than the U.S. dollar for the
Company or in the local currencies for the subsidiaries are
included in other income 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
in stockholders equity.



| |                    
| | -------------------
| | Revenue Recognition

The Company recognizes revenue upon the shipment
of its products to the customer provided that the Company has
received a signed purchase order, the price is fixed, title has
transferred, collection of resulting receivables is probable,
product returns are reasonably estimable, there are no customer
acceptance requirements and there are no remaining significant
obligations. The Company provides for future returns based on
historical experience at the time revenue is recognized.



| |                                     
| | ------------------------------------
| | Fair Value of Financial
	Instruments

The reported amounts of certain of the
Companys financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and accrued
liabilities approximate fair value due to their

43



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##### Table of Contents



AXT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

short maturities. The reported amounts of
short-term bank borrowings, loans payable and capital lease
obligations approximate fair value due to the market interest
rates which these debts bear.



| |                             
| | ----------------------------
| | Concentration of Credit Risk

Financial instruments which potentially subject
the Company to concentration of credit risk consist primarily of
trade accounts receivable. The Company performs ongoing credit
evaluations of its customers financial condition, and
limits the amount of credit extended when deemed necessary, but
generally does not require collateral. The Company invests
primarily in money market accounts and commercial paper
instruments. Cash equivalents are maintained with high quality
institutions and their composition and maturities are regularly
monitored by management

No customer represented greater than 10% of
Product revenues for the years ended December 31, 2001,
2000 and 1999.

No customer accounted for 10% or more of the
trade accounts receivable balance as of December 31, 2001
and 2000.



| |                 
| | ----------------
| | Cash Equivalents

The Company considers all highly liquid debt
instruments purchased with an original maturity of three months
or less to be cash equivalents.



| |            
| | -----------
| | Investments

The Company classifies its investment securities
as available-for-sale securities as prescribed in Financial
Accounting Standard No. 115, Accounting for Certain
Investments in Debt and Equity Securities. All investments
are carried at fair market value, which is determined based on
quoted market prices, with net unrealized gains and losses
included in comprehensive income, net of tax.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of cost or
net realizable value. Cost is determined using the weighted
average cost method. Finished goods and work-in-process
inventories include material, labor and manufacturing overhead
costs.



| |                              
| | -----------------------------
| | 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 three to ten 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, automobiles over 5 years,
office equipment, furniture and fixtures over 3 years,
machinery and equipment over 7 years, leasehold
improvements over 10 years, and buildings over
27.5 years.



| |         
| | --------
| | Goodwill

Goodwill, the excess of cost over the fair value
of net assets acquired, is being amortized over 5 years.



| |                                 
| | --------------------------------
| | Impairment of Long-Lived
	Assets

Pursuant to Statement of Financial Accounting
Standard No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
of, the Company reviews long-lived assets

44



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##### Table of Contents



AXT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

based upon a gross cash flow basis and will
reserve for impairment whenever events or changes in
circumstances indicate the carrying amount of the assets may not
be fully recoverable.



| |                         
| | ------------------------
| | Stock-Based Compensation

The Company accounts for stock-based employee
compensation arrangements using the intrinsic value method as
prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related
Interpretations thereof. Accordingly, compensation costs for
stock options is measured as the excess, if any, of the market
price of the Companys stock at the date of grant over the
stock option exercise price. In addition, the Company complies
with the disclosure provisions of Statement of Financial
Accounting Standard No. 123, Accounting for
Stock-Based Compensation.



| |                         
| | ------------------------
| | Research and Development

Research and development costs are expensed as
incurred.



| |             
| | ------------
| | Income Taxes

The Company accounts 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 deferred tax assets when management
estimates, based on available objective evidence, that it is
more likely than not that the benefit will not be realized for
the deferred tax assets.



| |                     
| | --------------------
| | Comprehensive Income

Comprehensive income is defined as the change in
equity of a company during a period from transactions and other
events and circumstances excluding transactions resulting from
investment by owners and distribution to owners. The difference
between net income and comprehensive income for the Company
relates to foreign currency translation adjustments and
unrealized gains and losses on investment securities.
Comprehensive income for the years ended December 31, 2001,
2000 and 1999 is disclosed in the Consolidated Statement
of Stockholders Equity.



| |                                               
| | ----------------------------------------------
| | Basic and Diluted Net Income (Loss) Per
	Share

Basic income (loss) per share is computed by
dividing the income (loss) available to holders of common stock
for the period by the weighted average number of shares of
common stock outstanding during the period. The calculation of
diluted income (loss) per share excludes potential common stock
if the effect of such stock is antidilutive. Potential common
stock consists of common shares issuable upon the exercise of
stock options.



| |                                  
| | ---------------------------------
| | Recent Accounting
	Pronouncements

In July 2001, the FASB issued Statement of
Financial Accounting Standards No. 141 and No. 142, or
SFAS 141, Business Combinations, and
SFAS 142, Goodwill and Other Intangible Assets.
Under SFAS 141, all business combinations must be accounted
for using the purchase method of accounting; use of the
pooling-of-interests (pooling) method is prohibited. The
provisions of the statement will apply to all business
combinations initiated after June 30, 2001. SFAS 142
will apply to all acquired intangible assets whether acquired
singly, as a part of a group, or in a business combination. The
statement will supersede APB Opinion No. 17,
Intangible Assets, and will carry forward provisions
in APB Opinion No. 17 relating to internally developed
intangible assets. Adoption of SFAS 142 will result in
ceasing amortization of goodwill. All of the statement should be
applied in fiscal years beginning after December 31, 2001
to all goodwill and other intangible assets recognized in an
entitys statement of financial position at that date,
regardless of when

45



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AXT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

those assets were initially recognized. We will
test all goodwill and intangible assets for impairment upon
adoption of SFAS 142 and will record any impairment charge
as accumulative effect of an accounting change at that time. We
believe adoption of the provisions of SFAS 141 and
SFAS 142 will not have a material effect on the
Companys financial position or results of operations.

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

Note
2.     Discontinued
Operations

On December 14, 2000, the Companys
Board of Directors approved managements plan to exit the
Companys unprofitable consumer products business. The plan
was substantially complete at December 31, 2001.

Certain information with respect to discontinued
operations is summarized below (in thousands):

|                                                 |                                     |                          |        |            |       |   |        |       |       | 
|------------------------------------------------ | ----------------------------------- | ------------------------ | ------ | ---------- | ----- | - | ------ | ----- | ----- | 
|                                                 |                                     | January 1, 2000          |        |           
|                                                 |                                     | through                  |        |           
|                                                 |                                     | December 14,             |        | Year Ended
|                                                 |                                     | 2000                     |        | 1999      
|                                                 |                                     |                          |        |           
|Revenue                                          |                                     | $                        | 4,832  |            |       | $ | 6,149  |      
|Cost of revenue                                  |                                     |                          | 4,311  |            |       |   | 7,343  |      
|                                                 |                                     |                          |        |            |       |   |        |      
|Gross profit                                     |                                     |                          | 521    |            |       |   | (1,194 | )    
|Operating expenses:                              |                                     |                          |        |            |       |   |        |      
|                                                 | Selling, general and administrative |                          |        | 2,899      |       |   |        | 3,543 |      
|                                                 | Research and development            |                          |        | 160        |       |   |        | 520   |      
|                                                 |                                     |                          |        |            |       |   |        |      
|                                                 |                                     | Total operating expenses |        |            | 3,059 |   |        |       | 4,063 | 
|Income from operations                           |                                     |                          | (2,538 | )          |       |   | (5,257 | )    
|Interest expense                                 |                                     |                          | 0      |            |       |   | 526    |      
|Other (income) expense                           |                                     |                          | (139   | )          |       |   | 116    |      
|                                                 |                                     |                          |        |            |       |   |        |      
|Income (loss) before provision for income
	taxes |                                     |                          | (2,399 | )          |       |   | (5,899 | )    
|Income tax benefit                               |                                     |                          | (912   | )          |       |   | (2,241 | )    
|                                                 |                                     |                          |        |            |       |   |        |      
|Loss from discontinued operations                |                                     | $                        | (1,487 | )          |       | $ | (3,658 | )    
|                                                 |                                     |                          |        |            |       |   |        |      

46



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##### Table of Contents



AXT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The charge in 2000 for loss on disposal of the
consumer products business includes the following:

|                                                                                                                                    |  |   |       |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | - | ----- | -
|Carrying value of net assets in excess of
	anticipated proceeds                                                                     |  | $ | 1,060 |  
|Expenses of asset disposal and anticipated
	operating loss for the period December 15, 2000 through the
	estimated date of disposal |  |   | 1,103 |  
|                                                                                                                                    |  |   |       |  
|Loss on disposal before taxes                                                                                                       |  |   | 2,163 |  
|Income tax benefit                                                                                                                  |  |   | (822  | )
|                                                                                                                                    |  |   |       |  
|Loss on disposal                                                                                                                    |  | $ | 1,341 |  
|                                                                                                                                    |  |   |       |  

Note
3.     Restructuring Costs

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

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

|                                        |  |         |       |          |  |              |     |      |  |   |       |  |  |   |       | 
|--------------------------------------- |  | ------- | ----- | -------- |  | ------------ | --- | ---- |  | - | ----- |  |  | - | ----- | 
|                                        |  |         |       |          |  |             
|                                        |  |         |       | Utilized |  | Balance     
|                                        |  |         |       |          |  | December 31,
|                                        |  | Reserve |       | Cash     |  | Non-cash     |     | 2001
|                                        |  |         |       |          |  |              |     |     
|Inventory write-off                     |  | $       | 1,844 |          |  | $            |    |      |  | $ | 1,844 |  |  | $ |      | 
|Property, plant and equipment write-off |  |         | 3,436 |          |  |              |    |      |  |   | 3,436 |  |  |   |      | 
|Goodwill write-off                      |  |         | 848   |          |  |              |    |      |  |   | 848   |  |  |   |      | 
|Other restructuring costs               |  |         | 2,124 |          |  |              | 382 |      |  |   | 121   |  |  |   | 1,621 | 
|                                        |  |         |       |          |  |              |     |      |  |   |       |  |  |   |       | 
|                                        |  | $       | 8,252 |          |  | $            | 382 |      |  | $ | 6,249 |  |  | $ | 1,621 | 
|                                        |  |         |       |          |  |              |     |      |  |   |       |  |  |   |       | 

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

Note
4.     Acquisition



| |                                                 
| | ------------------------------------------------
| | Merger of the Company with Lyte Optronics,
	Inc.

On May 28, 1999, the Company completed a
merger with Lyte Optronics, Inc., or Lyte, a Nevada corporation
and all of its subsidiaries, including Alpha Photonics, Inc.,
Lyte Optronics Ltd. (a United Kingdom company) and Advanced
Semiconductor (a Xiamen, China company). Lyte and its
subsidiaries manufactured and distributed semiconductor laser
diode chips, high-brightness LEDs and laser pointers.

Under the terms of the merger agreement, the
Company issued approximately 2,023,000 shares of its common
stock in exchange for all the outstanding shares of Lytes
common stock as well as the outstanding shares of Lytes
Series A preferred stock. The Company also issued
approximately 883,000 shares of Series A preferred stock in
exchange for all the outstanding shares of Lytes
Series B preferred stock. In addition, the Company assumed
and converted Lytes options and warrants representing
approximately 115,000 shares of the Companys common
stock.

47



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##### Table of Contents



AXT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The merger has been accounted for as a pooling of
interests; accordingly, all prior period consolidated financial
statements have been restated to include the combined results of
operations, financial position and cash flows of Lyte.

The Company incurred costs of approximately
$2.8 million associated with the merger, which were charged
to operations during the quarter ended June 30, 1999, the
period in which the merger was consummated.

Note 5.     Gain on
Demeter Warrants

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

Note
6.     Investments

The Company classifies its investment securities
as available-for-sale securities as prescribed by Statement of
Financial Accounting Standards No. 115 or SFAS 115,
Accounting for Certain Investments in Debt and Equity
Securities. All investments carried at fair market value,
which is determined based on quoted market prices, with net
unrealized gains and losses included in comprehensive income,
net of tax. The components of investments at December 31,
2001 are summarized below (in thousands):

|                                 |  |      |        |            |  |             |        |             |  |   |         |   |  |   |     | 
|-------------------------------- |  | ---- | ------ | ---------- |  | ----------- | ------ | ----------- |  | - | ------- | - |  | - | --- | 
|                                 |  |      |        | Aggregate  |  | Realized    |        | Unrealized 
|Available for Sale               |  | Cost |        | Fair Value |  | Gain/(Loss) |        | Gain/(Loss)
|                                 |  |      |        |            |  |             |        |            
|Money market                     |  | $    | 5,400  |            |  | $           | 5,400  |             |  | $ |        |   |  | $ |    | 
|Corporate bonds                  |  |      | 15,816 |            |  |             | 15,991 |             |  |   |        |   |  |   | 175 | 
|Government agency bonds          |  |      | 4,511  |            |  |             | 4,543  |             |  |   |        |   |  |   | 32  | 
|Corporate equity securities      |  |      | 28,409 |            |  |             | 11,691 |             |  |   | (16,718 | ) |  |   |    | 
|                                 |  |      |        |            |  |             |        |             |  |   |         |   |  |   |     | 
|                                 |  | $    | 54,136 |            |  | $           | 37,625 |             |  | $ | (16,718 | ) |  | $ | 207 | 
|                                 |  |      |        |            |  |             |        |             |  |   |         |   |  |   |     | 
|Recorded as:                     |  |      |        |            |  |             |        |             |  |   |         |   |  |   |     | 
|Cash equivalents                 |  | $    | 5,400  |            |  |             |        |             |  |   |         |   |  |   |     | 
|Investments due within one year  |  |      | 25,673 |            |  |             |        |             |  |   |         |   |  |   |     | 
|Investments due in over one year |  |      | 6,552  |            |  |             |        |             |  |   |         |   |  |   |     | 
|                                 |  |      |        |            |  |             |        |             |  |   |         |   |  |   |     | 
|                                 |  | $    | 37,625 |            |  |             |        |             |  |   |         |   |  |   |     | 
|                                 |  |      |        |            |  |             |        |             |  |   |         |   |  |   |     | 

48



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AXT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 7.     Corporate
Affiliates

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

|                                                |  |              |       |              |  |            |       |            |  |  |              |  |  |  |    |  
|----------------------------------------------- |  | ------------ | ----- | ------------ |  | ---------- | ----- | ---------- |  |  | ------------ |  |  |  | -- | -
|                                                |  | Investment   |       | Investment   |  |            |       |           
|                                                |  | Balance      |       | Balance      |  |            |       |           
|                                                |  | December 31, |       | December 31, |  | Accounting |       | Ownership 
|Affiliate                                       |  | 2001         |       | 2000         |  | Method     |       | Percentage
|                                                |  |              |       |              |  |            |       |           
|Xilingol Tongli Ge Co. Ltd.                     |  | $            | 810   |              |  | $          | 302   |            |  |  | Equity       |  |  |  | 25 | %
|Emeishan Jia Mei High Pure Metals Co.,
	Ltd.    |  |              | 629   |              |  |            |      |            |  |  | Equity       |  |  |  | 25 | %
|Beijing Ji Ya Semiconductor Material Co.,
	Ltd. |  |              | 1,599 |              |  |            | 1,599 |            |  |  | Consolidated |  |  |  | 51 | %
|Nanjing Jin Mei Gallium Co., Ltd.               |  |              | 700   |              |  |            | 700   |            |  |  | Consolidated |  |  |  | 88 | %

Undistributed retained earnings relating to the
Companys corporate affiliates was $679,000 at
December 31, 2001. Net income recorded from the
Companys corporate affiliates was $701,000 for the year
ended December 31, 2001.

Note
8.     Stockholder Rights
Plan.

In April 2001, the Company adopted a Stockholder
Rights Plan (the Plan) designed to enable all
stockholders to realize the full value of their investment and
to provide for fair and equal treatment for all stockholders in
the event that an unsolicited attempt is made to acquire the
Company. Under the Plan, stockholders received one Right to
purchase one one-thousandth of a share of a new series of
Preferred Stock for each outstanding share of Common Stock held
of record at the close of business on May 30, 2001 at
$131.00 per Right, when someone acquires 15 percent or more
of the Companys Common Stock or announces a tender offer
which could result in such person owning 15 percent or more
of the Common Stock. Each one one-thousandth of a share of the
new Preferred Stock has terms designed to make it substantially
the economic equivalent of one share of Common Stock. Prior to
someone acquiring 15 percent, the Rights can be redeemed
for $0.001 each by action of the Board of Directors. Under
certain circumstances, if someone acquires 15 percent or
more of the Common Stock, the Rights permit the stockholders
other than the acquiror to purchase the Companys Common
Stock having a market value of twice the exercise price of the
Rights, in lieu of the Preferred Stock. Alternatively, when the
Rights become exercisable, the Board of Directors may authorize
the issuance of one share of Common Stock in exchange for each
Right that is then exercisable. In addition, in the event of
certain business combinations, the Rights permit the purchase of
the Common Stock of an acquiror at a 50 percent discount.
Rights held by the acquiror will become null and void in both
cases. The Rights expire on April 24, 2011.

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AXT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 9.     Balance
Sheet Detail

The components of selected balance sheet accounts
are summarized below (in thousands):

|                               |                                                 |                                 |         |         |         |   |        |         |         |  
|------------------------------ | ----------------------------------------------- | ------------------------------- | ------- | ------- | ------- | - | ------ | ------- | ------- | -
|                               |                                                 |                                
|                               |                                                 | December 31,                   
|                               |                                                 |                                
|                               |                                                 | 2001                            |         | 2000   
|                               |                                                 |                                 |         |        
|Accounts receivable:           |                                                 |                                 |         |         |         |   |        |        
|                               | Accounts receivable, gross                      |                                 | $       | 22,353  |         |   | $      | 29,903  |        
|                               |                                                 | Allowance for doubtful accounts |         |         | (6,669  | ) |        |         | (2,130  | )
|                               |                                                 |                                 |         |         |         |   |        |        
|                               |                                                 | $                               | 15,684  |         |         | $ | 27,773 |        
|                               |                                                 |                                 |         |         |         |   |        |        
|Inventories:                   |                                                 |                                 |         |         |         |   |        |        
|                               | Raw materials                                   |                                 | $       | 21,308  |         |   | $      | 20,886  |        
|                               | Work-in-process                                 |                                 |         | 30,265  |         |   |        | 28,988  |        
|                               | Finished goods                                  |                                 |         | 17,368  |         |   |        | 12,931  |        
|                               |                                                 | Valuation allowance             |         |         | (13,354 | ) |        |         | (10,959 | )
|                               |                                                 |                                 |         |         |         |   |        |        
|                               |                                                 | $                               | 55,587  |         |         | $ | 51,846 |        
|                               |                                                 |                                 |         |         |         |   |        |        
|Prepaid expenses:              |                                                 |                                 |         |         |         |   |        |        
|                               | Income tax receivable                           |                                 | $       |        |         |   | $      | 1,389   |        
|                               | Other                                           |                                 |         | 3,577   |         |   |        | 2,214   |        
|                               |                                                 |                                 |         |         |         |   |        |        
|                               |                                                 | $                               | 3,577   |         |         | $ | 3,603  |        
|                               |                                                 |                                 |         |         |         |   |        |        
|Property, plant and equipment: |                                                 |                                 |         |         |         |   |        |        
|                               | Land                                            |                                 | $       | 2,447   |         |   | $      | 2,447   |        
|                               | Building                                        |                                 |         | 26,990  |         |   |        | 19,747  |        
|                               | Machinery and equipment                         |                                 |         | 60,984  |         |   |        | 40,002  |        
|                               | Leasehold improvements                          |                                 |         | 3,821   |         |   |        | 4,079   |        
|                               | Construction in progress                        |                                 |         | 11,478  |         |   |        | 14,694  |        
|                               |                                                 |                                 |         |         |         |   |        |        
|                               |                                                 |                                 | 105,720 |         |         |   | 80,969 |        
|                               | Less: accumulated depreciation and amortization |                                 |         | (23,147 | )       |   |        | (17,568 | )      
|                               |                                                 |                                 |         |         |         |   |        |        
|                               |                                                 | $                               | 82,573  |         |         | $ | 63,401 |        
|                               |                                                 |                                 |         |         |         |   |        |        
|Accrued liabilities:           |                                                 |                                 |         |         |         |   |        |        
|                               | Accrued compensation and other                  |                                 | $       | 2,026   |         |   | $      | 3,186   |        
|                               | Customer prepayments                            |                                 |         | 6,477   |         |   |        | 5,402   |        
|                               | Accrued restructuring costs                     |                                 |         | 1,621   |         |   |        | 1,991   |        
|                               | Accrued discontinued operation costs            |                                 |         | 619     |         |   |        | 1,103   |        
|                               | Income tax payable                              |                                 |         | 308     |         |   |        |        |        
|                               | Other                                           |                                 |         | 2,619   |         |   |        | 4,969   |        
|                               |                                                 |                                 |         |         |         |   |        |        
|                               |                                                 | $                               | 13,670  |         |         | $ | 16,651 |        
|                               |                                                 |                                 |         |         |         |   |        |        

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AXT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note
10.     Debt



| |                          
| | -------------------------
| | Short-Term Bank Borrowing

The Company has a $5.0 million bank line of
credit that expires on September 30, 2003. The line of
credit is secured by the Companys operating assets,
excluding assets in China. Borrowings bear interest at 2.25%
above LIBOR that was 4.13% at December 31, 2001. In
subsequent periods the interest rate will vary above LIBOR
depending on the companys financial performance compared
to a set of performance measures. No amounts were outstanding
under this line of credit at December 31, 2001 and 2000.

The credit facility that we have with our bank
includes the line of credit, term loans in the amount of
$5.2 million and the letter of credit supporting repayment
of our bonds. The credit facility is subject to certain
financial covenants regarding current financial ratios and cash
flow requirements that have all been met as of December 31,
2001. If we fail to comply with these covenants in the future
and are unable to obtain a waiver from our bank, the amounts due
under this credit facility would become immediately due and
payable. The total amount outstanding under the credit facility
at December 31, 2001 was $14.9 million.



| |               
| | --------------
| | Long-Term Debt

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

|                                                                                                                                                                                                    |  |              |        |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                                                                                                                                                                                    |  |             
|                                                                                                                                                                                                    |  | December 31,
|                                                                                                                                                                                                    |  |             
|                                                                                                                                                                                                    |  | 2001         |        | 2000
|                                                                                                                                                                                                    |  |              |        |     
|Various notes payable to banks, secured by
	certain equipment, bearing interest at fixed rates between 7.69%
	and 8.84%, maturing between February 2001 and May 2003                                |  | $            | 916    |      |  | $ | 2,035  |  
|Debenture loan to Bay Area Employment Development
	Company, guaranteed by the U.S. Small Business Administration,
	bearing interest at a fixed rate of 7.27%, maturing October 2016                 |  |              | 857    |      |  |   | 888    |  
|Taxable revenue bonds, secured by a letter of
	credit from a bank, bearing interest at the H15 30 day bond
	yield for commercial paper that was 5.60% on December 31,
	2000, maturing December 2023 |  |              | 9,720  |      |  |   | 10,555 |  
|Mortgage notes payable to a bank, secured by
	property, bearing interest at 150 basis points above the prime
	rate that was 5.75% on December 31, 2000, maturing May 2003                           |  |              | 5,185  |      |  |   | 6,000  |  
|                                                                                                                                                                                                    |  |              |        |      |  |   |        |  
|                                                                                                                                                                                                    |  |              | 16,678 |      |  |   | 19,478 |  
|Less current portion                                                                                                                                                                                |  |              | (2,336 | )    |  |   | (4,355 | )
|                                                                                                                                                                                                    |  |              |        |      |  |   |        |  
|                                                                                                                                                                                                    |  | $            | 14,342 |      |  | $ | 15,123 |  
|                                                                                                                                                                                                    |  |              |        |      |  |   |        |  

Maturities of long-term debt at December 31,
2001 were as follows:

|           |  |   |        | 
|---------- |  | - | ------ | 
|2002       |  | $ | 2,336  | 
|2003       |  |   | 1,548  | 
|2004       |  |   | 1,277  | 
|2005       |  |   | 1,240  | 
|2006       |  |   | 1,238  | 
|Thereafter |  |   | 9,039  | 
|           |  |   |        | 
|           |  | $ | 16,678 | 
|           |  |   |        | 

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AXT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Following the merger with Lyte Optronics in 1999,
the Company prepaid Lyte Optronics debt. The prepayment resulted
in an extraordinary loss in the amount of $508,000, net of tax
benefits.

Note 11.     Income
Taxes

The components of the provision for income taxes
are summarized below (in thousands):

|          |         |                                                                            |   |        |        |      |   |       |        |  |   |       |       |  
|--------- | ------- | -------------------------------------------------------------------------- | - | ------ | ------ | ---- | - | ----- | ------ |  | - | ----- | ----- | -
|          |         |                                                                           
|          |         | Years Ended December 31,                                                  
|          |         |                                                                           
|          |         | 2001                                                                       |   | 2000   |        | 1999
|          |         |                                                                            |   |        |        |     
|Current:  |         |                                                                            |   |        |        |      |   |       |        |  |   |      
|          | Federal |                                                                            | $ | 1,917  |        |      | $ | 7,738 |        |  | $ | 4,201 |      
|          | State   |                                                                            |   |       |        |      |   | 948   |        |  |   | 690   |      
|          | Foreign |                                                                            |   | 314    |        |      |   | 155   |        |  |   | 247   |      
|          |         |                                                                            |   |        |        |      |   |       |        |  |   |      
|          |         | Total current                                                              |   |        | 2,231  |      |   |       | 8,841  |  |   |       | 5,138 |  
|          |         |                                                                            |   |        |        |      |   |       |        |  |   |      
|Deferred: |         |                                                                            |   |        |        |      |   |       |        |  |   |      
|          | Federal |                                                                            |   | (3,481 | )      |      |   | 5,489 |        |  |   | (663  | )    
|          | State   |                                                                            |   | (1,560 | )      |      |   | 648   |        |  |   | (95   | )    
|          |         |                                                                            |   |        |        |      |   |       |        |  |   |      
|          |         | Total deferred                                                             |   |        | (5,041 | )    |   |       | 6,137  |  |   |       | (758  | )
|          |         |                                                                            |   |        |        |      |   |       |        |  |   |      
|          |         | Total provision from continuing operations before
	discontinued operations |   | $      | (2,810 | )    |   | $     | 14,978 |  |   | $     | 4,380 |  
|          |         |                                                                            |   |        |        |      |   |       |        |  |   |      

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

|                                                |  |                          |       |      |  |      |      |    |  |  |      |   
|----------------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ---- | -- |  |  | ---- | --
|                                                |  |                         
|                                                |  | Years Ended December 31,
|                                                |  |                         
|                                                |  | 2001                     |       | 2000 |  | 1999
|                                                |  |                          |       |      |  |     
|Statutory federal income tax rate               |  |                          | (35.0 | )%   |  |      | 35.0 | %  |  |  | 34.0 | % 
|State income taxes, net of federal tax benefits |  |                          | (5.0  | )%   |  |      | 3.3  | %  |  |  | 4.8  | % 
|Foreign sales corporation benefit               |  |                          | 0.0   | %    |  |      | (1.4 | )% |  |  | (3.0 | )%
|Acquisition costs                               |  |                          | 0.0   | %    |  |      | 0.0  | %  |  |  | 11.0 | % 
|Other                                           |  |                          | 4.0   | %    |  |      | 1.1  | %  |  |  | 3.4  | % 
|                                                |  |                          |       |      |  |      |      |    |  |  |      |   
|Effective tax rate                              |  |                          | (36.0 | )%   |  |      | 38.0 | %  |  |  | 50.2 | % 
|                                                |  |                          |       |      |  |      |      |    |  |  |      |   

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AXT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                          |                                                           |                                       |        |        |       |   |         |        |        |  
|------------------------- | --------------------------------------------------------- | ------------------------------------- | ------ | ------ | ----- | - | ------- | ------ | ------ | -
|                          |                                                           |                                      
|                          |                                                           | Years Ended                          
|                          |                                                           | December 31,                         
|                          |                                                           |                                      
|                          |                                                           | 2001                                  |        | 2000  
|                          |                                                           |                                       |        |       
|Deferred tax assets:      |                                                           |                                       |        |        |       |   |         |       
|                          | Accruals and reserves not yet deductible                  |                                       | $      | 10,151 |       |   | $       | 8,529  |       
|                          | State taxes                                               |                                       |        | (291   | )     |   |         | 288    |       
|                          | Net operating loss                                        |                                       |        |       |       |   |         | 867    |       
|                          | Credits                                                   |                                       |        | 997    |       |   |         | 165    |       
|                          |                                                           |                                       |        |        |       |   |         |       
|                          |                                                           | $                                     | 10,857 |        |       | $ | 9,849   |       
|                          |                                                           |                                       |        |        |       |   |         |       
|Deferred tax liabilities: |                                                           |                                       |        |        |       |   |         |       
|                          | Unrealized appreciation on Finisar marketable
	securities |                                       |        | (75    | )     |   |         | (1,339 | )     
|                          | Gain on receipt of Finisar marketable securities          |                                       |        | (3,664 | )     |   |         | (9,945 | )     
|                          | Unrepatriated Foreign Earnings                            |                                       |        | (967   | )     |   |         |       |       
|                          | Depreciation                                              |                                       |        | (3,693 | )     |   |         | (2,412 | )     
|                          |                                                           |                                       |        |        |       |   |         |       
|                          |                                                           | $                                     | (8,399 | )      |       | $ | (13,696 | )     
|                          |                                                           |                                       |        |        |       |   |         |       
|                          |                                                           | Net deferred tax assets (liabilities) |        | $      | 2,458 |   |         | $      | (3,847 | )
|                          |                                                           |                                       |        |        |       |   |         |       

At December 31, 2001, the Company had state
tax credits of approximately $997,000 which begins to expire in
2007.

Note 12.     Net
Income per Share

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

|                                                   |                                                                              |                          |        |        |   |      |        |        |       |   |        |        |       | 
|-------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------ | ------ | ------ | - | ---- | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                                                   |                                                                              |                         
|                                                   |                                                                              | Years Ended December 31,
|                                                   |                                                                              |                         
|                                                   |                                                                              | 2001                     |        | 2000   |   | 1999
|                                                   |                                                                              |                          |        |        |   |     
|Numerator:                                         |                                                                              |                          |        |        |   |      |        |        |       |   |        |       
|                                                   | Net income (loss)                                                            |                          | $      | (4,996 | ) |      | $      | 21,610 |       |   | $      | 172    |      
|                                                   | Less: Preferred stock dividends                                              |                          |        | (177   | ) |      |        |       |       |   |        |       |      
|                                                   |                                                                              |                          |        |        |   |      |        |        |       |   |        |       
|                                                   | Net income (loss) available to common
	stockholders                          |                          | $      | (5,173 | ) |      | $      | 21,610 |       |   | $      | 172    |      
|                                                   |                                                                              |                          |        |        |   |      |        |        |       |   |        |       
|Denominator:                                       |                                                                              |                          |        |        |   |      |        |        |       |   |        |       
|                                                   | Denominator for basic net income per
	share  weighted average common shares |                          |        | 22,278 |   |      |        | 19,677 |       |   |        | 18,655 |      
|                                                   | Effect of dilutive securities:                                               |                          |        |        |   |      |        |        |       |   |        |        |      
|                                                   |                                                                              | Common stock options     |        |        |  |      |        |        | 1,382 |   |        |        | 1,116 | 
|                                                   |                                                                              |                          |        |        |   |      |        |        |       |   |        |       
|Denominator for dilutive net income per share      |                                                                              |                          | 22,278 |        |   |      | 21,059 |        |       |   | 19,771 |       
|                                                   |                                                                              |                          |        |        |   |      |        |        |       |   |        |       
|Basic earnings per share                           |                                                                              | $                        | (0.23  | )      |   | $    | 1.10   |        |       | $ | 0.01   |       
|Diluted earnings per share                         |                                                                              | $                        | (0.23  | )      |   | $    | 1.03   |        |       | $ | 0.01   |       
|Options excluded from diluted net income per share |                                                                              |                          | 2,708  |        |   |      | 118    |        |       |   | 415    |       
|                                                   |                                                                              |                          |        |        |   |      |        |        |       |   |        |       

53



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AXT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note
13.     Stockholders
Equity

In May 1998, the Company completed its initial
public offering, and issued 2,875,000 shares of its common stock
at $10.00 per share, including the shares from the
underwriters exercise of the over-allotment option. The
Company received cash of approximately $25.8 million net of
underwriting discounts, commissions and IPO expenses. Upon the
closing of the IPO, all outstanding shares of the Companys
then convertible preferred stock were automatically converted
into shares of common stock.

On May 28, 1999, the Company completed its
acquisition of Lyte Optronics, Inc. Under the terms of the
acquisition, the Company issued approximately 2,023,000 shares
of common stock and 883,000 shares of non-voting and
non-convertible preferred stock with a 5.0% cumulative annual
dividend rate payable when declared by the board of directors of
the Company and $4 per share liquidation preference over common
stock, in exchange for all of the issued and outstanding shares
of capital stock of Lyte.

On July 25, 2000 the Company completed a
private securities offering, raising approximately
$8.5 million in exchange for 234,115 shares of common stock.

On September 19, 2000, the Company sold
pursuant to an underwritten public offering, 2,510,000 shares of
its common stock at a price of $34.25 per share, including the
shares from the underwriters exercise of the
over-allotment option. The Company received cash of
approximately $80.8 million net of underwriting discounts,
commissions and expenses. Following the public offering,
proceeds were used to repay its line of credit and for general
corporate purposes.

Note 14.     Employee
Benefit Plans



| |                   
| | ------------------
| | Stock Option Plans

In 1993, the Company adopted the 1993 Stock
Option Plan (1993 Plan) which provides for granting
of incentive and non-qualified stock options to employees and
directors of the Company. Under the 1993 Plan, 880,000 shares of
common stock have been reserved for issuance as of
December 31, 1998. Options granted under the 1993 Plan are
generally for periods not to exceed ten years 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
1993 Plan generally vest 25.0% upon grant and 25.0% each year
thereafter, with full vesting occurring on the third anniversary
of the grant date.

In May 1997, the Company adopted the 1997 Stock
Option Plan (1997 Plan) which provides for granting
of incentive and non-qualified stock options to employees and
directors of the Company. Under the 1997 Plan, 5,899,939 shares
of common stock have been reserved for issuance as of
December 31, 2001. Options granted under the 1997 Plan are
generally for periods not to exceed ten years (five years if the
option is granted to a 10.0% 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 25.0% at the end of one year and 2.1%
each month thereafter, with full vesting after four years. Some
Options issued under this plan during  2001 have vesting
schedules that began on January 31, 2002 and conclude in
2006.

54



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AXT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following summarizes the Companys stock
option activity under the 1993 Plan and the 1997 Plan, and
related weighted average exercise price within each category for
each of the years ended December 31, 1999, 2000, and 2001:

|                             |                              |           |           |                     |   |           |           |           |   |  |   |               |  |   |       |       | 
|---------------------------- | ---------------------------- | --------- | --------- | ------------------- | - | --------- | --------- | --------- | - |  | - | ------------- |  | - | ----- | ----- | 
|                             |                              |           |           |                    
|                             |                              |           |           | Options Outstanding
|                             |                              |           |           |                    
|                             |                              |           |           |                     |   | Weighted 
|                             |                              |           |           |                     |   | Average  
|                             |                              | Options   |           |                     |   | Exercise  |           | Exercise 
|                             |                              | Available |           | Number of           |   | Price per |           | Price per
|                             |                              | For Grant |           | Shares              |   | Share     |           | Share    
|                             |                              |           |           |                     |   |           |           |          
|Balance at December 31, 1998 |                              |           | 1,711,488 |                     |   |           | 1,531,076 |           |   |  |   |               |  | $ | 5.44  |      
|                             | Additional shares authorized |           |           | 1,000,000           |   |           |           |          |   |  |   |               |  |   |       |      | 
|                             | Granted                      |           |           | (1,504,350          | ) |           |           | 1,504,350 |   |  | $ | 9.12 - 24.96  |  |   |       | 18.21 | 
|                             | Exercised                    |           |           |                    |   |           |           | (200,679  | ) |  |   | 1.20 -  8.25  |  |   |       | 4.64  | 
|                             | Cancelled                    |           |           | 154,645             |   |           |           | (154,645  | ) |  | $ | 1.90 - 22.69  |  |   |       | 13.82 | 
|                             |                              |           |           |                     |   |           |           |           |   |  |   |               |  |   |       |      
|Balance at December 31, 1999 |                              |           | 1,361,783 |                     |   |           | 2,680,102 |           |   |  |   |               |  | $ | 12.18 |      
|                             | Additional shares authorized |           |           | 2,101,501           |   |           |           |          |   |  |   |               |  |   |       |      | 
|                             | Granted                      |           |           | (1,202,550          | ) |           |           | 1,202,550 |   |  |   | 15.06 - 47.00 |  |   |       | 30.21 | 
|                             | Exercised                    |           |           |                    |   |           |           | (711,259  | ) |  |   | 0.20 - 22.69  |  |   |       | 8.49  | 
|                             | Cancelled                    |           |           | 677,427             |   |           |           | (677,427  | ) |  | $ | 1.90 - 47.00  |  |   |       | 17.29 | 
|                             |                              |           |           |                     |   |           |           |           |   |  |   |               |  |   |       |      
|Balance at December 31, 2000 |                              |           | 2,938,161 |                     |   |           | 2,493,966 |           |   |  |   |               |  | $ | 20.46 |      
|                             | Additional shares authorized |           |           |                    |   |           |           |          |   |  |   |               |  |   |       |      | 
|                             | Granted                      |           |           | (1,693,070          | ) |           |           | 1,693,070 |   |  |   | 10.30 - 43.88 |  |   |       | 16.71 | 
|                             | Exercised                    |           |           |                    |   |           |           | (388,617  | ) |  |   | 5.00 - 39.00  |  |   |       | 9.94  | 
|                             | Cancelled                    |           |           | 478,696             |   |           |           | (478,696  | ) |  | $ | 5.00 - 44.25  |  |   |       | 22.14 | 
|                             |                              |           |           |                     |   |           |           |           |   |  |   |               |  |   |       |      
|Balance at December 31, 2001 |                              |           | 1,723,787 |                     |   |           | 3,319,723 |           |   |  |   |               |  | $ | 19.63 |      
|                             |                              |           |           |                     |   |           |           |           |   |  |   |               |  |   |       |      

Information about stock options outstanding at
December 31, 2001 is summarized below:

|                         |  |                     |           |             |  |             |      |          |  |  |         |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ----------- |  | ----------- | ---- | -------- |  |  | ------- |  |  | - | ----- | 
|                         |  |                    
|Options Outstanding      |  | Options Exercisable
|                         |  |                    
|                         |  | Weighted            |           |            
|                         |  | Average             |           |             |  | Weighted   
|                         |  | Remaining           |           |             |  | Average    
|                         |  | Number              |           | Contractual |  | Number      |      | Exercise
|Range of Exercise Prices |  | Outstanding         |           | Life        |  | Outstanding |      | Price   
|                         |  |                     |           |             |  |             |      |         
|$ 5.00 -  9.13           |  |                     | 378,666   |             |  |             | 6.25 |          |  |  | 284,146 |  |  | $ | 6.24  | 
|10.04 - 12.10            |  |                     | 68,000    |             |  |             | 8.36 |          |  |  | 14,583  |  |  |   | 10.04 | 
|12.12 - 12.12            |  |                     | 554,220   |             |  |             | 9.85 |          |  |  |        |  |  |   |      | 
|12.38 - 14.89            |  |                     | 693,980   |             |  |             | 9.24 |          |  |  | 6,100   |  |  |   | 13.40 | 
|15.00 - 21.19            |  |                     | 438,636   |             |  |             | 8.29 |          |  |  | 124,443 |  |  |   | 19.05 | 
|21.25 - 26.00            |  |                     | 379,438   |             |  |             | 8.23 |          |  |  | 56,111  |  |  |   | 23.66 | 
|26.04 - 31.63            |  |                     | 333,683   |             |  |             | 8.71 |          |  |  | 25,668  |  |  |   | 30.33 | 
|31.88 - 38.94            |  |                     | 334,350   |             |  |             | 8.76 |          |  |  | 53,970  |  |  |   | 34.86 | 
|39.13 - 43.88            |  |                     | 138,250   |             |  |             | 8.86 |          |  |  | 23,853  |  |  |   | 41.12 | 
|$44.38 - 44.38           |  |                     | 500       |             |  |             | 8.13 |          |  |  | 229     |  |  |   | 44.38 | 
|                         |  |                     |           |             |  |             |      |          |  |  |         |  |  |   |       | 
|                         |  |                     | 3,319,723 |             |  |             | 8.63 |          |  |  | 589,103 |  |  | $ | 15.87 | 
|                         |  |                     |           |             |  |             |      |          |  |  |         |  |  |   |       | 

55



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AXT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                           
| | ------------------------------------------
| | Stock-Based Compensation Under APB
	No. 25

In connection with certain stock option grants,
the Company recorded deferred compensation costs totaling
$203,000 for the year ended December 31, 1998 and $322,000
for the year ended December 31, 1997. Compensation cost is
the difference between the exercise price and the deemed fair
value at the date of grant. Compensation cost is being amortized
over the vesting period relating to these options, of which
approximately $107,000 was amortized for the year ended
December 31, 2001, $110,000 for 2000 and $110,000 for 1999.



| |                              
| | -----------------------------
| | Certain Pro Forma Disclosures

Pro forma information regarding net income and
net income per share is required by SFAS No. 123, which
also requires that information be determined as if the Company
had accounted for its employee stock options granted under the
fair value method. The fair value for these options was
estimated using the Black-Scholes option pricing model.

The Company calculated the fair value of each
option grant on the date of grant using the Black-Scholes option
pricing model as prescribed by SFAS No. 123 using the following
assumptions:

|                         |  |                          |       |      |  |      |       |   |  |  |      |  
|------------------------ |  | ------------------------ | ----- | ---- |  | ---- | ----- | - |  |  | ---- | -
|                         |  |                         
|                         |  | Years Ended December 31,
|                         |  |                         
|                         |  | 2001                     |       | 2000 |  | 1999
|                         |  |                          |       |      |  |     
|Risk free interest rate  |  |                          | 3.9   | %    |  |      | 5.8   | % |  |  | 5.6  | %
|Expected life (in years) |  |                          | 5.0   |      |  |      | 5.0   |   |  |  | 5.0  |  
|Dividend yield           |  |                          | 0.0   | %    |  |      | 0.0   | % |  |  | 0.0  | %
|Volatility               |  |                          | 104.0 | %    |  |      | 124.0 | % |  |  | 96.0 | %

The weighted average grant-date fair value of
options granted during the year ended December 31, 2001 was
$12.97, $25.73 in 2000 and $13.09 in 1999.

Had compensation cost for the Companys
options been determined based on the fair value at the grant
dates, as prescribed in SFAS 123, the Companys pro forma
net income and net income per share would have been as
summarized below (in thousands except per share data):

|                             |                              |                          |   |         |       |      |   |        |      |  |   |        |       |  
|---------------------------- | ---------------------------- | ------------------------ | - | ------- | ----- | ---- | - | ------ | ---- |  | - | ------ | ----- | -
|                             |                              |                         
|                             |                              | Years Ended December 31,
|                             |                              |                         
|                             |                              | 2001                     |   | 2000    |       | 1999
|                             |                              |                          |   |         |       |     
|Net income (loss):           |                              |                          |   |         |       |      |   |        |      |  |   |       
|                             | As reported                  |                          | $ | (4,996  | )     |      | $ | 21,610 |      |  | $ | 172    |      
|                             | Pro forma net income         |                          |   | (12,042 | )     |      |   | 16,417 |      |  |   | (2,747 | )    
|Net income (loss) per share: |                              |                          |   |         |       |      |   |        |      |  |   |       
|                             | As reported:                 |                          |   |         |       |      |   |        |      |  |   |        |      
|                             |                              | Basic                    |   | $       | (0.23 | )    |   | $      | 1.10 |  |   | $      | 0.01  |  
|                             |                              | Diluted                  |   |         | (0.23 | )    |   |        | 1.03 |  |   |        | 0.01  |  
|                             | Pro forma net income (loss): |                          |   |         |       |      |   |        |      |  |   |        |      
|                             |                              | Basic                    |   | $       | (0.54 | )    |   | $      | 0.83 |  |   | $      | (0.15 | )
|                             |                              | Diluted                  |   |         | (0.54 | )    |   |        | 0.78 |  |   |        | (0.15 | )

Because additional option grants are expected to
be made each year, the above pro forma disclosures are not
representative of pro forma effects on reported net income for
future years.



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

In February 1998, the Companys board of
directors approved the 1998 Employee Stock Purchase Plan (the
1998 Purchase Plan). The Companys stockholders
approved the 1998 Purchase Plan in March 1998.

56



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AXT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

At December 31, 2001 a total of 900,000
shares of the Companys common stock were reserved for
issuance under the 1998 Purchase Plan. A total of 191,000 shares
were purchased as of December 31, 2001. The 1998 Purchase
Plan permits eligible employees to acquire shares of the
Companys common stock through payroll deductions. The
common stock purchase price is determined as 85.0% of the lower
of the market price of the common stock at the purchase date or
the date of offer to the employee.



| |                        
| | -----------------------
| | Retirement Savings Plan

The Company has a 401(k) Savings Plan (the
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. Participants may
contribute up to 10.0% of their earnings to the Savings Plan
with a discretionary matching amount provided by the Company.
The Companys contributions to the Savings Plan were
$456,000 for the year ended December 31, 2001, $236,000 for
2000 and $146,000 for 1999. Employees are provided with several
investment options, none of which is a direct investment in AXT
stock.

Note 15.     Segment
and Foreign Operations Information

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

Selected financial information by business
segment is summarized below (in thousands):

|                                        |                                      |                          |   |         |   |      |   |         |   |  |   |         |  
|--------------------------------------- | ------------------------------------ | ------------------------ | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                        |                                      |                         
|                                        |                                      | Years Ended December 31,
|                                        |                                      |                         
|                                        |                                      | 2001                     |   | 2000    |   | 1999
|                                        |                                      |                          |   |         |   |     
|Subtrates Division                      |                                      |                          |   |         |   |      |   |         |   |  |   |        
|                                        | Net revenues from external customers |                          | $ | 108,800 |   |      | $ | 113,374 |   |  | $ | 56,732  |  
|                                        | Gross profit                         |                          |   | 41,306  |   |      |   | 52,013  |   |  |   | 23,286  |  
|                                        | Operating income                     |                          |   | 20,222  |   |      |   | 34,087  |   |  |   | 12,275  |  
|                                        | Identifiable assets                  |                          |   | 194,243 |   |      |   | 215,527 |   |  |   | 88,579  |  
|Visible Emitter Division                |                                      |                          |   |         |   |      |   |         |   |  |   |        
|                                        | Net revenues from external customers |                          | $ | 10,730  |   |      | $ | 8,129   |   |  | $ | 18,640  |  
|                                        | Gross profit (loss)*                 |                          |   | (3,967  | ) |      |   | (4,194  | ) |  |   | 2,060   |  
|                                        | Operating income (loss)*             |                          |   | (12,574 | ) |      |   | (19,487 | ) |  |   | (2,779  | )
|                                        | Identifiable assets                  |                          |   | 41,017  |   |      |   | 33,181  |   |  |   | 23,423  |  
|Discontinued Consumer Products Division |                                      |                          |   |         |   |      |   |         |   |  |   |        
|                                        | Identifiable assets                  |                          | $ |        |   |      | $ | 1,512   |   |  | $ | 3,760   |  
|Total                                   |                                      |                          |   |         |   |      |   |         |   |  |   |        
|                                        | Net revenues from external customers |                          | $ | 119,530 |   |      | $ | 121,503 |   |  | $ | 75,372  |  
|                                        | Gross profit                         |                          |   | 37,339  |   |      |   | 47,819  |   |  |   | 25,346  |  
|                                        | Operating income                     |                          |   | 7,648   |   |      |   | 14,600  |   |  |   | 9,496   |  
|                                        | Identifiable assets                  |                          |   | 235,260 |   |      |   | 250,220 |   |  |   | 115,762 |  



---



|  |                                                                                                            
|- | -----------------------------------------------------------------------------------------------------------
|* | Includes restructuring charge of
	$1.8 million in gross profit and $8.2 million in
	operating loss in 2000.

57



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AXT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|              |               |                          |   |         |  |      |   |         |  |  |   |        | 
|------------- | ------------- | ------------------------ | - | ------- |  | ---- | - | ------- |  |  | - | ------ | 
|              |               |                         
|              |               | Years Ended December 31,
|              |               |                         
|              |               | 2001                     |   | 2000    |  | 1999
|              |               |                          |   |         |  |     
|Net revenues: |               |                          |   |         |  |      |   |         |  |  |   |       
|              | United States |                          | $ | 59,300  |  |      | $ | 62,905  |  |  | $ | 36,497 | 
|              | Europe        |                          |   | 22,008  |  |      |   | 12,743  |  |  |   | 8,175  | 
|              | Canada        |                          |   | 6,679   |  |      |   | 6,661   |  |  |   | 2,221  | 
|              | Taiwan        |                          |   | 12,975  |  |      |   | 13,610  |  |  |   |       | 
|              | Japan         |                          |   | 8,473   |  |      |   | 10,934  |  |  |   | 5,426  | 
|              | Asia Pacific  |                          |   | 10,094  |  |      |   | 14,650  |  |  |   | 23,053 | 
|              |               |                          |   |         |  |      |   |         |  |  |   |       
|              | Consolidated  |                          | $ | 119,529 |  |      | $ | 121,503 |  |  | $ | 75,372 | 
|              |               |                          |   |         |  |      |   |         |  |  |   |       

Property, plant and equipment by geographic
location is summarized below (in thousands):

|                                    |               |              |        |        |  |   |        |        | 
|----------------------------------- | ------------- | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                                    |               |             
|                                    |               | Years Ended 
|                                    |               | December 31,
|                                    |               |             
|                                    |               | 2001         |        | 2000  
|                                    |               |              |        |       
|Property, plant and equipment, net: |               |              |        |        |  |   |        |       
|                                    | United States |              | $      | 67,978 |  |   | $      | 58,022 | 
|                                    | China         |              |        | 14,595 |  |   |        | 5,379  | 
|                                    |               |              |        |        |  |   |        |       
|                                    |               | $            | 82,573 |        |  | $ | 63,401 |       
|                                    |               |              |        |        |  |   |        |       

Note 16.     Related
Party Transactions

Equipment & Materials, a California
corporation engaged in international trading and quartzware
fabrication, supplies us with various raw materials from China
and has manufactured quartzware for us. Christina X. Li,
the sole shareholder and president of Equipment &
Materials, is the wife of Davis Zhang, the president of our
substrate division. Purchases from Equipment &
Materials were approximately $4.7 million for the year
ended December 31, 2001, $8.9 million for 2000 and
$3.6 million for 1999. There was no balance due to
Equipment & Materials at December 31, 2001.

4160 Business Center, LLC, a real estate holding
company, leases us a 24,100 sq. ft. warehouse in Fremont,
California. Davis Zhang, the president of our substrate
division, is the sole shareholder of 4160 Business Center,
LLC. Lease payments to 4160 Business Center, LLC were
approximately $188,000 for the year ended December 31, 2001.

Note
17.     Commitments and
Contingencies

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

On May 1, 2001, the Santa Clara Center for
Occupational Safety and Health filed a complaint for injunctive
relief and civil penalties against AXT in the Superior Court of
California, County of Alameda, Hayward Division, Case
No. H218237-5. The Complaint alleges violations of
California Business and Professions Code section 17200 et
seq., and Health and Safety Code section 25249 et seq. as a
result of AXTs use of arsenic and inorganic arsenic
compounds in its workplace. We believe that we have meritorious
defenses against the alleged claims, and intend to defend
ourselves vigorously. However, due to the nature of litigation

58



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AXT, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and fact that the case is still in its early
stages, we cannot determine the possible loss, if any, that may
ultimately be incurred either in the context of a trial or as a
result of a negotiated settlement. We may also incur substantial
legal fees in this matter. However, we do not believe that this
action is likely to have a material adverse effect on our
business, financial condition or results of operation.

The Company has entered into contracts to supply
several large customers with GaAs wafers. The contracts
guarantee the delivery of a certain number of wafers between
January 1, 2001 and December 31, 2002 with a current
contract value of $25.2 million. The contract sales prices
are subject to review quarterly and can be adjusted in the event
that raw material prices change. In the event of non-delivery of
the determined wafer quantities in any monthly delivery period,
the Company could be subject to non-performance penalties of
between 5% and 10% of the value of the delinquent monthly
deliveries. Partial prepayments received for these supply
contracts totaling $6.5 million are included in accrued
liabilities at December 31, 2001. As of December 31,
2001 the Company has met all of its delivery obligations under
these contracts.

The Company leases certain office space,
manufacturing facilities and property and equipment under
long-term operating leases expiring at various dates through
December 2006. Total rent expense under these operating leases
was approximately $779,000 for the year ended December 31,
2001.

Included in property, plant and equipment is
equipment that is leased under non-cancelable leases accounted
for as capital leases. These leases were approximately
$14 million at December 31, 2001 and $13 million
at December 31, 2000. These leases expire at various dates
through 2006.

Total minimum lease payments under the above
leases as of December 31, 2001, are summarized below (in
thousands):

|                                                   |  |         |        |           |  |       |       |  |  |   |        | 
|-------------------------------------------------- |  | ------- | ------ | --------- |  | ----- | ----- |  |  | - | ------ | 
|                                                   |  | Capital |        | Operating |  |      
|                                                   |  | Leases  |        | Leases    |  | Total
|                                                   |  |         |        |           |  |      
|2002                                               |  | $       | 5,369  |           |  | $     | 991   |  |  | $ | 6,360  | 
|2003                                               |  |         | 5,267  |           |  |       | 906   |  |  |   | 6,173  | 
|2004                                               |  |         | 3,307  |           |  |       | 855   |  |  |   | 4,162  | 
|2005                                               |  |         | 1,908  |           |  |       | 591   |  |  |   | 2,499  | 
|2006                                               |  |         | 550    |           |  |       | 220   |  |  |   | 770    | 
|Thereafter                                         |  |         |       |           |  |       |      |  |  |   |       | 
|                                                   |  |         |        |           |  |       |       |  |  |   |        | 
|                                                   |  | $       | 16,401 |           |  | $     | 3,563 |  |  | $ | 19,964 | 
|                                                   |  |         |        |           |  |       |       |  |  |   |        | 
|Less amounts representing interest at 5.6% to 8.8% |  |         | (2,027 | )         |  |       |       |  |  |   |        | 
|                                                   |  |         |        |           |  |       |       |  |  |   |        | 
|                                                   |  |         | 14,374 |           |  |       |       |  |  |   |        | 
|Less short-term portion                            |  |         | (4,372 | )         |  |       |       |  |  |   |        | 
|                                                   |  |         |        |           |  |       |       |  |  |   |        | 
|Long-term portion                                  |  | $       | 10,002 |           |  |       |       |  |  |   |        | 
|                                                   |  |         |        |           |  |       |       |  |  |   |        | 

Note 18.     Foreign
Exchange Contracts and Transaction Losses

The Company uses short-term forward exchange
contracts for hedging purposes to reduce the effects of adverse
foreign exchange rate movements. The Company has 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 is recognized as part of
the related foreign currency transactions as they occur. As of
December 31, 2001, the Companys outstanding
commitments with respect to the foreign exchange contracts,
which were commitments to sell Japanese yen, had a total
contract value of approximately $1.5 million.

The Company incurred a foreign transaction
exchange loss of $357,000 for the year ended December 31,
2001, a loss of $552,000 in 2000 and a gain of $652,000 in 1999.

59



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



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



| |     |                    
| | --- | -------------------
| | By: | /s/ MORRIS S. YOUNG

| |                                       
| | --------------------------------------
| |                                       
| | Morris S. Young,                      
| | Chief Executive Officer and
	President

Date: March 26, 2002

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below hereby constitutes and
appoints Morris S. Young and Donald L. Tatzin, 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/ MORRIS S. YOUNGMorris S. Young   |  | President,
	Chief Executive Officer
	and Chairman of the Board |  | March 26, 2002
|                                    
|/s/ DONALD L. TATZINDonald L. Tatzin |  | Senior Vice President,
	Chief Financial Officer                |  | March 26, 2002
|                                    
|/s/ JOHN E. DRURYJohn E. Drury       |  | Corporate Controller                                           |  | March 26, 2002
|                                    
|/s/ DAVID C. CHANGDavid C. Chang     |  | Director                                                       |  | March 26, 2002
|                                    
|/s/ JESSE CHENJesse Chen             |  | Director                                                       |  | March 26, 2002
|                                    
|/s/ B.J. MOOREB.J. Moore             |  | Director                                                       |  | March 26, 2002

60



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AXT, Inc.

EXHIBITS TO FORM 10-K ANNUAL REPORT

For the Year Ended December 31,
2001


|        |          |             |  |                                                                                                                                                                                                                                                                              
|------- | -------- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 2.1(1)   |             |  | Agreement and Plan of Merger between American
	Xtal Technology, a California corporation, and American Xtal
	Technology Delaware Corporation, a Delaware corporation.                                                                                                        
|        | 2.2(4)   |             |  | Agreement and Plan of Reorganization dated
	May 27, 1999 (which is incorporated herein by reference to
	Exhibit 2.1 to the registrants form 8-K dated
	May 28, 1999).                                                                                                       
|        | 2.3(4)   |             |  | Certificate of Merger dated May 27, 1999,
	filed with the Secretary of State of the State of Delaware on
	May 28, 1999 (which is incorporated herein by reference to
	Exhibit 2.1 to the registrants form 8-K dated
	May 28, 1999).                                         
|        | 2.4(4)   |             |  | Articles of Merger dated May 27, 1999, filed
	with the Secretary of State of Nevada on May 28, 1999
	(which is incorporated herein by reference to Exhibit 2.1
	to the registrants form 8-K dated May 28, 1999).                                                            
|        | 2.5(4)   |             |  | Agreement and Plan of Reorganization by and among
	American XTAL Technology, Inc., Monterey Acquisition Corp., Lyte
	Optronics, Inc. and certain stockholders of Lyte Optronics, Inc.
	dated May 27, 1999                                                                    
|        | 3.1(3)   |             |  | Restated Certificate of Incorporation                                                                                                                                                                                                                                        
|        | 3.2(4)   |             |  | Certificate of Designation, Preferences and
	Rights of Series A Preferred Stock, as filed with the
	Secretary of State of the state of Delaware on May 27, 1999
	(which is incorporated herein by reference to Exhibit 2.1
	to the registrants form 8-K dated May 28, 1999).
|        | 3.3(4)   |             |  | By Laws                                                                                                                                                                                                                                                                      
|        | 4.1(4)   |             |  | Rights Agreement                                                                                                                                                                                                                                                             
|        | 4.2(5)   |             |  | Rights Agreement                                                                                                                                                                                                                                                             
|        | 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.                                                                                                                                                                                                                  
|        | 10.4(1)  |             |  | 1997 Employee Stock Purchase Plan and forms of
	agreements thereunder.                                                                                                                                                                                                       
|        | 10.5(1)  |             |  | 1998 Employee Stock Purchase Plan and forms of
	agreements thereunder.                                                                                                                                                                                                       
|        | 10.6(1)  |             |  | Loan Agreement between U.S. Bank National
	Association and us dated March 4, 1998.                                                                                                                                                                                           
|        | 10.7(2)  |             |  | Purchase and Sale Agreement by and between Limar
	Realty Corp. #23 and us dated April 1998.                                                                                                                                                                                  
|        | 10.8(3)  |             |  | Loan Agreement between U.S. Bank National
	Association and us dated September 18, 1998                                                                                                                                                                                       
|        | 10.9(3)  |             |  | Letter of Credit and Reimbursement Agreement
	between U.S. Bank National Association and us dated
	December 1, 1998.                                                                                                                                                         
|        | 10.10(3) |             |  | Bond Purchase Contract between Dain Rauscher
	Incorporated and us dated December 1, 1998.                                                                                                                                                                                    
|        | 10.11(3) |             |  | Remarketing Agreement between Dain Rauscher
	Incorporated and us dated December 1, 1998.                                                                                                                                                                                     
|        | 10.12(6) |             |  | Loan Agreement between U.S. Bank National
	Association and us dated August 28, 2000.                                                                                                                                                                                         
|        | 10.13    |             |  | Modification to Loan Agreement between
	U.S. Bank National Association and us dated
	December 31, 2001.                                                                                                                                                                      
|        | 21.1(1)  |             |  | List of Subsidiaries.                                                                                                                                                                                                                                                        
|        | 24.1     |             |  | Power of Attorney (see signature page).                                                                                                                                                                                                                                      



---



|    |                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------
|(1) | As filed with the SEC in our Registration
	Statement on Form S-1 on March 17, 1998.                  
|   
|(2) | As filed with the SEC in our Registration
	Statement on Amendment No. 2 to Form S-1 on
	May 11, 1998.
|   
|(3) | As filed with the SEC in our Annual Report on
	Form 10-K for the year ended December 31, 1998        

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##### Table of Contents





|    |                                                                                              
|--- | ---------------------------------------------------------------------------------------------
|(4) | As filed with the SEC in our Form 8-K on
	June 14, 1999                                      
|   
|(5) | As filed with the SEC in our Form 8-K on
	May 30, 2001                                       
|   
|(6) | As filed with the SEC in our Annual Report on
	Form 10-K for the year ended December 31, 2000

62