Note 2. Accounting for Stock-Based Compensation

We account for stock-based compensation in accordance with the provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") topic 718, Compensation-Stock Compensation ("ASC 718"), which established accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at each grant date, based on the fair value of the award, and is recognized as expense over the employee's requisite service period of the award. We utilized the Black-Scholes valuation model for estimating the fair value of the stock options granted. The amortization of stock compensation under ASC 718 is based on the single-option approach. All of our stock compensation is accounted for as an equity instrument.

The following table summarizes compensation costs related to our stock-based awards (in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Stock-based compensation in the form of employee stock options and restricted stock awards, included in:

Cost of revenue	$	19		$	20		$	56		$	60
Selling, general and administrative		245			184			721			543
Research and development		36			12			96			35

Total stock-based compensation		300			216			873			638
Tax effect on stock-based compensation		-			-			-			-

Net effect on net income	$	300		$	216		$	873		$	638

Effect on net income attributable to AXT, Inc. per common share:
Basic	$	(0.01	)	$	(0.01	)	$	(0.03	)	$	(0.02	)
Diluted	$	(0.01	)	$	(0.01	)	$	(0.03	)	$	(0.02	)

As of September 30, 2012, the compensation costs related to unvested stock options granted to employees under our stock option plan but not yet recognized was approximately $1.6 million, net of estimated forfeitures of $91,000. These costs will be amortized on a straight-line basis over a weighted-average period of approximately 2.3 years and will be adjusted for subsequent changes in estimated forfeitures. We elected not to capitalize any stock-based compensation to inventory as of September 30, 2012 due to the immateriality of the amount.

There were no stock options granted in the three months ended September 30, 2012 and 2011. There were 104,000 and zero stock options granted with weighted average grant date fair value of $2.84 and none in the nine months ended September 30, 2012 and 2011, respectively. The fair value of our stock options granted to employees for the nine months ended September 30, 2012 was estimated using the following weighted-average assumptions:

	Nine Months Ended September 30, 2012
	2012

Expected term (in years)		4.0
Volatility		73.74	%
Expected dividend		0.0	%
Risk-free interest rate		0.71	%

The following table summarizes the stock option transactions during the nine months ended September 30, 2012 (in thousands, except per share data):

	Shares			Weighted- average Exercise Price		Weighted- average Remaining Contractual Life (in years)		Aggregate Intrinsic Value

Options outstanding as of January 1, 2012		2,380		$	3.25		6.25	$	3,456
Granted		104			5.22
Exercised		(126	)		2.19
Canceled and expired		(30	)		9.69
Options outstanding as of September 30, 2012		2,328		$	3.31		6.05	$	2,151
Options vested and expected to vest as of September 30, 2012		2,292		$	3.29		6.00	$	2,146
Options exercisable as of September 30, 2012		1,501		$	2.69		4.75	$	1,882

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $3.38 on September 30, 2012, which would have been received by the option holder had all option holders exercised their options on that date. The total number of in-the-money options exercisable as of September 30, 2012 was 1,152,553.

The options outstanding and exercisable as of September 30, 2012 were in the following exercise price ranges:

		Options Outstanding as of September 30, 2012						Options Exercisable as of September 30, 2012
Range of Exercise Price		Shares		Weighted-average Exercise Price		Weighted-average Remaining Contractual Life		Shares		Weighted-Average Exercise Price
$	1.18 - $1.38		407,001	$	1.31		1.73		407,001	$	1.31
$	1.40 - $1.40		1,094	$	1.40		2.45		1,094	$	1.40
$	1.59 - $1.59		328,460	$	1.59		6.54		273,967	$	1.59
$	1.88 - $1.91		8,000	$	1.90		2.00		8,000	$	1.90
$	2.04 - $2.04		441,775	$	2.04		7.07		313,481	$	2.04
$	2.19 - $4.09		175,510	$	2.80		2.00		151,510	$	2.62
$	4.79 - $4.79		366,500	$	4.79		9.08		-	$	-
$	4.81 - $5.61		144,610	$	5.26		7.10		64,610	$	4.84
$	5.83 - $5.83		362,450	$	5.83		7.84		200,431	$	5.83
$	6.31 - $7.82		92,295	$	6.65		5.73		81,191	$	6.48
			2,327,695	$	3.31		6.05		1,501,285	$	2.69

There were 26,000 and 51,579 options exercised in the three months ended September 30, 2012 and 2011, respectively. The total intrinsic value of options exercised for the three months ended September 30, 2012 and 2011 was $18,000 and $334,000, respectively. There were 126,000 and 250,591options exercised in the nine months ended September 30, 2012 and 2011, respectively. The total intrinsic value of options exercised for the nine months ended September 30, 2012 and 2011 was $383,000 and $1.5 million, respectively. Cash received from options exercised for the nine months ended September 30, 2012 and 2011 was $276,000 and $637,000, respectively.

Restricted stock awards

A summary of activity related to restricted stock awards for the nine months ended September 30, 2012 is presented below:

Stock Awards	Shares			Weighted-Average Grant Date Fair Value
Non-vested as of January 1, 2012		223,127		$	4.47
Granted		30,768		$	3.90
Vested		(77,812	)	$	3.09
Non-vested as of September 30, 2012		176,083		$	4.98

There were 30,768 and 16,548 restricted stock awards granted with weighted average grant date fair value of $3.90 and $7.25 in the nine months ended September 30, 2012 and 2011, respectively. There were 77,812 and 72,300 shares of restricted stock awards vested with weighted average grant date fair value of $3.09 and $2.77 in the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012, we had $721,000 of unrecognized compensation expense related to restricted stock awards, which will be recognized over the weighted average period of 2.5 years.