Technology can be a cruel mistress -- strong consumer demand may mean little if competitors flood the market with comparable products and ruin pricing for everyone. That's exactly what has been happening in the flat-panel market, and profits at Taiwan's AUOptronics (NYSE:AUO) have suffered as a result.

Despite shipping 2.1 million more large panels (up 46% annually) and 3.4 million more small panels (up 66.4% annually), AU Optronics reported that revenue for the first quarter fell 6% from the year-ago period and nearly 2% from the prior quarter.

Though the company was able to eke out a positive gross margin -- 3.2% vs. 3.5% in the prior quarter and 3.4% in the prior year -- large increases in selling, general, and administrative expenses (up 45.6%) and research and development (up 25.5%) pushed the company into a net loss for the quarter.

Even though I'm not a big fan of engaging in financial gymnastics to make numbers look better than they really are, it is fair to note that the company books a large amount of depreciation and amortization expense each quarter. If you add back that D&A expense into the operating loss for the first quarter, you see a positive number of about $172 million and a sequential improvement.

Not surprisingly, panel pricing was weak. Although blended average selling prices for larger panels were basically flat with the prior quarter (down about $1), pricing for smaller panels seems to have dropped about 15% sequentially. All that said, management continues to look for pricing to stabilize around midyear and possibly improve slightly by the end of the year.

AU Optronics remains undaunted in adding capacity, even though a supply glut is generally to blame for the current weakness in flat-panel pricing. The company now intends to add a new fab that will produce large panels targeted for the LCD-TV and HDTV markets. Although this is probably a good long-term strategic decision, given that TVs remain a lucrative growth market for the company, it comes at the price of over $1 billion in new debt. The company's debt-equity ratio is already somewhat high, at 57%.

On one hand, I can't help applauding AU Optronics management for plugging ahead with its business plans, secure in the notion that pricing will stabilize and that those who run the company need to be on top of the game when it does. On the other hand, investors are likely to be twitchy about a company in which expenses are rising considerably and more capacity is being brought online when overcapacity is what created the problem in the first place.

Investors should stay tuned -- the flat-panel business is no doubt a growing industry, but it remains to be seen who (if anybody) can ultimately reap long-term profits from the products.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).