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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>/in/edgar/work/20000901/0000891618-00-004507/0000891618-00-004507.txt : 20000922
<SEC-HEADER>0000891618-00-004507.hdr.sgml : 20000922
ACCESSION NUMBER:		0000891618-00-004507
CONFORMED SUBMISSION TYPE:	S-3/A
PUBLIC DOCUMENT COUNT:		5
FILED AS OF DATE:		20000901

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			AXT INC
		CENTRAL INDEX KEY:			0001051627
		STANDARD INDUSTRIAL CLASSIFICATION:	 [3674
]		IRS NUMBER:				943031310
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			1231
</COMPANY-DATA>

		FILING VALUES:
			FORM TYPE:		S-3/A
			SEC ACT:		
			SEC FILE NUMBER:	333-44704
			FILM NUMBER:		715604
</FILING-VALUES>

			BUSINESS ADDRESS:	
				STREET 1:		4821 TECHNOLOGY DRIVE
				CITY:			FREMONT
				STATE:			CA
				ZIP:			94538
				BUSINESS PHONE:		5106835900
</BUSINESS-ADDRESS>

				MAIL ADDRESS:	
					STREET 1:		4311 SOLAR WAY
					CITY:			FREMONT
					STATE:			CA
					ZIP:			94538
</MAIL-ADDRESS>

					FORMER COMPANY:	
						FORMER CONFORMED NAME:	AMERICAN XTAL TECHNOLOGY
						DATE OF NAME CHANGE:	19971217
</FORMER-COMPANY>
</FILER>
</SEC-HEADER>
<DOCUMENT>
<TYPE>S-3/A
<SEQUENCE>1
<FILENAME>f65146a1s-3a.txt
<DESCRIPTION>AMENDMENT NO.1 TO FORM S-3
<TEXT>

<PAGE>   1


   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 1, 2000.



                                                      REGISTRATION NO. 333-44704

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------


                                AMENDMENT NO. 1


                                       TO


                                    FORM S-3
                            ------------------------
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                            ------------------------

                                   AXT, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                                 <C>
                     DELAWARE                                           94-3031310
   (STATE OR OTHER JURISDICTION OF INCORPORATION                     (I.R.S. EMPLOYER
                 OR ORGANIZATION)                                   IDENTIFICATION NO.)
</TABLE>

                    4281 TECHNOLOGY DRIVE, FREMONT, CA 94538
                                 (510) 683-5900
  (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

                                MORRIS S. YOUNG
                            CHIEF EXECUTIVE OFFICER
                                   AXT, INC.
                             4281 TECHNOLOGY DRIVE
                           FREMONT, CALIFORNIA 94538
                                 (510) 683-5900
 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                             OF AGENT FOR SERVICE)

                                   COPIES TO:

<TABLE>
<S>                                                    <C>
                  SALLY J. RAU, ESQ.                                   JOHN T. SHERIDAN, ESQ.
                  JULIE L. HSU, ESQ.                                  KATHLEEN B. BLOCH, ESQ.
              ELIZABETH O'CALLAHAN, ESQ.                                JONATHAN BLOCK, ESQ.
           GRAY CARY WARE & FREIDENRICH LLP                             JONATHAN LEVY, ESQ.
                 400 HAMILTON AVENUE                             WILSON SONSINI GOODRICH & ROSATI,
                 PALO ALTO, CA 94301                                  PROFESSIONAL CORPORATION
                                                                         650 PAGE MILL ROAD
                                                                        PALO ALTO, CA 94304
</TABLE>

        APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
  As soon as practicable after this Registration Statement becomes effective.


    If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box.  [ ]



    If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.  [ ]


    If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.  [ ] __________

    If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ] __________

    If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.  [ ]


    THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY
DETERMINE.


- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>   2

       THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
       AXT AND THE SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE
       REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
       IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
       AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
       WHERE THE OFFER OR SALE IS NOT PERMITTED.


                   SUBJECT TO COMPLETION -- SEPTEMBER 1, 2000


PROSPECTUS
- --------------------------------------------------------------------------------

                                2,200,000 Shares

                                   [AXT LOGO]

                                  Common Stock

- --------------------------------------------------------------------------------

AXT, Inc. is offering 2,100,000 shares of common stock and the selling
stockholders are offering 100,000 shares of common stock. AXT will not receive
any proceeds from the sale of shares by the selling stockholders.


AXT 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 HB LEDs, and vertical cavity
surface emitting lasers, or VCSELs.



The shares of AXT are included for quotation in the Nasdaq National Market under
the symbol "AXTI." On August 31, 2000 the reported last sale price of AXT's
common stock in the Nasdaq National Market was $38.625 per share.


<TABLE>
<CAPTION>
                                                           Per Share        Total
<S>                                                      <C>              <C>
Public offering price.................................   $                $
Underwriting discounts and commissions................   $                $
Proceeds, before expenses, to AXT.....................   $                $
Proceeds to selling stockholders......................   $                $
</TABLE>

SEE "RISK FACTORS" ON PAGES 4 TO 13 FOR FACTORS THAT SHOULD BE CONSIDERED BEFORE
INVESTING IN THE SHARES OF AXT.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------

The underwriters may, under some circumstances, purchase up to 330,000
additional shares from AXT at the public offering price, less underwriting
discounts and commissions. Delivery and payment for the shares will be on
            , 2000.

PRUDENTIAL VOLPE TECHNOLOGY
    A UNIT OF PRUDENTIAL SECURITIES

                     CIBC WORLD MARKETS
                                 WIT SOUNDVIEW
                                            ABN AMRO ROTHSCHILD
                                            A DIVISION OF ABN AMRO INCORPORATED

            , 2000                                      PACIFIC CREST SECURITIES
<PAGE>   3
Set forth on the left-hand side of the inside front cover page are graphics of
selected end-market applications into which AXT's products are incorporated.
The following graphics and captions are included:

     o    a graphic of a wireless handset above the caption "WIRELESS
          COMMUNICATIONS AXT's compound semiconductor substrates are used
          by semiconductor device manufacturers in high-performance wireless
          communications applications."

     o    a graphic of optical fiber above the caption "FIBER OPTIC
          COMMUNICATIONS AXT's InP substrates and VCSELs are used in next
          generation fiber optic communications applications."

     o    a graphic of full-color outdoor displays above the caption "DISPLAYS
          Large, full-color displays, like this one in Tokyo, which incorporate
          LEDs that are manufactured on compound semiconductor substrates,
          attract attention with news broadcasts, sports events and commercial
          advertisements."

     o    a graphic of a traffic light above the caption "TRAFFIC SIGNALS LEDs
          manufactured on compound semiconductor substrates are being used in
          traffic lights worldwide."

A caption at the bottom of the page reads "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 new generations of high-performance
electronic and opto-electronic applications."

Set forth on the inside back cover page are graphics of selected products which
are designed, developed, manufactured and distributed by AXT. The following
graphic and caption is included:

     o    a graphic of various sizes of compound semiconductor crystals above
          the caption "We believe our proprietary 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."
<PAGE>   4

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                     PAGE
                                     ----
<S>                                  <C>
Prospectus Summary.................    1
Risk Factors.......................    4
Forward-Looking Statements.........   14
Use of Proceeds....................   15
Price Range of Common Stock and
  Dividend Policy..................   15
Capitalization.....................   16
Selected Consolidated Financial
  Data.............................   17
Management's Discussion and
  Analysis of Financial Condition
  and Results of Operations........   19
Business...........................   28
Management.........................   40
</TABLE>

<TABLE>
<CAPTION>
                                     PAGE
                                     ----
<S>                                  <C>
Certain Transactions...............   42
Principal and Selling
  Stockholders.....................   43
Underwriting.......................   44
United States Federal Income Tax
  Consequences to Non-United States
  Holders..........................   46
Legal Matters......................   48
Experts............................   48
Where You Can Find More
  Information......................   48
Information Incorporated By
  Reference........................   49
Index to Consolidated Financial
  Statements.......................  F-1
</TABLE>

- --------------------------------------------------------------------------------

     American Xtal Technology, AXT, the AXT logo, Laserlyte, Opti, Lyte
Optronics, Safe Escape and Minibrite are all trademarks of AXT, Inc. This
prospectus contains trademarks of other companies.

- --------------------------------------------------------------------------------

     You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are not
making an offer of these securities in any jurisdiction where the offer or sale
is not permitted. You should not assume that the information contained in this
prospectus is accurate as of any other date other than the date on the front
cover of this prospectus.

                                        i
<PAGE>   5

                               PROSPECTUS SUMMARY

     This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information that you
should consider before investing in our common stock. You should read the entire
prospectus carefully.

                                      AXT


     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 HB LEDs, and vertical cavity
surface emitting lasers, or VCSELs. 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 Agilent Technologies, Alpha Industries, 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 HB LEDs and VCSELs. 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
significantly expand our substrate and device manufacturing capacity and to
reduce the overall cost structure of our manufacturing operations.



     The semiconductor industry is experiencing rapid technological changes.
These changes are driven primarily by increased transmission and storage of
voice, video and data over communications networks and the Internet. This growth
has generated increased demand for devices to send, receive and display
information, as well as new wireless and wireline networks used to transmit
information. This increased demand has created a growing need for power
efficient, high-performance electronic systems that operate at very high
frequencies and can be produced cost-effectively in high volumes. To address
these demands, semiconductor device manufacturers are increasingly using
compound semiconductor substrates, such as GaAs and InP, to improve the
performance of semiconductor devices and to enable new applications.


     Our strategy is to strengthen our position as a leading developer and
supplier of high-performance compound semiconductor substrates and to develop a
leading position in the market for opto-electronic semiconductor devices by:


     - expanding our GaAs substrate manufacturing capacity and decreasing our
       manufacturing cost structure;



     - strengthening our position in the InP substrate market;



     - advancing our VGF technology leadership;



     - enhancing our opto-electronic semiconductor devices; and



     - leveraging existing customer relationships.


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

                                        1
<PAGE>   6

                                  THE OFFERING

Shares offered by AXT.................      2,100,000 shares

Shares offered by the selling
stockholders..........................       100,000 shares

Common stock outstanding after this
offering..............................     21,282,155 shares

Use of proceeds by AXT................     Repayment of debt and general
                                           corporate purposes, including working
                                           capital and capital expenditures.

Nasdaq National Market symbol.........     AXTI

     The number of shares of common stock to be outstanding after this offering
is based on 18,948,000 shares outstanding as of June 30, 2000, adjusted to
include 234,155 shares of common stock issued in a private placement to 11
stockholders at $36.306 per share in July 2000, and does not include:

     - 2,641,756 shares of common stock issuable upon exercise of options
       outstanding as of June 30, 2000, with a weighted average exercise price
       of $14.65 per share;

     - 3,239,831 shares of common stock available for issuance as of June 30,
       2000 under our 1993 and 1997 stock option plans;

     - 778,837 shares of common stock available for issuance as of June 30, 2000
       under our 1998 employee stock purchase plan;

     - 980,655 shares of preferred stock outstanding; and

     - up to 330,000 shares that the underwriters may purchase from us if they
       exercise their over-allotment option in full.

                                  RISK FACTORS

     You should consider the risk factors and the impact of various events that
could adversely affect our business before investing in our common stock.

                                        2
<PAGE>   7

                      SUMMARY CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                                 SIX MONTHS
                                                     YEARS ENDED DECEMBER 31,                  ENDED JUNE 30,
                                          -----------------------------------------------   ---------------------
                                           1995      1996      1997      1998      1999        1999        2000
                                          -------   -------   -------   -------   -------   -----------   -------
                                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                                            (UNAUDITED)
<S>                                       <C>       <C>       <C>       <C>       <C>       <C>           <C>
CONSOLIDATED INCOME STATEMENT DATA:
Revenue.................................  $24,117   $31,272   $43,313   $61,314   $81,521     $39,680     $52,878
Gross profit............................    9,344    10,235    13,663    22,365    24,152       9,469      20,680
Income from operations..................    4,122     4,109     2,453     8,143     4,240      (1,704)      8,412
Income (loss) before extraordinary
  item..................................    2,793     2,351       820     4,284       680      (2,520)      4,325
Extraordinary item -- net of tax
  benefits..............................       --        --        --        --      (508)       (508)         --
    Net income (loss)...................  $ 2,793   $ 2,351   $   820   $ 4,284   $   172     $(3,028)    $ 4,325
Basic income (loss) per share:
  Income (loss) before extraordinary
    item................................  $  0.96   $  0.65   $  0.22   $  0.27   $  0.04     $ (0.14)    $  0.23
    Net income (loss)...................     0.96      0.65      0.22      0.27      0.01       (0.16)       0.23
Diluted income (loss) per share:
  Income (loss) before extraordinary
    item................................  $  0.23   $  0.19   $  0.06   $  0.26   $  0.03     $ (0.14)    $  0.21
    Net income (loss)...................     0.23      0.19      0.06      0.26      0.01       (0.16)       0.21
Shares used in per share calculations:
  Basic.................................    2,921     3,595     3,697    16,076    18,655      18,451      18,687
  Diluted...............................   11,913    12,524    13,598    16,325    19,771      18,451      20,178
</TABLE>


<TABLE>
<CAPTION>
                                                                     JUNE 30, 2000
                                                              ---------------------------
                                                               ACTUAL       AS ADJUSTED
                                                              ---------    --------------
                                                                    (IN THOUSANDS)
<S>                                                           <C>          <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................................  $  5,149        $ 89,788
Working capital.............................................    34,669         119,308
Total assets................................................   137,172         221,821
Long-term capital leases, net of current portion............     8,137           8,137
Long-term debt, net of current portion......................    14,034          14,034
Total stockholders' equity..................................    69,246         153,885
</TABLE>


     Revenue from our substrates division and consumer products division is
included in all periods presented. Revenue from our visible emitters division is
included from the time of the acquisition of the visible emitter business on
September 29, 1998.

     See Note 6 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing per share data.


     The as adjusted information above reflects the application of the net
proceeds from our sale of 234,155 shares of common stock at a price of $36.306
per share to 11 investors in a private placement in July 2000 and of 2,100,000
shares of common stock by us in this offering assuming a public offering price
of $38.625 per share, after deducting the underwriting discounts and commissions
and estimated offering expenses.


                                        3
<PAGE>   8

                                  RISK FACTORS

     You should carefully consider the risks described below, in addition to the
other information in this prospectus, before purchasing shares of our common
stock. Each of these risk factors could adversely affect our business, financial
condition and operating results as well as adversely affect the value of an
investment in our common stock.

     RISKS RELATED TO OUR BUSINESS

     UNPREDICTABLE FLUCTUATIONS IN OUR OPERATING RESULTS COULD DISAPPOINT
     ANALYSTS OR OUR INVESTORS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.


     We may not be able to sustain our historical growth rate, and we may
experience significant fluctuations in our revenue and earnings in the future.
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:


     - 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;

     - integration of Lyte Optronics and its business, operations and facilities
       with our operations;

     - the volume and timing of orders from our customers;

     - 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.
It is possible that in some future quarter, our operating results may be below
the expectations of securities analysts or investors. If this occurs, the price
of our common stock would likely decline.

     IF WE FAIL TO EXPAND OUR MANUFACTURING CAPACITY, WE MAY NOT BE ABLE TO MEET
     DEMAND FOR OUR PRODUCTS, LOWER OUR COSTS OR INCREASE REVENUE.

     In order to increase production, we must build new facilities, expand our
existing facilities and purchase additional manufacturing equipment. 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 additional capacity and facilities in
California and China. Our expansion 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;

                                        4
<PAGE>   9

     - work stoppages or delays;

     - 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 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.

     WE HAVE LIMITED EXPERIENCE WITH SOME OF OUR NEW PRODUCTS, AND WE MAY NOT BE
     ABLE TO ACHIEVE ANTICIPATED SALES OF THESE PRODUCTS.

     To date, we have limited experience producing and selling our HB LED and
VCSEL products, and we may be unable to successfully market and sell these
products. To market and sell our HB LED and VCSEL products, we will have to
develop additional distribution channels. In addition, we must apply our
proprietary VGF technique to new substrate products and successfully introduce
and market new opto-electronic semiconductor devices, including LED 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, 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 majority 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.

                                        5
<PAGE>   10

     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, Litton Airtron and Sumitomo Electric
and from semiconductor device manufacturers that produce substrates for their
own use, and from companies, such as IBM, that are actively developing
alternative materials to GaAs. We believe that at least one of our competitors
has recently begun 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;

     - 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 HB LED market offer devices that are brighter than our
HB LEDs. 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.

     We expect the intensity of competition to increase in the future.
Competitive pressures could reduce our market share, require us to 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 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 began manufacturing six-inch
GaAs wafers and have also made substantial investments in equipment and
facilities to manufacture blue, green and cyan HB LEDs. 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.

                                        6
<PAGE>   11

     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.

     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 REGULATIONS, WE MAY BE SUBJECT TO
     SIGNIFICANT FINES OR CESSATION OF OUR OPERATIONS.

     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 are
cooperating 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. Although we are
appealing the citations, and have put in place engineering, administrative and
personnel protective equipment programs to address these issues, we may have to
pay this fine, and further penalties, including criminal penalties, could be
levied against us or our management. 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.

     THE LOSS OF ONE OR MORE OF OUR KEY SUBSTRATE CUSTOMERS WOULD SIGNIFICANTLY
     HURT OUR OPERATING RESULTS.

     A small number of substrate customers have historically accounted for a
substantial portion of our total revenue. Our top five substrate customers
accounted for 34.9% of our substrate revenue in 1997,

                                        7
<PAGE>   12

39.5% of our substrate revenue in 1998, 34.3% of our substrate revenue in 1999
and 26.2% of our substrate revenue in the six months ended June 30, 2000. Our
substrate revenue accounted for 58.5% of our total revenue in 1997, 70.4% of our
total revenue in 1998, 69.6% in 1999, and 85.7% in the six months ended June 30,
2000. We expect that a significant portion of our future revenue will continue
to be derived from a limited number of substrate customers. 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. 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.

     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 LED and consumer products,
which caused customers to return products to us. If we continue to experience
quality control problems, or experience these problems in our other 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.

     CYCLICALITY IN THE SEMICONDUCTOR INDUSTRY COULD CAUSE OUR OPERATING RESULTS
     TO FLUCTUATE SIGNIFICANTLY.

     Our business depends in significant part upon manufacturers of
semiconductor devices, as well as the current and anticipated market demand for
such devices and the 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. When these periods
occur, our operating results and financial condition are adversely affected.

     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 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. 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.

     We have experienced a period of rapid growth and expansion that has
strained our management and other resources, and we expect this rapid growth to
continue. Our acquisition of Lyte Optronics, together with expansion of our
manufacturing capacity, has placed and continues to place a significant strain
on our

                                        8
<PAGE>   13

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.

     We will spend substantial sums to support our 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.

     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 $11.0
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 June 30, 1999 as a result of
the acquisition. Ten percent of the shares issued to the Lyte Optronics'
stockholders are held in escrow to satisfy any claims that we may bring under
the acquisition agreement. We have filed certain claims under the agreement and
expect that all of the shares held in escrow will be returned to us in
satisfaction of these claims.

     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, 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

                                        9
<PAGE>   14

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. In addition, we have only recently hired our chief financial officer,
and need to retain senior marketing personnel, particularly for our new
opto-electronic semiconductor device products.

     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.

     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

                                       10
<PAGE>   15

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. 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.

     RISKS RELATED TO OUR INTERNATIONAL OPERATIONS

     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 29.2% of our total revenue
for 1997, 31.7% for 1998, 48.5% for 1999 and 47.3% for the six months ended June
30, 2000. 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 restrictions and other trade barriers;

     - unexpected changes in regulatory requirements;

     - longer periods to collect accounts receivable;

     - 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 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.

                                       11
<PAGE>   16

     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.

     RISKS RELATED TO THE OFFERING

     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 August 31, 2000, the high and
low sales prices of our common stock were $47.00 and $12.063. 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 capital in addition to the net proceeds of this offering 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.

                                       12
<PAGE>   17


     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

     - 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 WILL RETAIN BROAD DISCRETION IN THE USE OF PROCEEDS FROM THIS OFFERING
     AND MAY NOT OBTAIN A SIGNIFICANT RETURN ON THE USE OF THESE PROCEEDS.

     Although we plan to repay debt and fund expansion of our facilities with a
major portion of the proceeds of this offering, our management has discretion as
to how to spend the proceeds from this offering. They may spend these proceeds
in ways with which our stockholders may not agree. Management's allocation of
the proceeds of this offering may not benefit our business and the investment of
the proceeds may not yield a favorable return.

     A LARGE NUMBER OF SHARES OF OUR COMMON STOCK MAY BE SOLD IN THE MARKET
     FOLLOWING THIS OFFERING, WHICH MAY DEPRESS THE MARKET PRICE OF OUR COMMON
     STOCK.


     Sales of substantial numbers of shares of our common stock in the public
market after this offering, or the perception that those sales may be made,
could cause the market price of our common stock to decline. Based on shares
outstanding as of June 30, 2000, following this offering, we will have
21,282,155 shares of common stock outstanding or 21,612,155 shares if the
underwriters' over-allotment option is exercised in full. Of these, 2,184,762
shares are subject to lock-up agreements with the underwriters of this offering,
and may not be sold for 90 days following the date of this prospectus, subject
to the restrictions imposed by the federal securities laws on sales by
affiliates. However, Prudential Securities Incorporated may waive these lock-up
restrictions at its sole discretion without notice. In addition, we have agreed
to file a registration statement with the Securities and Exchange Commission
within ten days of the completion of this offering, covering the 234,155 shares
of our common stock issued in our private placement in July 2000.


                                       13
<PAGE>   18

                           FORWARD-LOOKING STATEMENTS

     This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. We have
based these forward-looking statements largely on our current expectations and
projections about future events and financial trends affecting the financial
condition of our business. These forward-looking statements are subject to a
number of risks, uncertainties and assumptions about us, including among other
things:

     - general economic and business conditions, both nationally and
       internationally;

     - our expectations and estimates concerning future financial performance,
       financing plans and the impact of competition;

     - anticipated trends in our business;

     - existing and future regulations affecting our business; and

     - other risk factors set forth under "Risk Factors" in this prospectus.

     In addition, in this prospectus, the words "believe," "may," "will,"
"estimate," "continue," "anticipate," "intend," "expect," "could," "plan" and
similar expressions, as they relate to us, our business or our management, are
intended to identify forward-looking statements.

     We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise
after the date of this prospectus. In light of these risks and uncertainties,
the forward-looking events and circumstances discussed in this prospectus may
not occur and actual results could differ materially from those anticipated or
implied in the forward-looking statements.

                                       14
<PAGE>   19

                                USE OF PROCEEDS


     The net proceeds to us from our sale of 2,100,000 shares of common stock in
this offering are estimated to be approximately $76.1 million, or $88.3 million
if the underwriters exercise their over-allotment option in full, based upon an
assumed public offering price of $38.625 per share and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us.


     We intend to use the net proceeds of this offering for general corporate
purposes, including working capital and capital expenditures for our
manufacturing expansion, and to repay approximately $8.0 million of indebtedness
under our revolving line of credit. We may also use a portion of the net
proceeds to acquire businesses, products or technologies that are complementary
to our business, although we are not currently negotiating any acquisitions and
we have no agreements with any third party for any acquisition. Prior to using
the proceeds in the manner described above, we plan to invest the net proceeds
of this offering in short-term, interest-bearing, investment-grade securities or
guaranteed obligations of the United States government. We will not receive any
proceeds from the sale of common stock by the selling stockholders.

     Borrowings under our revolving line of credit, which expires May 31, 2002,
bear interest at variable rates based upon the bank's reference rate or LIBOR.
At June 30, 2000, our line of credit bore interest at 10.0%.

                PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

     Our common stock has been quoted in the Nasdaq National Market under the
symbol "AXTI" since May 20, 1998. The following table sets forth the high and
low sales prices of our common stock for the periods indicated, as reported in
the Nasdaq National Market.


<TABLE>
<CAPTION>
                                                                   HIGH        LOW
                                                                  -------    -------
    <S>                                                           <C>        <C>
    1998:
    Second Quarter (from May 20, 1998)..........................  $15.000    $10.125
    Third Quarter...............................................   15.500      7.000
    Fourth Quarter..............................................   10.813      6.000
    1999:
    First Quarter...............................................  $22.500    $ 9.063
    Second Quarter..............................................   27.000     19.375
    Third Quarter...............................................   35.125     17.750
    Fourth Quarter..............................................   23.875     12.063
    2000
    First Quarter...............................................  $46.625    $14.500
    Second Quarter..............................................   47.000     21.250
    Third Quarter (through August 31, 2000).....................   45.000     31.125
</TABLE>



     On August 31, 2000, the last reported sale price of our common stock in the
Nasdaq National Market was $38.625 per share.



     We have not declared or paid cash dividends on our common stock and do not
anticipate doing so in the foreseeable future. It is our policy to retain any
future earnings to develop and expand our business. In addition, provisions of
our loan and debt covenants prevent us from declaring dividends without the
prior consent of our lenders. The payment of dividends, if any, on our common
stock in the future will be at the discretion of our board of directors. Our
preferred stock accrues dividends at the rate of 5.0% per annum.


                                       15
<PAGE>   20

                                 CAPITALIZATION

     The following table sets forth our capitalization as of June 30, 2000:

     - on an actual basis; and


     - on an as adjusted basis to reflect our sale of 234,155 shares of common
       stock in a private placement in July 2000 and the sale of 2,100,000
       shares of common stock in this offering at an assumed public offering
       price of $38.625 per share, after deducting the underwriting discounts
       and commissions and estimated offering expenses.


     You should read this table in conjunction with our consolidated financial
statements and related notes thereto included elsewhere in this prospectus.


<TABLE>
<CAPTION>
                                                                    JUNE 30, 2000
                                                              --------------------------
                                                               ACTUAL        AS ADJUSTED
                                                              --------       -----------
                                                                    (IN THOUSANDS)
<S>                                                           <C>            <C>
Note payable and short-term bank borrowing..................  $ 16,980        $ 16,980
Current portion of long-term debt and capital lease.........     5,299           5,299
                                                              --------        --------
     Total short-term debt..................................    22,279          22,279
Long-term debt and capital lease, net of current portion....    22,171          22,171
Stockholders' equity:
  Preferred stock
     $.001 par value, 2,000 shares authorized; 981 shares
     issued and outstanding actual and as adjusted..........         1               1
     Additional paid-in capital.............................     3,989           3,989
  Common stock
     $.001 par value, 100,000 shares authorized; 18,948
     shares issued and outstanding, actual; 21,282 shares
     issued and outstanding as adjusted.....................        19              21
     Additional paid-in capital.............................    48,606         133,243
  Deferred compensation.....................................      (162)           (162)
  Retained earnings.........................................    16,695          16,695
  Cumulative translation adjustments........................        98              98
                                                              --------        --------
       Total stockholders' equity...........................    69,246         153,885
                                                              --------        --------
       Total capitalization.................................  $113,696        $198,335
                                                              ========        ========
</TABLE>


     Shares issued and outstanding exclude the following:

     - 2,641,756 shares of common stock issuable upon exercise of options
       outstanding as of June 30, 2000 with a weighted average exercise price of
       $14.65 per share;

     - 3,239,831 shares of common stock reserved for future issuance as of June
       30, 2000 under our 1993 and 1997 stock option plans;

     - 778,837 shares of common stock reserved for future issuance as of June
       30, 2000 under our 1998 employee stock purchase plan; and

     - 330,000 shares that the underwriters may purchase if they exercise their
       over-allotment option in full.

                                       16
<PAGE>   21

                      SELECTED CONSOLIDATED FINANCIAL DATA

     The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, our consolidated financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected consolidated income
statement data for each of the three years in the period ended December 31, 1999
and for the six months ended June 30, 2000 and the selected consolidated balance
sheet data at December 31, 1998, 1999 and at June 30, 2000 are derived from, and
are qualified by reference to, our audited consolidated financial statements
included elsewhere in this prospectus. The selected consolidated income
statement data for each of the three years in the period ended December 31, 1997
and the selected consolidated balance sheet data as of December 31, 1995, 1996
and 1997 are derived from audited consolidated financial statements not included
in this prospectus. The consolidated income statement data for the six months
ended June 30, 1999 are derived from unaudited condensed consolidated financial
statements included elsewhere in this prospectus. In the opinion of management,
the unaudited condensed consolidated financial statements have been prepared on
the same basis as the audited consolidated financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair statement of the results of this period.


<TABLE>
<CAPTION>
                                                                                                            SIX MONTHS
                                                                YEARS ENDED DECEMBER 31,                  ENDED JUNE 30,
                                                     -----------------------------------------------   ---------------------
                                                      1995      1996      1997      1998      1999        1999        2000
                                                     -------   -------   -------   -------   -------   -----------   -------
                                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                                                       (UNAUDITED)
<S>                                                  <C>       <C>       <C>       <C>       <C>       <C>           <C>
CONSOLIDATED INCOME STATEMENT DATA:
Revenue............................................  $24,117   $31,272   $43,313   $61,314   $81,521     $39,680     $52,878
Cost of revenue....................................   14,773    21,037    29,650    38,949    57,369      30,211      32,198
                                                     -------   -------   -------   -------   -------     -------     -------
Gross profit.......................................    9,344    10,235    13,663    22,365    24,152       9,469      20,680
Operating expenses:
  Selling, general, and administrative.............    4,774     5,534     9,921    11,538    14,016       6,843       8,417
  Research and development.........................      448       592     1,289     2,684     3,086       1,520       3,851
  Acquisition costs................................       --        --        --        --     2,810       2,810          --
                                                     -------   -------   -------   -------   -------     -------     -------
    Total operating expenses.......................    5,222     6,126    11,210    14,222    19,912      11,173      12,268
                                                     -------   -------   -------   -------   -------     -------     -------
Income from operations.............................    4,122     4,109     2,453     8,143     4,240      (1,704)      8,412
Interest expense...................................      (12)     (170)     (793)   (1,481)   (2,150)     (1,360)     (1,918)
Other income and expense...........................      282       (72)      (57)      598       729         722         499
                                                     -------   -------   -------   -------   -------     -------     -------
Income (loss) before provision for income taxes....    4,392     3,867     1,603     7,260     2,819      (2,342)      6,993
Provision for income taxes.........................    1,599     1,516       783     2,976     2,139         178       2,668
                                                     -------   -------   -------   -------   -------     -------     -------
Income (loss) before extraordinary item............    2,793     2,351       820     4,284       680      (2,520)      4,325
Extraordinary item, net of tax benefits............       --        --        --        --      (508)       (508)         --
                                                     -------   -------   -------   -------   -------     -------     -------
Net income.........................................  $ 2,793   $ 2,351   $   820   $ 4,284   $   172     $(3,028)    $ 4,325
                                                     =======   =======   =======   =======   =======     =======     =======
Basic net income (loss) per share:
  Income (loss) before extraordinary item..........  $  0.96   $  0.65   $  0.22   $  0.27   $  0.04     $ (0.14)    $  0.23
  Extraordinary item...............................       --        --        --        --     (0.03)      (0.03)         --
  Net income.......................................     0.96      0.65      0.22      0.27      0.01       (0.16)       0.23
Diluted net income (loss) per share:
  Income (loss) before extraordinary item..........  $  0.23   $  0.19   $  0.06   $  0.26   $  0.03     $ (0.14)    $  0.21
  Extraordinary item...............................       --        --        --        --     (0.03)      (0.03)         --
  Net income.......................................     0.23      0.19      0.06      0.26      0.01       (0.16)       0.21
Shares used in calculations:
  Basic............................................    2,921     3,595     3,697    16,076    18,655      18,451      18,687
  Diluted..........................................   11,913    12,524    13,598    16,325    19,771      18,451      20,178
</TABLE>


                                       17
<PAGE>   22

<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                              -------------------------------------------------   JUNE 30,
                                                               1995      1996      1997       1998       1999       2000
                                                              -------   -------   -------   --------   --------   --------
                                                                                     (IN THOUSANDS)
<S>                                                           <C>       <C>       <C>       <C>        <C>        <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................................  $ 1,121   $ 1,171   $ 3,199   $ 16,438   $  6,062   $  5,149
Working capital.............................................    5,144     6,866    12,612     41,644     40,462     34,669
Total assets................................................   15,067    23,178    37,796    102,983    115,762    137,172
Long-term capital lease, net of current portion.............       --        --        --      3,854      6,853      8,137
Long-term debt, net of current portion......................    2,350     5,833     7,728     18,416     15,254     14,034
Stockholders' equity........................................    7,869    10,237    17,387     61,164     62,459     69,246
</TABLE>

     Revenue from our substrates division and consumer products division is
included in all periods presented. Revenue from our visible emitters division is
included from the time of the acquisition of the visible emitter business on
September 29, 1998.

                                       18
<PAGE>   23

                    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 prospectus. In addition to historical information,
the discussion in this prospectus contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated by these forward-looking statements due to factors, including
but not limited to, those set forth under "Risk Factors" and elsewhere in this
prospectus.


OVERVIEW

     We were founded in 1986 to commercialize and enhance our proprietary VGF
technique for producing high-performance compound semiconductor substrates. We
currently operate three divisions: our substrate division, our visible emitter
division and our consumer products 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 Lyte's historical business as our visible
emitter division and consumer products division. The visible emitter division
manufactures HB LEDs, VCSELs and laser diodes for the illumination markets,
including full-color displays, automobile lighting and traffic signals, as well
as fiber optic communications. The consumer products division focuses on the
design and marketing of laser-pointing and alignment products for the consumer,
commercial and industrial markets. We expect to focus our resources on the
substrate and visible emitter divisions.

     We have been profitable on an annual basis since 1990. Our total revenue
was $43.3 million for 1997, $61.3 million for 1998, $81.5 million for 1999 and
$52.9 million for the six months ended June 30, 2000. Our net income was
$820,000 for 1997, $4.3 million for 1998, $172,000 for 1999 and $4.3 million for
the six months ended June 30, 2000.

     Our five largest customers accounted for 20.4% of our total revenue in
1997, 27.9% in 1998, 22.9% in 1999 and 25.5% for the six months ended June 30,
2000. No customer accounted for more than 10.0% of our total revenue in 1997,
1998, 1999 or the six months ended June 30, 2000. Generally, we do not have
long-term or other non-cancelable commitments from our customers and usually
sell products pursuant to customer purchase orders.

     In the first quarter of 2000, we announced plans to expand substantially
our production capacity for compound substrates as well as blue, green and cyan
HB LEDs. Most of the expansion for substrates will occur at our facilities in
China and the remainder of our substrate expansion and all of our visible
emitter expansion will occur at our California facilities. We estimate that our
capital expenditures for this expansion during the next 12 months will be
approximately $47.0 million.


     In connection with our acquisition of Lyte Optronics and its subsidiaries,
we issued approximately 2,247,465 shares of common stock and 980,655 shares of
preferred stock with a 5.0% annual dividend rate and $4.0 million liquidation
preference over common stock, 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. Ten percent of the shares issued to Lyte Optronics'
stockholders are held in escrow to satisfy any claims that we may bring under
the acquisition agreement. We have filed claims under the acquisition agreement,
and expect that all of the shares held in escrow will be returned to us in
satisfaction of these claims.


     Our revenue primarily consists of product revenues. We recognize revenue
upon the shipment of products to the customer provided that we have received a
signed purchase order, the price is fixed, collection of resulting receivables
is probable, product returns are reasonably estimable and there are no remaining
significant obligations. We also provide for future returns based on historical
experience at the

                                       19
<PAGE>   24

time revenue is recognized. Except for sales in Japan and some sales in Taiwan,
which are denominated in Japanese yen, we denominate and collect our
international sales in U.S. dollars.

     Each of our three 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 Japan and
through independent sales representatives in France, Japan, South Korea, Taiwan
and the United Kingdom. We sell our HB LED and laser diode products primarily
through independent sales representatives to lamp package manufacturers in
Taiwan and China. We currently sell our consumer products through a combination
of our own direct sales force and independent sales representatives, mostly to
customers in the U.S.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                                     SIX MONTHS
                                                      YEARS ENDED DECEMBER 31,     ENDED JUNE 30,
                                                     --------------------------    --------------
                                                      1997      1998      1999     1999     2000
                                                     ------    ------    ------    -----    -----
<S>                                                  <C>       <C>       <C>       <C>      <C>
Revenue............................................  100.0%    100.0%    100.0%    100.0%   100.0%
Cost of revenue....................................   68.5      63.5      70.4      76.1     60.9
                                                     -----     -----     -----     -----    -----
Gross profit.......................................   31.5      36.5      29.6      23.9     39.1
Operating expenses:
  Selling, general and administrative..............   22.9      18.8      17.2      17.2     15.9
  Research and development.........................    3.0       4.4       3.8       3.8      7.3
  Acquisition costs................................     --        --       3.5       7.1       --
                                                     -----     -----     -----     -----    -----
     Total operating expenses......................   25.9      23.2      24.5      28.2     23.2
                                                     -----     -----     -----     -----    -----
Income (loss) from operations......................    5.6      13.3       5.2      (4.3)    15.9
Interest expense...................................   (1.8)     (2.4)     (2.6)     (3.4)    (3.6)
Other income and expense...........................   (0.1)      1.0       0.9       1.8      0.9
                                                     -----     -----     -----     -----    -----
Income (loss) before provision for income taxes....    3.7      11.9       3.4      (5.9)    13.2
Provision for income taxes.........................    1.8       4.9       2.6       0.4      5.0
                                                     -----     -----     -----     -----    -----
Income (loss) before extraordinary item............    1.9       7.0       0.8      (6.4)     8.2
Extraordinary item, net of tax benefits............     --        --      (0.6)     (1.3)      --
                                                     -----     -----     -----     -----    -----
Net income.........................................    1.9%      7.0%      0.2%     (7.6)%    8.2%
                                                     =====     =====     =====     =====    =====
</TABLE>

SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO JUNE 30, 2000


     Revenue. Total revenue increased $13.2 million, or 33.3%, from $39.7
million for the six months ended June 30, 1999 to $52.9 million for the six
months ended June 30, 2000. The increase in revenue was primarily due to a $19.2
million, or 73.5%, increase in substrate sales comprised of a $22.8 million, or
106.9% increase in sales of GaAs and InP substrates offset by a $3.6 million
decrease in Ge sales and contract revenues. The increase in GaAs and InP
substrate sales was a result of increased sales to existing and new customers
due in part to strong growth in the fiber optic and wireless handset markets.
The decrease in Ge sales was the result of a cancellation of a contract by a
major customer due to weakness in the satellite market. Sales at our visible
emitter division decreased $4.5 million, or 48.2%, for the six months ended June
30, 2000. Sales at our consumer products division decreased $1.5 million, or
35.6%, due to declining sales prices and lower demand for laser pointer
products.


     Revenue from the substrate division was 65.9% of total revenue, revenue
from the visible emitter division was 23.7% of total revenue and revenue from
the consumer products division was 10.5% of total revenue for the six months
ended June 30, 1999 compared to revenue from the substrate division of 85.7%

                                       20
<PAGE>   25

of total revenue, revenue from the visible emitter division of 9.2% of total
revenue and revenue from the consumer products division of 5.1% of total revenue
for the six months ended June 30, 2000.

     International revenue decreased from 49.6% of total revenue for the six
months ended June 30, 1999 to 47.3% of total revenue for the six months ended
June 30, 2000. The decrease in the percentage of revenue was primarily the
result of increased substrate sales to domestic customers.

     Gross margin. Gross margins increased from 23.9% for the six months ended
June 30, 1999 to 39.1% for the six months ended June 30, 2000. The gross margin
at the substrate division increased from 39.7% for the six months ended June 30,
1999 to 46.6% for the six months ended June 30, 2000. The increase was primarily
due to higher volume and the realization of lower labor and manufacturing
overhead costs as a result of expanding our wafer production capacity in China.
The gross margin at the visible emitter division decreased from negative 1.2%
for the period ended June 30, 1999 to negative 23.0% for the six months ended
June 30, 2000. The decrease was primarily due to increased costs associated with
the start-up of blue LED and other product production. The gross margin at the
consumer products division increased from negative 19.3% for the six months
ended June 30, 1999 to 24.4% for the six months ended June 30, 2000. The
increase was primarily due to manufacturing process improvements and cost
reductions.

     Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.6 million, or 23.0%, from $6.8 million for
the six months ended June 30, 1999 to $8.4 million for the six months ended June
30, 2000. 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 17.2% for the six months ended
June 30, 1999 compared to 15.9% for the six months ended June 30, 2000. Selling,
general and administrative expenses increased 23.0% compared to increased total
revenue of 33.3% for the six months ended June 30, 2000.

     Research and development expenses. Research and development expenses
increased $2.3 million, or 153.4%, from $1.5 million for the six months ended
June 30, 1999 to $3.9 million for the six months ended June 30, 2000. The
increase was primarily the result of increases in personnel and related expenses
and materials to support LED and other product research and development at the
visible emitter division. As a percentage of total revenue, research and
development expenses were 3.8% for the six months ended June 30, 1999 compared
to 7.3% for the six months ended June 30, 2000.

     Interest expense. Interest expense increased $558,000, or 41.0%, from $1.4
million for the six months ended June 30, 1999 to $1.9 million for the six
months ended June 30, 2000. 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 decreased $223,000 from
$722,000 for the six months ended June 30, 1999 to $499,000 for the six months
ended June 30, 2000. The decrease was primarily the result of smaller foreign
exchange gains.

     Provision for income taxes. The effective tax rate was 38.0% for the six
months ended June 30, 2000. For the six months ended June 30, 1999, the
provision for income taxes reflected the effect of non-deductible acquisition
costs of $2.8 million.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1999


     Revenue. Revenue increased 33.0%, or $20.2 million from $61.3 million for
1998 to $81.5 million for 1999. The increase in revenue resulted primarily from
a $13.7 million increase in sales of GaAs and InP substrates to existing
customers and the addition of new customers, a $12.7 million increase due to the
inclusion of the visible emitter division for a full year in 1999 compared to
only the fourth quarter in 1998, and a $6.1 million decrease in consumer product
sales. The decrease in consumer product sales reflected declining sales prices
for laser pointer products, an increase in sales returns due to product quality


                                       21
<PAGE>   26

problems and a change in government regulations regarding the allowable strength
of laser products sold to the consumer product market in Europe.

     Revenue from the substrate division was 70.4% of total revenue, revenue
from the visible emitter division was 9.6% of total revenue and revenue from the
consumer products division was 20.0% of total revenue for 1998 compared to
revenue from the substrate division of 69.6% of total revenue, revenue from the
visible emitter division of 22.9% of total revenue and revenue from the consumer
products division of 7.5% of total revenue for 1999.


     International revenue, excluding Canada, increased from 29.5% of total
revenue, or $18.1 million, for 1998, to 43.9% or $35.8 million for 1999. The
increase in international revenue resulted primarily from a $7.3 million
increase in GaAs and InP sales to new and existing customers and a $10.0 million
increase due to the inclusion of the visible emitter division for a full year in
1999 compared to only the fourth quarter in 1998.



     Gross margin. Gross margin decreased from 36.5% for 1998 to 29.6% for 1999.
The gross margin for substrates decreased slightly from 41.5% to 41.0%,
primarily due to a decline in sales prices. The gross margin on products sold by
the visible emitter division was 36.2% in 1998 compared to 11.1% in 1999. The
decrease in margins at the visible emitter division was primarily due to
significant sales price decreases for laser diodes, a $1.5 million charge to
settle a patent dispute and a $2.4 million charge to write down obsolete
inventory. Excluding these charges, the gross margin was 32.0% in 1999. Gross
margin on products sold by the consumer products division decreased from 18.7%
in 1998 to negative 19.4% in 1999, due to significant sales prices decreases for
laser pointer products and a $2.1 million charge to write down obsolete
inventory. Excluding these charges, the gross margin was 14.7% in 1999.


     Selling, general and administrative expenses. Selling, general and
administrative expenses increased 21.5%, or $2.5 million, from $11.5 million for
1998 to $14.0 million for 1999. The inclusion of the visible emitter division
for the full year in 1999 compared to only the fourth quarter of 1998 resulted
in an increase of $3.3 million. Substrate division expenses increased $1.2
million primarily due to increases in personnel and related expenses required to
support additional sales volume. These increases were offset by a decrease of
$2.0 million by the consumer products division as a result of the closing of a
manufacturing facility located in Arizona in 1998. Selling, general and
administrative expenses as a percentage of total revenue decreased from 18.8%
for 1998 to 17.2% for 1999. This decrease was primarily due to an increase in
total revenue.

     Research and development expenses. Research and development expenses
increased 15.0%, or $402,000, from $2.7 million for 1998, to $3.1 million for
1999. This increase resulted primarily from the inclusion of the visible emitter
division for a full year in 1999 compared to only the fourth quarter in 1998.
Also, historically the consumer products division did not separately account for
its research and development expenses but included them as part of the cost of
product revenue and selling, general and administrative expenses. Research and
development expenses as a percentage of total revenue decreased from 4.4% of
total revenue for 1998 to 3.8% of revenue for 1999. This decrease was primarily
due to an increase in total revenue.

     Acquisition cost. As a result of the acquisition of Lyte Optronics in May
1999, we incurred a number of one-time expenses which totaled approximately $2.8
million. These expenses included fees paid to our investment bankers,
accountants, attorneys and other outside consultants and related transaction
expenses.

     Interest expense. Interest expense increased 45.2%, or $669,000 from $1.5
million for 1998, to $2.2 million for 1999. This increase was primarily the
result of the inclusion of the visible emitter division for a full year in 1999
compared to only the fourth quarter in 1998, which resulted in increased
borrowing on a line of credit.

     Other income and expense. Other income and expense increased 21.9%, or
$131,000 from $598,000 for 1998 to $729,000 for 1999. The increase was primarily
the result of foreign exchange gains.

                                       22
<PAGE>   27

     Provision for income taxes. Income tax expense, excluding the effect of
non-deductible acquisition costs of approximately $2.8 million in 1999,
decreased from 41.0% to 38.0% of income before provision for income taxes for
1998 and 1999.

     Extraordinary item, net of tax benefit. In connection with the acquisition
of Lyte Optronics in May 1999, we incurred fees associated with a loan that we
repaid as part of the transaction.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998

     Revenue. Revenue increased 41.6%, or $18.0 million from $43.3 million for
1997 to $61.3 million for 1998. The increase in revenue resulted primarily from
a $17.8 million increase in the volume of sales of GaAs and InP substrates to
existing customers, the addition of new customers and the introduction of Ge
substrates in the fourth quarter of 1997. Additionally, there was a $5.9 million
increase due to the inclusion of the visible emitter division for the fourth
quarter of 1998, offset by a $5.7 million decrease in revenue at the consumer
products division reflecting declining sales prices for laser pointer products
and a change in government regulations reducing the allowable strength of lasers
sold to the consumer market in Europe.

     Revenue from the substrate division was 58.5% of total revenue, and revenue
from the consumer products division was 41.5% of total revenue for 1997 compared
to revenue from the substrate division of 70.4% of total revenue, revenue from
the visible emitter division of 9.6% of total revenue and revenue from the
consumer products division of 20.0% of total revenue for 1998.


     International revenue, excluding Canada, increased from 26.8% of total
revenues for 1997 to 29.5% for 1998. The increase in international revenue
resulted primarily from a $3.8 million increase in substrate sales to new and
existing customers and a $5.1 million increase due to the inclusion of the
visible emitter division for the fourth quarter of 1998, which sells products
primarily in Asia, offset by a $2.4 million decrease in sales to Europe by the
consumer products division caused by governmental regulation changes reducing
the allowable strength of lasers sold to the consumer market.



     Gross margin. Gross margins increased from 31.5% for 1997 to 36.5% for
1998. The gross margins for substrates increased slightly from 39.9% in 1997 to
41.5% in 1998 reflecting higher yields achieved in GaAs and InP production,
partially offset by lower margins on Ge substrates. Total gross margins also
benefited from the inclusion of the visible emitter division for the fourth
quarter of 1998, which had a 36.2% gross margin. Gross margins on products sold
by the consumer products division decreased slightly from 19.8% in 1997 to 18.7%
in 1998 due to declining prices for laser pointer products.


     Selling, general and administrative expenses. Selling, general and
administrative expenses increased 16.3%, or $1.6 million, from $9.9 million for
1997 to $11.5 million for 1998. Substrate division expenses increased $2.1
million primarily due to increases in personnel and related expenses required to
support additional sales volume. The inclusion of the visible emitter division
for the fourth quarter of 1998 added $1.0 million. These increases were offset
by a $1.4 million decrease at the consumer products division as a result of
closing a manufacturing facility located in Arizona in 1998. Selling, general
and administrative expenses as a percentage of total revenue decreased from
22.9% for 1997 to 18.8% for 1998. This percentage decrease was primarily due to
the 41.6% increase in revenue.

     Research and development expenses. Research and development expenses
increased 108.2%, or $1.4 million, from $1.3 million for 1997 to $2.7 million
for 1998. This increase resulted primarily from hiring additional engineers and
the purchase of materials at the substrate division to develop new products and
to enhance existing products. Also, historically the consumer products division
did not separately account for its research and development expenses but
included them as part of its cost of product revenue and selling, general and
administrative expenses. Research and development expenses as a percentage of
total revenue increased from 3.0% for 1997 to 4.4% for 1998, primarily as a
result of the increase in spending.

                                       23
<PAGE>   28

     Interest expense. Interest expense increased 86.8%, or $688,000 from
$793,000 for 1997 to $1.5 million for 1998. This increase was primarily the
result of additional borrowings to finance the purchase and lease of buildings
and equipment at the substrate and consumer products divisions.

     Other income and expense. Other income and expense increased from an
expense of $57,000 for 1997 to income of $598,000 for 1998. This increase was
primarily the result of interest income earned on the $25.8 million in net
proceeds raised from our initial public offering in May 1998.

     Provision for income taxes. Income tax expense decreased from 48.8% of
income before provision for income taxes in 1997 to 41.0% in 1998, due to a
decrease in non-deductible expenses.

SELECTED QUARTERLY RESULTS OF OPERATIONS

     The following table sets forth selected unaudited quarterly consolidated
financial information in dollars for the six quarters ended June 30, 2000. We
believe that all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
such quarterly information. The operating results for any quarter are not
necessarily indicative of results for any subsequent period.

<TABLE>
<CAPTION>
                                                                         QUARTERS ENDED
                                                ----------------------------------------------------------------
                                                MAR. 31,   JUNE 30,   SEPT. 30,   DEC. 31,   MAR. 31,   JUNE 30,
                                                  1999       1999       1999        1999       2000       2000
                                                --------   --------   ---------   --------   --------   --------
                                                                         (IN THOUSANDS)
<S>                                             <C>        <C>        <C>         <C>        <C>        <C>
Revenue.......................................  $18,897    $20,783     $20,017    $21,824    $23,934    $28,944
Cost of revenue...............................   16,240     13,971      13,077     14,081     14,339     17,859
                                                -------    -------     -------    -------    -------    -------
Gross profit..................................    2,657      6,812       6,940      7,743      9,595     11,085
Operating expenses:
  Selling, general and administrative.........    3,647      3,196       3,113      4,060      3,853      4,564
  Research and development....................      662        858         670        896      1,988      1,863
  Acquisition costs...........................       --      2,810          --         --         --         --
                                                -------    -------     -------    -------    -------    -------
         Total operating expenses.............    4,309      6,864       3,783      4,956      5,841      6,427
                                                -------    -------     -------    -------    -------    -------
Income (loss) from operations.................   (1,652)       (52)      3,157      2,787      3,754      4,658
Interest expense..............................     (630)      (730)       (752)      (615)      (769)    (1,149)
Other income and expense......................      693         29         235        349        196        303
                                                -------    -------     -------    -------    -------    -------
Income (loss) before provision for income
  taxes.......................................   (1,589)      (753)      2,640      2,521      3,181      3,812
Provision for income taxes....................     (604)       782       1,003        958      1,209      1,459
                                                -------    -------     -------    -------    -------    -------
Income (loss) before extraordinary item.......     (985)    (1,535)      1,637      1,563      1,972      2,353
Extraordinary item -- net of tax benefits.....       --       (508)         --         --         --         --
                                                -------    -------     -------    -------    -------    -------
Net income (loss).............................  $  (985)   $(2,043)    $ 1,637    $ 1,563    $ 1,972    $ 2,353
                                                =======    =======     =======    =======    =======    =======
</TABLE>

     The following table sets forth selected unaudited quarterly financial
information by segment.


<TABLE>
<S>                                             <C>        <C>        <C>         <C>        <C>        <C>
Revenue:
  Substrates..................................  $11,731    $14,405     $15,030    $15,566    $19,125    $26,212
  Visible emitters............................    4,600      4,792       3,889      5,359      3,140      1,728
  Consumer products...........................    2,566      1,586       1,098        899      1,669      1,004
                                                -------    -------     -------    -------    -------    -------
         Total................................  $18,897    $20,783     $20,017    $21,824    $23,934    $28,944
                                                -------    -------     -------    -------    -------    -------
Gross profit:
  Substrates..................................  $ 4,830    $ 5,549     $ 6,224    $ 6,683    $ 8,682    $12,466
  Visible emitters............................   (1,730)     1,622         921      1,248        289     (1,409)
  Consumer products...........................     (443)      (359)       (205)      (188)       624         28
                                                -------    -------     -------    -------    -------    -------
         Total................................  $ 2,657    $ 6,812     $ 6,940    $ 7,743    $ 9,595    $11,085
                                                -------    -------     -------    -------    -------    -------
</TABLE>


                                       24
<PAGE>   29

     The following table sets forth selected unaudited quarterly consolidated
financial information as a percent of the total revenue for the six quarters
ended June 30, 2000.


<TABLE>
<CAPTION>
                                                                         QUARTERS ENDED
                                                ----------------------------------------------------------------
                                                MAR. 31,   JUNE 30,   SEPT. 30,   DEC. 31,   MAR. 31,   JUNE 30,
                                                  1999       1999       1999        1999       2000       2000
                                                --------   --------   ---------   --------   --------   --------
<S>                                             <C>        <C>        <C>         <C>        <C>        <C>
Revenue.......................................    100.0%     100.0%      100.0%     100.0%     100.0%     100.0%
Cost of revenue...............................     85.9       67.2        65.3       64.5       59.9       61.7
                                                -------    -------     -------    -------    -------    -------
Gross profit..................................     14.1       32.8        34.7       35.5       40.1       38.3
Operating expenses:
  Selling, general and administrative.........     19.3       15.4        15.6       18.6       16.1       15.8
  Research and development....................      3.5        4.1         3.3        4.1        8.3        6.4
  Acquisition costs...........................       --       13.5          --         --         --         --
                                                -------    -------     -------    -------    -------    -------
         Total operating expenses.............     22.8       33.0        18.9       22.7       24.4       22.2
                                                -------    -------     -------    -------    -------    -------
Income (loss) from operations.................     (8.7)      (0.3)       15.8       12.8       15.7       16.1
Interest expense..............................     (3.3)      (3.5)       (3.8)      (2.8)      (3.2)      (4.0)
Other income and expense......................      3.6        0.1         1.2        1.6        0.8        1.0
                                                -------    -------     -------    -------    -------    -------
Income (loss) before provision for income
  taxes.......................................     (8.4)      (3.6)       13.2       11.6       13.3       13.1
Provision for income taxes....................     (3.2)       3.8         5.0        4.4        5.1        5.0
                                                -------    -------     -------    -------    -------    -------
Income (loss) before extraordinary item.......     (5.2)      (7.4)        8.2        7.2        8.2        8.1
Extraordinary item -- net of tax benefits.....       --       (2.4)         --         --         --         --
                                                -------    -------     -------    -------    -------    -------
Net income (loss).............................     (5.2)%     (9.8)%       8.2%       7.2%       8.2%       8.1%
                                                =======    =======     =======    =======    =======    =======
</TABLE>



     Revenue increased from the quarter ended March 31, 1999 to the quarter
ended June 30, 2000 primarily due to increases in unit sales of substrates,
partially offset by decreases in sales of visible emitter and consumer products.
The decrease in visible emitter sales was primarily caused by declines in both
the number of laser diode chips sold and their average price. Gross profit
margins were higher in the quarters ended March 31 and June 30, 2000 than in
previous quarters because substrates, which have a higher profit margin,
represented a higher proportion of total sales in these last two quarters. In
addition, we were successful in reducing the unit costs of substrates in these
last two quarters. Excluding the acquisition costs related to the merger with
Lyte Optronics in the quarter ended June 30, 1999, operating expenses generally
increased as we added people and equipment in order to generate increased sales.


LIQUIDITY AND CAPITAL RESOURCES


     Working capital decreased $5.8 million, or 14.3%, from $40.5 million at
December 31, 1999 to $34.7 million at June 30, 2000. The decrease was primarily
due to expenditures for equipment, partially offset by net income. Total
long-term debt, including capital leases, increased $7.3 million while property,
plant and equipment purchases were $14.5 million during the six months ended
June 30, 2000.


     Cash used in operating activities was $7.1 million for the six months ended
June 30, 1999 compared to cash generated from operating activities of $3.9
million for the six months ended June 30, 2000. The increase was primarily due
to increased profitability at the substrate division.

     Our capital expenditures were $3.9 million for the six months ended June
30, 1999 compared to $14.5 million during the six months ended June 30, 2000.
The increase in spending was primarily a result of facility expansion and
equipment additions in order to increase crystal growth and wafer processing
capacity at the substrate division as well as facility expansion and equipment
additions at the visible emitter division. We financed these acquisitions in
part through capital leases of $2.7 million during the six months ended June 30,
1999 and $3.4 million during the six months ended June 30, 2000.

     We are currently constructing an additional 32,000 square foot building in
Beijing, China to expand substrate wafer processing capacity, a 27,000 square
foot building in El Monte, California to expand HB LED and VCSEL epitaxy
production and leasehold improvements in a 20,000 square foot building and a
9,000 square foot building to expand our administrative offices and material
storage areas in Fremont, California. We are also constructing improvements to
our existing production facilities in Fremont,

                                       25
<PAGE>   30

California to increase crystal growth and wafer processing capacity. We expect
to invest approximately $47.0 million in additional facilities and equipment
over the next 12 months.

     Cash provided by financing activities for the six months ended June 30,
2000 included a $4.0 million note from our bank and $2.3 million in proceeds
from the exercise of stock options and purchases of stock under our stock
purchase plan.

     Total debt was $37.1 million at December 31, 1999, compared to $44.5
million at June 30, 2000.


     We currently have a $15.0 million line of credit with a commercial bank at
an interest rate equal to the bank's variable prime rate plus 0.5%. The bank's
prime rate was 9.5% at June 30, 2000. This line of credit is secured by all of
our assets, other than equipment, and expires on September 30, 2000. At June 30,
2000, $13.0 million was outstanding under the $15.0 million line of credit. On
August 28, 2000, we entered into new credit facilities with the bank for a
21-month $20.0 million line of credit and additional 31-month term loans of $6.0
million. This new line of credit will replace the existing $15.0 million
facility.



     On June 15, 2000, we entered into a short-term note with our bank in the
amount of $4.0 million. The note bears interest at 1.0% above the lender's
variable prime rate, which was 9.5% at June 30, 2000. The principal and unpaid
interest of the note is due September 30, 2000. We will repay this note with the
proceeds of the new term loans. The proceeds of the note were primarily used to
fund our current operating and capital expenditure needs.



     In July 2000, we raised approximately $8.5 million in a private placement
of 234,115 shares of common stock to 11 stockholders.


     We generally finance equipment purchases through secured equipment loans
and capital leases over five-year terms at interest rates ranging from 6.0% to
10.0% per annum. Some of our manufacturing facilities have been financed by
long-term borrowings, which were repaid by taxable variable rate revenue bonds
in 1998. These bonds mature in 2023 and bear an 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 June 30, 2000, $10.7 million was outstanding under
these bonds.

     We anticipate that the combination of existing working capital and the
borrowings available under the current and committed credit agreements, together
with the net proceeds of this offering, 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. In addition to the net
proceeds from this offering, we may need to raise additional equity and debt
financing in the future.

RECENT ACCOUNTING PRONOUNCEMENTS


     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 established accounting and
reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. In June 2000, SFAS 133 was amended by
SFAS 138. We have not determined what the effect of SFAS 133 will be on our
operations and financial position. We will be required to implement SFAS 133 as
amended by SFAS 137, beginning in 2001. We do not expect that adopting the
provisions of SFAS 133 will have a material effect on our financial position or
results of operations.



     In December 1999, the Securities and Exchange Commission, or SEC, issued
Staff Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition," which
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the


                                       26
<PAGE>   31


basic criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. We believe that the impact
of SAB 101 will have no material effect on our financial position or results of
operations.



     In March 2000, the FASB issued FASB Interpretation No. 44, or FIN 44,
"Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25." FIN 44 clarifies the application of
Opinion 25" for (a) the definition of an employee for purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence for various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998 or January 12, 2000. The adoption of FIN 44
did not and is not expected to have an impact on our financial position or
results of operations.


QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET 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. During 1997 we incurred a foreign
transaction exchange loss of $186,000, a loss of $24,000 in 1998, a gain of
$652,000 in 1999 and a loss of $3,000 during the six months ended June 30, 2000.
We purchase foreign exchange contracts to hedge against certain trade accounts
receivable in Japanese yen. The outstanding commitments with respect to such
foreign exchange contracts had a total contract value of approximately $1.7
million as of June 30, 2000. 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 minimize the impact of foreign exchange fluctuations.


     The fair market value of long-term fixed and variable interest rate debt is
subject to interest rate risk. The effect of an immediate 10% change in interest
rates would not have a material impact on our future operating results or cash
flows.

                                       27
<PAGE>   32

                                    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 HB LEDs, and vertical cavity
surface emitting lasers, or VCSELs. 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 HB LEDs and VCSELs. 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
significantly expand our substrate and device manufacturing capacity and to
reduce the overall cost structure of our manufacturing operations.

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, International Data Corporation, or IDC, expects the number of mobile
wireless devices for Internet access and other data transmission to grow from
10.0 million units in 1999 to more than 562.0 million units by 2004.


     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;

     - 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.

                                       28
<PAGE>   33


     The first 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 HB LEDs and VCSELs used in solid state
lighting and fiber optic communications.

     HB LEDs are solid-state compound semiconductor devices that emit light. The
global demand for HB LEDs is experiencing rapid growth because HB LEDs have a
long useful life, consume approximately 10% of the power consumed by
incandescent or halogen lighting and improve display visibility. Applications
where HB LEDs 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 HB LEDs is expected to grow from $600.0 million
in 1999 to approximately $1.2 billion by 2004.

     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 $247.0 million in 1999
to approximately $2.8 billion by 2004.

THE AXT ADVANTAGE


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



     Our VGF technology is a competitive advantage. 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.


     - 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
                                       29
<PAGE>   34

       that operate at speeds up to 40 gigabits per second. Manufacturers of
       these devices are turning to 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 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 the current rapid growth environment 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 expansion in China
provides us with a combination of lower costs for facilities, labor and
materials than we encountered in the United States and positions us to gain
access to low-cost raw materials supply sources. Furthermore, as we increase our
production capacity, we are able to spread fixed costs over a larger revenue
base, thereby leveraging our cost structure and achieving economies of scale.



     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 HB
LEDs and VCSELs. Since acquiring Lyte Optronics, we have developed
opto-electronic products that are among the more difficult to create using
epitaxy, including green HB LEDs and VCSELs. We have filed five patent
applications for our approach to fabricating HB LEDs. 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:

     Expand GaAs substrate manufacturing capacity and decrease manufacturing
cost structure. We are increasing our production capacity in order to increase
our share of the market for GaAs substrates. We believe that we can extend our
leadership position by increasing our manufacturing capacity more rapidly than
competitors and in a manner that enables us to further lower unit production
costs. Much of this capacity increase will be for production of our six-inch
diameter GaAs substrates. We further believe that expanding our manufacturing
operations in China will allow us to increase capacity more quickly and at lower
cost. Furthermore, this expansion will allow us to form strategic alliances with
suppliers of key raw materials.

                                       30
<PAGE>   35


     Strengthen our leadership position in the InP market. We believe that there
will be rapid 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 by significantly expanding our production
capacity. Our sales of InP substrates during the six-month period ended June 30,
2000 grew 261% compared to our sales of InP substrates during the six-month
period ended June 30, 1999.


     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 high growth 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 high growth HB LED and VCSEL markets through continued investment
in research and development and expansion of production capacity. We are
expanding 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. During the next year we expect to increase
our VCSEL sales and develop our chip fabrication capabilities, which will enable
us to develop one- and two-dimensional VCSEL arrays.

     Leverage existing customer relationships. We currently sell our GaAs
substrates to more than 200 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.

                                       31
<PAGE>   36

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 HB LEDs
and VCSELs.


           [VGF 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 of
the melt which results when 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


                                       32
<PAGE>   37

controlling the ratio of gallium to arsenic. It requires large, complex
electro-mechanical systems that are expensive and require highly skilled
personnel to operate.

     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:


<TABLE>
<S>                           <C>                       <C>                       <C>
- ----------------------------------------------------------------------------------------------------------
                                        VGF                        HB                       LEC
- ----------------------------------------------------------------------------------------------------------
  Substrate applications           Electronic and           Opto-electronic              Electronic
                                  opto-electronic
- ----------------------------------------------------------------------------------------------------------
 Largest wafer size                      6"                        3"                        6"
 available
- ----------------------------------------------------------------------------------------------------------
 Stress/defect levels                 Very Low                    Low                       High
- ----------------------------------------------------------------------------------------------------------
 Crystal purity                         Good                      Poor                      Good
- ----------------------------------------------------------------------------------------------------------
 Applicability to multiple         GaAs, InP, Ge                  GaAs                 GaAs, InP, GaP
   materials
- ----------------------------------------------------------------------------------------------------------
 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                  Few                       Many                      Many
- ----------------------------------------------------------------------------------------------------------
</TABLE>



     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 HB LED. 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.


                                       33
<PAGE>   38

PRODUCTS


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



<TABLE>
<S>                                 <C>                                 <C>
- -----------------------------------------------------------------------------------------------------
             PRODUCT                                          APPLICATIONS
- -----------------------------------------------------------------------------------------------------
 SUBSTRATES                         ELECTRONIC                          OPTO-ELECTRONIC
   GaAs                             - Cellular phones                   - LEDs
                                    - Direct broadcast television       - Lasers
                                    - High-performance transistors      - Optical couplers
                                    - Satellite communications          - Displays

   InP                              - Fiber optic communications        - Fiber optic communications
                                    - Satellite communications          - Lasers
                                    - High-performance transistors
                                    - Automotive collision avoidance
                                    radars

   Ge                               - Satellite solar cells
- -----------------------------------------------------------------------------------------------------
 VISIBLE EMITTERS
   Blue, green and cyan HB          - Full color displays
   LEDs                             - 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                     - Pointer products
- -----------------------------------------------------------------------------------------------------
 CONSUMER PRODUCTS
   Laser diode-based products       - Business presentations
                                    - Fire safety egress

   LED-based products               - LED flashlight
- -----------------------------------------------------------------------------------------------------
</TABLE>


     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 are developing and intend to initiate
production of sapphire substrates.

     Visible Emitters. We sell blue, green and cyan HB LED products in wafer and
chip form. We began selling blue HB LED products in the first quarter of 2000
and have recently begun shipping green and cyan HB LEDs in test quantities. We
introduced our first VSCEL product in August 2000.

     Consumer Products. We sell laser pointers and products that use laser
diodes manufactured by our visible emitter division and other sources. We
announced two new consumer products for shipment during the first half of 2000:
Safe Escape, a laser fire escape system, and MiniBrite, an LED flashlight.

                                       34
<PAGE>   39

CUSTOMERS

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

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

     We sell our laser diode and HB LED products primarily to customers that
incorporate them into lighting products. Our top laser diode and HB LED
customers include Harvatek and King Brite.

MANUFACTURING


     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 many of our labor-intensive processes to our facilities in China, where
costs, including labor costs, are generally lower. We intend to transfer the
majority of our substrate manufacturing operations to China by the end of 2001.
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
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 and most of
our laser diode assembly is done in Xiamen, China. Our Fremont and Beijing
substrate facilities are ISO 9002 certified, and we are working toward ISO
certification for our other manufacturing facilities.



     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 continued growth.



     We use MOCVD equipment to manufacture our opto-electronic devices. We
currently have several new MOCVD reactors on order and expect that these
additional machines will meet our needs for the foreseeable future. The
substrate materials and raw wafers used in our visible emitter products are
purchased from our substrate division and other sources.


     The production of a number of our consumer products, including laser
pointers, is being outsourced to contractors in Asia in order to reduce product
costs and manufacturing overhead. We have established quality control procedures
and personnel in Asia to support our outsourced manufacturing.

SALES AND MARKETING

     Each of our three 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
                                       35
<PAGE>   40

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
has launched a program with selected customers in which we will guarantee that
high volumes of six-inch GaAs and other substrates will be delivered on specific
dates and the customer will make a prepayment for part of the value of its
order. We intend to allow several major customers to participate in this
program.

     Visible Emitters. We sell our HB LED products primarily through independent
sales representatives to lamp package manufacturers in Taiwan and China. We
intend to expand sales of these products in the U.S. and Europe primarily using
our direct sales force. The majority of our laser diode chips are sold in China
and elsewhere in Asia, primarily through independent sales representatives. We
sell our VCSEL devices through our direct sales force.

     Consumer Products. We currently sell our consumer products through a
combination of our own direct sales force and independent sales representatives.
Most of our sales are to customers in the U.S.

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 are developing and intend to initiate
production of sapphire substrates.

     We are focusing on all three major stages of LED 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 LEDs.

     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 intend to
develop one- and two-dimensional array VCSEL chips.

     We have 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

                                       36
<PAGE>   41

develop for government purposes only. During the period from 1997 to 1999 these
contracts amounted to $5.9 million. Currently, our research and development is
internally funded.

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 and devices 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, Litton Airtron 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 that are actively developing alternative compound
semiconductor materials.

     Our primary competition in the market for LED products include Cree,
LumiLED, Nichia Chemicals, Toyoda Gosei and United Epitaxy. In general, LED
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 compete with Agilent, EMCORE and Honeywell in the market for VCSEL
devices. Our primary competition in the market for consumer products includes
Alpec and Transverse.

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.

                                       37
<PAGE>   42

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 which relate to our VGF
products and processes. We have five U.S. patent applications pending which
relate to our LED 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. We have two patents and two patent applications pending relating to our
consumer products.


ENVIRONMENTAL REGULATIONS

     We are subject to federal, state and local laws and regulations concerning
the use, storage, handling, generation, treatment, emission, release, discharge
and disposal of certain materials used in our research and development and
production operations, as well as laws and regulations concerning environmental
remediation and employee health and safety. The growing of crystals and the
production of substrates involve the use of certain hazardous raw materials,
including arsenic. We cannot guarantee that our control systems will be
successful in preventing a release of these materials or other adverse
environmental conditions. Any release or other failure to comply with present or
future environmental laws and regulations could result in the imposition of
significant fines against us, the suspension of production or a cessation of
operations.


     We are cooperating with the California Occupational Safety and Health
Administration, or Cal-OSHA, in an investigation 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. Further
penalties, including criminal penalties, could be levied against us or our
management. We are appealing the citations, and have put in place engineering,
administrative and personnel protective equipment programs to address this
issue. The facility is in full operation and to our knowledge, no accidents or
injuries resulted from this matter.


EMPLOYEES


     As of June 30, 2000, we had 1,121 full-time employees, of whom 901 were
principally engaged in manufacturing, 166 in sales and administration and 54 in
research and development. Of these employees, 696 are located in the U.S., 422
in China and three in Japan. Our success is in part dependent on our ability to
attract and retain highly skilled workers. None of our employees is represented
by a union and we have never experienced a work stoppage. We consider our
relations with our employees to be good.


                                       38
<PAGE>   43

PROPERTIES

     Our principal properties are as follows:

<TABLE>
<CAPTION>
                       SQUARE
    LOCATION            FEET           PROPERTY DESCRIPTION
    --------           ------          --------------------
<S>                    <C>         <C>
Fremont, CA            58,000      Production and Administration
Fremont, CA            80,000      Production
Fremont, CA            20,292      Administration
Fremont, CA             9,280      Warehouse
Monterey Park, CA      22,000      Production and Administration
Torrance, CA            6,674      Administration
Torrance, CA           15,027      Production
El Monte, CA           26,652      Production
El Monte, CA            6,281      Production
Beijing, China         31,000      Production
Beijing, China         31,000      Production
Beijing, China         32,000      Production
Xiamen, China          14,000      Production
</TABLE>

     All of the properties listed above are owned except for 20,292 square feet
in Fremont, the lease for which expires May 2005, 9,280 square feet in Fremont,
the lease for which expires in June 2005, 6,281 square feet in El Monte, the
lease for which expires in December 2006 and the two Torrance properties, the
leases for which expire in May 2003. 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.

                                       39
<PAGE>   44

                                   MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS


     As of August 31, 2000, our executive officers and directors were as
follows:


<TABLE>
<CAPTION>
                    NAME                      AGE                      POSITION
                    ----                      ---                      --------
<S>                                           <C>    <C>
Morris S. Young, Ph.D. .....................  55     Chairman of the Board of Directors, President
                                                       and Chief Executive Officer
Donald L. Tatzin............................  48     Chief Financial Officer and Director
Davis Zhang.................................  43     President, Substrate Division
Xiao Gordon Liu, Ph.D.......................  36     Senior Vice President, Marketing and Sales,
                                                       and Engineering and Development
Heng Liu, Ph.D. ............................  40     President, XtalLED Division
Bingwen Liang, Ph.D. .......................  39     Acting President, VCSEL Division
Jesse Chen..................................  42     Director
B.J. Moore..................................  64     Director
</TABLE>


     Mr. Jesse Chen and Mr. B.J. Moore are members of the compensation and audit
committees. Dr. Xiao Gordon Liu, Dr. Heng Liu and Dr. Bingwen Liang are not
executive officers or directors but are deemed to be significant employees who
make or are expected to make a significant contribution to our business.


     Morris S. Young, Ph.D. co-founded AXT in 1986 and has served as chairman of
our board of directors since February 1998 and president and chief executive
officer, as well as a director, since 1989. From 1985 to 1989, Dr. Young was a
physicist at Lawrence Livermore National Laboratory. Dr. Young holds a bachelor
of science degree in metallurgical engineering from Chengkung University,
Taiwan, a master of science degree in metallurgy from Syracuse University and a
Ph.D. in metallurgy from Polytechnic University.


     Donald L. Tatzin has served as a director since February 1998 and as chief
financial officer since August 2000. From April 2000 to August 2000, Mr. Tatzin
served as our interim chief financial officer. From 1993 to 1998, Mr. Tatzin
served as executive vice president of Showboat, a gaming company. In addition,
Mr. Tatzin served as a director for Sydney Harbour Casino, an Australian gaming
company, from April 1995 to October 1996 and as its chief executive officer from
April 1996 to October 1996. From 1976 to 1993, Mr. Tatzin was a director and
consultant with Arthur D. Little. Mr. Tatzin holds a bachelor of science degree
in economics and a bachelor of science and masters degrees in city planning from
the Massachusetts Institute of Technology and a master of science degree in
economics from Australian National University.



     Davis Zhang co-founded AXT in 1986 and served as senior vice president,
production from January 1994 until August 1999, and as president of the
substrate division since August 1999. From 1987 to 1993, Mr. Zhang served as our
senior production manager. Mr. Zhang holds a bachelor of science degree in
mechanical engineering from Northern Communication University, Beijing, China.



     Xiao Gordon Liu, Ph.D. joined us in June 1995 as senior engineer and was
promoted to vice president, engineering and development in November 1998 and to
senior vice president, marketing and sales, and engineering and development in
August 2000. Prior to joining us, Dr. Liu was a postdoctoral fellow and
associate specialist at University of California at Berkeley and a research
associate at the University of Lund, Sweden. Dr. Liu holds a Ph.D. in physics
from the University of Lund, Sweden and has published more than 30 scientific
papers.


     Heng Liu, Ph.D. joined us in September 1999 as director of LED epitaxy and
was promoted to president of the newly formed XtalLED division in March 2000.
From September 1994 to September 1999, Dr. Liu worked at the opto-electronics
division of Hewlett-Packard Company as a research and development engineer. Dr.
Liu holds an undergraduate degree from National Chiao-Tung University in Taiwan,
a masters degree in physics from University of Oregon and a Ph.D. in engineering
from North Carolina State University.

                                       40
<PAGE>   45


     Bingwen Liang, Ph.D. joined us in January 2000 as director of advanced
technologies and was subsequently promoted to acting president of the VCSEL
division. From November 1999 to January 2000, Dr. Liang was research and
development manager of the III-V materials group in the fiber-optic
communication division of Agilent Technologies. From July 1993 to November 1999,
Dr. Liang was a research and development manager for Hewlett-Packard Company.
Dr. Liang has a Ph.D. in applied physics from the University of California at
San Diego and has published more than 45 scientific papers.


     Jesse Chen has served as a director since February 1998. Since May 1997,
Mr. Chen has served as a managing director of Maton Venture, an investment
company. Prior to that, Mr. Chen co-founded BusLogic, a computer peripherals
company and served as its chief executive officer from 1990 to 1996. Mr. Chen
serves on the board of directors of several private companies. Mr. Chen has a
bachelor of science degree in aeronautical engineering from Chenkung University,
Taiwan and a master of science degree in electrical engineering from Loyola
Marymount University.


     B.J. Moore has served as a director since February 1998. Since 1991, Mr.
Moore has been self-employed as a consultant and has served as a director to
several technology-based companies. Mr. Moore currently serves on the boards of
directors for Adaptec, a computer peripherals company and Dionex Corporation, an
ion chromatography systems company, as well as several private companies. From
1986 to 1991, Mr. Moore served as president and chief executive officer of
Outlook Technology, an electronics test equipment company. Mr. Moore holds a
bachelor of science degree and a master of science degree in electrical
engineering from the University of Tennessee.


BOARD COMPOSITION


     Our board of directors currently consists of four members, as a result of
the resignation of Theodore S. Young in August 2000. We anticipate adding a
fifth director to fill our vacancy on the board by June 2001. Our certificate of
incorporation and bylaws provide that the terms of office of the members of the
board of directors are divided into three classes: class I, whose term will
expire at the annual meeting of stockholders to be held in 2002, class II, whose
term will expire at the annual meeting of stockholders to be held in 2003, and
class III, whose term will expire at the annual meeting of stockholders to be
held in 2001. The class I director is Morris S. Young, the class II directors
are Jesse Chen and Donald L. Tatzin and the class III director is B.J. Moore.


     At each annual meeting of stockholders after the initial classification,
the successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following their election. As a result, only one class of directors will be
elected at each annual meeting of stockholders, with the other classes
continuing for the remainder of their terms. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one-third of the total number of directors. This classification of the board of
directors may delay or prevent changes in our control or management. In
addition, our bylaws provide that the authorized number of directors may only be
changed by a resolution of the board of directors.

BOARD COMMITTEES

     The audit committee of our board of directors recommends or will recommend
the appointment of our independent auditors, reviews our internal accounting
procedures and financial statements and consults with and reviews the services
provided by our independent auditors, including the results and scope of their
audit. The audit committee currently consists of Messrs. Chen and Moore. We
anticipate appointing an additional director prior to June 15, 2001, who will
serve as a third member of the audit committee, as required by the rules and
regulations of the Nasdaq Stock Market.

     The compensation committee of our board of directors reviews and recommends
to the board the compensation and benefits of all of our executive officers,
administers our stock option plans and establishes and reviews general policies
relating to compensation and benefits of our employees. The compensation
committee currently consists of Messrs. Chen and Moore.

                                       41
<PAGE>   46

                              CERTAIN TRANSACTIONS

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 $1.5 million for 1997, $3.7 million for 1998, $3.6 million
for 1999 and $3.5 million for the six months ended June 30, 2000.


     In August 2000, we entered into a business transfer and acquisition
agreement with Demeter Technology, 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 visible emitter division. Under this agreement, we have 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 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 has 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. We anticipate that some of our employees previously engaged
in research and development relating to fiber optics products and services will
join Demeter.


                                       42
<PAGE>   47

                       PRINCIPAL AND SELLING STOCKHOLDERS


     The following table sets forth information known to us with respect to
beneficial ownership of our common stock as of August 31, 2000, and as adjusted
to reflect the sale of common stock offered by us and the selling stockholders,
in this offering, for:


     - each person known by us to own beneficially more than 5% of the
       outstanding shares;

     - each of our directors;

     - each executive officer; and

     - all executive officers and directors as a group.

     Except as otherwise indicated, the principal address of each of the
stockholders below is c/o AXT, Inc., 4281 Technology Drive, Fremont, California
94538. Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power over
securities. Except in cases where community property laws apply or as indicated
in the footnotes to this table, we believe that each stockholder identified in
the table possesses sole voting and investment power over all shares of common
stock shown as beneficially owned by the stockholder. Shares of common stock
subject to options that are currently exercisable or exercisable within 60 days
of the date of this prospectus are considered outstanding and beneficially owned
by the person holding the options for the purpose of computing the percentage
ownership of that person but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person.


<TABLE>
<CAPTION>
                                                    SHARES BENEFICIALLY   SHARES    SHARES BENEFICIALLY
                                                      OWNED PRIOR TO       BEING        OWNED AFTER
                                                       THE OFFERING       OFFERED       THE OFFERING
                                                    -------------------   -------   --------------------
NAME OF BENEFICIAL OWNERS AND SELLING STOCKHOLDERS   NUMBER     PERCENT              NUMBER      PERCENT
- --------------------------------------------------  ---------   -------             ---------    -------
<S>                                                 <C>         <C>       <C>       <C>          <C>
Morris S. Young(1)..........................        1,995,479     10.6%    80,000   1,915,479     9.0 %
Donald L. Tatzin(2).........................           21,050        *         --      21,050      *
Davis Zhang(3)..............................          270,608      1.4%    20,000     250,608     1.3 %
Jesse Chen(4)...............................           18,750        *         --      18,750      *
B.J. Moore(5)...............................           18,750        *         --      18,750      *
All directors and executive officers as a group (5
  persons)..................................        2,324,762     12.3%   100,000   2,224,762    10.5 %
</TABLE>


- ---------------
 *  Less than 1%

(1) Includes 731,071 shares held by the Morris & Vicke Young Trust, 1,104,200
    shares held by the Morris Young Family Ltd. Partnership, 20,000 shares held
    by the children of Dr. Young and 70,208 shares subject to options
    exercisable within 60 days of June 30, 2000. Also includes 20,000 shares
    held jointly by George Liu, Dr. Young's father-in-law, and Vicke Young, Dr.
    Young's spouse, of which Dr. Young disclaims beneficial ownership, and
    50,000 shares recently transferred into an exchange fund, of which Dr. Young
    disclaims beneficial ownership.

(2) Includes 18,750 shares subject to options exercisable within 60 days of the
    date of this prospectus.

(3) Includes 96,100 shares directly held by Davis Zhang, 29,000 shares held by
    Christina X. Li, Mr. Zhang's spouse, 16,000 shares held by Mr. Zhang's minor
    children and 92,500 shares subject to options exercisable within 60 days of
    the date of this prospectus.

(4) Includes 18,750 shares subject to options exercisable within 60 days of the
    date of this prospectus.

(5) Includes 11,250 shares subject to options exercisable within 60 days of the
    date of this prospectus.

                                       43
<PAGE>   48

                                  UNDERWRITING

     We and the selling stockholders have entered into an underwriting agreement
with Prudential Securities Incorporated, CIBC World Markets Corp., Wit SoundView
Corporation, ABN AMRO Incorporated and Pacific Crest Inc. acting as
underwriters. We and the selling stockholders are obligated to sell, and the
underwriters are obligated to purchase, all of the shares offered on the cover
page of this prospectus, if any are purchased. Subject to certain conditions in
the underwriting agreement, each underwriter has severally agreed to purchase
the shares indicated opposite its name:


<TABLE>
<CAPTION>
                                                               NUMBER
                        UNDERWRITERS                          OF SHARES
                        ------------                          ---------
<S>                                                           <C>
Prudential Securities Incorporated..........................
CIBC World Markets Corp. ...................................
Wit SoundView Corporation...................................
ABN AMRO Incorporated.......................................
Pacific Crest Inc...........................................
                                                              ---------
     Total..................................................  2,200,000
                                                              =========
</TABLE>


     The underwriters may sell more shares than the total number of shares
offered on the cover page of this prospectus and they have, for a period of 30
days from the date of this prospectus, an over-allotment option to purchase up
to 330,000 additional shares from us. If any additional shares are purchased,
the underwriters will severally purchase the shares in the same proportion as
per the table above.

     The underwriters have advised us and the selling stockholders that the
shares will be offered to the public at the offering price indicated on the
cover page of this prospectus. The underwriters may allow to selected dealers a
concession not in excess of $     per share, and these dealers may allow a
concession not in excess of $     per share to some other dealers. After the
shares are released for sale to the public, the underwriters may change the
offering price and the concessions.

     We and the selling stockholders have agreed to pay to the underwriters the
following fees, assuming both no exercise and full exercise of the underwriters'
over-allotment option to purchase additional shares:

<TABLE>
<CAPTION>
                                                                           TOTAL FEES
                                                        ------------------------------------------------
                                              FEE        WITHOUT EXERCISE OF         FULL EXERCISE OF
                                           PER SHARE    OVER-ALLOTMENT OPTION     OVER-ALLOTMENT OPTION
                                           ---------    ----------------------    ----------------------
<S>                                        <C>          <C>                       <C>
Fees paid by us..........................
Fees paid by the selling stockholders....
</TABLE>

     In addition, we estimate that we will spend approximately $1.0 million in
expenses for this offering, including those of the selling stockholders. We and
the selling stockholders have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act, or
contribute to payments that the underwriters may be required to make in respect
of these liabilities.

     We and our executive officers and directors will have entered into lock-up
agreements under which we and they agree not to offer or sell any shares of
common stock or securities convertible into or exchangeable or exercisable for
shares of common stock for a period of 90 days from the date of this prospectus
without the prior written consent of Prudential Securities Incorporated, on
behalf of the underwriters. Prudential Securities Incorporated may, at any time
and without notice, waive the terms of these lock-up agreements. We have agreed
to file a registration statement with the Securities and Exchange Commission no
later than 10 days after the consummation of this offering, covering 234,155
shares issued in a private placement in July 2000.

                                       44
<PAGE>   49

     Prudential Securities Incorporated, on behalf of the underwriters, may
engage in the following activities in accordance with applicable securities
rules:

     - Create a syndicate short position by making short sales of our common
       stock and may purchase our common stock on the open market to cover
       syndicate short positions created by short sales. Short sales involve the
       sale by the underwriters of a greater number of shares of common stock
       than they are required to purchase in the offering. Short sales can be
       either covered or naked. Covered short sales are sales made in an amount
       not greater than the underwriters' over-allotment options to purchase
       additional shares in the offering. Naked short sales are sales in excess
       of the over-allotment options. A naked short position is more likely to
       be created if the underwriters are concerned that there may be downward
       pressure on the price of the common stock in the open market after
       pricing that could adversely affect investors who purchase in the
       offering.

     - Stabilizing and short covering; stabilizing bids to purchase the shares
       are permitted if they do not exceed a specified maximum price. Prudential
       Securities Incorporated, on behalf of the underwriters, may close out any
       covered short position by either exercising the over-allotment options or
       purchasing shares in the open market and must close out any naked short
       position by purchasing shares in the open market. In determining the
       source of shares to close out the covered short position, Prudential
       Securities Incorporated, on behalf of the underwriters, will consider,
       among other things, the price of the shares. After the distribution of
       shares has been completed, short covering purchases in the open market
       may also reduce the short position. These activities may cause the price
       of the shares to be higher than would otherwise exist in the open market.

     - Penalty bids permitting the representatives to reclaim concessions from a
       syndicate member for the shares purchased in the stabilizing or short
       covering transactions.

     These activities, which may be commenced and discontinued at any time, may
be effected on the Nasdaq National Market, in the over-the-counter market or
otherwise. Also, and prior to the pricing of the shares, and until such time
when a stabilizing bid may have been made, some or all of the underwriters who
are market makers in the shares may make bids for or purchases of shares subject
to certain restrictions, known as passive market making activities.

     Each underwriter has represented that it has complied and will comply with
all applicable laws and regulations in connection with the offer, sale or
delivery of the shares and related offering materials in the United Kingdom,
including:

     - the Public Offers of Securities Regulations 1995;

     - the Financial Services Act 1986; and

     - the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
       Order 1996 (as amended).

     Prudential Securities Incorporated facilitates the marketing of new issues
online through its PrudentialSecurities.com division. Clients of Prudential
Advisor(SM), a full service brokerage firm program, may view offering terms and
a prospectus online and place orders through their financial advisors. A
prospectus in electronic format is also being made available on an Internet
website maintained by Wit SoundView's affiliate, Wit Capital Corporation. In
addition, other dealers purchasing shares from Wit SoundView in this offering
have agreed to make a prospectus in electronic format available on websites
maintained by each of these dealers.

                                       45
<PAGE>   50

                 UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
                          TO NON-UNITED STATES HOLDERS

     The following is a general discussion of the material United States federal
income tax consequences of the ownership and disposition of our common stock to
a non-United States holder. For the purpose of this discussion, a non-United
States holder is any holder that for United States federal income tax purposes
is not a United States person. For purposes of this discussion, the term United
States person means:

     - an individual citizen or resident of the United States;

     - a corporation or other entity taxable as a corporation created or
       organized in the United States or under the laws of the United States or
       any political subdivision thereof;

     - an estate whose income is subject to United States federal income tax
       regardless of its source; or

     - a trust (x) whose administration is subject to the primary supervision of
       a United States court and which has one or more United States persons who
       have the authority to control all substantial decisions of the trust or
       (y) which has made an election to be treated as a United States person.

If a partnership holds common stock, the tax treatment of a partner will
generally depend on the status of the partner and upon the activities of the
partnership.

     This discussion does not address all aspects of United States federal
income taxation that may be relevant in light of a non-United States holder's
special tax status or special tax situations. United States expatriates, life
insurance companies, tax-exempt organizations, dealers in securities or
currency, banks or other financial institutions, investors whose functional
currency is other than the United States dollar, and investors that hold common
stock as part of a hedge, straddle or conversion transaction are among those
categories of potential investors that are subject to special rules not covered
in this discussion. This discussion does not address any tax consequences
arising under the laws of any state, local or non-United States taxing
jurisdiction. Furthermore, the following discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended, and administrative
and judicial interpretations thereof, all as in effect on the date hereof, and
all of which are subject to change, possibly with retroactive effect.
ACCORDINGLY, EACH NON-UNITED STATES HOLDER SHOULD CONSULT A TAX ADVISOR
REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND NON-UNITED STATES INCOME
AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF SHARES OF OUR
COMMON STOCK.

DIVIDENDS

     We have not paid any dividends on our common stock and we do not plan to
pay any dividends for the foreseeable future. However if we do pay dividends on
our common stock, those payments will constitute dividends for United States tax
purposes to the extent paid from our current and accumulated earnings and
profits, as determined under United States federal income tax principles. To the
extent those dividends exceed our current and accumulated earnings and profits,
the dividends will constitute a return of capital and will first reduce a
holder's basis, but not below zero, and then will be treated as gain from the
sale of stock.

     Any dividend paid to a non-United States holder of common stock generally
will be subject to United States withholding tax either at a rate of 30% of the
gross amount of the dividend or such lower rate as may be specified by an
applicable tax treaty. In order to receive a reduced treaty rate, a non-United
States holder must provide us with an IRS form W-8BEN certifying to your
qualification for the reduced rate.

     Dividends received by a non-United States holder that are effectively
connected with a United States trade or business conducted by the non-United
States holder are exempt from such withholding tax. In order to obtain this
exemption, a non-United States holder must provide us with an IRS Form W-8ECI
certifying to such exemption. Such effectively connected dividends, although not
subject to withholding tax, are taxed at the same graduated rates applicable to
United States persons, net of certain deductions and credits.
                                       46
<PAGE>   51

     In addition to the graduated tax described above, dividends received by a
corporate non-U.S. holder that are effectively connected with a United States
trade or business of the corporate non-U.S. holder may also be subject to a
branch profits tax at a rate of 30% or such lower rate as may be specified by an
applicable tax treaty.

     A non-United States holder of common stock that is eligible for a reduced
rate of withholding tax pursuant to a tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund with
the Internal Revenue Service, or IRS.

GAIN ON DISPOSITION OF COMMON STOCK

     A non-United States holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
our common stock unless:

     - the gain is effectively connected with a United States trade or business
       of the non-United States holder (which gain, in the case of a corporate
       non-United States holder, must also be taken into account for branch
       profits tax purposes);

     - the non-United States holder is an individual who holds his or her common
       stock as a capital asset (generally, an asset held for investment
       purposes) and who is present in the United States for a period or periods
       aggregating 183 days or more during the calendar year in which the sale
       or disposition occurs and certain other conditions are met; or

     - we are or have been a "United States real property holding corporation"
       for United States federal income tax purposes at any time within the
       shorter of the five-year period preceding the disposition or the holder's
       holding period for our common stock. We have determined that we are not
       and do not believe that we will become a "United States real property
       holding corporation" for United States federal income tax purposes.

BACKUP WITHHOLDING AND INFORMATION REPORTING

     Generally, we must report annually to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax withheld.
A similar report is sent to the holder. Pursuant to tax treaties or other
agreements, the IRS may make its reports available to tax authorities in the
recipient's country of residence.

     Dividends paid to a non-United States holder at an address within the
United States may be subject to backup withholding at a rate of 31% if the
non-United States holder fails to establish that it is entitled to an exemption
or to provide a correct taxpayer identification number and other information to
the payer. Backup withholding generally will not apply to dividends paid to
non-United States holders at an address outside the United States on or prior to
December 31, 2000 unless the payer has knowledge that the payee is a United
States person. Under recently finalized Treasury Regulations regarding
withholding and information reporting, payment of dividends to non-United States
holders at an address outside the United States after December 31, 2000 may be
subject to backup withholding at a rate of 31% unless such non-United States
holder satisfies various certification requirements.

     Under current Treasury Regulations, the payment of the proceeds of the
disposition of common stock to or through the United States office of a broker
is subject to information reporting and backup withholding at a rate of 31%
unless the holder certifies its non-United States status under penalties of
perjury or otherwise establishes an exemption. Generally, the payment of the
proceeds of the disposition by a non-United States holder of common stock
outside the United States to or through a foreign office of a broker will not be
subject to backup withholding but will be subject to information reporting
requirements if the broker is a United States person or has certain other
connections to the United States, unless the broker has documentary evidence in
its files of the holder's non-United States status and certain other conditions
are met, or the holder otherwise establishes an exemption. Neither backup
withholding nor information reporting generally will apply to a payment of the
proceeds of a disposition of common stock by or through a foreign office of a
foreign broker not subject to the preceding sentence.
                                       47
<PAGE>   52

     In general, the recently promulgated final Treasury Regulations, described
above, do not significantly alter the substantive withholding and information
reporting requirements but would alter the procedures for claiming benefits of
an income tax treaty and change the certifications procedures relating to the
receipt by intermediaries of payments on behalf of the beneficial owner of
shares of common stock. Non-United States holders should consult their tax
advisors regarding the effect, if any, of those final Treasury Regulations on an
investment in our common stock. Those final Treasury Regulations generally are
effective for payments made after December 31, 2000.

     Backup withholding is not an additional tax. Rather, the United States
income tax liability of persons subject to backup withholding will be reduced by
the amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained, provided that the required information is furnished to
the IRS.

                                 LEGAL MATTERS

     The validity of the shares of common stock offered hereby will be passed
upon for AXT by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Certain
legal matters in connection with the offering will be passed upon for the
underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California.

                                    EXPERTS

     The audited financial statements as of December 31, 1998, 1999 and June 30,
2000 and for each of the three years in the period ended December 31, 1999 and
for the six months ended June 30, 2000 included in this Prospectus, except as
they relate to Lyte Optronics, Inc. as of December 31, 1998 and for the two
years in the period then ended, have been audited by PricewaterhouseCoopers LLP,
independent accountants, and, insofar as they relate to Lyte Optronics, Inc. as
of December 31, 1998 and for the two years in the period then ended, by Arthur
Andersen LLP, independent accountants, whose reports thereon appear herein. Such
financial statements have been so included in reliance on the reports of such
independent accountants given on the authority of said firms as experts in
auditing and accounting.

                      WHERE YOU CAN FIND MORE INFORMATION

     We have filed a registration statement on Form S-3 under the Securities Act
of 1933, as amended, with the Securities and Exchange Commission. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement or the
exhibits and schedules which are a part of the registration statement. For
further information with respect to us and our common stock, please refer to the
registration statement and the exhibits and schedules filed with it. You may
read and copy any document which we file with the SEC at the SEC's public
reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549, or in New
York, New York and Chicago, Illinois.

     We are also subject to the information and periodic reporting requirements
of the Securities Exchange Act of 1934, as amended. We file reports, proxy
statements and other information with the SEC to comply with the Exchange Act.
These reports, proxy statements and other information can be inspected and
copied on the Internet at http://www.sec.gov; at the SEC's regional offices at:
Seven World Trade Center, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and at the Public Reference Room of the
SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. You may call the SEC at
1-800-SEC-0330 to obtain information regarding the operation of the Public
Reference Room. Reports, proxy statements and other information concerning our
company also may be inspected at the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.

                                       48
<PAGE>   53

                     INFORMATION INCORPORATED BY REFERENCE

     The SEC allows us to incorporate by reference the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be a part of this prospectus. Any information that we file with the SEC will
automatically update and supersede this information. We incorporate by reference
the documents listed below and any additional documents we file with the SEC.
This registration statement incorporates by reference the documents listed below
that we have previously filed with the Securities and Exchange Commission. They
contain important information about us and our financial condition.

     The following documents filed with the SEC are incorporated by reference
into this prospectus:

     - our Definitive Proxy Statement relating to the Annual Meeting of
       Stockholders held June 7, 2000.

     All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act after the date of this prospectus and prior to the termination
of the offering of securities contemplated by this prospectus shall be deemed to
be incorporated by reference in this prospectus. Such documents shall be
considered to be a part of this prospectus from the date of filing of such
documents. Any statement contained in a document incorporated by reference or
deemed to be incorporated by reference into this prospectus shall be deemed to
be modified or superseded for all purposes of this prospectus and the
registration statement to the extent that a statement contained in this
prospectus, in any document incorporated by reference or in any subsequently
filed document which also is incorporated or deemed to be incorporated by
reference in this prospectus modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this prospectus.

     We will provide without charge to each person, including any beneficial
owner, to whom a copy of this prospectus has been delivered a copy of any and
all of the documents referred to above which have been or may be incorporated in
this prospectus by reference and were not delivered with this prospectus. We
will not deliver exhibits to such documents, unless such exhibits are
specifically incorporated by reference. We will provide this information upon
written or oral request by a person to whom we delivered a copy of the
prospectus. Requests for such copies should be directed to our principal
executive offices located at 4281 Technology Drive, Fremont, California 94538,
Attention: Secretary. Our general telephone number is (510) 683-5900.

                                       49
<PAGE>   54

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Accountants -- PricewaterhouseCoopers
  LLP.......................................................  F-2
Report of Independent Public Accountants -- Arthur Andersen
  LLP.......................................................  F-3
Consolidated Balance Sheets.................................  F-4
Consolidated Income Statements..............................  F-5
Consolidated Statement of Stockholders' Equity..............  F-6
Consolidated Statements of Cash Flows.......................  F-7
Notes to Consolidated Financial Statements..................  F-8
</TABLE>

                                       F-1
<PAGE>   55

                       REPORT OF INDEPENDENT ACCOUNTANTS


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


     In our opinion, based on our audits and the report of other auditors, 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, 1998 and 1999 and June 30, 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 and for the six months ended June 30, 2000 in conformity with
accounting principles generally accepted in the United States. 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. The consolidated financial statements give retroactive effect to the
merger of Lyte Optronics, Inc. on May 28, 1999 in a transaction accounted for as
a pooling of interests, as described in Note 2 to the consolidated financial
statements. We did not audit the financial statements of Lyte Optronics, Inc. at
December 31, 1998 and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1998, which statements reflect
total assets of $25,435,000 as of December 31, 1998 and total revenues of
$17,978,000 and $18,137,000 for each of the two years in the period ended
December 31, 1998. Those statements were audited by other auditors whose report
thereon has been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for Lyte Optronics, Inc., is based solely on
the report of the other auditors. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
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 and the report of
other auditors provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

San Jose, California
August 28, 2000

                                       F-2
<PAGE>   56

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of Lyte Optronics, Inc.:

     We have audited the consolidated balance sheet of Lyte Optronics, Inc. (a
Nevada corporation) and Subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholders' investment and cash flows
for the two years in the period ended December 31, 1998 (not presented herein).
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 in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lyte Optronics, Inc. and
Subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the two years in the period ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Los Angeles, California
May 27, 1999

                                       F-3
<PAGE>   57

                                   AXT, INC.

                          CONSOLIDATED BALANCE SHEETS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                             --------------------    JUNE 30,
                                                               1998        1999        2000
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
ASSETS:
Current assets:
  Cash and cash equivalents................................  $ 16,438    $  6,062    $  5,149
  Accounts receivable, net of allowance for doubtful
     accounts of $1,648, $778 and $1,702...................    13,128      17,561      20,889
  Inventories..............................................    25,300      35,470      43,630
  Prepaid expenses and other current assets................     3,271       8,945       6,071
  Deferred income taxes....................................     2,452       3,210       4,585
                                                             --------    --------    --------
     Total current assets..................................    60,589      71,248      80,324
Property, plant and equipment, net.........................    37,624      40,865      52,476
Other assets...............................................     1,927       1,405       2,427
Goodwill...................................................     2,843       2,244       1,945
                                                             --------    --------    --------
     Total assets..........................................  $102,983    $115,762    $137,172
                                                             ========    ========    ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
  Short-term bank borrowing................................  $  1,928    $ 11,298    $ 12,980
  Note payable.............................................        --          --       4,000
  Accounts payable.........................................     7,850       8,294      12,575
  Accrued liabilities......................................     5,242       7,464      10,801
  Current portion of long-term debt........................     2,733       1,568       1,862
  Current portion of capital lease obligation..............     1,192       2,162       3,437
                                                             --------    --------    --------
     Total current liabilities.............................    18,945      30,786      45,655
Long-term debt, net of current portion.....................    18,416      15,254      14,034
Long-term capital lease, net of current portion............     3,854       6,853       8,137
Other long-term liabilities................................       604         410         100
                                                             --------    --------    --------
     Total liabilities.....................................    41,819      53,303      67,926
                                                             --------    --------    --------
Commitments and contingencies (Note 11)

Stockholders' equity:
  Preferred stock,
     $.001 par value; 2,000 shares authorized; 981 shares
     issued and outstanding................................         1           1           1
  Additional paid-in capital...............................     3,999       3,989       3,989
  Common stock,
     $.001 par value; 100,000 shares authorized; 18,393,
     18,659 and 18,948 shares issued and outstanding.......        18          19          19
  Additional paid-in capital...............................    45,248      46,321      48,606
  Deferred compensation....................................      (327)       (217)       (162)
  Retained earnings........................................    12,198      12,370      16,695
  Cumulative translation adjustments.......................        27         (24)         98
                                                             --------    --------    --------
     Total stockholders' equity............................    61,164      62,459      69,246
                                                             --------    --------    --------
     Total liabilities and stockholders' equity............  $102,983    $115,762    $137,172
                                                             ========    ========    ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       F-4
<PAGE>   58

                                   AXT, INC.

                         CONSOLIDATED INCOME STATEMENTS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                      SIX MONTHS
                                                    YEARS ENDED DECEMBER 31,        ENDED JUNE 30,
                                                   ---------------------------   ---------------------
                                                    1997      1998      1999        1999        2000
                                                   -------   -------   -------   -----------   -------
                                                                                 (UNAUDITED)
<S>                                                <C>       <C>       <C>       <C>           <C>
Revenue..........................................  $43,313   $61,314   $81,521     $39,680     $52,878
Cost of revenue..................................   29,650    38,949    57,369      30,211      32,198
                                                   -------   -------   -------     -------     -------
Gross profit.....................................   13,663    22,365    24,152       9,469      20,680
Operating expenses:
  Selling, general and administrative............    9,921    11,538    14,016       6,843       8,417
  Research and development.......................    1,289     2,684     3,086       1,520       3,851
  Acquisition costs..............................       --        --     2,810       2,810          --
                                                   -------   -------   -------     -------     -------
     Total operating expenses....................   11,210    14,222    19,912      11,173      12,268
                                                   -------   -------   -------     -------     -------
Income (loss) from operations....................    2,453     8,143     4,240      (1,704)      8,412
Interest expense.................................     (793)   (1,481)   (2,150)     (1,360)     (1,918)
Other income and expense.........................      (57)      598       729         722         499
                                                   -------   -------   -------     -------     -------
Income (loss) before provision for income
  taxes..........................................    1,603     7,260     2,819      (2,342)      6,993
Provision for income taxes.......................      783     2,976     2,139         178       2,668
                                                   -------   -------   -------     -------     -------
Income (loss) before extraordinary item..........      820     4,284       680      (2,520)      4,325
Extraordinary item, net of tax benefits..........       --        --      (508)       (508)         --
                                                   -------   -------   -------     -------     -------
Net income (loss)................................  $   820   $ 4,284   $   172     $(3,028)    $ 4,325
                                                   =======   =======   =======     =======     =======
Basic income (loss) per share:
  Income (loss) before extraordinary item........  $  0.22   $  0.27   $  0.04     $ (0.14)    $  0.23
  Extraordinary item.............................       --        --     (0.03)      (0.03)         --
  Net income (loss)..............................     0.22      0.27      0.01       (0.16)       0.23
Diluted income (loss) per share:
  Income (loss) before extraordinary item........  $  0.06   $  0.26   $  0.03     $ (0.14)    $  0.21
  Extraordinary item.............................       --        --     (0.03)      (0.03)         --
  Net income (loss)..............................     0.06      0.26      0.01       (0.16)       0.21
Shares used in per share calculations:
  Basic..........................................    3,697    16,076    18,655      18,451      18,687
  Diluted........................................   13,598    16,325    19,771      18,451      20,178
</TABLE>

     The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       F-5
<PAGE>   59

                                   AXT, INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                                       ACCUMULATED OTHER
                                     PREFERRED STOCK      COMMON STOCK                                COMPREHENSIVE INCOME
                                     ----------------   ----------------     DEFERRED     RETAINED   CUMULATIVE TRANSLATION
                                     SHARES    AMOUNT   SHARES   AMOUNT    COMPENSATION   EARNINGS        ADJUSTMENTS
                                     -------   ------   ------   -------   ------------   --------   ----------------------
<S>                                  <C>       <C>      <C>      <C>       <C>            <C>        <C>
BALANCE AT JANUARY 1, 1997.........    8,929   $2,618    3,648   $   629                  $ 7,094            $(104)
Common stock options exercised.....                         85       154
Issuance of Series C convertible
  preferred stock..................    1,200    5,935
Issuance of Employee Stock Purchase
  Plan stock.......................                         67       232
Deferred compensation..............                                  322      $(322)
Amortization of deferred
  compensation.....................                                             102
Comprehensive income
  Net income.......................                                                           820
  Other comprehensive income
    Currency translation
      adjustment...................                                                                            (93)
                                     -------   ------   ------   -------      -----       -------            -----
BALANCE AT DECEMBER 31, 1997.......   10,129   $8,553    3,800   $ 1,337      $(220)      $ 7,914            $(197)
Common stock options exercised.....                         71       138
Issuance of common stock...........                        123       724
Issuance of common stock and Series
  A preferred stock in connection
  with the acquisition of Alpha
  Photonics, Inc...................      981    4,000    1,267     7,500
Issuance of common stock as
  settlement of trade payables.....                          4        25
Reacquisition and retirement of
  common stock.....................                        (61)
Issuance of common stock in
  connection with financing........                        185       994
Conversion of Series C convertible
  preferred stock to common
  stock............................  (10,129)  (8,553)  10,129     8,553
Issuance of common stock upon
  initial public offering..........                      2,875    25,792
Deferred compensation..............                                  203       (203)
Amortization of deferred
  compensation.....................                                              96
Comprehensive income
  Net income.......................                                                         4,284
  Other comprehensive income
    Currency translation
      adjustment...................                                                                            224
                                     -------   ------   ------   -------      -----       -------            -----
BALANCE AT DECEMBER 31, 1998.......      981   $4,000   18,393   $45,266      $(327)      $12,198            $  27
Common stock options exercised.....                        201       648
Repurchase of shares of common
  stock in connection with the
  early extinguishment of debt.....                        (21)     (211)
Issuance costs.....................               (10)              (139)
Issuance of Employee Stock Purchase
  Plan stock.......................                         86       776
Amortization of deferred
  compensation.....................                                             110
Comprehensive income
  Net income.......................                                                           172
  Other comprehensive income
    Currency translation
      adjustment...................                                                                            (51)
                                     -------   ------   ------   -------      -----       -------            -----
BALANCE AT DECEMBER 31, 1999.......      981   $3,990   18,659   $46,340      $(217)      $12,370            $ (24)
                                     =======   ======   ======   =======      =====       =======            =====
Common stock options exercised.....                        254     1,967
Issuance of Employee Stock Purchase
  Plan stock.......................                         35       318
Amortization of deferred
  compensation.....................                                              55
Comprehensive income
  Net income.......................                                                         4,325
  Other comprehensive income
    Currency translation
      adjustment...................                                                                            122
                                     -------   ------   ------   -------      -----       -------            -----
BALANCE AT JUNE 30, 2000...........      981   $3,990   18,948   $48,625      $(162)      $16,695            $  98
                                     =======   ======   ======   =======      =====       =======            =====

<CAPTION>

                                               COMPREHENSIVE
                                      TOTAL       INCOME
                                     -------   -------------
<S>                                  <C>       <C>
BALANCE AT JANUARY 1, 1997.........  $10,237
Common stock options exercised.....      154
Issuance of Series C convertible
  preferred stock..................    5,935
Issuance of Employee Stock Purchase
  Plan stock.......................      232
Deferred compensation..............       --
Amortization of deferred
  compensation.....................      102
Comprehensive income
  Net income.......................      820      $  820
  Other comprehensive income
    Currency translation
      adjustment...................      (93)        (93)
                                     -------      ------
BALANCE AT DECEMBER 31, 1997.......  $17,387      $  727
                                                  ======
Common stock options exercised.....      138
Issuance of common stock...........      724
Issuance of common stock and Series
  A preferred stock in connection
  with the acquisition of Alpha
  Photonics, Inc...................   11,500
Issuance of common stock as
  settlement of trade payables.....       25
Reacquisition and retirement of
  common stock.....................       --
Issuance of common stock in
  connection with financing........      994
Conversion of Series C convertible
  preferred stock to common
  stock............................       --
Issuance of common stock upon
  initial public offering..........   25,792
Deferred compensation..............       --
Amortization of deferred
  compensation.....................       96
Comprehensive income
  Net income.......................    4,284       4,284
  Other comprehensive income
    Currency translation
      adjustment...................      224         224
                                     -------      ------
BALANCE AT DECEMBER 31, 1998.......  $61,164      $4,508
                                                  ======
Common stock options exercised.....      648
Repurchase of shares of common
  stock in connection with the
  early extinguishment of debt.....     (211)
Issuance costs.....................     (149)
Issuance of Employee Stock Purchase
  Plan stock.......................      776
Amortization of deferred
  compensation.....................      110
Comprehensive income
  Net income.......................      172         172
  Other comprehensive income
    Currency translation
      adjustment...................      (51)        (51)
                                     -------      ------
BALANCE AT DECEMBER 31, 1999.......  $62,459      $  121
                                     =======      ======
Common stock options exercised.....    1,967
Issuance of Employee Stock Purchase
  Plan stock.......................      318
Amortization of deferred
  compensation.....................       55
Comprehensive income
  Net income.......................    4,325       4,325
  Other comprehensive income
    Currency translation
      adjustment...................      122         122
                                     -------      ------
BALANCE AT JUNE 30, 2000...........  $69,246      $4,447
                                     =======      ======
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       F-6
<PAGE>   60

                                   AXT, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED                  SIX MONTHS
                                                                DECEMBER 31,                ENDED JUNE 30,
                                                        -----------------------------   ----------------------
                                                         1997       1998       1999        1999         2000
                                                        -------   --------   --------   -----------   --------
                                                                                        (UNAUDITED)
<S>                                                     <C>       <C>        <C>        <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).....................................  $   820   $  4,284   $    172     $(3,028)    $  4,325
Adjustments to reconcile net income (loss) to cash
  provided by (used in) operations:
  Depreciation........................................    1,341      2,959      5,444       1,162        2,917
  Deferred income taxes...............................     (518)    (1,126)      (758)       (404)      (1,375)
  Amortization of goodwill............................       --        149        599         300          299
  Stock compensation..................................      102         96        110          55           55
  Changes in assets and liabilities:
    Accounts receivable...............................   (1,984)    (4,192)    (4,433)       (929)      (3,328)
    Inventories.......................................   (5,616)   (11,074)   (10,170)     (4,491)      (8,160)
    Prepaid expenses..................................     (435)    (1,610)    (5,674)     (4,407)       2,874
    Other assets......................................       45       (243)       522         790       (1,022)
    Accounts payable..................................    1,928      1,540        444         189        4,281
    Accrued liabilities...............................    2,168        533      2,222       3,764        3,337
    Other long-term liabilities.......................     (252)       110       (194)       (103)        (310)
                                                        -------   --------   --------     -------     --------
      Net cash provided by (used in) operating
         activities...................................   (2,401)    (8,574)   (11,716)     (7,102)       3,893
                                                        -------   --------   --------     -------     --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment..........   (5,227)   (14,899)    (2,758)     (1,238)     (11,101)
                                                        -------   --------   --------     -------     --------
      Net cash used in investing activities...........   (5,227)   (14,899)    (2,758)     (1,238)     (11,101)
                                                        -------   --------   --------     -------     --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of):
  Issuance of common stock............................      386     27,648      1,064         359        2,285
  Issuance of convertible preferred stock.............    5,935         --         --          --           --
  Capital lease payments..............................      (33)      (263)    (1,958)       (422)        (868)
  Short-term bank borrowings..........................      779     (2,320)     9,370       4,526        5,682
  Long-term debt borrowings...........................    2,654     17,002         --          --           --
  Long-term debt payments.............................       --     (5,574)    (4,327)     (2,304)        (926)
                                                        -------   --------   --------     -------     --------
      Net cash provided by financing activities.......    9,721     36,493      4,149       2,159        6,173
                                                        -------   --------   --------     -------     --------
Effect of exchange rate changes.......................      (65)       219        (51)        (53)         122
                                                        -------   --------   --------     -------     --------
Net increase in cash and cash equivalents.............    2,028     13,239    (10,376)     (6,234)        (913)
Cash and cash equivalents at the beginning of the
  period..............................................    1,171      3,199     16,438      16,438        6,062
                                                        -------   --------   --------     -------     --------
Cash and cash equivalents at the end of the period....  $ 3,199   $ 16,438   $  6,062     $10,204     $  5,149
                                                        =======   ========   ========     =======     ========
NON CASH ACTIVITY:
  Acquisition of property, plant and equipment through
    capital leases....................................  $    --   $  1,737   $  5,927     $ 2,654     $  3,427
SUPPLEMENTAL DISCLOSURES:
Interest paid.........................................  $   802   $  1,481   $  2,288     $   730     $  1,010
Income taxes paid.....................................  $ 1,814   $  4,338   $  6,268     $ 1,867     $    870
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       F-7
<PAGE>   61

                                   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 HB LEDs, and laser
diodes.



     AXT expanded its markets in 1999 through the acquisition of Lyte Optronics,
Inc., or Lyte (see Note 2). Lyte's business now operates as two separate
divisions of AXT: the visible emitter division, which focuses on manufacturing
LEDs and laser diodes, and the consumer products division, which focuses on
designing and marketing laser-pointing, laser-alignment and LED products. The
substrate division comprises the third division of AXT.


     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 wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.

Interim Results (unaudited)

     The accompanying consolidated balance sheet as of June 30, 1999 and the
consolidated statements of income and cash flows for the six months ended June
30, 1999 are unaudited. In the opinion of management, these statements have been
prepared on the same accounting basis as the audited consolidated financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of results for these periods. The
data disclosed in the notes to the consolidated financial statements for this
period are unaudited.

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. Income and expense items are translated
at the average rate of exchange for the period. Gains and losses from foreign
currency translation are included as a separate component of 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, collection of resulting receivables is

                                       F-8
<PAGE>   62
                                   AXT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

probable, product returns are reasonably estimable 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 short maturities. The
reported amounts of notes, short-term bank borrowing, loans payable and capital
lease obligations approximate fair value due to the market interest rates which
these debts bear.

Concentration of Credit Risk


     The Company manufactures and distributes GaAs, InP and Ge substrates,
semiconductor laser diodes, LEDs and laser pointer products. Financial
instruments which potentially subject the Company to concentration of credit
risk consist primarily of trade accounts receivable. 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.


     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.


     No customer represented greater than 10% of product revenues for the years
ended December 31, 1997, 1998, 1999 or the six months ended June 30, 2000.



     No customer accounted for 10% or more of the trade accounts receivable
balance as of December 31, 1998, 1999 or June 30, 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.

Inventories

     Inventories are stated at the lower of cost or market. 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.


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 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. Based
on its most recent analysis, the Company believes that there was no impairment
of its property, plant and equipment as of June 30, 2000.

                                       F-9
<PAGE>   63
                                   AXT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

Comprehensive Income


     In 1998, the Company adopted Statement of Financial Accounting Standard No.
130 "Reporting 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.
Comprehensive income for the years ended December 31, 1997, 1998, 1999 and the
six-month period ended June 30, 2000 is disclosed in the "Consolidated Statement
of Stockholders' Equity."


Basic and Diluted Net Income (Loss) Per Share

     The Company computes net income (loss) per share in accordance with
Statement of Financial Accounting Standard No. 128, or SFAS 128, "Earnings per
Share." Under the provisions of SFAS 128, 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.

Segment Reporting


     In 1998, the Company adopted Statement of Financial Accounting Standard No.
131, or SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 requires that companies report separately, in the
financial statements, certain financial and descriptive information about
operating segment profit or loss, certain specific revenue and expense items and
segment assets. Additionally, companies are required to report information about
the revenues derived from their products and service groups, about geographic
areas in which the Company earns revenues and holds assets and about major
customers.


Reclassifications

     Certain reclassifications have been made to the prior years consolidated
financial statements to conform to current period presentation.
                                      F-10
<PAGE>   64
                                   AXT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Recent Accounting Pronouncements


     In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133, or SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 established accounting and reporting standards for
derivative instruments including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. In June 2000, SFAS 133 was amended by SFAS 138. The Company will be
required to implement SFAS 133 as amended by SFAS 137, beginning in 2001.
Adopting the provisions of SFAS 133 is not expected to have a material effect on
the Company's financial position or results of operations.



     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition", which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosures related to
revenue recognition policies. Management believes that the impact of SAB 101
would have no material effect on the financial position or results of operations
of the Company.



     In March 2000, the FASB issued FASB Interpretation No. 44, or FIN 44,
"Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25." FIN 44 clarifies the application of
Opinion 25 for (a) the definition of employee for purposes of applying Opinion
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence for various modifications
to the terms of a previously fixed stock option or award and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998, or January 12, 2000. The adoption of FIN
44 did not and is not expected to have a material impact on the Company's
financial position or results of operations.


NOTE 2. 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 manufacture
and distribute semiconductor laser diode chips, high-brightness LEDs and laser
pointers.

     Under the terms of the merger agreement, the Company issued approximately
2,247,000 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 981,000 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.

     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.

                                      F-11
<PAGE>   65
                                   AXT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Acquisition of Alpha Photonics, Inc. by Lyte Optronics, Inc.


     On September 29, 1998, Lyte acquired Alpha Photonics, Inc., or Alpha. The
transaction was accounted for as a purchase. Lyte issued its common and
preferred stock with a value of $11.5 million in exchange for all the
outstanding shares of capital stock of Alpha. Lyte recorded goodwill of $3.0
million, representing the excess of the value of the shares issued by Lyte over
the net book value of Alpha. The results of operations of Alpha are included in
the operations of the Company beginning on September 29, 1998.


NOTE 3. BALANCE SHEET DETAIL

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

<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                                      -------------------    JUNE 30,
                                                       1998        1999        2000
                                                      -------    --------    --------
<S>                                                   <C>        <C>         <C>
Prepaid expenses:
  Income tax receivable.............................  $   312    $  4,013    $  2,374
  Other.............................................    2,959       4,932       3,697
                                                      -------    --------    --------
                                                      $ 3,271    $  8,945    $  6,071
                                                      =======    ========    ========
Inventories:
  Raw materials.....................................  $ 9,928    $ 13,503    $ 16,693
  Work-in-process...................................   13,171      16,151      20,987
  Finished goods....................................    2,201       5,816       5,950
                                                      -------    --------    --------
                                                      $25,300    $ 35,470    $ 43,630
                                                      =======    ========    ========
Property, plant and equipment:
  Land..............................................  $ 2,446    $  2,447    $  2,447
  Building..........................................   17,429      18,507      18,544
  Machinery and equipment...........................   23,544      31,058      35,437
  Leasehold improvements............................      476       2,704       4,617
  Construction in progress..........................    3,144       1,008       9,207
                                                      -------    --------    --------
                                                       47,039      55,724      70,252
  Less: accumulated depreciation and amortization...   (9,415)    (14,859)    (17,776)
                                                      -------    --------    --------
                                                      $37,624    $ 40,865    $ 52,476
                                                      =======    ========    ========
Accrued liabilities:
  Accrued compensation and other....................  $   934    $  2,090    $  3,180
  Allowance for sales returns.......................    1,036         344         380
  Income tax payable................................        0         615       4,043
  Other.............................................    3,272       4,415       3,198
                                                      -------    --------    --------
                                                      $ 5,242    $  7,464    $ 10,801
                                                      =======    ========    ========
</TABLE>

NOTE 4. DEBT

Short-Term Bank Borrowing


     The Company has a $15.0 million bank line of credit that expires on
September 30, 2000. On August 28, 2000, the Company entered into a new credit
facility of $20.0 million with its bank (see Note 13). The line of credit is
secured by the Company's operating assets, excluding equipment. Borrowings under
the prior line of credit bear interest at 0.5% above the bank's variable prime
rate, which was 9.5% at June 30, 2000 and the new facilities bear interest at
1.75% above LIBOR or 0.5% above the bank's


                                      F-12
<PAGE>   66
                                   AXT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


variable prime rate. The line of credit is subject to certain financial
covenants regarding current financial ratios and cash flow requirements that
have all been met as of June 30, 2000. The amounts outstanding under the prior
line of credit were $1.9 million at December 31, 1998, $11.3 million at December
31, 1999, and $13.0 million at June 30, 2000.


Notes Payable


     On June 15, 2000, the Company entered into a short-term note with its bank
in the amount of $4.0 million. The note bears interest at 1.0% above the bank's
variable prime rate, which was 9.5% at June 30, 2000. The principal and unpaid
interest of the note is due September 30, 2000. The proceeds of the note were
primarily used to fund current operating and capital expenditure needs of the
Company. The note is to be repaid using the proceeds of a new loan of $6.0
million (see Note 13).


Long-Term Debt

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

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                        ------------------    JUNE 30,
                                                         1998       1999        2000
                                                        -------    -------    --------
<S>                                                     <C>        <C>        <C>
Various notes payable to banks, secured by certain
  equipment, bearing interest at fixed rates between
  7.13% and 9.01%, maturing between February 2001 and
  May 2003............................................  $ 3,782    $ 2,948    $ 2,494
Debenture loan payable 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................      944        917        903
Taxable revenue bonds, secured by a letter of credit
  from a bank, bearing interest at 2.0% below prime
  rate, which was 9.5% on June 30, 2000, maturing
  December 2023.......................................   11,615     11,135     10,723
Various mortgage notes payable to a bank, secured by
  property, bearing interest at a fixed rate of 9.00%
  and 8.25%, maturing October 2003....................    1,890      1,822      1,776
Notes payable to a bank and a financing institution,
  acquired with Lyte Optronics, paid in full in
  1999................................................    2,918         --         --
                                                        -------    -------    -------
                                                         21,149     16,822     15,896
Less current portion..................................   (2,733)    (1,568)    (1,862)
                                                        -------    -------    -------
                                                        $18,416    $15,254    $14,034
                                                        =======    =======    =======
</TABLE>

     Maturities of long-term debt at June 30, 2000 were as follows:

<TABLE>
<S>                                                          <C>
2001.......................................................  $ 1,862
2002.......................................................    1,895
2003.......................................................    1,056
2004.......................................................      686
2005.......................................................      514
Thereafter.................................................    9,883
                                                             -------
                                                             $15,896
                                                             =======
</TABLE>

     On August 28, 2000, the Company entered into a new credit facility
including $6.0 million in term loans for real estate in Southern California.
Borrowings under the term loans bear interest at 2.75% above

                                      F-13
<PAGE>   67
                                   AXT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

LIBOR, 2.5% above short-term treasury notes or 1.5% above the bank's variable
prime rate. The term loans mature on March 31, 2003.

     Following the merger with Lyte Optronics in 1999, the Company repaid Lyte
Optronics debt that had been obtained at an unfavorable interest rate. The
repayment resulted in an extraordinary loss in the amount of $508,000, net of
tax benefits.

NOTE 5. INCOME TAXES

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

<TABLE>
<CAPTION>
                                          YEARS ENDED DECEMBER 31,
                                         ---------------------------    SIX MONTHS ENDED
                                          1997      1998       1999      JUNE 30, 2000
                                         ------    -------    ------    ----------------
<S>                                      <C>       <C>        <C>       <C>
Current:
  Federal..............................  $1,571    $ 3,774    $2,274        $ 3,069
  State................................      79        442       376            503
  Foreign..............................      84         51       247            190
                                         ------    -------    ------        -------
     Total current.....................   1,734      4,267     2,897          3,762
Deferred:
  Federal..............................    (808)    (1,097)     (663)          (997)
  State................................    (143)      (194)      (95)           (97)
                                         ------    -------    ------        -------
     Total deferred....................    (951)    (1,291)     (758)        (1,094)
                                         ------    -------    ------        -------
     Total provision...................  $  783    $ 2,976    $2,139        $ 2,668
                                         ======    =======    ======        =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                    YEARS ENDED
                                                    DECEMBER 31,
                                                --------------------    SIX MONTHS ENDED
                                                1997    1998    1999     JUNE 30, 2000
                                                ----    ----    ----    ----------------
<S>                                             <C>     <C>     <C>     <C>
Statutory federal income tax rate.............  34.0%   34.0%   34.0%         34.0%
State income taxes, net of federal tax
  benefits....................................   5.4%    2.6%    5.4%          3.4%
Foreign sales corporation benefit.............    --    (3.2%)  (4.8%)        (2.6%)
Foreign income taxed at higher rate...........   4.2%    0.8%    0.0%          0.0%
Acquisition costs.............................   0.0%    0.0%   33.9%          0.0%
Other.........................................   5.2%    6.9%    7.3%          3.3%
                                                ----    ----    ----          ----
Effective tax rate............................  48.8%   41.1%   75.8%         38.1%
                                                ====    ====    ====          ====
</TABLE>

                                      F-14
<PAGE>   68
                                   AXT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
                                                         YEARS ENDED
                                                        DECEMBER 31,
                                                      -----------------   SIX MONTHS ENDED
                                                       1998      1999      JUNE 30, 2000
                                                      -------   -------   ----------------
<S>                                                   <C>       <C>       <C>
Deferred tax assets:
  Accruals and reserves not yet deductible..........  $ 1,635   $ 2,935       $ 3,254
  State taxes.......................................      137        98           132
  Other.............................................      772       724         1,376
  Net operating loss................................      925       925           925
  Credits...........................................       --       128           366
                                                      -------   -------       -------
                                                      $ 3,469   $ 4,810       $ 6,053
Deferred tax liabilities:
  Depreciation......................................   (1,017)   (1,600)       (1,468)
                                                      -------   -------       -------
     Net deferred tax asset.........................  $ 2,452   $ 3,210       $ 4,585
                                                      =======   =======       =======
</TABLE>


NOTE 6. 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):


<TABLE>
<CAPTION>
                                                                         SIX MONTHS
                                     YEARS ENDED DECEMBER 31,          ENDED JUNE 30,
                                   -----------------------------   ----------------------
                                    1997       1998       1999        1999         2000
                                   -------    -------    -------   -----------    -------
                                                                   (UNAUDITED)
<S>                                <C>        <C>        <C>       <C>            <C>
Numerator:
  Net income (loss)                $   820    $ 4,284    $   172     $(3,028)     $ 4,325
                                   =======    =======    =======     =======      =======
Denominator:
     Denominator for basic
       earnings per
       share -- weighted
       average common shares...      3,697     16,076     18,655      18,451       18,687
     Effect of dilutive
       securities:
       Common stock options....         72        249      1,116          --        1,491
       Convertible preferred
          stock................      9,829         --         --          --           --
                                   -------    -------    -------     -------      -------
Denominator for dilutive income
  (loss) per share.............     13,598     16,325     19,771      18,451       20,178
                                   =======    =======    =======     =======      =======
Basic income (loss) per
  share........................    $  0.22    $  0.27    $  0.01     $ (0.16)     $  0.23
Diluted income (loss) per
  share........................    $  0.06    $  0.26    $  0.01     $ (0.16)     $  0.21
Options excluded from diluted
  net income (loss) per
  share........................          9          7        415       1,123           45
                                   =======    =======    =======     =======      =======
</TABLE>


     Certain common stock issuable upon exercise of stock options were excluded
from the calculation of diluted net income (loss) per share as the impact of the
options would have been anti-dilutive.

NOTE 7. STOCKHOLDERS' EQUITY

     In May 1998, the Company completed its initial public offering, or IPO, and
issued 2,875,000 shares of its common stock at $10.00 per share, including the
shares from an over-allotment option. The Company received cash of approximately
$25.8 million net of underwriting discounts, commissions and
                                      F-15
<PAGE>   69
                                   AXT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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. Under the
terms of the acquisition, the Company issued approximately 2,247,000 shares of
common stock and 981,000 shares of non-voting and non-convertible preferred
stock with a 5.0% annual dividend rate payable when declared by the board of
directors of the Company and $4.0 million liquidation preference over common
stock, in exchange for all of the issued and outstanding shares of capital stock
of Lyte. Ten percent of the shares issued to the Lyte's stockholders are held in
escrow to satisfy any claims that the Company may bring under the acquisition
agreement. The Company has filed certain claims under the agreement and expects
that all of the shares held in escrow will be returned to the Company in
satisfaction of these claims.


     Subsequent to June 30, 2000, the Company completed a private securities
offering (see Note 13).

NOTE 8. 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,
consultants, 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, consultants and directors of the Company. Under the 1997 Plan,
5,901,501 shares of common stock have been reserved for issuance as of June 30,
2000. 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.

                                      F-16
<PAGE>   70
                                   AXT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Information about stock option activities is summarized below:


<TABLE>
<CAPTION>
                                                                 OPTIONS OUTSTANDING
                                                   ------------------------------------------------
                                      OPTIONS                                      WEIGHTED AVERAGE
                                     AVAILABLE      NUMBER      EXERCISE PRICE      EXERCISE PRICE
                                     FOR GRANT     OF SHARES       PER SHARE          PER SHARE
                                     ----------    ---------    ---------------    ----------------
<S>                                  <C>           <C>          <C>                <C>
Balance at December 31, 1996.......     322,594      209,202                            $ 1.59
  Additional shares authorized.....   1,367,000           --                                --
  Granted..........................  (1,246,950)   1,246,950    $ 5.00 - $ 6.09           5.06
  Exercised........................          --      (84,825)     0.06 -   1.90           1.59
  Cancelled........................      25,175      (25,175)     1.50 -   5.00           3.43
                                     ----------    ---------
Balance at December 31, 1997.......     467,819    1,346,152                              4.77
  Additional shares authorized.....   1,500,000           --                                --
  Granted..........................    (320,599)     320,599      5.00 -  11.87           7.46
  Exercised........................          --      (71,407)     1.20 -   5.00           1.94
  Cancelled........................      64,268      (64,268)     5.00 -   7.50           5.39
                                     ----------    ---------
Balance at December 31, 1998.......   1,711,488    1,531,076                              5.44
  Additional shares authorized.....   1,000,000           --                                --
  Granted..........................  (1,500,350)   1,500,350      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.......   1,365,783    2,676,102                             12.18
  Additional shares authorized.....   2,101,501           --                                --
  Granted..........................    (433,800)     433,800     15.06 -  47.00          25.39
  Exercised........................          --     (261,799)     0.20 -  21.18           7.51
  Cancelled........................     206,347     (206,347)     5.00 -  32.50          14.22
                                     ----------    ---------
Balance at June 30, 2000...........   3,239,831    2,641,756                             14.65
                                     ==========    =========
</TABLE>


     Information about stock options outstanding at June 30, 2000 is summarized
below:


<TABLE>
<CAPTION>
              OPTIONS OUTSTANDING                       OPTIONS EXERCISABLE
- ------------------------------------------------   ------------------------------
                                WEIGHTED AVERAGE
   RANGE OF         NUMBER         REMAINING         NUMBER      WEIGHTED AVERAGE
EXERCISE PRICES   OUTSTANDING   CONTRACTUAL LIFE   OUTSTANDING    EXERCISE PRICE
- ---------------   -----------   ----------------   -----------   ----------------
<S>               <C>           <C>                <C>           <C>
$ 1.90 - $1.90         5,850          0.34             5,850          $1.90
  5.00 -  5.00       629,082          7.15           399,928           5.00
  5.50 -  7.91       315,581          7.73           161,486           6.56
  8.25 - 13.56       400,726          8.76             7,519           9.04
 14.56 - 17.75       266,500          9.45             5,520          15.53
 18.06 - 20.69        67,600          6.85            15,000          20.68
 21.19 - 21.19       433,117          8.98            97,876          21.19
 21.25 - 22.69       280,100          9.25                --             --
 24.00 - 44.38       242,000          9.69                --             --
 47.00 - 47.00         1,200          9.97                --             --
                   ---------          ----           -------          -----
                   2,641,756          8.43           693,179          $8.09
                   =========          ====           =======          =====
</TABLE>


                                      F-17
<PAGE>   71
                                   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 $322,000 for the year ended December 31,
1997 and $203,000 for the year ended December 31, 1998. 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 $102,000 was amortized for the year ended
December 31, 1997, $96,000 for 1998, $110,000 for 1999 and $55,000 for the six
months ended June 30, 2000.

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:

<TABLE>
<CAPTION>
                                                   YEARS ENDED             SIX MONTHS
                                                   DECEMBER 31,          ENDED JUNE 30,
                                               --------------------   --------------------
                                               1997    1998    1999      1999        2000
                                               ----    ----    ----   -----------    -----
                                                                      (UNAUDITED)
<S>                                            <C>     <C>     <C>    <C>            <C>
Risk free interest rate......................  6.1%     5.2%    5.6%      4.8%         6.2%
Expected life (in years).....................  4.5      5.0     5.0       5.0          5.0
Dividend yield...............................  0.0%     0.0%    0.0%      0.0%         0.0%
Volatility...................................  0.0%    75.0%   96.0%     90.0%       140.0%
</TABLE>

     The weighted average grant-date fair value of options granted during the
year ended December 31, 1997 was $0.49, $4.57 in 1998, $13.09 in 1999, $12.63
for the six months ended June 30, 1999 and $22.83 for the six months ended June
30, 2000.

     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):


<TABLE>
<CAPTION>
                                                                         SIX MONTHS
                                        YEARS ENDED DECEMBER 31,       ENDED JUNE 30,
                                       --------------------------   ---------------------
                                       1997      1998      1999        1999         2000
                                       -----    ------    -------   -----------    ------
                                                                    (UNAUDITED)
<S>                                    <C>      <C>       <C>       <C>            <C>
Net income:
  As reported........................  $ 820    $4,284    $   172     $(3,028)     $4,325
  Pro forma net income...............  $ 760    $3,936    $(2,747)    $(3,685)     $1,970
Net income per share:
  As reported:
     Basic...........................  $0.22    $ 0.27    $  0.01     $ (0.16)     $ 0.23
     Diluted.........................  $0.06    $ 0.26    $  0.01     $ (0.16)     $ 0.21
  Pro forma net income:
     Basic...........................  $0.21    $ 0.24    $ (0.15)    $ (0.20)     $ 0.11
     Diluted.........................  $0.06    $ 0.24    $ (0.15)    $ (0.20)     $ 0.10
</TABLE>


     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.

                                      F-18
<PAGE>   72
                                   AXT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Employee Stock Purchase Plan

     In May 1997, the Company's board of directors approved an Employee Stock
Purchase Plan. Under this plan, employees of the Company were allowed to
purchase a certain number of shares of common stock by December 31, 1997. A
total of 67,000 shares were purchased as of December 31, 1997.

     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. At June 30, 2000 a
total of 900,000 shares of the Company's common stock were reserved for issuance
under the 1998 Purchase Plan. A total of 121,000 shares were purchased as of
June 30, 2000. 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 $87,000 for
the year ended December 31, 1997, $101,000 for 1998, $146,000 for 1999 and
$75,000 for the six months ended June 30, 2000.

NOTE 9. SEGMENT AND FOREIGN OPERATIONS INFORMATION

     The Company has three reportable segments: substrates, visible emitters and
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.

                                      F-19
<PAGE>   73
                                   AXT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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


<TABLE>
<CAPTION>
                                                                             SIX MONTHS ENDED
                                           YEARS ENDED DECEMBER 31,              JUNE 30,
                                        -------------------------------   -----------------------
                                         1997        1998        1999        1999          2000
                                        -------    --------    --------   -----------    --------
                                                                          (UNAUDITED)
<S>                                     <C>        <C>         <C>        <C>            <C>
Substrates:
  Net revenues from external
     customers........................  $25,335    $ 43,177    $ 56,732     $26,136      $ 45,337
  Gross profit (loss).................   10,108      17,936      23,286      10,381        21,148
  Operating income (loss).............    5,860      10,416      12,275       4,022        14,418
  Identifiable assets.................   31,395      76,505      88,579      82,850       105,151
Visible Emitters:
  Net revenues from external
     customers........................  $    --    $  5,897    $ 18,640     $ 9,391      $  4,868
  Gross profit (loss).................                2,135       2,061        (110)       (1,120)
  Operating income (loss).............       --       1,132      (2,775)     (2,884)       (5,592)
  Identifiable assets.................       --      18,917      23,423      20,676        26,920
Consumer Products:
  Net revenues from external
     customers........................  $17,978    $ 12,240    $  6,149     $ 4,153      $  2,673
  Gross profit (loss).................    3,555       2,294      (1,195)       (802)          652
  Operating income (loss).............   (3,407)     (3,405)     (5,260)     (2,842)         (414)
  Identifiable assets.................    6,401       7,561       3,760       5,094         5,101
Total:
  Net revenues from external
     customers........................  $43,313    $ 61,314    $ 81,521     $39,680      $ 52,878
  Gross profit (loss).................   13,663      22,365      24,152       9,469        20,680
  Operating income (loss).............    2,453       8,143       4,240      (1,704)        8,412
  Identifiable assets.................   37,796     102,983     115,762     108,620       137,172
</TABLE>


     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):


<TABLE>
<CAPTION>
                                                                         SIX MONTHS
                                     YEARS ENDED DECEMBER 31,          ENDED JUNE 30,
                                   -----------------------------   ----------------------
                                    1997       1998       1999        1999         2000
                                   -------    -------    -------   -----------    -------
                                                                   (UNAUDITED)
<S>                                <C>        <C>        <C>       <C>            <C>
Net revenues:
  United States..................  $30,676    $41,902    $42,531     $19,991      $27,869
  Europe.........................    5,452      4,469      8,290       3,693        5,956
  Canada.........................    1,034      1,356      3,221         125        1,211
  Japan, Asia Pacific and
     other.......................    6,151     13,587     27,479      15,871       17,842
                                   -------    -------    -------     -------      -------
  Consolidated...................  $43,313    $61,314    $81,521     $39,680      $52,878
                                   =======    =======    =======     =======      =======
</TABLE>


                                      F-20
<PAGE>   74
                                   AXT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                        ------------------    JUNE 30,
                                                         1998       1999        2000
                                                        -------    -------    --------
<S>                                                     <C>        <C>        <C>
Property, plant and equipment, net:
  United States.......................................  $36,558    $37,362    $47,975
  China...............................................      881      3,491      4,499
  Other...............................................      185         12          2
                                                        -------    -------    -------
                                                        $37,624    $40,865    $52,476
                                                        =======    =======    =======
</TABLE>

NOTE 10. RELATED PARTY TRANSACTIONS

     The Company purchased raw materials and manufactured quartz from a supplier
that is owned by a family member of an officer. Purchases from this supplier
were $1.5 million for the year ended December 31, 1997, $3.7 million in 1998,
$3.6 million in 1999 and $3.5 million for the six months ended June 30, 2000.

NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES

     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.

     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 $183,000 for the six months ended June 30, 2000.

     Included in property and equipment is approximately $11.5 million of
equipment that is leased under non-cancelable leases accounted for as capital
leases. These leases expire at various dates through 2005.

     Total minimum lease payments under the above leases as of June 30, 2000,
are summarized below (in thousands):

<TABLE>
<CAPTION>
                                                        CAPITAL    OPERATING
                                                        LEASES      LEASES       TOTAL
                                                        -------    ---------    -------
<S>                                                     <C>        <C>          <C>
2001..................................................  $ 4,336     $  617      $ 4,953
2002..................................................    3,253        632        3,885
2003..................................................    3,170        540        3,710
2004..................................................    2,177        480        2,657
2005..................................................      620        443        1,063
Thereafter............................................       --         83           83
                                                        -------     ------      -------
                                                         13,556     $2,795      $16,351
                                                                    ======      =======
Less amounts representing interest at 8.25% to
  22.8%...............................................   (1,982)
                                                        -------
                                                         11,574
Less short-term portion...............................   (3,437)
                                                        -------
Long-term portion.....................................  $ 8,137
                                                        =======
</TABLE>

                                      F-21
<PAGE>   75
                                   AXT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12. 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. These contracts are accounted for using
hedge accounting, under which 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 June 30, 2000, 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 $1.7 million.

     The Company incurred a foreign transaction exchange loss of $186,000 for
the year ended December 31, 1997, a loss of $24,000 in 1998, a gain of $652,000
in 1999 and a gain of $3,000 for the six months ended June 30, 2000.

NOTE 13. SUBSEQUENT EVENTS

Private Securities Offering

     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. The shares issued have not been registered under the Securities Act of
1933 and are "restricted securities" as defined by Rule 144 promulgated under
the Act. The securities may not be sold or offered for sale or otherwise
distributed except in conjunction with an effective registration statement for
the shares under the Act, in compliance with Rule 144, or pursuant to an opinion
of counsel satisfactory to the Company, that such registration or compliance is
not required as to said sale, offer or distribution. The Company is obligated to
register the shares no later than ten days after the completion of its next
public securities offering.

New Debt Financing


     On August 28, 2000, the Company entered into a new 21-month $20.0 million
line of credit and additional long-term loans of $6.0 million with its bank.


                                      F-22
<PAGE>   76

- --------------------------------------------------------------------------------

                                   [AXT LOGO]

                          PRUDENTIAL VOLPE TECHNOLOGY
                        A UNIT OF PRUDENTIAL SECURITIES

                               CIBC WORLD MARKETS

                                 WIT SOUNDVIEW

                              ABN AMRO ROTHSCHILD
                      A DIVISION OF ABN AMRO INCORPORATED

                            PACIFIC CREST SECURITIES

- --------------------------------------------------------------------------------
<PAGE>   77

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

     The following table sets forth the various expenses payable by us in
connection with the sale and distribution of the securities being registered.
All of the amounts shown are estimates except for the Securities and Exchange
Commission registration fee and the Nasdaq listing application fee.


<TABLE>
<CAPTION>
                                                                  TO BE
                                                                 PAID BY
                                                              THE REGISTRANT
                                                              --------------
<S>                                                           <C>
Securities and Exchange Commission registration fee.........    $   28,074
NASD filing fee.............................................        11,063
Nasdaq National Market additional shares listing application
  fee.......................................................        17,500
Blue sky fees and expenses..................................        10,000
Accounting fees and expenses................................       380,000
Printing expenses...........................................       100,000
Transfer agent and registrar fees and expenses..............        10,000
Legal fees and expenses.....................................       200,000
Miscellaneous expenses......................................       243,363
                                                                ----------
          Total.............................................    $1,000,000
                                                                ==========
</TABLE>


ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

     Section 102 of the Delaware General Law, or DGCL, as amended, allows a
corporation to eliminate the personal liability of directors of a corporation to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except where the director breached his duty of loyalty,
failed to act in good faith, engaged in intentional misconduct or knowingly
violated a law, authorized the payment of a dividend or approved a stock
repurchase in violation of Delaware corporate law or obtained an improper
personal benefit.

     Section 145 of the DGCL provides, among other things, that we may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of AXT) by reason of the fact that the person is or
was a director, officer, agent, or employee of AXT, or is or was serving at our
request as a director, officer, agent or employee of another corporation,
partnership, joint venture, trust or other enterprise against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by the person in connection with such action,
suit or proceeding. The power to indemnify applies (a) if such person is
successful on the merits or otherwise in defense of any action, suit or
proceeding, or (b) if such person acting in good faith and in a manner he
reasonably believed to be in the best interest, or not opposed to the best
interest, of AXT, and with respect to any criminal action or proceeding had no
reasonable cause to believe his conduct was unlawful. The power to indemnify
applies to actions brought by or in the right of AXT as well but only to the
extent of defense expenses (including attorneys' fees but excluding amounts paid
in settlement) actually and reasonably incurred and not to any satisfaction of
judgment or settlement of the claim itself, and with the further limitation that
in such actions no indemnification shall be made in the event of any
adjudication of liability to AXT, unless the court believes that in light of all
the circumstances indemnification should apply.

     Section 174 of the DGCL provides, among other things, that a director, who
willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for such actions. A
director who was either absent when the unlawful actions were approved or
dissented at the time, may avoid liability by causing his or her dissent to such
actions to be entered in the

                                      II-1
<PAGE>   78

books containing minutes of the meetings of the board of directors at the time
such action occurred or immediately after such absent director receives notice
of the unlawful acts.

     Our Certificate of Incorporation and Bylaws provide that we shall indemnify
our directors, officers, employees and agents to the maximum extent permitted by
Delaware Law, including in circumstances in which indemnification is otherwise
discretionary under Delaware Law. In addition, we have entered into separate
indemnification agreements with our directors and officers which would require
us, among other things, to indemnify them against certain liabilities which may
arise by reason of their status or service (other than liabilities arising from
willful misconduct of a culpable nature). We also intend to maintain director
and officer liability insurance, if available on reasonable terms. These
indemnification provisions and the indemnification agreements may be
sufficiently broad to permit indemnification of our officers and directors for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act of 1933, as amended (the "Securities Act").

     The Underwriting Agreement hereto provides for indemnification by the
Underwriters of us and our officers and directors for certain liabilities,
including matters arising under the Securities Act.

     We have a policy of directors' and officers' liability insurance that
insures our directors and officers against the cost of defense, settlement or
payment of a judgment under certain circumstances.

     At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or other agents in which indemnification is
being sought. We are not aware of any threatened litigation that may result in a
claim for indemnification by any of our directors, officers, employees or other
agents.

ITEM 16. EXHIBITS.

     The following exhibits are filed with this Registration Statement:


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                           EXHIBIT TITLE
- -------                          -------------
<C>       <S>
  1.1     Form of Underwriting Agreement.
  5.1*    Legal opinion of Gray Cary Ware & Freidenrich LLP, counsel
          to the Registrant.
 10.1     Credit Agreement dated August 28, 2000 by and between the
          Registrant and U.S. Bank National Association.
 23.1     Consent of PricewaterhouseCoopers LLP, independent
          accountants.
 23.2     Consent of Arthur Andersen LLP, independent public
          accountants.
 23.3*    Consent of Gray Cary Ware & Freidenrich LLP (included in
          Exhibit 5.1 to this Registration Statement).
 24.1*    Power of Attorney (included as page II-4).
 27.1*    Financial Data Schedule (EDGAR filed version only)
</TABLE>


- ------------------

* Previously filed.


ITEM 17. UNDERTAKINGS.

     The undersigned registrant hereby undertakes:

          We hereby undertake that, for purposes of determining any liability
     under the Securities Act of 1933, as amended, each filing of the
     registrant's annual report pursuant to Section 13(a) or Section 15(d) of
     the Securities Exchange Act of 1934, as amended (and, where applicable,
     each filing of an employee benefit plan's annual report pursuant to Section
     15(d) of the Securities Exchange Act of 1934) that is incorporated by
     reference in the registration statement shall be deemed to be a new
     registration statement relating to the securities offered therein, and the
     offering of such securities at that time shall be deemed to be the initial
     bona fide offering thereof.

          Insofar as indemnification for liabilities arising under the Act may
     be permitted to directors, officers and controlling persons of the
     registrant pursuant to the foregoing provisions, or otherwise, the
     registrant has been advised that in the opinion of the Securities and
     Exchange Commission such indemnification is against public policy as
     expressed in the Securities Act and is, therefore,

                                      II-2
<PAGE>   79

     unenforceable. In the event that a claim for indemnification against such
     liabilities (other than the payment by the registrant of expenses incurred
     or paid by a director, officer or controlling person of the registrant in
     the successful defense of any action, suit or proceeding) is asserted by
     such director, officer or controlling person in connection with the
     securities being registered, the registrant will, unless in the opinion of
     its counsel the matter has been settled by controlling precedent, submit to
     a court of appropriate jurisdiction the question whether such
     indemnification by it is against public policy as expressed in the
     Securities Act and will be governed by the final adjudication of such
     issue.

     We hereby undertake that:

          (a) For purposes of determining any liability under the Securities
     Act, the information omitted from the form of prospectus filed as part of
     this registration statement in reliance upon Rule 430A and contained in a
     form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
     (4) or 497(h) under the Securities Act shall be deemed to be part of this
     registration statement as of the time it was declared effective.

          (b) For the purpose of determining any liability under the Securities
     Act, each post-effective amendment that contains a form of prospectus shall
     be deemed to be a new registration statement relating to the securities
     offered therein, and the offering of such securities at that time shall be
     deemed to be the initial bona fide offering thereof.

                                      II-3
<PAGE>   80

                                   SIGNATURES


     Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Fremont, State of California, on the
1st day of September, 2000.


                                          AXT, INC.

                                          By:      /s/ MORRIS S. YOUNG
                                            ------------------------------------
                                                      Morris S. Young
                                                  Chief Executive Officer


     Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed on September 1, 2000 by the
following persons in the capacities and on the dates indicated.



<TABLE>
<CAPTION>
                      SIGNATURE                                    TITLE                    DATE
                      ---------                                    -----                    ----
<C>                                                    <C>                            <S>
                 /s/ MORRIS S. YOUNG                    Chief Executive Officer and   September 1, 2000
- -----------------------------------------------------            Director
                   Morris S. Young

                /s/ DONALD L. TATZIN                    Chief Financial Officer and   September 1, 2000
- -----------------------------------------------------            Director
                  Donald L. Tatzin

                          *                                      Director             September 1, 2000
- -----------------------------------------------------
                     Jesse Chen

                          *                                      Director             September 1, 2000
- -----------------------------------------------------
                     B. J. Moore

              *By: /s/ DONALD L. TATZIN
  ------------------------------------------------
                  Donald L. Tatzin
                  Attorney-in-Fact
</TABLE>


                                      II-4
<PAGE>   81

                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                           EXHIBIT TITLE
- -------                          -------------
<C>       <S>
  1.1     Form of Underwriting Agreement.
  5.1*    Legal opinion of Gray Cary Ware & Freidenrich LLP, counsel
          to the Registrant.
 10.1     Credit Agreement dated August 28, 2000 by and between the
          Registrant and U.S. Bank National Association.
 23.1     Consent of PricewaterhouseCoopers LLP, independent
          accountants.
 23.2     Consent of Arthur Andersen LLP, independent public
          accountants.
 23.3*    Consent of Gray Cary Ware & Freidenrich LLP (included in
          Exhibit 5.1 to this Registration Statement).
 24.1*    Power of Attorney (included as page II-4).
 27.1*    Financial Data Schedule (EDGAR filed version only).
</TABLE>


- ------------------

* Previously filed.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-1.1
<SEQUENCE>2
<FILENAME>f65146a1ex1-1.txt
<DESCRIPTION>EXHIBIT 1.1
<TEXT>

<PAGE>   1

                                   AXT, Inc.

                              2,200,000 Shares(1)

                                  Common Stock

                             UNDERWRITING AGREEMENT



                                                                   [_____], 2000


PRUDENTIAL SECURITIES INCORPORATED
CIBC WORLD MARKETS CORP.
WIT SOUNDVIEW CORPORATION
ABN AMRO INCORPORATED
PACIFIC CREST INC.
As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York  10292

Ladies and Gentlemen:

       AXT, Inc., a Delaware corporation (the "Company") and certain
stockholders of the Company named in Schedule 2 hereto (the "Selling
Securityholders"), hereby confirm their agreement with the several underwriters
named in Schedule I hereto (the "Underwriters"), for whom you have been duly
authorized to act as representatives (in such capacities, the
"Representatives"), as set forth below. If you are the only Underwriters, all
references herein to the Representatives shall be deemed to be to the
Underwriters.

       1. Securities. Subject to the terms and conditions herein contained, the
Company proposes to issue and sell to the several Underwriters an aggregate of
2,100,000 shares, and the Selling Securityholders propose to sell to the several
Underwriters an aggregate of 100,000 shares (in the specific amounts set forth
opposite each Selling Securityholder's name in Schedule 2), of the Company's
Common Stock, par value $.001 per share ("Common Stock"). The shares set forth
in the preceding sentence to be sold by the Company and the Selling
Securityholders are collectively referred to herein as the "Firm Securities."
The Company also proposes to issue and sell to the several Underwriters not more
than 330,000 additional shares of Common Stock if requested by the
Representatives as provided in Section 3 of this Agreement. Any and all shares
of Common Stock to be purchased by the Underwriters pursuant to such option are
referred to herein as the "Option

- ----------
       (1) Plus an option to purchase from AXT, Inc. up to 330,000 additional
shares to cover over-allotments.



<PAGE>   2

Securities," and the Firm Securities and any Option Securities are collectively
referred to herein as the "Securities."

       2.     Representations and Warranties of the Company and the Selling
              Securityholders.

              (a) The Company represents and warrants to, and agrees with, each
of the several Underwriters that:

                     (i) The Company meets the requirements for use of Form S-3
       under the Securities Act of 1933, as amended (the "Act"). A registration
       statement on such Form (File No. 333-44704) with respect to the
       Securities, including a prospectus subject to completion, has been filed
       by the Company with the Securities and Exchange Commission (the
       "Commission") under the Act, and one or more amendments to such
       registration statement may have been so filed. After the execution of
       this Agreement, the Company will file with the Commission either (i) if
       such registration statement, as it may have been amended, has been
       declared by the Commission to be effective under the Act, either (A) if
       the Company relies on Rule 434 under the Act, a Term Sheet (as
       hereinafter defined) relating to the Securities, that shall identify the
       Preliminary Prospectus (as hereinafter defined) that it supplements, and,
       if required to be filed pursuant to Rules 434(c)(2) and 424(b), an
       Integrated Prospectus (as hereinafter defined), in either case,
       containing such information as is required or permitted by Rule 434, 430A
       and 424(b) under the Act or (B) if the Company does not rely on Rule 434
       under the Act, a prospectus in the form most recently included in an
       amendment to such registration statement (or, if no such amendment shall
       have been filed, in such registration statement), with such changes or
       insertions as are required by Rule 430A under the Act or permitted by
       Rule 424(b) under the Act, and in the case of clause (i)(A) or (i)(B) of
       this sentence as have been provided to and approved by the
       Representatives prior to the execution of this Agreement, or (ii) if such
       registration statement, as it may have been amended, has not been
       declared by the Commission to be effective under the Act, an amendment to
       such registration statement, including a form of prospectus, a copy of
       which amendment has been furnished to and approved by the Representatives
       prior to the execution of this Agreement. The Company may also file a
       related registration statement with the Commission pursuant to Rule
       462(b) under the Act for the purpose of registering certain additional
       Securities, which registration shall be effective upon filing with the
       Commission. As used in this Agreement, the term "Original Registration
       Statement" means the registration statement initially filed relating to
       the Securities, as amended at the time when it was or is declared
       effective, including (A) all financial schedules and exhibits thereto,
       (B) all documents incorporated by reference therein filed under the
       Securities Exchange Act of 1934, as amended (the "Exchange Act") and (C)
       any information omitted therefrom pursuant to Rule 430A under the Act and
       included in the Prospectus (as hereinafter defined) or, if required to be
       filed pursuant to Rule 434(c)(2) and 424(b), in the Integrated
       Prospectus; the term "Rule 462(b) Registration Statement" means any
       registration statement filed with the Commission pursuant to Rule 462(b)
       under the Act (including the Registration Statement and any Preliminary
       Prospectus or Prospectus incorporated therein at the time such
       Registration Statement becomes effective); the term "Registration
       Statement" includes both the Original Registration Statement and any Rule
       462(b) Registration Statement; the term "Preliminary Prospectus" means
       each prospectus subject to completion filed with such registration



                                      -2-
<PAGE>   3

       statement or any amendment thereto (including the prospectus subject to
       completion, if any, included in the Registration Statement or any
       amendment thereto at the time it was or is declared effective), including
       all documents incorporated by reference therein filed under the Exchange
       Act; the term "Prospectus" means:

                            (A) if the Company relies on Rule 434 under the Act,
              the Term Sheet relating to the Securities that is first filed
              pursuant to Rule 424(b)(7) under the Act, together with the
              preliminary Prospectus identified therein that such Term Sheet
              supplements:

                            (B) if the Company does not rely on Rule 434 under
              the Act, the prospectus first filed with the Commission pursuant
              to Rule 424(b) under the Act; or

                            (C) if the Company does not rely on Rule 434 under
              the Act and if no prospectus is required to be filed pursuant to
              Rule 424(b) under the Act, the prospectus included in the
              Registration Statement, including, in the case of clauses (A), (B)
              or (C) of this sentence, all documents incorporated by reference
              therein filed under the Exchange Act; the term "Integrated
              Prospectus" means a prospectus first filed with the Commission
              pursuant to Rules 434(c)(2) and 424(b) under the Act; and the term
              "Term Sheet" means any abbreviated term sheet that satisfies the
              requirements of Rule 434 under the Act. Any reference in this
              Agreement to an "amendment or supplement" to any Preliminary
              Prospectus, the Prospectus or any Integrated Prospectus or an
              "amendment" to any registration statement (including the
              Registration Statement) shall be deemed to include any document
              incorporated by reference therein that is filed with the
              Commission under the Exchange Act after the date of such
              Preliminary Prospectus, Prospectus, Integrated Prospectus or
              registration statement, as the case may be; any reference herein
              to the "date" of a Prospectus that includes a Term Sheet shall
              mean the date of such Term Sheet. For purposes of the preceding
              sentence, any reference to the "effective date" of an amendment to
              a registration statement shall, if such amendment is effected by
              means of the filing with the Commission under the Exchange Act of
              a document incorporated by reference in such registration
              statement, be deemed to refer to the date on which such document
              was so filed with the Commission.

                     (ii) The Commission has not issued any order preventing or
       suspending the use of any Preliminary Prospectus. When any Preliminary
       Prospectus and any amendment or supplement thereto was filed with the
       Commission, it (i) contained all statements required to be stated therein
       in accordance with, and complied in all material respects with the
       requirements of, the Act, the Exchange Act and the respective rules and
       regulations of the Commission thereunder, and (ii) did not include any
       untrue statement of a material fact or omit to state any material fact
       necessary in order to make the statements therein, in the light of the
       circumstances under which they were made, not misleading. When the
       Registration Statement or any amendment thereto was or is declared
       effective, it (i) contained or will contain all statements required to be
       stated therein in accordance with, and complied or will comply in all
       material respects with the requirements of, the Act, the Exchange Act and
       the respective rules and regulations of the Commission thereunder and



                                      -3-
<PAGE>   4

       (ii) did not or will not include any untrue statement of a material fact
       or omit to state any material fact necessary to make the statements
       therein not misleading. When the Prospectus or any Term Sheet that is a
       part thereof or any Integrated Prospectus or any amendment or supplement
       to the Prospectus is filed with the Commission pursuant to Rule 424(b)
       (or, if the Prospectus or part thereof or such amendment or supplement is
       not required to be so filed, when the Registration Statement or the
       amendment thereto containing such amendment or supplement to the
       Prospectus was or is declared effective), on the date when the Prospectus
       is otherwise amended or supplemented and on the Firm Closing Date and any
       Option Closing Date (both as hereinafter defined), each of the
       Prospectus, and, if required to be filed pursuant to Rules 434(c)(2) and
       424(b) under the Act, the Integrated Prospectus as amended or
       supplemented at any such time, (i) contained or will contain all
       statements required to be stated therein in accordance with, and complied
       or will comply in all material respects with the requirements of, the
       Act, the Exchange Act and the respective rules and regulations of the
       Commission thereunder and (ii) did not or will not include any untrue
       statement of a material fact or omit to state any material fact necessary
       in order to make the statements therein, in the light of the
       circumstances under which they were made, not misleading. The foregoing
       provisions of this paragraph (ii) do not apply to statements or omissions
       made in any Preliminary Prospectus or any amendment or supplement
       thereto, the Registration Statement or any amendment thereto, the
       Prospectus or, if required to be filed pursuant to Rules 434(c)(2) and
       424(b) and the Act, the Integrated Prospectus or any amendment or
       supplement thereto in reliance upon and in conformity with written
       information furnished to the Company by any Underwriter through the
       Representatives specifically for use therein.

                     (iii) If the Company has elected to rely on Rule 462(b) and
       the Rule 462(b) Registration Statement has not been declared effective
       (i) the Company has filed a Rule 462(b) Registration Statement in
       compliance with and that is effective upon filing pursuant to Rule 462(b)
       and has received confirmation of its receipt and (ii) the Company has
       given irrevocable instructions for transmission of the applicable filing
       fee in connection with the filing of the Rule 462(b) Registration
       Statement, in compliance with Rule 111 promulgated under the Act or the
       Commission has received payment of such filing fee.

                     (iv) The Company and each of its subsidiaries have been
       duly organized and are validly existing as corporations in good standing
       under the laws of their respective jurisdictions of incorporation and are
       duly qualified to transact business as foreign corporations and are in
       good standing under the laws of all other jurisdictions where the
       ownership or leasing of their respective properties or the conduct of
       their respective businesses requires such qualification, except where the
       failure to be so qualified does not amount to a material liability or
       disability to the Company and its subsidiaries, taken as a whole.

                     (v) The Company and each of its subsidiaries have full
       power (corporate and other) to own or lease their respective properties
       and conduct their respective businesses as described in the Registration
       Statement and each of the Prospectus and any Integrated Prospectus (or,
       if the Prospectus and any required Integrated Prospectus are not in
       existence, the most recent Preliminary Prospectus); and the Company has
       full power (corporate and



                                      -4-
<PAGE>   5

       other) to enter into this Agreement and to carry out all the terms and
       provisions hereof to be carried out by it.

                     (vi) The issued shares of capital stock of each of the
       Company's subsidiaries have been duly authorized and validly issued, are
       fully paid and nonassessable and are owned beneficially by the Company
       free and clear of any security interests, liens, encumbrances, equities
       or claims.

                     (vii) The Company has an authorized, issued and outstanding
       capitalization as set forth in the Prospectus or, each of the Prospectus
       and any Integrated Prospectus (or, if the Prospectus and any required
       Integrated Prospectus are not in existence, the most recent Preliminary
       Prospectus). All of the issued shares of capital stock of the Company
       have been duly authorized and validly issued and are fully paid and
       nonassessable. The Firm Securities to be sold by the Company and the
       Option Securities have been duly authorized and at the Firm Closing Date
       or the related Option Closing Date (as the case may be), after payment
       therefor in accordance herewith, will be validly issued, fully paid and
       nonassessable. No holders of outstanding shares of capital stock of the
       Company are entitled as such to any preemptive or other rights to
       subscribe for any of the Securities, and no holder of securities of the
       Company has any right which has not been fully exercised or waived to
       require the Company to register the offer or sale of any securities owned
       by such holder under the Act in the public offering contemplated by this
       agreement.

                     (viii) The capital stock of the Company conforms to the
       description thereof contained in the Prospectus or, each of the
       Prospectus and any Integrated Prospectus (or, if the Prospectus and any
       required Integrated Prospectus are not in existence, the most recent
       Preliminary Prospectus).

                     (ix) Except as disclosed in the Prospectus or, each of the
       Prospectus and any Integrated Prospectus (or, if the Prospectus and any
       required Integrated Prospectus are not in existence, the most recent
       Preliminary Prospectus), there are not outstanding (A) securities or
       obligations of the Company or any of its subsidiaries convertible into or
       exchangeable for any capital stock of the Company or any such subsidiary,
       (B) warrants, rights or options to subscribe for or purchase from the
       Company or any such subsidiary any such capital stock or any such
       convertible or exchangeable securities or obligations, or (C) obligations
       of the Company or any such subsidiary to issue any shares of capital
       stock, any such convertible or exchangeable securities or obligations, or
       any such warrants, rights or options.

                     (x) The consolidated financial statements and schedules of
       the Company and its consolidated subsidiaries included in the
       Registration Statement and the Prospectus or, each of the Prospectus and
       any Integrated Prospectus (or, if the Prospectus and any required
       Integrated Prospectus are not in existence, the most recent Preliminary
       Prospectus) fairly present the financial position of the Company and its
       consolidated subsidiaries and the results of operations and changes in
       financial condition as of the dates and periods therein specified. Such
       financial statements and schedules have been prepared in accordance with
       generally accepted accounting principles consistently applied throughout
       the periods



                                      -5-
<PAGE>   6

       involved (except as otherwise noted therein). The selected financial data
       set forth under the caption "Selected Financial Information" in the
       Prospectus or, each of the Prospectus and any Integrated Prospectus (or,
       if the Prospectus and any required Integrated Prospectus are not in
       existence, the most recent Preliminary Prospectus) and in the Company's
       Annual Report on Form 10-K for the fiscal year ended December 31, 1999,
       fairly present, on the basis stated in the each of Prospectus and any
       Integrated Prospectus (or such Preliminary Prospectus) and such Annual
       Report, the information included therein.

                     (xi) To the best of our knowledge, PricewaterhouseCoopers
       LLP, who has certified certain financial statements of the Company and
       its consolidated subsidiaries and delivered its report with respect to
       the audited consolidated financial statements and schedules included in
       the Registration Statement or each the Prospectus and Integrated
       Prospectus (or, if the Prospectus and any required Integrated Prospectus
       are not in existence, the most recent Preliminary Prospectus), are
       independent public accountants as required by the Act, the Exchange Act
       and the related published rules and regulations thereunder.

                     (xii) The execution and delivery of this Agreement have
       been duly authorized by the Company and this Agreement has been duly
       executed and delivered by the Company, and is the valid and binding
       agreement of the Company, enforceable against the Company in accordance
       with its terms.

                     (xiii) No legal or governmental proceedings are pending to
       which the Company or any of its subsidiaries is a party or to which the
       property of the Company or any of its subsidiaries is subject that are
       required to be described in the Registration Statement or the Prospectus
       or, each of the Prospectus and any Integrated Prospectus (or, if the
       Prospectus and any required Integrated Prospectus are not in existence,
       the most recent Preliminary Prospectus), and no such proceedings have
       been threatened against the Company or any of its subsidiaries or with
       respect to any of their respective properties; and no contract or other
       document is required to be described in the Registration Statement or the
       Prospectus or any Integrated Prospectus or to be filed as an exhibit to
       the Registration Statement that is not described therein (or, if the
       Prospectus and any required Integrated Prospectus are not in existence,
       the most recent Preliminary Prospectus) or filed as required.

                     (xiv) The issuance, offering and sale of the Securities to
       the Underwriters by the Company pursuant to this Agreement, the
       compliance by the Company with the other provisions of this Agreement and
       the consummation of the other transactions herein contemplated do not (i)
       require the consent, approval, authorization, registration or
       qualification of or with any governmental authority, except such as have
       been obtained, such as may be required under state securities or blue sky
       laws and, if the registration statement filed with respect to the
       Securities (as amended) is not effective under the Act as of the time of
       execution hereof, such as may be required (and shall be obtained as
       provided in this Agreement) under the Act, or (ii) conflict with or
       result in a breach or violation of any of the terms and provisions of, or
       constitute a default under, any indenture, mortgage, deed of trust, lease
       or other agreement or instrument to which the Company or any of its
       subsidiaries is a party or by which the Company or any of its
       subsidiaries or any of their respective properties are bound, or the
       charter documents or by-laws of the Company or any of its subsidiaries,
       or



                                      -6-
<PAGE>   7

       any statute or any judgment, decree, order, rule or regulation of any
       court or other governmental authority or any arbitrator applicable to the
       Company or any of its subsidiaries.

                     (xv) Subsequent to the respective dates as of which
       information is given in the Registration Statement, the Prospectus or any
       Integrated Prospectus (or, if the Prospectus and any required Integrated
       Prospectus are not in existence, the most recent Preliminary Prospectus),
       neither the Company nor any of its subsidiaries has sustained any
       material loss or interference with their respective businesses or
       properties from fire, flood, hurricane, accident or other calamity,
       whether or not covered by insurance, or from any labor dispute or any
       legal or governmental proceeding and there has not been any material
       adverse change, or any development involving a prospective material
       adverse change, in the condition (financial or otherwise), management,
       business prospects, net worth, or results of operations of the Company or
       any of its subsidiaries, except in each case as described in or
       contemplated by the Prospectus or, each of the Prospectus and any
       Integrated Prospectus (or, if the Prospectus and any required Integrated
       Prospectus are not in existence, the most recent Preliminary Prospectus).

                     (xvi) The Company has not, directly or indirectly, (i)
       taken any action designed to cause or to result in, or that has
       constituted or which might reasonably be expected to constitute, the
       stabilization or manipulation of the price of any security of the Company
       to facilitate the sale or resale of the Securities or (ii) since the
       filing of the Registration Statement (A) sold, bid for, purchased, or
       paid anyone any compensation for soliciting purchases of, the Securities
       or (B) paid or agreed to pay to any person any compensation for
       soliciting another to purchase any other securities of the Company
       (except for the sale of Securities by the Selling Securityholders under
       this Agreement).

                     (xvii) The Company has not distributed and, prior to the
       later of (i) the Closing Date and (ii) the completion of the distribution
       of the Securities, will not distribute any offering material in
       connection with the offering and sale of the Securities other than the
       Registration Statement or any amendment thereto, any Preliminary
       Prospectus or the Prospectus or any amendment or supplement thereto, or
       other materials, if any permitted by the Act.

                     (xviii) Subsequent to the respective dates as of which
       information is given in the Registration Statement and the Prospectus
       (or, if the Prospectus is not in existence, the most recent Preliminary
       Prospectus), (1) the Company and its subsidiaries have not incurred any
       material liability or obligation, direct or contingent, nor entered into
       any material transaction not in the ordinary course of business; (2) the
       Company has not purchased any of its outstanding capital stock, other
       than pursuant to the terms of its stock option plans, nor declared, paid
       or otherwise made any dividend or distribution of any kind on its capital
       stock; and (3) there has not been any material change in the capital
       stock, short-term debt or long-term debt of the Company and its
       consolidated subsidiaries, except in each case as described in or
       contemplated by the Prospectus (or, if the Prospectus is not in
       existence, the most recent Preliminary Prospectus).



                                      -7-
<PAGE>   8

                     (xix) The Company and each of its subsidiaries have good
       and marketable title in fee simple to all items of real property and
       marketable title to all personal property owned by each of them, in each
       case free and clear of any security interests, liens, encumbrances,
       equities, claims and other defects, other than as security under credit
       and loan agreements, except such as do not materially and adversely
       affect the value of such property and do not interfere with the use made
       or proposed to be made of such property by the Company or such
       subsidiary, and any real property and buildings held under lease by the
       Company or any such subsidiary are held under valid, subsisting and
       enforceable leases, with such exceptions as are not material and do not
       interfere with the use made or proposed to be made of such property and
       buildings by the Company or such subsidiary, in each case except as
       described in or contemplated by the Prospectus (or, if the Prospectus is
       not in existence, the most recent Preliminary Prospectus).

                     (xx) No labor dispute with the employees of the Company or
       any of its subsidiaries exists or is threatened or imminent that could
       result in a material adverse change in the condition (financial or
       otherwise), business prospects, net worth or results of operations of the
       Company and its subsidiaries, except as described in or contemplated by
       the Prospectus (or, if the Prospectus is not in existence, the most
       recent Preliminary Prospectus).

                     (xxi) The Company and its subsidiaries own or possess, or
       can acquire on reasonable terms, all material patents, patent
       applications, trademarks, service marks, trade names, licenses,
       copyrights and proprietary or other confidential information currently
       employed by them in connection with their respective businesses, and
       neither the Company nor any such subsidiary has received any notice of
       infringement of or conflict with asserted rights of any third party with
       respect to any of the foregoing which, singly or in the aggregate, if the
       subject of an unfavorable decision, ruling or finding, would result in a
       material adverse change in the condition (financial or otherwise),
       business prospects, net worth or results of operations of the Company and
       its subsidiaries, except as described in or contemplated by the
       Prospectus (or, if the Prospectus is not in existence, the most recent
       Preliminary Prospectus).

                     (xxii) The Company and each of its subsidiaries are insured
       by insurers of recognized financial responsibility against such losses
       and risks and in such amounts as are prudent and customary in the
       businesses in which they are engaged; neither the Company nor any such
       subsidiary has been refused any insurance coverage sought or applied for;
       and neither the Company nor any such subsidiary has any reason to believe
       that it will not be able to renew its existing insurance coverage as and
       when such coverage expires or to obtain similar coverage from similar
       insurers as may be necessary to continue its business at a cost that
       would not materially and adversely affect the condition (financial or
       otherwise), business prospects, net worth or results of operations of the
       Company and its subsidiaries, except as described in or contemplated by
       the Prospectus (or, if the Prospectus is not in existence, the most
       recent Preliminary Prospectus).

                     (xxiii) No subsidiary of the Company is currently
       prohibited, directly or indirectly, from paying any dividends to the
       Company, from making any other distribution on such subsidiary's capital
       stock, from repaying to the Company any loans or advances to



                                      -8-
<PAGE>   9

       such subsidiary from the Company or from transferring any of such
       subsidiary's property or assets to the Company or any other subsidiary of
       the Company, except as described in or contemplated by the Prospectus
       (or, if the Prospectus is not in existence, the most recent Preliminary
       Prospectus).

                     (xxiv) The Company and its subsidiaries possess all
       certificates, authorizations and permits issued by the appropriate
       federal, state or foreign regulatory authorities necessary to conduct
       their respective businesses, and neither the Company nor any such
       subsidiary has received any notice of proceedings relating to the
       revocation or modification of any such certificate, authorization or
       permit which, singly or in the aggregate, if the subject of an
       unfavorable decision, ruling or finding, would result in a material
       adverse change in the condition (financial or otherwise), business
       prospects, net worth or results of operations of the Company and its
       subsidiaries, except as described in or contemplated by the Prospectus
       (or, if the Prospectus is not in existence, the most recent Preliminary
       Prospectus).

                     (xxv) The Company will conduct its operations in a manner
       that will not subject it to registration as an investment company under
       the Investment Company Act of 1940, as amended, and this transaction will
       not cause the Company to become an investment company subject to
       registration under such Act.

                     (xxvi) The Company has filed all foreign, federal, state
       and local tax returns that are required to be filed or has requested
       extensions thereof (except in any case in which the failure so to file
       would not have a material adverse effect on the Company and its
       subsidiaries) and has paid all taxes required to be paid by it and any
       other assessment, fine or penalty levied against it, to the extent that
       any of the foregoing is due and payable, except for any such assessment,
       fine or penalty that is currently being contested in good faith or as
       described in or contemplated by the Prospectus (or, if the Prospectus is
       not in existence, the most recent Preliminary Prospectus).

                     (xxvii) Neither the Company nor any of its subsidiaries is
       in violation of any federal or state law or regulation relating to
       occupational safety and health or to the storage, handling or
       transportation of hazardous or toxic materials and the Company and its
       subsidiaries have received all permits, licenses or other approvals
       required of them under applicable federal and state occupational safety
       and health and environmental laws and regulations to conduct their
       respective businesses, and the Company and each such subsidiary is in
       compliance with all terms and conditions of any such permit, license or
       approval, except any such violation of law or regulation, failure to
       receive required permits, licenses or other approvals or failure to
       comply with the terms and conditions of such permits, licenses or
       approvals which would not, singly or in the aggregate, result in a
       material adverse change in the condition (financial or otherwise),
       business prospects, net worth or results of operations of the Company and
       its subsidiaries, except as described in or contemplated by the
       Prospectus (or, if the Prospectus is not in existence, the most recent
       Preliminary Prospectus).



                                      -9-
<PAGE>   10

                     (xxviii) Each certificate signed by any officer of the
       Company and delivered to the Representatives or counsel for the
       Underwriters shall be deemed to be a representation and warranty by the
       Company to each Underwriter as to the matters covered thereby.

                     (xxix) Except for the shares of capital stock of each of
       the subsidiaries owned by the Company and such subsidiaries, neither the
       Company nor any such subsidiary owns any shares of stock or any other
       equity securities of any corporation or has any equity interest in any
       firm, partnership, association or other entity, except as set forth in
       Schedule 3 hereto.

                     (xxx) The Company and each of its subsidiaries maintain a
       system of internal accounting controls sufficient to provide reasonable
       assurance that (1) transactions are executed in accordance with
       management's general or specific authorizations; (2) transactions are
       recorded as necessary to permit preparation of financial statements in
       conformity with generally accepted accounting principles and to maintain
       asset accountability; (3) access to assets is permitted only in
       accordance with management's general or specific authorization; and (4)
       the recorded accountability for assets is compared with the existing
       assets at reasonable intervals and appropriate action is taken with
       respect to any differences.

                     (xxxi) No default exists, and no event has occurred which,
       with notice or lapse of time or both, would constitute a default in the
       due performance and observance of any term, covenant or condition of any
       indenture, mortgage, deed of trust, lease or other agreement or
       instrument to which the Company or any of its subsidiaries is a party or
       by which the Company or any of its subsidiaries or any of their
       respective properties is bound or may be affected in any material adverse
       respect with regard to property, business or operations of the Company
       and its subsidiaries.

              (b) Each Selling Securityholder severally and not jointly
represents and warrants to, and agrees with, each of the several Underwriters
that:

                     (i) Such Selling Securityholder has full power (corporate
       and other) to enter into this Agreement and to sell, assign, transfer and
       deliver to the Underwriters the Securities to be sold by such Selling
       Securityholder hereunder in accordance with the terms of this Agreement;
       the execution and delivery of this Agreement have been duly authorized by
       all necessary corporate action of such Selling Securityholder; and this
       Agreement has been duly executed and delivered by such Selling
       Securityholder.

                     (ii) Such Selling Securityholder has duly executed and
       delivered a power of attorney and custody agreement (with respect to such
       Selling Securityholder, the "Power of Attorney" and the "Custody
       Agreement," respectively), each in the form heretofore delivered to the
       Representatives, appointing [________] as such Selling Securityholder's
       Attorney-in-Fact (the "Attorney-in-Fact") with authority to execute,
       deliver and perform this Agreement on behalf of such Selling
       Securityholder and appointing [________], as custodian thereunder (the
       "Custodian"). Certificates in negotiable form, endorsed in blank or
       accompanied by blank stock powers duly executed, with signatures
       appropriately guaranteed, representing the Securities to be sold by such
       Selling Securityholder hereunder have been



                                      -10-
<PAGE>   11

       deposited with the Custodian pursuant to the Custody Agreement for the
       purpose of delivery pursuant to this Agreement. Such Selling
       Securityholder has full power (corporate and other) to enter into the
       Custody Agreement and the Power of Attorney and to perform its
       obligations under the Custody Agreement. The execution and delivery of
       the Custody Agreement and the Power of Attorney have been duly authorized
       by all necessary corporate action of such Selling Securityholder; the
       Custody Agreement and the Power of Attorney have been duly executed and
       delivered by such Selling Securityholder and, assuming due authorization,
       execution and delivery by the Custodian, are the legal, valid, binding
       and enforceable instruments of such Selling Securityholder. Such Selling
       Securityholder agrees that each of the Securities represented by the
       certificates on deposit with the Custodian is subject to the interests of
       the Underwriters hereunder, that the arrangements made for such custody,
       the appointment of the Attorney-in-Fact and the right, power and
       authority of the Attorney-in-Fact to execute and deliver this Agreement,
       to agree on the price at which the Securities (including such Selling
       Securityholder's Securities) are to be sold to the Underwriters, and to
       carry out the terms of this Agreement, are to that extent irrevocable and
       that the obligations of such Selling Securityholder hereunder shall not
       be terminated, except as provided in this Agreement or the Custody
       Agreement, by any act of such Selling Securityholder, by operation of law
       or otherwise, whether in the case of any individual Selling
       Securityholder by the death or incapacity of such Selling Securityholder,
       in the case of a trust or estate by the death of the trustee or trustees
       or the executor or executors or the termination of such trust or estate,
       or in the case of a corporate or partnership Selling Securityholder by
       its liquidation or dissolution or by the occurrence of any other event.
       If any individual Selling Securityholder, trustee or executor should die
       or become incapacitated or any such trust should be terminated, or if any
       corporate or partnership Selling Securityholder shall liquidate or
       dissolve, or if any other event should occur, before the delivery of such
       Securities hereunder, the certificates for such Securities deposited with
       the Custodian shall be delivered by the Custodian in accordance with the
       respective terms and conditions of this Agreement as if such death,
       incapacity, termination, liquidation or dissolution or other event had
       not occurred, regardless of whether or not the Custodian or the
       Attorney-in-Fact shall have received notice thereof.

                     (iii) Such Selling Securityholder is the lawful owner of
       the Securities to be sold by such Selling Securityholder hereunder and
       upon sale and delivery of, and payment for, such Securities, as provided
       herein, such Selling Securityholder will convey good and marketable title
       to such Securities, free and clear of any security interests, liens,
       encumbrances, equities, claims or other defects.

                     (iv) Such Selling Securityholder has not, directly or
       indirectly, (i) taken any action designed to cause or result in, or that
       has constituted or which might reasonably be expected to constitute, the
       stabilization or manipulation of the price of any security of the Company
       to facilitate the sale or resale of the Securities or (ii) since the
       filing of the Registration Statement (A) sold, bid for, purchased, or
       paid anyone any compensation for soliciting purchases of, the Securities
       or (B) paid or agreed to pay to any person any compensation for
       soliciting another to purchase any other securities of the Company
       (except for the sale of Securities by the Selling Securityholders under
       this Agreement).



                                      -11-
<PAGE>   12

                     (v) To the extent that any statements or omissions are made
       in the Registration Statement, any Preliminary Prospectus, the Prospectus
       or any amendment or supplement thereto in reliance upon and in conformity
       with written information furnished to the Company by such Selling
       Securityholder specifically for use therein, such Preliminary Prospectus
       did, and the Registration Statement and the Prospectus and any amendments
       or supplements thereto, when they become effective or are filed with the
       Commission, as the case may be, will conform in all material respects to
       the requirements of the Act, the Exchange Act and the respective rules
       and regulations of the Commission thereunder and will not contain any
       untrue statement of a material fact or omit to state any material fact
       required to be stated therein or necessary to make the statements
       therein, in the light of the circumstances under which they are made, not
       misleading. Such Selling Securityholder has reviewed the Prospectus (or,
       if the Prospectus is not in existence, the most recent Preliminary
       Prospectus) and the Registration Statement, and the information regarding
       such Selling Securityholder set forth therein under the caption
       "Principal and Selling Securityholders" is complete and accurate.

                     (vi) The sale by such Selling Securityholder of Securities
       pursuant hereto is not prompted by any adverse information concerning the
       Company that is not set forth in the Registration Statement or the
       Prospectus (or, if the Prospectus is not in existence, the most recent
       Preliminary Prospectus).

                     (vii) The sale of the Securities to the Underwriters by
       such Selling Securityholder pursuant to this Agreement, the compliance by
       such Selling Securityholder with the other provisions of this Agreement,
       the Custody Agreement and the consummation of the other transactions
       herein contemplated do not (i) require the consent, approval,
       authorization, registration or qualification of or with any governmental
       authority, except such as have been obtained, such as may be required
       under state securities or blue sky laws and, if the registration
       statement filed with respect to the Securities (as amended) is not
       effective under the Act as of the time of execution hereof, such as may
       be required (and shall be obtained as provided in this Agreement) under
       the Act and the Exchange Act, or (ii) conflict with or result in a breach
       or violation of any of the terms and provisions of, or constitute a
       default under any indenture, mortgage, deed of trust, lease or other
       agreement or instrument to which such Selling Securityholder or any of
       its subsidiaries is a party or by which such Selling Securityholder or
       any of its subsidiaries or any of their respective properties are bound,
       or the charter documents or by laws of such Selling Securityholder or any
       of its subsidiaries or any statute or any judgment, decree, order, rule
       or regulation of any court or other governmental authority or any
       arbitrator applicable to such Selling Securityholder or any of its
       subsidiaries.

                     (viii) The Selling Securityholders have not distributed
       and, prior to the later of (i) the Closing Date and (ii) the completion
       of the distribution of the Securities, will not distribute any offering
       material in connection with the offering and sale of the Securities other
       than the Registration Statement or any amendment thereto, any Preliminary
       Prospectus or the Prospectus or any amendment or supplement thereto, or
       other materials, if any permitted by the Act.



                                      -12-
<PAGE>   13

                     (ix) When any Preliminary Prospectus and any amendment or
       supplement thereto was filed with the Commission, it (i) contained all
       statements required to be stated therein in accordance with, and complied
       in all material respects with the requirements of, the Act, the Exchange
       Act and the respective rules and regulations of the Commission
       thereunder, and (ii) did not include any untrue statement of a material
       fact or omit to state any material fact necessary in order to make the
       statements therein, in the light of the circumstances under which they
       were made, not misleading. When the Registration Statement or any
       amendment thereto was or is declared effective, it (i) contained or will
       contain all statements required to be stated therein in accordance with,
       and complied or will comply in all material respects with the
       requirements of, the Act, the Exchange Act and the respective rules and
       regulations of the Commission thereunder and (ii) did not or will not
       include any untrue statement of a material fact or omit to state any
       material fact necessary to make the statements therein not misleading.
       When the Prospectus or any Term Sheet that is a part thereof or any
       Integrated Prospectus or any amendment or supplement to the Prospectus is
       filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus
       or part thereof or such amendment or supplement is not required to be so
       filed, when the Registration Statement or the amendment thereto
       containing such amendment or supplement to the Prospectus was or is
       declared effective), on the date when the Prospectus is otherwise amended
       or supplemented and on the Firm Closing Date and any Option Closing Date
       (both as hereinafter defined), each of the Prospectus, and, if required
       to be filed pursuant to Rules 434(c)(2) and 424(b) under the Act, the
       Integrated Prospectus as amended or supplemented at any such time, (i)
       contained or will contain all statements required to be stated therein in
       accordance with, and complied or will comply in all material respects
       with the requirements of, the Act, the Exchange Act and the respective
       rules and regulations of the Commission thereunder and (ii) did not or
       will not include any untrue statement of a material fact or omit to state
       any material fact necessary in order to make the statements therein, in
       the light of the circumstances under which they were made, not
       misleading. The foregoing provisions of this paragraph do not apply to
       statements or omissions made in any Preliminary Prospectus or any
       amendment or supplement thereto, the Registration Statement or any
       amendment thereto or the Prospectus or, if required to be filed pursuant
       to Rules 434(c)(2) and 424(b) and the Act, the Integrated Prospectus or
       any amendment or supplement thereto in reliance upon and in conformity
       with written information furnished to the Company by any Underwriter
       through the Representatives specifically for use therein.

       3. Purchase, Sale and Delivery of the Securities.

              (a) On the basis of the representations, warranties, agreements
and covenants herein contained and subject to the terms and conditions herein
set forth, the Company agrees to issue and sell to each of the Underwriters, and
each of the Underwriters, severally and not jointly, agrees to purchase from the
Company, at a purchase price of $[______] per share, the number of Firm
Securities set forth opposite the name of such Underwriter in Schedule 1 hereto.
One or more certificates in definitive form for the Firm Securities that the
several Underwriters have agreed to purchase hereunder, and in such denomination
or denominations and registered in such name or names as the Representatives
request upon notice to the Company at least 48 hours prior to the Firm Closing
Date, shall be delivered by or on behalf of the Company to the Representatives
for the respective accounts of the Underwriters, against payment by or on behalf
of the Underwriters of the



                                      -13-
<PAGE>   14

purchase price therefor by wire transfer in same-day funds (the "Wired Funds")
to the account of the Company. Such delivery of and payment for the Firm
Securities shall be made at the offices of Gray Cary Ware & Freidenrich LLP, 400
Hamilton Avenue, Palo Alto, CA 94301, at 9:30 a.m., New York time, on [_____],
2000, or at such other place, time or date as the Representatives and the
Company may agree upon or as the Representatives may determine pursuant to
Section 9 hereof, such time and date of delivery against payment being herein
referred to as the "Firm Closing Date." The Company will make such certificate
or certificates for the Firm Securities available for checking and packaging by
the Representatives at the offices in New York, New York of the Company's
transfer agent or registrar or of Prudential Securities Incorporated at least 24
hours prior to the Firm Closing Date

              (b) For the purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Securities as contemplated by the
Prospectus, the Company hereby grants to the several Underwriters an option to
purchase, severally and not jointly, the Option Securities. The purchase price
to be paid for any Option Securities shall be the same price per share as the
price per share for the Firm Securities set forth above in paragraph (a) of this
Section 3. The option granted hereby may be exercised as to all or any part of
the Option Securities from time to time within thirty days after the date of the
Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on
the next business day thereafter when the New York Stock Exchange is open for
trading). The Underwriters shall not be under any obligation to purchase any of
the Option Securities prior to the exercise of such option. The Representatives
may from time to time exercise the option granted hereby by giving notice in
writing or by telephone (confirmed in writing) to the Company setting forth the
aggregate principal amount of Option Securities as to which the several
Underwriters are then exercising the option and the date and time for delivery
of and payment for such Option Securities. Any such date of delivery shall be
determined by the Representatives but shall not be earlier than two business
days or later than five business days after such exercise of the option and, in
any event, shall not be earlier than the Firm Closing Date. The time and date
set forth in such notice, or such other time on such other date as the
Representatives and the Company may agree upon or as the Representatives may
determine pursuant to Section 9 hereof, is herein called the "Option Closing
Date" with respect to such Option Securities. Upon exercise of the option as
provided herein, the Company shall become obligated to sell to each of the
several Underwriters, and, subject to the terms and conditions herein set forth,
each of the Underwriters (severally and not jointly) shall become obligated to
purchase from the Company, the same percentage of the total number of the Option
Securities as to which the several Underwriters are then exercising the option
as such Underwriter is obligated to purchase of the aggregate number of Firm
Securities, as adjusted by the Representatives in such manner as they deem
advisable to avoid fractional Shares. If the option is exercised as to all or
any portion of the Option Securities, one or more certificates in definitive
form for such Option Securities, and payment therefor, shall be delivered on the
related Option Closing Date in the manner, and upon the terms and conditions,
set forth in paragraph (a) of this Section 3, except that reference therein to
the Firm Securities and the Firm Closing Date shall be deemed, for purposes of
this paragraph (b), to refer to such Option Securities and Option Closing Date,
respectively.

              (c) The Company hereby acknowledges that the wire transfer by or
on behalf of the Underwriters of the purchase price for any Shares does not
constitute closing of a purchase and sale of the Shares. Only execution and
delivery of a receipt for Shares by the Underwriters indicates



                                      -14-
<PAGE>   15

completion of the closing of a purchase of the Shares from the Company.
Furthermore, in the event that the Underwriters wire funds to the Company prior
to the completion of the closing of a purchase of Shares, the Company hereby
acknowledges that until the Underwriters execute and deliver a receipt for the
Shares, by facsimile or otherwise, the Company will not be entitled to the Wired
Funds and shall return the Wired Funds to the Underwriters as soon as
practicable (by wire transfer of same-day funds) upon demand. In the event that
the closing of a purchase of Shares is not completed and the Wired Funds are not
returned by the Company to the Underwriters on the same day the Wired Funds were
received by the Company, the Company agrees to pay to the Underwriters in
respect of each day the Wired Funds are not returned by it, in same-day funds,
interest on the amount of such Wired Funds in an amount representing the
Underwriters' cost of financing as reasonably determined by Prudential
Securities Incorporated.

              (d) It is understood that any of you, individually and not as one
of the Representatives, may (but shall not be obligated to) make payment on
behalf of any Underwriter or Underwriters for any of the Securities to be
purchased by such Underwriter or Underwriters. No such payment shall relieve
such Underwriter or Underwriters from any of its or their obligations hereunder.

       4. Offering by the Underwriters. Upon your authorization of the release
of the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.

       5. Covenants of the Company and the Selling Securityholders.

              (a) The Company covenants and agrees with each of the Underwriters
that:

                     (i) The Company will use its best efforts to cause the
       Registration Statement, if not effective at the time of execution of this
       Agreement, and any amendments thereto to become effective as promptly as
       possible. If required, the Company will file the Prospectus or any Term
       Sheet that constitutes a part thereof or, each of the Prospectus and any
       amendment or supplement thereto with the Commission in the manner and
       within the time period required by Rule 434 and 424(b) under the Act.
       During any time when a prospectus relating to the Securities is required
       to be delivered under the Act, the Company (i) will comply with all
       requirements imposed upon it by the Act, the Exchange Act and the Trust
       Indenture Act and the respective rules and regulations of the Commission
       thereunder to the extent necessary to permit the continuance of sales of
       or dealings in the Securities in accordance with the provisions hereof
       and of each of the Prospectus and any Integrated Prospectus, as then
       amended or supplemented, and (ii) will not file with the Commission the
       prospectus or the amendment referred to in the third sentence of Section
       2(a)(i) hereof, any amendment or supplement to such prospectus or any
       amendment to the Registration Statement or any Rule 462(b) Registration
       Statement of which the Representatives shall not previously have been
       advised and furnished with a copy for a reasonable period of time prior
       to the proposed filing and as to which filing the Representatives shall
       not have given their consent. The Company will prepare and file with the
       Commission, in accordance with the rules and regulations of the
       Commission, promptly upon request by the Representatives or counsel for
       the Underwriters, any amendments to the Registration Statement or
       amendments



                                      -15-
<PAGE>   16

       or supplements to the Prospectus and any Integrated Prospectus that may
       be necessary or advisable in connection with the distribution of the
       Securities by the several Underwriters, and will use its best efforts to
       cause any such amendment to the Registration Statement to be declared
       effective by the Commission as promptly as possible. The Company will
       advise the Representatives, promptly after receiving notice thereof, of
       the time when the Registration Statement or any amendment thereto has
       been filed or declared effective or the Prospectus and any Integrated
       Prospectus or any amendment or supplement thereto has been filed and will
       provide evidence satisfactory to the Representatives of each such filing
       or effectiveness.

                     (ii) The Company will advise the Representatives, promptly
       after receiving notice or obtaining knowledge thereof, of (i) the
       issuance by the Commission of any stop order suspending the effectiveness
       of the Original Registration Statement or any Rule 462(b) Registration
       Statement or any post-effective amendment thereto or any order directed
       at any document incorporated by reference in the Registration Statement
       or if the Prospectus and any required Integrated Prospectus are or any
       amendment or supplement thereto or any order preventing or suspending the
       use of any Preliminary Prospectus, the Prospectus and any Integrated
       Prospectus or any amendment or supplement thereto, (ii) the suspension of
       the qualification of the Securities for offering or sale in any
       jurisdiction, (iii) the institution, threatening or contemplation of any
       proceeding for any such purpose or (iv) any request made by the
       Commission for amending the Original Registration Statement or any Rule
       462(b) Registration Statement, for amending or supplementing any
       Preliminary Prospectus, the Prospectus and any Integrated Prospectus or
       for additional information. The Company will use its best efforts to
       prevent the issuance of any such stop order and, if any such stop order
       is issued, to obtain the withdrawal thereof as promptly as possible.

                     (iii) The Company will arrange for the qualification of the
       Securities for offering and sale under the securities or blue sky laws of
       such jurisdictions as the Representatives may designate and will continue
       such qualifications in effect for as long as may be necessary to complete
       the distribution of the Securities, provided, however, that in connection
       therewith the Company shall not be required to qualify as a foreign
       corporation or to execute a general consent to service of process in any
       jurisdiction.

                     (iv) If, at any time prior to the later of (i) the final
       date when a prospectus relating to the Securities is required to be
       delivered under the Act or (ii) the Option Closing Date, any event occurs
       as a result of which the Prospectus, as then amended or supplemented,
       would include any untrue statement of a material fact or omit to state a
       material fact necessary in order to make the statements therein, in the
       light of the circumstances under which they were made, not misleading, or
       if for any other reason it is necessary at any time to amend or
       supplement the Prospectus to comply with the Act, the Exchange Act or the
       respective rules or regulations of the Commission thereunder, the Company
       will promptly notify the Representatives thereof and, subject to Section
       5(a) hereof, will prepare and file with the Commission, at the Company's
       expense, an amendment to the Registration Statement, an amendment or
       supplement to the Prospectus or any Integrated Prospectus that corrects
       such statement or omission or effects such compliance.



                                      -16-
<PAGE>   17

                     (v) The Company will, without charge, provide (i) to the
       Representatives and to counsel for the Underwriters a conformed copy of
       the registration statement originally filed with respect to the
       Securities and each amendment thereto (in each case including exhibits
       thereto) or any Rule 462(b) Registration Statement, certified by the
       Secretary or an Assistant Secretary of the Company to be true and
       complete copies thereof as filed with the Commission by electronic
       transmission, (ii) to each other Underwriter, a conformed copy of such
       registration statement or any Rule 462(b) Registration Statement and each
       amendment thereto (in each case without exhibits thereto) and (iii) so
       long as a prospectus relating to the Securities is required to be
       delivered under the Act, as many copies of each Preliminary Prospectus,
       the Prospectus or any Integrated Prospectus or any amendment or
       supplement thereto as the Representatives may reasonably request; without
       limiting the application of clause (iii) of this sentence, the Company,
       not later than (A) 6:00 p.m., New York City time, on the date of
       determination of the public offering price, if such determination
       occurred at or prior to 10:00 a.m., New York City time on such date of
       (B) 2:00 p.m., New York City time, on the business day following the date
       of determination of the public offering price, if such determination
       occurred after 10:00 a.m., New York City time, on such date, will deliver
       to the Underwriters, without charge, as many copies of the Prospectus and
       any amendment or supplement thereto as the Representatives may reasonably
       request for purposes of confirming orders that are expected to settle on
       the Firm Closing Date.

                     (vi) The Company, as soon as practicable, will make
       generally available to its securityholders and to the Representatives a
       consolidated earnings statement of the Company and its subsidiaries that
       satisfies the provisions of Section 11(a) of the Act and Rule 158
       thereunder.

                     (vii) The Company will apply the net proceeds from the sale
       of the Securities as set forth under "Use of Proceeds" in the Prospectus
       or any Integrated Prospectus.

                     (viii) The Company will not, directly or indirectly,
       without the prior written consent of Prudential Securities Incorporated,
       on behalf of the Underwriters, offer, sell, offer to sell, contract to
       sell, pledge, grant any option to purchase or otherwise sell or dispose
       (or announce any offer, sale, offer of sale, contract of sale, pledge,
       grant of any option to purchase or other sale or disposition) of any
       shares of Common Stock or any securities convertible into, or
       exchangeable or exercisable for, shares of Common Stock for a period of
       90 days after the date hereof, except pursuant to this Agreement and
       except for issuances of options pursuant to Company's stock option plan
       and issuances pursuant to the exercise of employee stock options
       outstanding on the date hereof, pursuant to the Company's employee stock
       purchase plan, pursuant to the Company's dividend reinvestment plan or
       pursuant to the terms of convertible securities of the Company
       outstanding on the date hereof.

                     (ix) The Company will not, directly or indirectly, (i) take
       any action designed to cause or to result in, or that has constituted or
       which might reasonably be expected to constitute, the stabilization or
       manipulation of the price of any security of the Company to facilitate
       the sale or resale of the Securities or (ii) (A) sell, bid for, purchase,
       or pay anyone any compensation for soliciting purchases of, the
       Securities or (B) pay or agree



                                      -17-
<PAGE>   18

       to pay to any person any compensation for soliciting another to purchase
       any other securities of the Company (except for the sale of Securities by
       the Selling Securityholders under this Agreement).

                     (x) The Company will obtain the agreements described in
       Section 7(h) hereof prior to the Firm Closing Date.

                     (xi) If at any time during the 25-day period after the
       Registration Statement becomes effective or the period prior to the
       Option Closing Date, any rumor, publication or event relating to or
       affecting the Company shall occur as a result of which in your opinion
       the market price of the Common Stock has been or is likely to be
       materially affected (regardless of whether such rumor, publication or
       event necessitates a supplement to or amendment of the Prospectus and any
       Integrated Prospectus), the Company will, after notice from you advising
       the Company to the effect set forth above and in consultation with
       Company counsel, forthwith prepare, consult with you concerning the
       substance of, and disseminate a press release or other public statement,
       reasonably satisfactory to you, responding to or commenting on such
       rumor, publication or event.

                     (xii) If the Company elects to rely on Rule 462(b), the
       Company shall both file a Rule 462(b) Registration Statement with the
       Commission in compliance with Rule 462(b) and pay the applicable fees in
       accordance with Rule 111 promulgated under the Act by the earlier of (i)
       10:00 p.m. New York time on the date of this Agreement and (ii) the time
       confirmations are sent or given, as specified by Rule 462(b)(2).

                     (xiii) The Company will cause the Securities to be duly
       included for quotation on The Nasdaq Stock Market's National Market (the
       "Nasdaq National Market") prior to the Firm Closing Date. The Company
       will ensure that the Securities remain included for quotation on the
       Nasdaq National Market following the Firm Closing Date.

              (b) Each Selling Securityholder covenants and agrees with each of
the several Underwriters that:

                     (i) Each Selling Securityholder will not, directly or
       indirectly, without the prior written consent of Prudential Securities
       Incorporated, offer, sell, offer to sell, contract to sell, pledge, grant
       any option to purchase or otherwise sell or dispose (or announce any
       offer, sale, offer of sale, contract of sale, pledge, grant of any option
       to purchase or other sale or disposition) of any Securities legally or
       beneficially owned by such Selling Securityholder or any securities
       convertible into, or exchangeable or exercisable for, Securities for a
       period of 90 days after the date hereof.

                     (ii) Each Selling Securityholder will not, directly or
       indirectly, (i) take any action designed to cause or result in, or that
       has constituted or which might reasonably be expected to constitute, the
       stabilization or manipulation of the price of any security of the Company
       to facilitate the sale or resale of the Securities or (ii) (A) sell, bid
       for, purchase, or pay anyone any compensation for soliciting purchases
       of, the Securities or (B) pay or agree to pay to any person any
       compensation for soliciting another to purchase any other securities



                                      -18-
<PAGE>   19

       of the Company (except for the sale of Securities by the Selling
       Securityholders under this Agreement).

       6. Expenses. The Company will pay all costs and expenses incident to the
performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including all costs and expenses incident to (i)
the printing or other production of documents with respect to the transactions,
including any costs of printing the registration statement originally filed with
respect to the Securities and any amendment thereto, any Rule 462(b)
Registration Statement, any Preliminary Prospectus, the Prospectus and any
Integrated Prospectus and any amendment or supplement thereto, this Agreement
and any blue sky memoranda, (ii) all arrangements relating to the delivery to
the Underwriters of copies of the foregoing documents, (iii) the fees and
disbursements of the counsel, accountants and any other experts or advisors
retained by the Company, (iv) preparation, issuance and delivery to the
Underwriters of any certificates evidencing the Securities, including transfer
agent's and registrar's fees, (v) the qualification of the Securities under
state securities and blue sky laws, including filing fees and fees and
disbursements of counsel for the Underwriters relating thereto, (vi) the filing
fees of the Commission (and the National Association of Securities Dealers,
Inc.) relating to the Securities, (vii) the quotation of the Securities on the
Nasdaq National Market, (viii) meetings with prospective investors in the
Securities (other than shall have been specifically approved by the
Representatives to be paid for by the Underwriters) and (ix) advertising
relating to the offering of the Securities (other than shall have been
specifically approved by the Representatives to be paid for by the
Underwriters). If the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 7 hereof is not satisfied, because this Agreement is terminated
pursuant to Section 11 hereof or because of any failure, refusal or inability on
the part of the Company to perform all obligations and satisfy all conditions on
its part to be performed or satisfied hereunder other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally upon demand for all out-of-pocket expenses (including fees and
disbursements of counsel) that shall have been incurred by them in connection
with the proposed purchase and sale of the Securities. The Company shall not in
any event be liable to any of the Underwriters for the loss of anticipated
profits from the transactions covered by this Agreement.

       7. Conditions of the Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company contained herein as of the date
hereof and as of the Firm Closing Date, as if made on and as of the Firm Closing
Date, to the accuracy of the statements of the Company's officers made pursuant
to the provisions hereof, to the performance by the Company of its covenants and
agreements hereunder and to the following additional conditions:

              (a) If the Original Registration Statement or any amendment
thereto filed prior to the Firm Closing Date has not been declared effective as
of the time of execution hereof, and, if the Company has elected to rely upon
Rule 462(b), the Rule 462(b) Registration Statement shall have been declared
effective not later than the earlier of (i) 11:00 a.m., New York time, on the
date on which the amendment to the registration statement originally filed with
respect to the Securities or to the Registration Statement, as the case may be,
containing information regarding the initial public



                                      -19-
<PAGE>   20

offering price of the Securities has been filed with the Commission and (ii) the
time confirmations are sent or given as specified by Rule 462(b)(2), or with
respect to the Original Registration Statement, or such later time and date as
shall have been consented to by the Representatives; if required, the Prospectus
or any Term Sheet that constitutes a part thereof and any Integrated Prospectus
and any amendment or supplement thereto shall have been filed with the
Commission in the manner and within the time period required by Rule 434 and
424(b) under the Act; no stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto and no order
directed at any document incorporated by reference in the Registration
Statement, the Prospectus or any Integrated Prospectus or any amendment or
supplement thereto shall have been issued and no proceedings for that purpose
shall have been instituted or threatened or, to the knowledge of the Company or
the Representatives, shall be contemplated by the Commission; and the Company
shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement, the Prospectus or any
Integrated Prospectus or otherwise).

              (b) The Representatives shall have received an opinion, dated the
Firm Closing Date, of Gray Cary Ware & Freidenrich LLP, counsel for the Company
and the Selling Securityholders, to the effect that:

                     (i) the Company and each of its U.S. subsidiaries listed in
       Schedule 4 hereto (the "Subsidiaries") have been duly incorporated and
       are validly existing as corporations in good standing under the laws of
       their respective jurisdictions of incorporation and are duly qualified to
       transact business as foreign corporations and are in good standing under
       the laws of all other jurisdictions where the ownership or leasing of
       their respective properties or the conduct of their respective businesses
       requires such qualification, except where the failure to be so qualified
       does not amount to a material liability or disability to the Company and
       the Subsidiaries, taken as a whole;

                     (ii) the Company and each of the Subsidiaries have
       corporate power to own or lease their respective properties and conduct
       their respective businesses as described in the Registration Statement
       and the Prospectus or any Integrated Prospectus, and the Company has
       corporate power to enter into this Agreement and to carry out all the
       terms and provisions hereof and thereof to be carried out by it;

                     (iii) the issued shares of capital stock of each of the
       Subsidiaries have been duly authorized and validly issued, are fully paid
       and nonassessable and, except for directors' qualifying shares and as
       otherwise set forth in each of the Prospectus and any Integrated
       Prospectus, are owned beneficially by the Company free and clear of any
       perfected security interests or, to the best knowledge of such counsel,
       any other security interests, liens, encumbrances, equities or claims;

                     (iv) the Company has an authorized, issued and outstanding
       capitalization as set forth in each of the Prospectus or any Integrated
       Prospectus; all of the issued shares of capital stock of the Company have
       been duly authorized and validly issued and are fully paid and
       nonassessable, have been issued in compliance with all applicable federal
       and state securities laws and were not issued in violation of or subject
       to any preemptive rights or other rights to subscribe for or purchase
       securities; the Firm Securities to be sold by the Company



                                      -20-
<PAGE>   21

       have been duly authorized by all necessary corporate action of the
       Company and, when issued and delivered to and paid for by the
       Underwriters pursuant to this Agreement, will be validly issued, fully
       paid and nonassessable; the Securities have been duly included for
       trading on the Nasdaq National Market; no holders of outstanding shares
       of capital stock of the Company are entitled as such to any preemptive or
       other rights to subscribe for any of the Securities; and no holders of
       securities of the Company are entitled to have such securities registered
       under the Registration Statement;

                     (v) the statements set forth under the heading "Description
       of Capital Stock" in each of the Prospectus and any Integrated
       Prospectus, insofar as such statements purport to summarize certain
       provisions of the capital stock of the Company, provide a fair summary of
       such provisions;

                     (vi) the execution and delivery of this Agreement have been
       duly authorized by all necessary corporate action of the Company and this
       Agreement has been duly executed and delivered by the Company;

                     (vii) no legal or governmental proceedings are pending to
       which the Company or any of the Subsidiaries is a party or to which the
       property of the Company or any of the Subsidiaries is subject that are
       required to be described in the Registration Statement, the Prospectus
       and any Integrated Prospectus and are not described therein, and, to the
       best knowledge of such counsel, no such proceedings have been threatened
       against the Company or any of the Subsidiaries or with respect to any of
       their respective properties; and no contract or other document is
       required to be described in the Registration Statement, the Prospectus
       and any Integrated Prospectus or to be filed as an exhibit to the
       Registration Statement that is not described therein or filed as
       required;

                     (viii) the issuance, offering and sale of the Securities to
       the Underwriters by the Company pursuant to this Agreement, the
       compliance by the Company with the other provisions of this Agreement and
       the consummation of the other transactions herein contemplated do not (A)
       require the consent, approval, authorization, registration or
       qualification of or with any governmental authority, except such as have
       been obtained and such as may be required under state securities or blue
       sky laws, or (B) conflict with or result in a breach or violation of any
       of the terms and provisions of, or constitute a default under, any
       indenture, mortgage, deed of trust, lease or other agreement or
       instrument, known to such counsel, to which the Company or any of the
       Subsidiaries is a party or by which the Company or any of the
       Subsidiaries or any of their respective properties are bound, or the
       charter documents or by-laws of the Company or any of the Subsidiaries,
       or any statute or any judgment, decree, order, rule or regulation of any
       court or other governmental authority or any arbitrator known to such
       counsel and applicable to the Company or any of the Subsidiaries;

                     (ix) the Registration Statement is effective under the Act;
       any required filing of the Prospectus, or any Term Sheet that constitutes
       a part thereof, and any Integrated Prospectus pursuant to Rules 434 and
       424(b) has been made in the manner and within the time period required by
       Rules 434 and 424(b); and no stop order suspending the effectiveness



                                      -21-
<PAGE>   22

       of the Registration Statement or any post-effective amendment thereto and
       no order directed at any document incorporated by reference in the
       Registration Statement, the Prospectus and any Integrated Prospectus or
       any amendment or supplement thereto has been issued, and no proceedings
       for that purpose have been instituted or threatened or, to the best
       knowledge of such counsel, are contemplated by the Commission; and

                     (x) the Registration Statement originally filed with
       respect to the Securities and each amendment thereto and any Rule 462(b)
       Registration Statement, the Prospectus and any Integrated Prospectus (in
       each case, including the documents incorporated by reference therein but
       not including the financial statements and other financial information
       contained therein, as to which such counsel need express no opinion)
       comply as to form in all material respects with the applicable
       requirements of the Act, the Exchange Act and the respective rules and
       regulations of the Commission thereunder.

                     (xi) in the case of each Selling Securityholder that is a
       corporation, such Selling Securityholder has full corporate power to
       enter into this Agreement, the Custody Agreement and the Power of
       Attorney and to sell, transfer and deliver the Securities being sold by
       such Selling Securityholder hereunder in the manner provided in this
       Agreement and to perform its obligations under the Custody Agreement; the
       execution and delivery of this Agreement, the Custody Agreement and the
       Power of Attorney have been duly authorized by all necessary corporate
       action of each Selling Securityholder; this Agreement, the Custody
       Agreement and the Power of Attorney have been duly executed and delivered
       by each Selling Securityholder; assuming due authorization, execution and
       delivery by the Custodian, the Custody Agreement and the Power of
       Attorney are the legal, valid, binding and enforceable instruments of
       such Selling Securityholder, subject to applicable bankruptcy, insolvency
       and similar laws affecting creditors' rights generally and subject, as to
       enforceability, to general principles of equity (regardless of whether
       enforcement is sought in a proceeding in equity or at law);

                     (xii) upon delivery of and payment for the Securities to be
       sold by each Selling Securityholder as contemplated by this Agreement,
       the Underwriters will be "protected purchasers" within the meaning of
       Division 8 of the Uniform Commercial Code, and will acquire their
       interests therein free of any "adverse claim" within the meaning of
       Division 8 of the Uniform Commercial Code, provided that the Underwriters
       are purchasing such Securities in good faith and without notice of any
       such adverse claim;

                     (xiii) the sale of the Securities to the Underwriters by
       such Selling Securityholder pursuant to this Agreement, the compliance by
       such Selling Securityholder with the other provisions of this Agreement,
       the Custody Agreement and the consummation of the other transactions
       herein contemplated do not (i) require the consent, approval,
       authorization, registration or qualification of or with any governmental
       authority, except such as have been obtained and such as may be required
       under state securities or blue sky laws, or (ii) conflict with or result
       in a breach or violation of any of the terms and provisions of, or
       constitute a default under any indenture, mortgage, deed of trust, lease
       or other agreement or instrument to which such Selling Securityholder or
       any of its subsidiaries is a party or by which such Selling
       Securityholder or any of its subsidiaries or any of such Selling



                                      -22-
<PAGE>   23

       Securityholder's their respective properties are bound, or the charter
       documents or by laws of such Selling Securityholder or any of its
       subsidiaries or any statute or any judgment, decree, order, rule or
       regulation of any court or other governmental authority or any arbitrator
       applicable to such Selling Securityholder or any of its subsidiaries.

       Such counsel shall also state that they have no reason to believe that
the Registration Statement, other than the financial statements, including
supporting schedules and other financial and statistical information contained
therein as to which they make no comment, as of its effective date, contained
any untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus and any Integrated Prospectus, as of its date
or the date of such opinion, included or includes any untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.

       In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company, the Selling Securityholders and public officials, and
copies of such opinion shall be delivered to the Representatives and counsel for
the Underwriters..

       References to the Registration Statement and the Prospectus and any
Integrated Prospectus in this paragraph (b) shall include any amendment or
supplement thereto at the date of such opinion.

              (c) The Representatives shall have received an opinion, dated the
Firm Closing Date, of [_________], counsel for the Company in China, to the
effect that:

                     (i) Beijing Tongmeixtal Technology Co., Ltd (AXT-TM) (the
       "Chinese Subsidiary") has been duly incorporated and is validly existing
       as a corporation in good standing under the laws of its jurisdiction of
       incorporation and is duly qualified to transact business as a foreign
       corporation and is in good standing under the laws of all other
       jurisdictions where the ownership or leasing of its properties or the
       conduct of its business requires such qualification, except where the
       failure to be so qualified does not amount to a material liability or
       disability to the Company and its subsidiaries, taken as a whole;

                     (ii) The Chinese Subsidiary has corporate power to own or
       lease its properties and conduct its business as described in the
       Registration Statement and the Prospectus or any Integrated Prospectus;

                     (iii) the issued shares of capital stock of the Chinese
       Subsidiary have been duly authorized and validly issued, are fully paid
       and nonassessable and, except for directors' qualifying shares and as
       otherwise set forth in each of the Prospectus and any Integrated
       Prospectus, are owned beneficially by the Company free and clear of any
       perfected security interests or, to the best knowledge of such counsel,
       any other security interests, liens, encumbrances, equities or claims;



                                      -23-
<PAGE>   24

                     (iv) no legal or governmental proceedings are pending to
       which the Chinese Subsidiary is a party or to which the property of the
       Chinese Subsidiary is subject that are required to be described in the
       Registration Statement, the Prospectus or any Integrated Prospectus and
       are not described therein, and, to the best knowledge of such counsel, no
       such proceedings have been threatened against the Chinese Subsidiary or
       with respect to its properties; and

                     (v) the issuance, offering and sale of the Securities to
       the Underwriters by the Company pursuant to this Agreement, the
       compliance by the Company with the other provisions of this Agreement and
       the consummation of the other transactions herein contemplated do not
       conflict with or result in a breach or violation of any of the terms and
       provisions of, or constitute a default under, any indenture, mortgage,
       deed of trust, lease or other agreement or instrument known to such
       counsel to which the Chinese Subsidiary is a party or by which the Hong
       Kong Subsidiary or any of its properties are bound, or the charter
       documents or by-laws of the Chinese Subsidiary, or any statute or any
       judgment, decree, order, rule or regulation of any court or other
       governmental authority or any arbitrator known to such counsel and
       applicable to the Chinese Subsidiary.

       In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials.

       References to the Registration Statement and the Prospectus and any
Integrated Prospectus in this paragraph (c) shall include any amendment or
supplement thereto at the date of such opinion.

              (d) The Representatives shall have received an opinion, dated the
Firm Closing Date, of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Rd., Palo
Alto, CA 94304, counsel for the Underwriters, with respect to the issuance and
sale of the Firm Securities, the Registration Statement, the Prospectus or any
Integrated Prospectus, and such other related matters as the Representatives may
reasonably require, and the Company shall have furnished to such counsel such
documents as they may reasonably request for the purpose of enabling them to
pass upon such matters. In rendering such opinion, such counsel may rely as to
all matters of law upon the opinion of referred to in paragraphs (b) and (c)
above.

              (e) The Representatives shall have received from
PricewaterhouseCoopers LLP a letter or letters dated, respectively, the date
hereof and the Firm Closing Date, in form and substance satisfactory to the
Representatives, to the effect that:

                     (i) they are independent accountants with respect to the
       Company and its consolidated subsidiaries within the meaning of the Act,
       the Exchange Act and the applicable rules and regulations thereunder;

                     (ii) in their opinion, the audited consolidated financial
       statements and schedules examined by them and included in the
       Registration Statement, the Prospectus and any Integrated Prospectus
       comply in form in all material respects with the applicable accounting
       requirements of the Act, the Exchange Act and the related published rules
       and regulations thereunder;



                                      -24-
<PAGE>   25

                     (iii) on the basis of their limited review in accordance
       with standards established by the American Institute of Certified Public
       Accountants of any interim unaudited consolidated condensed financial
       statements of the Company and its consolidated subsidiaries as indicated
       in their reports incorporated in the Registration Statement, the
       Prospectus and any Integrated Prospectus, and of the unaudited
       consolidated financial statements of the Company and its consolidated
       subsidiaries for the periods from which such amounts are derived,
       carrying out certain specified procedures (which do not constitute an
       examination made in accordance with generally accepted auditing
       standards) that would not necessarily reveal matters of significance with
       respect to the comments set forth in this paragraph (iii), a reading of
       the minute books of the shareholders, the board of directors and any
       committees thereof of the Company and each of its consolidated
       subsidiaries, and inquiries of certain officials of the Company and its
       consolidated subsidiaries who have responsibility for financial and
       accounting matters, nothing came to their attention that caused them to
       believe that:

                          (A) the unaudited consolidated condensed financial
              statements of the Company and its consolidated subsidiaries
              included in the Registration Statement, the Prospectus and any
              Integrated Prospectus do not comply in form in all material
              respects with the applicable accounting requirements of the Act,
              the Exchange Act and the related published rules and regulations
              thereunder, or are not in conformity with generally accepted
              accounting principles applied on a basis substantially consistent
              with that of the audited consolidated financial statements
              included in the Registration Statement and the Prospectus and any
              Integrated Prospectus;

                           (B) at a specific date not more than five business
              days prior to the date of such letter, there were any changes in
              the capital stock or long-term debt of the Company and its
              consolidated subsidiaries or any decreases in net current assets
              or stockholders' equity of the Company and its consolidated
              subsidiaries, in each case compared with amounts shown on the June
              30, 2000 audited consolidated balance sheet included in the
              Registration Statement, the Prospectus and any Integrated
              Prospectus, or for the period from July 1, 2000 to such specified
              date there were any decreases, as compared with the six months
              ended June 30, 2000, in revenue, gross profit, income before
              income taxes or total or per share amounts of net income of the
              Company and its consolidated subsidiaries, except in all instances
              for changes, decreases or increases set forth in such letter; and

                     (iv) they have carried out certain specified procedures,
       not constituting an audit, with respect to certain amounts, percentages
       and financial information that are derived from the general accounting
       records of the Company and its consolidated subsidiaries and are included
       in the Registration Statement, the Prospectus and any Integrated
       Prospectus under the captions "Summary Consolidated Financial Data,"
       "Capitalization," "Selected Consolidated Financial Data" and
       "Management's Discussion and Analysis of Financial Condition and Results
       of Operations" and in Exhibit II to the Registration Statement, and have
       compared such amounts, percentages and financial information with such
       records of the Company and its consolidated subsidiaries and with
       information derived from such records and have found them to be in
       agreement, excluding any questions of legal interpretation.



                                      -25-
<PAGE>   26

       In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representatives, make
it impractical or inadvisable to proceed with the purchase and delivery of the
Securities as contemplated by the Registration Statement, as amended as of the
date hereof.

       References to the Registration Statement, the Prospectus and any
Integrated Prospectus in this paragraph (e) with respect to either letter
referred to above shall include any amendment or supplement thereto at the date
of such letter.

              (f) The Representatives shall have received a certificate, dated
the Firm Closing Date, of Morris S. Young and Donald L. Tatzin of the Company to
the effect that:

                     (i) the representations and warranties of the Company in
       this Agreement are true and correct as if made on and as of the Firm
       Closing Date; the Registration Statement, as amended as of the Firm
       Closing Date, does not include any untrue statement of a material fact or
       omit to state any material fact necessary to make the statements therein
       not misleading, the Prospectus and any Integrated Prospectus, as amended
       or supplemented as of the Firm Closing Date, does not include any untrue
       statement of a material fact or omit to state any material fact necessary
       in order to make the statements therein, in the light of the
       circumstances under which they were made, not misleading; and the Company
       has performed all covenants and agreements and satisfied all conditions
       on its part to be performed or satisfied at or prior to the Firm Closing
       Date;

                     (ii) no stop order suspending the effectiveness of the
       Registration Statement or any post-effective amendment thereto and no
       order directed at any document incorporated by reference in the
       Registration Statement or the Prospectus or any amendment or supplement
       thereto has been issued, and no proceedings for that purpose have been
       instituted or threatened or, to the best of the Company's knowledge, are
       contemplated by the Commission; and

                     (iii) subsequent to the respective dates as of which
       information is given in the Registration Statement, the Prospectus and
       any Integrated Prospectus, neither the Company nor any of its
       Subsidiaries has sustained any material loss or interference with their
       respective businesses or properties from fire, flood, hurricane, accident
       or other calamity, whether or not covered by insurance, or from any labor
       dispute or any legal or governmental proceeding, and there has not been
       any material adverse change, or any development involving a prospective
       material adverse change, in the condition (financial or otherwise),
       management, business prospects, net worth or results of operations of the
       Company or any of its subsidiaries, except in each case as described in
       or contemplated by the Prospectus and any Integrated Prospectus.

              (g) The Representatives shall have received a certificate from
Selling Securityholder, dated the Closing Date, to the effect that:



                                      -26-
<PAGE>   27

                     (i) the representations and warranties of such Selling
       Securityholder in this Agreement are true and correct as if made on and
       as of the Closing Date;

                     (ii) to the extent that any statements or omissions are
       made in the Registration Statement, any Preliminary Prospectus, the
       Prospectus or any amendment or supplement thereto in reliance upon and in
       conformity with written information furnished to the Company by such
       Selling Securityholder specifically for use therein, the Registration
       Statement, as amended as of the Closing Date, does not include any untrue
       statement of a material fact or omit to state any material fact necessary
       to make the statements therein not misleading, and the Prospectus, as
       amended or supplemented as of the Closing Date, does not include any
       untrue statement of a material fact or omit to state any material fact
       necessary in order to make the statements therein, in the light of the
       circumstances under which they were made, not misleading; and

                     (iii) such Selling Securityholder has performed all
       covenants and agreements on its part to be performed or satisfied at or
       prior to the Closing Date.

              (h) The Representatives shall have received from each person who
is a director or officer of the Company, and from the Selling Securityholders,
an agreement to the effect that such person will not, directly or indirectly,
without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters, offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or dispose (or announce
any offer, sale, offer of sale, contract of sale, pledge, grant of an option to
purchase or other sale or disposition) of any shares of Common Stock or any
securities convertible into, or exchangeable or exercisable for, shares of
Common Stock for a period of 90 days after the date of this Agreement.

              (i) The Company shall have sent a letter (a copy of which shall
have been provided to the Representatives) to each person who purchased Company
Common Stock pursuant to the [private placement offering], requesting that each
such person will not, directly or indirectly, without the prior written consent
of Prudential Securities Incorporated, on behalf of the Underwriters, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of an option to purchase or other sale or disposition) of
any shares of Common Stock or any securities convertible into, or exchangeable
or exercisable for, shares of Common Stock until the resale Registration
Statement filed in connection with [private placement offering] becomes
effective.

              (j) On or before the Firm Closing Date, the Representatives and
counsel for the Underwriters shall have received such further certificates,
documents or other information as they may have reasonably requested from the
Company.

              (k) Prior to the commencement of the offering of the Securities,
the Securities shall have been included for trading on the Nasdaq National
Market.

       All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the



                                      -27-
<PAGE>   28

Representatives such conformed copies of such opinions, certificates, letters
and documents in such quantities as the Representatives and counsel for the
Underwriters shall reasonably request.

       The respective obligations of the several Underwriters to purchase and
pay for any Option Securities shall be subject, in their discretion, to each of
the foregoing conditions to purchase the Firm Securities, except that all
references to the Firm Securities and the Firm Closing Date shall be deemed to
refer to such Option Securities and the related Option Closing Date,
respectively.

       8. Indemnification and Contribution.

              (a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter or such controlling person may become subject under the Act, the
Exchange Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon:

                     (i) any untrue statement or alleged untrue statement made
       by the Company or such Selling Securityholder in Section 2 of this
       Agreement,

                     (ii) any untrue statement or alleged untrue statement of
       any material fact contained in (A) the Registration Statement or any
       amendment thereto or any Preliminary Prospectus or the Prospectus or any
       amendment or supplement thereto or (B) any application or other document,
       or any amendment or supplement thereto, executed by the Company or such
       Selling Securityholder or based upon written information furnished by or
       on behalf of the Company or such Selling Securityholder filed in any
       jurisdiction in order to qualify the Securities under the securities or
       blue sky laws thereof or filed with the Commission or any securities
       association or securities exchange (each an "Application"),

                     (iii) the omission or alleged omission to state in the
       Registration Statement or any amendment thereto, any Preliminary
       Prospectus or the Prospectus or any amendment or supplement thereto, or
       any Application a material fact required to be stated therein or
       necessary to make the statements therein not misleading or

                     (iv) any untrue statement or alleged untrue statement of
       any material fact contained in any audio or visual materials prepared by
       the Company or based upon information furnished by or on behalf of the
       Company used in connection with the marketing of the Securities,
       including without limitation, slides, videos, films, tape recordings and
       statements communicated to securities analysts employed by the
       Underwriters,

       and will reimburse, as incurred, each Underwriter and each such
controlling person for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending against or appearing as a third party witness in connection with any
such loss, claim, damage, liability or action; provided, however, that the
Company and such Selling Securityholder will not be liable in any such case to
the extent that any such loss, claim, damage or liability arises out of or is
based upon any untrue statement or alleged untrue statement or



                                      -28-
<PAGE>   29

omission or alleged omission made in such registration statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or any Application in reliance upon and in conformity
with written information furnished to the Company by any Underwriter through the
Representatives specifically for use therein; and provided, further, that the
Company and such Selling Securityholder will not be liable to any Underwriter or
any person controlling such Underwriter with respect to any such untrue
statement or omission made in any Preliminary Prospectus that is corrected in
the Prospectus (or any amendment or supplement thereto) if the person asserting
any such loss, claim, damage or liability purchased Securities from such
Underwriter but was not sent or given a copy of the Prospectus (as amended or
supplemented), other than the documents incorporated by reference therein at or
prior to the written confirmation of the sale of such Securities to such person
in any case where such delivery of the Prospectus (as amended or supplemented)
is required by the Act, unless such failure to deliver the Prospectus (as
amended or supplemented) was a result of noncompliance by the Company with
Section 5(d) and (e) of this Agreement. This indemnity agreement will be in
addition to any liability which the Company and such Selling Securityholder may
otherwise have. Neither the Company nor any Selling Securityholder will, without
the prior written consent of the Underwriter or Underwriters purchasing, in the
aggregate, more than fifty percent (50%) of the Securities, settle or compromise
or consent to the entry of any judgment in any pending or threatened claim,
action, suit or proceeding in respect of which indemnification may be sought
hereunder (whether or not any such Underwriter or any person who controls any
such Underwriter within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act is a party to such claim, action, suit or proceeding), unless
such settlement, compromise or consent includes an unconditional release of all
of the Underwriters and such controlling persons from all liability arising out
of such claim, action, suit or proceeding.

              (b) Each Selling Securityholder jointly and severally agrees to
indemnify and hold harmless the Company, each of its directors, each of its
officers who signs the Registration Statement, each Underwriter and each person
who controls the Company or any Underwriter within the meaning of the Act or the
Exchange Act against any losses, claims, damages or liabilities to which the
Company, any such director, officer, such Underwriter or any such controlling
person may become subject under the Act, the Exchange Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon

                     (i) any untrue statement or alleged untrue statement made
       in Section 2(b) of this Agreement;

                     (ii) any untrue statement or alleged untrue statement of
       any material fact contained in the Registration Statement or any
       amendment thereto, any Preliminary Prospectus or the Prospectus or any
       amendment or supplement thereto, or any Application or

                     (iii) the omission or the alleged omission to state therein
       a material fact required to be stated in the Registration Statement or
       any amendment thereto, any Preliminary Prospectus or the Prospectus or
       any amendment or supplement thereto, or any Application or necessary to
       make the statements therein not misleading, in each case to the extent,
       but only to the extent, that such untrue statement or alleged untrue
       statement or omission or alleged omission was made in reliance upon and
       in conformity with written information furnished to the Company by such
       Selling Securityholder for use therein;



                                      -29-
<PAGE>   30

       provided, however, that such Selling Securityholder will not be liable to
       any Underwriter or any person controlling such Underwriter with respect
       to any such untrue statement or omission made in any Preliminary
       Prospectus that is corrected in the Prospectus (or any amendment or
       supplement thereto) if the person asserting any such loss, claim, damage
       or liability purchased Securities from such Underwriter but was not sent
       or given a copy of the Prospectus (as amended or supplemented) at or
       prior to the written confirmation of the sale of such Securities to such
       person in any case where such delivery of the Prospectus (as amended or
       supplemented) is required by the Act, unless such failure to deliver the
       Prospectus (as amended or supplemented) was a result of noncompliance by
       the Company with Section 5(a)(iv) and 5(a)(v) of this Agreement;

       and, subject to the limitation set forth immediately preceding this
clause, will reimburse, as incurred, any legal or other expenses reasonably
incurred by the Company, any such director, officer, such Underwriter or any
such controlling person in connection with investigating or defending any such
loss, claim, damage, liability or any action in respect thereof. This indemnity
agreement will be in addition to any liability which any Selling Securityholder
may otherwise have. Each Selling Securityholder will not, without the prior
written consent of the Underwriter or Underwriters purchasing, in the aggregate,
more than fifty percent (50%) of the Securities, settle or comprise or consent
to the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not any such Underwriter or any person who controls any such Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of all of the
Underwriters and such controlling persons from all liability arising out of such
claim, action, suit or proceeding.

              (c) Each Underwriter will, severally and not jointly, indemnify
and hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, each Selling Securityholder and each person,
if any, who controls the Company or such Selling Securityholder within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act against any
losses, claims, damages or liabilities to which the Company, any such director
or officer of the Company, such Selling Securityholder or any such controlling
person of the Company or such Selling Securityholder may become subject under
the Act, the Exchange Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or any Application or (ii) the omission or the alleged omission to state therein
a material fact required to be stated in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or any Application or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein; and, subject to the limitation set forth
immediately preceding this clause, will reimburse, as incurred, any legal or
other expenses reasonably incurred by the Company, any such director, officer or
controlling person or such Selling Securityholder in connection with
investigating or defending



                                      -30-
<PAGE>   31

any such loss, claim, damage, liability or any action in respect thereof. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.

              (d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section 8. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel satisfactory to such indemnified
party; provided, however, that if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this Section 8 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated by the Representatives in the case of
paragraph (a) of this Section 8, representing the indemnified parties under such
paragraph (a) who are parties to such action or actions) or (ii) the
indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the consent
of the indemnifying party.

              (e) In circumstances in which the indemnity agreement provided for
in the preceding paragraphs of this Section 8 is unavailable or insufficient,
for any reason, to hold harmless an indemnified party in respect of any losses,
claims, damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the offering of the Securities or (ii) if
the allocation provided by the foregoing clause (i) is not permitted by
applicable law, not only such relative benefits but also the relative fault of
the indemnifying party or parties on the one hand and the indemnified party on



                                      -31-
<PAGE>   32

the other in connection with the statements or omissions or alleged statements
or omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Securityholders on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total proceeds from the offering
(before deducting expenses) received by the Company and the Selling
Securityholders bear to the total underwriting discounts and commissions
received by the Underwriters. The relative fault of the parties shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, the Selling
Securityholders or the Underwriters, the parties' relative intents, knowledge,
access to information and opportunity to correct or prevent such statement or
omission, and any other equitable considerations appropriate in the
circumstances. The Company, the Selling Securityholders and the Underwriters
agree that it would not be equitable if the amount of such contribution were
determined by pro rata or per capita allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
that does not take into account the equitable considerations referred to above
in this paragraph (d). Notwithstanding any other provision of this paragraph
(d), no Underwriter shall be obligated to make contributions hereunder that in
the aggregate exceed the total public offering price of the Securities purchased
by such Underwriter under this Agreement, less the aggregate amount of any
damages that such Underwriter has otherwise been required to pay in respect of
the same or any substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11 (f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and contributions among Underwriters shall be governed by the provisions
of the Prudential Securities Incorporated Master Agreement Among Underwriters.
For purposes of this paragraph (d), each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement and each person, if any, who controls the Company or any
Selling Securityholder within the meaning of Section 15 of the Act or Section 20
of the Exchange Act, shall have the same rights to contribution as the Company
or such Selling Securityholder, as the case may be.

              (f) The liability of each Selling Securityholder under this
Section 8 shall not exceed an amount equal to the purchase price per share set
forth in Section 3 hereof multiplied by the number of the Securities sold by
such Selling Securityholder.

       9. Default of Underwriters. If one or more Underwriters default in their
obligations to purchase Firm Securities or Option Securities hereunder and the
aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments



                                      -32-
<PAGE>   33

hereunder to purchase the Firm Securities or Option Securities that such
defaulting Underwriter or Underwriters agreed but failed to purchase. If one or
more Underwriters so default with respect to an aggregate number of Securities
that is more than ten percent of the aggregate number of Firm Securities or
Option Securities, as the case may be, to be purchased by all of the
Underwriters at such time hereunder, and if arrangements satisfactory to the
Representatives are not made within 36 hours after such default for the purchase
by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company other than as provided
in Section 10 hereof. In the event of any default by one or more Underwriters as
described in this Section 9, the Representatives shall have the right to
postpone the Firm Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 3 hereof for not more than seven business
days in order that any necessary changes may be made in the arrangements or
documents for the purchase and delivery of the Firm Securities or Option
Securities, as the case may be. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 9. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.

       10. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, its officers and the
several Underwriters set forth in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement shall remain in full force and
effect, regardless of (i) any investigation made by or on behalf of the Company,
any of its officers or directors, any Underwriter or any controlling person
referred to in Section 8 hereof and (ii) delivery of and payment for the
Securities. The respective agreements, covenants, indemnities and other
statements set forth in Sections 6 and 8 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement.

       11. Termination.

              (a) This Agreement may be terminated with respect to the Firm
Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company given prior to the Firm Closing Date or
the related Option Closing Date, respectively, in the event that the Company
shall have failed, refused or been unable to perform all obligations and satisfy
all conditions on its part to be performed or satisfied hereunder at or prior
thereto or, if at or prior to the Firm Closing Date or such Option Closing Date,
respectively,

                     (i) the Company or any of its subsidiaries shall have, in
       the sole judgment of the Representatives, sustained any material loss or
       interference with their respective businesses or properties from fire,
       flood, hurricane, accident or other calamity, whether or not covered by
       insurance, or from any labor dispute or any legal or governmental
       proceeding or there shall have been any material adverse change, or any
       development involving a prospective material adverse change (including
       without limitation a change in management or control of the Company), in
       the condition (financial or otherwise), business prospects, net worth or
       results of operations of the Company and its subsidiaries, except in each
       case as described in or contemplated by the Prospectus (exclusive of any
       amendment or supplement thereto);



                                      -33-
<PAGE>   34

                     (ii) trading in the Common Stock shall have been suspended
       by the Commission or the Nasdaq National Market or trading in securities
       generally on the New York Stock Exchange or the Nasdaq National Market
       shall have been suspended or minimum or maximum prices shall have been
       established on either any such exchange or (market) system,

                     (iii) a banking moratorium shall have been declared by New
       York or United States authorities; or

                     (iv) there shall have been (A) an outbreak or escalation of
       hostilities between the United States and any foreign power, (B) an
       outbreak or escalation of any other insurrection or armed conflict
       involving the United States or (C) any other calamity or crisis or
       material adverse change in general economic, political or financial
       conditions having an effect on the U. S. financial markets that, in the
       sole judgment of the Representatives, makes it impractical or inadvisable
       to proceed with the public offering or the delivery of the Securities as
       contemplated by the Registration Statement, as amended as of the date
       hereof.

              (b) Termination of this Agreement pursuant to this Section 11
shall be without liability of any party to any other party except as provided in
Section 10 hereof.

       12. Information Supplied by Underwriters. The statements set forth under
the heading "Underwriting" in any Preliminary Prospectus, the Prospectus or any
Integrated Prospectus (to the extent such statements relate to the Underwriters)
constitute the only information furnished by any Underwriter through the
Representatives to the Company for the purposes of Sections 2(b) and 8 hereof.
The Underwriters confirm that such statements (to such extent) are correct.

       13. Notices. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Prudential Securities
Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity
Transactions Group; and if sent to the Company, shall be delivered or sent by
mail, telex or facsimile transmission and confirmed in writing to the Company at
AXT, Inc., 4821 Technology Drive, Fremont, CA 94538, (510) 683-5901 (facsimile).

       14. Successors. This Agreement shall inure to the benefit of and shall be
binding upon the several Underwriters, the Company and their respective
successors and legal representatives, and nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any other person any legal
or equitable right, remedy or claim under or in respect of this Agreement, or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that (i)
the indemnities of the Company contained in Section 8 of this Agreement shall
also be for the benefit of any person or persons who control any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
and (ii) the indemnities of the Underwriters contained in Section 8 of this
Agreement shall also be for the benefit of the directors of the Company, the
officers of the Company who have signed the Registration Statement and any
person or persons who control the Company within the meaning of Section 15 of
the Act or Section 20 of



                                      -34-
<PAGE>   35

the Exchange Act. No purchaser of Securities from any Underwriter shall be
deemed a successor because of such purchase.

       15. Applicable Law. The validity and interpretation of this Agreement,
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to any provisions relating to conflicts of laws.

       16. Consent to Jurisdiction and Service of Process. All judicial
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of New York, and
by execution and delivery of this Agreement, the Selling Shareholder accepts for
itself and in connection with its properties, generally and unconditionally, the
nonexclusive jurisdiction of the aforesaid courts and waives any defense of
forum non conveniens and irrevocably agrees to be bound by any judgment rendered
thereby in connection with this Agreement. The Selling Shareholder designates
and appoints [_____], and such other persons as may hereafter be selected by the
Selling Shareholder irrevocable agreeing in writing to so serve, as its agent to
receive on its behalf service of all process in any such proceedings in any such
court, such service being hereby acknowledged by the Selling Shareholder to be
effective and binding service in every respect. A copy of any such process so
served shall be mailed by registered mail to the Selling Securityholder at its
address provided in Section 13 hereof; provided, however, that, unless otherwise
provided by applicable law, any failure to mail such copy shall not affect the
validity of service of such process. If any agent appointed by the Selling
Shareholder refuses to accept service, the Selling Shareholder hereby agrees
that service of process sufficient for personal jurisdiction in any action
against the Selling Shareholder in the State of New York may be made by
registered or certified mail, return receipt requested, to the Selling
Shareholder at its address provided in Section 13 hereof, and the Selling
Shareholder hereby acknowledges that such service shall be effective and binding
in every respect. Nothing herein shall affect the right to serve process in any
other manner permitted by law or shall limit the right of any Underwriter to
bring proceedings against the Selling Shareholder in the courts of any other
jurisdiction.

       17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.



                                      -35-
<PAGE>   36

       If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company and each of the
several Underwriters.

                                        Very truly yours,

                                        AXT, INC.



                                        By
                                          --------------------------------------
                                           Morris S. Young
                                           President and Chief Executive Officer



                                        SELLING STOCKHOLDERS



                                        By
                                          --------------------------------------
                                           [name]
                                           Attorney-in-Fact



The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.


PRUDENTIAL SECURITIES INCORPORATED
CIBC WORLD MARKETS CORP.
WIT SOUNDVIEW CORPORATION
ABN AMRO INCORPORATED
PACIFIC CREST INC.

By PRUDENTIAL SECURITIES INCORPORATED



By
  --------------------------------------------
          Jean-Claude Canfin
          Managing Director


For itself and on behalf of the Representatives.



                                      -36-
<PAGE>   37

                                   SCHEDULE 1

                                  UNDERWRITERS



<TABLE>
<CAPTION>
                                                    Number of Firm
                                                    Securities to
Underwriter                                         be Purchased
- -----------                                         ------------
<S>                                                 <C>
Prudential Securities Incorporated

CIBC World Markets Corp.

Wit SoundView Corporation

ABN AMRO Incorporated

Pacific Crest Inc.


Total
</TABLE>



                                      -37-
<PAGE>   38

                                   SCHEDULE 2

                             SELLING SECURITYHOLDERS



<TABLE>
<CAPTION>
                                                 Number of Firm
                                                 Securities to
Selling Securityholder                              be Sold
- ----------------------                              -------
<S>                                              <C>
Morris S. Young                                     80,000

Davis Zhang                                         20,000


Total                                              100,000
</TABLE>



                                      -38-
<PAGE>   39

                                   SCHEDULE 3

                        EQUITY INTEREST IN OTHER ENTITIES



                                      -39-
<PAGE>   40

                                   SCHEDULE 4

                           UNITED STATES SUBSIDIARIES



                                      -40-


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>3
<FILENAME>f65146a1ex10-1.txt
<DESCRIPTION>EXHIBIT 10.1
<TEXT>

<PAGE>   1

                                CREDIT AGREEMENT



                                      AMONG



                                    AXT, INC.



                                       AND



                            THE LENDERS NAMED HEREIN



                                       AND



                         U.S. BANK NATIONAL ASSOCIATION
                                    AS AGENT











                                 AUGUST 28, 2000



<PAGE>   2

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                      Page
                                                                                      ----
<S>              <C>                                                                  <C>
Article I        Definitions............................................................2
                  SECTION 1.1       Defined Terms.......................................2
                  SECTION 1.2       Interpretation.....................................16
                  SECTION 1.3       Headings...........................................16

Article II       The Credits...........................................................16
                  SECTION 2.1       Line Of Credit.....................................16
                  SECTION 2.2       Term Loans.........................................19
                  SECTION 2.3       The Letter Of Credit Facility......................21
                  SECTION 2.4       Notice Of Borrowing................................22
                  SECTION 2.5       Interest/Fees......................................23
                  SECTION 2.6       Conversion Of Interest Options.....................25
                  SECTION 2.7       Other Payment Terms................................26
                  SECTION 2.8       Prepayment.........................................27
                  SECTION 2.9       Funding............................................28
                  SECTION 2.10      Pro Rata Treatment.................................29
                  SECTION 2.11      Change Of Circumstances............................29
                  SECTION 2.12      Taxes On Payments..................................31
                  SECTION 2.13      Funding Loss Indemnification.......................32
                  SECTION 2.14      Authorized Representatives.........................33
                  SECTION 2.15      Collateral.........................................33
                  SECTION 2.16      Guaranties.........................................34

Article III      Payments With Respect To The Bonds  And The Letter Of Credit..........34
                  SECTION 3.1       Annual Redemption Of Bonds.........................34
                  SECTION 3.2       Reimbursement Deposit Account......................35
                  SECTION 3.3       Other Optional Redemptions Of Bonds................35

Article IV       Representations And Warranties........................................35
                  SECTION 4.1       Legal Status.......................................36
                  SECTION 4.2       Authorization And Validity.........................36
</TABLE>



                                      -i-
<PAGE>   3

<TABLE>
<CAPTION>
                                                                                      Page
                                                                                      ----
<S>              <C>                                                                  <C>
                  SECTION 4.3       No Violation.......................................36
                  SECTION 4.4       No Additional Approvals............................36
                  SECTION 4.5       Litigation.........................................36
                  SECTION 4.6       Correctness Of Financial Statement.................37
                  SECTION 4.7       Income Tax Returns.................................37
                  SECTION 4.8       No Subordination...................................37
                  SECTION 4.9       Permits, Franchises................................37
                  SECTION 4.10      ERISA..............................................37
                  SECTION 4.11      Other Obligations..................................38
                  SECTION 4.12      Government Regulations.............................38
                  SECTION 4.13      Securities Activities..............................38
                  SECTION 4.14      Environmental Matters..............................38
                  SECTION 4.15      Real Property Collateral...........................38
                  SECTION 4.16      Subsidiaries.......................................39
                  SECTION 4.17      Truth, Accuracy Of Information.....................39

Article V        Conditions............................................................39
                  SECTION 5.1       Conditions Of Initial Extension Of Credit..........39
                  SECTION 5.2       Conditions Of Each Extension Of Credit.............43

Article VI       Affirmative Covenants.................................................44
                  SECTION 6.1       Punctual Payments..................................44
                  SECTION 6.2       Accounting Records.................................44
                  SECTION 6.3       Financial Statements...............................44
                  SECTION 6.4       Compliance.........................................45
                  SECTION 6.5       Insurance..........................................45
                  SECTION 6.6       Facilities.........................................45
                  SECTION 6.7       Taxes And Other Liabilities........................46
                  SECTION 6.8       Litigation.........................................46
                  SECTION 6.9       Financial Condition................................46
                  SECTION 6.10      Notice To Agent....................................47
                  SECTION 6.11      Site Visits; Right To Stop Work....................47
                  SECTION 6.12      Security...........................................47
                  SECTION 6.13      Related Documents..................................47
</TABLE>



                                      -ii-
<PAGE>   4

<TABLE>
<CAPTION>
                                                                                      Page
                                                                                      ----
<S>              <C>                                                                  <C>
                  SECTION 6.14      Investigations And Inquiries.......................48
                  SECTION 6.15      Contract Collateral................................48
                  SECTION 6.16      Borrowing Base Deficiency..........................48
                  SECTION 6.17      Notice Of Certain Matters..........................48

Article VII      Negative Covenants....................................................49
                  SECTION 7.1       Use Of Funds.......................................49
                  SECTION 7.2       Other Indebtedness.................................50
                  SECTION 7.3       Merger, Consolidation, Organizational
                                    Structure, Transfer Of Assets......................50
                  SECTION 7.4       Guaranties.........................................50
                  SECTION 7.5       Loans, Advances, Investments.......................50
                  SECTION 7.6       Dividends And Distributions........................50
                  SECTION 7.7       Pledge Of Assets...................................51

Article VIII     Events Of Default.....................................................51
                  SECTION 8.1       Events Of Default..................................51
                  SECTION 8.2       Remedies...........................................53

Article IX       The Agent.............................................................54
                  SECTION 9.1       Authorization And Action...........................54
                  SECTION 9.2       Reliance By Agent..................................55
                  SECTION 9.3       Defaults...........................................55
                  SECTION 9.4       Indemnification....................................55
                  SECTION 9.5       Non-Reliance On Agent..............................56
                  SECTION 9.6       Successor Agent....................................56
                  SECTION 9.7       Execution Of Loan Documents........................57
                  SECTION 9.8       Agent In Its Individual Capacity...................57

Article X        Miscellaneous.........................................................57
                  SECTION 10.1      Notices............................................57
                  SECTION 10.2      Costs, Expenses Attorneys' Fees....................58
                  SECTION 10.3      Indemnification....................................58
                  SECTION 10.4      Waivers, Amendments................................59
                  SECTION 10.5      Successors And Assigns.............................60
</TABLE>



                                     -iii-
<PAGE>   5

<TABLE>
<CAPTION>
                                                                                      Page
                                                                                      ----
<S>              <C>                                                                  <C>
                  SECTION 10.6      Setoff.............................................63
                  SECTION 10.7      No Waiver; Cumulative Remedies.....................63
                  SECTION 10.8      Entire Agreement, Amendment........................63
                  SECTION 10.9      No Third Party Beneficiaries.......................63
                  SECTION 10.10     Time...............................................64
                  SECTION 10.11     Severability Of Provisions.........................64
                  SECTION 10.12     Governing Law......................................64
                  SECTION 10.13     Submission To Jurisdiction.........................64
                  SECTION 10.14     Arbitration........................................64
                  SECTION 10.15     Counterparts.......................................67
                  SECTION 10.16     Confidentiality....................................67
</TABLE>



                                      -iv-
<PAGE>   6

                         LIST OF SCHEDULES AND EXHIBITS



<TABLE>
<S>                   <C>
Schedule 1            Lenders and Proportionate Shares
Schedule 2.1(d)       Borrower Letter of Credit Agreement
Schedule 2.3(a)       Amortization Schedule for the Letter of Credit Facility
Schedule 2.13(b)      Prepayment Indemnity
Schedule 4
Schedule 5            Contract Collateral Description
Schedule 7.4          Existing Indebtedness
Schedule 7.5          Existing Guaranties
Schedule 7.7          Existing Loans; Advances; Investments
Schedule 7.8          Existing Liens; Pledges of Assets

Exhibit A             Letter of Credit
Exhibit B             Form of Line of Credit Note
Exhibit C             Form of Term Note
Exhibit D             Notice of Borrowing
Exhibit E             Notice of Conversion or Continuation
Exhibit F             Notice of Authorized Representatives
Exhibit G             Assignment and Assumption Agreement
Exhibit H             Borrowing Base Certificate
</TABLE>



                                      -v-
<PAGE>   7

                                                                    EXHIBIT 10.1

                                CREDIT AGREEMENT


              THIS CREDIT AGREEMENT is entered into as of August 28, 2000, by
and among AXT, INC., a Delaware corporation ("Borrower"), each of the financial
institutions from time to time listed on Schedule I attached hereto, as amended
from time to time (collectively, "Lenders"), and U.S. BANK NATIONAL ASSOCIATION
("U.S. Bank"), as agent for the Lenders (in such capacity, "Agent"), and as
arranger.

                                    RECITALS

              WHEREAS, Borrower has requested from Lenders the line of credit,
term loan and other credit facilities described herein for the purposes
described herein; and

              WHEREAS, Borrower has issued a series of bonds designated the
Variable Rate Taxable Demand Revenue Bonds Series 1998, in the aggregate
principal amount of $11,615,000.00 (the "Bonds"), pursuant to an Indenture dated
as of December 1, 1998 (the "Indenture") between Borrower and Harris Trust
Company of California, as trustee (the "Trustee"); and

              WHEREAS, to support certain payments with respect to the Bonds,
Borrower requested U.S. Bank to issue, and U.S. Bank issued for the account of
Borrower and for the benefit of the Trustee, an irrevocable direct-pay letter of
credit (the "Letter of Credit"), in the original stated amount of
$11,986,680.00, a copy of which is attached hereto as Exhibit A, pursuant to
that certain Reimbursement Agreement dated as of December 1, 1998, between
Borrower and U.S. Bank; and

              WHEREAS, as of the date of this Agreement, $11,092,000.00 of the
principal amount of the Bonds remains outstanding; and

              WHEREAS, Borrower will be responsible for amounts drawn under the
Letter of Credit and for certain fees and amounts due with respect to the Letter
of Credit and this Credit Agreement; and

              WHEREAS, Lenders and Agent have agreed to provide said Letter of
Credit facility to Borrower, as well as a revolving line of credit facility and
certain term loans to Borrower on the terms and subject to the conditions
contained herein.

              NOW, THEREFORE, in consideration of the mutual covenants and
promises of the parties contained herein, Agent, Lenders and Borrower hereby
agree as follows:



                                      -1-
<PAGE>   8

                                    ARTICLE I
                                   DEFINITIONS

              SECTION 1.1 DEFINED TERMS. As used in this Agreement, all terms
defined above shall have the meanings set forth above, and the following terms
shall have the meanings set forth after each:

              "Accounts" means all currently existing and hereafter arising
       accounts, contract rights, and all other forms of obligations owing to
       Borrower arising out of the sale or lease of goods or the rendition of
       services by Borrower, irrespective of whether earned by performance, and
       any and all credit insurance, guaranties, or security therefor.

              "Agent's Office" means (i) initially, Agent's office designated as
       such in Schedule I attached hereto, and (ii) subsequently, such other
       office designated as such in writing by Agent to Lenders and Borrower.

              "Agreement" means this Credit Agreement, as amended, amended and
       restated, modified or supplemented from time to time.

              "Applicable Lending Office" means, with respect to each Lender,
       (i) initially, its office designated as such in Schedule I attached
       hereto, and (ii) subsequently, such other office or offices designated as
       such in writing by such Lender to Agent.

              "Assignee" has the meaning assigned to that term in Section
       10.5(c) hereof.

              "Assignment" has the meaning assigned to that term in Section
       10.5(c) hereof.

              "Assignment Agreement" has the meaning assigned to that term in
       Section 10.5(c) hereof.

              "Assignor" has the meaning assigned to that term in Section
       10.5(c) hereof.

              "Authorized Representatives" means those officers and employees
       designated by Borrower on the most current Notice of Authorized
       Representatives delivered by Borrower to Agent as being authorized to
       request any borrowing or to make any interest rate selection on behalf of
       Borrower hereunder, or to give Agent any other notice hereunder that is
       required by the terms hereof to be made through one of Borrower's
       Authorized Representatives.



                                      -2-
<PAGE>   9

              "Bankruptcy Code" means the Bankruptcy Reform Act, Title 11 of the
       United States Code, as amended or recodified from time to time, including
       (unless the context otherwise requires) any rules or regulations
       promulgated thereunder.

              "Bond Interest Payment Date" has the meaning assigned to that term
       in the Indenture.

              "Bonds" means the Bonds described in the Recitals hereof.

              "Borrower Letter of Credit(s)" has the meaning assigned to that
       term in Section 2.1(d) hereof.

              "Borrower Letter of Credit Agreement(s)" has the meaning assigned
       to that term in Section 2.1(d) hereof.

              "Borrower's Books" means all of Borrower's books and records
       including: ledgers; records indicating, summarizing, or evidencing
       Borrower's properties or assets (including the Personal Property
       Collateral) or liabilities; all information relating to Borrower's
       business operations or financial condition; and all computer programs,
       disk or tape files, printouts, runs, or other computer prepared
       information.

              "Borrowing Base" has the meaning assigned to that term in Section
       2.1(b) hereof.

              "Borrowing Base Certificate" has the meaning assigned to that term
       in Section 2.1(b) hereof.

              "Business Day" means any day other than a Saturday, Sunday or
       other day on which commercial banks in New York City or Seattle are
       authorized or required by law to close and, if the applicable Business
       Day relates to any LIBOR borrowing, means such a day which is also a day
       on which banks in the City of London are generally open for interbank or
       foreign exchange transactions.

              "Change of Law" means the adoption of any Governmental Rule, any
       change in any Governmental Rule or the application or requirements
       thereof (whether such change occurs in accordance with the terms of such
       Governmental Rule as enacted, as a result of amendment or otherwise), any
       change in the interpretation or administration of any Governmental Rule
       by any Governmental Authority, or compliance by any Lender (or any entity
       controlling such Lender) with any request, guideline or directive
       (whether or not having the force of law) of any Governmental Authority.



                                      -3-
<PAGE>   10

              "Closing Date" means the date on which all of the conditions set
       forth in Section 5.1 of this Agreement have been satisfied or waived by
       Agent.

              "Collateral" means, collectively, the Personal Property Collateral
       and the Real Property Collateral.

              "Contract Collateral" has the meaning assigned to that term in
       Section 5.1(b)(xiv) hereof.

              "Credits" means the Line of Credit, the Term Loans and the Letter
       of Credit Facility.

              "Date of Issuance" means December 1, 1998.

              "Deeds of Trust" means, collectively, all of the deeds of trust
       for the benefit of Agent that secure the obligations of Borrower to Agent
       and Lenders under this Agreement.

              "Default" means an Event of Default or an event or condition
       which, with the giving of notice or the passage of time, or both, would
       constitute an Event of Default.

              "EBITDA" means, for the most recent trailing four-quarter period,
       consolidated net income from operations (after eliminating all
       extraordinary items of gain or loss) plus interest expense, income taxes,
       depreciation and amortization, in each case defined in accordance with
       GAAP and, if applicable, to the extent each has been deducted in the
       determination of net income.

              "El Monte Property" means that certain real property located at
       9650 Telstar Avenue, in the City of El Monte, County of Los Angeles,
       California, owned by Borrower and improved with a commercial building
       used for research and development and manufacturing purposes.

              "ERISA" means the Employee Retirement Income Security Act of 1974,
       as amended or recodified from time to time, including (unless the context
       otherwise requires) any rules or regulations promulgated thereunder.

              "Event of Default" has the meaning assigned to that term in
       Section 8.1 hereof.

              "Expiration Date" means December 1, 2008.

              "Federal Funds Rate" means, for any day, the weighted average of
       the per annum rates on overnight Federal funds transactions with member
       banks of the Federal Reserve System arranged by Federal funds brokers as
       published by



                                      -4-
<PAGE>   11

       the Federal Reserve Bank of New York for such day (or, if such rate is
       not so published for any day, the average rate quoted to Agent on such
       day by three (3) Federal funds brokers of recognized standing selected by
       Agent).

              "Fixed Charge Coverage Ratio" means the ratio of (A) EBITDA less
       the aggregate amount of (i) unfinanced capital expenditures, (ii) cash
       taxes, and (ii) permitted dividends, distributions and treasury stock
       purchases, divided by (B) the aggregate amount of the following, each
       measured for the most recent four historical quarters (excluding the
       current quarter in possession) (i) cash Interest Expense (including any
       letter of credit fees payable to U.S. Bank) and (ii) capital lease
       payments plus the average of current maturities of long-term debt
       (including all bond redemptions required by this Agreement) measured for
       the most recent four historical quarters (excluding the current quarter
       in possession) and (iii) the current maturity of subordinated debt
       measured for the most recent four historical quarters (excluding the
       current quarter in possession).

              "Fixed Rate Term" means a period of one (1), two (2), three (3),
       or six (6) months, as designated by Borrower, during which all or a
       portion of the Line of Credit or the Term Loan bears interest determined
       in relation to LIBOR; provided however, that (a) no Fixed Rate Term may
       be selected for a principal amount less than One Million Dollars
       ($1,000,000.00); (b) no Fixed Rate Term shall extend beyond the scheduled
       maturity date hereof; (c) any Fixed Rate Term which would otherwise
       expire on a day which is not a Business Day shall be extended to the next
       succeeding Business Day, unless the result of such extension would be to
       extend such Fixed Rate Term into another calendar month, in which event
       the Fixed Rate Term shall end on the immediately preceding Business Day;
       (d) any Fixed Rate Term that begins on the last Business Day of a
       calendar month (or on a day for which there is no numerically
       corresponding day in the calendar month at the end of such Fixed Rate
       Term) shall end on the last Business Day of a calendar month; and (e)
       with respect to the Term Loans, no Fixed Rate Term shall extend beyond a
       date on which Borrower is required to make a scheduled payment of
       principal on the Term Loans unless the aggregate principal amount of Term
       Loans bearing interest at the Reference Rate plus the aggregate principal
       amount of Term Loans bearing interest at LIBOR with Fixed Rate Terms
       expiring on or before such date equals or exceeds the principal amount
       required to be paid on the Term Loans on such date.

              "Funded Debt" means the aggregate amount of all obligations for
       (1) borrowed money, including senior bank debt, subordinated debt and
       amounts owing under the Bonds; (2) capital leases; (3) issued but undrawn
       letters of credit, except the direct pay Letter of Credit supporting the
       Bonds, plus any



                                      -5-
<PAGE>   12

       amounts outstanding under drawn letters of credit; and (4) contingent
       obligations.

              "GAAP" means generally accepted accounting principles as in effect
       in the United States of America from time to time, consistently applied.

              "General Intangibles" means all of Borrower's present and future
       general intangibles and other personal property (including the Contract
       Collateral and all contract rights, rights arising under common law,
       statutes, or regulations, choses or things in action, goodwill, patents,
       trade names, trademarks, servicemarks, copyrights, blueprints, drawings,
       purchase orders, customer lists, monies due or recoverable from pension
       funds, route lists, rights to payment and other rights under any royalty
       or licensing agreements, infringement claims, computer programs,
       information contained on computer disks or tapes, literature, reports,
       catalogs, deposit accounts, insurance premium rebates, tax refunds, and
       tax refund claims), other than goods, Accounts and Negotiable Collateral.

              "Governmental Authority" means any domestic or foreign national,
       state or local government, any political subdivision thereof, any
       department, agency, authority or bureau of any of the foregoing, or any
       other entity exercising executive, legislative, judicial, regulatory or
       administrative functions of or pertaining to government, including the
       Federal Deposit Insurance Corporation, the Federal Reserve Board, the
       Comptroller of the Currency, any central bank or any comparable
       authority.

              "Governmental Rule" means any law, rule, regulation, ordinance,
       order, code interpretation, judgment, decree, directive, guideline,
       policy or similar form of decision of any Governmental Authority.

              "Guarantee" means any guarantee of Borrower's obligations to Agent
       and Lenders under the Loan Documents executed by a Guarantor.

              "Guarantor" means, subject to the release provisions set forth in
       Section 2.16 hereof, collectively, AXT-Japan, Beijing Tongmei Xtal
       Technology Co., Ltd., American Xtal Technology (Hong Kong), Lyte
       Optronics, Inc., Lyte Optronics Ltd. (UK), Advanced Semiconductor
       (Xiamen), Bestal Substrate Foreign Sales Corp., and each future
       wholly-owned subsidiary of Borrower.

              "Indemnitees" has the meaning assigned to that term in Section
       10.3 hereof.

              "Indenture" has the meaning assigned to that term in the Recitals
       hereof.



                                      -6-
<PAGE>   13

              "Interest Expense" means any and all interest owing by Borrower
       under any debt obligations, including the Credits, during the measured
       period.

              "Inventory" means all present and future inventory in which
       Borrower has any interest, including goods held for sale or lease or to
       be furnished under a contract of service and all of Borrower's present
       and future raw materials, work in process, finished goods, and packing
       and shipping materials, wherever located.

              "Investment Property" means all of Borrower's presently existing
       and hereafter acquired or arising investment property (as that term is
       defined in Section 9115 of the California Uniform Commercial Code).

              "Issuance Spread" means two and one-half of one percent (2.50%)
       per annum.

              "Letter of Credit" has the meaning assigned to that term in the
       Recitals hereof.

              "Letter of Credit Facility" means the credit facility available to
       Borrower pursuant to Section 2.3 hereof pursuant to which U.S. Bank has
       issued the direct pay Letter of Credit to the Trustee.

              "LIBOR" means, for each Fixed Rate Term, the rate per annum
       (computed on the basis of a 360-day year and the actual number of days
       elapsed and rounded upward if necessary to the nearest whole 1/16 of 1%)
       and determined pursuant to the following formula:


<TABLE>
<S>                          <C>
                                                  Base LIBOR
               LIBOR =       ---------------------------------------------------
                                       100% - LIBOR Reserve Percentage
</TABLE>


              As used herein, (i) "Base LIBOR" shall mean the rate per annum at
       which United States dollar deposits would be offered to U.S. Bank in the
       London interbank market at approximately 11:00 a.m. London time on the
       date which is two Business Days prior to the first day of a Fixed Rate
       Term for delivery of funds on the first day of such Fixed Rate Term for a
       period of time substantially equal to the number of days in such Fixed
       Rate Term and in an amount substantially equal to the principal amount to
       which such Fixed Rate Term applies, and (ii) "LIBOR Reserve Percentage"
       shall mean the reserve percentage measured as of the date which is two
       Business Days prior to the date of pricing, prescribed by the Board of
       Governors of the Federal Reserve System (or any successor) for
       "Eurocurrency Liabilities" (as defined in Regulation D of



                                      -7-
<PAGE>   14

       the Federal Reserve Board, as amended), required to be maintained by U.S.
       Bank, adjusted by U.S. Bank for expected changes in such reserve
       percentage during the applicable Fixed Rate Term.

              "Line Maturity Date" means May 31, 2002.

              "Line of Credit" means a revolving credit facility in the maximum
       principal amount of $20,000,000.00, as defined more fully in Section 2.1
       hereof.

              "Line of Credit Facility Fee" has the meaning assigned to that
       term in Section 2.5(c)(i).

              "Line of Credit Note" means a promissory note executed by Borrower
       in favor of a Lender to evidence advances under the Line of Credit,
       substantially in the form of Exhibit B attached hereto.

              "Line of Credit Pricing Grid" means the following Line of Credit
       Pricing Grid:


<TABLE>
<CAPTION>
       ---------------------------------------------------------------------------
                     - APPLICABLE MARGINS (IN BASIS POINTS) & FEE -
       ---------------------------------------------------------------------------
         RATIO OF FUNDED      PRICING    LIBOR       REFERENCE    LINE OF CREDIT
          DEBT TO EBITDA       LEVEL     MARGIN     RATE MARGIN    FACILITY FEE
       ---------------------------------------------------------------------------
<S>                           <C>        <C>        <C>           <C>
              < 1.00             I         175          50             25.0
       ---------------------------------------------------------------------------
         =/> 1.00 < 1.50        II         200          75             25.0
       ---------------------------------------------------------------------------
         =/> 1.50 < 2.00        III        225          100            37.5
       ---------------------------------------------------------------------------
         =/> 2.00 < 2.50        IV         250          125            50.0
       ---------------------------------------------------------------------------
</TABLE>


              Borrower shall be eligible for Level I pricing when its ratio of
       Funded Debt to EBITDA is less than 1.00:1.00; for Level II pricing when
       such ratio is equal to or greater than 1.00:1.00, but less than
       1.50:1.00; for Level III pricing when such ratio is equal to or greater
       than 1.50:1.00, but less than 2.00:1.00; for Level IV pricing when such
       ratio is equal to or greater than 2.00:1.00, but less than 2.50:1.00.
       This ratio shall be measured quarterly for the preceding four-quarter
       period. The pricing will be set at Level IV until receipt of the first
       financial covenant compliance reflecting the Funded Debt to EBITDA ratio.

              "Loan Costs" means all costs incurred by Agent in connection with
       the Credits, including, without limitation, all taxes and assessments,
       recording fees, title insurance premiums and other title charges,
       document binding costs,



                                      -8-
<PAGE>   15

       appraisal fees, lien and judgment search costs, fees of architects,
       engineers, surveyors and any special consultants, construction and
       Collateral inspection and exam fees, brokers fees (except as otherwise
       specified herein), escrow fees, all travel and out-of-pocket expenses of
       Agent to conduct audits or inspections and wire transfer fees.

              "Loan Documents" means this Agreement, the Notes, the Security
       Documents and each other notice, document, contract or instrument
       required by or at any time delivered to Agent in connection with this
       Agreement.

              "Majority Lenders" means two (2) or more Lenders whose
       Proportionate Shares at any time equal or exceed sixty-six and two-thirds
       percent (66-2/3%) of the Total Commitments.

              "Material Adverse Effect" means a material adverse effect on (i)
       the business operations or financial condition of Borrower and its
       Subsidiaries taken as a whole or (ii) the ability of Borrower to repay
       the amounts loaned to Borrower by Lenders hereunder.

              "Minimum Interest Coverage Ratio" means EBITDA divided by Interest
       Expense (net of capitalized interest expense) for the most recent four
       quarter period.

              "Monterey Park Property" means that certain real property located
       at 2019 Saturn Street, in the City of Monterey Park, County of Los
       Angeles, California owned by Borrower and improved with a commercial
       building used for research and development and manufacturing purposes.

              "Negotiable Collateral" means all of Borrower's present and future
       letters of credit, notes, drafts, instruments, securities (including the
       shares of stock of Subsidiaries of Borrower), documents, personal
       property leases (wherein Borrower is the lessor), and chattel paper.

              "Notes" means, collectively, the Line of Credit Note and all of
       the Term Notes.

              "Notice of Authorized Representatives" has the meaning set forth
       in Section 2.14 hereof.

              "Notice of Borrowing" has the meaning set forth in Section 2.4
       hereof.

              "Notice of Conversion or Continuation" has the meaning assigned to
       that term in Section 2.6(b) hereof.



                                      -9-
<PAGE>   16

              "Participant" has the meaning assigned to that term in Section
       10.5(b) hereof.

              "Permitted Indebtedness" means, subject to Borrower's compliance
       with the financial covenants required under this Agreement, the
       following:

              (a)    Indebtedness of Borrower in favor of Lenders arising
                     hereunder or any other Loan Document:

              (b)    Capital leases incurred solely to purchase equipment which
                     is secured by a purchase money security interest and is not
                     in excess of the lesser of the purchase price for such
                     equipment or the fair market value of such equipment on the
                     date of acquisition.

              (c)    Indebtedness to trade creditors incurred in the ordinary
                     course of business;

              (d)    Indebtedness set forth on Schedule 7.7 hereto;

              (e)    Indebtedness incurred to refinance any Indebtedness
                     permitted under the foregoing clause (b) or clause (d);

              (f)    Accrued dividends on the capital stock of Borrower;

              (g)    Interest rate and currency hedging agreements;

              (h)    Guaranties of any Subsidiary's suppliers in connection with
                     the purchase of supplies in the ordinary course of
                     business;

              (i)    Guaranties of lease obligations incurred in the ordinary
                     course of business and to the extent otherwise permitted
                     hereunder;

              "Permitted Investments" means, subject to Borrower's compliance
       with the financial covenants required under this Agreement, the
       following:

              (a)    Investments existing on the Closing Date and disclosed in
                     Schedule 7.7 attached hereto;

              (b)    Marketable direct obligations issued or unconditionally
                     guaranteed by the United States of America or any agency or
                     any State thereof maturing within one year from the date of
                     acquisition thereof, (ii) commercial paper maturing no more
                     than one year from the date of creation thereof and
                     currently having a rating of at least A-2 or P-2 from
                     either Standard & Poor's Corporation or Moody's Investors
                     Service, (iii) certificates of



                                      -10-
<PAGE>   17

                     deposit maturing no more than one year from the date of
                     investment therein; and (iv) money market accounts;

              (c)    Investments consisting of travel advances and employee
                     relocation loans and other employee loans and advances in
                     the ordinary course of business;

              (d)    Joint ventures or strategic alliances in the ordinary
                     course of Borrower's business consisting of the
                     non-exclusive licensing of technology, the development of
                     technology or the providing of technical support, provided
                     that any such investments by Borrower do not exceed
                     $3,000,000.00 in the aggregate in any fiscal year; and

              (e)    Investments or capital infusions in Borrower's
                     Subsidiaries.

              "Permitted Liens" means, subject to Borrower's compliance with the
       financial covenants required under this Agreement, the following:

              (a)    Liens in favor of Agent;

              (b)    liens and security interests existing on the Closing Date
                     and disclosed in Schedule 4.15 attached hereto;

              (c)    liens for taxes, fees, assessment or other governmental
                     charges or levies, either not delinquent or being contested
                     in good faith by appropriate proceedings;

              (d)    liens securing claims or demands of materialmen, mechanics,
                     carriers, warehousemen, landlords and other like persons or
                     entities imposed without action of such parties, provided
                     that the payment thereof is not yet required;

              (e)    liens arising from judgments, decrees or attachments in
                     circumstances not constituting an Event of Default
                     hereunder;

              (f)    liens incurred or deposits made in the ordinary course of
                     Borrower's business in connection with workers'
                     compensation, unemployment insurance, Social Security and
                     other like laws;

              (g)    liens and security interests (a) upon or in any equipment
                     acquired or held by the Borrower to secure the purchase
                     price of such equipment or indebtedness incurred solely for
                     the purpose of financing the acquisition of such equipment,
                     or (b) existing on such equipment at the time of its
                     acquisition, provided that the



                                      -11-
<PAGE>   18

                     lien and security interest is confined solely to the
                     property so acquired and improvements thereon, and the
                     proceeds of such equipment;

              (h)    liens consisting of leases and subleases and licenses and
                     sublicenses granted to others in the ordinary course of
                     Borrower's business not interfering in any material respect
                     with the business of Borrower and any interest or title of
                     a lessor or licensor under any lease or license, as
                     applicable;

              (i)    liens in favor of customs and revenue authorities arising
                     as a matter of law to secure payment of customs duties in
                     connection with the importation of goods; and

              (j)    liens that are not prior to Agent's security interest which
                     constitute rights of set-off of a customary nature.

              "Person" means an individual, a corporation, a partnership, a
       limited liability company, an association, a trust or any other entity or
       organization, including a Governmental Authority.

              "Personal Property Collateral" means each of the following:

              (k)    the Accounts,

              (l)    Borrower's Books,

              (m)    the General Intangibles,

              (n)    the Inventory,

              (o)    the Investment Property,

              (p)    the Negotiable Collateral,

              (q)    any money, or other assets of Borrower that now or
                     hereafter come into the possession, custody, or control of
                     U.S. Bank or the Lenders, and

              (r)    the proceeds and products, whether tangible or intangible,
                     of any of the foregoing, including proceeds of insurance
                     covering any or all of the Personal Property Collateral,
                     and any and all Accounts, Borrower's Books, General
                     Intangibles, Inventory, Investment Property, Negotiable
                     Collateral, Real Property, money, deposit accounts, or
                     other tangible or intangible property resulting from



                                      -12-
<PAGE>   19

                     the sale, exchange, collection, or other disposition of any
                     of the foregoing, or any portion thereof or interest
                     therein, and the proceeds thereof.

              "Plan" means any defined employee pension benefit plan as defined
       in ERISA.

              "Proportionate Share" means, for each Lender, the dollar amount
       determined at any time by multiplying the percentage set forth opposite
       such Lender's name in Schedule 1 attached hereto by the amount of the
       Total Commitments at such time, and shall include, where the context so
       requires, the amount of all outstanding credit from such Lender to
       Borrower pursuant to this Agreement and the obligation of such Lender to
       make advances or otherwise extend credit up to such amount on the terms
       and subject to the conditions set forth herein.

              "Real Property" means collectively, the Monterey Park Property,
       the El Monte Property, the Technology Drive Property and the Solar Way
       Property.

              "Real Property Collateral" means, collectively, the Monterey Park
       Property, the El Monte Property, the Technology Drive Property and the
       Solar Way Property.

              "Reference Rate" means at any time the rate of interest which U.S.
       Bank establishes as its reference rate and is not necessarily the lowest
       rate of interest which it collects from any borrower or class of
       borrowers. If U.S. Bank ceases to publicly announce or publish its
       Reference Rate, U.S. Bank will choose a new index by using a comparable
       index or reference rate as its Reference Rate.

              "Register" has the meaning assigned to that term in Section
       10.5(d) hereof.

              "Reimbursement Default Rate" has the meaning assigned to that term
       in Section 2.3(b).

              "Reimbursement Deposit Account" means the demand deposit account
       established by Borrower with U.S. Bank as defined in Section 3.2 hereof.

              "Reimbursement Obligations" mean the obligations of Borrower to
       Lenders described in Section 2.3(b) hereof.

              "Related Documents" means the Bonds, the Indenture, the Bond Loan
       Agreement, the Deeds of Trust, the UCC-1 Financing Statements, the
       Security Agreements, the Guarantees and any other agreement or instrument
       related to the issuance of the Bonds and pertaining to Borrower.



                                      -13-
<PAGE>   20

              "Security Agreements" means, collectively, all of the security
       agreements for the benefit of Agent that secure the obligations of
       Borrower to Agent and Lenders under this Agreement.

              "Security Documents" means, collectively, the Deeds of Trust and
       the Security Agreements.

              "Solar Way Property" means that certain real property located at
       4211 Solar Way in the City of Fremont, County of Alameda, California
       owned by Borrower and improved with a manufacturing and research and
       development facility.

              "Stated Amount" means $11,986,680.00, as such amount may be
       reduced from time to time as a result of unreinstated Drawings on the
       Letter of Credit in accordance with the terms thereof.

              "Subsidiary" means any corporation, association, limited liability
       company, partnership, joint venture or other business entity of which
       more than fifty percent (50%) of the voting stock or other equity
       interest is owned directly or indirectly by Borrower.

              "Tangible Net Worth" means, at any time, total stockholders'
       equity at such time less the amount of any treasury stock less the value
       of any in tangible assets at such time.

              "Taxes" has the meaning assigned to that term in Section 2.12(a)
       hereof.

              "Technology Drive Property" means that certain real property
       located at 4281 Technology Drive in the City of Fremont, County of
       Alameda, California owned by Borrower and improved with a manufacturing
       facility.

              "Term Loan A" means a credit facility available to Borrower in the
       maximum principal amount of $1,190,000.00, as defined more fully in
       Section 2.2 hereof.

              "Term Loan A Maturity Date" means May 31, 2003.

              "Term Loan B" means a credit facility available to Borrower in the
       maximum principal amount of $1,610,000.00, as defined more fully in
       Section 2.2 hereof.

              "Term Loan B Maturity Date" means May 31, 2003.



                                      -14-
<PAGE>   21

              "Term Loan C" means a credit facility available to Borrower in the
       maximum principal amount of $3,200,000.00, as more fully defined in
       Section 2.2 hereof.

              "Term Loan C Maturity Date" means May 31, 2003.

              "Term Loan Pricing Grid" means the following Term Loan Pricing
       Grid:


<TABLE>
<CAPTION>
       -----------------------------------------------------------------------------
                         - APPLICABLE MARGINS (IN BASIS POINTS) -
       -----------------------------------------------------------------------------
         RATIO OF FUNDED      PRICING     LIBOR MARGIN            REFERENCE
          DEBT TO EBITDA       LEVEL                             RATE MARGIN
       -----------------------------------------------------------------------------
<S>                           <C>         <C>                    <C>
              < 1.00             I             200                    75
       -----------------------------------------------------------------------------
         =/> 1.00 < 1.50        II             225                   100
       -----------------------------------------------------------------------------
         =/> 1.50 < 2.00        III            250                   125
       -----------------------------------------------------------------------------
         =/> 2.00 < 2.50        IV             275                   150
       -----------------------------------------------------------------------------
</TABLE>


       Borrower shall be eligible for Level I pricing when its ratio of Funded
       Debt to EBITDA is less than 1.00:1.00; for Level II pricing when such
       ratio is equal to or greater than 1.00:1.00, but less than 1.50:1.00; for
       Level III pricing when such ratio is equal to or greater than 1.50:1.00,
       but less than 2.00:1.00; for Level IV pricing when such ratio is equal to
       or greater than 2.00:1.00, but less than 2.50:1.00. This ratio shall be
       measured quarterly for the preceding four-quarter period. The pricing
       will be set at Level IV until receipt of the first financial covenant
       compliance reflecting the Funded Debt to EBITDA ratio.

              "Term Loans" means, collectively, Term Loan A, Term Loan B and
       Term Loan C.

              "Term Notes" means, collectively, each of the promissory notes
       executed by Borrower in favor of a Lender to evidence advances under each
       of the Term Loans, substantially in the form of Exhibit C attached
       hereto.

              "Termination Date" has the meaning assigned to that term in
       Section 3.2 hereof.

              "Total Commitments" means, for all Lenders and at any time, the
       then aggregate amount of (i) the outstanding principal balance of each of
       the Credits, and (ii) the maximum undisbursed principal amount of each of
       the Credits.



                                      -15-
<PAGE>   22

              "Treasury Rate" means the Issuance Spread plus the yield to
       maturity of the most recently issued one, two or three year U.S. Treasury
       Security, as elected by Borrower, as quoted in the Wall Street Journal on
       the date of election of a Treasury Rate. If such date is not a Business
       Day, then the quote shall be obtained on the Business Day immediately
       preceding such date. If the Wall Street Journal (i) quotes more than one
       such one, two or three year U.S. Treasury Security, the highest of such
       quotes shall apply, or (ii) ceases to publish such quotes, the one, two
       or three year U.S. Treasury Security, as elected by Borrower, shall be
       determined from such substitute financial reporting service or source as
       U.S. Bank in its reasonable discretion shall determine.

              "Trustee" has the meaning assigned to that term in the Recitals
       hereof.

              SECTION 1.2 INTERPRETATION. The meaning of each defined term is
equally applicable to both the singular and plural forms of the terms defined.
As used in this Agreement and each of the other Loan Documents, the term
"including" is not limiting, and means "including without limitation."

              SECTION 1.3 HEADINGS. Headings in this Agreement and each of the
other Loan Documents are for convenience of reference only and are not part of
the substance hereof or thereof.


                                   ARTICLE II
                                   THE CREDITS

              SECTION 2.1 LINE OF CREDIT.

              (a) Line of Credit. On the terms and subject to the conditions set
forth in this Agreement, each Lender hereby severally agrees, on a pro rata
basis in accordance with Schedule 1 attached hereto, to make advances to
Borrower under the Line of Credit from time to time up to and including the Line
Maturity Date, not to exceed at any time the aggregate principal amount of
Twenty Million Dollars ($20,000,000.00), the proceeds of which shall be used for
general corporate purposes, including working capital financing, and for the
issuance of standby and commercial letters of credit, subject to a sublimit of
$250,000.00 for such letters of credit as described in subparagraph (d), below.
Borrower's obligation to repay advances under the Line of Credit shall be
evidenced by the Line of Credit Note, all terms of which are incorporated herein
by this reference.

              (b) Limitation on Borrowings. Outstanding borrowings under the
Line of Credit, to a maximum of the principal amount set forth above, shall not
at any



                                      -16-
<PAGE>   23

time exceed an aggregate of (i) eighty percent (80%) of eligible receivables
generated by U.S. based obligors, (ii) eighty percent (80%) of eligible
receivables generated by obligors with principal offices outside of the United
States provided that such foreign eligible receivables are insured in a manner
acceptable to Lender, and (iii) the lesser of $7,500,000 or fifty percent (50%)
of eligible inventory (the "Borrowing Base"), as evidenced by a borrowing base
certificate in the form attached hereto as Exhibit H (the "Borrowing Base
Certificate"). All of the foregoing shall be determined by Agent upon receipt
and review of the collateral reports required hereunder and such other documents
and collateral information as Agent may from time to time require.

              As used herein, "eligible receivables" shall consist solely of
trade accounts which have been created in the ordinary course of Borrower's or
any Guarantor's business, upon which Borrower's or any Guarantor's right to
receive payment is absolute and not contingent upon the fulfillment of any
condition whatsoever, and in which Agent has a perfected security interest of
first priority, and shall not include:

                     (i) any Account which is past due more than ninety (90)
              days after the invoice date;

                     (ii) that portion of any Account for which there exists any
              right of setoff, defense or discount (except regular discounts
              allowed in the ordinary course of business to promote prompt
              payment) or for which any defense or counterclaim has been
              asserted;

                     (iii) any Account which represents an obligation of any
              state or municipal government or of the United States government
              or any political subdivision thereof (except accounts which
              represent obligations of the United States government and for
              which Assignment of Claims Act forms reasonably satisfactory to
              Agent have been duly executed and acknowledged);

                     (iv) any Account which arises from the sale or lease to or
              performance of services for, or represents an obligation of, an
              employee, affiliate, partner, member, parent or subsidiary of
              Borrower;

                     (v) that portion of any Account which represents interim or
              progress billings or retention rights on the part of the account
              debtor;

                     (vi) any Account which represents an obligation of any
              account debtor when twenty percent (25%) or more of Borrower's
              accounts from such account debtor are not eligible pursuant to (i)
              above;



                                      -17-
<PAGE>   24

                     (vii) that portion of any Account from an account debtor
              which represents the amount by which Borrower's total accounts
              from said account debtor exceeds twenty-five percent (25%) of
              Borrower's total accounts;

                     (viii) any Account deemed ineligible by Agent when Agent,
              in its sole discretion, deems the creditworthiness or financial
              condition of the account debtor to be unsatisfactory; or

                     (ix) uninsured foreign receivables.

              As used herein, "eligible inventory" shall mean, at any time, all
of Borrower's Inventory constituting raw materials (valued at the lower of cost
or market), except:

                     (i) Inventory which is not owned by Borrower free and clear
              of all security interests, liens, encumbrances and claims of third
              parties; and

                     (ii) Inventory which Agent, in its sole discretion, deems
              to be obsolete, unsalable, damaged, defective or unfit for further
              processing.

              (c) Borrowing and Repayment. Borrower may from time to time during
the term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all the limitations, terms and conditions
contained herein; provided however, that the total outstanding borrowings under
the Line of Credit shall not at any time exceed the maximum principal amount set
forth above in this Section 2.1.

              (d) Borrower Letter of Credit Subfeature. As a subfeature under
the Line of Credit, Agent agrees from time to time during the term thereof to
issue standby or commercial letters of credit for the account of Borrower (each,
a "Borrower Letter of Credit" and collectively, "Borrower Letters of Credit");
provided however, that the form and substance of each Borrower Letter of Credit
shall be subject to reasonable approval by Agent and the aggregate amount of
Borrower Letters of Credit issued at any one time shall not exceed $250,000.00.
Except with the prior approval of Agent, which may be granted or withheld in its
sole discretion, no Borrower Letter of Credit shall have an expiration date
subsequent to the Line Maturity Date. The undrawn amount of all Borrower Letters
of Credit issued and outstanding under this letter of credit subfeature shall be
reserved under the Line of Credit and shall not be available for borrowings
thereunder. Each Borrower Letter of Credit shall be subject to the additional
terms and conditions of the Borrower Letter of Credit Agreement and related
documents, if any, required by Agent in connection with the issuance thereof
(each, a "Borrower Letter of Credit Agreement" and collectively, the "Borrower
Letter



                                      -18-
<PAGE>   25

of Credit Agreements"), each of which shall be substantially in the form
attached hereto as Schedule 2.1. Each draft paid by Agent under a Borrower
Letter of Credit shall be deemed an advance under the Line of Credit and shall
be repaid by Borrower on or before the Line Maturity Date in accordance with the
terms and conditions of this Agreement. Borrower agrees that Agent, in its sole
discretion, may debit any demand deposit account maintained by Borrower with
Agent, other than a demand deposit account maintained by Borrower on behalf of a
joint venture of which Borrower is a member, for the amount of any such draft.

              SECTION 2.2 TERM LOANS.

              (a) Term Loan A. On the terms and subject to the conditions set
forth in this Agreement, each Lender hereby severally agrees, on a pro rata
basis in accordance with Schedule 1 attached hereto, to grant Term Loan A to
Borrower on the Closing Date in the principal amount of One Million One Hundred
Ninety Thousand Dollars ($1,190,000.00), the proceeds of which shall be used to
repay existing indebtedness encumbering the Monterey Park Property in the
approximate amount of $684,260.00 and to finance improvements and additions to
the El Monte Property. Borrower's obligation to repay Term Loan A shall be
evidenced by the Term Note for Term Loan A, all terms of which are incorporated
herein by this reference.

              (b) Repayment of Term Loan A. Interest on Term Loan A shall be
paid monthly or as otherwise set forth in this Agreement. Commencing September
30, 2000, and on the last day of each calendar quarter thereafter, Borrower
shall make quarterly installments of principal in the amount required in order
to amortize fully the principal amount of Term Loan A, together with interest
thereon at the rates of interest applicable under the Term Loan A Notes, over
twenty (20) years and continuing until the Term Loan A Maturity Date, as
follows:


<TABLE>
<CAPTION>
               ----------------------------------------------------------------------
                      YEAR         QUARTERLY PAYMENT AMOUNT
               ----------------------------------------------------------------------
<S>                                <C>
                      2000                  $14,875
                      2001                  $14,875
                      2002                  $14,875
                      2003                  $14,875
                      BALANCE DUE         $1,011,500
               ======================================================================
</TABLE>


There will be one payment due on March 31, 2003 in the amount of $14,875 with
the entire balance of principal and interest then unpaid due and payable on the
Term Loan A Maturity Date. Such quarterly payment shall be credited to
principal, and interest shall be paid separately as set forth herein.



                                      -19-
<PAGE>   26

              (c) Term Loan B. On the terms and subject to the conditions set
forth in this Agreement, each Lender hereby severally agrees, on a pro rata
basis in accordance with Schedule 1 attached hereto, to grant Term Loan B to
Borrower on the Closing Date in the principal amount of One Million Six Hundred
Ten Thousand Dollars ($1,610,000.00), the proceeds of which shall be used to
repay existing indebtedness encumbering the El Monte Property in the approximate
amount of $1,106,559.00 and to finance improvements and additions to the El
Monte Property. Borrower's obligation to repay Term Loan B shall be evidenced by
the Term Notes for Term Loan B, all terms of which are incorporated herein by
this reference.

              (d) Repayment of Term Loan B. Interest on Term Loan B shall be
paid monthly or as otherwise set forth in this Agreement. Commencing on
September 30, 2000, and on the last day of each calendar quarter thereafter,
Borrower shall make quarterly installments of principal in the amount required
in order to amortize fully the principal amount of Term Loan B, together with
interest thereon at the rates of interest applicable under the Term Loan B
Notes, over twenty (20) years and continuing until the Term Loan B Maturity
Date, as follows:


<TABLE>
<CAPTION>
               ---------------------------------------------------------------------
                      YEAR          QUARTERLY PAYMENT AMOUNT
               ---------------------------------------------------------------------
<S>                                 <C>
                      2000                    $20,125
                      2001                    $20,125
                      2002                    $20,125
                      2003                    $20,125
                      BALANCE DUE           $1,368,500
               =====================================================================
</TABLE>


There will be one payment due on March 31, 2003 in the amount of $20,125 with
the entire balance of principal and interest then unpaid due and payable on the
Term Loan B Maturity Date. Such quarterly payment shall be credited to
principal, and interest shall be paid separately as set forth herein.

              (e) Term Loan C. On the terms and subject to the conditions set
forth in this Agreement, each Lender hereby severally agrees, on a pro rata
basis in accordance with Schedule 1 attached hereto, to grant Term Loan C to
Borrower on the Closing Date in the principal amount of Three Million Two
Hundred Thousand Dollars ($3,200,000.00), the proceeds of which shall be used to
finance the construction of improvements and additions to the El Monte Property.
Borrower's obligation to repay Term Loan C shall be evidenced by the Term Notes
for Term Loan C, all terms of which are incorporated herein by this reference.



                                      -20-
<PAGE>   27

              (f) Repayment of Term Loan C. Borrower shall make installments of
interest only through December 31, 2000 monthly or as otherwise set forth in
this Agreement. Commencing on March 31, 2001, and on the last day of each
calendar quarter thereafter, Borrower shall make quarterly installments of
principal in the amount required in order to amortize fully the principal amount
of Term Loan C, together with interest thereon at the rates of interest
applicable under the Term Loan C Notes, over five (5) years and continuing until
the Term Loan C Maturity Date, as follows:


<TABLE>
<CAPTION>
              ----------------------------------------------------------------------
                     YEAR            QUARTERLY PAYMENT
                                          AMOUNT
              ----------------------------------------------------------------------
<S>                                  <C>
                     2001                $160,000
                     2002                $160,000
                     2003                $160,000
              ----------------------------------------------------------------------
                 BALANCE DUE           $1,760,000
              ======================================================================
</TABLE>


There will be one payment due on March 31, 2003 in the amount of $160,000 with
the entire balance of principal and interest then unpaid due and payable on the
Term Loan C Maturity Date. Such quarterly payment shall be credited to
principal, and interest shall be paid separately as set forth herein.

              (g) Prepayment. Borrower may prepay principal on each of the Term
Loans solely in accordance with the provisions of Sections 2.8 and 2.13 of this
Agreement.

              SECTION 2.3 THE LETTER OF CREDIT FACILITY.

              (a) Terms and Amount of Letter of Credit. U.S. Bank has issued its
irrevocable direct-pay Letter of Credit for the account of Borrower in favor of
the Trustee in an initial amount equal to the initial Stated Amount, which
amount shall be amortized as follows: $10,340,000.00 of the initial Stated
Amount shall be amortized based on a twenty-five (25) year amortization schedule
and $1,275,000.00 of the initial Stated Amount shall be amortized based on a
five (5) year amortization schedule. The amount of principal and interest which
Borrower must pay monthly in order to amortize fully the initial Stated Amount
according to the above amortization schedule is set forth on Schedule 2.3(a)
attached hereto. Notwithstanding any contrary provision of this Agreement, this
Agreement shall not expire or be otherwise terminated until such time as all
payment obligations due or to become due to Agent or any Lender with respect to
the Letter of Credit have been paid.



                                      -21-
<PAGE>   28

              (b) Reimbursement Obligations. Borrower agrees to pay to Agent (i)
on the day that any drawing is made by the Trustee under the Letter of Credit,
all amounts to be advanced by Agent pursuant to the Letter of Credit on behalf
of Borrower in respect of such drawing, and (ii) interest on any and all amounts
that Borrower fails to pay when due under this Agreement from the date such
amounts become payable until payment in full (collectively, the "Reimbursement
Obligations"). For each day that any Reimbursement Obligation remains unpaid,
interest shall accrue on such amounts at an aggregate rate per annum equal to
five percent (5%) above the Reference Rate (the "Reimbursement Default Rate"),
based on the actual number of days elapsed in a year of 360 days.

              SECTION 2.4 NOTICE OF BORROWING. Borrower, through one of its
Authorized Representatives, shall request advances under each of the Term Loans
and each advance under the Line of Credit by giving Agent irrevocable written
notice or telephonic notice (confirmed promptly in writing), in the form of
Exhibit D attached hereto (each, a "Notice of Borrowing"), which specifies,
among other things:

                     (i) the principal amount to be disbursed, if under the Term
              Loans, or the principal amount of the requested advance, if under
              the Line of Credit;

                     (ii) the proposed date of borrowing, which shall be a
              Business Day;

                     (iii) the interest rate option applicable to such borrowing
              (which, for a LIBOR interest selection, shall be subject to the
              minimum dollar requirements set forth in Section 2.5(a) hereof);
              and

                     (iv) if the amounts disbursed or advanced will bear
              interest determined in relation to LIBOR, the length of the Fixed
              Rate Term applicable thereto.

Each such Notice of Borrowing must be received by Agent not later than 10:00
a.m. Pacific Standard time at least one (1) Business Day prior to the date of
borrowing if interest will be determined in relation to the Reference Rate, and
(ii) at least three (3) Business Days prior to the date of borrowing if interest
will be determined in relation to LIBOR; provided however, that Agent, at its
sole discretion, may permit borrowing requests to be made by telephone
(confirmed promptly in writing) and on the same day only if interest will be
determined in relation to the Reference Rate. Agent shall promptly notify each
Lender of the contents of each Notice of Borrowing and of the amount of the
disbursement or advance to be made by such Lender. Each advance for which
interest will be determined in relation to the Reference Rate shall be in the
minimum amount of $100,000.00.



                                      -22-
<PAGE>   29

              SECTION 2.5 INTEREST/FEES.

              (a) Interest on the Line of Credit. The outstanding principal
balance of the Line of Credit shall bear interest in accordance with the
following interest rate options, as designated periodically by Borrower:

                     (i) at the applicable margin over the Reference Rate set
              forth in the Line of Credit Pricing Grid; or

                     (ii) at the applicable margin over LIBOR set forth in the
              Line of Credit Pricing Grid; provided, however, that each LIBOR
              interest selection must be for a minimum amount of $1,000,000 and
              in integral multiples of $100,000.

              (b) Interest on the Term Loans. The outstanding principal balances
of each of the Term Loans shall bear interest in accordance with the following
interest rate options, as designated periodically by Borrower:

                     (i) at the applicable margin over the Reference Rate set
              forth in the Term Loan Pricing Grid;

                     (ii) at the applicable margin over LIBOR set forth in the
              Term Loan Pricing Grid; provided, however, that each LIBOR
              interest selection must be for a minimum amount of $1,000,000 and
              in integral multiples of $100,000; or

                     (iii) at a fixed rate per annum equal to the Treasury Rate
              (for a term of one, two or three years, at Borrower's option).

The margins above the Reference Rate or LIBOR, as applicable (the "Interest Rate
Margins"), at which the outstanding principal balances of the Line of Credit and
each of the Term Loans bear interest from time to time shall be adjusted in
accordance with the Line of Credit Pricing Grid and the Term Loan Pricing Grid,
respectively. Until such time as Agent receives Borrower's financial statements
(as required under this Agreement) evidencing Borrower's compliance with any of
the Funded Debt to EBITDA ratios set forth in the applicable Pricing Grid, the
Level IV Interest Rate Margin above the Reference Rate or LIBOR shall apply.
Thereafter, Agent shall adjust the Interest Rate Margins in accordance with the
applicable Pricing Grid on the first day of the month following each month in
which Agent receives updated financial statements from Borrower pursuant to this
Agreement. Such Interest Rate Margins shall be determined (i) using the most
recent quarterly financial statement of Borrower available to Agent on the
applicable adjustment date to determine the amount of Funded Debt and (ii) using
the most recent financial statements of Borrower available



                                      -23-
<PAGE>   30

to Agent on the applicable adjustment date for a four (4) consecutive quarter
period to determine EBITDA.

              (c) Fees for the Line of Credit.

                     (i) Line of Credit Facility Fee. Commencing on the Closing
              Date and continuing through the Line Maturity Date, Borrower shall
              pay to Agent, for the ratable benefit of Lenders, a per annum
              facility fee (the "Line of Credit Facility Fee") calculated based
              on the average undisbursed portion of the Line of Credit at the
              applicable Line of Credit Facility Fee described in the Line of
              Credit Pricing Grid. Such Line of Credit Facility Fee shall be
              payable quarterly in arrears commencing September 30, 2000, and on
              the last day of each calendar quarter thereafter, and on the Line
              Maturity Date. The rate set forth above shall be adjusted in
              accordance with the Line of Credit Pricing Grid as of the first
              day of the month following receipt of Borrower's financial
              statements as required under this Agreement.

                     (ii) Borrower Letter of Credit Fees. In the event any
              Borrower Letters of Credit are issued for the account of Borrower,
              Borrower shall pay to the Agent , for the ratable benefit of the
              Lenders, (1) with respect to each Borrower Letter of Credit which
              is a commercial letter of credit, a fee at issuance equal to one
              quarter of one percent (.25%) of the Borrower Letter of Credit
              amount plus a flat fee of $125.00 for each commercial letter of
              credit without negotiation and a fee upon negotiation equal to one
              quarter of one percent (.25%) of the drawn amount plus a flat fee
              of $100.00 for each commercial letter of credit with negotiation,
              and (2) with respect to each Borrower Letter of Credit which is a
              standby letter of credit, a per annum fee equal to the Interest
              Rate Margin above LIBOR set forth in the Line of Credit Pricing
              Grid then applicable and multiplied by the face amount of such
              standby letter of credit.

              (d) Term Loan Commitment Fees. Borrower shall pay to Agent a
non-refundable commitment fee for each of the Term Loans as set forth below,
which fee shall be due and payable in full on the date on which the applicable
Term Loan is made:

                      --     Term Loan A:  $11,900.00

                      --     Term Loan B:  $16,100.00

                      --     Term Loan C:  $32,000.00



                                      -24-
<PAGE>   31

              (e) Letter of Credit Facility Fee. Borrower shall pay to Agent a
Letter of Credit Facility fee (for itself) in an amount equal to one and
one-quarter of one percent (1.25%) per annum of the Stated Amount of the Letter
of Credit, payable annually on each anniversary of the Date of Issuance, until
the earlier of the termination or expiration of the Letter of Credit Facility,
which fee shall be non-refundable even if the Letter of Credit is terminated or
canceled before its stated expiration date.

              (f) Computation and Payment. All interest and fees shall be
computed on the basis of a 360-day year, actual days elapsed. Interest
determined in relation to the Reference Rate or the Treasury Rate shall be
payable on the first (1st) day of each month. Interest determined in relation to
LIBOR shall be payable on the last day of the Fixed Rate Term to which such
interest rate applies; provided that if such Fixed Rate Term is for six (6)
months, on the first (1st) day of the fourth (4th) month of such Fixed Rate Term
and on the last day of such Fixed Rate Term.

              SECTION 2.6 CONVERSION OF INTEREST OPTIONS.

              (a) Election. Subject to the minimum dollar requirements set forth
in Section 2.5(a) hereof, (i) at any time any portion of the Line of Credit or
any of the Term Loans bear interest determined in relation to the Reference
Rate, Borrower may convert all or any portion thereof so that it bears interest
determined in relation to LIBOR for a Fixed Rate Term designated by Borrower,
and (ii) at any time any portion of the Line of Credit or the Term Loan bears
interest determined in relation to LIBOR, Borrower may convert all or a portion
thereof at the end of the Fixed Rate Term applicable thereto so that it bears
interest determined in relation to the Reference Rate or in relation to LIBOR
for a new Fixed Rate Term designated by Borrower. In addition, Borrower may
elect to convert any Term Loan to a fixed rate equal to the Treasury Rate as set
forth in Section 2.5(b). If Borrower has not made the required interest rate
conversion or continuation election prior to the last day of any Fixed Rate
Term, Borrower shall be deemed to have made a Reference Rate interest selection
for the amounts that were subject thereto.

              (b) Notice to Agent. Borrower, through one of its Authorized
Representatives, shall request each interest rate conversion or continuation by
giving Agent irrevocable written notice or telephonic notice (confirmed promptly
in writing), in the form of Exhibit E attached hereto (a "Notice of Conversion
or Continuation"), which specifies, among other things:

                     (i) the Credit to which such Notice applies;

                     (ii) the principal amount which is the subject of such
              conversion or continuation;



                                      -25-
<PAGE>   32

                     (iii) the proposed date of such conversion or continuation,
              which shall be a Business Day;

                     (iv) and if such Notice pertains to a LIBOR interest
              selection, the length of the applicable Fixed Rate Term.

Any such Notice of Conversion or Continuation must be received by Agent not
later than 10:00 a.m. at least one (1) Business Day prior to the effective date
of any Reference Rate interest selection, and (ii) at least three (3) Business
Days prior to the effective date of any LIBOR interest selection; provided
however, that Agent, at its sole discretion, may permit interest rate conversion
or continuation requests to be made by telephone (confirmed promptly in writing)
and on the same day for a Reference Rate interest selection. Agent shall
promptly notify each Lender of the contents of each such Notice of Conversion or
Continuation, or if timely notice is not received from Borrower prior to the
last day of any Fixed Rate Term of the automatic conversion of the amounts
subject thereto to the Reference Rate interest option.

              SECTION 2.7 OTHER PAYMENT TERMS.

              (a) Automatic Debit. Agent shall, and Borrower hereby authorizes
Agent to, debit any deposit account of Borrower with Agent (including the
Reimbursement Deposit Account described in Section 3.2 hereof) for all payments
of principal, interest and fees as they become due on any of the Credits. At
least one Business Day prior to any such debit of a deposit account of Borrower,
Agent shall provide a written statement of all amounts to be debited. Should,
for any reason whatsoever, the funds in any such deposit account be insufficient
to pay all principal, interest and/or fees when due, Borrower shall, immediately
upon demand, remit to Agent the full amount of any such deficiency.

              (b) Place and Manner. Borrower shall make all payments due to each
Lender under the Loan Documents by payment to Agent at Agent's Office, for the
account of such Lender, in lawful money of the United States and in same day or
immediately available funds not later than 12:00 noon Pacific Standard time on
the date due. Agent shall promptly disburse to each Lender at such Lender's
Applicable Lending Office each such payment received by Agent for such Lender.

              (c) Date. Whenever any payment due hereunder shall fall due on a
day other than a Business Day, such payment shall be made on the next succeeding
Business Day, and such extension of time shall be included in the computation of
interest or fees, as the case may be.

              (d) Default Interest Rate. Notwithstanding any contrary provision
of this Agreement or any Note, upon the occurrence and during the continuance of
any Event of Default, interest shall accrue on the outstanding principal balance
of the Line



                                      -26-
<PAGE>   33

of Credit and each of the Term Loans at an increased rate per annum (computed on
the basis of a year of 360 days for the actual number of days elapsed) equal to
two percent (2%) above the rate of interest from time to time applicable to such
Credit, and on the outstanding principal balance of the Letter of Credit
Facility at an increased rate per annum (computed on the basis of a year of 360
days for the actual number of days elapsed) equal to five percent (5%) above the
Reference Rate in effect from time to time. Borrower agrees that an Event of
Default will cause the Agent to incur additional expense in servicing the
Credits, that the Agent is entitled to damages for the detriment caused thereby,
that such damages are extremely difficult and impractical to ascertain, and that
application of the above default interest rates to the amounts owing by Borrower
under the Loan Documents is a reasonable estimate of such damages to Agent.

              (e) Application of Payments. All payments under the Loan Documents
(including prepayments) shall be applied first to unpaid fees, costs and
expenses then due and payable under this Agreement and the other Loan Documents,
second to accrued interest then due and payable under the Loan Documents, and
finally to reduce the outstanding principal amount of such Credits. Subject to
the provisions of Section 3.2, if no Event of Default has occurred and is
continuing, Agent shall, subject to the preceding sentence, apply all payments
to be applied to Borrower's obligations as directed by Borrower. If an Event of
Default has occurred and is continuing or if Borrower fails to direct
application, Agent shall apply such payments as determined by it in its
discretion.

              (f) Failure to Pay Agent. Unless Agent shall have received notice
from Borrower at least one (1) Business Day prior to the date on which any
payment is due to the Lenders hereunder that Borrower will not make such payment
in full, Agent may assume that Borrower has made such payment in full to Agent
on such date and Agent may, in reliance upon such assumption, cause to be
distributed to each Lender on such due date an amount equal to the amount then
due such Lender. If and to the extent Borrower shall not have made such payment
in full to Agent, such Lender shall repay to Agent forthwith on demand such
amount distributed to such Lender together with interest thereon, for each day
from the date such amount is distributed to such Lender until the date such
Lender repays such amount to Agent, at the Federal Funds Rate. A certificate of
Agent submitted to any Lender with respect to any amounts owing by such Lender
under this Section 2.7(f) shall be presumptive evidence of such amounts.

              SECTION 2.8 PREPAYMENT.

              (a) Optional Prepayments. Borrower may, through one of its
Authorized Representatives and upon at least (i) one (1) Business Day's prior
written notice to Agent if interest is determined in relation to the Reference
Rate, or (ii) three (3) Business Days' prior written notice to Agent if interest
is determined in relation to



                                      -27-
<PAGE>   34

LIBOR, prepay the outstanding amount of the Line of Credit or any Term Loan in
whole or in part, without premium or penalty, except as required by Section 2.13
hereof. Partial prepayments of any portion of the Line of Credit or any Term
Loan shall be in the minimum amount of $1,000,000 and in integral multiples of
$100,000.

              (b) Application of Term Loan Prepayments. All optional prepayments
on any of the Term Loans pursuant to Section 2.8(a) shall be applied pro rata to
reduce principal then outstanding.

              SECTION 2.9 FUNDING.

              (a) Lender Funding and Disbursement. Each Lender shall, before
11:00 a.m. (San Francisco time) on the date of each borrowing under the Line of
Credit or under any of the Term Loans, make available to Agent at Agent's
Office, in same day or immediately available funds, such Lender's Proportionate
Share thereof. After Agent's receipt of such funds and upon fulfillment of the
applicable conditions set forth in Article V hereof, Agent will promptly
disburse such funds in same day or immediately available funds to Borrower.
Unless otherwise directed by Borrower in writing, Agent shall disburse the
proceeds of each borrowing to Borrower by deposit to any demand deposit account
maintained by Borrower with Agent.

              (b) Lender's Failure to Fund. Unless Agent shall have received
notice from a Lender on or prior to the date of any borrowing under the Line of
Credit or any of the Term Loans that such Lender will not make available to
Agent such Lender's Proportionate Share thereof, Agent may assume that such
Lender has made such portion available to Agent on the date of such borrowing in
accordance with Section 2.9(a) hereof, and Agent may, in reliance upon such
assumption, make available to Borrower (or otherwise disburse) on such date a
corresponding amount. If any Lender does not make the amount of its
Proportionate Share of any borrowing available to Agent on the date of such
borrowing, such Lender shall pay to Agent, on demand, interest which shall
accrue on such amount until made available to Agent at rates equal to (i) the
daily Federal Funds Rate during the period from the date of such borrowing
through the third Business Day thereafter, and (ii) thereafter, the Reference
Rate in effect from time to time. A certificate of Agent submitted to any Lender
with respect to any amounts owing under this Section 2.9(b) shall be presumptive
evidence of such amounts. If any Lender's Proportionate Share of any borrowing
is not in fact made available to Agent by such Lender within three (3) Business
Days after the date of such borrowing, Borrower shall pay to Agent, on demand,
an amount equal to such Proportionate Share together with interest thereon, for
each day from the date such amount was made available to Borrower until the date
such amount is repaid to Agent, at the rate of interest then applicable thereto.

              (c) Lenders' Obligations Several. The obligation of each Lender
hereunder is several. The failure of any Lender to make available its
Proportionate



                                      -28-
<PAGE>   35

Share of any borrowing shall not relieve any other Lender of its obligation
hereunder to do so on the date requested, but no Lender shall be responsible for
the failure of any other Lender to make available the Proportionate Share to be
funded by such other Lender.

              SECTION 2.10 PRO RATA TREATMENT.

              (a) Borrowings. Except as otherwise provided herein, (i) each
extension of credit under any Credit shall be made or shared among the Lenders
pro rata according to their respective Proportionate Shares in such Credit, and
(ii) each payment of principal of and interest or fees on a Credit shall be made
or shared among the Lenders pro rata according to the respective unpaid
principal amounts of such Credit held by such Lenders.

              (b) Sharing of Payments, Etc. If any Lender shall obtain any
payment (whether voluntary, involuntary or otherwise) on account of a Credit in
excess of its ratable share of payments on account of such Credit obtained by
all Lenders entitled to such payments, such Lender shall forthwith purchase from
the other Lenders sufficient participations in such Credit as shall be necessary
to cause the purchasing Lender's interest in the Credit to be equivalent to the
excess payment received; provided however, that if all or any portion of such
excess payment is thereafter recovered from such purchasing Lender, such
purchase shall be rescinded and each other Lender shall repay to the purchasing
Lender the purchase price to the extent of such recovery together with an amount
equal to such other Lender's ratable share (according to the proportion of (i)
the amount of such other Lender's required repayment to (ii) the total amount so
recovered from the purchasing Lender) of any interest or other amount paid or
payable by the purchasing Lender in respect of the total amount so recovered.
Borrower agrees that any Lender so purchasing a participation from another
Lender pursuant to this Section 2.10(b) may, to the fullest extent permitted by
law, exercise all its rights of payment (but not including any right of setoff)
with respect to such participation as fully as if such Lender were the direct
creditor of Borrower in the amount of such participation.

              SECTION 2.11 CHANGE OF CIRCUMSTANCES.

              (a) Inability to Determine Rate. If Agent at any time shall
determine that adequate and reasonable means do not exist for ascertaining
LIBOR, or the Majority Lenders shall determine at any time that LIBOR does not
accurately reflect the cost to Lenders of making or maintaining LIBOR interest
rates hereunder, then Agent shall give telephonic notice (promptly confirmed in
writing) to Borrower and each Lender of such determination. If such notice is
given, and until such notice has been withdrawn in writing by Agent, then no
LIBOR interest option may be selected by Borrower and any portion of any Credit
which bears interest determined in relation to LIBOR, subsequent to the end of
the Fixed Rate Term applicable thereto, shall bear



                                      -29-
<PAGE>   36

interest determined in relation to the Reference Rate pursuant to the terms and
conditions of this Agreement.

              (b) Illegality: Termination of Commitment. Notwithstanding any
other provisions herein, if any Change of Law shall make it unlawful for any
Lender (i) to make a LIBOR interest rate available, or (ii) to maintain LIBOR
interest rates hereunder, then, in the former event, any obligation of Lenders
hereunder to make available such unlawful LIBOR interest rate shall forthwith be
canceled, and in the latter event, any such unlawful LIBOR interest rate then
outstanding shall at the option of Agent be converted so that interest is
determined in relation to the Reference Rate pursuant to the terms of this
Agreement; provided however, if any such Change in Law, shall permit a LIBOR
interest rate until the expiration of the Fixed Rate Term relating thereto, then
such permitted LIBOR interest rate shall continue as such until the end of such
Fixed Rate Term. With respect to any outstanding principal amount as to which
such LIBOR interest rate is converted to a lower rate in accordance with the
foregoing terms and provisions, Borrower agrees to pay to Agent, for the benefit
of each Lender, as appropriate, the amount of any increase in cost or expense to
the Lenders.

              (c) Charges: Illegality. Upon the occurrence of any event
described in Section 2.11(b) hereof, Borrower shall pay to Agent, for the
benefit of each Lender, as appropriate, such amount or amounts as may be
necessary to compensate such Lender for any fines, fees, changes, penalties or
other amounts payable by such Lender as a result thereof and which are
attributable to LIBOR interest rates made available to Borrower hereunder. In
determining which amounts payable by any Lender and/or losses incurred by any
Lender are attributable to LIBOR interest rates made available to Borrower
hereunder, any reasonable allocation made by any Lender among its operations
shall be conclusive and binding upon Borrower provided Lender provides Borrower
with a statement setting forth in reasonable detail such amount and the
reasonable calculation thereof.

              (d) Charges: Change of Law. If, after the date of this Agreement,
any Change of Law:

                     (i) shall subject any Lender to any tax, duty or other
              charge with respect to any LIBOR interest rate, or shall change
              the basis of taxation of payments by Borrower to any Lender of
              principal, interest, fees or any other amount payable hereunder
              (except for changes in the rate of taxation on the overall net
              income of any Lender imposed by the jurisdiction of such Lender's
              incorporation or by any jurisdiction in which its Applicable
              Lending Office is located); or

                     (ii) shall impose, modify or hold applicable any reserve,
              special deposit, compulsory loan or similar requirement against
              assets



                                      -30-
<PAGE>   37

              held by, deposits or other liabilities in or for the account of,
              advances or loans by, or any other acquisition of funds by any
              Lender; or

                     (iii) shall impose on any Lender any other condition with
              respect to its performance hereunder;

and the effect of any of the foregoing is to increase the cost to such Lender of
making, renewing or maintaining any LIBOR interest rate hereunder or to reduce
any amount receivable by such Lender in connection therewith, then Borrower
shall, pay to Agent, on behalf of each Lender, as appropriate, such amount or
amounts as may be necessary to reimburse such Lender for such increased costs or
to compensate such Lender for such reduced amounts. A certificate as to the
amount of such increased costs or reduced amounts, delivered by such Lender to
Borrower (which delivery shall be through Agent) shall, in the absence of
manifest error, be conclusive and binding on Borrower for all purposes provided
Lender provides Borrower with a statement setting forth in reasonable detail
such amount and the reasonable calculation thereof.

              (e) Capital Requirements. If any Lender shall have determined that
any Change of Law regarding capital adequacy which occurs after the Closing Date
hereof has or shall have the effect of reducing the rate of return on the
capital of such Lender (or any entity controlling such Lender) as a consequence
of such Lender's obligations hereunder to a level below that which such Lender
or such entity would have achieved but for such Change of Law (taking into
consideration such Lender's or such entity's policies with respect to capital
adequacy), by an amount deemed by such Lender to be material, then from time to
time, within fifteen (15) days after presenting a statement setting forth in
reasonable detail such amount and the reasonable calculation thereof. Borrower
shall pay to Agent, for the benefit of such Lender such amounts set forth
therein which shall compensate such Lender for such reduction.

              SECTION 2.12 TAXES ON PAYMENTS.

              (a) Payments Free of Taxes. All payments made by Borrower under
the Loan Documents shall be made free and clear of, and without deduction or
withholding for or on account of, any present or future income, stamp or other
taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now
or hereafter imposed, levied, collected, withheld or assessed by any
Governmental Authority (except net income taxes imposed on Agent or any Lender)
(with all such non-excluded taxes, levies, imposts, duties, charges, fees,
deductions and withholdings relating to the payments made hereunder being
hereinafter referred to herein as "Taxes"). If any Taxes are required to be
withheld from any amounts payable to Agent or any Lender under the Loan
Documents, the amounts so payable to Agent or such Lender shall be increased to
the extent necessary to yield to Agent or such Lender (after payment of all
Taxes) interest or any such other amounts payable hereunder at the rates or in
the amounts specified in the Loan Documents. Whenever any such



                                      -31-
<PAGE>   38

Taxes are payable by Borrower, as promptly as possible thereafter, Borrower
shall send to Agent, for its own account or for the account of such Lender, as
the case may be, a certified copy of an original official receipt received by
Borrower showing payment thereof. If Borrower fails to pay any Taxes when due to
the appropriate taxing authority or fails to remit to Agent the required
receipts or other required documentary evidence, Borrower shall indemnify Agent
and the Lenders for any incremental taxes, interest or penalties that may become
payable by Agent or any Lender as a result of any such failure. The agreements
in this Section 2.12(a) shall survive the termination of this Agreement for a
period not to exceed the lesser of the applicable statute of limitations or
twenty-four months.

              (b) Withholding Exemption Certificates. Each Lender agrees that it
will deliver to Borrower and Agent, upon the reasonable request of Borrower or
Agent, either (i) a statement that it is incorporated under the laws of the
United States of America or a state thereof, or (ii) if it is not so
incorporated, two duly completed copies of United States Internal Revenue
Service Form 1001 or 4224 or successor applicable form, as the case may be,
certifying in each case that such Lender is entitled to receive payments under
this Agreement without deduction or withholding of any United States federal
income taxes.

              SECTION 2.13 FUNDING LOSS INDEMNIFICATION.

              (a) LIBOR. If Borrower shall (a) repay or prepay any portion of a
Credit which bears interest determined in relation to LIBOR on any day other
than the last day of the Fixed Rate Term therefor (whether an optional
prepayment, a mandatory prepayment, a payment upon acceleration or otherwise),
(b) fail to borrow any such portion of a Credit for which a Notice of Borrowing
has been delivered to Agent (whether as a result of the failure to satisfy any
applicable conditions or otherwise), or (c) fail to convert or continue at the
LIBOR interest option any portion of a Credit in accordance with a Notice of
Conversion or Continuation delivered to Agent (whether as a result of the
failure to satisfy any applicable conditions or otherwise), Borrower shall,
concurrent with Borrower's repayment pursuant to the foregoing, reimburse Agent
on behalf of each Lender, as appropriate, and hold such Lender harmless for all
costs and losses incurred by such Lender as a result of such repayment,
prepayment or failure. Borrower understands that such costs and losses may
include, without limitation, losses incurred by a Lender as a result of funding
and other contracts entered into by such Lender to fund any LIBOR portion of any
Credit. Each Lender demanding payment under this Section 2.13 shall, in
accordance with the foregoing, deliver to Agent for delivery to Borrower a
certificate setting forth the amount of costs and losses for which demand is
made. Borrower shall have the right to review and confirm any amount alleged to
be owing and any calculation relating thereto. The agreements in this Section
2.13 shall survive the termination of this Agreement.



                                      -32-
<PAGE>   39

              (b) Treasury Rate. If Borrower shall repay or prepay any portion
of a Credit which bears interest at the Treasury Rate on any day other than the
last day of its term (whether an optional prepayment, a mandatory prepayment, a
payment upon acceleration or otherwise), Borrower shall pay to such Lender the
"prepayment indemnity" more particularly described on Schedule 2.13(b).

              SECTION 2.14 AUTHORIZED REPRESENTATIVES. On the Closing Date, and
from time to time subsequent thereto at Borrower's option, Borrower shall
deliver to Agent a written notice in the form of Exhibit F attached hereto
(each, a "Notice of Authorized Representatives"), which designates by name each
of Borrower's Authorized Representatives and includes each of their respective
specimen signatures. Agent shall be entitled to rely conclusively on the
authority of each officer or employee designated as an Authorized Representative
in the most current Notice of Authorized Representatives delivered by Borrower
to Agent, to request borrowings and select interest rate options hereunder, and
to give to Agent such other notices are as specified herein as being made
through one of Borrower's Authorized Representatives, until such time as
Borrower has delivered to Agent, and Agent has actual receipt of, a new written
Notice of Authorized Representatives. Agent shall have no duty or obligation to
Borrower to verify the authenticity of any signature appearing on any Notice of
Borrowing, Notice of Conversion or Continuation or any other written notice from
an Authorized Representative or to verify the authenticity of any person
purporting to be an Authorized Representative giving any telephonic notice
permitted hereby.

              SECTION 2.15 COLLATERAL.

              (a) Personal Property Collateral and Contract Collateral. As
security for all indebtedness of Borrower to Lenders pursuant to this Agreement,
as of the Closing Date Borrower grants to Agent, for the benefit of Lenders, a
security interest of first priority in the Personal Property Collateral.

              (b) Real Property Collateral. As additional security for all
indebtedness of Borrower to Lenders pursuant to this Agreement, as of the
Closing Date Borrower grants to Agent, for the benefit of Lenders (but only to
the extent that a Lender has a Proportional Share in any of the Term Loans), (i)
a lien of first priority in the Monterey Park Property and all improvements
thereon with respect to Term Loan A, (ii) a lien of first priority in the El
Monte Property and all improvements thereon with respect to Term Loan B, (iii) a
lien of second priority in the Monterey Park Property and all improvements
thereon with respect to Term Loan C, and (iv) a lien of second priority in the
El Monte Property and all improvements thereon with respect to Term Loan C,
subject solely to such exceptions to title as Agent shall deem acceptable.



                                      -33-
<PAGE>   40

              (c) Cross-Collateralization and Cross-Default. Borrower
acknowledges that the Lenders have made the Credits to Borrower upon the
security of Borrower's collective interests in the Collateral and in reliance
upon the Collateral taken together being of greater value as collateral security
than the sum of the Collateral taken separately. Borrower agrees that the
Security Agreements are and will be cross-collateralized and cross-defaulted
with each other so that (i) an Event of Default under any Security Agreement
shall constitute an Event of Default under each of the other Security
Agreements; (ii) an Event of Default under any Note or this Agreement shall
constitute an Event of Default under each Security Agreement; and (iii) each
Deed of Trust shall secure the obligations evidenced by all of the Notes as if a
single blanket lien were placed on all of the Collateral as security for such
obligations provided that to the extent that a Lender does not have a
Proportional Share in a particular Credit hereunder, such Lender's security
interest in the Collateral for such Credit shall be subordinate and second in
priority to the pro rata security interests of the Lenders having Proportional
Shares in such Credit(s).

              (d) Documentation; Fees. All of the foregoing shall be evidenced
by and subject to the terms of the documents described in Section 5.1 hereof.
Borrower shall fully cooperate with Agent and perform all additional acts
reasonably requested by Agent or any Lender to effect the purposes of this
Section 2.15. Borrower shall reimburse Agent, immediately upon demand, for all
reasonable costs and expenses incurred by Agent in connection with any of the
foregoing security, including filing and recording fees and costs of
inspections, expert opinions, appraisals, and audits.

              SECTION 2.16 GUARANTIES. One hundred percent (100%) of the
principal amount of the Credits plus one hundred percent (100%) of all accrued
interest, late charges, attorney's fees and other charges arising under the
Credits, shall be unconditionally guaranteed by each of the Guarantors.
Notwithstanding the foregoing, Lender agrees that American Xtal Technology (Hong
Kong) and Lyte Optronics Ltd. (UK) shall be released at such time as Borrower
has provided Agent with satisfactory evidence that such Guarantors have ceased
all operations and have no assets.


                                   ARTICLE III

                       PAYMENTS WITH RESPECT TO THE BONDS
                            AND THE LETTER OF CREDIT

              SECTION 3.1 ANNUAL REDEMPTION OF BONDS. Borrower covenants to take
all necessary action to prepay the loan and cause optional redemptions of the
Bonds pursuant to Article IV of the Indenture and this Section 3.1 at a price
equal to the principal amount of the Bonds to be redeemed, together with accrued
interest to the redemption date, on the Bond Interest Payment



                                      -34-
<PAGE>   41

Date for December of each year, commencing with the Bond Interest Payment Date
for the month of December 2000. The principal amount of Bonds to be redeemed on
each such December Bond Interest Payment Date is set forth on Schedule 2.3(a)
attached hereto.

              SECTION 3.2 REIMBURSEMENT DEPOSIT ACCOUNT. Borrower agrees to
maintain an interest-bearing deposit account in Borrower's name with U.S. Bank
(the "Reimbursement Deposit Account"), which shall be pledged to Agent as
security for Borrower's performance of its obligations under this Agreement.
Borrower agrees to deposit into the Reimbursement Deposit Account on a monthly
basis, three (3) Business Days before the Bond Interest Payment Date for such
month, until the earlier to occur of (x) the earliest date on which both no
further demands may be made for a drawing under the Letter of Credit and all
amounts due to Agent or any Lender under this Agreement in respect of the Letter
of Credit have been paid in full, or (y) the Expiration Date (such earlier date,
the "Termination Date"), an amount equal to the sum of (i) the next monthly
interest payment that Borrower is obligated to make under the Indenture and (ii)
the smallest monthly amount that, if deposited by Borrower into the
Reimbursement Deposit Account each month during the year commencing on the date
of the last annual principal redemption of the Bonds, would be sufficient to
meet when due the next annual principal redemption of the Bonds as required
under Section 3.1 hereof.

              SECTION 3.3 OTHER OPTIONAL REDEMPTIONS OF BONDS. Notwithstanding
any contrary provision of this Agreement, any optional redemption of the Bonds
under the Indenture other than the optional redemptions required by Section 3.1,
above, shall require the advance written consent of Agent (which consent shall
not be unreasonably withheld), and Agent's receipt of satisfactory evidence of
Borrower's ability to reimburse Agent and Lenders for any drawing under the
Letter of Credit for such redemption.


                                   ARTICLE IV
                         REPRESENTATIONS AND WARRANTIES

              Except as set forth in Schedules 4.5-4.16 hereto (the "Disclosure
Schedule"), the parts of which are numbered according to the relevant Sections
of this Agreement, Borrower makes the following representations and warranties
to Agent and Lenders, which representations and warranties shall survive the
execution of this Agreement and shall continue in full force and effect until
the full and final payment, and satisfaction and discharge, of all obligations
of Borrower to Lenders and Agent under this Agreement.



                                      -35-
<PAGE>   42

              SECTION 4.1 LEGAL STATUS. Borrower is a corporation, duly
organized and existing and in good standing under the laws of the State of
Delaware, each of Borrower and each Guarantor is qualified or licensed to do
business in California and is in good standing as a foreign corporation in
California, and is qualified or licensed to do business (and is in good standing
as a foreign corporation, if applicable) in all other jurisdictions in which
such qualification or licensing is required or in which the failure to so
qualify or to be so licensed could have a Material Adverse Effect.

              SECTION 4.2 AUTHORIZATION AND VALIDITY. The execution, delivery
and performance by each of Borrower and each Guarantor of the Loan Documents to
which it is a party have been duly authorized, and upon their execution and
delivery in accordance with the provisions hereof such Loan Documents will
constitute legal, valid and binding agreements and obligations of Borrower and
such Guarantor, enforceable in accordance with their respective terms, except as
such enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other laws or equitable principles relating to or limiting
creditors' rights generally or the availability of equitable remedies.

              SECTION 4.3 NO VIOLATION. The execution, delivery and performance
by Borrower of each of the Loan Documents to which it is a party do not (a) to
Borrower's knowledge, violate any provision of any applicable law or regulation,
(b) contravene any provision of the Certificate of Incorporation or By-Laws of
Borrower, (c) result in a breach of, or constitute a default under, any
contract, obligation, indenture or other instrument, or, any judgment,
injunction, order or decree, to which Borrower is a party or by which Borrower
or any of its respective property may be bound, or (d) result in or require the
creation or imposition of any lien, security interest or other charge or
encumbrance upon or with respect to any property of Borrower except in favor of
Agent or Lenders.

              SECTION 4.4 NO ADDITIONAL APPROVALS. No further approval,
authorization, consent, order, notice to or filing or registration with any
governmental authority or any public board or body is legally required with
respect to the execution, delivery or performance by Borrower of the Loan
Documents to which it is a party where the failure to obtain such approval could
reasonably have a Material Adverse Effect.

              SECTION 4.5 LITIGATION. There are no pending, or to the best of
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could reasonably be expected to have a Material
Adverse Effect.



                                      -36-
<PAGE>   43

              SECTION 4.6 CORRECTNESS OF FINANCIAL STATEMENT. The audited
consolidated financial statements of Borrower dated as of December 31, 1999, and
the unaudited interim consolidated financial statements of Borrower dated as of
March 31, 2000, heretofore delivered by Borrower to Agent, (a) are complete and
correct and present fairly the financial condition of Borrower as of the date
thereof; (b) disclose all liabilities of Borrower that are required to be
reflected or reserved against under GAAP, whether liquidated or unliquidated,
fixed or contingent; and (c) have been prepared in accordance with GAAP. Since
the date of such financial statements there has been no material adverse change
in the financial condition of Borrower, nor has Borrower mortgaged, pledged or
granted a security interest in or otherwise encumbered any of its assets or
properties except as permitted by this Agreement or as disclosed by Borrower to
Agent in the Disclosure Schedule.

              SECTION 4.7 INCOME TAX RETURNS. Except to the extent covered by
legally permitted and validly filed extensions, Borrower has filed all United
States federal income tax returns, state tax returns and all other material tax
returns which it is required to file, and have paid all taxes due pursuant to
such returns or pursuant to any assessment received by them, except for those
being actively contested in good faith. The charges, accruals and reserves on
the books of Borrower in respect of taxes or other governmental charges are, in
the opinion of Borrower or its independent certified public accountants,
adequate. Borrower has no knowledge of any pending assessments or adjustments of
the income tax paid or payable by Borrower with respect to any year.

              SECTION 4.8 NO SUBORDINATION. There is no agreement, indenture,
contract or instrument to which Borrower or any Guarantor is a party or by which
Borrower or any Guarantor may be bound that requires the subordination in right
of payment of any of Borrower's or such Guarantor's or such other Person's
obligations subject to this Agreement to any other obligation of Borrower or
such Guarantor or such other Person.

              SECTION 4.9 PERMITS, FRANCHISES. Borrower possesses, and will
hereafter possess, all permits, franchises and licenses required and rights to
all trademarks, trade names, patents and fictitious names, if any, necessary to
enable it to conduct the business in which it is now engaged in compliance with
applicable law.

              SECTION 4.10 ERISA. Borrower and each Guarantor is in compliance
in all material respects with all applicable provisions of ERISA; neither
Borrower nor any Guarantor has violated any provision of any Plan maintained or
contributed to by Borrower or such Guarantor or such other Person; no Reportable
Event as defined in ERISA has occurred and is continuing with respect to any
Plan initiated by Borrower or any Guarantor; each of Borrower and each Guarantor
has met its minimum funding requirements under ERISA with respect to each Plan;
and each



                                      -37-
<PAGE>   44

Plan will be able to fulfill its benefit obligations as they come due in
accordance with the Plan documents and under GAAP.

              SECTION 4.11 OTHER OBLIGATIONS. To the best of Borrower's
knowledge, neither Borrower nor any Guarantor is in default on any obligation
for borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.

              SECTION 4.12 GOVERNMENT REGULATIONS. Neither Borrower nor any
Guarantor is subject to regulation under the Investment Company Act of 1940, the
Federal Power Act, the Interstate Commerce Act, the Public Utility Holding
Company Act of 1935 or any federal or state statute or regulation limiting its
ability to incur indebtedness for money borrowed.

              SECTION 4.13 SECURITIES ACTIVITIES. Neither Borrower nor any
Guarantor is engaged principally, or as one of its important activities, in the
business of extending credit for the purpose of purchasing or carrying any
margin stock (as defined within Regulations G, T and U of the Board of Governors
of the Federal Reserve System), and not more than twenty-five percent (25%) of
the value of Borrower's or any Guarantor's assets consists of such margin stock.

              SECTION 4.14 ENVIRONMENTAL MATTERS. Except as set forth on the
Disclosure Schedule hereto, each of Borrower and each Guarantor is in compliance
in all material respects with all applicable Federal and state environmental,
hazardous waste, health and safety statutes, and any rules or regulations
adopted pursuant thereto, which govern or affect any of Borrower's or any
Guarantor's operations and/or properties, including the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Superfund
Amendments and Reauthorization Act of 1986, the Federal Resource Conservation
and Recovery Act of 1976, the Federal Toxic Substances Control Act and the
California Health and Safety Code, as any of the same may be amended, modified
or supplemented from time to time. None of the operations of Borrower or any
Guarantor is the subject of any federal or state investigation evaluating
whether any remedial action involving a material expenditure is needed to
respond to a release of any toxic or hazardous waste or substance into the
environment. To Borrower's knowledge, neither Borrower nor any Guarantor has any
material contingent liability in connection with any release of any toxic or
hazardous waste or substance into the environment.

              SECTION 4.15 REAL PROPERTY COLLATERAL. Except as set forth in
Schedule 4.15 hereto, with respect to the Real Property Collateral:

              (a) All taxes, governmental assessments, insurance premiums, and
water, sewer and municipal charges, and rents (if any) which previously became
(or



                                      -38-
<PAGE>   45

without payment before the date hereof would have become) delinquent in respect
thereof have been paid as of the date hereof;

              (b) There are no mechanics' or similar liens or claims which have
been filed for work, labor or material (and no rights are outstanding that under
law could give rise to any such lien) which affect all or any interest in any
such real property and which are or may be prior to or equal to the lien thereon
in favor of Agent;

              (c) To Borrower's knowledge, none of the improvements which were
included for purpose of determining the appraised value of any such real
property lie outside of the boundaries and/or building restriction lines
thereof, and no improvements on adjoining properties materially encroach upon
any such real property; and

              (d) There is no pending, or to the best of Borrower's knowledge
threatened, proceeding for the total or partial condemnation of all or any
portion of any such real property, and all such real property is in good repair
and free and clear of any damage that would materially and adversely affect the
value thereof as security and/or the intended use thereof.

              SECTION 4.16 SUBSIDIARIES. Borrower does not own any stock or
equity interest in any corporation or other entity, other than those listed on
the Disclosure Schedule hereto.

              SECTION 4.17 TRUTH, ACCURACY OF INFORMATION. All financial and
other information furnished to Agent or any Lender in connection with this
Agreement is true and correct as of the date hereof and does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the information furnished, in light of the circumstances under
which furnished, not misleading.


                                    ARTICLE V
                                   CONDITIONS

              SECTION 5.1 CONDITIONS OF INITIAL EXTENSION OF CREDIT. The
obligation of Lenders to extend any credit contemplated by this Agreement is
subject to the fulfillment to Agent's satisfaction of all of the following
conditions:

              (a) Approval of Agent's Counsel. All legal matters incidental to
the extension of credit hereunder shall be satisfactory to counsel for Agent.



                                      -39-
<PAGE>   46

              (b) Documentation. Agent shall have received, in form and
substance satisfactory to Agent, each of the following duly executed:

                     (i) This Agreement and the Notes.

                     (ii) Guaranty from each Guarantor as required by Section
              2.16 hereof.

                     (iii) All Security Agreements, UCC-1 Financing Statements
              and other documentation from Borrower and each other person or
              entity required by Agent for the creation, perfection and
              preservation of the personal property security interests described
              in Section 2.15(a) hereof.

                     (iv) All Deeds of Trust and other documentation from
              Borrower and each other person or entity required by Agent for the
              creation, perfection and preservation of the real property
              security interests described in Section 2.15(b) hereof (including,
              as deemed necessary by Agent, a modification to the Deeds of Trust
              encumbering the Solar Way Property and the Technology Drive
              Property), together with such policies of title insurance covering
              said parcels of real property, issued by companies, in amounts and
              in form and substance as Agent shall deem acceptable.

                     (v) Corporate Borrowing Resolution from Borrower.

                     (vi) Resolution from each corporate or limited liability
              company Guarantor authorizing the execution and delivery of its
              respective Guaranty and its pledge of collateral required
              hereunder.

                     (vii) Certified copies of the filed Articles of
              Incorporation for Borrower and each corporate Guarantor and the
              certificate of formation for each limited liability company
              Guarantor.

                     (viii) Certificate of Incumbency from Borrower and each
              corporate or limited liability company Guarantor.

                     (ix) Notice of Authorized Representatives.

                     (x) Evidence satisfactory to Agent certifying that all
              improvements at each of the Real Properties comply with all
              applicable zoning and building laws, and all approvals, consents,
              licenses, and permits necessary to conduct Borrower's business
              have been obtained.

                     (xi) An opinion of Gray Cary Ware & Freidenrich LLP,
              counsel to Borrower, in form satisfactory to Agent, confirming
              that the



                                      -40-
<PAGE>   47

              Loan Documents are valid, binding and enforceable in accordance
              with their terms, that they do not violate any usury or other
              applicable laws and that the Borrower, the Guarantors and each of
              the Real Properties are in compliance with all applicable laws.

                     (xii) Copies of all of Borrower's franchise agreements and
              service agreements.

                     (xiii) Evidence of a tax service contract with a third
              party vendor which shall provide tax information on the
              Properties.

                     (xiv) Copies of all material contracts, agreements and
              leases set forth on Schedule 5 hereto (the "Contract Collateral")
              to which Borrower or any Guarantor is a party and assignments
              thereof to Agent as additional collateral for the Credits and any
              consents to such assignment or landlord waivers as Agent may
              require.

                     (xv) Copies of the most current tax bills for each of the
              Real Properties evidencing no delinquency in payment and that such
              Real Property has been segregated from all other property on the
              applicable municipal tax rolls.

                     (xvi) A written certification executed by Borrower and each
              Guarantor certifying as to the truth and accuracy of all material
              facts pertinent to the Credits and to the legal opinion described
              in (xi) above.

                     (xvii) Such other documents as Agent may require under any
              other Section of this Agreement.

              (c) Financial Statements. Agent shall have received, in form and
substance satisfactory to Agent and Lenders, audited financial statements for
Borrower for and as of the fiscal year ending December 31, 1999, which financial
statements shall reflect no material adverse change in the financial condition
of Borrower from the financial information previously delivered to Agent.

              (d) Fees and Expenses. Borrower shall have paid all fees and
invoiced costs and expenses then due pursuant to the terms of this Agreement and
all Loan Costs incurred by Agent as of the Closing Date.

              (e) Insurance. Borrower shall have delivered to Agent evidence of
insurance coverage on all Borrower's and Guarantor's property, in form,
substance, amounts, covering risks and issued by companies satisfactory to
Agent, and where required by Agent, with loss payable endorsements in favor of
Agent, including policies of fire and extended coverage insurance covering the
Real Property Collateral, with replacement cost and mortgagee loss payable
endorsements, commercial general



                                      -41-
<PAGE>   48

liability insurance for Borrower and each Guarantor with respect to each of
Borrower's and such Guarantor's properties providing for limits of not less than
$5,000,000 for both injury to or death of a person and for property damage per
occurrence, and such policies of insurance against specific hazards affecting
any such real property as may be required by governmental regulation or Agent.

              (f) Appraisals; Collateral Audit; and Credit Checks. Agent shall
have obtained, at Borrower's cost (A) an appraisal of all Real Property
Collateral, all improvements thereon, and all Personal Property Collateral
issued by an appraiser acceptable to Agent and in form, substance and reflecting
values satisfactory to Agent, in its discretion, (B) a collateral audit of all
Personal Property Collateral performed by a person satisfactory to Agent and in
form, substance and reflecting values satisfactory to Agent, and (C)
satisfactory credit checks on Borrower and each Guarantor.

              (g) Title Insurance. As to the El Monte Property and the Monterey
Park Property, Agent shall have received an ALTA Policy of Title Insurance, with
such endorsements as Agent may require, including CLTA endorsements 100, 100.29,
103.1A, 103.7, 104.7, 111.5, 116, 116.4, 116.7 and 123.2, issued by a company
and in form and substance satisfactory to Agent, in such amount as Agent shall
require, insuring Agent's lien on the El Monte Property and the Monterey Park
Property to be of first priority, subject only to such exceptions as Agent shall
approve in its discretion, with all costs thereof to be paid by Borrower. As to
the Solar Way Property and the Technology Drive Property, Agent shall have
received a CLTA 110.5 modification endorsement to each of the existing Title
Policies for such properties.

              (h) Environmental Reports. Agent shall have obtained, at
Borrower's cost, a Phase I (and to the extent deemed necessary by Agent, a Phase
II) Environmental Site Assessment for each parcel of Real Property Collateral,
and such other documentation as Agent may reasonably determine is necessary in
order to adequately review and make a determination as to the condition of each
such parcel of Real Property Collateral.

              (i) Material Adverse Change. There shall have been no material
adverse change, as determined by Agent, in the business, operations, properties,
or financial condition of Borrower since the dates of the financial statements
delivered to Agent pursuant to Section 5.1(c).

              (j) Engineering Survey. Agent shall have made a physical
inspection of each parcel of Real Property Collateral and if required by Agent,
an independently prepared structural and mechanical engineering report
satisfactory to Agent.

              (k) UCC Filings. There shall exist no UCC filings against Borrower
or any Guarantor which have not been approved by Agent, and each of Borrower and
each Guarantor, as applicable, shall have delivered to Agent such first priority
UCC-1



                                      -42-
<PAGE>   49

Financing Statements covering all Personal Property Collateral and Contract
Collateral as Agent may require.

              (l) Subordination Agreement. Agent shall have received, in form
and substance satisfactory to Agent, a subordination agreement from the Small
Business Administration subordinating its lien in the Solar Way Property to
Agent's first priority lien in the Solar Way Property or a re-affirmation
thereof consenting to the cross-collateralization as set forth in the Loan
Documents.

              SECTION 5.2 CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation
of Lenders to make each extension of credit requested by Borrower hereunder
(including the initial extension of credit) shall be subject to the fulfillment
to Agent's satisfaction of all of the following conditions:

              (a) Compliance. The representations and warranties contained
herein and in each of the other Loan Documents shall be true on and as of the
date of the signing of this Agreement and on the date of each extension of
credit by Lenders pursuant hereto, with the same effect as though such
representations and warranties had been made on and as of each such date, and on
each such date, no Default or Event of Default shall have occurred and be
continuing or shall exist, and Agent shall have received a certificate
confirming the matters set forth in this Section 5.2(a) signed by a senior
financial officer of Borrower.

              (b) Borrowing Base. With respect to the Line of Credit, Agent has
determined that there is availability under the Borrowing Base to make the
extension of credit.

              (c) Minimum Extension of Credit. The extension of credit is in the
amount of at least $100,000; however, Agent in its sole discretion may make an
extension of credit in an amount less than $100,000.

              (d) Documentation. Agent shall have received all additional
documents which may be required in connection with such extension of credit.
Borrower shall pay the costs of any additional documentation, legal fees or
title insurance required by Agent to evidence such extension of credit and
preserve the priority of the lien of the Security Documents.



                                      -43-
<PAGE>   50

                                   ARTICLE VI
                              AFFIRMATIVE COVENANTS

              Borrower covenants that so long as Lenders remain committed to
extend credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Lenders under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower shall, unless Agent otherwise consents in
writing:

              SECTION 6.1 PUNCTUAL PAYMENTS. Punctually pay all principal,
interest, fees or other liabilities due under any of the Loan Documents at the
times and place and in the manner specified therein.

              SECTION 6.2 ACCOUNTING RECORDS. Maintain adequate books and
records in accordance with generally accepted accounting principles consistently
applied, and permit any representative of Agent, upon reasonable notice and
during regular business hours, to inspect, audit and examine such books and
records, to make copies of the same, and to inspect the properties of Borrower.
Borrower shall not be responsible for the costs of more than one (1) inspection
and audit of Borrower's books and records in any six (6) month period if an
Event of Default is not continuing during the inspection and audit.

              SECTION 6.3 FINANCIAL STATEMENTS. Provide to Agent all of the
following, in form and detail satisfactory to Agent:

              (a) not later than ninety (90) days after and as of the end of
each fiscal year, an audited financial statement of Borrower and each entity
whose financial results are consolidated with those of Borrower for reporting
purposes, prepared by a nationally recognized certified public accountant, to
include a balance sheet, income statement, statement of cash flows,
reconciliation of net worth and notes to financial statements;

              (b) not later than thirty (30) days prior to the end of each
fiscal year, an annual budget for Borrower, prepared by Borrower, which shall
include three-year projections of Borrower's operations and planned capital
expenditures and financial projections for Borrower and each entity whose
financial results are consolidated with those of Borrower for reporting purposes
for the next fiscal year;

              (c) not later than forty-five (45) days after and as of the end of
each fiscal quarter, a financial statement of Borrower and each entity whose
financial results are consolidated with those of Borrower for reporting
purposes, prepared by Borrower, to include a balance sheet and income statement;



                                      -44-
<PAGE>   51

              (d) not later than thirty (30) days after and as of the end of
each calendar month, (i) a calculation of the Borrowing Base certified as
correct by a senior financial officer of Borrower; and (ii) an accounts
receivable aging and an accounts payable aging;

              (e) not later than ninety (90) days after and as of the end of
each fiscal year, a financial statement of each Guarantor hereunder, prepared by
such Guarantor to include a balance sheet and, for any non-individual Guarantor,
an income statement, and within thirty (30) days after filing, copies of each
such Guarantor's filed United States federal income tax returns, if any, for
such year;

              (f) contemporaneously with each annual and quarterly financial
statement of Borrower required hereby, a certificate of the chief financial
officer or other executive officer of Borrower that said financial statements
are accurate, that Borrower is in compliance with the financial covenants set
forth in Section 6.9 below and that there is no Borrowing Base Deficiency as
defined in Section 6.16 below, and that there exists no Event of Default nor any
condition, act or event which, with the giving of notice or the passage of time
or both, would constitute an Event of Default;

              (g) from time to time such other information as Agent may
reasonably request.

              SECTION 6.4 COMPLIANCE. Preserve and maintain all licenses,
permits, governmental approvals, rights, privileges and franchises necessary for
the conduct of its business; and comply with the provisions of all documents
pursuant to which Borrower is organized and/or which govern Borrower's continued
existence and with the requirements of all laws, rules, regulations and orders
of any governmental authority applicable to Borrower and/or its business.

              SECTION 6.5 INSURANCE. Maintain and keep in force insurance of the
types and in amounts customarily carried in lines of business similar to that of
Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers' compensation, with all such
insurance carried with companies and in amounts reasonably satisfactory to
Agent, and deliver to Agent from time to time at Agent's request schedules
setting forth all insurance then in effect.

              SECTION 6.6 FACILITIES. Keep all properties useful or necessary to
Borrower's business in good repair and condition, ordinary wear and tear
excepted, and from time to time make necessary repairs, renewals and
replacements thereto so that such properties shall be fully and efficiently
preserved and maintained, ordinary wear and tear excepted.



                                      -45-
<PAGE>   52

              SECTION 6.7 TAXES AND OTHER LIABILITIES. Pay and discharge when
due any and all indebtedness, obligations, assessments and taxes, both real or
personal, including without limitation federal and state income taxes and state
and local property taxes and assessments, except such (a) as Borrower may in
good faith contest or as to which a bona fide dispute may arise, and (b) for
which Borrower has made appropriate reserves in accordance with GAAP.

              SECTION 6.8 LITIGATION. Promptly give notice in writing to Agent
of any litigation pending or threatened against Borrower with a claim in excess
of $500,000.00.

              SECTION 6.9 FINANCIAL CONDITION. Maintain Borrower's financial
condition as follows, based on the consolidated financial statements of Borrower
and each entity whose financial results are consolidated with those of Borrower
for reporting purposes, using generally accepted accounting principles
consistently applied and used consistently with prior practices (except to the
extent modified by the definitions herein):

              (a) Maintain at all times a ratio of current assets to current
liabilities greater than or equal to 1.75 to 1.00.

              (b) Without Agent's prior written consent, Borrower shall not
incur expenses for capital expenditures in excess of (i) $50,000,000 for the
Borrower's fiscal year 2000, and (ii) $40,000,000 for the Borrower's fiscal year
2001, and (iii) thereafter, such limit to be mutually approved by Borrower and
Majority Lenders.

              (c) Maintain at all times a Minimum Interest Coverage Ratio of
3.00 to 1:00, measured quarterly, based upon the four-quarter period then ended.

              (d) Maintain, as of the end of each fiscal quarter commencing with
the quarter ended September 30, 2000, a Tangible Net Worth not less than
$63,000,000.00 plus seventy-five percent (75%) of net income for each fiscal
quarter after June 30, 2000 without deduction for losses, plus 100% of net
equity proceeds.

              (e) Maintain at all times a Fixed Charge Coverage Ratio of not
less than (i) 1.15 to 1.00 for the period from January 1, 2000 to December 31,
2000, measured as of December 31, 2000, and (ii) 1.25 to 1.00 measured for the
most recent four historical quarters (excluding the current quarter in
possession), for the fiscal quarter ending on March 31, 2001 and for each fiscal
quarter thereafter.

              (f) Maintain a ratio of Funded Debt to EBITDA not to exceed the
following amounts for the four (4) consecutive fiscal quarter period ending on
the last day of each fiscal quarter during the following periods:



                                      -46-
<PAGE>   53

<TABLE>
<S>                                                              <C>
              -----------------------------------------------------------------
              the period from June 30, 2000, through and         2.50 to 1.00
              including December 31, 2000
              -----------------------------------------------------------------
              the period from January 1, 2001, through and
              including December 31, 2001, and each fiscal       2.00 to 1.00
              quarter thereafter
              -----------------------------------------------------------------
</TABLE>


              SECTION 6.10 NOTICE TO AGENT. Promptly (but in no event more than
five (5) Business Days after Borrower becomes aware of the occurrence of each
such event or matter) give written notice to Agent in reasonable detail of: (a)
the occurrence of any Event of Default, or any condition, event or act which,
with the giving of notice or the passage of time or both, would constitute an
Event of Default; (b) any change in the name or the organizational structure of
Borrower; (c) the occurrence and nature of any Reportable Event or Prohibited
Transaction, each as defined in ERISA, or any funding deficiency with respect to
any Plan; or (d) any termination or cancellation of any insurance policy which
Borrower is required to maintain, or any uninsured or partially uninsured loss
through liability or property damage, or through fire, theft or any other cause
affecting Borrower's property in excess of an aggregate of $500,000.

              SECTION 6.11 SITE VISITS; RIGHT TO STOP WORK. Agent and its agents
and representatives shall have the right to enter and visit the Real Property
and the facilities thereon during regular business hours. In each instance,
Agent shall give Borrower reasonable notice before entering any of the Real
Property facilities thereon. Agent shall use its best efforts to reasonably
avoid interfering with Borrower's use of any Real Property facilities thereon or
with Borrower's business operations when exercising any of the rights granted in
this Section 6.11. Notwithstanding this Section 6.11 or any other provisions of
the Loan Documents, Borrower shall not be responsible for the cost of more than
one (1) such visit to the Real Properties and facilities thereon in any six (6)
month period if an Event of Default is not continuing at the time of the
proposed visit.

              SECTION 6.12 SECURITY. At all times maintain in favor of Agent
perfected security interests of such priority as is designated herein in all
assets in which, under the provisions of this Agreement, Agent has or is to
obtain a security interest; take such actions (including the execution of
financing statements and fixture filings) as Agent reasonably requests to
protect Agent's security interests; and provide to Agent such assurances as
Agent may require as to Borrower's compliance herewith.

              SECTION 6.13 RELATED DOCUMENTS. Comply with the terms and
covenants of the Related Documents to which it is a party, and Borrower



                                      -47-
<PAGE>   54

will not amend, modify or terminate, or agree to amend, modify or terminate, any
Related Document.

              SECTION 6.14 INVESTIGATIONS AND INQUIRIES. Agent and its agents
and representatives shall have the right once per six (6) month period (or more
frequently if an Event of Default is outstanding) to conduct such investigations
and inquiries as to the credit and operations of Borrower, each of the
Guarantors and the Collateral as shall be necessary in connection with the
Credits and monitoring of the Credits, and Borrower shall cooperate with Agent
and provide Agent with such information reasonably requested by Agent in the
exercise of such right and pay for the cost of such inquiry.

              SECTION 6.15 CONTRACT COLLATERAL. Agent shall have the right to
review any Contract Collateral.

              SECTION 6.16 BORROWING BASE DEFICIENCY. If at any time and for any
reason, Borrower delivers to Agent a quarterly compliance certificate that shows
that the outstanding unpaid principal balance of the Line of Credit exceeds the
aggregate amount of the Borrowing Base ("Borrowing Base Deficiency"), or if at
any time and for any reason Agent gives notice to Borrower of a Borrowing Base
Deficiency, then Borrower shall immediately prepay the principal balance of the
Line of Credit in an amount equal to the difference between the aggregate
outstanding principal balance of the Line of Credit and the amount of the
Borrowing Base.

              SECTION 6.17 NOTICE OF CERTAIN MATTERS. Borrower shall give notice
to Agent, within ten (10) days of Borrower's learning thereof, of any of the
following:

              (a) any disputes, litigation, investigation, proceeding or
suspension that may exist at any time between Borrower or any Guarantor and any
Governmental Agency;

              (b) any threat or commencement of proceedings in condemnation or
eminent domain relating to any of the Real Property Collateral;

              (c) the commencement of, or any material development in, any
litigation or proceeding relating to any Collateral between the Borrower and (i)
any Governmental Authority, (ii) any Person having rights under or in connection
with any covenants, conditions, restrictions, easements or rights-of-way
affecting such Collateral, or (iii) any tenant under its lease of such
Collateral, in each case under this subsection (c) the adverse determination of
which would reasonably be expected to materially and adversely affect such
Collateral;



                                      -48-
<PAGE>   55

              (d) upon, but in no event later than ten (10) days after,
Borrower's becoming aware of (i) any and all enforcement, cleanup, removal or
other governmental or regulatory actions, instituted or threatened in writing
against (A) Borrower that involve potential liability in excess of $5,000,000
for any single action or $15,000,000 in the aggregate of all such actions, or
(B) any of the Real Properties, pursuant to any applicable environmental laws,
(ii) all other environmental claims against (A) Borrower that involve potential
liability in excess of $5,000,000 for any single environmental claim or
$15,000,000 in the aggregate for all such environmental claims, or (B) any Real
Property, and (iii) any environmental or similar condition on any real property
adjoining or in the vicinity of any Real Property that causes such Real Property
or any part thereof to be subject to any restrictions on the ownership,
occupancy, transferability or use of such Real Property under any applicable
environmental laws; and

              (e) any trade name hereafter used by Borrower and any change in
Borrower's principal place of business.

              Each notice under this Section 6.17 shall be accompanied by a
written statement by Borrower setting forth details of the occurrence referred
to therein, and stating what action, if any, Borrower or any affected Guarantor
proposes to take with respect thereto and at what time. Each notice under this
Section 6.17 shall describe with particularity any and all clauses or provisions
of this Agreement or other Loan Documents that have been breached or violated.


                                   ARTICLE VII
                               NEGATIVE COVENANTS

              Borrower further covenants that so long as Lenders remain
committed to extend credit to Borrower pursuant to the terms hereof or any
liabilities (whether direct or contingent, liquidated or unliquidated) of
Borrower to Lenders or Agent under any of the Loan Documents remain outstanding,
and until payment in full of all obligations of Borrower subject hereto,
Borrower will not, and will not permit any Subsidiary to, without the prior
written consent of Majority Lenders:

              SECTION 7.1 USE OF FUNDS. Use any of the proceeds of any Credit
extended hereunder except for the following purposes:

              (a) The purposes stated in Article II hereof;

              (b) Payment of outstanding debt owed to U.S. Bank as of the
Closing Date, including U.S. Bank's existing line of credit in the amount of
$15,000,000.00 and U.S. Bank's existing bridge loan to Borrower; and



                                      -49-
<PAGE>   56

              (c) Payment of the Loan Costs.

              SECTION 7.2 OTHER INDEBTEDNESS. Create, incur, assume or permit to
exist any indebtedness or liabilities resulting from borrowings, loans or
advances, whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several, which in the aggregate exceed $500,000, except
(a) the liabilities of Borrower to Lenders, or (b) Permitted Indebtedness.

              SECTION 7.3 MERGER, CONSOLIDATION, ORGANIZATIONAL STRUCTURE,
TRANSFER OF ASSETS. Merge into or consolidate with any other entity; make
substantial change in the nature of Borrower's business as conducted as of the
date hereof; acquire all or substantially all of the assets of any other entity;
sell, lease, transfer or otherwise dispose of all or a substantial or material
portion of Borrower's assets except in the ordinary course of its business; nor
change the day to day control and management of Borrower (which shall include
the resignation or termination of Morris S. Young from his current position but
shall not include the changing of officers or employees in the ordinary course
of Borrower's business), Borrower's name, identity or organizational structure;
provided, however, that the consent of Majority Lenders will not be required for
any of the foregoing that does not result in an expenditure or gain to Borrower
of $1,000,000 or less; provided further, however, that Majority Lenders shall
not unreasonably withhold their consent in the case of a corporate restructure
of Borrower in which Borrower is the surviving entity and ownership and control
of Borrower remain substantially unchanged.

              SECTION 7.4 GUARANTIES. Guarantee or become liable in any way as
surety, endorser (other than as endorser of negotiable instruments for deposit
or collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security for,
any liabilities or obligations of any other person or entity, except any of the
foregoing in favor of Lenders and except as any such liability constitutes
Permitted Indebtedness.

              SECTION 7.5 LOANS, ADVANCES, INVESTMENTS. Except for Permitted
Investments, make any loans or advances to or investments in any person or
entity in excess of $1,000,000 in the aggregate in any fiscal year.

              SECTION 7.6 DIVIDENDS AND DISTRIBUTIONS. Pay any dividend or
distribution in any fiscal year, either in cash, stock or any other property, on
Borrower's stock now or hereafter outstanding in an aggregate amount that
exceeds ten (10%) of Borrower's after-tax net income for such fiscal year, nor
redeem, retire, repurchase or otherwise acquire any shares of any class of
Borrower's stock now or hereafter outstanding in an aggregate amount that
exceeds $1,000,000 in any fiscal year.



                                      -50-
<PAGE>   57

              SECTION 7.7 PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to
exist a security interest in, or lien upon, all or any portion of Borrower's
assets now owned or hereafter acquired, except any of the foregoing (a) in favor
of Agent, or (b) Permitted Liens.


                                  ARTICLE VIII
                                EVENTS OF DEFAULT

              SECTION 8.1 EVENTS OF DEFAULT. The occurrence of any of the
following shall constitute an "Event of Default" under this Agreement:

              (a) Loan Document Payments. Borrower fails to pay when due any
principal, interest, fees or other amounts payable under any of the Loan
Documents.

              (b) Other Required Payments. Borrower fails to pay when due any
required payment under the Indenture.

              (c) Misrepresentation. Any financial statement or certificate
furnished to Agent in connection with, or any representation or warranty made by
Borrower, or any Guarantor shall prove to be incorrect, false or misleading in
any material respect when furnished or made or when deemed made.

              (d) Other Covenants. Borrower or any Guarantor fails to perform,
observe or comply with any obligation, agreement or other provision on its part
to be performed under this Agreement or any other Loan Document (other than
those referred to in subsections (a), (b) and (c) above), and with respect to
any such failure which by its nature can be cured, such failure shall continue
for a period of thirty (30) days from its occurrence.

              (e) Other Defaults. Any event of default by Borrower or any
Guarantor in the payment or performance of any obligation under the terms of any
contract or instrument (other than any of the Loan Documents) pursuant to which
Borrower or any such Guarantor has incurred any debt or other liability in
excess of $500,000 to any person or entity (including any Lender or Agent),
which default is not cured within any cure period applicable thereto. The Event
of Default under this Section 8.1(e) caused by the occurrence of an event of
default under another agreement described in this Section 8.1(e) shall be
automatically cured for purposes of this Agreement upon the cure or waiver of
the event of default under the other agreement.

              (f) Judgment Liens or Levies. The filing of a notice of judgment
lien against Borrower or any Guarantor; or the recording of any abstract of
judgment



                                      -51-
<PAGE>   58

against Borrower or any Guarantor in any county in which Borrower or such
Guarantor has an interest in real property; or the service of a notice of levy
and/or of a writ of attachment or execution or other like process, against the
assets of Borrower or any Guarantor; or the entry of a judgment against Borrower
or any Guarantor, and any of the foregoing shall relate to a claim or judgment
of $500,000 or more and shall continue unstayed for a period of forty-five (45)
days from its occurrence.

              (g) Insolvency. Borrower or any Guarantor shall suffer or consent
to or apply for the appointment of a receiver, trustee, custodian or liquidator
of itself or any of its property, or shall generally fail to pay its debts as
they become due, or shall make a general assignment for the benefit of
creditors; or Borrower or any Guarantor shall file a voluntary petition in
bankruptcy, or seeking reorganization, in order to effect a plan or other
arrangement with creditors or any other relief under the Bankruptcy Code, or
under any state or Federal law granting relief to debtors, whether now or
hereafter in effect; or any involuntary petition or proceeding pursuant to the
Bankruptcy Code or any other applicable state or Federal law relating to
bankruptcy, reorganization or other relief for debtors is filed or commenced
against Borrower or any Guarantor, and such case or proceeding shall continue
undismissed for a period of forty-five (45) days from commencement of such
proceeding or case; or Borrower or any Guarantor shall file an answer admitting
the jurisdiction of the court and the material allegations of any involuntary
petition; or Borrower or any Guarantor shall be adjudicated a bankrupt, or an
order for relief shall be entered by any court of competent jurisdiction under
the Bankruptcy Code or any other applicable state or Federal law relating to
bankruptcy, reorganization or other relief for debtors.

              (h) ERISA Event. A Reportable Event (as defined in ERISA), or any
violation of any provision of any Plan maintained or contributed to by Borrower
or any Subsidiary, involving an amount in excess of $500,000 occurs and is not
cured within forty-five (45) days.

              (i) Invalidity. Any material provision of this Agreement, any
other Loan Document or any Related Document shall at any time for any reason
cease to be in full force and effect or valid and binding on Borrower or any
Guarantor, or shall be declared to be null and void, or the validity or
enforceability thereof shall be contested by Borrower or any Guarantor, or
Borrower or any Guarantor shall deny that it has any further liability or
obligation under this Agreement, any other Loan Document or any Related
Document, and such event shall have or be likely to have, in the reasonable
judgment of Agent and Majority Lenders, a Material Adverse Effect.

              (j) Material Adverse Change. A material adverse change, as
reasonably determined by Agent and Majority Lenders in the good faith exercise
of their discretion, shall occur in the financial condition of Borrower taken as
a whole.



                                      -52-
<PAGE>   59

              (k) Death or Incapacity. The death or incapacity of Morris S.
Young, provided that Agent and Majority Banks reasonably determine, in the good
faith exercise of their discretion, that such death or incapacity shall have or
be likely to have, in their reasonable judgment, a Material Adverse Effect.

              (l) Dissolution or Liquidation. The dissolution or liquidation of
Borrower or any corporate or limited liability company Guarantor; or Borrower or
any such entity Guarantor or their respective directors, stockholders or members
shall take action seeking to effect the dissolution or liquidation of Borrower
or such entity Guarantor.

              (m) Change in Ownership. Any change in ownership during the term
of this Agreement which would lead to a change in the management of Borrower;
provided, however, that no Event of Default shall be deemed to have occurred
under this Section 8.1(m) as a result of a change in the Borrower's management
or employees in the ordinary course of business.

              (n) Real Property Transfers. The sale, transfer, hypothecation,
assignment or other encumbrance, other than Permitted Liens, whether voluntary,
involuntary or by operation of law, without Agent's prior written consent, of
all or any part of or interest in any of the Real Property Collateral.

              (o) Cross-Default. A defined event of default under any of the
Security Documents, subject to the applicable cure period, if any, provided in
such Security Document. The Event of Default under this Section 8.1(o) shall be
automatically cured for purposes of this Agreement upon the cure or waiver of
the event of default under the Security Documents.

              SECTION 8.2 REMEDIES. During the continuation of any Event of
Default (other than an Event of Default referred to in Section 8.1(g) hereof),
Agent may, with the consent of the Majority Lenders, or shall, upon written
instructions from the Majority Lenders, by written notice to Borrower, (a)
terminate the obligations of the Lenders to extend any further credit under any
of the Loan Documents, and/or (b) declare all indebtedness of Borrower under the
Loan Documents to be immediately due and payable without presentment, demand,
protest or any other notice of any kind, all of which are hereby expressly
waived by Borrower. Upon the occurrence or existence of any Event of Default
described in Section 8.1(g) hereof, immediately and without notice, (i) the
obligations, if any, of Lenders to extend any further credit under any of the
Loan Documents shall automatically cease and terminate, and (ii) all
indebtedness of Borrower under the Loan Documents shall automatically become
immediately due and payable, without presentment, demand, protest or any other
notice of any kind, all of which are hereby expressly waived by Borrower. In
addition to the foregoing remedies, during the continuance of any Event of
Default, Agent may (i) exercise all of its rights and remedies under any Related
Document (to which Agent



                                      -53-
<PAGE>   60

is a party or is a third party beneficiary) or applicable law; (ii) require the
Trustee to declare a default under the Indenture and accelerate the maturity of
the Bonds; (iii) require Borrower to deliver and pledge to Agent, as security
for Borrower's obligations to Agent and Lenders under this Agreement, cash
collateral in the amount of any outstanding but undrawn amounts under the Letter
or Credit; (iv) exercise any other right, power or remedy granted to it or the
Lenders under any Loan Document or permitted to it or the Lenders by law, either
by suit in equity or by action at law, or both; or (v) exercise all or any
combination of the remedies provided for in this Section 8.2. Immediately after
taking any action under this Section 8.2, Agent shall notify each Lender of such
action.


                                   ARTICLE IX
                                    THE AGENT

              SECTION 9.1 AUTHORIZATION AND ACTION. Each Lender hereby
irrevocably appoints U.S. Bank as Agent, and authorizes Agent to act as its
agent under the Loan Documents and to take such actions on such Lender's behalf
and to exercise such powers and perform such duties under the Loan Documents as
are expressly delegated to Agent by the terms thereof, together with such other
powers as are reasonably incidental thereto. Agent shall have no duties or
responsibilities except those expressly set forth in the Loan Documents, and no
implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into any Loan Document or otherwise exist against
Agent. Notwithstanding anything to the contrary contained herein, Agent shall
not be required to take any action which is contrary to any Loan Document or
applicable law. Neither Agent nor any Lender shall be responsible to any other
Lender for any recitals, statements, representations or warranties made by
Borrower contained in any Loan Document, for the value, validity, effectiveness,
genuineness, enforceability or sufficiency of any Loan Document or the
Collateral or for any failure by Borrower to perform its respective obligations
hereunder or thereunder. Agent may employ agents and attorneys-in-fact and shall
not be responsible to any Lender for the negligence or misconduct of any such
agents or attorneys-in-fact selected by it with reasonable care. Neither Agent
nor any of its directors, officers, employees or agents shall be responsible to
any Lender for any action taken or omitted to be taken by it or them under any
Loan Document or in connection therewith, except for its or their own gross
negligence or willful misconduct. Except as otherwise provided under this
Agreement, Agent shall take such action with respect to the Loan Documents as
shall be directed by the Majority Lenders. Notwithstanding the foregoing, Agent
shall have the right, after consultation with Borrower, which consultation shall
not be unreasonably withheld or delayed, to change the terms, structure, pricing
and/or any amount of any of the Credits, including the right to reallocate the
relative principal



                                      -54-
<PAGE>   61

loan amounts among any of the Term Loans and the Line of Credit, and/or to
establish additional Term Loan tranches in the event a syndication of the
Credits has not been successfully completed; provided however, that agent shall
not have the right to change the aggregate amount of the Credits unless Agent
determines in its sole discretion that such change is necessary to ensure a
successful syndicate of the Credits.

              SECTION 9.2 RELIANCE BY AGENT. Agent shall be entitled to rely
upon any certificate, notice or other document (including any cable, telegram,
telecopy, or telex) or conversation believed by it in good faith to be genuine
and correct and to have been signed, sent or made by or on behalf of the proper
person or persons, and upon advice and statements of legal counsel (including
counsel to Borrower), independent accountants and other experts selected by
Agent with reasonable care. As to any matters not expressly provided for by this
Agreement, Agent shall not be required to take any action or exercise any
discretion, but shall be required to act or to refrain from acting upon
instructions of the Majority Lenders and shall in all cases be fully protected
by the Lenders in acting, or in refraining from acting, hereunder or under any
other Loan Document in accordance with the instructions of the Majority Lenders,
and such instructions of the Majority Lenders and any action taken or failure to
act pursuant thereto shall be binding on all of the Lenders.

              SECTION 9.3 DEFAULTS. Agent shall not be deemed to have knowledge
or notice of the occurrence of a Default unless Agent has received a notice from
a Lender or Borrower referring to this Agreement, describing such Default and
expressly stating that such notice is a "notice of default". If Agent receives
such notice of the occurrence of a Default, Agent shall promptly give notice
thereof to the Lenders. Agent thereupon shall take such action with respect to
such Default as shall be reasonably directed by the Majority Lenders; provided
however, that unless and until Agent shall have received such directions, Agent
may (but shall not be obligated to) take such action, or refrain from taking
such action, with respect to such Default as it shall deem advisable in the best
interests of the Lenders.

              SECTION 9.4 INDEMNIFICATION. Without limiting the obligations of
Borrower hereunder, each Lender agrees to indemnify Agent, ratably in accordance
with its Proportionate Shares, for any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind or nature whatsoever which may at any time (including at any time
following payment of such obligations) be imposed on, incurred by or asserted
against Agent in any way relating to or arising out of this Agreement or any
documents contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or the enforcement of any of the terms hereof or
thereof or of any such other documents or any action taken or omitted by Agent
under or in connection herewith or



                                      -55-
<PAGE>   62

therewith; provided however, that no Lender shall be liable for any of the
foregoing to the extent they arise from Agent's gross negligence or willful
misconduct. Without limiting the foregoing, each Lender agrees to reimburse
Agent promptly on demand for its ratable share of any amounts payable but not
paid by Borrower under Section 10.2 hereof. Agent shall be fully justified in
refusing to take or to continue to take any action hereunder unless it shall
first be indemnified to its satisfaction by the Lenders against any and all
liability and expense which may be incurred by Agent by reason of taking or
continuing to take any such action. The agreements in this Section 9.4 shall
survive the payment of Borrower's obligations hereunder.

              SECTION 9.5 NON-RELIANCE ON AGENT. Each Lender represents that it
has, independently and without reliance on Agent or any other Lender, and based
on such documents and information as such Lender has deemed appropriate, made
its own appraisal of and investigation into the financial condition and affairs
of Borrower and decision to enter into this Agreement. Each Lender agrees that
such Lender will, independently and without reliance upon Agent or any other
Lender, and based on such documents and information as it shall deem appropriate
at the time, continue to make its own appraisals and decisions in taking or not
taking action under this Agreement. Each Lender acknowledges that Agent has not
made any representation or warranty to it with respect to the financial
condition or affairs of Borrower, any Loan Document or any Collateral, and that
no act by Agent hereafter, including any review of any of such matters, shall be
deemed to constitute any such representation or warranty by Agent to any Lender.
Neither Agent nor any Lender shall be required to keep informed as to the
performance or observance by Borrower of the obligations under this Agreement or
any other document referred to or provided for herein or to make inquiry of, or
to inspect the properties or books of Borrower. Except for notices, reports and
other documents and information expressly required to be furnished to the
Lenders by Agent hereunder, neither Agent nor any Lender shall have any duty or
responsibility to provide any Lender with any credit or other information
concerning Borrower, which may come into the possession of Agent or such Lender,
or any of its or their affiliates.

              SECTION 9.6 SUCCESSOR AGENT. Subject to the appointment and
acceptance of a successor Agent as provided below, Agent may resign at any time
by giving thirty (30) days' written notice thereof to the Lenders, and Agent may
be removed at any time with or without cause by the Majority Lenders. Upon any
such resignation or removal, the Majority Lenders shall have the right to
appoint a successor Agent. If no successor Agent shall have been appointed by
the Majority Lenders and shall have accepted such appointment within thirty (30)
days after the retiring Agent's giving of notice of resignation or the Majority
Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf
of the Lenders, appoint a successor Agent, which shall be a bank having a
combined capital, surplus and retained earnings of not less than U.S.
$500,000,000. Upon the acceptance of any



                                      -56-
<PAGE>   63

appointment as Agent hereunder by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Agent, and the retiring Agent shall be discharged
from its duties and obligations hereunder. After any retiring Agent's
resignation or removal hereunder as Agent, the provisions of this Article IX
shall continue in effect for its benefit in respect of any actions taken or
omitted to be taken by it while it was acting as Agent.

              SECTION 9.7 EXECUTION OF LOAN DOCUMENTS. Agent is hereby
authorized by the Lenders to execute, deliver and perform each of the Loan
Documents to which Agent is or is intended to be a party and each Lender agrees
to be bound by all of the agreements of Agent contained in the Loan Documents.

              SECTION 9.8 AGENT IN ITS INDIVIDUAL CAPACITY. Agent and its
affiliates may make loans to, accept deposits from, own securities of and
generally engage in any kind of business with Borrower, as though Agent were not
Agent hereunder, without any duty to give notice thereof or account therefor to
any Lender. U.S. Bank as a Lender shall have the same rights and powers under
this Agreement and the other Loan Documents as any other Lender and may exercise
the same as though it were not Agent, and the terms "Lender" or "Lenders" shall
include U.S. Bank in each such capacity.


                                    ARTICLE X
                                  MISCELLANEOUS

              SECTION 10.1 NOTICES. Except as specified otherwise herein, all
notices, requests and demands which any party is required or may desire to give
to any other party under this Agreement must be in writing, addressed to Agent
and each Lender at its address or telecopy number set forth as the "Address for
Notices" for Agent or such Lender in Schedule I hereto, and addressed to
Borrower at the following address or telecopy number:

<TABLE>
<S>                            <C>
Borrower:                      AXT, Inc.
                               4281 Technology Drive
                               Fremont, CA  94538
                               Attn:   Donald Tatzin
                                       Chief Financial Officer/Secretary
                               Telecopier: (510) 438-4793
</TABLE>



                                      -57-
<PAGE>   64

<TABLE>
<S>                        <C>
With a copy to:            Gray Cary Ware & Freidenrich LLP
                           400 Hamilton Avenue
                           Palo Alto, CA  9301
                           Attn: Sally Rau, Esq.
                           Telecopier: (650) 327-3699
</TABLE>


or to such other address or telecopy number as any party may designate by
written notice to all other parties. Each such notice, request and demand shall
be deemed given or made as follows: (a) if sent by hand delivery, upon delivery;
(b) if sent by mail, upon the earlier of the date of receipt or three (3) days
after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent
by telecopy, upon receipt.

              SECTION 10.2 COSTS, EXPENSES ATTORNEYS' FEES.

              Except as otherwise set forth herein, Borrower shall pay
immediately upon demand: (a) all reasonable costs, fees and expenses, including
reasonable attorneys' fees and expenses, incurred by Agent in connection with
the preparation, review, execution and delivery of, and the exercise of its
duties under, this Agreement and the other Loan Documents, and the preparation
of amendments and waivers hereunder and thereunder; (b) all reasonable costs,
fees and expenses, including reasonable attorneys' fees and expenses, incurred
by Agent and/or Lenders in connection with the enforcement, preservation or
protection (or attempted enforcement, preservation or protection) of any rights
or remedies of Agent and/or Lenders under this Agreement or any other Loan
Document (including in connection with any "workout" or restructuring relating
to this Agreement, any Credit, or any bankruptcy or insolvency case involving
Borrower; and (c) all reasonable costs, fees and expenses incurred by Agent for
appraisals, audits, environmental inspections and reviews, searches and filings
in connection with any of the foregoing. As used herein, the term "reasonable
attorneys' fees and expenses" shall include, without limitation, allocable costs
and expenses of Agent's (or any Lender's, if applicable) in-house legal counsel
and staff, and "reasonable costs, fees and expenses" shall include, without
limitation, allocable costs, fees and expenses of Agent's (or any Lender's, if
applicable) internal appraisal, audit, environmental and other similar services.

              SECTION 10.3 INDEMNIFICATION. To the fullest extent permitted by
law, Borrower hereby agrees to protect, indemnify, defend and hold harmless each
of the Lenders, Agent, their respective affiliates and each of their respective
past and present officers, directors, shareholders, employees, agents, attorneys
and affiliates, together with their respective heirs, beneficiaries, executors,
administrators, trustees, predecessors, successors and assigns (collectively,
"Indemnitees") from and against any liabilities, losses, damages or expenses of
any kind or nature and from any suits, claims or demands (including in respect
of or for reasonable attorneys' fees and other expenses, including the allocated
costs and



                                      -58-
<PAGE>   65

expenses of internal counsel) arising on account of or in connection with any
matter or thing or action or failure to act by Indemnitees, or any of them,
arising out of or relating to this Agreement or any other Loan Document,
including any use by Borrower of any proceeds of any Credit, except to the
extent such liability arises from the Indemnitee's own willful misconduct or
gross negligence. Upon receiving knowledge of any suit, claim or demand asserted
by a third party that Agent or any Lender believes is covered by this indemnity,
Agent or such Lender shall give Borrower notice of the matter and an opportunity
to defend it, at Borrower's sole cost and expense, with legal counsel reasonably
satisfactory to Agent or such Lender, as the case may be. Agent or such Lender
may also require Borrower to defend the matter. Any failure or delay of Agent or
any Lender to notify Borrower of any such suit, claim or demand shall not
relieve Borrower of its obligations under this Section 10.3 but shall reduce
such obligations to the extent of any increase in those obligations caused
solely by an unreasonable failure or delay in providing such notice. If Bank
does not require Borrower to defend such action, or if Borrower fails or refuses
to defend such action, Bank shall have the right to employ counsel to defend
such action and to participate in the defense thereof, and the fees and expenses
of such counsel shall be at the expense of Borrower. In addition, Bank shall
have the right to employ separate counsel and to participate in the defense of
any such action if Bank has been advised by counsel of recognized standing in
matters of banking or securities laws that a single lawyer cannot ethically
represent both Bank or any other Indemnitee and Borrower. The obligations of
Borrower under this Section 10.3 shall survive the payment in full and
performance of all Borrower's obligations to Lenders and Agent.

              SECTION 10.4 WAIVERS, AMENDMENTS. Any term, covenant, agreement or
condition of this Agreement or any other Loan Document may be amended or waived
if such amendment or waiver is in writing and is signed and the Majority Lenders
(or by Agent with written consent of the Majority Lenders), Borrower and any
other party thereto; provided however, that any amendment, waiver or consent
which affects the rights or duties of Agent must be in writing and be signed
also by Agent; and provided further, that any amendment, waiver or consent which
effects any of the following changes must be in writing and signed by all
Lenders (or by Agent with the written consent of all Lenders):

              (a) increases the maximum principal amount available under any
Credit or the Borrowing Base;

              (b) extends the maturity date of any Credit;

              (c) reduces the principal of, or interest (including default rate
interest) on, any Credit or any fees or other amounts payable for the account of
the Lenders hereunder;



                                      -59-
<PAGE>   66

              (d) postpones or conditions any date fixed for any payment of the
principal of, or interest on, any Credit or any fees or other amounts payable
for the account of the Lenders hereunder;

              (e) waives or amends this Section 10.4;

              (f) amends the definition of Majority Lenders or any provision of
this Agreement requiring approval of the Majority Lenders or some other
specified number or proportion of Lenders;

              (g) changes the voting percentages of the Lenders;

              (h) results in a release of any material part of the Collateral;
or

              (i) increases or decreases the Proportionate Share of any Lender
in the Total Commitments (other than through an assignment under Section 10.5
hereof).

Unless otherwise specified in such waiver or consent, a waiver or consent given
hereunder shall be effective only in the specific instance and for the specific
purpose for which given.

              SECTION 10.5 SUCCESSORS AND ASSIGNS.

              (a) Binding Effect. The Loan Documents shall be binding upon and
inure to the benefit of Borrower, the Lenders, Agent, all future holders of the
Notes and their respective successors and permitted assigns, except that
Borrower may not assign or transfer any of its rights or obligations under any
Loan Document without the prior written consent of Agent and each Lender unless
in accordance with Section 7.3. All references in this Agreement to any person
or entity shall be deemed to include all successors and assigns of such person
or entity.

              (b) Participations. Any Lender may, in the ordinary course of its
business and in accordance with applicable law, at any time sell to one or more
banks or other financial institutions ("Participants") participating interests
in any Credit owing to such Lender, any Note held by such Lender, or any other
interest of such Lender under this Agreement and the other Loan Documents. In
the event of any such sale by a Lender of a participating interest to a
Participant, (i) such Lender's obligations under this Agreement to the other
parties to this Agreement shall remain unchanged, (ii) such Lender shall remain
solely responsible for the performance thereof, (iii) such Lender shall remain
the holder of any such Note for all purposes under this Agreement, and (iv)
Borrower and Agent shall continue to deal solely and directly with such Lender
in connection with such Lender's rights and obligations under this Agreement.
Participants shall have no rights under this Agreement or any other Loan
Document except as provided below. No Lender shall sell any participating
interest under which the Participant shall have any rights to vote on any



                                      -60-
<PAGE>   67

amendment or waiver of this Agreement or any other Loan Document; provided
however, that a Lender may sell a participating interest under which the
Participant shall have the right to vote on any amendment or waiver of this
Agreement or any Loan Document requiring the unanimous consent of all Lenders
pursuant to Section 10.4 hereof; provided further, however, that any agreement
pursuant to which any Lender sells a participating interest to a Participant may
require the selling Lender to obtain the consent of such Participant in order
for such Lender to agree in writing to any amendment of a type specified in
Section 10.4 hereof not requiring the unanimous consent of all Lenders. No
agreement pursuant to which any Lender sells a participating interest to a
Participant other than a Lender may permit the participant to transfer, pledge,
assign, sell participations in or otherwise encumber its participating interest.
Borrower agrees that if amounts outstanding under this Agreement and the other
Loan Documents are due and unpaid, or shall have been declared or shall have
become due and payable upon the occurrence of an Event of Default, each
Participant shall, to the fullest extent permitted by law, be deemed to have the
rights of payment (but not including any right of setoff) in respect of its
participating interest in amounts owing under this Agreement and any other
Documents to the same extent as if the amount of its participating interest were
owing directly to it as a Lender under this Agreement or any other Documents;
provided however, that such rights of payment shall be subject to the obligation
of such Participant to share with the Lenders, and the Lenders agree to share
with such Participant, as provided in Section 2.10(b) hereof. Borrower also
agrees that any Lender which has transferred all or part of its interests in the
Credits to one or more Participants shall, notwithstanding any such transfer, be
entitled to the full benefits accorded such Lender under Sections 2.11 and 2.13
hereof, as if such Lender had not made such transfer.

              (c) Assignments. Any Lender may, in the ordinary course of its
business and in accordance with applicable law, at any time, sell and assign to
any Lender, any affiliate of a Lender or any other bank or financial institution
(individually, an "Assignee") all or any portion of its rights and obligations
under this Agreement and the other Loan Documents (such a sale and assignment to
be referred to herein as an "Assignment") pursuant to an Assignment and
Assumption Agreement in the form of Exhibit G attached hereto (an "Assignment
Agreement"), executed by each Assignee and such assignor Lender (an "Assignor")
and delivered to Agent for its acceptance and recording in the Register;
provided however, that:

                     (i) each Assignment shall be in a minimum amount of
              $5,000,000; and

                     (ii) without the written consents of Borrower and Agent,
              which consents shall not be unreasonably withheld, no Lender may
              make any Assignment to any Assignee which is not, immediately
              prior to such Assignment, a Lender hereunder or an affiliate
              thereof.



                                      -61-
<PAGE>   68

Upon the execution, delivery, acceptance and recording of each Assignment
Agreement, from and after the effective date set forth therein, (A) each
Assignee thereunder shall be a Lender hereunder with a Proportionate Share as
set forth in Section 1 of such Assignment Agreement and shall have the rights,
duties and obligations of such a Lender under this Agreement and the other Loan
Documents, and (B) the Assignor thereunder shall be a Lender with a
Proportionate Share as set forth in Section 1 of such Assignment Agreement, or,
if the Proportionate Share of the Assignor has been reduced to 0%, the Assignor
shall cease to be a Lender; provided however, that each Assignor shall
nevertheless be entitled to the indemnification rights contained in Section 10.3
hereof for any events, acts or omissions occurring before the effective date of
its Assignment. Each Assignment Agreement shall be deemed to amend Schedule 1
hereto to the extent necessary to reflect the addition of each Assignee and the
resulting adjustment of Proportionate Shares arising from the purchase by each
Assignee of all or a portion of the rights and obligations of an Assignor under
this Agreement and the other Loan Documents.

              (d) Register. Agent shall maintain at Agent's Office a copy of
each Assignment Agreement delivered to and accepted by Agent and a register (the
"Register") for the recordation of the names and addresses of the Lenders and
the Proportionate Shares of each Lender from time to time. The entries in the
Register shall be conclusive and binding for all purposes, absent manifest
error, and Borrower, Agent and the Lenders may treat each entity whose name is
recorded in the Register as a Lender hereunder for all purposes of this
Agreement. The Register shall be available for inspection by Borrower or any
Lender at any reasonable time and from time to time upon reasonable prior
notice.

              (e) Registration. Upon its receipt of an Assignment Agreement
executed by an Assignor and an Assignee (and, in the case of an Assignee that is
not then a Lender or an affiliate of a Lender, by Borrower and Agent) together
with payment by such Assignee to Agent of a registration and processing fee of
$3,500.00, Agent shall (i) promptly accept such Assignment Agreement, and (ii)
on the effective date of such Assignment record the information contained
therein in the Register and give notice of such acceptance and recordation to
the Lenders and Borrower. Agent may, from time to time at its election, prepare
and deliver to the Lenders and Borrower a revised Schedule 1 reflecting the
names, addresses and respective Proportionate Shares of all Lenders then parties
hereto.

              (f) Confidentiality. Without limitation, Agent and the Lenders may
disclose the Loan Documents, and any financial or other information relating to
Borrower, to each other or to any potential Participant or Assignee; provided,
however, that such potential Participant or Assignee shall have agreed in
writing to be bound by Section 10.16 hereof prior to such disclosure.



                                      -62-
<PAGE>   69

              SECTION 10.6 SETOFF. In addition to any rights and remedies of the
Lenders provided by law, each Lender shall have the right, but only with the
prior consent of Agent, which consent may be granted or withheld by Agent in its
sole and absolute discretion, but without prior notice to Borrower, any such
notice being expressly waived by Borrower to the extent permitted by applicable
law, upon the occurrence and during the continuance of a Default or Event of
Default, to set-off and apply against any indebtedness, whether matured or
unmatured, of Borrower to such Lender, any amount owing from such Lender to
Borrower, at or at any time after, the happening of any of the above mentioned
events, and as security for such indebtedness, Borrower hereby grants to each
Lender a continuing security interest in any and all deposits, accounts or
moneys of Borrower then or thereafter maintained with such Lender, subject in
each case to Section 2.10(b) hereof. The aforesaid right of set-off may be
exercised by such Lender against Borrower or against any trustee in bankruptcy,
debtor in possession, assignee for the benefit of creditors, receiver or
execution, judgment or attachment creditor of Borrower or against anyone else
claiming through or against Borrower or such trustee in bankruptcy, debtor in
possession, assignee for the benefit of creditors, receiver, or execution,
judgment or attachment creditor, notwithstanding the fact that such right of
set-off shall not have been exercised by such Lender prior to the occurrence of
a Default or Event of Default. Each Lender agrees promptly to notify Borrower
after any such set-off and application made by such Lender, provided that the
failure to give such notice shall not affect the validity of such set-off and
application.

              SECTION 10.7 NO WAIVER; CUMULATIVE REMEDIES. No failure on the
part of Agent or any Lender to exercise, and no delay in exercising, any right,
power, privilege or remedy under any Loan Document shall operate as a waiver
thereof; nor shall any single or partial exercise of any such right, power,
privilege or remedy preclude any other or further exercise thereof or the
exercise of any other right, power, privilege or remedy. The rights and remedies
under the Loan Documents are cumulative and not exclusive of any rights, powers,
privileges or remedies that may otherwise be available to the Agent or any
Lender.

              SECTION 10.8 ENTIRE AGREEMENT, AMENDMENT. This Agreement and the
other Loan Documents constitute the entire agreement among Borrower, Agent and
Lenders with respect to the Credits and supersede all prior negotiations,
communications, discussions and correspondence concerning the subject matter
hereof. This Agreement may be amended or modified only in a writing signed by
each party hereto.

              SECTION 10.9 NO THIRD PARTY BENEFICIARIES. This Agreement is made
and entered into for the sole protection and benefit of the parties hereto and
their respective permitted successors and assigns, and no other person or entity
(other than an Indemnitee) shall be a third party beneficiary of, or have any



                                      -63-
<PAGE>   70

direct or indirect cause of action or claim in connection with, this Agreement
or any other of the Loan Documents to which it is not a party.

              SECTION 10.10 TIME. Time is of the essence of each and every
provision of this Agreement and each other of the Loan Documents.

              SECTION 10.11 SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or any remaining provisions
of this Agreement.

              SECTION 10.12 GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of California (without
regard to the conflicts of law rules of such jurisdiction).

              SECTION 10.13 SUBMISSION TO JURISDICTION. EACH OF BORROWER, AGENT
AND LENDERS HEREBY: (A) SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF
THE STATE OF CALIFORNIA AND THE FEDERAL COURTS OF THE UNITED STATES SITTING IN
THE STATE OF CALIFORNIA FOR THE PURPOSE OF ANY ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO ANY OF THE LOAN DOCUMENTS; (B) AGREES THAT ALL CLAIMS IN
RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH
COURTS; (C) IRREVOCABLY WAIVES (TO THE FULL EXTENT PERMITTED BY APPLICABLE LAW)
ANY OBJECTION WHICH IT NOW OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY
SUCH ACTION OR PROCEEDING BROUGHT IN ANY OF THE FOREGOING COURTS, AND ANY
OBJECTION ON THE GROUND THAT ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM; AND (D) AGREES THAT A FINAL JUDGMENT IN
ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER
JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PERMITTED BY LAW.

              SECTION 10.14 ARBITRATION.

              (a) Arbitration. Upon the demand of any party, any Dispute shall
be resolved by binding arbitration (except as set forth in (e) below) in
accordance with the terms of this Agreement. A "Dispute" shall mean any action,
dispute, claim or controversy of any kind, whether in contract or tort,
statutory or common law, legal or equitable, now existing or hereafter arising
under or in connection with, or in any way pertaining to, this Agreement or any
of the Related Documents, or any past, present or future extensions of credit
and other activities, transactions or obligations of any kind



                                      -64-
<PAGE>   71

related directly or indirectly to this Agreement or any of the Related
Documents, including without limitation, any of the foregoing arising in
connection with the exercise of any self-help, ancillary or other remedies
pursuant to this Agreement or any of the Related Documents. Any party may by
summary proceedings bring an action in court to compel arbitration of a Dispute.
Any party who fails or refuses to submit to arbitration following a lawful
demand by any other party shall bear all costs and expenses incurred by such
other party in compelling arbitration of any Dispute.

              (b) Governing Rules. Arbitration proceedings shall be administered
by the American Arbitration Association ("AAA") or such other administrator as
the parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in this Agreement or any
of the Related Documents; provided, however, that notwithstanding the foregoing
or anything to the contrary herein, it is specifically contemplated and agreed
by Borrower, Agent and Lenders (and any Participants and Assignees) that the
provisions of Section 1283.05 of the California Code of Civil Procedure, as
presently in force, be incorporated into and made a part of, and be applicable
to, the arbitration agreement set forth in this Section 10.14. The arbitration
shall be conducted at a location in California selected by the AAA or other
administrator. If there is any inconsistency between the terms hereof and any
such rules, the terms and procedures set forth herein shall control. All
statutes of limitation applicable to any Dispute shall apply to any arbitration
proceeding. All discovery activities shall be expressly limited to matters
directly relevant to the Dispute being arbitrated. Judgment upon any award
rendered in an arbitration may be entered in any court having jurisdiction;
provided however, that nothing contained herein shall be deemed to be a waiver
by any party that is a bank of the protections afforded to it under 12 U.S.C.
Section 91 or any similar applicable state law.

              (c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.

              (d) Arbitrator Qualifications and Powers; Awards. Arbitrators must
be active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators



                                      -65-
<PAGE>   72

(i) shall resolve all Disputes in accordance with the substantive law of the
state of California, (ii) may grant any remedy or relief that a court of the
state of California could order or grant within the scope hereof and such
ancillary relief as is necessary to make effective any award, and (iii) shall
have the power to award recovery of all costs and fees, to impose sanctions and
to take such other actions as they deem necessary to the same extent a judge
could pursuant to the Federal Rules of Civil Procedure, the California Rules of
Civil Procedure or other applicable law. Any Dispute in which the amount in
controversy is $5,000,000 or less shall be decided by a single arbitrator who
shall not render an award of greater than $5,000,000 (including damages, costs,
fees and expenses). By submission to a single arbitrator, each party expressly
waives any right or claim to recover more than $5,000,000. Any Dispute in which
the amount in controversy exceeds $5,000,000 shall be decided by majority vote
of a panel of three arbitrators; provided however, that all three arbitrators
must actively participate in all hearings and deliberations.

              (e) Judicial Review. Notwithstanding anything herein to the
contrary, in any arbitration in which the amount in controversy exceeds
$25,000,000 the arbitrators shall be required to make specific, written findings
of fact and conclusions of law. In such arbitrations (A) the arbitrators shall
not have the power to make any award which is not supported by substantial
evidence or which is based on legal error, (B) an award shall not be binding
upon the parties unless the findings of fact are supported by substantial
evidence and the conclusions of law are not erroneous under the substantive law
of the state of California, and (C) the parties shall have in addition to the
grounds referred to in the Federal Arbitration Act for vacating, modifying or
correcting an award the right to judicial review of (1) whether the findings of
fact rendered by the arbitrators are supported by substantial evidence, and (2)
whether the conclusions of law are erroneous under the substantive law of the
state of California. Judgment confirming an award in such a proceeding may be
entered only if a court determines the award is supported by substantial
evidence and not based on legal error under the substantive law of the state of
California.

              (f) Real Property Collateral; Judicial Reference. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration if
the Dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance



                                      -66-
<PAGE>   73

with said Section 638. A referee with the qualifications required herein for
arbitrators shall be selected pursuant to the AAA's selection procedures.
Judgment upon the decision rendered by a referee shall be entered in the court
in which such proceeding was commenced in accordance with California Code of
Civil Procedure Sections 644 and 645.

              (g) Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to this Agreement or the subject matter of the Dispute shall
control. This arbitration provision shall survive termination, amendment or
expiration of this Agreement any of the Related Documents or any relationship
between the parties.

              SECTION 10.15 COUNTERPARTS. This Agreement may be executed in any
number of identical counterparts, any set of which signed by all the parties
hereto shall be deemed to constitute a complete, executed original for all
purposes.

              SECTION 10.16 CONFIDENTIALITY. No Lender shall disclose to any
Person any information with respect to Borrower which is furnished pursuant to
this Agreement and the other Loan Documents, except that Agent and Lenders may
disclose any such information (a) to their own directors, officers, employees,
auditors, counsel and other professional advisors and to their respective
affiliates if Agent and Lenders reasonably determine that any such party should
have access to the information; (b) if such information is generally available
to the public; (c) if required in any report, statement or testimony submitted
to any governmental authority having jurisdiction over any Lender; (d) if
required in response to any summons or subpoena or in connection with any
litigation, to the extent permitted or deemed advisable by counsel (provided,
however, that written notice of such disclosure be given to Borrower at least
five (5) Business Days prior to such event to allow Borrower to seek a
protective order); (e) to comply with any requirement or law applicable to
Lenders; (f) to the extent necessary in connection with the exercise of any
right or remedy under any Loan Document; (g) to any Participant or Assignee or
prospective Participant or Assignee, provided that such Participant or Assignee
or such prospective Participant or Assignee agrees in writing to be bound by
this Section 10.16 prior to disclosure; or (h) otherwise with the prior written
consent of Borrower; provided, however, that any



                                      -67-
<PAGE>   74

disclosure made in violation of this Agreement shall not affect the obligation
of Borrower under this Agreement or the other Loan Documents.

              IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed as of the day and year first written above.


"BORROWER"                              "AGENT"

AXT, INC., a Delaware corporation       U.S. BANK NATIONAL ASSOCIATION

By:                                     By:
   ---------------------------------       -------------------------------------
Title:                                  Title:
      ------------------------------          ----------------------------------



                                      -68-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>4
<FILENAME>f65146a1ex23-1.txt
<DESCRIPTION>EXHIBIT 23.1
<TEXT>

<PAGE>   1

                                                                    EXHIBIT 23.1

                       CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in this Registration Statement on Form S-3 of our
report dated August 28, 2000 relating to the consolidated financial statements
of AXT, Inc., which appears in such Registration Statement. We also consent to
the reference to us under the heading "Experts" in such Registration Statement.




PricewaterhouseCoopers LLP

San Jose, California
August 31, 2000


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.2
<SEQUENCE>5
<FILENAME>f65146a1ex23-2.txt
<DESCRIPTION>EXHIBIT 23.2
<TEXT>

<PAGE>   1
                                                                    EXHIBIT 23.2


                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS


As independent public accountants, we hereby consent to the use of our report
dated May 27, 1999 for Lyte Optronics, Inc. and Subsidiaries for years ended
December 31, 1998 and 1997 included in or made part of this registration
statement.

/s/ ARTHUR ANDERSEN LLP
- -------------------------------
Arthur Andersen LLP

Los Angeles, California
August 31, 2000
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
